A Compendium Of Unforeseen (NOT!) Risk In Today's MSM Headlines on Europe, China & Banks - Meaty Reading For The Holidays

Reggie Middleton's picture

Note: This will probably be the last post until after Thanksgiving,
after which I will delve into insurance industry shorts for my
subscribers. In the meantime, I have compiled a very meaty post to keep
reades and subscribes alike stuffed to the gills like a turkey. If you
haven't noticed, I tend to be a bit spicier and considerably more
eccentric than the average financial pundit, commentator, analyst or
investor. I think because of that, I've been left out this year's Wall
Street bank Christmas party invitations. I ask that anyone who wishes to
add a little "spice" in additional to some intellectual discourse and
fun to their Goldman, JP Morgan, Morgan Stanley, etc. Christmas party shoot me an email and invite me along. It'll be fun - really!

In looking through this morning's MSM headlines I see what is tantamount
to a mandate for BoomBustBlog subscriptions. Let's walk throught CNBC's
front page.


Starting at the top. The latest German bund auction flopped!

The day before yesterday, and throughout the year, I warned that Bunds would make a good short and Germany was next on The Next Stop On The European Bank Flu Express.
There's no reason to believe that Germany, as a net export nation, will
not get sick as ALL of its EU neighbors sneeze recession in its face!
Nearly two years ago, I posted the following prescient pieces:

  1. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

  2. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be..
    attempts to illustrate the highly interdependent weaknesses in Europe’s
    sovereign nations can effect even the perceived “stronger” nations.

  3. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

  4. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

we have the Asian markets down on weak China PMI. What else was there
to expect? Does one really think China to be the 23 year of growth
packed into 3 year miracle that the sell side and the media make it out
to be? I've been warning on China since 2009 as well. See
China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You
Don't Get Something (Growth Through Stimulus) For Nothing (No Economic
Consequences), as exceprted:

have not had a chance to revisit my China thesis in a while, but it is
coming once I round off the European recap and finish up my US
technology thesis. China will most likely play a key portion in global financial and economic contagion that is simmering over in Europe. A commenter on another popular blog had this to say of my most recent post regarding Ireland (Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???):

Mr. Middleton,

I have no connection with financial investing or services, I read your
analyses, and those of others, to be informed of events and topics of
great economic importance.  What strikes me as odd, is that in all the
stories on European Contagion I find no mention of China's position. 
Given China's significant economic connection via trade with the
European Union, it is puzzling we don't see more overt action from China
to protect/affect the health of it's export recipient's economies.  Am I
to infer there is covert action (via GS, Central Banks, IMF for
example), China is simply not concerned about the economic stability of
the European Union, or it's just waiting for the appropriate time for

We definitely know where China stands on U.S. trade and Fed's policies, and it's relations with the other BRIC countries.

Is there a story here that I've missed?

I replied:

believe China's ability to alter its own course is grossly exaggerated.
As a net exporter with relatively minimal internal consumption as a
source of economic activity, it is basically at the mercy of importing
nation's ability to buy their goods. Any attempt to stoke the ability of
these nations importing will be ancillary at best. The "reported"
success of their bubble blowing is showing only one side of the equation
- the bubble blowing. Signs of a traditional bubble (such as the one
whose bursting the US and Europe are struggling to escape from) are
everywhere, yet the mainstream media has not focused nearly as much
attention on such. Unless the laws of basic human nature has changed,
expect to see China suffering from the effects of profligate excesses
just as the others that tried to inflate their economies the quick and
easy way did.

Less than an hour after typing said reply, Bloomberg reports: China Inflation May Be Too Hot for Controls Amid Cash Glut.

it didn't take a genius to figure out this would happen. As a matter of
fact a slight dose of common sense (when was the last time you got
something for nothing, really?), a little historical perspective or a
BoomBustBlog subscription would have sufficed.

  1. BoomBustBlog China Focus: Inflation? Thursday, May 20th, 2010
  2. Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts Wednesday, February 3rd, 2010
  3. What Are the Odds That China Will Follow 1920’s US and 1980’s Japan? Wednesday, March 10th, 2010
  4. BoomBustBlog China Focus: Interest Rates Thursday, May 20th, 2010
  5. My China Ruminations Have Come to Pass As the Country Enters a Bear Market Tuesday, May 11th, 2010
also have MSM headlines stating Franco-German manufacturing stalling as
Belgium and France bitch about Dexia. Well, I warned all that France
was the fulcrum point for the EU fall, not Italy and not Greece.
Remember, France was supposed to be a savior, along side Germany bailing
out with both buckets of water (I mean liquidity). As for France,
referrence French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days! Then please see When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!, as excerpted:

BoomBustBlog readers and subscribers
saw this coming a mile away. The Duopoly that ruled the economics of
the EU have divergent needs now, hence divergent interests. Expect this
to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer
because stress in the Italian bond markets will be a direct cause of a
French bank run - with the largest of the French banks running the
hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers
on BNP due to the Greco-Italiano risk factor causing a liquidity run
born from imminent writedowns. No one from the sell side apparently had a
clue. Reference the series:

Let's not forget that obvious headline, "'The Sky Will Fall In' for Europe". Where were you two years ago when the sky started falling? See our Pan-European sovereign debt crisis and notice the dates.
also have the not so prescient headline akin to a fireman ariving at a
smolding pile of ashes, brandishing his brand new fire hose waiting to
put out said house fire - Two Thirds Chance of 2012 Europe Recession: Survey. Subscribe to BoomBustBlog, my friend (early 2010) The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
Now, speaking of Europe, particular Dexia (France, Belgium Wrangle About Dexia Deal: Reports), this brings to mind another highlighted headline focusing on the oft quoted sell side banking analyst US Stress Tests Not Worrying: Bove...
Dick Bove is one of the, if not most oft quoted sell side bank analyst
in the mainstream media. I disagree with him, regularly. As the uber
independent investor/analyst that I am, I will never be accurately
accused of kissing [up to] Dick - regardless, let's grab Dick by the base [of his assumptions] and see if we can yank something usable out of it, shall we?

The Federal Reserve announced Tuesday it plans to stress test U.S. banks—including the six largest—against a hypothetical market shock, such as an escalation of the European debt crisis.

Dick Bove
Dick Bove

noted banking analyst Dick Bove said there is nothing for investors to
get upset about because the stress tests are pro forma and are not an
indication that the Fed  has any particular concerns about the state of American banks.

was really required by the Dodd-Frank law that they have a stress
test,” the Rochdale Securities analyst told Larry Kudlow. “So every year
at about this time you have the Fed setting up a new stress test for
the banking industry.”

The six big banks to be tested are Bank of America [BAC  5.37    -0.12  (-2.19%)   ], Citigroup [C  24.46    -0.54  (-2.16%)   ], Goldman Sachs [GS  89.40    -1.90  (-2.08%)   ], JPMorgan Chase [JPM  29.41    -0.50  (-1.67%)   ], Morgan Stanley [MS  13.52    -0.08  (-0.59%)   ] and Wells Fargo [WFC  23.93    -0.25  (-1.03%)   ].

the Fed's stress tests will see whether U.S. banks can withstand any
further deepening of the European debt crisis crisis, Bove isn't worried
about contagion from the EU.

[the European banks] run into significant difficulties, it is not going
to create a massive crisis in American banks,” he said. “American banks are benefiting meaningfully as a result of the European banking crisis and it’s showing up in their earnings.”

someone buy Mr. Bove an Insitutional BoomBustBlog subscription. Of
course it won't create a massive crisis in American banks... The 8th
largest bankruptcy in this country's history doesn't even scratch the
radar, right??? The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications

That’s because European banks are selling American assets to American banks at discounted prices.

However, Bove thinks it’s highly unlikely that the European banks will collapse. He believes the European Central Bank will ultimately bail them out.

where do I start? Well, I must admit, I don't look, speak, think nor
act like any of the sell side analysts. If you are into convention, and
not into hard hitting analysis and outspoken brothers, then I'm just not
your man. If that's the case, I suggest you simply get you some Dick.
For those who (like me) don't favor dick, I have a slightly different
flavor to offer in terms of analysis and perspective.

For those
not familiar with Mr. Bove, he made an interesting call on Bear Stearns
which was essentially antithetical to my research. I will copiiously (I
apologize Karl) excerpt a post from the Market Ticker which explains the
story explicitly: Dick Bove, Bear Stearns, And Controversey

Apparently Mr. Bove does not like my ticker from last night, and
believes that I have been in some way "unreasonable" in my
characterization of him, specifically this paragraph:

"The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK
You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU

was kind enough to send me a copy of the full report which I have
edited to remove his email address and phone number (at his request),
but which is otherwise reprinted here with his permission. You are urged to read the report in full and draw your own conclusions about whether the market performrating
was reasonable or not. Links are at the bottom of this post. There
apparently is one word he can legitimately complain about in my original
ticker - the word "PUT". In fact, he maintained a "Market Perform" rating on the 11th of March; the upgrade to Market Perform from SELL appears to have occurred in February.

You can find an archived copy of that story here. It says among other things, in reference to Bear and Lehman:

said private equity may once again be able to fund activities in the
high yield markets, while adding that credit derivatives markets were
unlikely to go lower, and that the mortgage business may actually be
quite strong this year.

New York-based Lehman will likely recover faster than its peers due to the expected strength in mortgages, Bove said."

I apologize for the error in not noting that the actual upgrade
apparently came a month earlier, not that I think its material, but when
you're wrong, you admit you're wrong. Mr. Bove, of course, didn't
bother to mention when the rating was issued by him during our phone
call, nor that when he issued the rating the price of the stock was even
HIGHER (by nearly $20!) than it was in March when the
rating was "maintained" (even though he claims it really wasn't if you
read the narrative.)
Now let's get to the meat of the matter and why I raised a stink about it in The Ticker - the rating. Dick claims that "anyone who read the report in full would see that I had told them to stay away from the stock."

After reading the report in full, I agree - the stock, by the narrative of the report, is indeed a sell - albiet a sell $20, or 25% of your money, too late!

here's the problem - the report clearly cuts the price target from $90
to $45 (a 50% haircut!) and further is a reduction of 25$ (from $59 to
$45) from the closing price on the day the report was issued.

report is intended only for institutional clients who pay his firm, but
it, like the report yesterday, was picked up and widely quoted in the
Take a look at the second page of that report, directly above Mr. Bove's certification, under the definition of "Market Perform":

"Common stock is expected to perform with the market plus or minus five percentage points."

I took the liberty of excerpting so much, I urge all who are interested
in this story to read Karl Deningers full post on his page - Dick Bove, Bear Stearns, And Controversey. In regards to me, let's contrast my opinions of Lehman and Bear in January of 2008, as opposed to Dick's - Is this the Breaking of the Bear?

Bear Stearns is in Real trouble

Stearns will soon be, if not already, in a fight for its life. It is
beset with the possibility of a criminal indictment (no Wall Street firm
has ever survived a criminal indictment), additional civil litigation,
and client defection and alienation. Despite all of these, the biggest
issues don't seem all that prevalent in the media though. Bear Stearns
is in a real financial bind due to the assets that it specialized in,
and it is not in it by itself, either. For some reason, the Street
consistently underestimates the severity of this real estate crash. If
you look throughout my blog,
it appears as if I have an outstanding track record. I would love to
take the credit as superior intelligence, but the reality of the matter
is that I just respect the severity of the current housing downturn -
something that it appears many analysts, pundits, speculators, and
investors have yet to do with aplomb. With a primary value driver linked
to the biggest drag on the US economy for the last century or so, Bear
Stearn's excessive reliance on highly "modeled" and real asset/mortgage
backed products in its portfolio may potentially be its undoing. This is
exacerbated significantly by leverage, lack of transparency, and
products that are relatively illiquid, even when the mortgage days were

Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back

I’ll admit it. I watch CNBC. Now that I am out of the confessional, I
can say that when I do watch it I hear a lot of perma-bulls stating that
this and that stock is cheap because it is trading at or below its book
value. They then go on to quote the historical significance of this
event, yada, yada, yada. This is then picked up by a bunch of other
individual investors, media pundits and other “professionals,” and it
appears that rampant buying ensues. I don’t know how much of it is
momentum trading versus actual investors really believing they are
buying on the fundamentals, but the buying pressure is certainly there.
They then lose their money as the stock they thought was cheap, actually
gets a lot cheaper, bringing their investment down the crapper with it.
What happened in this scenario? These investors bought accounting
numbers instead of true economic book value...

Level 2 and Level 3 Assets – Model Risk

risk, or the risk of the bank living in a spreadsheet in lieu of the
market, has already reared its head in the summer of ’07 with the blow
up of two of BSC’s hedge funds, which have left them in litigation with
their own customers. Basically, many of the assets of the fund were
levered highly, and valued based upon modeled cash flows from assets,
and not from the actual tradable value of the assets. This is fine,
until you need to liquidate by selling assets. As luck would have it,
they found no market they felt was acceptable and were forced to market
value down significantly, approaching zero. It has also manifested
itself more recently in the recent announcement that they will be moving
at least 7 billion dollars to the level three (the most BullSh1+)
category. Bear Stearns has recently announced another hedge fund blow
up, which doledout significant losses to investors and is attempting
liquidation. For my laymen’s plain English take on level 1, 2, and 3
asset accounting, see the Banks, Brokers and Bullsh|+series (Banks, Brokers, & Bullsh1+ part 1 for model risk,).

Level 3 Assets at 231% of Total Equity; Amongst the Highest on Wall Street

Weighted average price (US$)
Methodologies Weight assigned Fair Price Weighted average price
Fair price using P/Adj. BV approach 50.00% 33.84 16.92
Fair price using P/E approach 50.00% 39.00 19.50
Weighted average fair price     36.42
Current price     87.03
Upside from current levels (US$)     -58.2%


book value numbers are after our economic marking and adjustments, of
course. The “E” portion of the P/E ration is quite conservative, since
the we built model incorporated BSC doing much better during the next 4
fiscal quarters than their peers are reporting for this quarter, and in
my opinion BSC will not only fail to match their peers, but underperform
due to the loss of their primary value drivers – mortgage derivative
and related fixed income products – not to mention their asset
management, legal, and litigation distractions as well as client and
talent retention issues.

Am I right about the Bear?

the Bear Stearns negative developments, and my opinion of its value,
Bear Stearns has managed to find investors as was mentioned earlier in
the insider transaction section. These are accomplished and wealthy
investors to boot. My concern is that so many astute, accomplished and
economically powerful investors have failed to realize and fully
appreciate the depth and breadth of the current real asset recession,
burst bubble, and quite possibly asset depression we have recently
entered. This has destroyed the value of many bottom fishing value
investors, both intitutional and retail.


And this is a summmary of my takes on Lehman Brothers from a similar period:

(February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers
Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are
paying off for them. The have the most CMBS and RMBS as a percent of
tangible equity on the street following BSC. The question is, “Can they
monetize those hedges?”. I’m curious to see how the options on Lehman
will be priced tomorrow. I really don’t have enough. Goes to show you
how stingy I am. I bought them before Lehman was on anybody’s radar and I
was still to cheap to gorge. Now, all of the alarms have sounded and
I’ll have to pay up to participate or go in short. There is too much
attention focused on Lehman right now. ) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 | May 2008

that we've established a small base of potential credibility when it
comes to bank failure, back to today and Dick's proclamations on CNBC,
let's start with Bank of America, who Dick says won't be affected by
European malaise. This is Reggie's take...

Then there's Goldman Sachs, the bank where Reggie is just so loved...

all, I'm sure there'll be no volatility in the markets if Europe blows
up. Then again, even if there is volatility in the markets, Goldman's
prop desk can handle it, right? I sure hope you guys don't think I'm being a Dick, do you?

What Was That I Heard About Squids Raising Capital Because They Can't Trade? Well, you guys know where I stand on this, and I have warned you ad nauseum...the Squid Can't Trade!




After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

I'm Hunting Big Game Today: The Squid On A Spear Tip

This is the first in a series of articles to be released this weekend
concerning Goldman Sachs, the Squid! In this introduction (for those who
do not regularly follow me) I demonstrate how the market, the sell
side, and most investors are missing one of the biggest bastions of risk
in the US investment banking industry. I will also...

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

to part two of my series on Hunting the Squid, the overvaluation and
under-appreciation of the risks that is Goldman Sachs. Since this highly
analytical, but poignant diatribe covers a lot of material, it's
imperative that those who have not done so review part 1 of this series,
I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

those who don't subscribe to BoomBustblog, or haven't read I'm Hunting
Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To
Blow Up The World Something To Be Ignored?, not only have you missed out
on some unique artwork, you've potentially missed out on 300%...

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

this more of the hardest hitting investment banking research available
focusing on Goldman Sachs (the Squid), but before you go on, be sure you
have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A
Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since
When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies

to the next Banque de Dick... You'd think with Dexia in the news, one
would know to either stay clear of JP Morgan or at least subscribe to
the BoomBust, eh? CNBC reports today (as highlighted in the introductory
graphic) France, Belgium Wrangle About Dexia Deal: Reports. Why is this important? Well, look at why Dexia's in trouble in the first place. In the (must read) post
Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same
Residential Real Estate Assets Upon Which JP Morgan Has Slashed
Provisions 83% to $1.2bn from $7.0bn
you will find..

many sell-side researchers award stocks “buy” or “overweight” ratings
even as their internal asset-management units unload shares, presenting a
conflict of interest and ethical dilemma. Goldman’s most famous
front-runs to date were the Abacus transactions, through which the bank
allegedly postured for high ratings for its mortgage-backed CDOs, sold
them to clients and then shorted them.

to research from the Street.com, Goldman put a Conviction Buy
Recommendation on JP Morgan Chase shares and issued it to their clients,
and then sold 4,200,009 shares of JPMorgan Chase. At an average of
$45/share,  that means that Goldman had a lack of conviction in its own
"Conviction Buy" recommendation to the tune of $189,000,405. I'd hate to
see what the company would do if they recommended clients sell, or
worst yet short sell, stock. Oh yeah! We already know, don't we.

Bloomberg reports: Dexia Takes 3.6 Billion-Euro Charge on Asset Sales

charge taken by Dexia was more than necessary, and most likely not
nearly enough. But wait a minute, why did JP Morgan do the exact
opposite regarding the exact same asset class?

Do you remember my recent missive "There’s Something Fishy at the House of Morgan"?
Well, in it I queried how it was that JP Morgan can continuously pull
risk provisions and reserves to pad quarterly accounting earnings at
time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:

invite all to peruse the mainstream financial media and sell side Wall
Street's take on JP Morgan's Q1 earnings before reading through my take.
Pray thee tell me, why is there such a distinct difference? Below are
excerpts from the our review of JP Morgan's Q1 results, available to
paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.

'Nuff said! Let's move over to Morgan Stanley... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? You know, I'm still quite bearish on Asian, European and American banks. Just look at the facts as they're laid before you...

another headline with Cramer's opinion on RIMM, which brings me to mind
of all of the flack that I got when I said RIMM was bust as it traded
in teh 60's and 70's (currently quoted at about $17). See As Forecast Last Year and Clearly Demonstrated This Year, Research in Motion's Problems Are Far From Over:

in Motion has been one of the most successful tech shorts of this
blog's history (thus far). We first recommended a short last year and
reiterated it in the fist quarter of this year. Reference:

    1. BoomBustBlog Research Performs a RIM Job!

    2. BoomBustBlog's Fundamental/Forensic Analysis of Research in Motion Has Returned 2x-3x Original Investment This Year!!

This is a snapshot of RIMM as of the writing of this article...


As you can see, the results have been spectacular, particular if well timed puts have been put to use. In January I posted:

I don't want to pick on just the Dicks on Wall Street. I'm willing to challenge the entire sell side as a whole. I hit hard...

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

 Feel free to subsrcibe to BoomBustBlog or follow me via the following channels...

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StychoKiller's picture

If I were crazy enough to jump back into the stock market(s), I would subscribe to your service(s).  Alas, I misplaced my crazy pills! :>D

Gunther's picture

you are hitting hard intellectually an physically – no question about that.
But you do not keep yourself protected. For a work-out it does not matter, for a fight in or with the street it does. I leave the martial arts part to somebody else; this is a financial blog.
After the MFG bankruptcy there is a real possibility that the money will be stolen out of a brokerage account. In theory stock brokerage accounts are insured and Futures brokerage accounts are segregated.
In practice we will see.

Any way, your post is full of insight and entertaining as well.

I am more equal than others's picture

The great Zulu - Mandingo Squid Hunter.

topcallingtroll's picture

You ever come thru Arkansas I can take you on a bear hunting trip next fall in bow season or a turkey hunt this spring. Or a wild boar hunt anytime. Wild Arkansas pig raised on acorns, grubs, and snakes is the best tasting ribs I have ever had. Better than pata negra and other spanish free range pig.

Not a lot of great parties though.
If you want to just photograph the bear or try to pet it thats cool too. We would enjoy watching that.

Roland99's picture

Happy Thanksgiving.


Oh, hey...is it time to jump on GRPN now?  youch!