In the headlines today: S&P Places EFSF's Long-Term AAA Ratings on Creditwatch Negative, May Lower Ratings by One or Two Notches

Is this truly a surprise? Does anyone truly believe this heavily financially engineered FrankenFinance monster actually deserves a AAA rating? Yes, I do mean Frankenstein assets. I implore you to delve in further - "Welcome to the World of Dr. FrankenFinance!" and .

As a matter of fact, it actually appears that those few members of S&P that do read my blog have actually found some influence in the company. If you remember, last week I challenged the rating agencies with this taunting post -Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? Now, it's not as if the agencies have went so far as to actually take heed to my warning, but those who follow me know that I have been leading my subscribers through an explicit path of "contagion to come" for two years now. Who is the major conduit of said contagion? Well, the very same nation who is the 50% of the bilateral lynchpin of the EFSF. See:

  1. When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!
  2. France, As Most Susceptible To Contagion, Will See Its Banks Suffer

  3. Focus on Greece? No! How About Italy? No! It's About Baguettes, Mes Amis! See also, When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

Of course, if France is 50% of the fire power behind the EFSF, and Reggie keeps banging the rating agencies about Frances impending fall from true economic AAA grace (as if it ever deserved such in the first place), then by default if one goes the other must follow. As a matter of fact, I even warned that the smaller, supposedly more staid countries are truly at risk - Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly? And as if by magic, Bloomberg reports: S&P Puts 15 Euro Nations on Watch for Downgrade Amid Sovereign-Debt Crisis

Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade.

The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks.

“Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement.

Back in April of 2011, I told a curious audience of several hundred bankers and institutional investors in Amsterdam exactly how this will turn out. Thus far, I'v been right on point, as has the predictions dating as far back as 2009 in the Pan-European sovereign debt crisis series.

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

S&P Puts 15 Euro Nations on Watch for Downgrade Amid Sovereign-Debt Crisis

Published in BoomBustBlog

Note: The video in this post had a coding error, hence did not appear. I apologize, and the video has been repaired. Enjoy!

Reggie Middleton Interviews GBI: Gold Bullion International

thumb_Sprott_Phys_Gold_Trust

This is part 2 of a 5 part interview with the principals of GBI - Gold Bullion International (http://www.bullioninternational.com/) - a unique firm located on Wall Street that allows investors (retail & institutional) to actually buy, sell, trade and store physical gold OTC in the investor's own name. Part 1 can be found here. This episode has the CEO comparing and contrasting his services with Eric Sprott's famed Physical Gold Trust. I plan on inviting Eric to offer his viewpoint in rebuttal (if any) to this video. Parts 3 and 4 (yet to be posted) feature some very tough questions. BoomBustBlog interviews are not pushovers or advertisements. You must be able to hold your own. Enjoy!

BullionVault

This is a competitor to GBI: Gold Bullion International. Click the graphic to access site.

 

Click the graphic to the right to download the Sprott Physical Gold Trust Prospectus. Sprott is a BoomBustBlog client, but is not aware of this post (at least not yet) and there are no conflicts here. I may have him interviewed to enable him to counter assertions made in the interview above.

Sprott_Phys_Gold_Trust_Prospectus

 Anyone who considers gold the armageddon trade should also believe that our select financial sector research will lead to a windfall. Subscriber reports available to th right...

Free public versions that have been stripped of tradable valuation information are available to download for those who do not subscribe or have not heard of BoomBustBlog. If you find it to be of
interest or insightful, feel free to distribute it (intact) as you wish.

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 File Icon BNP Exposures - Free Public Download Version

We feel the insurance industry may kick off events that cause volatility in the gold markets. See You Can Rest Assured That The Insurance Industries Are In For Guaranteed Losses …

Click here to subscribe to BoomBustBlog!

 

The SPDRs GLD prospectus is available here. Highlights:

thumb_gld_prosp_clip

thumb_gld_prosp_clip2

 Gold exchange-traded product information sourced from Wikipedia, the free encyclopedia

Gold exchange-traded products are exchange-traded funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs) that aim to track the price of gold. Gold exchange-traded products are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. As of 25 June 2010, physically backed funds held 2,062.6 tonnes of gold in total for private and institutional investors.[1] Each gold ETF, ETN, and CEF has a different structure outlined in its prospectus. Some such instruments do not necessarily hold physical gold. For example, gold ETNs generally track the price of gold using derivatives.

History

The first gold exchange-traded product was Central Fund of Canada, a closed-end fund founded in 1961. It later amended its articles of incorporation in 1983 to provide investors with an exchange-tradable product for ownership of gold and silver bullion. It has been listed on the Toronto Stock Exchange since 1966 and the AMEX since 1986.[2]

The idea of a gold exchange-traded fund was first conceptualized by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002. However it did not receive regulatory approval at first and was only launched later in March 2007.[3] The first gold ETF actually launched was Gold Bullion Securities, which listed 28 March 2003 on the Australian Stock Exchange. Graham Tuckwell, the founder and major shareholder of ETF Securities, was behind the launch of this fund and enlisted N.M. Rothschild & Sons (Australia) Ltd, Citibank and Deutsche Bank as market makers on the ASX.[4]

Fees

Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage fee is charged. U.S. based transactions are a notable exception, where most brokers charge only a small fraction of this commission rate. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each share, so the amount of gold in each share will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars.

In the United States, sales of a gold ETF are treated as sales of the underlying commodity and thus are taxed at the 28% capital gains rate for collectibles, rather than the rates applied to equity securities.[5]

Exchange-traded and closed-end funds

Central Fund of Canada and Central Gold Trust

The Central Fund of Canada (TSXCEF.A, TSXCEF.U, NYSECEF) and the Central Gold Trust (TSXGTU.UN, TSXGTU.U, NYSEGTU) are closed-end funds headquartered in Calgary, Alberta, Canada, mandated to keep the bulk of their net assets in precious metals, with a small percentage of cash. The Central Fund of Canada holds primarily a mix of gold and silver, while the Central Gold Trust holds primarily gold.

The custodian of the precious metals assets of both funds is the main Calgary branch of CIBC. Both funds are considered especially safe because of their published codes of governance and ethics, the Central Fund's history of operation since 1961, and the funds' simple prospectuses which equate shares of the closed-end funds with real units of ownership in the trusts. As of October 2009, the Central Fund of Canada held 42.6 tonnes of gold and 2129.7 tonnes of silver in storage, and the Central Gold Trust held 13.6 tons of gold in storage.

Claymore Gold Bullion ETF

In May 2009 Canadian-based Claymore Investments launched Claymore Gold Bullion ETF (TSXCGL). As of November 2010 the fund held 10.4 tonnes in gold assets.[6]

Exchange Traded Gold

Several associated gold ETF's are grouped under the name Exchange Traded Gold.[7] The Exchange Traded Gold funds are sponsored by the World Gold Council, and as of June 2009 held 1,315.95 tonnes of gold in storage.[7] Exchange Traded Gold securities are listed on multiple exchanges worldwide by various ETF providers, including:

SPDR Gold Shares

SPDR Gold Shares marketed by State Street Global Markets LLC, an affiliate of State Street Global Advisors, accounts for over 80 percent of the gold within the Exchange Traded Gold group. As of 2009, SPDR Gold Shares is the largest and most liquid gold ETF on the market, and the second-largest exchange-traded fund (ETF) in the world.[8][9]

Stock market listings:

The SPDR Gold Trust ETF (GLD) holds a proportion of its gold in allocated form in London at HSBC, where it is audited twice a year by the company Inspectorate. GLD has been criticized by Catherine Austin Fitts and Carolyn Betts for its extremely complex structure and prospectus, possible conflict of interest in its relationships with HSBC and JPMorgan Chase which are believed to have large short positions in gold, and overall lack of transparency.[10] GLD has been compared with mortgage-backed securities and collateralized debt obligations.[10] These problems with SPDR Gold Trust are not necessarily unique to the fund, however as the dominant gold ETF the fund has received the most extensive analysis.

Gold Bullion Securities, ETFS Physical Gold and ETFS Physical Swiss Gold

ETF Securities "Gold Bullion Securities" (previously marketed by Lyxor Asset Management) listings:

Similar to Gold Bullion Securities, ETF Securities’ ETFS Physical Gold (LSEPHAU) and ETFS Physical Swiss Gold (LSESGBS) are also backed by allocated gold bullion. They later launched ETFS Physical Swiss Gold Shares (NYSESGOL) and ETFS Physical Asian Gold Shares (NYSEAGOL) on the New York Stock Exchange for US investors seeking geographical and custodian diversification.

ETF Securities’ physical gold ETCs — ETFS Physical Gold (PHAU), ETFS Physical Swiss Gold (SGBS) and Gold Bullion Securities (GBS) — are all backed by “allocated” gold bars – uniquely identifiable bars which carry no bank credit risk. The precious metal bars are held in trust in London by the Custodian HSBC Bank USA N.A., the world’s leading Custodian for ETCs. The metal held with the Custodian must conform to the rules for Good Delivery of the London Bullion Market Association (LBMA). Securities are only issued once metal is confirmed as being deposited into the Company’s bullion account with the Custodian. Consistent with allocated gold, no precious metal is borrowed, loaned out nor does it earn any income.[citation needed]

Dubai Gold Securities and NewGold

Goldist ETF

Goldist ETF (ticker symbol: GLDTR) was launched by Finansbank in September 2006 on the Istanbul Stock Exchange.[11]

iShares Gold Trust

The iShares Gold Trust was launched by iShares on 21 January 2005 and is listed on the New York Stock Exchange (NYSEIAU) and Toronto Stock Exchange (TSXIGT). As of July 29, 2010, the fund claimed to hold 90.88 tonnes of gold in storage. According the prospectus, trading in the fund may be suspended if COMEX gold trading is restricted or gold delivery is not possible. Some writers have expressed doubts that iShares has sufficient gold inventory to back its existing warehouse receipts.[12] One of the main differences between iShares and SPDR Gold Trusts is that iShares creates roughly 100 shares from every ounce of gold, versus the 10 shares per ounce created by SPDR. This makes iShares more accessible for day traders or small investors to play the gold market.[13]

Julius Baer Physical Gold Fund

In October 2008 Swiss & Global Asset Management (formerly Julius Baer Asset Management) launched JB Physical Gold Fund (SIXJBGOCA, JBGOEA, JBGOUA, JBGOGA) which invests in physical 12.5 kg gold bars (around 400 ounces). The ETF has four unit classes traded in different currencies: CHF, EUR, USD and GBP.[14]

Precious Metals Bullion Trust

On August 14, 2009 Brompton Funds Management Limited launched Precious Metals Bullion Trust (TSXPBU.UN). The Fund invests in physical gold, silver and platinum bullion bars which are stored on a fully allocated, insured and physically segregated basis in Canada, in the treasury vaults of the Bank of Nova Scotia, a Canadian Schedule 1 bank. PBU.UN publishes its “Good Delivery” standard bar holdings on a monthly basis on its website[15] and units can be redeemed quarterly at Net Asset Value for cash with no limitations. As the physical bullion held by the Fund is entirely unencumbered, unitholders may also choose to redeem quarterly for whole bars of physical gold, silver and platinum bullion (subject to minimum redemption amounts).

Sprott Physical Gold Trust

Sprott Asset Management launched the Sprott Physical Gold Trust as a closed-end fund on February 26, 2010. It is traded on the NYSE Arca (NYSEPHYS) and the Toronto Stock Exchange (TSXPHY.U). The fund holds physical gold, stored at the Royal Canadian Mint. PHYS publishes its inventory of Good Delivery gold bars on the web, and (uniquely among gold ETFs) allows shares to be redeemed for whole bars. As LBMA bars weigh between 350 and 430 troy ounces, physical redemption is limited to such increments. Regardless, the provision for physical redemption lends credibility to the fund's claim of holding unencumbered physical gold, especially as of 2010 when funds such as SPDR Gold Shares with elaborately structured holdings are under scrutiny. As of June 2010, the Sprott Physical Gold Trust held 582,417 ounces of gold, plus about $9 million of other assets.[16]

ZKB Gold ETF

The ZKB Gold ETF (SIXZGLD, ZGLDEU, ZGLDUS, ZGLDGB) was launched on 15 March 2006 by Zürcher Kantonalbank. The fund invests exclusively in physical 12.5 kg gold bars (around 400 ounces). The ETF has four unit classes traded in different currencies: CHF, EUR, USD and GBP.[17]

Exchange-traded certificates

Source Physical Gold P-ETC

Source, the specialist provider of exchange traded products partnered with BofA Merrill Lynch, Goldman Sachs, JP Morgan, Morgan Stanley and Nomura, listed the Source Physical Gold P-ETC (SGLD) on the London Stock Exchange in June 2009.[18] The product has also been cross-listed on the SIX Swiss Exchange (SIX)in November 2010.[19]

SGLD trades in US dollars and has raised over US$1.1 billion in assets to date.[20]

Each Gold P-ETC is a certificate which is secured by gold bullion held in J.P. Morgan Chase Bank’s London vaults. The vast majority of gold bullion is held in allocated gold bars. Any residual value that cannot be split into standard gold bars will be put into unallocated gold. This is placed in a segregated account with J.P. Morgan Chase Bank acting as Custodian and Deutsche Bank as Trustee. The investment return is achieved by holding gold bullion which is valued daily at the London PM fixing price.[21]

One of the main advantages of this product is the annual management fee, which at 0.29% is considerably lower than comparable competing products. SGLD has achieved UK reporting status, which provides for preferential tax treatment in the United Kingdom.[22]

db Physical Gold ETC

db Physical Gold ETC (SIXXGLD, LSEXGLD, FWBXAD5) was launched by Deutsche Bank in July 2010.[23]

Nomura Gold-Price-Linked ETF

On 10 August 2007, Nomura Asset Management launched the Gold-Price-Linked ETF (code "1328") on the Osaka Securities Exchange, Japan. Shares are sold in 1 gram gold units, with a minimum purchase of ten units. The fund is not backed by physical gold but by bonds traded in London which are linked to the price of gold.

RBS Physical Gold ETC

Royal Bank of Scotland N.V. launched RBS Physical Gold ETC (FWBXOB1) in April 2010.[24]

Xetra-Gold

Xetra-Gold (FWB4GLD) was launched by Deutsche Börse Commodities in December 2007.[25]

Hybrid products

Hybrid products hold mostly physical gold, but also hold other financial instruments such as gold futures, bonds or money market funds.

Benchmark Gold BeES

On 19 March 2007 Benchmark Asset Management Company Private Ltd, a Mumbai-based mutual fund house, launched Gold BeES (NSEGOLDBEES) on the National Stock Exchange of India. The name is short for "Gold Benchmark Exchange-traded Scheme." Shares are sold in approximately 1 gram gold units. The scheme's assets are 90-100% physical gold, and up to 10% money market instruments, securitised debts (up to 5%), and bonds.[26]

UTI Gold Exchange Traded Fund

On 17 April 2007 UTI Mutual Fund listed Gold Exchange Traded Fund (NSEGOLDSHARE) on the National Stock Exchange of India. The fund states that its objective is "to provide investment returns that, before expenses, closely correspond to the performance and yield of the gold prices or gold related instruments."[27] Every unit of UTI Gold Exchange Traded Fund approximately represents one gram of pure gold. Units allotted under the scheme will be credited to investors’ demat accounts.[28]

Index-tracking products

ETFS Gold

In September 2006 ETF Securities launched ETFS Gold (LSEBULL) which tracks the DJ-AIG Gold Sub-Index.

IDBI Gold ETF

IDBI Mutual Fund has launched IDBI Gold Exchange Traded Fund, an open ended Gold Exchange Traded Scheme. The investment objective of the scheme is invest in physical Gold and Gold related instruments with the objective to replicate the performance of Gold in domestic prices. The ETF will adopt a passive investment strategy and will seek to achieve the investment objective by minimizing the tracking error between the Fund and the underlying asset . The New Fund Offer (NFO) open for subscription from October 19 and close on November 2, 2011. The New Fund Offer price is Rs 100 for cash at a premium equivalent to the difference between the allotment price and face value of 100/- each. Allotment price would be approximately equal to the price of 1 gram of Gold. The Scheme does not offer any Plans for investment. The minimum investment amount is 10,000 and in multiples of Rs. 1 thereafter. Entry and exit load charge will be nil for the scheme. The scheme will invest 95% to 100% of assets in gold and gold related instruments and upto 5% of assets in debt and money market instruments. The Benchmark Index will be domestic price of physical Gold

PowerShares DB Gold ETF and ETNs (PowerShares/Deutsche Bank)

Tracks the performance of certain index moves inside the Deutsche Bank Liquid Commodity Index - Optimum Yield Gold [1]. ETNs are exchange-traded notes, which differ from exchange-traded funds (ETFs).

  • DB Gold (NYSEDGL) (gold ETF)
  • DB Gold Double Long (NYSEDGP) (long leveraged gold ETN)
  • DB Gold Short (NYSEDGZ) (short gold ETN)
  • DB Gold Double Short (NYSEDZZ) (short leveraged gold ETN)
Published in BoomBustBlog

reggie_serious_with_rt_copy

The insurance industry is next up for BoomBustBlog subscriber scrutiny. Quite frankly, it’s amazing this industry has gone this long without getting the bank treatment, ex. Shorted into oblivion. Just imagine, and industry that is:

1.      extremely cyclical,

2.      prone to booms and busts (the fodder of BoomBustBlog),

3.      and relies as much, if not more, on investment income borne from bonds (primarily sovereign debt [whaaaat?] and bank/financial institution debt [whoa!!!??] for earnings as much as their core business of underwriting risk.

If this is not a group of shorts made in investor heaven, I truly don’t know what is! This article is the first in several to help my subscribers make sense of the list of insurers that I posted for download earlier this week (Addressing Risks In The Insurance Industry)

·  Insurance Cos. Operational Stress
(Insurers, Insurance & Risk Management)

·  Insurance cos. EU exposure 11-2011
(Insurers, Insurance & Risk Management)

·  Exposure of European insurers to PIIGS_051210
(Property, Casualty, Specialty & Monoline Insurers)

Since some of the lexicon in the insurance/risk management industry may be a little jargon-ish, let’s take it from the top and work our way down – courtesy of heavy excerpting from the web’s most useful collaborative, groupthink knowledge utility, Wikipedia.

How Do Insurance Companies Make Money?

Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium.

The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

The insurance industry has it own lexicon of performance and risk, with the most pertinent being the following three measures:

Expense ratio

Relatively easily calculated as the underwriting expenses divided by net premiums earned. Since many insurers bill periodically (i.e. annually), they collect monies that they haven’t performed for. As they perform for said monies, they earn them. So, P/C insurer accepts a $10,000 premium payment on January 1. By February 1 it has only “Earned” 1/12th of that premium although it has had physical possession of the (investable, very important concept here that we will review in a moment) full amount of the funds. The expense ratio measures an insurer's efficiency in conducting its business. The lower the expense ratio the better the insurance operation is run. Expenses include typical business outlays, ex:

1.      advertising

2.      commissions to sales force whether in-house (insurance agents) or external (brokers)

3.      salaries

4.      taxes and other operational expenses.

Keep in mind that every single penny sucked in in the expense ratio through underwriting expense is a penny that doesn’t get to stay in the insurer's pocket, thus tight expense ratios are a must.

Loss ratio

The loss ratio is simple enough – the monies lost divided by the net monies acquired through underwriting (not investment, which we will get to in a minute). It is calculated as loss and loss adjustment expense (the expense of minimizing loss) divided by the net premium earned (as explained up top). The loss ratio measures the proportion of acquired premium paid out in claims and claims related expenses. The loss ratio, over the longer term (shorter term are really just a matter of happenstance and luck) is an indicator of an insurer's risk management skills combined with its underwriting discipline.

Combined Ratio

The combined ratio is, simply enough, the combination of the loss ratio and the expense ratio. It is a simple, yet effective measure that reflects the operational excellence (or lack thereof) of an insurer. It measures what an insurer has to pay out in claims and expenses. Of course, even this metric has flaws, primarily in that it doesn't reflect the investment expertise of the insurer, which (particularly in the longer tail risks) can have a very significant effect on the bottom line.

A combined ratio of 104% means that an insurer is underwriting at a loss -- for every $1 in premiums taken in, $1.04 in claims and expenses are paid out. Fortunately, insurers also earn investment income from their float, so an insurer can still earn a profit even with a combined ratio in excess of 100%. 

In general, those who invest in the low long-term combined ratio companies have been handsomely rewarded with above market returns. One of the most famous combined ratio consumers is the venerable Warren Buffett. Now, the riskier forms of insurance that entail insuring risks with very long tails (basically, insurable events that can take many years in the making, as opposed to car insurance which has a 1 year or so maximum [short] tail) are also some of the potentially most rewarding. Medical malpractice is a good example. The field is treacherous, and the risks are murky and hard to see. But the possibility arises for claim to be made 3 or 4 years after the insured incident, and even after the claim is made payout may not occur for another 4 or 5 years due to litigation. Even after litigation is settled, the claim can be paid out as an annuity (if the plaintiff is foolish enough to accept such), which extends even further the amount of time the insurer has access to the investable premiums. Add all of this time up, and you have insurers that can invest monies for 12 to 20 years and rake investment income off of said funds for all of that time. This is why asset/liability management is so important in the insurance industry. A medical malpractice insurer that manages to earn 10% after taxes and expenses on its investments on premiums earned on long-tail risk business written with even a 104 combined ratio can do very well if payouts don't start until 8 years after the claim and don't end until 26 years after the claim (due to annuitized payouts). How many businesses do you know of that can do so well while making an operating loss? 

Think about it. This is one of the few industries where you can take a distinct and material operating loss and still post a material accounting AND economic profit! Of course this works both ways. If the insurer with a high combined ration takes significant losses, then you (as an investor) had best grab your ass cheeks with both hands and hold on tight. It's going to be a sickening ride. 

Let's use the data from the BoomBustBlog post How Greece Killed Its Own Banks! to further illustrate this point. Assume we had Insurer EuroX, who wrote long tale risks and invested heavily in European sovereign debt, including the sterling credit (at least as asserted by the big rating agencies) of Greece, Portugal and Ireland...

... imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)...

image001

The same hypothetical leveraged positions expressed as a percentage gain or loss...

image003

 

Of course, insurers don't use the leverage that banks do - or at least they don't use it explicitly. AIG did, and my analysts and I busted other US insurers packing the leverage in through the use of exotic derivatives, sold to them by.... Who the hell else? Banks! Subscribers, see the reports dated between 11/08 to 1/09 in the Life and Health Insurance subcategory for examples. Even without the use of leverage, significant losses are being taken in insurance company portfolios. The Greek bonds are being bid at 18 cents on the dollar. Try paying claims with that investment portfolio, purchased at par! Now, imagine you have a near 100 combined ratio - with no margin for error, god forbid the 82% margin that is needed just to break even. Wait, it gets worse...

The underwriting cycle (excerpted from Wikipedia)

Because most insurance policies are commodities, insurers generally lack pricing power. In other words, most people don't care who writes their insurance policy as long as the price is cheap. Thus, insurance prices are a function of supply and demand. When times are good, insurers make underwriting profits, and loss ratios decrease. As a result of the smaller losses, some insurers, driven by short-term greed, increase capacity by writing more policies. This increase in supply results in decreasing prices. Eventually, the cycle turns, losses increase, and insurers who wrote a lot of policies at low prices are left holding the bag. This situation is extremely similar to the boom-bust cycle of the stock market.

Have experienced a boom in the stock, credit and real estate markets? Are we know in a boom? 'Nuff said? No, not this time. Next to banks, insurance companies are the largest sources of cash for mortgages and private equity/mezzanine financiing for real estate deals. Despite massive bubble blowing by .govs, you know where we stand with real estate, right?

 

... It is the reporting company’s responsibility to report, not to obfuscate. The big problem with this “hide the market marks” thing is that markets tend to revert to mean. Unless said market values fundamentally catch up with said market prices, you will get a snapback. That is what is happening in residential real estate now. That is what happened in Japan over the last 21 years!!! That’s right, it wasn't a lost decade in Japan, it was a lost 2.1 decades!

This has been the first balance sheet recession that the US has ever had, but there is precedence to follow. Japan had a balance sheet recession following their gigantic real asset bust. They made a slew of fiscal and policy errors, which essentially prolonged their real asset recession (now officially a depression) for T-W-E-N-T-Y  O-N-E long years! For those that may have  a problem reading that, it is 21 long years. 

And here we are full circle, back to the list that I asked my subscribers to study earlier this week (Addressing Risks In The Insurance Industry). My next post on this topic this weekend will go over the number one pick from that list, along with the reasons for such pick using the logic outlined in this post. This will be quickly followed up by a forensic summary. Shortly after that will be either a full forensic report on said company or another shortlist of companies from another industry at risk from the impending debt crisis.

·  Insurance Cos. Operational Stress
(Insurers, Insurance & Risk Management)

·  Insurance cos. EU exposure 11-2011
(Insurers, Insurance & Risk Management)

·  Exposure of European insurers to PIIGS_051210
(Property, Casualty, Specialty & Monoline Insurers)

 

 

 

Published in BoomBustBlog
Thursday, 01 December 2011 08:15

Panic Buying?

From Eurocalypse:

litteraly... credit btp france, equities everything. charts dont mean anything anymore...never seen such a thing... nobody wants to play anymore... even those rallies are not good for the mkt... extreme vols make for extreme VARs and reduce automatically the risk taking ability of dealers in terms of volumes at a time when debt auction sizes increase etc...                                   the pain trade is that RISK assets perform for the time being... in spite of the worsening fundamentals

Published in BoomBustBlog

Slide1Last week I illustrated the interconnected EU master duo with the most ironic of divergent agendas: When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!  Basically, Germany and France are pulling in two different directions trying to get off of a boat that will drown them both, regardless. Then I posed the taboo question: Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?

The Dutch are probably in for a banging that the vast majority of the populace are not expecting. The presentation below is a subset of the keynote speech that I gave at the ING CRE Valuation Conference in Amsterdam last April. Some may say it was quite prescient. I'd say it was a matter of paying attention.

Before you peruse through the Power Points and related videos, glance over Interbank_Contagion_in_the_Dutch_Banking - 2006 (pdf)  and then review Cross_Border_Bank_Contagion_in_Europe_- 2006 (pdf). It is apparent that I wasn't the only one who used calculators and common sense before it was too late. To wit:

We investigate interlinkages and contagion risks in the Dutch interbank market. Based on several data sources, including survey data, we estimate the exposures in the interbank market at bank level. Next, we perform a scenario analysis to measure contagion risks. We find that the bankruptcy of one of the large banks will put a considerable burden on the
other banks but will not lead to a complete collapse of the interbank market. The exposures to foreign counterparties are large and warrant further research.

The following presentation shows not only Euro-area banks going bust but European CRE as well. So, why aren't German and UK banks - and REITs (yes, even Dutch REITs) on negative watch with the ratings agencies? And even more interesting question is why isn't the industry that I prepped my subscribers for in regards to the next forensic report beng put on watch by the ratings agencies? The quick answer is... Because they know they'll get paid to come to a pile of smoldering ashes with a fire hose, anyway. Let this be the official declaration: The man that called the fall of WaMu, CountryWide, Bear Stearns, Lehman Brothers, and GGP as well as the problems of about 32 regional US banks as well as the Pan-European Sovereign Debt Crisis (all while these enttities were investment grade and AAA rated) is now calling BS to the ratings agencies as they fail to take it to the UK, Germany and CRE. You heard it here first, and you'll probably hear an "I told you so" in a few months as well.
Below, click the graphic to advance it, or you can click the play button at the bottom of the black box for "autoplay".

Subscibers are welcome to discuss this in the private forums:

Published in BoomBustBlog

Weeks after I told my subscribers that Bunds were the unrecognized short of the quarter in "And The Next Stop On The European Bank Flu Express Is" - BAM!

  1. German Bond Auction Fails - The Atlantic: 1 day ago – A year ago, Germany and France could probably have saved the euro--at least for a time--by stepping…

  2. Germany Fails to Get Bids for 35% of Bonds Offered at Debt Sale (Businessweek): Germany failed to get sufficient bids at an auction of benchmark 10-year bunds today to reach its maximum sales target of 6 billion euros ($8.06 ...

I also said Italy would cause France and Germany to be at odds, as both start to sell off in the post "When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!"as well as After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It"

Once could probably guess what happes immediately thereafter... Like clockwork... Italian, Belgian Yields Rise; Bunds Sell-Off

German and French banks and governments are about to get hammered through to totally separate yet unrecognized industries. I will cover the reason in detail after the holidays for subscribers - but here's a hint: Instead of waiting for Germany and France to rescue the EU, one should start wondering who's going to rescue Germany and France. Take out your calculators people! There are no shining knights riding to the rescue...  Watch The Pandemic Bank Flu Spread From …

I discussed European real estate yesterday in the post Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly? If you have an economic interest or even curiosity in European Real estate, it is suggested you read the afore-linked post as well as...

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

 

And in closing, here are the two Dutch real estate videos I posted yesterday that were never released before...

Part 1

Part 2


As usual, I can be reached via the following (or directly via email), and urge all who rely on the perenially wrong sell side to subscribe to BoomBustBlog:

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Published in BoomBustBlog

Here is another interview given where I espouse my opinion and perspective on global banking and the sovereign debt crisis. Click here for the full audio.

endofthe_world_NO

Published in BoomBustBlog

Note: This will probably be the last post until after Thanksgiving, after which I will delve into insurance industry shorts for my subscribers. In the meantime, I have compiled a very meaty post to keep reades and subscribes alike stuffed to the gills like a turkey. If you haven't noticed, I tend to be a bit spicier and considerably more eccentric than the average financial pundit, commentator, analyst or investor. I think because of that, I've been left out this year's Wall Street bank Christmas party invitations. I ask that anyone who wishes to add a little "spice" in additional to some intellectual discourse and fun to their Goldman, JP Morgan, Morgan Stanley, etc. Christmas party shoot me an email and invite me along. It'll be fun - really!

In looking through this morning's MSM headlines I see what is tantamount to a mandate for BoomBustBlog subscriptions. Let's walk throught CNBC's front page.

msm_11-23

Starting at the top. The latest German bund auction flopped!

The day before yesterday, and throughout the year, I warned that Bunds would make a good short and Germany was next on The Next Stop On The European Bank Flu Express. There's no reason to believe that Germany, as a net export nation, will not get sick as ALL of its EU neighbors sneeze recession in its face! Nearly two years ago, I posted the following prescient pieces:

  1. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

  2. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.

  3. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

  4. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

Then we have the Asian markets down on weak China PMI. What else was there to expect? Does one really think China to be the 23 year of growth packed into 3 year miracle that the sell side and the media make it out to be? I've been warning on China since 2009 as well. See China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You Don't Get Something (Growth Through Stimulus) For Nothing (No Economic Consequences), as exceprted:

I have not had a chance to revisit my China thesis in a while, but it is coming once I round off the European recap and finish up my US technology thesis. China will most likely play a key portion in global financial and economic contagion that is simmering over in Europe. A commenter on another popular blog had this to say of my most recent post regarding Ireland (Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???):

Mr. Middleton,

Although I have no connection with financial investing or services, I read your analyses, and those of others, to be informed of events and topics of great economic importance.  What strikes me as odd, is that in all the stories on European Contagion I find no mention of China's position.  Given China's significant economic connection via trade with the European Union, it is puzzling we don't see more overt action from China to protect/affect the health of it's export recipient's economies.  Am I to infer there is covert action (via GS, Central Banks, IMF for example), China is simply not concerned about the economic stability of the European Union, or it's just waiting for the appropriate time for action/influence?

We definitely know where China stands on U.S. trade and Fed's policies, and it's relations with the other BRIC countries.

Is there a story here that I've missed?

I replied:

I believe China's ability to alter its own course is grossly exaggerated. As a net exporter with relatively minimal internal consumption as a source of economic activity, it is basically at the mercy of importing nation's ability to buy their goods. Any attempt to stoke the ability of these nations importing will be ancillary at best. The "reported" success of their bubble blowing is showing only one side of the equation - the bubble blowing. Signs of a traditional bubble (such as the one whose bursting the US and Europe are struggling to escape from) are everywhere, yet the mainstream media has not focused nearly as much attention on such. Unless the laws of basic human nature has changed, expect to see China suffering from the effects of profligate excesses just as the others that tried to inflate their economies the quick and easy way did.

Less than an hour after typing said reply, Bloomberg reports: China Inflation May Be Too Hot for Controls Amid Cash Glut.

Now, it didn't take a genius to figure out this would happen. As a matter of fact a slight dose of common sense (when was the last time you got something for nothing, really?), a little historical perspective or a BoomBustBlog subscription would have sufficed.

  1. BoomBustBlog China Focus: Inflation? Thursday, May 20th, 2010
  2. Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts Wednesday, February 3rd, 2010
  3. What Are the Odds That China Will Follow 1920’s US and 1980’s Japan? Wednesday, March 10th, 2010
  4. BoomBustBlog China Focus: Interest Rates Thursday, May 20th, 2010
  5. My China Ruminations Have Come to Pass As the Country Enters a Bear Market Tuesday, May 11th, 2010
We also have MSM headlines stating Franco-German manufacturing stalling as Belgium and France bitch about Dexia. Well, I warned all that France was the fulcrum point for the EU fall, not Italy and not Greece. Remember, France was supposed to be a savior, along side Germany bailing out with both buckets of water (I mean liquidity). As for France, referrence French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days! Then please see When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!, as excerpted:

BoomBustBlog readers and subscribers saw this coming a mile away. The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue. Reference the series:

Let's not forget that obvious headline, "'The Sky Will Fall In' for Europe". Where were you two years ago when the sky started falling? See our Pan-European sovereign debt crisis and notice the dates.
You also have the not so prescient headline akin to a fireman ariving at a smolding pile of ashes, brandishing his brand new fire hose waiting to put out said house fire - Two Thirds Chance of 2012 Europe Recession: Survey. Subscribe to BoomBustBlog, my friend (early 2010) The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
Now, speaking of Europe, particular Dexia (France, Belgium Wrangle About Dexia Deal: Reports), this brings to mind another highlighted headline focusing on the oft quoted sell side banking analyst US Stress Tests Not Worrying: Bove... Dick Bove is one of the, if not most oft quoted sell side bank analyst in the mainstream media. I disagree with him, regularly. As the uber independent investor/analyst that I am, I will never be accurately accused of kissing [up to] Dick - regardless, let's grab Dick by the base [of his assumptions] and see if we can yank something usable out of it, shall we?

The Federal Reserve announced Tuesday it plans to stress test U.S. banks—including the six largest—against a hypothetical market shock, such as an escalation of the European debt crisis.

Dick Bove
cnbc.com
Dick Bove

But noted banking analyst Dick Bove said there is nothing for investors to get upset about because the stress tests are pro forma and are not an indication that the Fed  has any particular concerns about the state of American banks.

“It was really required by the Dodd-Frank law that they have a stress test,” the Rochdale Securities analyst told Larry Kudlow. “So every year at about this time you have the Fed setting up a new stress test for the banking industry.”

The six big banks to be tested are Bank of America [BAC  5.37    -0.12  (-2.19%)   ], Citigroup [C  24.46    -0.54  (-2.16%)   ], Goldman Sachs [GS  89.40    -1.90  (-2.08%)   ], JPMorgan Chase [JPM  29.41    -0.50  (-1.67%)   ], Morgan Stanley [MS  13.52    -0.08  (-0.59%)   ] and Wells Fargo [WFC  23.93    -0.25  (-1.03%)   ].

While the Fed's stress tests will see whether U.S. banks can withstand any further deepening of the European debt crisis crisis, Bove isn't worried about contagion from the EU.

“If [the European banks] run into significant difficulties, it is not going to create a massive crisis in American banks,” he said. “American banks are benefiting meaningfully as a result of the European banking crisis and it’s showing up in their earnings.”

Will someone buy Mr. Bove an Insitutional BoomBustBlog subscription. Of course it won't create a massive crisis in American banks... The 8th largest bankruptcy in this country's history doesn't even scratch the radar, right??? The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications

That’s because European banks are selling American assets to American banks at discounted prices.

However, Bove thinks it’s highly unlikely that the European banks will collapse. He believes the European Central Bank will ultimately bail them out.

Okay, where do I start? Well, I must admit, I don't look, speak, think nor act like any of the sell side analysts. If you are into convention, and not into hard hitting analysis and outspoken brothers, then I'm just not your man. If that's the case, I suggest you simply get you some Dick. For those who (like me) don't favor dick, I have a slightly different flavor to offer in terms of analysis and perspective.

For those not familiar with Mr. Bove, he made an interesting call on Bear Stearns which was essentially antithetical to my research. I will copiiously (I apologize Karl) excerpt a post from the Market Ticker which explains the story explicitly: Dick Bove, Bear Stearns, And Controversey

  Apparently Mr. Bove does not like my ticker from last night, and believes that I have been in some way "unreasonable" in my characterization of him, specifically this paragraph:

"The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!"

He was kind enough to send me a copy of the full report which I have edited to remove his email address and phone number (at his request), but which is otherwise reprinted here with his permission. You are urged to read the report in full and draw your own conclusions about whether the market performrating was reasonable or not. Links are at the bottom of this post. There apparently is one word he can legitimately complain about in my original ticker - the word "PUT". In fact, he maintained a "Market Perform" rating on the 11th of March; the upgrade to Market Perform from SELL appears to have occurred in February.

You can find an archived copy of that story here. It says among other things, in reference to Bear and Lehman:

"He said private equity may once again be able to fund activities in the high yield markets, while adding that credit derivatives markets were unlikely to go lower, and that the mortgage business may actually be quite strong this year.

New York-based Lehman will likely recover faster than its peers due to the expected strength in mortgages, Bove said."

Ok, I apologize for the error in not noting that the actual upgrade apparently came a month earlier, not that I think its material, but when you're wrong, you admit you're wrong. Mr. Bove, of course, didn't bother to mention when the rating was issued by him during our phone call, nor that when he issued the rating the price of the stock was even HIGHER (by nearly $20!) than it was in March when the rating was "maintained" (even though he claims it really wasn't if you read the narrative.) Now let's get to the meat of the matter and why I raised a stink about it in The Ticker - the rating. Dick claims that "anyone who read the report in full would see that I had told them to stay away from the stock."

After reading the report in full, I agree - the stock, by the narrative of the report, is indeed a sell - albiet a sell $20, or 25% of your money, too late!

But here's the problem - the report clearly cuts the price target from $90 to $45 (a 50% haircut!) and further is a reduction of 25$ (from $59 to $45) from the closing price on the day the report was issued.

The report is intended only for institutional clients who pay his firm, but it, like the report yesterday, was picked up and widely quoted in the media. Take a look at the second page of that report, directly above Mr. Bove's certification, under the definition of "Market Perform":

"Common stock is expected to perform with the market plus or minus five percentage points."

Since I took the liberty of excerpting so much, I urge all who are interested in this story to read Karl Deningers full post on his page - Dick Bove, Bear Stearns, And Controversey. In regards to me, let's contrast my opinions of Lehman and Bear in January of 2008, as opposed to Dick's - Is this the Breaking of the Bear?

Bear Stearns is in Real trouble

Bear Stearns will soon be, if not already, in a fight for its life. It is beset with the possibility of a criminal indictment (no Wall Street firm has ever survived a criminal indictment), additional civil litigation, and client defection and alienation. Despite all of these, the biggest issues don't seem all that prevalent in the media though. Bear Stearns is in a real financial bind due to the assets that it specialized in, and it is not in it by itself, either. For some reason, the Street consistently underestimates the severity of this real estate crash. If you look throughout my blog, it appears as if I have an outstanding track record. I would love to take the credit as superior intelligence, but the reality of the matter is that I just respect the severity of the current housing downturn - something that it appears many analysts, pundits, speculators, and investors have yet to do with aplomb. With a primary value driver linked to the biggest drag on the US economy for the last century or so, Bear Stearn's excessive reliance on highly "modeled" and real asset/mortgage backed products in its portfolio may potentially be its undoing. This is exacerbated significantly by leverage, lack of transparency, and products that are relatively illiquid, even when the mortgage days were good...

Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back

Okay, I’ll admit it. I watch CNBC. Now that I am out of the confessional, I can say that when I do watch it I hear a lot of perma-bulls stating that this and that stock is cheap because it is trading at or below its book value. They then go on to quote the historical significance of this event, yada, yada, yada. This is then picked up by a bunch of other individual investors, media pundits and other “professionals,” and it appears that rampant buying ensues. I don’t know how much of it is momentum trading versus actual investors really believing they are buying on the fundamentals, but the buying pressure is certainly there. They then lose their money as the stock they thought was cheap, actually gets a lot cheaper, bringing their investment down the crapper with it. What happened in this scenario? These investors bought accounting numbers instead of true economic book value...

Level 2 and Level 3 Assets – Model Risk

Model risk, or the risk of the bank living in a spreadsheet in lieu of the market, has already reared its head in the summer of ’07 with the blow up of two of BSC’s hedge funds, which have left them in litigation with their own customers. Basically, many of the assets of the fund were levered highly, and valued based upon modeled cash flows from assets, and not from the actual tradable value of the assets. This is fine, until you need to liquidate by selling assets. As luck would have it, they found no market they felt was acceptable and were forced to market value down significantly, approaching zero. It has also manifested itself more recently in the recent announcement that they will be moving at least 7 billion dollars to the level three (the most BullSh1+) category. Bear Stearns has recently announced another hedge fund blow up, which doledout significant losses to investors and is attempting liquidation. For my laymen’s plain English take on level 1, 2, and 3 asset accounting, see the Banks, Brokers and Bullsh|+series (Banks, Brokers, & Bullsh1+ part 1 for model risk,).

Level 3 Assets at 231% of Total Equity; Amongst the Highest on Wall Street

Weighted average price (US$)
Methodologies Weight assigned Fair Price Weighted average price
Fair price using P/Adj. BV approach 50.00% 33.84 16.92
Fair price using P/E approach 50.00% 39.00 19.50
Weighted average fair price     36.42
Current price     87.03
Upside from current levels (US$)     -58.2%

 

The book value numbers are after our economic marking and adjustments, of course. The “E” portion of the P/E ration is quite conservative, since the we built model incorporated BSC doing much better during the next 4 fiscal quarters than their peers are reporting for this quarter, and in my opinion BSC will not only fail to match their peers, but underperform due to the loss of their primary value drivers – mortgage derivative and related fixed income products – not to mention their asset management, legal, and litigation distractions as well as client and talent retention issues.

Am I right about the Bear?

Despite the Bear Stearns negative developments, and my opinion of its value, Bear Stearns has managed to find investors as was mentioned earlier in the insider transaction section. These are accomplished and wealthy investors to boot. My concern is that so many astute, accomplished and economically powerful investors have failed to realize and fully appreciate the depth and breadth of the current real asset recession, burst bubble, and quite possibly asset depression we have recently entered. This has destroyed the value of many bottom fishing value investors, both intitutional and retail.

image018.gif

And this is a summmary of my takes on Lehman Brothers from a similar period:

(February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “Can they monetize those hedges?”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody’s radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I’ll have to pay up to participate or go in short. There is too much attention focused on Lehman right now. ) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 | May 2008

Now that we've established a small base of potential credibility when it comes to bank failure, back to today and Dick's proclamations on CNBC, let's start with Bank of America, who Dick says won't be affected by European malaise. This is Reggie's take...

Then there's Goldman Sachs, the bank where Reggie is just so loved...

After all, I'm sure there'll be no volatility in the markets if Europe blows up. Then again, even if there is volatility in the markets, Goldman's prop desk can handle it, right? I sure hope you guys don't think I'm being a Dick, do you?

What Was That I Heard About Squids Raising Capital Because They Can't Trade? Well, you guys know where I stand on this, and I have warned you ad nauseum...the Squid Can't Trade!

 

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

 

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

I'm Hunting Big Game Today: The Squid On A Spear Tip

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

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:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies

On to the next Banque de Dick... You'd think with Dexia in the news, one would know to either stay clear of JP Morgan or at least subscribe to the BoomBust, eh? CNBC reports today (as highlighted in the introductory graphic) France, Belgium Wrangle About Dexia Deal: Reports. Why is this important? Well, look at why Dexia's in trouble in the first place. In the (must read) post Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn you will find..

...Similarly, many sell-side researchers award stocks “buy” or “overweight” ratings even as their internal asset-management units unload shares, presenting a conflict of interest and ethical dilemma. Goldman’s most famous front-runs to date were the Abacus transactions, through which the bank allegedly postured for high ratings for its mortgage-backed CDOs, sold them to clients and then shorted them.

According to research from the Street.com, Goldman put a Conviction Buy Recommendation on JP Morgan Chase shares and issued it to their clients, and then sold 4,200,009 shares of JPMorgan Chase. At an average of $45/share,  that means that Goldman had a lack of conviction in its own "Conviction Buy" recommendation to the tune of $189,000,405. I'd hate to see what the company would do if they recommended clients sell, or worst yet short sell, stock. Oh yeah! We already know, don't we.

Bloomberg reports: Dexia Takes 3.6 Billion-Euro Charge on Asset Sales

That charge taken by Dexia was more than necessary, and most likely not nearly enough. But wait a minute, why did JP Morgan do the exact opposite regarding the exact same asset class?

Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:

I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.

'Nuff said! Let's move over to Morgan Stanley... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? You know, I'm still quite bearish on Asian, European and American banks. Just look at the facts as they're laid before you...

There's another headline with Cramer's opinion on RIMM, which brings me to mind of all of the flack that I got when I said RIMM was bust as it traded in teh 60's and 70's (currently quoted at about $17). See As Forecast Last Year and Clearly Demonstrated This Year, Research in Motion's Problems Are Far From Over:

Research in Motion has been one of the most successful tech shorts of this blog's history (thus far). We first recommended a short last year and reiterated it in the fist quarter of this year. Reference:

    1. BoomBustBlog Research Performs a RIM Job!

    2. BoomBustBlog's Fundamental/Forensic Analysis of Research in Motion Has Returned 2x-3x Original Investment This Year!!

This is a snapshot of RIMM as of the writing of this article...

image002

As you can see, the results have been spectacular, particular if well timed puts have been put to use. In January I posted:

I don't want to pick on just the Dicks on Wall Street. I'm willing to challenge the entire sell side as a whole. I hit hard...

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

 Feel free to subsrcibe to BoomBustBlog or follow me via the following channels...

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Published in BoomBustBlog

As global equity markets gap downward the trading day after I suggested Watch The Pandemic Bank Flu Spread, can kicking will get progressively harder from this point on. As I have said in my many interviews, the only way out of this is debt destruction, which will crush big European banks leveraged up on debt marked at par of close enough to it.

reggie_on_RT

 

Having made clear that default was the only way out, Iceland has once again proven me correct. And just to jog the memory, I made it clear that default was the only way out nearly two years ago...

Online Spreadsheets (professional and institutional subscribers only)

Bloomberg reports: Iceland May Hold Krona Auctions Within Weeks

The island, whose banks defaulted on $85 billion in 2008, is moving into the final stages of its resurrection plan as the last vestiges of crisis management are gradually removed. Iceland’s decision, taken together with the International Monetary Fund, to impose capital controls three years ago was key to surviving the bleakest moments of the crisis and helped prevent an all-out run on the island’s assets, Gudmundsson said.

“Without the capital controls it would have been much more difficult to ensure stability in the exchange rate, calling for much higher interest rates and an inability to shelter the domestic economy as well as we did,” he said. “With the turbulence in the international markets lately, the capital controls have sheltered Iceland considerably, since there’s no way of doing a run on the financing of the Icelandic state or the financing of the Icelandic banks.”

It is clear that capital controls are coming to the EU, and I'm sure there already in place in some form or fashion. It is quite ironic how the so-called "in the know" pundits alleged that Iceland would be osctrazied from the captial markets for defaulting when they are the ones actually returning to the markets as the TPTB in the EU are being shunned. Just default already and get it over with, or you just may find yourself working for an Icelandic boss momentarily... You can try to save all of your banks and end up saving no banks at all, or you can go the logical route - the route that Iceland democratically allowed their populace to choose, which also so happened to be the right way. Hmmm... Democaracy! Capitalism! We just don't seem to be seeing those concepts in the Euro area much these days...

Outperforming Euro Area

Iceland’s economy will grow faster than the euro-area average this year and next, the IMF estimated in September. The cost of insuring against an Icelandic default, using credit default swaps, is lower than the average for the euro area.

Iceland’s economy will grow 2.5 percent this year and next, versus 1.6 percent in the euro area this year and 1.1 percent in 2012, the IMF said Sept. 20. Next year, Iceland’s current account surplus will widen to 3.2 percent of the economy and unemployment will be 6 percent, versus 9.9 percent joblessness in the euro area, the fund said.

The stabilization of the island’s economy has allowed the central bank to press ahead with capital liberalizations that the government estimates won't be fully dropped until 2013. The approach allows foreign investors eager to offload their krona holdings to transfer them to foreign or local investors willing to commit long-term to the island, according to the central bank.

'Nuff said. Now, on to my other premonitions, predilections and predictions for which my subscribers pay me so dearly for... CNBC reports Moody's Warns On French Rating Outlook

A rise in interest rates on French government debt and weaker growth prospects could be negative for the outlook on France's credit rating, Moody's warned in a report on Monday, adding to pressure on European debt markets.

Worries that France has the weakest economic fundamentals among the euro's six AAA-rated countries have drawn the euro zone's second largest economy into the firing line in the debt crisis this month.

The rating agency said the deteriorating market climate was a threat to the country's credit outlook, though not at this stage to its actual rating.

"Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated Nov.21.

"As we noted in recent publications, the deterioration in debt metrics and the potential for further liabilities to emerge are exerting pressure on France's creditworthiness and the stable outlook (though not at this stage the level) of the government's Aaa debt rating," the Moody's note read.

The yield differential between French and German 10-year government bonds rose above 200 basis points last week, a new euro-era high.

Moody's said that at that spread level, France pays nearly twice as much as Germany for long-term funding, adding that a 100 basis point increase in yields roughly equates to an additional three billion euros in yearly funding costs.

In early Monday trade, the French 10-year spread was up about 20 basis points at 167 bps following publication of Moody's report but remained well short of the 202 bps hit last week.

The CAC 40 index, which was down 1.7 percent in opening trade, was down 2.2 percent after an hour of trade.

"With the government's forecast for real GDP growth of a mere one percent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult," Moody's said.

On Oct 17, Moody's said it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget.

"The French social model cannot be financed if the French economy's potential is not preserved.

... The stress on banks' balance sheets can lead to further increases of liabilities on the government's balance sheet when further state support to banks is needed, it added.

The events are unfolding like clockwork. Just go back a few months - or a year - or two years - in the BoomBustBlog archives for the Eurozone topic...

Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!!

BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter

When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

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 File Icon 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:

CNBC and Bloomberg report S&P to Update Bank Credit Ratings Within 3 Weeks. You know that means (or at least should mean)... Next stop of the bank flu express... Germany!

I may post an update on German banks in a week, but I want subscribers to remember that if when things really kick off, this is going to be an explosion that no one said they expected but will blow everybody's ears out - posted behind the paywall well over a month ago and still priced inexpensively relative to those other banks: Blowup Bank - Haircuts, Derivative Risks and Valuation

Published in BoomBustBlog