Using Veritas to Construct the "Per…

29-04-2017 Hits:25065 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:26363 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:26030 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:27593 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:27369 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:29767 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:18746 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:28536 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:28570 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:28782 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:30538 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:30115 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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I know the stock market has been on a tear as of late, which did not do well for those of us trying to short shoddy fundamentals. That doesn't help companies burdened with the dubious combination of excessive debt and shoddy business models though. I analyze companies, and I can tell a strong company from a weak one. My analysis may take some time to bear fruit when the government, the media, and the major market players act in concert to suspend null matter that happens to be a decent portion of the S&P 500. Alas, although I can't control stock prices, I can (as the child star in "The Sixth Sense" alludes) "see dead people"!

The problem with the bad business model powered by debt is that you cannot tell it was a bad business model without delving heavily into the books. The companies with these models were able to borrow money and push the borrowings out as earnings which seemed to have easily fooled both the naive retail investor and the lazy institutional investor who never bothered to look at where the "so-called" money was coming from.

Well, the easy money well has dried up, and it will not get refilled any time soon. Hence we see insolvencies, bankruptcies, and "dead people". A prime example of not being able to roll over debt was General Growth Properties where I issued a lot of predictive research before the fact, but it will go way beyond overleveraged development companies.

First let's look at commercial and industrial lending from a historical and comparative perspective using data from the Wells Fargo economics team, who sees green shoots as well except for some distinct factual observations in commercial and industrial (C&I) lending:

ci_vs_fed_funds_rate.jpg

In looking at previous recessions (the gray shaded areas), one can easily determine that C&I lending will drop precipitously, even if not particularly after the recession is over.

inventories_vs_ci_loans.jpg

The drop in C&I also seems to run a very tight correlation to business inventories. Basically destocking softens credit demand, or is it the other way around???

Now, the question is not which came first, the chicken or the egg. It is what is responsible for the drop in credit, suppy or demand destruction. I say both, but listen carefully. Responsible borrowers do not want credit now. They are trying to retrench, both on the corporate and the consumer side. There is a large swath of potential borrowers who are very hungry for loans though. These are the adverse selection crowd. The guys who shouldn't have been lent to in such excesses in the first place, but were before the bust of the shadow banking system (which we will get to soon), and whose existing loans are coming due for rollover and refinance. These are the guys whose business models are predicated on bubble economics and easy credit, who are literally walking zombies, and who will go down, regardless of how high the stock market rallies.

Comparisons to other recessionary periods are not necessarily tantamount to being accurate this time around though. Why, because the majority of corporate and consumer credit, paricularly in the US, no longer exists or is essentially a government entitlement program, ex. consumer and corporate welfare.

Click to expand

market_based_vs_bank_based_credit_sources.jpg

Source: NY Federal reserve

The following is an abstract of research from the NY Fed on the "shadow banking system", ex. the securitization market, which for all practical intents and purposes, no longer exists in any significant form.

The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.

How did we get so dependent on securities to supply us with loans. Well, Wall Street is the answer, mein freund.

Click to enlarge

growth_of_credit_sources.jpg

When I say the market no longer exists, I really mean it no longer exists...

abs_history.jpg

As excerpted from the Fed paper,"
However, the drying up of credit in the capital markets would have been missed if one paid attention to bank-based lending only. As can be seen from Figure 7, commercial bank lending has picked up pace after the start of the financial crisis, even as market-based providers of credit have contracted rapidly. Banks have traditionally played the role of a buffer for their borrowers in the face of deteriorating market conditions (as during the 1998 crisis) and appear to be playing a similar role in the current crisis."

asset_growth_rates.jpg

From the Fed report, "Securitization refers to the practice of parcelling and selling of loans to investors. It was intended as a way to disperse risks associated with bank lending so that deep-pocketed investors who were better able to absorb losses would share the risks. But in reality, securitization worked to concentrate risks in the banking sector. There was a simple reason for this. Banks and other intermediaries wanted to increase their leverage – to become more indebted – so as to spice up their short-term profit. So, rather than dispersing risks evenly throughout the economy, banks and other intermediaries bought each other’s securities with borrowed money. As a result, far from dispersing risks, securitization had the perverse effect of concentrating all the risks in the banking system itself."

 

Armed with the knowledge of what has truly happened to our banking and lending system, it really makes one wonder what will become of the latest actionable intelligence subject forwarded to subscribers (see CVC Intelligence  note Technically insolvent Intelligence note 2009-07-29 00:40:46 926.20 Kb):

XXX has a structurally weak balance sheet loaded with a significant amount of debt, negative shareholders' equity and an enormous amount of goodwill (excess costs over fair value of net assets acquired) making the company, technically, an insolvent concern. As of March 31, 2009 the company had total assets of $9.6 bn while tangible assets (deducting only goodwill representing excess costs over fair value of net assets acquired) stood at $8.5 bn. In contrast the company had total debt of about $12.2 bn. Besides this, the company had negative shareholders' equity of $5.4 bn while tangible tangible equity (deducting only goodwill representing excess costs over fair value of net assets acquired) was at negative $6.6 bn. XXX's Altman's Z-score has deteriorated sharply over the past two quarters declining from an already alarming 0.53x in 1Q08 to an abysmal 0.40x in 1Q09 (an Altman's Z-score below 1.81x indicates serious financial trouble and a high chance of bankruptcy with a historical 72% probability of bankruptcy over the next couple of years).