Trading Tips October 11^th

Below, please find the latest trading commentary from BoomBustBlogger and institutional trader, Eurocalypse...

Hello BBB,

I must admit that lately I had a bad week, and among the ones disappointed and disoriented by the very recent vicious price action in financial markets. If you are not, congratulations; if you are, lets not punish ourselves too much, and lets do the sensible thing ie reduce risk and take a step back and look calmly at charts and info again.

Looking at the European markets, notably the CAC, I thought that the failed attempt to break 3025 on a closing basis on Friday Sep30th meant the resumption of the bear as the engulfing pattern wasnt completed. Well that was wrong; or maybe only half-wrong but half wrong is wrong.

 20111011_-_CAC_Weekly

So, what I was looking for was a bullish reversal signal was a bullish engulfing pattern (at the lows) in the weekly chart

 Capture_Bullish_Engulfing

http://www.candlestickforum.com/PPF/Parameters/12_61_/candlestick.asp

 Technicians don't all agree on the definition, the more agressive ones focus just on open and close ignoring highs and lows. The most restrictive definition is for the whole previous bar to be engulfed. On my own definition, i like for bullish (bearish) patterns for an engulfing pattern which includes the previous candle's high (low), not necessarily the low (high); and that finish the candle on a bullish note if zooming to a higher frequency chart.

Well the market did trade very weak on Monday Oct3rd and Tuesday Oct4th nearly revisiting the lows (thats the « half right ») only to bounce with a vengeance, taking out 3025 and running higher...closing at 3161 on Monday oct10th.

Anyhow, any trader going long on Friday's close or Monday's open on the basis of that pattern, had to have strong nerves as the price action was very scary until Tuesday...

So I will let you decide about all this discussion and the futility or not of trying to look for these kind of things. I will also mention that the bounce in stock markets in 2009 was initiated without this kind of signal.

Its a bit disappointing as I had been repeating for some time that European markets were oversold and that we were due for a bounce. I also thought that the skew in options gave a good incentive to buy calls as the risk/reward was in bullish trades and not anymore in bearish trades.

The newsflow had been very negative, and lets say it again, until proof of the contrary this is a bear market, and if politicians and ECB doesnt do anything, the banking system in Europe will implode, and it might implode even if ECB intervenes. But lets be honest. Being bearish now is a common view. BBB has given a lot of prescient calls but read the FT or WSJ interviews from portfolio managers or analysts, hard to see anyone very positive around now. Even when fundamentals are horrible, if there is no more seller, then the market can only go up, at least in the short term.

What were the important news this week ? Dexia I think... We've seen DEXIA go bust. Not a surprise to me. As an industry insider, Dexia (and Depfa) were among 2 big names known to do dumb things and very good « clients » of bigger banks. In bankster language, a « good client » is someone you can rip off well...What was a semi-public entity whose mission was supposedly to lend money to french and belgium municipalities. What the hell were they doing with subprime, or buying 30Y greek bonds on a highly levered basis refinancing on the money and interbank markets ??? sheer greed and stupidity...contagion assured as Dexia is a big counterparty in derivatives markets and has sold a lot of debt. Municipalities will have a hard time to refinance. My guess is Dexia total cleanup bill will be at least the 10-20bn EUR range probably with much more than that in guarantees. Not bad for a medium sized bank, and that's 25% of the EFSF...

Also weve seen continued downgradings. I just cant remember who and how many of them but i didnt hear of anyone being upgraded last week. Personnally more than the grade itself, its the yield that matters (remember Japan was downgraded in 2001 and in June 2003 10Y yields hit 0.5% !!). Italian and Spanish yields are still in an uptrend and if that doesnt change the bear market is not over. And MAYBE only the ECB might change that in a short time frame. For me 5.25% needs to in 10Y BTP yields for the current uptrend to be broken, and Id like to see 5% broken to call it all over. We are a far, far away from that today.

 20111011_-_Italy_10Y_yield

Personally i think the politicians will seize the ECB and that we will see fiscal union and massive monetization, together with recapitalization/nationalization of private european banks because there is nothing else to do (from their point of view). If that happens, however bad it may be for the long term, banks valuation will radically change (at least in the short term) as the systemic risk is kicked further out. There is a lot of uncertainties. Sure, banks will have to shift to a new business model, with less leverage, much lower returns, and they will have to eat govt bonds in their balance sheets as they will be invited to do so. No need for EFSF to buy govt bonds, banks will just do that. In that scenario, sovereign debt and banking sector are « saved » BTP and Bonos yields go down massively boosting (=no longer hitting) the capital of those banks. But longer term, no more derivatives game, no more leverage, no more yield, eroding margins, means utility type business model, need to merge those new « semi-public » entities.

Anyway even in this scenario, confidence in the financial system will be very low with ever higher debt/gdp ratios until the real fireworks begin with the sovereign crisis hitting core countries (US, UK, Germany, France, Japan, Italy...)

But lets not forget a stock like BNP was trading near 50 only 3 months ago when we recommended shorting it, and it more than halved at one stage. So on a lot of metrics, it is a cheap stock (at least cheaper than we sold it :-) ) and oversold so there is scope for a recovery in price without fundamentals changing and not the broader trend changing. I know a French HF manager who was bullish around 27, and he must be happy. But he had a modest 35 target...

Personally i dont want to be sucked in this kind of stuff. Had he bought Dexia instead...

Same for stock indexes, they were more expensive a while ago (but cheaper only a few days ago...)

So what are the new technical levels ?

On the CAC (3137)

Once 3025 has been broken, the natural objective is 3260-3280 which on the weekly chart corresponds to the close of the first violent decline in the early days of August, and caps the highs of the 2 following weeks and the squeeze attempt in the last days of August. It is also roughly were the upper bollinger band sits. Actually there is a local declining trendline with resistance nearer to current levels which i see at 3180 but its being threatened to be taken out.

The roughly 235 point rally objective is also consistent with the fact that the lowest weekly close is contained by 3025-235 = 2790

In the bulls case, looking at the weekly chart, we have to admit there is a divergence in the RSI and stochastics. But i dont think it means more than the 3260-3280 objective. The bulls can also argue that the weekly DMI is extremely strong and that a stronger technical correction is overdue.

On the monthly chart, we can see we are very far from the moving average, and a rally to for example 3400-3450 wouldnt change the broader trend.

 20111011_-_CAC_Monthly

However, i would note that if we close this month on a strong footnote above 3310, thats a bullish engulfing reversal pattern !! I dont favour this scenario at all, but we have to keep our mind open; and i dont know for you, but ill put all my structural bearish bets off for a while if that happens.

On the SP (1183)

 20111011_-_SP_Weekly

same kind of chart, but with the market even more reluctant to sell off, witness the candles of the 2^nd week of August or 1^st week of October which indicate strong and swift buying at the lows. And divergences in technical indicators RSI, stochastics. 1220-1240 is the level to watch on the upside, if it breaks, one should back off for a while I think. But its also the place to try to go short with tight stops.

Financials have been weak. We're looking at the next Armageddon trade. We hate GS (96) at BBB, but we think it has much more downside potential if/when everything blows up. But, the trendline channel support seem to have worked for GS which has lost more than 40% YTD. I personally prefer to be modest and thank BBB to have given realistic band valuations for the likes of GS and BNP and even if the risk is on further downside, I believe now is a place to reduce risk.

20111011_-_GS_Monthly

EURUSD (1.361) has been correlated 1to1 with stocks. With yesterday's big move in the EUR, i do feel stupid to have given a recommendation to stay short last week at 1.335. Eu(ro)phoria is not good for trading ! I should have set a stopwin. Weve recommended shorts since 1.41+ so its not a total disaster, but personally, ill go out for money management puposes. Actually 1.385/1.39 the moving average is quite near and is the zone where new players not involved should like to go short, because nothing changed...so LT players should stay short, but long term player am I not...

Also, whats also the point to hold similar positions in correlated assets ? None i think. Unless there is a specific and timely technical signal we (try to) get right.

Gold (1660) is still healing, I favour building longs cautiously on weakness around 1550-1600 again but i dont expect strong quick gains now. Here is the monthly chart. Please make up your own mind following the earlier discussion on engulfing patterns.

 20111011_-_Gold_Monthly

 Remember trading is not about getting all calls right; not even about getting more than 50% right, but about making and managing money. I prefer to miss a trade than to be involved in a messy trade. I am more in wait and see mode here. Luck, as usual, is also very important of course. I wish good luck to you all.

All paying subscribers, please make more use of our private discussion forums. I've left a not there about my position in Apple to get the discussion started.

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Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3: 

1. I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction
2. Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?"
3. Reggie Middleton Serves Up Fried Calamari From Raw Squid: Market Perceptions of Real Risk in Goldman Sachs

So, what else can go wrong with the Squid? 

Plenty! In Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?" I included a graphic that illustrated Goldman's raw credit exposure...

So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

 image006

And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party
I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just
giving y'all a heads up ahead of time...

And for those who may not be sure of the significance, please review my presenation as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam, below. After all, for all intents and purposes, Dexia has officially collapsed - [CNBC] France, Belgium Pledge Aid for Struggling Dexia... and its a good chance that it's a matter of time before BNP follows suit - exactly as BoomBustBlog predicted for paying subsccribers way back in July.

A step by step tutorial on exactly how it will happen....

• The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
• What Happens When That Juggler Gets Clumsy?
• Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
• The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
• The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
• Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run 
• France, As Most Susceptible To Contagion, Will See Its Banks Suffer
• Observations Of French Markets From A Trader's Perspective
• On Your Mark, Get Set, (Bank) Run! The D…
• ECB As European Lender Of Last Resort = Institutional Purveyor Of A Pan-European Ponzi Scheme

 The European banking debacle was predicted at the start of 2010, a full year and a half before this has come to a head. If I could have seen it so clearly, why couldn't the banking industry and its regulators?

Now, back to GS, and considering all of the European falllout coming down the pike, of which Goldman is heavily leveraged into, particulary France (say BNP/Dexia/etc.)...

image009

Let's go over exactly how GS is exposed following the logic outlined in the graphic before this series of videos, as excerpted from subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 3,4 and 5.

GS__Banks_Derivatives_exposure_temp_work_Page_3

GS__Banks_Derivatives_exposure_temp_work_Page_4

GS__Banks_Derivatives_exposure_temp_work_Page_5

Booyah!

There you go. The markets and the media have concentrated on Morgan Stanely because Goldman has successfully hid much of its risk from those who didn't subscribe to BoomBustBlog. Of course, those who did subscribe picked up those puts ridiculosuly cheap, and are/will reap the benefits as the TRUTH goes VIRAL!

Those who wish to jump on the gravy train of our next US bank analysis featuring those susceptible to this malaise can subcribe here and now!

The many ways to reach Reggie Middleton:

Or simply email me.

Meet Reggie Middleton in person in NYC and London!

I will be hosting two BoomBustBlog meet and greets, for those who aren't too put off by my truthful, fact-based style. One in the next couple of weeks in a swank, pretty people laden lounge in downtown Manhattan, and the other potentially in London in mid-November - both wherein we sit down and chew the fat about things financial, global macro and socio-economic over drinks and heated debate. I will have plenty of gratis BoomBustBlog research there as well. Those who are interested should email the blog Customer Support for info.

New trading opinion available from Eurocalypse, subscribers ony: Eurocalypse trade opinion, 10-3-11

key word: Patience

Hello BoomBustBloggers! Eurocalypse here to share a few thoughts about the market. I'd like to open this post with a much loved topic among the blogosphere and its readers, aka gold.

I'm sure I received quite a lot of scorn and criticism when I said that Gold was NOT a no-brainer buy for the LT (see past Eurocalypse commentary), and to avoid buying it when it was in the high 1700. Of course, it did squeeze more to 1900$, but I think the price action demonstrated that I was basically right, that there was a lot of speculative longs, and that Gold (denominated in USD) IS correlated to the USD index, more than the stock market.

Well I also said the objective for a retracement was the monthly moving average low 1600s, high 1500s so here is how the charts looks now (click an graphic to enlarge).

20110927_-_Gold_Monthly

Oh! I like very much that candle touching the MA and bouncing there just after. We can zoom on the weekly and daily charts to see better what happened...

20110927_-_Gold_Weekly

We touched the Bollinger low on the weekly. I'd say that was a double reason to buy at that level, together with the monthly MA level. That was a fantastic buy opportunity for the patient and opportunistic trader.

20110927_-_Gold_Daily

Subscribers (click here to subscribe) can download the entire 6 page commentary (which is quite interesting) as well as recommendations on winding down the profitable SPY pair/fly trades here Trading Tips Sep 27th 2011.

Below is the latest from Eurocalypse. Before we get to his opinion, let's remember... This time really is different! Einstein has his definition of inssanity, but Middleton says the definition of a cental banker/planner is more and more borrowing & expecting insolvency this time around. Reggie, logging off (for now).

First I (Eurocalypse, the credit trader) must apologize for not updating for a while despite those very volatile markets. I am currently on a business trip in Europe, totally jet lagged, and with a lot of personal stuff to fix.

Well, Reggie has been totally right in his call for the French Bank Run as the French banks have continued to being hit hard, especially BNP, Socgen and Crédit Agricole. Paribas is looking for capital when their stock is at 23 and they denied they needed any

However what I find interesting, and which is not difficult to judge for non-Europeans, is that clearly the mindset of people, including politicians has changed here. Reading French mainstream newspaper like Le Monde, les Echos, le Figaro... there is clearly the realization that things cant go on like this and the prospect of a deeper and systemic crisis is real.

For example, the day before, there was a long debate on French television showing the ex-French minister of Industry (under Sarkozy), far-right Marine Le Pen who is anti-immigrant and anti-Euro, socialist Cahuzac whos heading the finance commitee in the House of Representatives, and an economist.

Well the 2 mainstream parties were of course pro-Euro, and for helping Greece, but the 2 others against, and clearly the Socialist and the Sarkozist were not at ease during the debate.

The economist said yesterday on the prime time evening news that there was no other choice than for the French govt to enter in size in the capital of the banks (magnitude 10bn each...). There is no more taboo in the media to talk about these scenarios.

Yesterday, Le Monde's headline was "Zone Euro Peut-on encore éviter la catastrophe" which can be translated as EuroZone, can we still avoid disaster???

http://www.lemonde.fr/economie/article/2011/09/19/zone-euro-peut-on-encore-eviter-la-catastrophe_1574160_3234.html#ens_id=1268560

Basically everything which was dismissed as fantasy is now gaining credibility with the events unfolding, and one can feel that even governments dont believe their own words or lies, which are perhaps only destined just to calm markets and people, but in reality they feel helpless.

The average French guy grasps that, and believe me they are not very optimistic about the future.

One thing is becoming clear:
The European banks, and the French banks in particular, will be RBSised, with the state the only entity who has the firepower to put money in it. contrarily to 2008 where in France there were just loans (which have been all repaid in full), this time, probably it will be de facto nationalization as the stock is so low, with the dilution effect, if private participation is not enough, the French govt will end up owning 30%-50% or more of the likes of SG BNP CA...There is now public and political pressure from all sides to do that, and the govts wont be as generous as the Dexia deal when they overpaid at the time... the price will be at the current quote, with a discount more likely than a premium paid. However, the market in those stocks should enjoy a huge short term rally (maybe like 50% to 100%)  on the announcement, even if that proves short lived. Even PIIGS would stabilize somewhat as the fear of massive liquidation from the banks subside.

Then, in time, they will merge up the retail banking activities and investment banking activities and try to sell them separately. Good luck with that, with all the new stringent regulation in place, banks will never be able to have so much leverage as before, will fight to earn a dime with govt bonds. Actually it will be "sound" policy (from the new govt imposed management) to buy more govt bonds, even PIIGS if necessary.

At the same time there is a crackdown on bankers, bonuses, and all kind of taxes are going up, including capital gain taxes. There is a strong shift towards this. In France or Germany, the Left parties (Socialists in France, SPD and Green in Germany), which are pro-European are gaining ground. The anti-Euro parties are gaining ground as well, but Left seems a clear favourite right now to win the next elections in France (personally, I think it will be a tight race between the Socialists and the Far Right). It probably means more state intervention, higher taxes, a Federal Europe, repressing the financial sector. I also think they will try to avoid sovereign defaults by all means, including massive ECB monetization (talking trillions of Euros, 10x times the current ECB program..) and FORCING the recapitalized banks to buy all the govt debt.

In such a scenario, Id like to make a remark, if they succeed in that and BTPs yield -say- 2%, a lot of the current issues we are discussing would disappear, that would be the Japanization of Europe. Some will say it will be worse than allowing defaults, and that may or not be true, but it would have definitely a lot of impact on the markets. Food for thought.

On the markets

As I write, after the FED, the stock markets resumed its selloff led up by financials and Europe crashing again. (CAC 2800 -5%) Click to enlarge...

20110922_-_CAC_Daily

Also the USD is continuing its massive strenghtening against virtually everything EUR, CHF, CAD, AUD, GBP, but also Asian Currencies are hit very hard too (except the JPY for now). There is a rush for USD and deleveraging is in full mode. Our bearish call for EURUSD to keep its downtrend is a hard winner. I still believe low 1.20s is achievable in a short period of time.

I had recommended earlier to get out of our short on BNP when it was still trading 27, more than 15% up than now, but hey, the stock did trade above 30 thereafter. My motivation was not to say that was THE LOW on BNP. I fully agree with Reggie that the stock could go to 20,15,10 or 0 if/when it gets ugly.The thing is about risk/reward. a 10% move today is only a 5% move compared to when we recommended shorting the stock. Implied vols means a 7% daily move in the stock is noise only (1STD).

And my stance is a bit different from Reggie (we cant agree on everything). I spoke to a clever HF manager yday, and he believes the stock could easily be worth 35 if the govt puts a big ticket in BNP. If the govt puts 10bn in all French banks at the same time, I think its not unwise to believe this will happen in a matter of seconds. BUT, I replied to him as well, waiting for this to happen, we could see the stock down to 20,15,10 and still see 35 behind! Remember 2009. Banks are being squeezed by (USD) liquidity and some kind of run starting.

Its becoming a casino now and insiders have a clear advantage on us. Play at your risk. But a way to minimize risk in a bear market, is to sell bounces, not to try to go long to catch the falling knife, but also not to try to sell with the momentum as there are always vicious squeezes. bear markets trade sideways or up most of the time!

On SP, which was resilient to selloff, well I will admit that yday before the FED I was feeling quite nervous with the positions with a fear of a squeeze, as the Daily Chart wasn't overbought yet. However the 1210-20 level (where we recommended to sell calls to buy put spreads in previous comments) was also the Weekly MA10, which was retested and now were heading logically lower again. Luckily (or not ) I'd say, our recommended strikes fit well with the price action.

(More to come soon, sorry for the short post).

Opposing opinion

This is Reggie here, forcing my two cents into this post (the rest of these posts regarding trading strategies and tactics will be subsciption only). I have no doubt the French government along with the other EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts. The fact of the matter at hand is that they simply can't afford to bail them out. I have predicted FIRE sector (including banks) failure at a commendable rate (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?). It's not rocket science, though. It's simply (and actually quite simple, since my 10 year old can do it) math, coupled with a pliable understanding of human nature couped in grasp of history. Listen, it was the (attempted) bailing out of the banking system that got these countries in this situation to begin with. Bailing out the banks just two years later??? Do you really thing that will help the sovereign debt situation or hurt it? If the bailout goes through, you eat the small losses (relative to the big gains that BoomBustBlog delivered subscribers) and roll your gains directly into bearish positions on the bailing sovereigns. It's really just that simple. Don't belive me, let's look at history...

image022

image021_copy

image034

 So, as I was saying...

Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional), read the balance of this article for perspective, then populate the assumptions and inputs with what you feel is realistic. I'm sure you will come up with conclusions similar to ours. Below is sample outout from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)

image014

A detailed and accurate picture of what is happening...

1. Now That European Bank Run Contagion Has Started Skipping Across That Big Pond... US Bank Risk Stands Woefully Underappreciated!!!
2. The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download
3. BNP Bust Up: Yet Another Reason Why BNP Paribas Is Still Ripe For Implosion!
4. Most Headlines Now Show French Bank Run Has Started, And It's Happening Just As Our Research Anticipated
5. I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
6. And The European Bank Run Continues...

A step by step tutorial on exactly how it will happen....

• The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
• What Happens When That Juggler Gets Clumsy?
• Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
• The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
• The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
• Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run 
• France, As Most Susceptible To Contagion, Will See Its Banks Suffer
• Observations Of French Markets From A Trader's Perspective
• On Your Mark, Get Set, (Bank) Run! The D…
• ECB As European Lender Of Last Resort = Institutional Purveyor Of A Pan-European Ponzi Scheme

Stacy Summary: We interview Reggie Middleton about a run on French banks. I notice today that Pimco’s El-Erian is also talking about a run on French banks. He must have watched the Keiser Report when it aired from late last night PDT. We know you’re taking our shtick Mr. El-Erian, we’ve got our eye on you!

Go to 13:07 marker in the video, contrast and compare and consider watching the smaller more independent shows for the real scoop every now and then.

For some back ground on the "Kick the Can Triumvirate Three" [BBB Trademark], go to 20:50 in the video and dedicate 5 minutes to it...

My April presentation in Amsterdam as Keynote detailing the inevitable...

Again, I believe the next big thing, for when (not if, but when) European banks blow up, is the reverberation through American banks and how it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

Note: This bank has members of its peer group who have been identified as at risk, but no one has pulled the covers off of this one as of yet. I think I may blow the whistle. It will be a doozy, and a potentially very profitable one at that since nearly 3/4 of it tangible equity is embroiled in a region that looks like it is about to blow up. As I type this, some of the puts have already doubled in price. I will be releasing additional analysis on this bank this weekend for paying subscribers.

•  Contagion Forensic Review - Retail
•  Contagion Forensic Review - Professional

Does anyone truly wonder why so many seemingly smart people in such high places of power fail to see the obvious difference between a lack of liquidity and true insolvency? I don't! Everyone knows what time it is, they just don't want to admit that they looked at their watch! Its_a_liquidity-trap

It appears that we have successfully hit another home run with out BNP short call in the beginning of the third quarter (Bank Run Liquidity Candidate Forensic Opinion, over 50% decrease in price), and apparently timed the bull run with underpriced call options to the upside as well (Trading Opinion and Analysis 9-14-2011) as BNP rallies on nonsense news adding puff and premium to those cheap calls. This post is a constructive followup to the quite popular piece earier this week wherein I took the wraps off of our prime French bank run candidate. If you haven't read it yet, I strongly suggest you peruseThis Is Why BoomBustBlog Is THE Place To Go For Hard Hitting Research: BoomBust BNP Paribas?

The media has been awaken to the BNP situation a little more than a quarter after we prepped BoomBustBlog subscribers, as is exemplified by the following:

1. BNP Launches Restructuring Plan‎ Wall Street Journal
2. BNP Paribas Bonds Tumble Amid U.S. Money Market Funding Concerns‎ San Francisco Chronicle
3. BNP Paribas Bonds Tumble Amid Concerns Over Funding in U.S. Money ...‎ Bloomberg

Now, that the perception of panacea is being traded upon, that is panacea in the form of liquidty attempting to solve solvency issues, we will now attempt to illustate the folly of such...

Stocks Jump as ECB Offers Loans to Banks [Bloomberg]

Stocks and the euro rose, while Treasuries slid, as the European Central Bank and international policy makers coordinated to lend dollars to banks to help tame the credit crisis. Energy and metals led commodities higher.

... The ECB said it coordinated with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to extend three-month loans to euro-area banks in an effort to ensure they have enough cash for the rest of the year. The announcement added to optimism that policy makers were containing the European sovereign debt crisis after the leaders of France and Germany yesterday confirmed they will support Greece’s continued participation in the shared euro currency.

“It is about protecting the liquidity of the European banks,” Howard Ward, a money manager who helps oversee about $36.1 billion for Gamco Investors Inc. in Rye, New York, wrote in an e-mail. “The private sector has pulled back from funding these banks. So central banks are stepping in to make that dollar funding available. Good news is the banks get their dollar funding. Bad news is that the situation has gotten this dire.”

... The Stoxx 600 advanced for a third day, climbing 2 percent, as banks led gains in all 19 industry groups. BNP Paribas SA surged 12 percent in Paris and Italy’s Intesa Sanpaolo jumped 8.4 percent.

May I take this time to congratulate resident trader Eurocalypse on a most wonderful call, referencing the trading opinion from9/13 and 9/14 - Trading Opinion and Analysis 9-14-2011

Trading_Opinion_and_Analysis_9-14-2011_Page_1

Trading_Opinion_and_Analysis_9-14-2011_Page_2

A very, very well timed call indeed. Now, back to the Bloomberg article...

“It’s nice to see that the risk factors coming out of Europe are abating somewhat,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in a telephone interview. “That addresses the liquidity issue that would be threatening the European banking system.”

... The cost of insuring European sovereign and corporate debt extended declines after the ECB announcement and as the prospect of default by Greece receded. The Markit iTraxx SovX Western Europe Index of swaps tied to 15 governments dropped 13 basis points to 330 as of 2:45 p.m. in London, the lowest since Sept. 9 and signaling an improvement in perceptions of credit quality. Swaps on France fell 10 basis points to 171, contracts on Italy dropped 29 basis points to 442 and Spain fell 22 basis points to 370, CMA prices show.

Cheap dollar funding is not going to help BNP anymore than it helped Lehman. I have prepared several models to illustrate such, and are designed to go hand in hand with both our illustrative trading supplements and our forensic research on BNP - namely:

•  French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
•  Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

The first model (all are cast in Excel 2010 format [.xlsx]), BNP Exposures - Free Public Download Version, is available to the public free of charge and is designed to spark the discussion of Whether Another Banking Crisis Is Inevitable? I will be discussing this model, and its ramifications on Max Keiser, Russian Television - to be televised Tuesday. It should be interesting. Here are some screen shots.

The Impairment Scenarios: a very important concept that practically the entire European banking systm has somehow forgotten to address.

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Trading and HTM inventory at Level 1,2,3 or fantastical fanstasy?

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For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same - and then revisit this free model and reapply your assumptions:

• a research note to subscribers,  The Inevitability of Another Bank Crisis,
• followed by blog posts on the same, see Is Another Banking Crisis Inevitable?

The next nugget of knowledge is the BNP Exposures - Retail Subscriber Download Version. It enables users to simulate an anecdotal bank run - for retail subscribers only of course. In addition to those above, it sports...

 image005

 For those professional investors and institutions, namely hedge funds, asset managers, regulators, high net worth individuals with ties to BNP and family offices, heres to you. This is not a toy, but a tool that can truly communicate why you feel BNP may, or may not be a candidate for a bank run - contingent upon your inputs: BNP Exposures - Professional Subscriber Download Version. Additional screenshots above and beyond that included above...

Income statement implications of a true bank run...

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Let's recap the BoomBustBlog perspective before I offer my opinion for the upcoming week...

Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding

image012image012

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

•  French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
•  Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document contianing all types of juicy details...

• Contagion Forensic Review - Retail
• Contagion Forensic Review - Professional

image004The latest trading commentary from resident BoomBustBlog trader Eurocalypse, worth reading for all paying subscribers... This may be considered time sensitive.

Trading Opinion and Analysis 9-14-2011

This post, in and of itself, should demonstrate to the entire Sell Side of Wall Street, the MSM/pop media outlets and all who may follow them that BoomBustBlog forensic research and analysis is simply superior to much of what is significantly overpaid for in terms of investment advice and opinion. Even more, what's ironic is that as I type this, the ZeroHedge newsticker flashes "Because The First Amendment Does Not Reach Across The Atlantic..."

The idiocy just hit record highs:

• • BNP PARIBAS SAYS IT ASKED AMF TO INVESTIGATE WSJ OPINION PIECE - BLOOMBERG

What next: the AMF dispatches black choppers to round up all those trop-beaucoup criminal bloggers?

Hmmm... Speaking of bloggers... Well, I don't consider myself to be the average blogger with a wordpress account. I come to the table with a full place setting of analytics. For those who don't embrace this new medium of dynamic, chaos theory embracing, distributed method of knowledge dissemination, all I can say is... Let's dance!

Bloomberg reports: BNP Paribas, SocGen Rebound After Rejecting Money-Market Funding Concerns and Company Bond Risk Falls From Two-Year High as French Banks Reject Concerns

BNP Paribas SA, France’s biggest bank, and Societe Generale (GLE)SA rebounded in Paris trading after rejecting concerns over their access to funding.

BNP Paribas, which plunged as much as 12 percent, closed 7.2 percent higher, the biggest gain in more than a year. Societe Generale, which slid as much 8.1 percent, jumped almost 15 percent after Chief Executive Officer Frederic Oudea said in an interview with Bloomberg Television in New York that the bank’s exposure to European sovereign debt was “manageable” and that it could do without access to U.S. money-market funds.

“For our bank, the exposure to sovereign debt is low, absolutely manageable,” Oudea said. “We have plenty of buffers of liquidity and we are adjusting to the reduction in the money- market fund exposure.”

The two banks dropped more than 10 percent yesterday on a possible ratings cut by Moody’s Investors Service because of their holdings in Greece. French lenders top the list of Greek creditors with $56.7 billion in overall exposure to private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements.

Repeat quote, "Chief Executive Officer Frederic Oudea said in an interview with Bloomberg Television in New York that the bank’s exposure to European sovereign debt was “manageable” and that it could do without access to U.S. money-market funds.“For our bank, the exposure to sovereign debt is low, absolutely manageable,” Oudea said. “We have plenty of buffers of liquidity and we are adjusting to the reduction in the money- market fund exposure.”" 

Note: For clarification, Oudea is the CEO of SocGen, but the the point remains as illustrated by a statement released by Bank of France governor Christophe Noyer, which said that French banks had no liquidity or solvency problems, and were recapitalizing. The three major French banks are in very similar positions.

 Okay, let's dance! Keep in mind as you read the balance of this post and the inevitable attempt at trying to disparage my opinion, I am the very same guy that publcily and quite accurately predicted (in detail) the:

1. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?
2. The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 
3. The housing market crash in the spring of 2006 and publicly in September of 2007: Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?
4. Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 (not a single sell side analyst that we know of made mention of this very material point in the industry): Lennar, Voodoo Accounting & Other Things of Mystery and Myth!
5. The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007):BoomBustBlog.com’s answer to GGP’s latest press release and Another GGP update coming…(among over 700 pages of analysis, review the January 2008 archives or search for “GGP” for more research).
6. The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual
7. The collapse of the monoline insurers, Ambac and MBIA in late 2007 & 2008: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton,Welcome to the World of Dr. FrankenFinance! and Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion
8. The ENTIRE Pan-European Sovereign Debt Crisis (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010: The Pan-European Sovereign Debt Crisis

Bear Stearns/Lehman Deja vu?

Yesterday, in my post 'As The French Bank Runs....", I queried of the sell side, "What the hell took you so long to come to these rather astute observations, dude?" Well, in continuing my crusade of truth against the potential insolvency of French banks, I reference the WSJ article titlled "BNP Paribas Denies Funding Problem"

PARIS—BNP Paribas SA on Tuesday denied it is facing a dollar-liquidity problem, as reported in an opinion column in The Wall Street Journal. BNP Paribas said it is fully able to obtain U.S. dollar funding in the "normal course of business," either directly or through swaps. In a column published in The Wall Street Journal Tuesday, Nicolas Lecaussin, director of development at France's Institute for Economic and Fiscal Research, cited an unidentified BNP executive saying the bank "can no longer borrow dollars."

A Wall Street Journal representative wasn't immediately available to comment. BNP Paribas said its has abundant euro short-term funding and has a net dollar short-term funding with maturity shorter than a year worth €60 billion. The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks. The bank also said it is using foreign-exchange swaps to more than offset the recent reduction and "shortening" of funding from U.S. money market funds. French banks, in particular BNP Paribas and Société Générale SA, have been hurt by a perception that they face difficulties in tapping short-term funding in the U.S., as money-market funds cut their exposure to the banks amid fears about potential contagion from the Greek and broader European sovereign debt crisis. Shares of BNP Paribas were down 8.3% at €23.97 recently, the biggest loser on the Paris stock exchange, where the benchmark index was down 1.8%. SocGen was down 3%."

Hey, Big Wall Street Bank Execs Always Tell the Truth When They're in Trouble, RIIIIGHT????

Here's more of Alan Schwartz lying on TV in March of 2008

Like I said above, it's not as if upper management of these Wall Street banks would ever mislead us, RIGHT????

Erin Callan, CFO of Lehman Brothers Lying giving an interview on TV in March andagain in June of 2008.

Even if the big Wall Street banks would lie to us, we have expert analysts at hot shot, white shoe firms such as Goldman Sachs, who of course not only are "Doing God's Work" but also happen to be the smartest of the smart and the "bestest" of the best, RIIIGHT!!!??? Below we have both Erin from Lehman AND Goldman lyingon TV in a single screen shot. Ain't a picture worth a thousand words???

We even had the inscrutable Meredith Whitney say "To suggest that Lehman Brothers is going out of business is a real stretch!" (She OBVIOUSLY DOESN'T READ THE BOOMBUST) as well as Erin Callan, the CFO of this big Wall Street bank on TV lying interviewing again...

But that damn blogger guy Reggie Middleton put his "put parade"short combo on Lehman right about that time, and had all of these additional negative things to say...

Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008

It appears that I should have dug deeper into Lehman! 

So, does BNP have a funding problem, or is it at risk of the same?

BoomBustBlog subscribers know full well the answer to this question. I'm also going to be unusually generous this morning being that our prime French bank run candidate has approached my "crisis" scenario valuation band. So, as to answer the question as to BNP, let's reference  Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers, and otherwise known as BNP Paribas, First Thoughts...

The WSJ article excerpted above quotes BNP management as saying: "The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks."

OK, I'll bite. Excactly how did BNP get to this €135 billion figure? Was it by using Lehman math? Methinks so, as clearly delineated in my resarch report on the very first page:

BNP_Paribus_First_Thoughts_4_Page_01 

The following two pages of this report go on to reveal the games being played to potentially come up with a figure such as the 135 billion quoted above. Boys and girls, I fear those may be Lehman bucks! 

For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same:

• a research note to subscribers,  The Inevitability of Another Bank Crisis,
• followed by blog posts on the same, see Is Another Banking Crisis Inevitable?, as excerpted...

But wait, there's more - much more!

BNP_Paribus_First_Thoughts_4_Page_04

BNP_Paribus_First_Thoughts_4_Page_05

BNP_Paribus_First_Thoughts_4_Page_06

BNP_Paribus_First_Thoughts_4_Page_07

This document is 19 pages full of stuff that BNP management may have forgotten to tell you, as well as valuation for both "crisis" and bailout scenarios. What you have before is an anecdotal 5 pages. To put this in perspective particularly since no on the sell side warned about French bank risk before the fact, let's look at the chart as of the day this research was released and I'll let you tell me if it was worth the subscription...

image004

Roughly 50% and falling as Vol and gamma explode! 

Just to add a sense of chronological depth to this post, let's revisit the timeline from yesterday's piece, "As The French Bank Runs....": 

Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding

image012image012

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

•  French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
•  Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

I also provided a very informative document for public consumption which clearly detailed exactly how this French bank collapse thing is likely to go down:  French Bank Run Forensic Thoughts - pubic preview for Blog - A freebie, to illustrate what all of you non-subscribers are missing!

So, What's the Next Shoe To Drop? Read on...

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

•  Contagion Forensic Review - Retail
•  Contagion Forensic Review - Professional

The following is a quick trader's opinion from BoomBustBlog trader, Eurocalypse:

The price action was very weak on Friday, and Euro (the currency) broke major supports last week. With the rumours of downgrade of French banks + Stark's demission, one can only be surprised we didnt open -20% or more on banks, and 2 points or more down on the Euro... ! Market already short ? !

The end game is near. Speaking with traders here and there, there is a sentiment of despair and/or inevitability about what is going on.

Regarding France, my bet is for the RBSation of the French banking sector... At some stage, liquidity issues will become too big, and there will also be strong political pressure for the govt to do something, and maybe something bigger than they would like to do. In 2008 it was loans only, this time they'll take preferred or even shares at the market price (big discount to book value). Portends big dilution for current shareholders. Once this happens, assuming Italy isnt trading like Portugal or Greece at that stage, we would have a tremendous rally/repricing in the share price.

My black swan is for Japan to try the Swiss strategy in the FX market...