I'm about to go over Goldman Sach's 1st quarter 2010 results, but before I do, let's recap the last quarter's price movement and the consequences of believing in infalliable name brands. This is basically a continuation of the rant - So, How Many Banks and Analysts Were Bearish On Goldman Before Today? and Is the Threat to the Banks Over? Implied Volatility Says So. Some may ask why I'm being so generous in regards to the extent of this quarter's earning review. Well... A European institutional subscriber recently stated he was able to get the same content found in my offerings from his investment bank research. Whaaatt!!! I told him that he probably wasn't reading the subscriber content. He wrote back stating that that wasn't the case. He also said that he doesn't see any fundamental analysis in the work. I nearly fell out of my chair. Hmmmm. Well, on the day that Goldman executives are due to testify before the Senate, let's review the opinions of the ONLY entity that I know of that had a bearish perspective (rightfully and profitably so - twice and counting) on Goldman Sachs. If I am not mistaken, nearly every bank and analyst (save Meredith Whitney, you know I love you :mrgreen: ) had a strong buy or hold on this company both back in 2008 and last month. So much for relying on that name brand investment bank research. For any others who may hold the sell side propaganda machine in such high regard (or is it me in such low regard), might I recommend the following two posts before we move on: For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”.
[caption id="attachment_1448" align="alignnone" width="640" caption="Map those base Jumping, spilunking, sky diving drops in Goldman's share price with the research linked below. This company is very, very risky and the risks are there for all to see. All you have to do is look for them!!!"][/caption]
GS return on equity has declined substantially due to deleveraging and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike. Using your method, our valuation would drop from where it is to an even lower point.
It would pay to review all of the relevant European bank research. The market seems to have realized the perilous linkages throughout the EU and is taking many (if not all) of the researched banks down. This research came out early enough for all subscribers to have been able to take advantage of it. Of particular note should be:
In continuing my rant on why the mainstream media cannot charge for content, combined with the still deteriorating situation of many banks in the US and Europe, I release to subscribers the Bank of America Q1-2010 earnings opinion: BAC Q1 2010 Earnings Review, which is considerably less rosy than I have been reading in the mainstream media. To get up to speed on the MSM/blog rant, I suggest you read "Are Blogs Truly Competitive With the Mainstream Media in Terms of Quality of Content?"
For those who do not subscribe, here are some key excerpts:
Bank of America’s 1Q10 results are a reflection of the continued weakness in the commercial banking space. While the core operations’ revenues remained weak, the increase in trading profits and the consolidation of the securitized assets (due to FAS 166/167) made up for declines in revenue from the core portfolio and operations.
The JP Morgan Q1 2010 review and analysis is available to download for all paying subscribers: JP Morgan Q1 2010 Review. Just this morning I posted an article describing how much of the mainstream media suffers from diminishing revenues due to the fact that they simply rubber stamp soundbites and produce reports that are simply cardboard cutouts of what is pushed out by Reuters and the AP.org. Well, JP Morgan's latest quarterly earnings release is a perfect example. Before you go on, I recommend reading "Are Blogs Truly Competitive With the Mainstream Media in Terms of Quality of Content?".
A scouring of the news from last week yields (and this is from the cream of the crop, may I add):
We're off to another day of earnings and the big one of the day comes courtesy of J.P. Morgan Chase, which beat earnings expectations from Wall Street analysts on both the top and the bottom lines in its report out earlier this morning... Importantly, a big part of the better-than-expected performance on the bottom line came from J.P. Morgan socking away less cash to cover loans it expects to go bad. Dow Jones reports that J.P. Morgan’s managed credit-loss provisions were $7.01 billion, down from $10.06 billion a year earlier and $8.9 billion in the previous quarter... As we mentioned before, onlookers are hoping that this earnings season brings a bit more clarity to weather the worst is over for the banks, and J.P. Morgan’s results are a good sign.
Short version: We’re at an inflection point for the loan losses that have dogged banks... Just as a refresher, better credit trends can translate into better earnings for banks, as they move some of the cash they socked away to cover the losses they previously expected, and move that money back into the earnings column.
JPMorgan Chase & Co (JPM.N) reported quarterly profit that beat forecasts and set a high bar for rivals, as investment banking earnings gained, loan losses slowed and Chief Executive Jamie Dimon sounded an atypically optimistic note about the prospects for a strong U.S. economic recovery.
NYTimes.com: JPMorgan's Profit Soars Despite Downturn
Now, here are some excerpts from my reader's subscriber material (JP Morgan Q1 2010 Review):
Here is another smattering of news from the weekend past, as well as our take on it and a decent dose of realistic analysis to cast a light on the real issues at hand...
Beijing Reports a Trade Deficit: BusinessWeek
- China reported its first trade deficit in over 70 months as the prices of raw materials imports climbed
- Analysts are stating that a stronger Yuan is needed to deter increasing domestic inflation
- China has the impossible task of balancing an ever increasing asset price bubble with US demands for a revalued Yuan in order to fuel President Obama's manufacturing jobs utopia
- Subscribers should reference China Macro Discussion 2-4-10 (Global Macro, Trades & Strategy)
And speaking of Beijing,,, China's Economic Growth Accelerates to 11.9%, May Prompt End of Yuan Peg - The Overheating has arrived???
After having just stating in an interview earlier this week that although many banks are probably guilty of what Lehman was caught doing with Repo 105's pursuing those actions based upon semantics may be fruitless (it may be called depo 106?), Reuters comes out with this interesting story: Major US banks masked risk levels: report
(Reuters) - Major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky, the Wall Street Journal said, citing data from the Federal Reserve Bank of New York.
The paper said on Friday 18 banks, including Goldman Sachs Group , Morgan Stanley , J.P. Morgan Chase Bank of America and Citigroup , understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each period.
The banks had increased their debt in the middle of successive quarters, it said.
Citi, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley were not immediately available for comment when contacted by Reuters outside regular U.S. business hours.
Excessive leverage by the banks was one of the causes that led to the global financial crisis in 2008.
Due to the credit crisis, banks have become more sensitive about showing high levels of debt and risk, worried their stocks and credit ratings could be punished, the Journal said.
Federal Reserve Bank of New York could not be immediately reached for comment by Reuters.
The Wall Street Journal (see their interactive model) and ZeroHedge broke a similar storty with some meat behind it to justify the allegations. Ahhh!!! The return of real reporting, and not just from blogs!
A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...
Let’s get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying “How the hell did he know that?”
- Is this the Breaking of the Bear? It wasn’t hard to see Bear Stearns collapsing 3 month before bankruptcy. Why didn’t our regulators see what I saw?
- As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades It wasn’t hard to see that nearly all of these 32 banks would be facing the threat of insolvency. Why didn’t our regulators see what I saw?
- The Commercial Real Estate Crash Cometh, and I know who is leading the way! It wasn’t hard to see that commercial real estate was ready to implode and that GGP was about to collapse under its own weight. Why didn’t our regulators see what I saw?
- Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide Countrywide and Washington Mutual’s collapse were visible AT LEAST a year in advance!
- The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk – Beware what lies beneath! ‘Nuff said…
- … and even Lehman Brothers: Is Lehman a Lying Lemming?
The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain’t so and I’m not going to lie to you. The truth of the matter is I sniffed these incongruencies out because 2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating “This time is different”, “There is a new math” (as if there was something wrong with the old math), etc. and so on and associated bullshit.
So, the question remains, why is it that a lowly blogger and small time
individual investor with a skeleton staff of analysts can uncover
systemic risks, frauds and insolvencies at a level that it appears the
SEC hasn’t even gleaned as of yet? Two words, “Regulatory Capture”. You
see, and as I reluctantly admitted, it is not that I am so smart, it is
that the regulator’s goals are not the same as mine. My efforts are
designed to ferret out the truth for enlightenment, profit and gain.
Regulators’ goals are to serve a myriad constituency that does not
necessarily have the individual tax payer at the top of the heirachal
pyramid. Before we go on, let me excerpt from a piece that I wrote on
the topic at hand so we are all on the same page: How
Regulatory Capture Turns Doo Doo Deadly
First off, some definitions:
- The Doo Doo, as in the Doo
Doo 32: A list of 32 banks that I created on May 22, 2008 which set the stage for my investment
thesis of shorting the regional banks. At that time, I was one of the
very few, if not one of the only, to warn that the regional banks would
hit the fan.
- Regulatory capture (adopted from Wikipedia): A
term used to refer to situations in which a government regulatory
agency created to act in the public interest instead acts in favor of
the commercial or special interests that dominate in the industry or
sector it is charged with regulating. Regulatory capture is an
explicit manifestation of government failure in that it not only
encourages, but actively promotes the activities of large firms that
produce negative externalities. For public
choice theorists, regulatory capture occurs because groups or
individuals with a high-stakes interest in the outcome of policy or
regulatory decisions can be expected to focus their resources and
energies in attempting to gain the policy outcomes they prefer, while
members of the public, each with only a tiny individual stake in the
outcome, will ignore it altogether. Regulatory capture is when this
imbalance of focused resources devoted to a particular policy outcome
is successful at “capturing” influence with the staff or commission
members of the regulatory agency, so that the preferred policy
outcomes of the special interest are implemented. The risk of
regulatory capture suggests that regulatory agencies should be
protected from outside influence as much as possible, or else not
created at all. A captured regulatory agency that serves the interests
of its invested patrons with the power of the government behind it is
often worse than no regulation whatsoever.
About a year and a half ago, after sounding the alarm on the
regionals, I placed strategic bearish positions in the sector which
paid off extremely well. The only problem is, it really shouldn’t have.
Why? Because the problems of these banks were visible a mile away. I
started warning friends and family as far back as 2004, I announced it
on my blog in 2007, and I even offered a free report in early 2008.
Well, here comes another warning. One of the Doo Doo 32 looks to be
ready to collapse some time soon. Most investors and pundits won’t
realize it because a) they don’t read BoomBustblog, and b) due to
regulatory capture, the bank has been given the OK by its regulators to
hide the fact that it is getting its insides gutted out by CDOs and
losses on loans and loan derivative products. Alas, I am getting ahead
of myself. Let’s take a quick glance at regulatory capture, graphically
encapsulated, then move on to look at the recipients of the Doo Doo
Award as they stand now…
A picture is worth a thousand words…
So, how does this play into today’s big headlines in the alternative,
grass roots media? Well, on the front page of the Huffington
Post and ZeroHedge, we have a damning expose of Lehman
Brothers (we told you this in the first quarter of 2008, though),
detailing their use of REPO 105 financing to basically lie about their
liquidity positions and solvency. The most damning and most interesting
tidbit lies within a more obscure ZeroHedge article that details
findings from the recently released Lehman papers, though:
On September 11, JPMorgan executives met to discuss significant
valuation problems with securities that Lehman had posted as collateral
over the summer. JPMorgan concluded that the collateral was not worth
nearly what Lehman had claimed it was worth, and decided to request an
additional $5 billion in cash collateral from Lehman that day. The
request was communicated in an executive?level phone call, and Lehman
posted $5 billion in cash to JPMorgan by the afternoon of Friday,
September 12. Around the same time, JPMorgan learned that a security
known as Fenway,which
Lehman had posted to JPMorgan at a stated value of $3 billion, was actually asset?backed
commercial paper credit?enhanced by Lehman (that is, it was Lehman,
rather than a third party, that effectively guaranteed principal and
interest payments). JPMorgan concluded that Fenway was worth
practically nothing as collateral.
Hold up! Lehman was pledging as collateral allegedly “investment grade”,
“credit enhanced” securities that were enhanced by Lehman, who was
insolvent and in need of liquidity, itself. For anybody who is not
following me, how much is life insurance on yourself worth if it is
backed up by YOU paying out the proceeds after you die bankrupt? Lehman
was allowed to get away with such nonsense because it was allowed to
value its OWN securities. Think about this for a second. You are in big
financial trouble, you have only a $10 bill to your name, but your
favorite congressman (whom you have given $10 bills to in the past) has
given you the okay to erase that number 10 on the $bills and put
whatever number on it you feel is “reasonable”. So, when your creditors
come a callin’ , looking for $20 in collateral, what number would you
deem reasonable to put on that $10 bill.
Ladies and gentlemen, in the short paragraph above, we have just
encapsulated the majority of the mark to market argument. Let’s delve
farther into the ZH article:
By early August 2008, JPMorgan had learned that Lehman had pledged
self-priced CDOs as collateral over the course of the summer. By August
9, to meet JPMorgan’s margin requirements, Lehman had pledged $9.7
billion of collateral, $5.8 billion of which were CDOs priced
by Lehman, mostly at face value. JPMorgan expressed
concern as to the quality of the assets that Lehman had pledged and,
consequently, Lehman offered to review its valuations. Although JPMorgan
remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that
it had no other collateral to pledge. The
fact that Lehman did not have other assets to pledge raised some
concerns at JPMorgan about Lehman’s liquidity
Hmmm!!! Three day old fish has a fresher scent, does it not? So where
was the SEC, the NY Fed, or anybody the hell else who’s supposed to
safeguard us against this malfeasance? Even bloggers picked up on this
months before it collapsed. The answer, dear readers: REGULATORY
Again, from ZH:
The SEC was not aware of any significant issues with Lehman’s liquidity
pool until September 12, 2008, when officials learned that a large
portion of Lehman’s liquidity pool had been allocated to its clearing
banks to induce them to continue providing essential clearing services.
In a September 12, 2008 e?mail, one SEC analyst
wrote: Key point: Lehman’s
liquidity pool is almost totally locked up with clearing banks to cover
intraday credit ($15bnjpm, $10bn with others like citi and bofa). withThis is a really big
BoomBustBlog featured several warnings starting January of 2008!
One would think that after all of this, the problem would have been
rectified. To the contrary, it has been made worse. Congress has
pressured FASB to institutionalize and make acceptable the lies that
Lehman told its investors, counterparties and regulators. That’s right,
not only will no one get in trouble for this blatant lying, the practice
is now actually endorsed by the government – that is until somebody
blows up again. At that point there will be a bunch of finger pointing
and allegations and claims such as “But who could have seen this
Do you not believe me, dear reader. Reference
About the Politically Malleable FASB, Paid for Politicians,
and Mark to Myth Accounting Rules: the nonsense is unfolding and
collapsing right now, even as I type this sentence.
The next place to look??? Who knows? Maybe someone should take an An
Independent Look into JP Morgan .. or maybe even an unbiased
gander at Wells Fargo (see
The Wells Fargo 4th Quarter Review is Available, and Its a
Doozy!). After all, If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear
The IMF has recently released the results of their staff consultations with Greece. Some may find it interesting, particularly where it intersects with relevant BoomBustBlog research. Let's not mince words here. Greece is going to effectively default on its debt, one way or another, and it is probably going to do it relatively soon. Shall we walk through the IMF findings from LAST YEAR and how they are actually optimistic compared to the facts that my team and I have dug up?
IMF Consultation: Greece (2009)
· After joining the EU, the income gap between Greece and the Eurozone fell on lower interest rates and the resulting “demand boom”
· Through the boom, fiscal deficits stayed at >95% of GDP, fiscal condition continues to aggravate 10 year spreads & contributes to credit downgrades (arguably a lagging indicator)
· Private Greek debt is below the Eurozone average, as is the case for non-financial corporations (governments and financial services therefore must be the source of Greek leveraging)
· Even as output has dropped, Greek wages have remained comparably high, and saw a 12% nominal increases in from 2008 - 2009
· Quality of assets on Grecian balance sheets continues to erode with end of credit based consumption in Southeastern Europe (SEE)
· Household and corporate credit growth has slowed, probably due to rising interest rates causing the opportunity cost of taking on new debt to be unmanageable (directly causing revenue shortfall at the government level)
· IMF forecasted uncertain, and potentially negative growth from 2009 through 2010 on stagnant trade and policy based mistakes
· The EU had a much rosier forecast, citing a rise in tourism, lower dependency on trade, and government based infrastructure projects (that are paid in money taken from bond offerings and paid to construction workers at far greater than average Eurozone wages)
I have sourced the accuracy of both the IMF and the EU's forecasting in "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!. If your well being relies on this stuff, you would be well served to subscribe to our research services. Let's take a visual perusal of what I am talking about in regards to Grecian GDP, the IMF and the EU.
Here are our considerably more realistic forecasts (premiums content: Greece Public Finances Projections).
Implied volatility for the big banks is down across the board, just about where it was before the system went into convulsions. This implies the coast is clear, as do the share prices of many banks.
Hard core forensic and fundamental analysis implies otherwise. So does the Fed's actions, which still incorporates ZIRP policy, as well as the waffling at FASB. We will either have smooth sailing from this point on out or there is a nasty surprise waiting (on and off balance sheet) for bank investors in the near future. I invite readers to weigh in with their opinions.
As you can see, we are just about where we were in 2007 in terms of average volatility.
From Capital.gr: Moody's Downgrades Five Greek Banks
Moody’s Investors Service said Wednesday it downgraded the deposit and debt ratings of five of the nine Moody’s-rated Greek banks due to a weakening in the banks’ stand-alone financial strength and anticipated additional pressures stemming from the country’s challenging economic prospects in the foreseeable future. [Moody's is late to the party, but their logic is solid, see "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! followed by our forecast of the weaker vs. stronger Greek banks (premium content subscribers only) - Greek Banking Fundamental Tear Sheet]
The affected banks are: National Bank of Greece (to A2 from A1), EFG Eurobank Ergasias SA (to A3/Prime-2 from A2/Prime-1), Alpha Bank AE (to A3/Prime-2 from A2/Prime-1), and Piraeus Bank (to Baa1/Prime-2 from A2/Prime-1). Moody’s has also downgraded the deposit and debt ratings of Emporiki Bank of Greece SA (to A3/Prime-2 from A2/Prime-1), but as a result of a reassessment of the credit enhancement associated with systemic support for this institution. The outlook on all five banks’ ratings remains negative. This action concludes the review of these banks initiated on 3 March 2010. [It looks as if Moody's peaked at the blog's subscription content :-)]