Using Veritas to Construct the "Per…

29-04-2017 Hits:88575 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:82261 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:82155 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:86650 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:83081 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:85203 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:56307 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:84534 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:84241 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:84101 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:90591 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:88162 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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This is a refresher to the The Riskiest Bank on the Street piece that I posted a few months ago on Morgan Stanley. Let me get straight to the salient points.

High exposure to level 3 assets to cause significant write-down - Morgan Stanley’s exposure to level 2 and level 3 assets (this is about more than subprime) stood at $226 bn and $74 bn as of November 30, 2007. Morgan Stanley has the highest ‘Level 3 assets-to-equity’ of 236% after Bear Stearns. In 4Q2007, Morgan Stanley reported a $9.4 bn write-off primarily relating subprime related mortgages. With nearly 50% decline in ABX-HE-BBB 06-2 index since November 2007, more losses are likely to be reported in the coming quarters.

 

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Drying liquidity in the repo market to impact Morgan Stanley’s funding - The $4.5 trillion repo market, accounting for 20-25% of assets of five top brokerage firms, enables short-term financing by selling securities and agreeing to repurchase them. During good times these loans were inexpensive and could be easily rolled over. However with declining value of securities used as collateral, lenders in repo market have become increasingly worried about losing money on securities used as collateral. In addition to being selective and cautious while lending, lenders are also demanding higher amount of collateral. For instance, for every $100 to be lent, lenders are requiring $105 for bonds backed by Fannie Mae and Freddie Mac (up from $102 few weeks ago) and $130 for bonds backed by 'Alt-A' loans. This is leading to tightening credit conditions and severe liquidity crunch in the repo market.

The liquidly crisis took its toll on Bear Stearns (see The Breaking of the Bear) which sought an emergency funding from the Federal Reserve on March 14, 2008, as its clients withdrew assets while their creditors stopped renewing short-term loans. Bear Stearns' financing crisis has created wide spread concerns on the brokerage firms relying heavily on repo markets for day-to-day cash requirements. Morgan Stanley relies heavily on short term financing with $162.8 bn or 16% of total assets in form of repo financing as of November 30, 2007. Although we believe that Morgan Stanley along with other brokerage firms could face short-term cash problems owing to declining confidence in the capital markets, the Fed’s recent initiative by allowing brokers to borrow directly from the central bank (and lowering the Fed rate to 2.25%) would ease the liquidity concerns to a considerable extent. This is something that I will explore in depth in the very near future, since much of the level three assets may or may not qualify for "Fed Funding". This may portend less liquidity than the popular media may have you believe. See the overview of recent events for more on the Fed's move .

 

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Decline in investment banking revenues - In view of declining activity in the capital markets, Morgan Stanley in line with other brokerage firms, is expected to show a decline in investment-banking revenues. In 1Q08, Lehman brothers and Goldman Sachs reported a 20% and 16.4% y-o-y decline in net revenues. As per Bloomberg, Morgan Stanley’s sale of stock and equity-linked offerings declined to $7.77 bn in 1Q08 compared to $14 bn 1Q07 while Morgan Stanley’s sales of high-yield bonds plunged to $101.5 mn from $2.46 bn in 1Q207. Morgan Stanley’s reported earnings dropped 47% in 1Q08. This has been hailed as a near "blowout" quarter by the sell side and the media, even though it clearly shows a rapidly deteriorating business and is a very disappointing result. The street's game of lowering expectations to create the aura of "better than expected" results should not pass muster with the quality of readers that I have visit my blog. 

Challenges ahead - Brokerage firms are facing several challenges owing to a slow down in economy, increased regulation, lightening credit conditions and reduced capital market activity particularly relating to mergers & acquisitions and corporate-finance. Traditionally brokerage firms have borrowed money to growth their business. Now with credit being harder to come by despite falling interest rates, brokerage firms going forward will operate at reduced leverage levels impacting their future profitability.

Valuation – Owing to continuing write-downs due to widening credit spreads and persistent weakness in the credit markets, we expect financial services firms’ valuation to remain under pressure until the credit market situation eases off significantly. Decline in fixed-income securities has negatively impacted the book value of securities. Based on a 15% haircut of illiquid assets, Morgan Stanley’s adjusted book value stands at $18.4 per share. Based on price-to-book value multiple of 1.23, Morgan Stanley’s valuation comes approximately $22.7 per share implying a downward potential of 47.0% from current share price of $42.9.

Next up will be a complete and verbose forensic analysis of Assured Guaranty.

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Source: As per latest filings