The BoomBustBlog Pan-European Sovereign Debt Crisis Bankruptcy Search

One of the most apparent side-effects of the turmoil resulting from
what I have coined as the Coming (now arrived) Pan-European (soon
to be global) Sovereign (soon to be private as well) Debt
Crisis is the spread of the awareness the markets have drastically
undercharged for risk over the last 7 years or so. This, of course, is
just a long winded method of saying bubble. Many companies, and some
entire industries (ex. residential and commercial real estate [Commercial
Delinquencies], banking, etc.) as well as entire nations (namely
Greece [Calculate Your Haircuts Here] and Spain whose
underestimated debt woes I just posted on yesterday[Spreads are Blowing Out]) have grown so used to
this under-charging of risk that to wean them off of this cheap capital
would be devastating. This means, in essences, the bankruptcies and
restructurings are coming, and its not a matter of if, but when. This
will probably portend a return to the 2008 lows, close to it, or worse,
because in this global economic ecosystem you cannot have one part of
the developed world’s  import/export component do that bad without
infecting the other components. This was explained in explicit detail in
“Financial Contagion vs. Economic Contagion: Does the
Market Underestimate the Effects of the Latter?” and modeled out to
show which direction the chain reaction may push the dominoes, as well
as which countries were at risk from whom in the BoomBustBlog Sovereign Contagion Model.

We can see the effects of contagion driving market rates higher
already, even as central bankers set negative rate policies. Reference Spain T-Bill Yields Jump; Doubts
Emerge over Rating and the (still 3 months too tardy) dropping of
Greece’s debt rating which exposes how politically exposed and
potentially manipulable ratings agencies are even when they pussy foot
around with should have been explicit downgrades months ago – reference EU Commissioner Attacks Moodys
on Greek Downgrade.

It is only a matter of time (and I doubt it will be much time) before
the popping rates of sovereign debt and the incessant demand from the
market (or bailout vehicles to be funded in the market) start crowding
out private debt consumers, and drive those rates higher. Those
companies with weak balance sheet, minuscule margins and play-dough
business models will crack like Easter eggs. The BoomBustBlog Bankruptcy
Search Series will attempt to identify those companies before the
market recognizes them and either warn our subscribers of the peril of
holding said companies or allow them to potentially profit from their
downfall. Let’s start with the banks, which are a special case. You see,
explicit bankruptcy (actually, regulatory receivership candidates) are
often priced accordingly, but if you move one or two notches up the food
chain, you can find a bevy of overpriced candidates that may not be
ready to collapse immediately, but are priced as if they will continue
forever. Add in a little sovereign malaise as a catalyst and boom, there
goes the chemistry set!

There is a lot of banking research on the blog, but we decided to
start from scratch with a fresh start and a tweaked set of criteria,
which I have outlined below.

Stage	Process
Initial List	List of 229 banks in U.S with market cap greater than $100 mn
Step 1	Divided the banks into the following three sets to analyze each set individually
Set A	Banks with Texas ratio of more than 50%
Set B	Banks with Texas ratio of less than 50% but more than 30%
Set C	Banks with Texas ratio of less than 30%
Step 2	Sub-divided each set further into three categories
	1) Shortable set – Banks with share price of more than $10 and free float of more than 20 million shares
	2) Banks with share price of more than $10 but free float of less than 20 million shares
	3) Banks with share price of less than $10
INITIAL SCREENING – The selection criteria was to to find banks which continue to have high accumulated NPLs in the balance sheet and continue to record relatively high charge-off rates (loan losses), resulting in negative earnings and erosion of equity.
Step 3	In Set A and Set B , banks were selected in the first two sub-categories. In Set C, banks were selected only in the first category.
	Major parameters used
	a) Charge-off rates in the last quarter is higher than 2.5% of total loans
	b) Loan loss coverage, i.e, Charge-offs/ (Pretax income + Provisions for loan losses) in the last quarter was less than 1.5x
	c) Return on equity in the last quarter and on TTM basis is negative or extremely low
	d) Coverage ratio (Allowance for loan losses to Non-performing assets) is less than 40%
	e) Price-to tangible book value is more than 1.5x
Step 4	Banks selected in Set A, Set B and Set C in each sub-categories were consolidated to produce two separate lists
List 1	Selected banks in step 3 with share price of more than $10 and free float of more than 20 million shares
List 2	Selected banks in step 3 with share price is more than $10 but float less than than 20 mn shares
FINAL SHORTLISTING – The primary shortlisting criteria was to to find overvalued banks in terms of high 2011e P/E and high 2011 Price-to-tangible book value. Estimates for 2011e EPS and 2011e Tangible book value per share are based on consensus estimates sourced from Bloomberg
Step 5	Banks with relatively high 2011e P/E ratio while having weak fundamental were selected. A total of 13 banks have been finally shortlisted from the two lists
Final shortlisted banks	Banks with high 2011e P/E as well as high 2011 Price-to-tangible book value are highlighted in green
	Banks with high 2011e P/E but low 2011 Price-to-tangible book value are highlighted in blue

We have 4 banks that have returned to us from the original Doo Doo 32 list from two years ago (yes, many of
those banks went bust, but there are still a few stalwart living dead
traipsing around), while everyone else is brand spanking new to the
watch list. All paying subscribers may access the live spreadsheet here.

For those of you who don’t subscribe, here is a freebie. It’s nowhere
on top of the list, but it does provide food for thought:

Ticker	Short name	Price	P/Tangible BVPS (2011e)	ROE (based on 2010e earnings)	ROE (based on 2011e earnings)	Market cap	Float (mn)	Price as % of 52 week high	Price as % of 52 week low	52 week high	52 week low	P/B	P/Tangible BVPS	Tier 1 ratio	Tangible Equity/ Tangible assets	Loan-to Deposit ratio	Texas ratio	Coverage ratio	Charge-off rate	Provisions to charge-offs	Loan loss coverage
Final shortlisted
PBIB US Equity	PORTER BANCORP I	13.6	1.00	6.0%	7.8%	120	3.0	78.6%	128.1%	17.2	10.6	0.9	1.04	12.2	6.6%	91.6%	81.0%	23.2%	0.8%	105.3%	2.7

Comments

[plocequ1]

This is my point. What good are charts and Technicals when the market is being totally minipulated. Showing charts at this stage of the game is like being the band that played music on the Titanic up until the last second before it sank. The free market is about to about to take it's final plunge. You have done your job well, Tyler. It is now time to jump ship

[Invisible Hand]

The big risk in gold is not Market Risk, but Political Risk.

When fiat is loved, gold can be allowed to be held by public (as it poses no threat to fiat).  When gold is loved and fiat hated, gold must be confiscated because it is "the" option to fiat (same is true to a lesser degree of silver).

When the extent of sovereign risk of default is understood by most, then capital controls and confiscation of precious metals (at below market prices) will be used as a last ditch attempt to protect the ruling class.

Unfortunately, there really is no hiding place for older folks (such as myself).  Younger people should develop real-life skills and move to smaller communities and learn how to live as independent of modern society as possible while staying out of debt and building relationships with neighbors.

The good news is that deer, squirrel and rabbit populations are huge (since hunting has become socially unacceptable).  That will help the self-reliant get through the roughest periods.

Old folks, or those in poor health, are faced with just waiting for the end.  The light you see ahead in the tunnel isn't a train.  It is the end of the line where civilization falls off the cliff.

[Aaron Burr]

Dear Invisible,

 Your post saddened me but gave me some great ideas! We too feel "the quikening" and feel our society is in grave danger. Your advice is profound and dead on in my humble opinion!

My wife and I already are reaching out in our neighborhood and are focusing on getting to know the elderly ones in particular. We won't let them down should assistance ever be needed and I can't say enough how astounded we are what great people we live near. We would never had got to know this if not concerned about a collapse. God bless this administration for the fellowship it has inspired (even if it is in opposition to it ;) and God Bless you Invisible Hands-- There are people around you too who won't let you down!

[whiteshadow]

to rebel...teaser indeed but who's gonna feed the guy...be happy, atleast you get some knowledge about his method,,use similar approach plus check if some has used accounting tricks to fabricate the statements,,,you should have good list of urs....

Mr. Reggie,

I emailed you again through ur website n through my own email but still no response. let me learn from you, i will not disappoint you.

thanks for showin your work...

[Rebel]

It would have been nice to have a few more shortable names. I realize the list is available for purchase, but that then makes the story read more like an teaser to buy the list.

[obewon]

@ Tina:

Tech analysis is meaningless, given the total FED manipulation and the fact that the HFT boys are moving the market by gambling on only a small handful of stocks (15 to 25 or so).

Your "game plan" (as identified above) is a good one; patience is the name of the game for the little guys, and that includes folks who have several million in net worth.

[Kina]

How good is tech analysis IF the stock market is mostly Fed manipulation?

[Kina]

I was only pondering the other night what the hell to do with my money here in Aust. Dont want to get it caught up in a bank, but dont want it in the market as that will tank, already have 67% in gold and silver and a bunch of cash on hand hidden away.

I think the only thing to do is wait for the market to tank, hopefully gold miners will go down with it, then buy into to gold miners like Newmont, Lihir hoping to at least maintain value and keep it safe from and bank restriction/freezes.

All in the timing.

[Grand Supercycle]

As mentioned earlier, EURUSD and EURJPY daily charts give bullish warnings.

http://stockmarket618.wordpress.com