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I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction
Summary: 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 demonstrate how
BoomBustBlog research not only runs circles around the big name brand
bank analysts in their missing this risk (once again), but has been
doing so for years, since our proclamation that Bear Stearns would
collapse in January of 2008 (Is this the Breaking of the Bear?) and the fishy things at Lehman Brothers just a few days afterward (Is Lehman really a lemming in disguise?).
I urge the big media to catch on as the TRUTH goes viral, delivered raw
and uncut. Now let's go hunt some big Goldman game! You see, unlike
some of the more meek (which is really to be read as conflicted), I am
particularly well suited to go after the dangerous game... Enjoy!
Reggie_Midleton_The_Squid_Hunter
All paying subscribers are urged to download the latest forensic research: Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine? in order to get a head start on what will be publshed in parts 2 and 3 of this series!
Friday, 9/20/11, Bloomberg reports: Morgan Stanley Seen as Risky as Italian Banks, as excerpted
Morgan Stanley (MS), which owns the world’s largest retail brokerage, is being priced in the credit- default swaps market as less creditworthy than most U.S., U.K. and French banks and as risky as Italy’s biggest lenders.
The cost of buying the swaps, or CDS, which offer protection against a default of New York-based Morgan Stanley’s debt for five years, has surged to 456 basis points, or $456,000, for every $10 million of debt insured, from 305 basis points on Sept. 15, according to prices provided by London-based CMA. Italy’s Intesa Sanpaolo SpA (ISP) has CDS trading at 405 basis points, and UniCredit SpA (UCG) at 424, the data show. A basis point is one-hundredth of a percent.
... Moody’s Analytics, an arm of Moody’s Investors Service that’s separate from the company’s credit-rating business, said in a report yesterday that Morgan Stanley’s CDS prices imply that investors see the bank’s credit rating as having declined to Ba2 from Ba1 in the last month. The company is actually rated six grades higher at A2 by Moody’s Investors Service.
By comparison, Bank of America Corp. (BAC) and France’s Societe Generale (GLE) SA, which have CDS trading at 403 basis points and 320 basis points respectively, have prices that imply a rating of Ba1, higher than the implied rating on Morgan Stanley, said Allerton Smith, a banking-risk analyst at Moody’s Analytics in New York.
... Morgan Stanley was the biggest recipient of emergency loans from the Federal Reserve during the financial crisis and also benefited from capital provided by Tokyo-based Mitsubishi UFJ Financial Group Inc., now the biggest shareholder, and the U.S. Treasury, which it repaid with interest.
... While the price of Morgan Stanley’s credit-default swaps is at the highest level since March 2009, it’s nowhere near the peak reached in 2008. On Oct. 10 of that year, the annual price for five-year protection rose to the equivalent of 1,300 basis points, according to data provided by CMA, a unit of CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market.
... Trading in Morgan Stanley credit-default swaps has risen recently to 257 contracts last week, compared with 187 for Goldman Sachs Group Inc. (GS), according to the Depository Trust & Clearing Corp. That compares with a weekly average of 73 trades in Morgan Stanley and 91 in Goldman Sachs in the six months that ended on Aug. 26, DTCC data show.
... There was a net $4.6 billion of protection bought and sold on Morgan Stanley debt as of Sept. 23, according to DTCC. Even with the higher trading volume, investor skittishness in the face of Europe’s sovereign debt crisis may be leaving few market participants willing to sell CDS protection to meet the demand for hedges, said Hintz.
“With the EU teetering, few other firms are going to jump in and write CDS on a global capital markets player like MS,” Hintz said in his e-mail, referring to the European Union and to Morgan Stanley’s stock-market ticker symbol.
... The rise in Morgan Stanley’s CDS prices may also relate to an expected decline in third-quarter trading revenue or to the company’s exposure to French banks, Smith said.
... Morgan Stanley had $39 billion of cross-border exposure to French banks at the end of December before accounting for offsetting hedges and collateral, according to an annual filing with the U.S. Securities Exchange Commission. Cross-border outstandings include cash deposits, receivables, loans and securities, as well as short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements.
‘Galloping Wider’
While Morgan Stanley hasn’t updated those figures, Hintz estimated in a Sept. 23 note to investors that the bank’s total risk to France and French lenders is less than $2 billion when collateral and hedges are included.
As of June 30, Morgan Stanley had about $5 billion of funded exposure to Greece, Ireland, Italy, Portugal and Spain, which was reduced to about $2 billion when offsetting hedges were accounted for, according to a regulatory filing. The company also had about $2 billion in overnight deposits in banks in those countries and about $1.5 billion of unfunded loans to companies in those countries, the filing shows.
“Their spreads just are galloping wider,” Smith said. “Is it rational that Morgan Stanley CDS spreads would be wider than French bank CDS spreads if the concern is exposure to French banks? I don’t think that makes perfect sense.”
I have addressed this ad nauseum on the blog, but the answer to that questions has been put best by Tyler Durden, at ZeroHedge put it best:
...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.
The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.
You see, despite the massive following that the big brand name bank
analysts have, none of them warned on Morgan Stanley nor the banking
industry in a timely fashion. That is none, except for none other...
- When
bank shares were flying and the sell side passed out buy
recommendations on each other like cheap candy on Halloween... Monday,
29 August 2011 The Banking Industry Still Looks Dismal Despite Rising Share Prices - When the opportune time to short Morgan Stanley actually arrived, starting in early 2008... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? Notice the price movement since this BoomBustBlog refresh article.
- In early August, when the French banking system was ripe for
implosion and not a peep was available from any of the big brand names,
who instead focused on Italy but apparently failed to inform clients
that Italy fed contagion directly into the French banking system... The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! -
Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer:
In case the hint was strong enough, I explicitly state that although
the sell side and the media are looking at Greece sparking Italy, it is
France and french banks in particular that risk bringing the
Franco-Italia make-believe capitalism session, aka the French leveraged
Italian sector of the Euro ponzi scheme down, on its head. I then
provided a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!
French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers
- This was culminated in the piece, BoomBust BNP Paribas? - a must read!
Herein
lies the rub, though. The Bloomberg article above rightfully states
that Morgan Stanley has more gross exposure to France then its peers,
but it totally leaves out the aggregate risk that its peers face. Is the
media, led by the market, ignoring the squid canary in the coal mine?
A
month or so ago (Monday, 22 August 2011), I penned the public blog post
that also relased my most recent research on Goldman Sachs -
The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat
Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The
Shareholders and Tax Payer??? - as excerpted:
The
chart below demonstrates how the volatility of the revenues from the
trading and principal investments trickles down into volatility of the
total revenues and profits of Goldman Sachs. I don’t call Goldman the
world’s most expensive federally insured hedge fund for nothing!
As you
can see above, volatility ramped up in 2008 and Goldman reacted like
any other beta-chasing, long only hedge fund (although they aren't long
only) - they lost money!
Now,
with the benefit of BoomBustBlog hindsight, I'd like to announce to the
release of a blockbuster document describing the true nature of Goldman
Sachs, a description that you will find no where else. It's chocked
full of many interesting tidbits, and for those who found "The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely" to be an iteresting read, you're gonna just love this! Subscribers can access the document here:
As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor. Here are the first 2 pages of the 19
page professional edition, with illustrative option trade setups soon to follow.
Is Goldman Sachs stock really the front running, Mo-Mo traders wet dream?
Given
the high correlation of Goldman’s prop trading desk to equity markets
and taking into consideration the state of equity markets in Q2-Q3, it
would be interesting to see how Goldman Sachs share perform in the
coming quarters. Those who would have followed the
traditional school of thought and bid the price up would have already
seen their capital erode by 20% during the last quarter and by 12% over
the last one month alone.
This warning given to both
to my paying subscribers (in explicit detail) and my blog followers two
months ago. Over the last few days, the sell side has followed suit,
unfortunately not in enough time to capture much of the downward share
price movement. Compare the difference between the two time frames from
the perspective of catching/avoiding the sharp share price drop and it
is clear that the BoomBustBlog one and a half month or so
headstart/prescience had its advantages...
- om: Goldman Sachs
estimates cut at Meredith Whitney AdvisoryMeredith Whitney is slashing
Goldman Sachs September quarter EPS estimate to 31c vs. consensus $1.45
and FY12 EPS estimate to $7.85 vs. consensus $15.14. Shares are Hold
rated. :theflyonthewall.com
-
Bernstein cuts Goldman, Morgan Stanley estimatesBernstein Research analyst Brad Hintz cut price targets and earnings estimates for Goldman Sachs Group Inc and Morgan Stanley on Monday, saying a capital ...
-
Goldman Sachs: Earnings Estimates Get Whacked - Deal Journal ...blogs.wsj.com/deals/2011/.../outlook-shrivels-for-goldman-earnings/ 5 days ago - According to FactSet, the average of analyst estimates for Goldman's third-quarter earnings has been cut in half in just three weeks. At the end of August, the ...
-
Goldman Bracing for Yet Another Weak Quarterly Earnings Report ...www.advancedtrading.com/infrastructure/231602136 1 day ago - In a note to clients, Barclays analyst Roger Freeman cut his earnings forecast for Goldman to a loss of 35 cents a share after a prior prediction of a $2.40 per
- Goldman Could Chop Another 3000 Staff (GS, BAC, MS, C, WFC - Goldman has already indicated that it would cut $1.2 billion from its operating ... The research firm also lowered target prices and earnings for Goldman Sachs. ...
- Deutsche Bank Sees Goldman Sachs (GS) Posting a Loss in Q3
If
one were to click through on the links above this chart leading to the
various sell side downgrades, the main focus is on accounting earnings
diminishing primarily as a result of potential trading issues. These
issues were covered in our report two months earlier, yes, but there are
several things we covered that the sell side missed, and apparently is
continuing to miss. It is these "misses" that will be the focus of the
next two articles on. As a teaser, I urge all to read (or reread) the
controversial piece: So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? and stay tuned as I post part two of this documented virtual squid hunt over the next few hours.
Related reading and media:
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?
- advertisements -
Reggie, been a big fan of your work, not that I am smart enough or patient enough to follow it, but telegraphing your intentions before a battle or showing the other guys your plans/analysis is never wise. They have resources to call upon, ya know.
So what's the deal?
'the deal' as Reggie explains in the first minute of the Vid above your post is that Our Reg is an independent analyst and took decisions when setting up his commercial operation to be free of conflicts on interest that the other bent crones, sorry financial analysts, in the industry display week in week out.
Just on trading revenue alone, I'm shocked. I always hear Goldman makes like100 mill a week frontrunning. But I can see they make solid money at specific times-where the graphs square off and they hold for a long time.
I'm wiling to bet those are areas near or at major announcements by CB's or the FED or the SP ratings services.
So, the squid can only make money when they are frontrunning-but they cannot frontrun all the time-only when they play ball with Ben and the NYFed. You know Geithner is dying to help them.
Looks like they have a major trend change in revenue-downwards. But the plus periods come in massive pileups
Well done reggie, have a good weekend.
I love the smell of calimari frying in the morning.
You're good, Reggie, very very good. I enjoy your anatomical (and functional) dissection of these tough problems...Thanks!
I love your anatomy.
Reggie we all know GS was going down hard in 08 but for the saving grace of TARP, bank holding co. status, mark to model,Buffett investment,AIG bailout, and access to various Fed discount windows.
Who invests in this beast anyway?They'll just take the company private when the stock gets low enough.
Well done on the collage, I needed the hearty lol this morning.
Per usual, great analysis here, Goldman is destined to fail, it's been a slow motion train wreck since 2008, the regulatory capture and repeated client-fucking shenanigans masks the reality that getting lucky is no substitute for actually being good at your profession (as has been recently demonstrated by John Paulson).
I actually see some parallels with this, conceptually, in Blackstone.
http://www.forbes.com/sites/steveschaefer/2011/09/28/kkrs-henry-kravis-any-fool-can-buy-a-company/?partner=yahootix
Blackstone = "any fool" (ironically, I'd probably put KKR in this category too). They've been going hog wild buying, of all things, shopping malls. Way to catch that consumer wave from malls to online, Blackstone. Also, it's trading under the assumption of a forward P/E of 6.72. It's current P/E is 103.50. The payout ratio for it's last dividend was 918.72%. The current EPS is .12, and is expected to double to .25 by the October 24th reporting, and by this time next year, is expected to go to 1.98!!!!! Oppenheimer's guidance on this one was $72/share back in February, latest guidance in mid Sept. from Ticonderoga is $17. Insiders have sold the hell off, they now own exactly .01% of the shares. Short ratio currently at 1.53, which is a little high-ish, but I think there's still plenty of room here.
So Goldman is trying to blow up Morgan Stanley just like Hank Greenberg said they set about to destroy AIG. No news there. At some point they'll be blowing up the Freedom Towers too. One day someone will explain all this "blowing up thing" to me. I imagine they'll be asking for their vote in November as well. "vote for me or I will kill all of you" I imagine. Hard to imagine any of this garbage is legal in the first place. Buy gold is all it says to me.
Zulu warrior AND captain Nemo ! Squiding time is here again...Lets twist...
But is the MS going down the tubes or will get bailed like AIG?
I sure can't trust the rating agencies anymore than staying dry when pissing against the wind.
Nail them on the cross Reggie!!
http://www.zerohedge.com/contributed/BoomBustBlog/So-When-Does-3+5=4-Whe...
page not found
Keep up the great work. Thanks...love the smell of fresh burnt squid.
it seems to give you a zerohedge page when the reggie site is busy ? ?
http://boombustblog.com/BoomBustBlog/So-When-Does-3+5=4-When-You-Aggrega...
Great work reg. You are the man. Kill the squid.
Reg. I look forward to your blog stuff every day!! Great job... But i wouldnt let you within 12 inches of my wife!!!
You know what they say... Once you go reg...
That's probably close enough for him to get the tip in!
You beat me to it :-)
Squid...it's whats for dinner! YArrrrrrrrrrrrrrr! Nice post Reggie. Good Hunting!
Gettem Reggie!!
Rastafari!
great stuff and you made me laugh, go get em
Reading these posts leaves me with feelings similar to those experienced while watching a certain Chrisian Bale movie. I think Carlie Simon said it best...
Thanks for the info, though.
I thought most analysts lived on Red Bull and Hot Pockets. Reggie must blog from the gym. Look out squid!
Not only is Mr. Middleton exceedingly generous with his financial insights, his what could be perceived as self-deprecating humor is refreshing. I like dressing up in the garb of my ancestral warriors too.
Dang.
Reggie Middleton is RIPPED!
And... black? Not that there's anything wrong with that...