Many people ask me for investing advice, something that I am quite reticent to give over casual conversation. There is one aspect that I do offer freely though, and that is the push for the return of common sense. When people ask me what sectors to invest in, and whether banks are a potentially good buy or not, I remind them that buying stocks for the longer term is no different than buying a chunk of any business. The question is, "Is this a good business prospect?".

Just imagine if I came up to you and pitched my business for an investment along the lines of the following...

"Listen, Dude! I have this big banking business that does several billion dollar per year. It is very sensitive to the business cycle and as you know, Tim Geithner and Ben Bernanke - two of the smartest and most honest people this universe has ever experienced - says that the worst is behind us and the economy is growing. Hey, even the NAR says that we should buy a  house now, and they have those high falutin' fancy economists to crunch numbers for them. So, with that being said, all you have to do is look past the fact that I had to get bailed out by the government several times to the tune of many billions of dollars. My lawyers may also want me to disclose that some smart ass investor/blogger types say that we are coming off a high in the business cycle, but we have Optimism Driven Reduction of Risk Reserve due to our very rosy outlook. Due not be deterred by the fact that the collateral behind our loans has depreciated by as much as 42% and is still on the downfall. I know that blogger/investor guy that is starting to get a few seconds of airplay says we are in a Real Estate Depression That Is About To Get Much Worse, but truth be told, it's really a matter of semantics. A depression is generally a 20% drop in values surround by severely depressed economic activity. We are experiencing 40%+... See! The numbers don't match. It ain't a depression! What that blogger dude fails to realize is that my whole industry is under the protection of the US gubment - that's right, we are directly indemnified by .GOV. In case you didn't get the memo, FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!

We have put out record profits, as the government supports our paying out that vast majority of what should be retained earnings as salary, bonus and other unearned compensation. As a matter of fact, the government has actually funded this exercise with tax payer dollars! I'm telling you man, this is the best gimmick since that PT Barnum guy and his snake oil. There's an ass for every seat." [continue reading up on this topic, for it is highly illuminating. Of course, it doesn’t end there. After all, Buried Deep Within The Files That The Federal Reserve Released On Their MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks]

Does this sound like a sound investment to you?

Primarily Dealer Credit Facility

Note: Paying subscribers may download the fully scrubbed model containing all of the date output by the Fed regarding the PDCF as an Excel pivot table here, Primarily Dealer Credit Facility Analysis. Those who are interested in subscribing to our research should click here.

Yesterday, I illustrated how the Fed buried TARP 2.0 amongst a spreadsheet dump of over 70,000 trades and what amounted to probably a million cells of spreadsheet data distributed among a plethora files, see Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!. Today, we will review another one of those files, dealing with the lending program that the Fed instituted for its Primary Dealer banks.

About a year ago, after hearing so many pie-in-the-sky perma-bullish pundits and bankers say how banks paid every cent of TARP and government assistance back, I went on the following rant - 10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the Taxpayer! Monday, January 18th, 2010:

Yes, some of the banks repaid TARP, with interest and warrants. Okay. The investment big banks (that were still in existence) were offered expedited financial holding company (bank) charters. That is why they didn’t fail, at least in part. So, running down the list, the banks paid back TARP. That’s a +, but….

1. 1. What was the value for bank charter, to get cheap access to the Fed’s funds? did they pay back this value yet? No!
   1. How about the payment of interest on the banks’ excess reserves at the Fed. Have the banks repaid that yet? No!
   2. The Fed and the Treasury have purchased hundreds of billions of dollars of Agency debt, Agency mortgage-backed securities (MBS) and related securities through Treasury purchase programs. Have the banks paid back the capital behind those purchases yet? No!
   3. How about the Term Auction Facility? Has the capital behind the benefits of that program been paid back? No!
   4. Then there is the Primary Dealer Credit Facility (PDCF), has this been paid back? No!
   5. Do you remember the Term Asset-Backed Securities Loan Facility (TALF)? Have the funds behind that been paid back? No!
   6. What about the PPIP? No!
   7. Hey, there’s the Foreign Exchange Swap programs (the currency swap lines, that saved not only our banks but out banks facing counterparties who were short on dollars), has that been paid back? No!
   8. There’s the Commercial Paper Funding Facility (CPFF), have the funds behind that been paid back? No!
   9. Most importantly, the opportunity cost of ZIRP, which hurts those who do not speculate (or have not speculated) with near free money! How do you pay that back to grandma and her .017% CDs?

Well, all rants aside, if you bothered to go through the mass dump of data that the Fed produced as a result of the Bloomberg FOIL suit, you will find that not only did the banks not pay back the massive amount of assistance that was given to them, they were actually granted more in the form of MOPTARP (MBS Overpayment Troubled Asset Repayment Program), and yes, I did make that up. How much more? Well, potentially more than the original TARP bailout! I'm getting ahead of myself though, so let's backtrack.

I feel this month has thrown enough events at the market to force it to start taking the real fundamentals into consideration. Of course, battling this ideal is the US Federal Reserve and their QE 2.1 policy. This should be a time to reflect upon exactly where we stand thus, I will review my thoughts and observations over the last 30 to 45 days and then summarize a truly unbiased and independently calculated view of the downright nasty side effects of the US shadow inventory of distressed housing. All paying subscribers can download the full shadow inventory report here:  Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel - Shadow Inventory.

Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves and provisions to pad lagging accounting earnings under the auspices of increasing credit metrics are simply setting their investors up for a major reversal which will bang those very same accounting earnings: JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves).

Here is a presentation using readily available data from the Federal Reserve and BoomBustBlog illustrating what clearly shows we have not come anywhere near the peak of the economic downturn IF you believe that real asset prices, economic housing activity and bank lending and available credit are gauges of, and effect, economic health.

Since the loan peak of 7.3227 trillion for week ending 10-22-08, total loans and leases at banks have dropped over 500 billion dollars.  That big spike on April 1st was due to an FASB rule change that forced some 452 or so billion in off-balance sheet stuff back on their books.  Basically, this was not new lending, it was lending that was held off balance sheet. Despite the stimulus that was supposed to increase lending, the current total loans and leases is now at 6.7889 trillion.  This is a drop of $533.8 billion.  Not counting the +452 to 515 billion resulting from that rule change, the drop is ~1,000 billion.  In other words, we've had total loan retraction in the amount of nearly a trillion dollars since the bailout - green shoots, end of the recession, no chance of a double dip (because we never left the first one) and all. Unbelievable.

It has come to my attention that several banks have actually blocked rank and file level access to my blog through their intranet. That, my dear friends, is asinine, and does nothing but engender distrust. While I admit I can be rather flamboyant in my writings, I am nonetheless quite fair. In addition, my opinions are analytically driven, by design. Thus, if you have a differing opinion all you really need to do is challenge me with the facts. One of us will be proven to be right, or at the very least it will be shown to all how we came to our conclusions. I have absolutely no problem admitting when I am wrong or have made a mistake. I have been right long enough and often enough that I have plenty of emotional and even egotistical room for error. I know fully that no one is perfect, and while I would much rather catch any error first, before a third party does it (particularly a dissenting third party) I know that things don't always happen that way.

A commenter had a very intelligent dissent against my Goldman Sachs post on Zero Hedge the other day. While cogent, eloquent and very lengthy, it was still wrong but it definitely exemplified what a bank (or any other entity) should do when they feel that I am not in the right. Of course, if you put yourself out there, there is always the risk that you can be proven wrong as well. Believe it or not, and contrary to what you marketing and PR advisers may tell you - it is alright. As a matter of fact, it is actually good sometimes. You see, to many of the people that matter, it is not only acceptable, it is expected that you will not be right all of the time. Anybody who is right all of the time should be held up to a much higher level of scrutiny. Just ask Bernie Madoff. The true test of character and fortitude is to be able to publicly admit when you have made a boo-boo, and be willing to do something about it. That goes a lot farther in my eyes, than abject perfection. This is a lesson that the global and national banking industry in the US has yet to learn.

On that note, let's go over a few emails that I have received recently...

Reggie Middleton with Max Keiser on the Keiser Report and RTT Television

Go to 12:20 in the video to see the portion with Reggie Middleton

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The topics in this interview stem from the post Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!

On the difference between accounting earnings and economic earnings...

... accountants have not been – and currently are not, trained in the economic realities of corporate valuation. They are trained to tabulate business operations data. There is a marked and distinct difference. That difference is as stark as night and day for investors, yet despite this stark difference, Wall Street still reports corporate performance metrics strictly in accounting terms, and the media (both mainstream and the more specialized financial media) simply follow suit. Hence we hear much about easily manipulable and manageable accounting earnings, revenues, operating margins, earnings per share, etc. These measures are highly flawed in a variety of ways, with the primary flaw being that they do not account for the efforts both required and undertaken to achieve them. Basically, they measure JUST HALF (and coincidentally, the positive half may I add) of the risk/reward equation that should be at the root of every investors move. Long story short, they do not account for, nor do they EVEN RESPECT, the cost of capital. This concept ties in closely with Chairman Bernanke’s current course of action as well as the ZIRP discussion later on this missive demonstrates (capital offered at zero cost causes reckless abandonment of risk management principles which eventually causes crashes – yes, more crashes). Acknowledgment of the cost of capital enforces a certain discipline on both corporate management and investors/traders. Without respect for such, it is much too easy to create and portray a scenario that is all too rosy, since we are only looking at rewards but never bother to glance at the risks taken to achieve said rewards. I reviewed this concept in detail as it relates to bonuses and compensation on Wall Street in The Solution to the Goldman (and by Extension, the Securities Industry) Compensation Dilemma.

Over the three years since I have been publishing BoomBustBlog, I have amassed what many consider a remarkable track record, having called nearly every major market crash and large financial/real estate/bank collapse over said time period.  Believe it or not, many have even went so far as to call me "intelligent". While I would love to bask in the light of potential admiration, let me assure you, although I am in no way lacking in confidence or ability, I am also quite average in the intelligence arena. While not being any more intelligent than the average man, I do have an uncanny knack for seeking out that rarest of rare concepts these days - the TRUTH! This increasingly uncommon ability (to both speak and seek the truth) has served me quite well in both my investing pursuits as well as in the personal aspects of life. Let's delve into how I translate this personal talent into a product that I distribute from my BoomBustBlog, and then into the facts in regards to the current state of concentrated risk in today's US banking system - to wit, the systemic risk of derivatives concentration.

The full 3rd quarter forensic analysis and valuation update for JP Morgan is now available for all subscribers: JPM 3Q 2010 Forensic Update. The download is a much more detailed version of the (not so) quick overview I posted the day after earnings that reveals some very interesting points. All in all, the JPM quarter was quite bad, considerably worse than the media appears to be making it out to be. I have taken the liberty to include some of the highlights of interest in this blog post. While the hardcore actionable stuff is reserved for clients, I feel there are a few topics of discussion that demand public attention. I would like anybody who reads this to go to their local broker (or prime broker) and get a copy of their JP Morgan quarterly research opinion and update - regardless of the source(s). If the four issues that I have discussed in this blog post are NOT PRESENT in your (prime) broker's report(s), I respectfully request that you do yourself a favor - subscribe to BoomBustBlog.com and download the report linked above, which includes valuation as well. I will be offering an extra download for professional and institutional subscribers interested in granular, detailed loan, charge-off and derivative holdings in the near future.

FACT ONE: First and Foremost, JP Morgan has been DESTROYING Shareholder Value for TWO Years Running, and I Don't See It Getting Much Better Any Time Soon! That Two Years Is Exclusive Of The Devastating 2008 Market Crash!

Getting back to the issue of Wall Street's sell side analysis, the biggest problem I have with them (outside of rampant conflicts of interest, which is probably not the fault of the individual analysts) is the abject reliance on accounting figures to measure and value an economic entity such as a business as an ongoing concern. Let' be frank here, accountants, albeit probably quite smart, don't necessarily make the world's best investors. As a matter of fact, practically every accountant I know comes to me for my investment opinion and I make a horrible accountant. Try and try as I might, I can only think of one accountant that has ever excelled at investing over time (not to disparage accountants, of course, with all respect due). Granted, this man is probably a damn genius, and he knows how to identify quality when he sees it - having created Canada's largest independent brokerage and independently its premier asset management firm with ~$6 billion under management - including the innovative physical gold trust. He has said, and I quote from Crain’s New York:

“His work is so detailed, so accurate, it’s among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton’s research.

Yeah, I know that was cheesy, but I couldn't help myself :-) . Back to the matter at hand, accountants have not been - and currently are not, trained in the economic realities of corporate valuation. They are trained to tabulate business operations data. There is a marked and distinct difference. That difference is as stark as night and day for investors, yet despite this stark difference, Wall Street still reports corporate performance metrics strictly in accounting terms, and the media (both mainstream and the more specialized financial media) simply follow suit.

Here's a little cross pollination to attract bears from all over.  Karl Deninger, the editor of the Market Ticker, invited me over for a half hour chat on his Blog Talk Radio show to discuss things such as foreclosure fraud, banks, derivative risk and the markets. You can access the original airing podcast on Karl's site. I have taken the liberty to append some graphics to the background to add some information to the discussion (see below). Enjoy!

Part One (the impatient may want to skip ahead about 1:32 to get the actual start of the discussion. I highly recommend you choose the 720p HD setting and expand to full screen in order to read the graphics in full fidelity.

Part one

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Part two

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