Reggie's Blog & Proprietary Research

Reggie's Blog & Proprietary Research (1277)


The year 2009 was the year of reflation theories and bubble blowing. Theses of "Green Shoots", catching the bottom, and QE reigning supreme were the order of the day. Sure enough, asset prices (nearly all of them) went one direction, straight up. We all saw it coming, but guys like me who actually count the money and rely on the fundamentals didn't believe it was a sustainable gain. It wasn't a bull market, but a bear market rally. After nearly one year, the reflationists have had their hay day, or have they?

Sunday, 28 February 2010 18:00

HSBC is Performing as Expected

Written by

About a year and a half ago I warned that HSBC would be facing increasing and unanticipated (I was a contrarian on the China bubble) losses in Asia, as well as increasing losses on bad debt in the US. I believe I was one of the very few who threw this caution out there. I have included a free opinion along with the macro analysis to badk it up here: Part one of three of my opinion of HSBC and the macro factors affecting it . Subscribers can download the forensic reports: spreadsheet  HSBC_Holdings_Report_04August2008 - retail 2008-09-16 06:38:38 87.28 Kb and  HSBC_Holdings_Report_04August2008 - pro HSBC_Holdings_Report_04August2008 - pro 2008-11-06 10:11:09 138.89 Kb. As a refresher, the 2nd quarter 2008 review is available here: HSBC 1H 08 results update. There is a discernable trend.

From Bloomberg:

March 1 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, posted full-year net income that missed analyst estimates after impairments for bad loans rose and profit in Asia fell.

Saturday, 27 February 2010 18:00

Part 2 of the Mechel Overview is Available

Written by

I would like professional and institutional subscribers to know that they can always submit research requests. If we feel that there is some potential to the requests, we will follow up with custom research.

This idea, submitted by shaunsnoll, is developing into something worth looking into. See this asset manager's opinion at Seeking Alpha (http://seekingalpha.com/article/190073-high-conviction-a-russian-miner-leveraging-massive-china-demand) then download part one and part of our cursory overview and analysis. All may feel free to discuss this in the comments section below.

  • File Icon Mechel (MTLR) Overview, pt2 (NEW)
  • I urge all interested to download the Mechel (MTLR) overview. You can feel free to discuss it in the comment section of this thread if you desire. If anything of interest is brought up I will have the team dig in a little further.

    pdf  Mechel (MTLR) 2010-02-26 03:49:25

     Johnathan Weill has an excellent article on Bloomberg today illustrating just how BS the BS FASB accounting changes regarding mark-to-market really were. For all of those who wondered why I have stayed so bearish on the banks, stay tuned, but before we read this oh so interesting story, let me provide you with a graphical recollection of recent history via this chart sourced from Bloomberg:

    fasb_mark_to_market_chart.png

    If the engineered bear market rally is running off of the FASB generated lies, then we certainly do have another crash coming, don't we?

    I think it's safe to assume that the civil unrest in Greece over alleged "austerity" measures is real, and is material. According to CNBC, more than 20,000 protesters struck and marched through the streets. In a country of only 8 million people, that is an awful lot!

    Greece strike
    Getty Images
    Police arrest a demonstrator during a protest march to mark a 24-hour general strike on February 24, 2010 in Athens, Greece.

    Additional quotes from this story:

    The Socialist government meanwhile hit back at European criticism of Greece's fiscal management, accusing European Union partners of double standards and poor leadership.

    The 24-hour general strike grounded flights and disrupted services but stopped short of bringing Greece to a standstill.

    Scuffles broke out on the fringe of the protest, with police firing teargas to disperse groups of stone-throwing youths.

    "No sacrifices, the rich should pay for the crisis," demonstrators chanted as more than 20,000 marched on parliament in an otherwise peaceful protest...

    In a sign of persistent market jitters, Greece's borrowing costs rose on Wednesday after Czech Finance Minister Eduard Janota said Athens would find it impossible to slash its budget deficit as fast as promised...

    Deputy Prime Minister Theodoros Pangalos said Italy, France and Belgium had used the same techniques as Greece to mask their true deficits to qualify for the euro zone.

    "You simply put some amounts of money in the next year ... it is what everybody did and Greece did it to a lesser extent than Italy for example," Pangalos told BBC World Service radio.

    He said Germany was ill-placed to criticize Athens given its behavior during the Nazi occupation of Greece in World War Two, including the looting of central bank gold reserves...

    ... "Today, Europe's eyes are turned on us," said Yannis Panagopoulos, head of the private sector union GSEE.

    "We ask the government not to give in to the desires of the markets, to set people's needs as a priority and adopt a mix of economic and social policies that won't lead to recession but to jobs," he told the rally.

    Fitch Ratings on Tuesday downgraded the ratings of Greece's four largest banks, expecting fiscal tightening to weigh on the economy and loan demand, hurting profits.

    The strike coincided with a visit by EU officials assessing whether Greece is on track to cut its double-digit deficit.

    ...

    Some of the top secret AIG bailout info is out. Guess who's at the heart of it, making money by creating straight trash, selling it to its clients then buying insurance to benefit from its inevitable crash? I have been warning about Goldman's ability to sell trash to its clients for some time now.

    This is not a short post, for it is packed with a lot of supporting information, analysis and data. If you are looking for quippy paragraph, soundbyte or quick headline to get an overview of,,, well whatever, click here, or better yet, click here. For everyone else who may be looking for deeper investigative analysis and the unbridled TRUTH for a change, please continue on.

    First a little background info. Goldman is supremely overvalued in my opinion. It is even more so considering much of its profit is generated solely from the raping of its clients. I say this holding absolutely no ill will towards Goldman. This is strictly factual. Let's walk through the evidence, of profit potential, valuation, and the stuff behind some of the value drivers in their business model, like brokerage and investment banking...

    Monday, 22 February 2010 18:00

    The Beginning of the Endgame is Coming???

    Written by

    So, Fitch finally get's around to downgrading the Greek banks. The sovereign debt short is probably a bit crowded right now, and may be due for a squeeze, but the fundamentals and the macro situation still stands. As a matter of fact, I really believe that most investors, speculators, pundits and regulators are actually looking at the wrong sets of risks - hence may truly be surprised when the choco-pudding hits the fan blades. 

    From Fitch:

    Fitch Ratings-Barcelona/London-23 February 2010: Fitch Ratings has today downgraded the Long-term and Short-term Issuer Default Ratings (IDR) of Greece's four largest banks,  National Bank of Greece (NBG), Alpha Bank  (Alpha), Efg Eurobank Ergasias (Eurobank) and Piraeus Bank (Piraeus) to 'BBB' from 'BBB+' and 'F3' from 'F2' respectively. The Outlook on the Long-term IDRs is Negative.

    • Alpha Bank warned about in subscriber reports last week - Check!
    • National Bank of Greece warned about in subscriber report last week - Check!
    • Efg Eurobank Ergasias (Eurobank) warned about in subscriber report last week -Check!
    • Piraeus Bank (Piraeus)  warned about in subscriber report last week -Check!

    All subscribers can download the Greek Bank Tear Sheet here: 

    File Icon

     Greek Banking Fundamental Tear Sheet

    Pro subscribers can click below for the extended download

    File Icon

     Banks exposed to high sovereign risks 

    There is only one bank in the analysis that was not downgraded, most likely for political issues. It is really only a matter of time, and when that one goes, so goes Greece... 

    At the same time, the agency has downgraded the banks' Individual Ratings to 'C' from 'B/C', whilst the ratings of the banks' senior, subordinated and hybrid capital instruments have all been downgraded by one notch. The Support Ratings and Support Rating Floors (SRF) of all four banks have been affirmed.

    A full rating breakdown is provided at the end of this comment.  Separately, Fitch has also affirmed Agricultural Bank of Greece's (ATEbank) Long-term IDR at 'BBB-', which is on its SRF, and Short-term IDR at 'F3'. The Outlook on the Long-term IDR is Negative. ATEbank's IDRs, Support Rating and SRF are based on sovereign support as the bank is majority-owned by the Greek state (rated 'BBB+'/Negative Outlook).

    The rating actions reflect Fitch's view that the banks' already weakening asset quality and profitability will come under further pressure due to anticipated considerable fiscal adjustments in Greece. In particular, Fitch believes the required fiscal tightening that needs to be made by the Greek government will have a significant effect on the real economy, affecting loan demand and putting additional pressure on asset quality. The latter could result in higher credit costs, ultimately weakening underlying profitability.

    While the banks' operations in South Eastern Europe (SEE) and Turkey add revenue diversification, such revenues are derived from more volatile economies - some of which have themselves experienced recessionary pressures.

    BoomBustBloggers are ahead of you Fitch :-) 

    The banks' profitability is also likely to be affected by higher funding costs derived from increased funding and liquidity pressures on Greek banks which mostly resulted from the ongoing market perception of elevated risk surrounding the Greek sovereign. The uncertainties surrounding the Greek public finances have to a large extent constrained Greek banks' access to wholesale markets and, to a lesser degree, interbank markets at reasonable prices. As a result, Greek banks continue to rely to some degree on European Central bank (ECB) funding. While unhindered access to ECB facilities provides short-term liquidity, Fitch would welcome a rebalancing of the banks' funding and liquidity profiles towards more traditional funding sources. However, on a positive note, Fitch highlights that Greek banks continue to be primarily funded by customer deposits (86% of gross loans on average for the five largest Greek banks at end-Q309), highlighting limited reliance on non-bank wholesale funding. Additionally, wholesale funding maturities for 2010 are manageable and funding needs for the year should be limited.

    Excluding ATEbank, the other four banks' Long-term IDRs remain based on their individual financial strength, as expressed by Fitch's Individual Rating. This takes into account their well-established domestic banking franchises, which support revenue generation and good deposit bases, sound and in most cases recently strengthened capitalisation and also some degree of geographical diversification.

    The Negative Outlook on all the banks' IDRs could be revised to Stable should Greek banks be successful in reducing ECB funding and be able to rebalance their funding and liquidity position without impairing their profitability, and if their underlying earnings capacity proves to be more resilient than currently anticipated to the expected prolonged recessionary environment in Greece and to a lesser extent in SEE.

     The real question of the day is when will the rating agencies get serious and start downgrading Bank Greece. Bank Greece is an interesting entity, for it is the publicly traded Central Bank of Greece. Hey, why don't we float an offering of Bernanke Bank, the Federal Reserve - ticker BBFRB:-). Bank Greece's liabilities are backed directly by the Greek Government. I think it is fair to say that the Greek government's explicit backing doesn't necessarily mean that an entity is truly economically indemnified against loss. Who's backing the Greek government? As of the time of this writing, not one!

    As we go over the responsibilities of Bank Greece, just keep in mind its financial condition in relation to the other banks, despite being backed by an entity that currently cannot pay its bills, has more debt than annual GDP and is facing civil unrest in trying to adjust its budget in attempt to resolve the issue, Bank Greece has the highest valuation multiple of 1.2x book, and has the highest adjusted leverage - by far - of the group at nearly 90x. Normally, the explicit backing of the Greek government should mean something, but again since it is obvious that the Greek government needs backing, this is sort of an increasingly empty promise - in appearance at least. 

    The next question is since the Bank of Greece is a member of the European System of Central Banks (ESCB) which is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States, do they get backstopped somehow by forces from the EU? Inquiring minds want to know. I mean, it is quite feasible that the Greek banks can get in trouble once austerity measures take place and the civil unrest picks up. Even if unrest doesn't pick up, there is still a nearly guaranteed deepening of the recession. Then there is CEE exposure, which can help push banks over the edge. If the Greek Central Bank has to come to the aid of the banks, who will come to the Greek Central Banks aid? It is obvious that Greece doesn't have the budget for it. 

    The Bank of Greece, a short summary taken from their website... 

    The Bank of Greece

     

    The Bank of Greece is the central bank of the country. It was established in 1927 by an Annex to the Geneva Protocol and started operations in May 1928. It was incorporated as a société anonyme. According to its Statute, its head office is in Athens. It has a nationwide network of 19 branches, 38 agencies and 7 outlets.

     

    As from January 2001, the Bank of Greece is an integral part of the Eurosystem, which consists of theEuropean Central Bank  (ECB) and the national central banks (NCBs) of the European Union (EU) Member States participating in the euro area. This implies that the Bank of Greece contributes through its activities to the achievement of the objectives and the performance of the tasks of the Eurosystem, which defines and implements monetary policy in the euro area.

     

    The Bank of Greece is responsible for implementing the Eurosystem’s monetary policy in Greece and safeguarding the stability of the Greek financial system. According to its Statute, its primary objective is to ensure the stability of the general price level. Without prejudice to its primary objective, the Bank supports the general economic policy of the government. In the performance of its tasks, the Bank enjoys institutional, personal and operational independence, and is accountable to the Greek Parliament.

     

    ...

     

     

    Eurosystem-Related Tasks

    Monetary policy

    The Bank of Greece participates in the formulation of the single monetary policy in the euro area and implements it in Greece, in line with the guidelines and instructions of the European Central Bank (ECB). The Bank conducts monetary policy operations whereby it provides liquidity to domestic credit institutions (main and long-term refinancing operations). It also provides marginal lending and deposit facilities to credit institutions, in order to grant and absorb liquidity, respectively. Finally, it holds the minimum reserve accounts of domestic banks.

    Financial stability

    The Bank of Greece is responsible for monitoring financial stability, with a view to identifying vulnerabilities in Greece’s financial system, and assesses its resilience.

    • It promotes arrangements for the maintenance of financial stability and effective management of financial crises, in cooperation with other competent authorities in Greece.
    • It monitors banking risks, analyses developments affecting them and presents proposals for ensuring financial stability. It also monitors developments in insurance and investment firms, as well as in undertakings in collective investments not supervised by the Bank of Greece.

    I think it is fair to say they are not doing a very good job of excelling at the financial stability task right now.

    Statistics

    Collecting statistical data from monetary financial institutions (MFIs) (i.e. banks and money market funds) is also a very important task of the Bank. The Bank of Greece collects data on bank rates, as well as data that make up monetary statistics (loans, deposits and other assets and liabilities of MFIs). These statistics are sent to the ECB and taken into account for the calculation of average interest rates in the euro area and the compilation of euro area monetary and credit aggregates. These aggregates are monitored in the context of the Eurosystem’s monetary analysis and their outcomes directly affect monetary policy decisions.

    The statistics task appears to have succumbed to manipulation at worst, and quite liberal interpretation at best. From finding information that significantly increases the deficit over the weekend to private sector swaps with banks that mask debt obligations, I feel there is a reason to truly audit this bank and its past tasks and procedures as a condition of remaining an EMU member. Then again, that's just my opinion.

    Treasurer and fiscal agent of the government

    The Bank of Greece keeps current and time deposit accounts of the government and legal persons in public law in euro and foreign exchange, on the one hand for meeting domestic requirements and, on the other hand, for servicing the external debt. It also carries out payment and collection orders of the government and legal persons in public law in connection with foreign counterparties and provides intermediation services for their international financial activities.

    Hmmm!!!

    Statistics

    The Bank of Greece also compiles and publishes the monetary and credit aggregates concerning the Greek economy and the average interest rates applied by domestic credit institutions to various categories of deposits and loans. In addition to collecting data for monetary statistics, the Bank of Greece also compiles the balance of payments and the financial accounts of the country and, generally, collects and publishes data concerning the Greek economy in the Bulletin of Conjunctural Indicators. Moreover, it conducts specialised statistical surveys on matters related to its tasks (e.g. household indebtedness surveys).

    Collecting statistical data aims at both meeting the Bank’s own statistical information requirements and performing its obligations towards the ECB and other international organisations, as well as informing the public and researchers in Greece and abroad. Specifically, the data – in addition to monetary statistics – collected and compiled by the Bank of Greece concern the following four categories:

    i. assets and liabilities of financial corporations and data on the mutual fund market

    ii. Greece’s balance of payments and international investment position

    iii. the country’s financial accounts, according to the methodology of the European System of Accounts 1995 and

    iv. general data on the Greek economy.

    Can we really trust these numbers?

     See Will Greece Set Off the Pan-European Sovereign Debt Crisis? as well as: 

  •  The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
  • 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.
  • The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  •  The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! 
  • Well, not if they are able to pull off their stated austerity measures. Let's see how well they are doing thus far...

    Papandreou Says First Deficit Is Greece's Credibility Gap Jan. ...

    Jan. 28 (Bloomberg) -- Greece's first "deficit" is its credibility gap, Prime Minister George Papandreou said today at a panel event at the World Economic Forum in Davos, Switzerland.

    Greek Markets Rattled as EU Says Deficit Forecasts ‘Unreliable ...

    Jan. 12 (Bloomberg) -- Greek stocks and bonds tumbled after the European Commission said "severe irregularities" in the nation's statistical data leave the accuracy of the European Union's largest budget deficit in doubt.

     So, in order to gain credibility, Greece has to apply austerity measures and close its large budget. Can Greece accomplish this mission? After all, they are trying to close a fiscal deficit at an unprecedented pace... Let's gauge both their progress and the populace's reactions...

    Greek Customs WorkersStrike Dents ExportsCuts Fuel Supplies‎ 

     Feb. 19 (Bloomberg) -- Greek motorists lined up at gas stations as fuel stocks dwindled while a strike by customs workers over government austerity measures stretched into a fourth day, hurting imports and exports.

    The Federation of Greek Customs Workers called a three-day strike on Feb. 16 and decided yesterday to extend the action by six days to protest government austerity measures aimed at trimming Europe’s biggest budget deficit.

    Greece is once again “hostage to strikes by powerful labor union groups,” theNational Federation of Greek Commerce said in an e-mailed statement. The strike is “catastrophic” for the country’s trade and industry as well as shipping, food and transport companies and the Greek consumer, said the Athens- based organization, which represents Greek commerce groups.

    Exports have fallen 18 percent since the beginning of the customs strike as the shipping of goods via maritime, rail and air links is paralyzed, Christina Sakellaridi, president of the Panhellenic Union of Exporters, told private Skai radio today.

    The total value of goods exported by her organization’s members reached 11.4 billion euros ($15.4 billion) in 2009, according to Central Bank of Greece data.

    Customs workers in parts of Thessaloniki, Greece’s second- largest city, and on Crete, the biggest Greek island, returned to work today, the state-run Athens News Agency reported. That contradicted a statement by the customs workers’ union on its Web site that continued participation in the industrial action was “universal.”

     

    Cab Drivers Join In

    Greece’s taxi drivers also staged a 24-hour strike today, the second in as many weeks, to protest measures including an increase in fuel tax and the obligation to give customers receipts, part of the Greek government’s efforts to clamp down on tax evasion.

    Private and public sector unions strike for 24 hours on Feb. 24 over measures introduced by Prime Minister George Papandreou’s government to reduce a budget gap of 12.7 percent of gross domestic product by 4 percentage points this year. The government has frozen wages for public workers and trimmed bonuses, while raising taxes on consumer goods such as tobacco and gasoline.

    I suggest subscribers take another look at those exposed Greek banks: 

    File Icon

     Greek Banking Fundamental Tear Sheet 

     I'm going to end the Euro-Sovereign debt crisis in two more installments, and they will be hard hitting ones. In the meantime, make sure you are caught up because I will be creating a road map that will track where the dominoes fall - If (actually, when) they start falling... 

    1. Can China Control the "Side-Effects" of its Stimulus-Led Growth? Let's Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China. While not European, it is quite likely to kick off the daisy chain effect.
    2.  The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
    3. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
    4. 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.
    5. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

       

     

    This is the 2nd to last installment in my Pan-European Sovereign Debt Crisis series. After covering western and southern Europe, we are moving eastward. Before we go any further, be sure you have caught up on the previous portions:

    1. Can China Control the "Side-Effects" of its Stimulus-Led Growth? Let's Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China. While not European, it is quite likely to kick off the daisy chain effect.
    2.  The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
    3. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
    4. 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.
    5. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

    Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression!

    Click to Enlarge... 

    cee_risk_map.png 

    These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly "OVERBANKED" (a term that I have coined).  

    So as to quiet those pundits who feel I am being sensationalist, let's take this step by step.

    Depression (Wikipedia): In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen as part of a normal business cycle.

    Considered a rare and extreme form of recession, a depression is characterized by its length, and by abnormal increases in unemployment, falls in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflationfinancial crisis and bank failures are also common elements of a depression.

    There is no widely agreed definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions.[1] Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output).[2] Another proposed definition of depression includes two general rules: 1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years.[3][4]

    Before we go on, let's graphically what a depression would look like in this modern day and age...