Reggie Middleton's blog

I have decided to release a significant amount of opinion on Wells to the public, and have created an extended version of the report for subscribers with geo-specific charge-off estimates stemming from the FDIC/NY Fed model that we have created in house. A rather comprehensive piece of work. It appears that much of the sell side community is much, much more optimistic on the prospect of Wells than I am. It must be the Warren Buffet investment...

Well, it looks like Blankein, Dimon, et. al. really should have tried harder to make that meeting with the President a couple of weeks ago. It appeared as if he may have had something important to discuss. Here is a clear break down of the how much principal and prop trading adds to the top and implied bottom lines of Goldman, Morgan Stanley, JP Morgan and Bank of America.

I have had a lot of problems with the way the last two adminstration have dealt with this financial crisis and Wall Street, but I must say "Kudos to Obama". Somebody had to do it. Call it politically motivated if you want to (he is a politician, isn't he?), nobody else bothered to contain the self reinforcing boom/bust risk cycle that is Wall Street.

I was not going to bother to comment further, but after hearing pundit after pundit attack Obama for the bank levy and Glass Steagal 'lite', after banks allegedly paid their dues... I just couldn't take it anymore. This short-term memory-itis is driving me nuts!

Here is a glimpse at an internal debate between BoomBustBlog analysts on the merits of the China bubble short, and its comparison on the merits to a short in the EU and CEE contries. It appears as if the China bubble thing is about to heat up.

Banks are giving up to 10x leverage to investors to buy MBS while foreclosures and unemployment are still on the rise against the backdrop of continuing diminishing home prices - all at interest rates that have nowhere to go but UP!

Are the regulators going to wait until after this blows up (AGAIN) or do something about it as it is blowing up.

Today's banks are much more complex than LTVs and 2nd liens, but when these risky products on the downturn are multiples of your tangible capital, it really doesn't take more than that to start causing some severe solvency issues. You can have a trillion dollars in assets, but if you have $20 billion in equity with $100 billion in investments that will take a 50% loss, you are underwater by $30 billion. You can talk about these banks using terms such as "complicated", "complex", "fancy" and all of the other high falutin' adjectives that you can think of, but at the end of the day, if you lose more than you own you are insolvent. Now, that's a simple concept and it works quite well for my investment pursuits.

As you recall, my take on the deflation vs inflation debate is much less crystal ball-ish than many other pundits on the web. I never was very much into fortune telling or forecasting the future. From what I observed and researched, if I had to make a call that call would be stagflation.

On that note, here is an interesting note from one of my site's subscribers on how China is exporting to what is amounting to stagflation to the United States, now!

JP Morgan's Q4 results show that banks are not only still in hot water yet, but the pot hasn't even really started to boil. Why is it that I look at the info and get such a different impression than much of the media and the sell side who proclaim "blow out results"? Yeah, the results "blow" alright...

Pray tell, how can anyone in their right mind trust the economic reporting of company that says it is running 13 cylinders of an 8 cylinder engine leading the world to economic recovery when they overtly, and without denial, censor free speech and publicly outlaw research and even Internet searches on government activities?

The grave unemployment situation not only undermines the economic health and recovery hopes, but is also acting as a major source of financial strain on the Fed's books. It is observed that the Fed has been taking in huge deficits on its books because of UI programs. The total UI withdrawals on Fed books in 2009 were $139 billion against deposits of just $31 billion received from states for unemployment. While the withdrawals in 2009 have increased by 320% when compared with withdrawals in 2007, the deposits have declined by 6.6%. The deficit has increased to nearly $107 billion from nearly no deficit, two years ago.

It will be interesting to see how optimistic/pessimistic this quarter's bank credit losses will be reported. Here are some very interesting facts on the latest trend in Alt-a mortgages that have been in the news as of late. The following charts were culled from my mortgage default model which was built primarily from date gathered from the FDIC and the NY Fed.

As a muni trader, my bonus is derived directly from my P/L which is accrued over the quarter and kept in a separate account. It does not go into the firms bottom line and then back out to me. Also, like most traders, I accrue 2% of my gains in a loss provision account in case I have a major write-down in the year. My bonus is 10% of my profit for the year. If I make $50mm for the year my bonus is $5mm

What does my bonus have to do with the MBS trader who's sitting on losses? Did I or did I not show a profit of $40mm to the firm’s bottom line?

As I have stated throughout all of last year, the macro, fundamental and
political headwinds facing banks make them good shorts and risky
investments. They faced a good run in this recent bear market rally,
but the spirits have cursed them for the medium term. In addition,
these guys act as if they have never heard of PR and strategy, ex. this
bonus thing.

In continuing the rant on the possibility of the US entering a stagflationary environment, as was hinted by Alcoa's quarterly report (see "Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?"), I have decided to graphically illustrate the historically most successful inflation hedges as well as demonstrate where North America and Western Europe currently stand.