Using Veritas to Construct the "Per…

29-04-2017 Hits:94540 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:85471 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:85838 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:89940 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:88376 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:88119 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:59260 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:87709 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:87266 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:87607 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:94008 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:91299 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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Okay, I'll admit it. I watch CNBC when I should be trying to make money. What can I say? It's entertaining. On CNBC today, there are the usual cadre of long only guys talking their book. Don't get me wrong. There is nothing wrong with talking your book, after all that's all that I do. But there comes a point where you would want a little common sense to be thrown in there as well. Being long only, regardless of the trend of the market cycles and macro environment is akin to driving a car that can only make right turns. Seriously, it is a simple as that. Despite this undeniable fact, we still have the long only crew who help develop mentalities that produce what would be some fairly humorous happenstances if your money wasn't actually at stake.

For instance:

  1. Lehman went bankrupt yesterday. It's ratings get dropped severely - shortly thereafter???
  2. Goldman and Morgan get pummeled today and yesterday in the markets. I am sure I am the only one who had outright sell on Goldman (not to mention sell short). More than 100% in return later, who still has this company as a hold or buy. Please pundits, limit the bullsh1t on the "I'm in there for the long term" speeches. I'm in it for the long term as well. That doesn't mean that I'm willing to voluntary let me money scatter in the wind.
  3. Have you guys hear the "AIG is not insolvent, it simply has a liquidity problem." line yet? The inability to meet your obligations due to a lack of cash is called...... are you ready???........ INSOLVENCY!!!
    1. From Wikipedia: Insolvency means the inability to pay debts when they fall due. 

      This is different to having negative net assets. A business can have negative net assets showing on their balance sheet but still be (cash flow - I had to add this for accuracy) solvent if ongoing revenue is able to meet debt obligations. Reggie comment: The article does not distinguish between cash flow insolvency and balance sheet insolvency...

      Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency... Under the Uniform Commercial Code, a person is considered "insolvent" when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts as they become due, or is insolvent within the meaning of the Bankruptcy Code. This is important because certain rights under the code may be invoked against an insolvent party which are otherwise unavailable.

  So, not only is AIG insolvent, but so are many of its financial services brethren. This insolvency will not be assisted, at least significantly, by another rate cut. To add, the Fed's mandate is not to guaranty the bonuses of traders. The rate cut will placate the market for an hour or two, and then it will fall - just like it did with the last 3 rate cuts. It will also increase the risk of inflation. As partial evidence of the inability of rate cuts to significantly assist the insolvents in our financial system, I bring you excerpts from "The Anatomy of a Sick Bank!".


This is an insolvency issue, not a liquidity issue! I have been banging the table on this for almost a year... 

As concluded in the bullet list above, the trifecta of diminishing margins, increasing insolvency, and high leverage leads to a sick bank. I would like to delve deeper into each symptom and side effect in order to identify the sickest amongst the Doo Doo.

Insolvency exists for a person or organization when total financial liabilities exceed total financial assets. Financial and real estate institutions that have binged on overvalued risky assets at the top of a bubble, paying for said assets via highly leveraged credit, are now facing the effects of the devaluing of those assets and that devaluation being applied against the excessive debts that have been accumulated to buy those assets when they were bubblicious. Although the Fed appears to by trying to use excessive liquidity through rate reductions to re-inflate risky asset prices (the rate reductions bypass the debt, and only inflate asset prices) in a bid to make these institutions more solvent, the process is backfiring. The assets that weren't binged but are relied upon for daily consumption are inflating, but the speculative real assets that were at the heart of the problem are still devaluing against a mountain of debt. Lots of debt, diminishing collateral. Whoa!   Click any graph to enlarge to a full page, presentation quality print .


Solvency ratios

There are a variety of ratios and metrics floating around that attempt to measure the risk of failure in banks. The Texas ratio has received a lot of media attention lately, and is simple and straightforward. It is a measure of a bank's credit troubles, developed by Gerard Cassidy and others at RBC Capital Markets. It is calculated by dividing the value of the lender's non-performing loans by the sum of its tangible equity capital and loan loss reserves. 

In analyzing Texas banks during the early 1980s recession, Cassidy noted that banks tended to fail when this ratio reached 1:1, or 100%. He noted a similar pattern among New England banks during the recession of the early 1990s.


As you can see, some of the Doo Doo banks have 6/10th's of their feet in the grave already. To be realistic in today's environment of high leverage and structured products, a Texas ratio of 100 is unlikely. A bank that even got close to 1o0 would be out of business before it got there. Case in point is Countrywide, at a 40% ratio, is only still in existence due to a proposed acquisition by another troubled bank. Huntington Bancshares, at 60%, is literally the walking dead and is assuredly on some (if not many) government entity's watchlist. 


  Looking back over the last two quarters, one can notice significant jumps in this ratio for the entire spectrum of banks on the Doo Doo list. These spikes are quite significant in most cases, and are fairly consistent, in that they are for several quarters and not a one time phenomena.



Leverage Significantly Exacerbates Solvency Problems, and Ladies and Gentlemen We Have Solvency Problems 


To quickly recap how this leverage works let's revisit "Banks, Brokers, & Bullsh1+ part 2" wherein I breakdown the layered effects of leverage on Morgan Stanleys books.While commercial banks are generally less levered then investment banks, the effects of leverage and the multiplier effect of cascading losses remain the same. I urge all who are not familiar with it to peruse the afore-referenced link.

In the graph above, notice how the banks in question are bringin leverage down and realizing substantive losses in the process. The standout is Citigroup, who in essence is bringing large swaths of assets on balance sheet that were off. Citi is simply coming clean on past leverage, and not truly increasing it.

Bernanke  comes to the rescue that doesn't

Federal Reserve chairman Ben Bernanke has spearheaded the most aggressive rate cutting and monetary policy action in the history of this country. He has reduced the effective federal funds rate by nearly 50% in just 5 calendar quarters, from an already relatively low 5.3% to 2.6%. 

History's most aggressive rate cutting does nothing to help sick banks. As a matter of fact, some of the banks got sicker after the rate cuts. For those not familiar with bank numbers and net interest margins, let's look at it from a manufacturers perspective. Banks inventory can be equated to capital. Banks borrow to get inventory, just as manufacturers borrow to get physical inventory. The banks, and the manufacturers must pay interest on these loans. So, let's say the manufacturer has to buy inventory (bank's capital) for $5 each to make widgets. The company then sells widget inventory items at $5.20 each retail. This gives the manufacturer a 4% profit margin (the manufacturer must turn the borrowed money into product, where the banks can actually use the borrowed money as product). Now, the manufacturer runs into trouble because he bought 40 million too many widgets due to his belief the whole world would go on buying more widgets then it needed, and could afford, forever. So, the government comes to bailout out,,, oh, sorry about that, apply monetary policy to the situation and subsidizes the cost of said widgets to the manufacturer by 50%. That's right, the government takes 50% off of the manufacturer's widget costs so the manufacturer will have more profit in order to dig himself out of this hole from which he so aptly and skillfully dug himself into.

But, guess what's happening? Contrary to all of the "know it all" pundits, arm chair investors and ivory tower economist's preachings and teachings (no disrespect intended towards "know it all" pundits, arm chair investors and ivory tower economistsWink) the manufacturer still can't make money and his profit margins are remaining the same, or even going down in some cases.    Click any graph to enlarge to a full page, print quality presentation.


The primary reason why the Fed's lowering of the interest rates is not helping the banks is because monetary stimulus via discount windows and low interest rates can solve liquidity issues, which the banks have - but the banks liquidity issues stem from INSOLVENCY, and illiquidity. Thus, all the Fed is doing is taking a pricey, risky (inflation and weakening currency that pisses off our trading partners) and volatile band aid and applying it to deep and gushing wound. Those band aids with the pretty colors do indeed tend to make Mama's baby's little boo-boo feel better, but from a scientific perspective do very little in regards to addressing deep puncture wounds.


Thinning Margins are Impervious to the Medicinal Elixir of Low Interest Rates Proffered by the Fed. Unfortunately Inflation is not!

  image110.pngThis is an example of what a healthy response to the Fed's rate cuts should look like. As the funding rates (which are the primary expenses for commercial banks) drop the profit margins in the capital intensive businesses should expand (net interest margins). As you can see, JP Morgan took full advantage of the Fed's bailout-i-licious actions, although as you can see we seem to be hitting a point of diminishing returns. Let's see how the banks on the Doo-Doo 32 list have fared under this rather generous environment created by the Fed Chairman.The Fed Funds rate has dropped 225 basis points over the last 5 quarters, nearly halving bank's funding costs. As the most prescient among you have already surmised, we have a slew of sick banks, and they seem to have actually choked on Dr. Bernanke's thin rate elixir. Oh Uh! Heavens to Mercutroids! Whatever will we do when the Fed can no longer rescue the banking system by dropping rates??? Oh my....

Keep in mind that if the Fed is forced to raise rates for whatever reason, the marginal banks on the Doo-Doo list are toast.

 A visual depiction of margin health among Reggie Middleton's Doo-Doo 32 is below. Remember, these banks have a multi-dimensional problem set. Even though some may be doing relatively well via interest margins, they are getting killed in mark-to-market losses, credit risk exposures, etc., and vice versa.



 The Visual Doo-Doo


  Bank Y-o-Y share price Chg in NIM (1Q08/1Q07), FF:-2.25% Texas ratio Tangible Equity/Assets?  
Watch  your money! Huntington Bancshares -63.10% 0.31% 59.5% 7.6%  image072.png
Watch  your money! WAMU * -80.40% 0.21% 47.0% 6.9%  image057.png
Watch  your money! National City Corp -84.70% -0.34% 40.4% 6.5%  image130.png
Watch  your money! Countrywide * -86.25% -0.10% 38.8% 4.7%  image140.png
Highly Suspect! Popular Inc -41.50% 0.34% 29.7% 7.4%  image058.png
Highly Suspect! Fifth Third Bancorp   0.16% 26.9% 7.7%  image200.png
Approaching the brink! SunTrust   0.05% 26.4% 7.2%  image078.png
Very Sick Bank First Horizon -75.20% -0.16% 26.3% 6.6%  image226.png
Very Sick Bank Wachovia Corp -60.40% -0.24% 23.9% 6.2%  image148.png
Very Sick Bank Synovus Financial Corp -66.80% -0.34% 21.2% 9.0%  image086.png
Very Sick Bank Marshall & Ilsley -53.70% -0.31% 18.3% 8.3%  image011.png
Very Sick Bank Regions Financial Corp -54.20% -0.42% 18.3% 6.7%  image234.png
Sick Bank KeyCorp -49.50% -0.22% 17.2% 9.2%  image008.png
Sick Bank Wells Fargo -26.80% -0.10% 17.0% 7.0%  image004.png
Sick Bank First Charter -37.90% -0.07% 16.8% 9.4%  image098.png
Sick Bank M&T Bank Corp -24.60% -0.19% 16.4% 7.0%  image088.png
  Citigroup   0.16% 16.3% 6.1%  image146.png
Sick Bank Associated Banc -21.30% -0.06% 15.2% 7.8%  image066.png
Sick Bank BB&T Corp -31.60% -0.20% 15.1% 7.3%  image076.png
  Sandy Spring Bancorp   0.12% 15.0% 8.8%  image136.png
Sick Bank Sovereign Bancorp -60.80% -0.35% 14.4% 6.9%  image246.png
Sick Bank Zions Bancorp -49.50% -0.21% 14.0% 7.2%  image240.png
Sick Bank U.S. Bancorp 1.90% -0.13% 11.5% 8.1%  image084.png
  Harleysville National   0.09% 10.9% 8.1%  image032.png
Sick Bank Bank of America -37% -0.12% 9.4% 5.6%  image092.png
Sick Bank TriCo Bancshares -29.40% -0.24% 8.6% 10.8%  image199.png
Sick Bank Nara Bancorp -20.80% -0.41% 8.1% 10.6%  image132.png
Thinnest Capital in Class PNC   0.40% 7.4% 6.8%  image143.png
  JPM Chase   1.29% 6.5% 5.9%  image110.png
  Glacier Bancorp   0.09% 6.4% 10.9%  image224.png
Sick Bank Capital One -47.14% -0.12% 5.8% 9.4%  image096.png
Sick Bank CVB Financial -9.10% -0.13% 0.9% 7.7%  image147.png
Averages   -46.2% -0.04% 19.0% 7.7%