It has taken a while to get this out, but the core message hasn't changed...
1Q10 Results review
For 1Q10, MS reported significant increase in its net revenues to $9.1 billion from $6.3 billion in 4Q09 and $2.9 billion in 1Q09, primarily driven by trading and principal investments revenues which increased to $4.1 billion versus $1.3 billion and $205 million in 4Q09 and 1Q09, respectively. Trading and principal investment revenues in 1Q10 increased off improvement in debt-related credit spreads and better results in Fixed Income. Revenues from Investment banking and Asset management, distribution and admin fees increased 21.4% and 126.7% (y-on-y) to 1060 million and $1,963 million, respectively. However, both the categories reported a quarter-on-quarter decline in revenues of 36.6% and 0.6%, respectively. Commissions earned for the year increased 63.8% (y-o-y) and 1.1% (q-o-q) to $1.3 billion. Compensation expenses increased to $4.4 billion from $2.0 billion in1Q09 and $3.8 billion in 4Q09, while non-compensation expenses were up 38.4% (y-o-y) mainly off MSSB inclusion and higher business activity. Consequently, net income from continuing operations increased to $2.1 billion, which was further supported by a $382 million tax benefit associated with prior year’s undistributed earnings of certain non-U.S. subsidiaries.
Taking into consideration Merkel's ill-conceived ban on financial company shorts, I feel this is a good time to review alternate exposures to concentrations of European sovereign debt exposure. Before we go, please reference the effects of this ban announcement as expressed in the mainstream media:
- •Stocks, Commodities Fall as Euro Hits Four-Year Low on German Trading Ban
- •Default Swaps Soar Following Merkel's `Act of Desperation': Credit Markets
- •Germany Bans Naked Short Selling, Some European Bond Swaps to Calm Markets
Keep in mind that all investors are speculators since no return is a "sure thing" and furthermore prudent speculators don't short healthy nor strong prospects. The ban on financial company shorts is akin to a ban on calling a horrible smelling person stinky, it really doesn't make them smell any better. As a matter of fact, it very well may draw additional and more detrimental attention to the odor. The best way to deal with both legal (at least what used to be) shorting and being called stinky is to address to address the root causes of the problem. Personal hygiene in the case of "stinky" and fiscal hygiene (ex. fixing those balance sheet and transparency issues) in the case of financial companies.
With that being said, I would like to offer an excerpt of a recently released subscriber report that may be of interest to those following the European crisis. Subscribers may access this document here Sovereign Debt Exposure of European Insurers and Reinsurers and professional and institutional subscribers may access the live spreadsheet behind the document by clicking here.
May 11 (Bloomberg) -- China’s inflation accelerated, bank lending exceeded estimates and property prices jumped by a record, increasing pressure on the government to raise interest rates and let the currency appreciate.
Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.
Asian stocks fell, with the local benchmark index entering into a bear market, and oil and copper slumped on concern the government will move to cool the fastest-growing major economy. China should focus on preventing excessive increases in asset prices and liquidity after Europe’s almost $1 trillion loan package reduced the risk of another global slump, central bank adviser Li Daokui said yesterday.
“Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”
Subscribers interested in this sector should have their positions intact by now. Those that do not and are interested in my opinion should know that I believe China has a way to go. The equity market drop signals an official bear market. Non-subscribers should reference:
Yesterday I commented on the folly of promising big money to throw at a myriad variety of highly indebted nation without a central authority to enforce the structural change needed to actually cure the problems that created the need for the monies in the first place. See The EU Has Set Up An Oppurtunistic Entry Point for Shorts Instead of Expressly Offering a Solution to the Pan-European Sovereign Debt Crisis! and What We Know About the Pan European Bailout Thus Far. The primary flaw, by far, that I perceive in this most grand of grand bailout schemes is that it is just that - a bailout, not a solution. Methinks the market is about to call the EU on their bluff pretty much along the same lines that I espoused above. For those subscribers who follow my belief that the ECB and EU leaders are making one of the largest policy blunders of modern times, this may be an opportunity to set up a short position that makes the Lehman Brothers' debacle look like a day rally. All subscribers are welcome to download our latest Euro Bank Sovereign Debt Exposure Preview. A more verbose summary will be released for pro and institutional subscribers shortly. Reference the following articles in this early morning edition of Bloomberg:
In continuing my rant of earlier this morning, let's take a look at what we know thus far about the Great Pan-European Bailout. Before we go on, I would like to make clear how dangerous this bailout game is for those in the confines of the EMU. Suppose.... Just suppose, as with the Greek Bailout(s) announced just weeks ago, the markets call the bailers' bluff? Exactly what ammunition will be left to move forward? The ECB/EU had better hope that this rally will hold up (and recent history shows that it will probably have an ever decreasing half-life), for if it doesn't the member countries are in a world of hurt.
Unlike many pundits, I am more than willing to offer solutions in lieu of just bitching about problems. So, what is the solution? Everyone needs to come clean in regards to the true state of their economic affairs, as well as the realistic prospects of earning their way out of their respective problems using realistic numbers. In this fashion, I would never be able to pen a piece called Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Once we have an honest, realistic starting point, then we move forward with very, very stringent contingencies on loan dollars and specific demands on selling off state assets using realistic valuations as estimates. As it stands now, the loans are given to counties that are knowingly attempting to mislead, and have a history of chicanery in their attempts to join the EMU. This can easily smell like a farce and the risk of failure is very high. Yes, the promise of massive liquidity will drive a big rally in risky assets, but if these risky asset prices diverge from their fundamentals, the snap back will be destructive. It is my opinion that offering money without a structural solution is a non-solution of throwing good money after bad. Remember, monetization is now on the table and in a big way. This means that the REAL value of the Euro is still looking downward...
A quick rundown of the bailout
EU policy makers have come out with a massive rescue plan worth EUR 750 billion to combat with the unprecedented crisis that threatens not only the stability but the very survival of the monetary union. The new EU stabilization mechanism which will be backed by funds of up to €750 billion, of which two thirds will be provided by euro-zone members (€500 billion) and one third by the IMF (€ 250 billion), is by far the strongest effort by EU and the ECB to avert a regional debt crisis.
As many of us were expecting, the EU has come together for their 54th meeting to discuss their 9th solution to the problems that were contained in just Greece, which were over two months ago, just as Greece said they didn't want and were not looking for any aid - which was good since the Germans said they would never give any aid as France said any inclusion of the IMF would be the end of the Euro - as the IMF offers aid right before this big meeting that arranges a nearly trillion dollar package of more promises that pushed the STOXX index up over 7%. Wheww!!! Even with a 4 line run-on I could barely get all of the non-functional BS in. Let me excerpt this one line from a recent Bloomberg story that sums it all up:
“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” Anantha-Nageswaran also said.
It appears that "politciians" will never be able to solve this economic problem of the state, for they are too constrained by politics (I'm giving them the benefit of the doubt in assuming they truly recognize the problem). For those that don't get it, I will try to express it simply.... You cannot cure issues of over-indebtedness and insolvency by lopping humongous amounts of debt onto the problem. All that does is exacerbated the issue, with the immediately calming, but eventually scalding realization that all you have done was kicked the can down the road (and adding lead to said can which makes it both heavier and more toxic). The ailing countries at hand need significant structural change and equity in some form or fashion. Adding more debt simply makes them more indebted.
ECB policy makers said they will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.
QE, right on schedule. The ECB will load up on this stuff which will eventually devalue, and then what???? The will look just like the Federal Reserve, minus the reserve currency... Don' t get me wrong, I'm all for significant action to be taken, but it must be in a logical definable form. Just spending money replicates the actions that got us here in the first place. Back to the original questions, "How will it be pad for when nearly all of the contributing states are facing some form or fashion of austerity of their own?" and "Where is equity to counterbalance all of this debt?".
“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”
Yeah, okay! More like spend and borrow, the indebted edition... The US "Shock and Awe" was an EQUITY package, not a loan package!
As Greece, and Portugal, and recently even Spain bask in the spotlight of the bond vigilantes, I want to remind my subscribers to be prepared for Italy's turn to dance. Subscribers should reference Italy public finances projection 2010-03-22 10:47:41 588.19 Kb for the skinny on Italy's "realistic" prospects, and
Italian Banking Macro-Fundamental Discussion Note for a list prospective candidates to monetize this view in the banking industry. As of the last time I checked, the market hasn't hammered them yet... Complacency???
We have come across a bank with a very weak equity position, skirting insolvency. It is a German bank trading at an insanely high multiple. Below is a quick synopsis of the solvency situation and the subscriber notes which illustrate the situation and the potential opportunity.
|Impaired and past due||6,274|
|Fair value of the collateral||3,995|
|Allowance for losses||1,641|
|Shortfall from current reserve for loan loss||5,042|
|Shortfall as % of tangible shareholders' equity||174.9%|
- Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional
- Deutsche Bank vs Postbank Review & Summary Analysis - Retail
Spain is due to hit the capital markets tomorrow. This is far from an opportune time: Spain's Borrowing Costs to Rise at Debt Sale as Zapatero Confronts `Abyss'
May 5 (Bloomberg) -- Spain’s borrowing costs may climb tomorrow at the country’s first debt sale since its credit rating was cut last week on concern the fiscal crisis pummeling Greek bonds will spread to fellow euro-region countries.
The Treasury may sell as much as 3 billion euros ($3.89 billion) of five-year notes to yield 3.34 percent, according to the median estimate of seven analysts and investors in a Bloomberg News survey. The yield was 2.84 percent when Spain auctioned 4.5 billion euros of the same securities on March 4...
Standard & Poor’s lowered its ranking for Spanish debt one step to AA on April 28, saying more downgrades are possible if the government’s “budgetary position underperforms to a greater extent than we currently anticipate.” Spain, which has the euro-region’s third-largest deficit, has pledged to reduce it to within the EU limit of 3 percent of gross domestic product in 2013, from 11.2 percent last year.
Bloomberg has as a headline: Greek Quarantine Tested as Spain Vows to Combat Euro Contagion `Madness':
Investors are already testing the euro region’s efforts to contain the Greek crisis.
Greek bond yields rose yesterday above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.
The equity destroying capability of this occurrence should not be underestimated. Referencing " How Greece Killed Its Own Banks!", you can see that at just 10x leverage (about 1/3rd what most European banks are currently sporting), any holder of Greek bonds are underwater (if not insolvent) on those particular purchases at offer - and that is using last weeks numbers, which look much better than the reality today!