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Stock Market Today: Obamacare Upheld

By , Money Morning -

Volatility in the stock market today is high due to several factors both domestically and abroad.

The Obamacare ruling is the main driver causing uncertainty in the market, followed by the start of the European Union summit today in Brussels.

The Obamacare ruling had been anticipated with such fervor that reporters camped in front of the Supreme Court for days before the decision.

They finally got one - and it may come as a surprise to many.

The controversial mandate that requires everyone to purchase healthcare by 2014 or pay a small fine was upheld. The vote came in at 5-4 with Justices Scalia, Kennedy, Thomas and Alito dissenting.

Chief Justice Roberts said that the mandate is not a valid exercise of Congress's power under the Commerce Clause, but it will survive as a tax.

Republicans had been almost certain that the mandate would be stuck down and President Obama can now breathe a small sigh of relief that his healthcare overhaul has been upheld.

Back to the EU summit, which has been awaited with such pessimism that the yield on Spanish 10-year bonds has risen above 7% again and the euro slipped to a three-week low of $1.24 versus the dollar.

There is an unusual and detrimental air of division and discord among the European leaders heading into the summit. The continent needs to work towards more integration rather than fragmentation if they are to lay down a framework for better fiscal, financial and political union.

U.S. unemployment claims fell slightly from the 392,000 initial claims reported last week to a still alarmingly high number of 386,000 for the week ended June 23. The final estimate for the first quarter's gross domestic product (GDP) came in at the expected 1.9%, but that estimate had already been lowered last week by the U.S. Federal Reserve.

Looking beyond these reports, here are some stocks in the headlines today.

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Don't Get Duped by Derivatives

By , Money Morning -

It recently came out that a $1.2 billion derivatives portfolio that Goldman Sachs Group Inc. (NYSE: GS) managed for the Libyan government lost 98.5% of its value between 2004 and June 2010.

If a firm like Goldman will sit idly by while a client eats about $1 billion on a single investment, where do you think you and your portfolio land on Wall Street's list of priorities?

The message here is simple: You can't trust Wall Street - not with a $10,000 investment, a $100,000 investment, a $1 million investment, and especially not with $1 billion investment.

Goldman Sachs claims that the Libyans were picking the derivatives trades themselves. But that's exactly what they would say.

After all, if it got around that Goldman's ace traders were capable of losing virtually all of their clients' money, bonuses would fly out of the window along with most of the business. I'm sure the Libyan government would have offered a rebuttal if it weren't being toppled in a civil war.

The Libyans no doubt did much of the investment decision-making themselves, but the real problem is that there was no basis of comparison for the prices of the derivatives products they were being given.

And that's where there's a lesson to be learned. As a retail investor, you have to be able to determine a two-way price quote for whatever investment you buy.

The investment landscape is littered with the wreckage of failed structured investments.

Between 2008 and 2010 already-strapped cities and states had to pay Wall Street $4 billion in termination fees to get out of various interest rate products that had gone wrong.

For example, there's the exciting 2007 "Abacus" deal by Goldman Sachs trader "Fabulous Fab" Tourre, which lost European banks a total of $1 billion.

The investors in Fabulous Fab's Abacus deal had no independent means of assessing the value of the subprime mortgages in the pool. These were large, "sophisticated" banks, but they deluded themselves with the risk/reward tradeoff they were taking on.

Losses are not confined to the notoriously murky derivatives investments, either. I would bet that the special Goldman clients who earlier this year bought privately offered shares of Facebook Inc. at a $60 billion valuation will end up losing big on their investment as well.

As investors, most of us are not rich enough to get Wall Street's attention, but we should stay informed about how these firms are luring their clients into spectacularly bad deals.

That way we'll all know what to avoid.



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