Using Veritas to Construct the "Per…

29-04-2017 Hits:85773 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:80003 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:79864 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:84342 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:80884 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:83130 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:54140 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:82264 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:82117 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:81985 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:88010 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:85884 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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Note the graph below that shows the bank borrowng from the Fed over the last century. A picture is worth a thousand words. Imagine imposing a 10 year (mean time between recesssions, roughly) over this graph. The NBER official recessions are the gray bars on the chart. This speaks volumes. Although the Fed has seeming declared itself the checks and balances are of the government opposite the Administration and the Legislature by donning the powers to change the very nature of Fed lending,they have done so nonetheless. This means there was a percieved grave need for such. This need apparently never manifested itself during the previous 19 recessions over the last 100 years or so. 'Nuff said.

 To think, some actually argue whether the banking crisis is over or not.

Here is the chart of non-borrowed researves.

 More of the same glaring evidence of a truly unprecedented disruption. In short:

Non-borrowed Funds

As a result of increased counterparty risk inter-bank borrowings between the banks had dried up. In response, Federal Reserve (Fed), in December 2007, announced Term Auction Facility (TAF) to facilitate banks to borrow directly from Fed against a wide range of collaterals. The interest rate on the borrowing was decided to be determined through an auction process.

A plunge in non-borrowed reserves (total reserves minus borrowed reserves) since January 2008 has attracted a lot of attention in the financial community to argue if it signaled distress in the US banking system.

One would need to understand the flow of money to assess the underlying essence of transaction. The money was lent to banks, and for each dollar lent through the TAF the Fed was careful to liquidate a dollar of its holdings of Treasury bills and bonds to keep its overall balance sheet unchanged. The money borrowed by banks under TAF by Fed was classified as borrowed funds, the figure of which was subtracted from total reserves.

Essentially, it amounted to indirect lending by banks to each other through Fed. To understand clearly, please see the diagram below. Bank 2 borrows from Fed under TAF against collaterals. Fed sells an equal amount of Treasury bills to Bank 1 to raise an equal amount. As a result, the amount received from Bank 1 is being used to lend to Bank 2. The TAF didn’t add to the money supply in the economy as Fed liquidates its holdings of Treasury bills for amount of dollar lent through the TAF. The figure of negative non-borrowed reserves in Fed’s balance sheet is represented by issuance of treasuries and bonds to banks.

 

Intermediately role of Fed

image001.gif

 

Now, as the Fed launders this bank money, one must call into question the need to do so to such a dramatic extent in relation to this nations history. The answer is found in my asset securitization crisis series. Take a look at how we got to where we are now:

The Asset Securitization Crisis Analysis road-map to date:

  1. Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
  2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
  3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue 
  5. Municipal bond market and the securitization crisis - part I
  6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
  7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  9. More on the banking backdrop, we've never had so many loans!
  10. As I see it, these 32 banks and thrifts are in deep doo-doo!
  11. A little more on HELOCs, 2nd lien loans and rose colored glasses
  12. Will Countywide cause the next shoe to drop?
  13. Capital, Leverage and Loss in the Banking System
  14. Doo-Doo bank drill down, part 1 - Wells Fargo
  15. Doo-Doo Bank 32 drill down: Part 2 - Popular
  16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
  17. The Anatomy of a Sick Bank!
  18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
  19. GE: The Uber Bank???
  20. Sun Trust Forensic Analysis
  21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
  22. Goldman Sachs Forensic Analysis
  23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest...
  24. Part one of three of my opinion of HSBC and the macro factors affecting it

 

 

Thursday the July inflation estimate was released: up 0.8%, due to rising food, energy, airline and apparel prices, and up 5.6% from the level 12 months ago, for the highest jump in 17 years. Meanwhile, S&P 500 earnings were down about 22% in the second quarter, after falling 16% in the first, with most of that damage in the financials. With a global slowdown under way, the likelihood is that S&P 500 profits will show further quarterly drops, perhaps for the next six to 12 months.

 

The Real Effects of the Credit Crunch On EMU Member CountriesAug 14, 2008

  • ECB: Results of July 2008 bank lending survey: lending standards for corporates and households remain tight, access to capital markets remains difficult.
  • IMF Selected Issues: Estimates of the total subprime-related losses in euro-area global banks were around $45 billion as of March 2008 (losses for all of Europe were much larger (about $121 billion), but substantial chunks of these losses were in global banks based in the United Kingdom and Switzerland.)
  • $45bn corresponds to 2% of of the euro-area banks’ capital and reserves--> if banks target a certain leverage ratio, they would cut lending by $45bn if no additional capital is raised--> The paper assumes a decline in the supply of bank loans by 10 percentage points leads to a decline in real GDP by about 1 percentage point. A loan decline by 2.0 percent therefore corresponds to 0.2 percentage point drop in real GDP.
  • As a market-based indicator that incorporates market participants’ view on banks’ situation and outlook, distance to default can provide an alternative assessment of the likely impact of the shocks that hit the banks--> The average distance to default in January 2008 was 1.9 standard deviations lower than in July 2007. This translates into a decline in real credit by 2.9%. That in turn translates into a real GDP decline by some 0.3 percentage points.
  • Caveats: The impact of bank losses on lending, and thereby on output, can be lower if banks increase their capital-to-asset ratios (decrease leverage) through capital injections rather than (or in addition to) asset manipulation. The impact can also be bigger if banks aim to decrease their leverage target, “which is quite likely given the overall increase in risk aversion and if they get hit by additional shocks, such as stock price declines.â€ï¿½
  • JPMorgan: Credit headwinds modest for Germany, huge for Spain: Turn in credit cycle to dampen growth overall and widen dispersion of performance across the region
  • cont.: For the Euro area as a whole, the credit expansion looks to have added around 0.8% points to nominal growth each year during 2004-6. Half of this came from increased household borrowing and half from increased corporate borrowing.
  • cont.: For Germany, the credit cycle appears to have had no effect on the real economy: households and corporates both increased their financial surpluses slightly. In France, the impact of the credit expansion on nominal growth looks to have been around 1.3% of GDP each year, with a larger contribution from corporate borrowing. In Italy, the impact appears to have been small.
  • cont.: The impact of the credit expansion on Spanish nominal growth looks to have been huge, around 2.3% points on average in 2004, 2005, and 2006. Around a third of this came from increased borrowing by households andtwo thirds from increased borrowing by corporates.
  • RGE: Non-financial corporate financial positions in EMU more unbalanced than household sectors (corporate balances in Spain -8% of GDP; France -4% of GDP; Italy and Germany about balanced)--> deleveraging hits EMU countries asymmetrically thus pro-cyclically enforcing performance divergence between Spain and Germany on both ends of the spectrum.

 

Non-Investment Grade Corporations: Current State and Historical Context Aug 18, 2008

  • Junk bond sales since May have been at the lowest volume since 1994
  • Sirius XM's Karamazin admitted that the company signed an "ugly" debt deal in order to close the merger, demonstrating the tight situation for junk rated corporations in the current market.  Moody's rates the company at Caa1
  • On Aug 13, 2008, Martin Fridson stated that CCC rated junk bonds now make up 23.5% of the overall junk bonds traded on the Merrill Lynch High Yield Master II Index.  That compares with 10.4 % ten years ago. (Financial News)
  •  In a study published by Kamakura on August 1, 2008 the company said that corporate default risk, globally, had risen by another 0.7 % in the month of July to 13.9% of public companies.  The highest rate since August 2003. (Reuters)
  • Given the current market dynamics, the default rate of non-investment grade corporations seems likely to increase dramatically in the not too distant future. (The Deal)   
  • Default rates for all types of bonds and obligations during 2006 and 2007 were nearing or were at historic lows.
  • Bloomberg: May 15, 2007.  ``The normal thing is two to four years after the issuance for defaults,'' said NYU's Altman. ``Deals with little covenants, toggles, push back the time-line. But it's gotta happen.''
  • At the end of 2006, Altman estimates that there was $1.05 trillion of junk bonds outstanding, and new issues accounted for $144 billion of that.  What worried Altman was that $20 billion of the debt issued in 2006 was in the bottom tier of junk bond status, an all time high. 
  • Shai Waisman, a seasoned restructuring lawyer quoted on Feb. 26, 2007 "Any number of triggers could really ripple through the system, and then worsen... If you'll excuse the cliche, we could have a true tsunami."
  • "The notion that somehow structured products take the risk out of the market is poppycock... Only someone who has never read history believes that"(Anders Maxwell). (The Deal)

These people, and others, who were largely ignored during the hey day of the debt financing bonanza of the past few years, are turning out to be right  

 

http://www.rgemonitor.com/images/r2/whiteminus.gif

Leveraged Loans and CLOs versus High Yield Debt: How Do They Differ?Jul 16, 2007

  • Leveraged loans are rated below BBB-
  • Yield advantage of high-yield bonds over loans disappeared after Fed hikes
  • Speculative-grade bonds offer fewer protections, lower recovery rates than loans

https://mm.jpmorgan.com/servlet/OpenPubServlet?skey=TU1SQy00NTg0NjUtMSw0MjAsRExZX0MxX0ZFRUQA&Name=1338877.pdf

http://www.researchrecap.com/index.php/2008/08/04/euro-area-subprime-bank-losses-to-hit-gdp-by-02-03-points/

http://www.ecb.int/stats/pdf/blssurvey_200807.pdf

http://www.imf.org/external/pubs/cat/longres.cfm?sk=22225.0

http://www.imf.org/external/pubs/ft/scr/2008/cr08262.pdf

https://mm.jpmorgan.com/servlet/OpenPubServlet?skey=TU1SQy00MzY2MDAtMSw0MjAsRExZX0MxX0ZFRUQA&Name=1293949.pdf

http://www.rgemonitor.com/euro-monitor/252522/is_the_corporate_sector_emus_achilles_heel

http://www.ecb.int/press/pr/date/2008/html/pr080609.en.html

http://www.voxeu.org/index.php?q=node/1188

 


 

Please find attached the initial screener for companies in the UK industrial / manufacturing sector. In this, we have covered 209 companies and comparing them on the basis of profitability, leverage, valuation and balance sheet ratios.

 

As you had mentioned during the call, we have broadly covered all the important metrics and focused more on EBITDA margins, Net profit margins, ROA, ROCE, D/E ratio, Interest coverage ratio, Current ratio, Price to earnings, EV/EBITDA and Free cash flow per share in this analysis. We have also prepared a scoring mechanism based on the above mentioned parameters and ranked these companies on a rating of 1-4 with 1 being the strongest and 4 the weakest on these financial metrics. We have also done a consolidated weighted average ranking for these companies after assigning weights to the above mentioned parameters based on their relative importance. However, this is just an initial attempt in rating / ranking these companies and we will refine it after consulting with you on the same.

 

Additionally, we have used the Altman Z score from Bloomberg to cross check our findings from this exercise. This will help us in further finding out the companies which could be potential short candidates.

 

Please let us know your comments / feedback on the same. Also, can we have a call to discuss and refine this further on August 18, 2008 (Monday) since we have a holiday tomorrow on account of Independence Day.


 

Please find attached list of 20 companies in the US industrial and manufacturing sector. These companies have been shortlisted based on the following parameters:

 

  • Price performance over last one year and last one month
  • 1 Yr Revenue Growth (with minimum absolute revenue amount)
  • Gross margin and operating margin
  • Market cap
  • Debt/Equity ratio

 

We have followed the following methodology for shortlisting:

 

  • A list of all listed manufacturing companies with market cap of more than $100 million was selected from Bloomberg under SIC classification – Aircraft building (17), motor vehicles (31), ship building (1), industrial equipment (157), motor cycles (2), metal producing (39), fabricated metal (38), electronic equipment (226). This resulted in an output of 512 companies.
  • All the 512 companies were evaluated on four different set of parameters to arrive at four different lists. The four set of parameters were –
    • Negative revenue growth, gross margin less than 40%, operating margin less than 10%, 1 year price performance greater than -40% and 1 month performance greater than -15%
    • Market cap less than $500 million, revenue growth less than 5% and operating margin less than 10%, 1 year price performance greater than -40% and 1 month performance greater than -15%
    • Market cap more than $500 million, revenue growth is less than 2% and operating margin is less than 5%, 1 year price performance greater than -40% and 1 month performance greater than -15%
    • Debt Equity is greater than 100%, Revenue growth is less than 20%, 1 year price performance greater than -40% and 1 month performance greater than -15%
  • The companies obtained through above criteria were combined into one list. A total of 78 companies were included in the list.
  • Further refining was done on the basis of size, operating and financial parameters to arrive at the final list of 20 companies

 

Of the total 20 companies we had selected, we have shortlisted the following 4 companies:

 

Navistar International Corporation

 

The company has huge debt liabilities ($6.8 bn) and negative shareholders equity of $562 mn. Its debt liability currently stands at approx. 60% of its total assets.

Recently S&P gave Navistar’s debt a below investment grade BB- rating -- with a negative outlook. All the company's competitors, including Paccar Inc, Volvo AB and Scania AB, earn investment grade ratings from S&P

The company is also in financing activities (for financing sale of trucks) and has around 50% of assets in the form of finance receivables. The current provision stands at mere 1.7% of the total receivables. Given the current problems in the consumer credit environment, the company can have double whammy from slow-down in sales and higher credit losses. Higher crude oil prices have had a denting impact on its revenues in recent quarters.

The company witnessed a 13.4% decline in its 2007 revenue off continuing subdued demand for automotives, and its operating margin declined to 2.6% in 2007 compared to 5.0% in 2006 off rising input cost and inelastic product prices.

Its interest coverage ratio is less than one, indicating insufficient cash flows to service its interest payments

The Company recently got relisted on NYSE after 16 months. The Company’s valuation multiples seem higher compared to its peers despite the fact that its operating margins are much lower.

The Company’s stock has witnessed a decline of nearly 14% in last 5 trading days

 

Crown Holdings Inc.

 

Crown has adjusted equity of negative $2 bn. Its current debt outstanding is at significant level of $3.8 bn, comprising nearly 70% of its total adjusted assets (excluding intangibles)

Based on its recent quarterly results, the company generated cash from operating activities of around $100 mn. This, on an annual basis, would amount to around $400 mn, which could prove to be grossly insufficient to repay its outstanding debt of $3.8 bn in next 7-8 years.

Its share price has witnessed an increase of 14% in last 52 weeks.

The company could witness bankruptcy as it doesn’t seem to have adequate asset to repay its liabilities.

 

Encore Wire Corporation

 

Slowdown in construction industry and rising copper costs had a negative impact on its revenues and operating margins, respectively. Its revenues declined 5.2% in 2007 while its gross margin nearly halved to 9.4% in 2007 from 19.6% in 2006. For its recent quarter, gross margin and operating margins were 6% and 0.8% as against 12.6% and 7.5% in the previous quarter this year.

Although the sales in the current quarter recovered as compared to the previous quarter, these were lower than the same quarter last year. Volumes have got hit in the six months ended June 30, 2008, decreasing 9.7% versus the same period in 2007

Declining new home unit sales and steeply sliding home prices have impacted the sales for the company. With housing sector not to expected turnaround in the near-to-medium term, the slowing revenues along with rising input cost is expected to seriously impact the Company’s margins

 

Wabash National Corporation

 

Revenues in 2007 declined 16%.

Although the company was able to improve its margins in the second quarter of 2008 as compared to first quarter of 2008 off better operational efficiency and production planning, the same is not likely to sustain in the future with rising raw materials costs. The pressure is evident from the decline in margins in the first six months of 2008 compared to the margins in the first six months of 2007. Gross margin fell to 4.6% from 8.7% and the operating margin fell to  a negative 3.3% from 2.7%

Volumes are dipping with macroeconomic and residential housing slowdown. Not only the results have been poor for the first two quarters of 2008, the company has also revised its sales guidance for the rest of the year. The company expects 32,000 to 33,000 new trailers sales for the whole year against the previous estimate of 38000