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:
What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
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.
Then 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:
I 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???):
Although 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 action/influence?
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?
Now, 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.
- BoomBustBlog China Focus: Inflation? Thursday, May 20th, 2010
- Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts Wednesday, February 3rd, 2010
- What Are the Odds That China Will Follow 1920’s US and 1980’s Japan? Wednesday, March 10th, 2010
- BoomBustBlog China Focus: Interest Rates Thursday, May 20th, 2010
- My China Ruminations Have Come to Pass As the Country Enters a Bear Market Tuesday, May 11th, 2010
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:
- Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding
- Thursday, 28 July 2011 The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
“It 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%) ].
While 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.
“If [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.”
Will 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.
Okay, 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 BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! 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 SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!"
He 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:
"He 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."
Ok, 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!
But 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.
The 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 media. 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."
Since 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
Bear 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 good...
Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back
Okay, 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
Model 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|
|Upside from current levels (US$)||-58.2%|
The 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?
Despite 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 | It appears that I should have dug deeper into Lehman! May 2008
Now 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...
After 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?
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...
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?
Welcome 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...
Yes, 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...
On 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..
...Similarly, 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.
According 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
That 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:
I 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): 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...
There's 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:
Research 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:
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?
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