Financial, Real Estate, Stock Markets Trends and Current Affairs

The increase in home sale is most likely banks dumping their REO and pre-foreclosure inventory at cut-throat pricing that existing homeowners who are looking to sell cannot match. That is bad news, very bad news. It means that you are getting the lower price points, but you are not truly reducing the natural inventory of existing homeowner sellers and new homebuilders, just the synthetic inventory created by banks with bad deals on the books. It is concievable that natural inventory is actually increasing. I haven't looked into it, but it is a distinct possibility, even a probability!

Reference last year's (and even the year before that) posts. It wasn't that hard to see this coming. In addition, the housing metric that everybody is following (Case-Shiller) is extremely optimistic when considering many urban areas, ex. Miami, NYC, Pheonix, Vegas, Philly, etc. due to the exclusion of practically everything but single family, owner oocupied, detached, homes with the resale being mandatory.

My housing market forecasts from 2007 were right on point.
The contruction of the Case-Shiller index excludes a lot of inventory commonly found in urban areas: mutlifamily, condos and co-ops, investor properties and recent flips. See "A reminder concerning popular housing indices" and " The Real Trend in US Housing Prices...".

It may be of use to remember how much inventory the homebuilders still hold as well. These posts (nearly all of the links on this page) are over a year and a half old. Notice how prescient they were.

Straight Talk From the Homebuilder CFO: How independent are the independent auditors?
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog) ...lass. As I stated before, the purpose of senior level classes is to give you a peak behind the curtain of how homebuilders operated. The good (none), the bad (lies) and the ugly (incompetence). You...

Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

About 8 months ago, I released research (as part of the Asset Securitiziation Crisis series) as a summary overview of Wells Fargo (Doo-Doo bank drill down, part 1 - Wells Fargo) and the forensic analysis of the same, Doo Doo 32 Bank Drill Down 1.5: The Forensic Analysis of Wells Fargo. For those that don't know, Warren Buffet is the largest shareholder of Wells Fargo. When my analysts and I came up with the short list that included Wells, the first thing to pop into my head was actually included in the introductory post. I will excerpt it here:

"Well, the first bank on the drill down list will also be 2nd of the banks that I will deliver a forensic analysis on (the first was PNC Bank). That bank is,,, (drum roll in the backgroud, crescendo.... I know some of you hate it when I do this........) Wells Fargo! I can hear a few of you naysayers cackling behind your computer screens as I type this. Wells Fargo is a big name brand bank (cackle, cackle)! Wells Fargo has Warren Buffet as its largest investor (cackle, cackle)! Wells Fargo this and that and blah, blah and (cackle, cackle).... All I can say is, beware of name brands (I actually felt compelled to address this in earlier posts). I have made more than a couple of dollars benefiting from name brand hubris and smaller minded investors (this easily includes big institutions as well as little retail investors) who would rather be told what to do than read a balance sheet! Time will tell if I am right or not on Wells Fargo, just be forewarned - several of the banks on teh Doo-Doo 32 list have already taken a trip to the confessional! The score card for the credit crisis to date, Reggie Middleton - 10, big name brand investors - 0 (not to toot my own horn, I'm sort of a modest guy and I know I have a big mistake/loss coming soon, it just isn't going to be this one).

I actually have a lot of respect for Buffet, though. Hell of a fundamental investor and cash flow king, and charming public persona as well as being modest (at least he's got me beat). My appreciation differs from that of many, though. His investment track record is quite impressive for it stands the test of time as consistent. As a smaller, unknown investor, he was the most impressive, but now he is an icon and his very words and even a scent of investment from him actually moves markets. Even though he has a much larger capital base to work from (which makes it harder to generate large proportionate returns), his influence can be confused for investment acumen. All in all, he is one to be admired, but the investment results stemming from alpha have to be seperated from the ability to manipulate and move the market (unless that actual ability can be defined as alpha - topic for another day). We all make mistakes though, and Wells Fargo is a mistake waiting to happen for anyone invested in it, including and particularly Mr. Buffet due to the size of his investment. Let's walk through this company as I see it. Of course, since Wells Fargo failed to cooperate with me in releasing their numbers, I used statistical data to back into their probable delinquincies where they weren't directly available from their public filings."

Due to Mr. Buffet's heavy investment in industrial, manufacturing, insurance and banking stocks, he has had a very rough two years. The recent deterioration of stocks in the Berkshire portfolio happen to include a $4.5 billion drop in the value of its Well Fargo holdings since December 1. Wells has lost half of its value in under two months. This translates into a 2x to 4x on my bearish Wells Fargo positions.

Name brands that I have trounced and made significant money off of in this crisis do not end with Mr. Buffett (see BoomBustBlog Research Performance for 2008). There is also Wibur Ross (Assured Guaranty ), Citadel/Ken Griffin (homebuilders/Beazer), Warren Buffet (Wells Fargo), Joseph Lewis from the UK (Bear Stearns), Legg Mason and Citibank (the homebuilders), UBS and Warburg Pincus (MBIA and Ambac), Carl Icahn (WCI Communities), nearly all the ex-bulge bracket banks (see Blog vs. Broker, whom do you trust!), and the list goes on for some bit. This is not to say that I am so smart. It is stated to illustrate that people are people, and we are all wrong sometimes. As a matter of fact, I have shown that many name brands have been consistently wrong for almost two years straight. My track record for the last 8 years easily bests the name brands that I just mentioned, yet no one would have ever heard of me if I didn't write in this blog. Let this be a lesson to you - do not follow an investor or any personality/pundit simply because they have a branded name. Do your own homework/legwork and create your own brand. We are all human, and chances are the best investors are most likely individuals that you have never heard of and probably never will hear of.

See my past name brand commentary:

More on Name Brands
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

The bankruptcies that I predicted are here
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

A Direct Challenge to the Mainstream Media (the MSM)
(Reggie Middleton's Boom Bust Blog/MyBlog)

Comparing the BoomBustBlog to the Name Brands, again
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

Do you remember what I said on January 6 (Amid the rally, I look at the Doo Doo 32 and their receipt of the TARP)? Well, believe it or not, Mr. Market along with members of the Bush Administration and certain CEOs are allowing members of BoomBustBlog to actually get paid from the same set of research for a 5th time in less than a year. This has got to be a record! I am of the mindset that this type of behavior will not continue for much longer, for I get the feeling that Barack and crew are a bit more serious about putting the bank issues to bed than the previous administration. Be that as it may, until they get their machinations firmly entrenched, and as long as banks are shuffling taxpayer money out the door in the form of dividends ala ponzi scheme et Madoff, my subscribers have the opportunity to profit immensely.

I have said it before, and I'll say it again - JP Morgan is insolvent! Anybody from JPM who wants to correct can simply email me via the contact form at the top of my site to show me where I'm wrong. I am always willing to admit that I am wrong when I actually am. I don't think this is one of those times. Keep in mind that throughout this entire credit debacle, I haven't been wrong about a bank or insurer yet. I have called all 32 of the Doo Doo 32, Bear Stearns, Lehman, GGP, MBIA, Ambac. Simply search my blog for the articles, for most of these companies have fallen in share price more than 98% (with the Doo Doo 32 being an exception since that was more of a macro call).

Despite heavy government subsidies (in my opinion, JPM is the beneficial recipient of over $100 billion of government aid and other capital, between the Bear Stearns subsides, backstops and guarantees, WaMu seller's concessions and TARP) I am still confident in declaring JPM insolvent. They have pre-announced earnings to coincide with the feel good aura of the Obama inauguration - good move, but it didn't work. I can still count even if I do feel good. JPM incurred an operating loss, masked by accounting shenanigans (these things don't fool me, I can count) and one time asset sales. Basically, the JPM dividend is being funded by tax payer monies (TARP) and asset sales, hidden by accountants who may been smoking some of those creativity tea leaves I hear they sell in Jamaica, you know that dark green Sensimilia! I've decided to divulge a bit of the top secret subscriber research to the public through an open post available to all. I've done this as to illustrate to those who are not part of our closed community the travesty and trouble that is what appears to be the MSMs (mainstream media) most respected and well run bank. The real juicy stuff (valuations and a sample trade optimized for risk/reward) will be available for download to retail and pro subscribers, accordingly.

Here is some JPM accountant's Sensimilia inspired food for thought:

• While the banking world is bustin' their ass to delever, JPM is currently sporting a ~30x leverage ratio.
• In
  4Q2008 derivatives increased substantially to $163 bn from $118 bn in
  3Q2008 and $77 bn in 4Q2007. Much of the increase in 3Q2008 was due to
  acquisition of Bear Sterns. As of September 2008 JPM has a $118 bn worth
  of derivatives on its balance sheet while the notional value of these
  derivatives is $84.3 bn.
• As a reminder, JPM is the WORLD's largest credit derivative counterparty. With that note in mind, realize that JPM's trading VaR is up 50% while its increase in derivatives receivables are up nearly 40%. This all occuring as JPM is trying to delever by shedding assets,
• According to September 2008 filings although bank had sold credit
  derivatives of $4.5 bn and purchased credit derivatives of $4.6 bn (net is
  nearly 0) the bank has recorded a fair value of $28.5 bn (as of Sep' 08)
  against notional amount of $9.2 bn.
• JPM’s level 3 assets
  have increased significantly due to purchase of Bear Sterns, reaching 17.5% of
  total assets at fair value from 11.2% as of December 2007.
• As of Q3 08, JPM sported an adjusted leverage of 32x! That is just what we could find on balance sheet. You know there has to me some stuff off balance sheet somewhere that is hidden from me. And to think, some people thought Bear Stearns and Lehman were highly leveraged... Oh yeah, that's right! JPM bought Bear Stearns and Lehman went bankrupt. Hmmmm!

Despite all of this, JPM actually rallied 40% up after the bank rout the other day and continued to drift up after hours. Cool, the kids gotta eat! You see, the counter-argument to the JPM short is that it the government has set up juicy wide spreads in certain trades that will allow banks such as JPM to earn their way out of insolvency. Well, this will work for solvent banks, but the very insolvent one's are just about out of time. The trades entail borrowing low and lending high, but who will you lend to? Think about it. If you are a very strong credit risk right now, you are probably not in the market to borrow money unless you have a relatively risky deal you are trying to finance. Of course, there are a lot of other entities and persons who are in the market for loans right now, but those are the one's that should have never been lent to in the first place and are definitely not the ones you want to lend to now. Adverse selection via Taxpayer subsidy! That's what I call it. The insolvent banks are between a rock and a hard place.

In addition, and as the article below illustrates, banks are using TARP to do the same thing that Madoff allegedly did. They are placating investors in an unprofitable business (remember JPM had an operating loss this quarter) by taking the capital received from new investors (the US tax payer) and paying off older investors (shareholders through dividends and bond holders through interest). The technical finance term for this is called, PONZI scheme. To see the Ponzi scheme in detail, as well as valuations, download the subscription material. For the first time, I will also include sample trades with an optimized risk/return profile based upon the findings of the report for professional level subscribers and above. The samples include a vertical ratio spread vs straight shorting of stock vs long only put purchases. Keep in mind that there is no need to get fancy with solid research. As both my long time subscribers and the 2008 Blog Research Performance attest, all you really have to do is buy a simple position and hold in the case of a company that is bankruptcy (or receivership) bound. Alas, since subscribers have been clamoring for trade info, I will occasionally remit such. I want to make it clear that these sample trades do not necessarily reflect what I do in my own proprietary account (which is I call it "proprietary") but are feasible assuming a relatively strong background in options and stock trading.

JP Morgan Q408 quarterly valuation opinion - Retail 2009-01-22 08:49:26 79.24 Kb

JP Morgan Q408 Quarterly opinion with sample trades - Professional & Institutional 2009-01-22 08:48:02 211.69 Kb

Subscription plans and pricing

Click any picture below to enlarge

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Even on an unadjusted, accountant polluted basis, the economic value of non-performing assets just about wipes out shareholder's equity.

image002.png

When adjusting for intangibles, JPM's equity holders are underwater 1.4x over!

image005.png

The Eyles test shows JPM's current reserve for loan losses shortfall as % of tangible shareholders' equity (non-accrual loans on an economic basis). No matter which way you look at it (as long as you REALLY look at it) the common shareholder's of JPM are done for. Maybe this is why they are still paying a dividend. "Get as much (taxpayer) money out of the door as possible before the one of those damn bloggers start spewing the truth and the feces hits the fan blades"!

image008.png

Yeah, you think the subprime category is eating heavily into equity, wait until the Option ARMs start to recast AND guys like me make it known the accounting BS that JPM is trying to pull in order to hide the fact that WaMu's purchase is killing it!

Bloomberg: Kill JPMorgan’s Dividend, Save America’s Banks: Jonathan Weil

Memo to JPMorgan Chase & Co.: Your
dividend needs to go.

For all the complaints that U.S. banks aren’t lending enough
money, the bigger problem may be they’re giving too much away.
Here we are amid the greatest banking crisis in 80 years, and
some of the biggest, purportedly shrewdest banks keep acting as
though they can spend their way into solvency by plying
shareholders with outsized quarterly checks.

The latest numbers from JPMorgan say it all. Last week, the
nation’s largest bank by market value reported $702 million of
net income for the fourth quarter. That was about half as much as
the $1.4 billion it paid in dividends to common shareholders. The
company barely earned its dividend for the year, too, when net
income and common dividends each were about $5.6 billion.

JPMorgan’s chief executive officer, Jamie Dimon, says the
dividend is sustainable. “This company has enormous earnings
power,” he said on the company’s Jan. 15 earnings conference
call. “We feel an obligation to pay the dividend. So we feel
pretty good about it, and so we’re not that concerned about it.”

That’s hardly convincing. JPMorgan would have reported net
losses the last two quarters were it not for $1.9 billion of
nonrecurring gains from accounting adjustments, related to the
company’s purchase last September of the banking units of the
failed thrift Washington Mutual Inc.

...

JPMorgan already has received $25 billion of government
bailout cash. It would pay almost a fourth that much in common
dividends this year. That doesn’t include the interest the bank
separately must pay to the U.S. Treasury on its preferred stock.

After Bernard Madoff’s Ponzi scheme, it should be out of
fashion for financial companies to pay returns to old investors
with money raised from new investors. Put aside the unseemliness
of paying dividends with taxpayer bailout cash, though. The best
reason for JPMorgan to slash its dividend is self-preservation.

...Dimon, who also is JPMorgan’s chairman, already may have
waited too long to hack the bank’s dividend. That’s no excuse for
further delay. JPMorgan’s bosses should start showing they’re
prepared for the worst. The longer they dither, the greater the
risk for us all.

I'm winding down activities in DC (I had to catch a political ball or two to do some schmoozing) and then its back to business. Those who read my post from January 6, "Amid the rally, I look at the Doo Doo 32 and their receipt of the TARP" and took heed (with access to subscription materials) should have had a very, very profitable day today. I would like subscribers to share their experiences, both successes and failures, so I can both observe the effectiveness of the research and potentially make improvements, where practical.

In addition, those who have not yet subscribed can hear the testimonies (both good and bad) of actual subscribers. I will start tomorrow evening off with at least one forensic update, and possibly another full report, with another full report following either Friday or early next week (3 in total). Unfortunately the hacking consumed an immense amount of time and resources and affected the timeliness of the reports, but the information gleaned within should be close to priceless for those who grasp the magnitude of what is actually happening.

One is a full macro/forensic on a Spanish bank, with some minor trading info (not necessarily recommendations), and the other will be the JPM update - following will be a retailer. I am looking for the home run candidate, but alas have not found it yet.

I posted this response in the comments column
of a Wall Street Journal article this morning concerning Morgan
Stanley's downgrading of HSBC bank, the track record of Wall Street
banks in general, and the damage done the net worth of the wealthy. If
you have the time (and are not a reguler reader of the blog), it is
well worth your while to read through the links provided. The challenge
inherent in the statement stands for anybody in mainstream media who
feel they can produce anyone who can come close to even 75% of my
performance. My 3,000 or so subscribers (including Wall Street banks,
large central banks, etc.) seem to think more of boutique blog services
than the mainstream media does.

For those who are knocking the Big Three automakers in Detroit for
underperformance and mismanagement (which they are all guilty of in
varying degrees), you should take a more global perspective, from the UK Guardian:

It should be obvious to all that we are entering a global depression. I ask all of you, in your lifetime, have you ever witnessed anything like this? I know there are a lot of super smart economists, analysts, investors and pundits that may say otherwise, but I query, who are you gonna trust, them or your LYING eyes?! Why wasn't there so much doubt over the last 15 years when we were experience a global equity and asset boom? I know, I know... Things can go up and do well, but they really can't go down and go bad.

666. That's the sign of the beast. It's also representative of that big bank that is buying that other big bank's brokers. They put a sell out on HSBC. That's cool! I agree, except for the fact that it is over 6 monts late, nearly 60% in value decline later (not quite, but it does fit into the catchy title), and the last 6 is the IQ of anyone who leaves their money with these buffoons. I know that's a little harsh, but come on now. I warned explicitly (as in 20 pages explicitly) back in August. January 75 puts were trading at $6.99, now they are about $33.50. Whose money am I taking? Morgan Stanely clients, that's who! The same can be said for Bear Stearns, Lehman, GGP, GS and even Morgan - the riskiest bank on the Street. I had sell and collapse (that's right, I told you that Lehman and Bear would fail at least 3 to 6 months before hand see research & performance) calls on these stocks early last year while these brokerages were pushing buys and holds. Come fellas! Now that I think of it, buffoon is really not that harsh. For more on this, see Super Brokers form to push Super Broken products to make those with High Net Worth Super Broke!

hbc.png

A glance at HSBC - Did the market miss this one?
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

As I sit back and look at the market go through its bear rally, performing a myriad of what if scenarios on my various bearish positions and generating cash where feasible by selling off profits, I revisited the Doo Doo 32 and a few big name banks. I say to myself, "This year will not be as easy as last year, now that nearly everybody should be aware of the extent of the problem, and the violent bear market rally/option spreads that makes shorting and put buying very expensive." Then I listen to talking heads in the media and the "everbull", long only professionals. I ponder, "Hmm, maybe there is a little low hanging fruit to be had after all". To be sure, we will have to sit through this bear market rally which has to hurt anybody not in all cash or hedged, and there seems to be a willingness of traders to push this one relatively far. The FACTS still remain though, if the stocks of the BoomBustBlog bear targets move much farther, this could very well be another repeat of last year's triple digit performance. Yes, it's risky, but risk is the price of reward, isn't it.

With that disclaimer espoused, let's look at how accurate my longer term thesis have fared. The graph below was taken from the Doo Doo 32 article.

In order to determine how likely the aforementioned event
is, let's create a metric by which Reggie Middleton measures risk. This metric
will be units of risky or non-performing assets as a percentage of statutory
equity. This, of course, can be refined by removing goodwill, Bullsh1t, and the
various accounting pollutants to plain old economic earnings, but less just
start with this. When applying Reggie's Risk Metric to the graphs above, we can identify more banks.

image006.png

Looking at risk from this perspective, we not only see who has no
clothes on when the tide goes out, but also how well (un)endowed they
are in addition.

Now, compare the companies from the Doo Doo 32 article and the allocation of the TARP program below (sans the companies that have already failed or have been driven into other firms), and you will see that I am on to something. After all, the Doo Doo 32 article was penned on May 22, 2008, about 7 months ago. This was despite the fact that Treasury Secretary Paulson assured all of us that the worst was behind us (see

The credit crisis is (not) waning
and then Reggie
Middleton says don't believe Paulson: S&L crisis 2.0, bank failure
redux).

Now "the worst is behind us" Secretary Paulson wants to claim the balance of the TARP that is not already spent. WHY??? Well let's look at it visually.

Big on this list are the recipients of much of my research from early last year. Never let it be said that I don't have a clue about what's going on.

• Countrywide vs WaMu 9/8/2007
• Banks, Brokers, & Bullsh1+ part 1
• Is Lehman really a lemming in disguise?
• Is this the Breaking of the Bear?
• Doo-Doo bank drill down, part 1 - Wells Fargo
• Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
• Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
• PNC:
  The first of my regional bank shorts to be posted to the blog...
• The Anatomy of a Sick Bank!
• The newest Goldman Report: the Goldan Boys as a Bank Holding Company
• The Riskiest Bank on the Street
• 
  Riskiest Bank on the Street update for my subscribers
• 
  Anecdotal observations regarding Bank of America
• I know who's holding the $119 billion dollar bag! / Comments by Reggie Middleton

Well, I have some other thoughts on certain financial institutions, the first of which is available below (with at least one other following). Subscribers can view my opinion here. I trust you will find the inconsistencies that I have found to be quite interesting. You will also be wise to beware of those "name brands" that are "too big to fail"! Keep the recent post, "The banking backdrop for 2009 " in mind as you read the following:

JP Morgan Forensic Highlights 2009-01-06 19:18:08 133.34 Kb

To follow up on the post that I scribble together at 3 am, undedited, the other day -A few grim thoughts for the New Year, as I reflect upon the past year, I want to refresh the memory of my readers, particularly in regards to why I was so bearish on many name brand banks last year. This may require some re-reading of the Asset Securitization series. So, before we get started on the major value drainers of 2009 (believe it or not, still mortgages, consumer and corporate loans) I want to provide a few links of interest that put things into perspective.

• The Asset Securitization Crisis Part 27: The Butterfly Effect: details leverage loan failure (ex-ibank risk), and The Butterfly is released!
• Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
• More on the banking backdrop, we've never had so many loans!
• As I see it, these 32 banks and thrifts are in deep doo-doo!
• A little more on HELOCs, 2nd lien loans and rose colored glasses
• Capital, Leverage and Loss in the Banking System
• Doo-Doo bank drill down, part 1 - Wells Fargo
• Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
• The Anatomy of a Sick Bank!
• Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank

Yes, I know its a lot of reading, but that is why I have the confidence to short heavily into a rising market, and it is what has powered my returns thus far. Confidence in the fact that I have performed more comprehensive, more diligent, and more accurate research than those that I am selling shares to.

Now, that we have caught up on the happenings of last year, let's look forward to what we can expect this year.

To follow up on the post that I scribble together at 3 am, undedited, the other day -A few grim thoughts for the New Year, as I reflect upon the past year, I want to refresh the memory of my readers, particularly in regards to why I was so bearish on many name brand banks last year. This may require some re-reading of the Asset Securitization series. So, before we get started on the major value drainers of 2009 (believe it or not, still mortgages, consumer and corporate loans) I want to provide a few links of interest that put things into perspective.

• The Asset Securitization Crisis Part 27: The Butterfly Effect: details leverage loan failure (ex-ibank risk), and The Butterfly is released!
• Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
• More on the banking backdrop, we've never had so many loans!
• As I see it, these 32 banks and thrifts are in deep doo-doo!
• A little more on HELOCs, 2nd lien loans and rose colored glasses
• Capital, Leverage and Loss in the Banking System
• Doo-Doo bank drill down, part 1 - Wells Fargo
• Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
• The Anatomy of a Sick Bank!
• Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank

Yes, I know its a lot of reading, but that is why I have the confidence to short heavily into a rising market, and it is what has powered my returns thus far. Confidence in the fact that I have performed more comprehensive, more diligent, and more accurate research than those that I am selling shares to.

Now, that we have caught up on the happenings of last year, let's look forward to what we can expect this year.