Reggie Middleton's blog

It is beyond a hallucinogenic-induced pipe dream to even consider that the Eurozone will come out of this attempt at replicating the US "extend and pretend" policy intact and unscathed. The US won't even get away with it, and we have the world's reserve currency printing press in our basement running with an ink-based inter-cooled, twin-turbo supercharger strapped on that will make those German engineers green with envy, not to mention green with splattered Greenback printer ink as the presses go berserk!

The levered assets of the banks in many Euro-sovereign nations easily outstrip those nations' GDP's. So when the nations' banks get in trouble from bad banking practices (and a very large swath have), the nations themselves are helpless in attempting to truly save the banks (and instead only institute a bait and switch wherein private default risk/insolvency potential is swapped for public manifestations of the same).

Bloomberg has an excellent interactive analysis on the potential for a near one million count revision upwards of the unemployment numbers. This combined with the work my team and I have put together should lead subscribers to believe that medium term, unemployment can (and probably will) exacerbate the global equity market decline.

One of the regular reporters on CNBC was comparing Greece to the subprime "crisis" of 2007, in that "investors" (I am sure that term is being used very loosely) are not going to make the same mistake as they did in 2007 by underestimating the "contagion" that subprime contained.

I feel compelled to correct him.

The more I look into the China, the stronger the short thesis becomes. With my China shorts performing quite well as they are, I have decided to spread the thesis around.

As mentioned in my previous posts, I have been engaged in a discussion of the valuation of Goldman Sachs and investment banks in general. Here is how it has played out.

Senator Corker challenged Mr. Volcker's stance in today's congressional hearings on the Volker Rule by saying that no financial holding company that had a commercial bank failed while performing proprietary trading. It appears as if Mr. Corker may have received his information from the banking lobby, and did not do his own homework.
Let's reference the largest commercial bank/thrift failure of all...

Volcker is correct in that banks conflicts of interests need to be
stemmed. One would not have to worry about over regulation if one does
not attempt to regulate every single act or attempt to guess what might
go wrong. What needs to be done is to use regulation to dis-incentivize
banks from engaging in activities that engender systemic risks and/or
harm clients. By putting everybody on the same side of the table, you
don't have to worry about outsmarting the private sector.

A knowledgeable reader, who is currently a sell side analyst, questioned
me about using book value to value Goldman and investment banks in
general. He proposed using a formula that entails revenues as well due
to the fact that the main concern during the crisis was breakup value
while revenue visibility is clearer now that the crisis is over. While the crisis may be over, the root causes of the crisis have went nowhere, and the counter party risk concentration is actually much worse than before. In addition, not only is it political suicide to attempt to bailout another bank, I think it is poor economic policy as well. Combining these two assertions, it is not clear that we will not see anymore bank failures. The probability of such has dropped considerably though.

Before I get started, I want all to realize that this is not Goldman bashing piece. I think it is a [relatively] well run company, but its PR machine appears to be from Kindergarten land, and the aura of invincibility that it enjoys(ed?) is highly undeserved, as a consequence its historical "aura-based" premium is absolutely unjustified. Case in point...

The lead story this morning of ZH is "The Only Thing Better Than A Zero Hedge? Wells Fargo's "Never Lose" Economic Hedge", explaining more accounting shenanigans (if you read the links below, you will see that I have caught Wells in a few rather aggressive interpretations) related to MSR's. One thing that was noted was the inputs for valuing MSRs using interest rates as was extolled by management. Well...

Of particular note is the difference between some readers perception of the Suntrust results and mine. If you take a close look at the results, you will see credit performance and asset quality is still deteriorating. The perception of a reprieve or moderation is potentially misleading due to the fact that Suntrust (like most other large banks) is actively shrinking their loan portfolio and transferring bad assets from one category to another.

To the credit of the CEO, he actually appears to tell it like it is and does not appear to be on a marketing binge to sugarcoat reality.

My suspicions regarding CAT were right on point last year. Unfortunately, the suspiciously engineered "feeling" bear market rally made it very difficult to profit from being right. I still have an OTM position on them. Let's see what comes of it.

Instead of trying to curb short selling, curb the uncertainty that comes from misleading and fraudulent reporting practices.

Now, it is time to see if fundamentals return to the market as the write down's start to roll in. This would have made a good "I told you so" accept for that damn bear rally that totally distorted the price of stocks in relation to their underlying fundamentals. We shall see what happens when the rubber hits the road.