Here is a presentation using readily available data from the Federal Reserve and BoomBustBlog illustrating what clearly shows we have not come anywhere near the peak of the economic downturn IF you believe that real asset prices, economic housing activity and bank lending and available credit are gauges of, and effect, economic health.
Since the loan peak of 7.3227 trillion for week ending 10-22-08, total loans and leases at banks have dropped over 500 billion dollars. That big spike on April 1st was due to an FASB rule change that forced some 452 or so billion in off-balance sheet stuff back on their books. Basically, this was not new lending, it was lending that was held off balance sheet. Despite the stimulus that was supposed to increase lending, the current total loans and leases is now at 6.7889 trillion. This is a drop of $533.8 billion. Not counting the +452 to 515 billion resulting from that rule change, the drop is ~1,000 billion. In other words, we've had total loan retraction in the amount of nearly a trillion dollars since the bailout - green shoots, end of the recession, no chance of a double dip (because we never left the first one) and all. Unbelievable.
I wanted to share a series of negative news flow relating to the weakness in the core businesses of the investment banks owing to increased volatility in the capital markets over the last few months. This ebb from the sell side trails the opinion of BoomBustBlog research which forwarned of the same very early in the first quarter as well as last quarter of 2009l The news flow points out that the upcoming results of GS, MS and JPM might be disappointing or below expectations - as if we already didn't know this.
- According to some of the recent MSM articles, the recent surge in volatility has led to record low activity in the underwriting and M&A activity.
Global M&A value for the first half of 2010 grew 3% to $1.18 trillion, compared with $1.15 trillion a year earlier, according to Dealogic's figures. But while values were up against the year-earlier period, the $552.7 billion in value generated in the second quarter was down almost 7% compared with the first quarter of the year - WSJ.com.
Wall Street investment banks sold $1.36 trillion of stocks and bonds in the second quarter, down 33% from the second quarter of 2009 and the lowest quarterly total since the fourth quarter of 2008, according to Dealogic.
- Also, the capital markets volatility will have severe implications for the trading revenues of investment banks like GS and MS which derive substantial portions of their revenues from trading activities. Analysts have been downgrading earnings estimates for these banks and GS’s earnings have been particularly slashed since it generates nearly 60-70% of total revenues from trading.
Barclays Capital analyst, Roger Freeman, cut earnings estimates for Goldman Sachs Group (GS) and Morgan Stanley (MS) on June 23, 2010. Freeman slashed his second-quarter profit forecast for Goldman by nearly 64% to $1.95 a share from $5.35 a share. Freeman is expecting 40% lower trading revenues in FICC and equity segments in 2Q10 against 1Q10. His estimate for Morgan Stanley dropped 29% to 55 cents a share from 77 cents a share - WSJ.com.
Bank of America analyst, Guy Moszkowski, also slashed earnings estimates for GS and MS. He revised GS’ 2Q10 earnings estimates to $1.76 per share, 51% lower than the previous estimate of $3.57. The new estimates reflect a 45% decline in equity trading revenue and 40% drop in fixed-income trading revenue compared with the first quarter. MS’s 2Q10 EPS estimate was cut 35%, to 58 cents a share from 89 cents. The estimate on JPMorgan Chase & Co. was trimmed to 70 cents a share from 77 cents, and Citigroup Inc. was lowered to 2 cents a share from 4 cents - Businessweek.
I would also like to add that the recent volatility and market decline has also impacted the AUM of asset managers and there has been downward price revision by analysts. The assets under management of BEN declined 5% (m-o-m) in May, 2010 and the June figures are not yet out. Consequently, the target price estimates have been lowered by many analysts. In June, FBR Capital lowered its target for BEN to $105 from $118 and Barclays capital lowered its target for BEN to $125 from $133. Analyst at Goldman Sachs have also made significant downward revisions in this sector.
Now, the news flow in light of applied BoomBustBlog research:
The Asset Manager Trade is Printing Money Almost as Fast as Ben Bernanke
As a follow-up to our piece on the Australian macro outlook (Australia: The Land Down Under(water in mortgage debt), We looked into the four largest Australian banks - Australia and New Zealand banking Group Limited, Commonwealth bank of Australia, National Australia Bank Limited, Westpac Banking Corporation. All the banks, except Commonwealth bank of Australia, have ADR.
The banks are trading at very high multiples when compared with their US counterparts. The current average price-to-tangible book value of the four Australian banks is 2.5x against the current multiples of less than 1.5x for US banks. The Australian banks are enjoying a premium largely owing to lower charge-off rates, delinquency levels and the NPL levels than their US counterparts. While the housing loans account for a substantial portion of the total portfolio of Australian banks, the housing bubble in Australia is yet to burst to result in defaults in this sector. Also, the Australian banks have additional shelter from two factors:
- The housing loans in Australia are recourse loans (borrowers are personally liable to pay even after foreclosure)
- The loans given in excess of LTV (Loan-to-value) of 80% have Lender Mortgage Insurance which covers the losses of the lending bank
The average Texas ratio of the four Australian banks is 25% and average NPL coverage ratio ( NPL+90 days past due to allowance for loan losses) is 68%. While the NPLs and the past due loans of the Australian banks have increased over the last year, a major portion of the increase is coming from business loans and commercial property while the delinquency rates in residential mortgage in Australia have remained stable (except for Commonwealth bank where substantial increase has been seen in the past due loans in the housing sector). The reported delinquency rates for mortgage or housing loans in Australia for the four banks are summarized below.
- Commonwealth bank of Australia – The total delinquent loans (1+ days past due) remained at 3.0% in 1H10, equal to the level of 3.0% in 1H09. However, owing to the aging of the some portion of the delinquent loans, the mortgage delinquency (90+ days) rate increased to 0.77% in 1H10 against 0.45% in 1H09 while the mortgage delinquency (30-80 days) rate remained stable at 0.86% and mortgage delinquency (less than 30 days) rate declined to 1.36% in 1H10 against 1.72% in 1H09.
The full analysis is available for download to subscribers below. Subscribers are also urged to review the Macro outlook document as well.
As excerpted from Australia: The Land Down Under(water in mortgage debt:
A few minutes ago, I posted an informational piece on Australia’s creeping protectionism in the form of taxing multi-national mining companies in ”In Australia, Tax as a Contagion“. This begs the questions, “Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?” Well, the answer most likely is because it is actually a ”Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!
As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese
investment slowdown. Those at risk are the countries and regions that have supplied China with the commodities necessary to build empty cities. While the (comparatively, in terms of GDP) enormous Chinese stimulus package from the first part of the financial meltdown in 2008 has generated incredible growth in GDP and asset prices, the game appears to be over for flipping 1000 square foot apartments in Shanghai. After the direct hit taken to China, the picture looks very grim for Australia, where a bursting Chinese housing bubble could drive industrial commodities lower, sparking higher unemployment in one of the nation’s largest sectors, and in turn pop their domestic housing and property bubble. In the near to medium term, Australia is showing some major red flags.
Yesterday, I sat through a conference sponsored by Andrew Schneider's Hedgeco.net on starting and marketing hedge funds. As I sat through the various presentations focusing on transparency, performance results, etc., I though to myself, " You know Reg, you probably rank in the top echelon of these guys in terms of absolute performance, and in terms of transparency you actually publish what you do on the web for all to see." Shortly thereafter I glimpsed at the latest issue of HedgeWeekly2010_No21 and decided to compare my blog results with that of the top funds.
As you can see, many funds were hurt in 2008, but there were some who did quite well, with the top of the pile pulling just over 72%. That's pretty damn good! Below is an excerpt from the BoomBustBlog post "Updated 2008 performance":
Below are the raw, absolute returns for my proprietary account. These returns are calculated by calculating the difference between my starting point and ending point, and is the number that I use for comparison (since it is the number that shows how much money I actually made).
||Reggie’s gross avg. return||S&P return|
|For all 2007 (6 months)
|For Q1 2008||50.03%||0.68%|
|For Q2 2008||53.46%||-8.66%|
|For Q3 2008||32.40%||-8.30%|
|For all 2008||196.11%||-8.69%|
|2008 absolute return||335.42%||
to S&P 500
The numbers below are average monthly numbers. They are posted for the sake of uniform comparison.
Subscribers (click here to subscribe) should review the research not released last year before the market run-up. A bearish position hurt immensely back then, but methinks now it may be time for them to pay the piper, particularly if the market dips significantly further causing equity asset outflows.
Take note of the price movement as well (see below).
For those who have been following me in the Asset Securitization and Pan-European Sovereign Debt Crisis series this may be old news, but let's go through the exercise anyway. It looks as if we are back to those non-sense games being played by those that manipulate the market. Taking a look at Bloomberg.com's front page, you'll see "Stocks, U.S. Futures Rally on Economic Outlook; Yen Weakens, Bonds Decline" (hey, good times are here again) followed directly by "Banks Deposit Record $394 Billion With ECB, Avoiding Loans to One Another"(hey, isn't this the exact same environment wherein Bear Stearns, then Lehman Brothers collapsed leading the Treasury Secretary Hank Paulson to proclaim the end of the financial world was coming?). Then there's "Covered Bond Sales Surge; Transocean Tumbles: Credit Markets": Sales of covered bonds are accelerating as investors seek debt backed by collateral amid concern about the creditworthiness of governments and banks.
Okay, let's take this by the numbers....
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:
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
Some of the top secret AIG bailout info is out. Guess who's at the heart of it, making money by creating straight trash, selling it to its clients then buying insurance to benefit from its inevitable crash?
I have been warning about Goldman's ability to sell trash to its clients
for some time now.
This is not a short post, for it is packed with a lot of supporting information, analysis and data. If you are looking for quippy paragraph, soundbyte or quick headline to get an overview of,,, well whatever, click here, or better yet, click here. For everyone else who may be looking for deeper investigative analysis and the unbridled TRUTH for a change, please continue on.
First a little background info. Goldman is supremely overvalued in my opinion. It is even more so considering much of its profit is generated solely from the raping of its clients. I say this holding absolutely no ill will towards Goldman. This is strictly factual. Let's walk through the evidence, of profit potential, valuation, and the stuff behind some of the value drivers in their business model, like brokerage and investment banking...
Well, it looks like Blankein, Dimon, et. al. really should have tried
harder to make that meeting with the President a couple of weeks ago.
It appeared as if he may have had something important to discuss. As my
readers and subscribers know, I have been very bearish on the big money
center banks since 2007, and quite profitably so. The last 3 quarters
saw a much larger trend reversal than I expected, that resulted in the
disgorgement of a decent amount of those profits - a disgorgement that I am still
beating myself up over. You see, as a fundamental investor, I don't do
well when reality diverges from the fundamentals for too long a period.
Luckily for me, fundamentals always return, and they usually return
with a vengeance. To keep things in perspective though, I am still up
on a cumulative basis many, many multiples
over the S&P (which is still negative, may I add) as well as your
average fund manager. Why? How was I able to do this? Well, its not
because I am supersmart, or well connected. It is because I keep things
in perspective. Those that look at the records that I publish say,
"Well he was down the last couple of quarters, so..." while
disregarding what happened the 8 or even 40 or so quarters before that.
Such a short term horizon will probably not be able to appreciate the
longer term perspective and foresight that enabled me to see this
entire malaise coming years ago and profit from it. No, I am not
perfect and I do mess up on occasion, but I also do pay attention to
These facts pointed to a massive overvalutation in banks throughout the
bulk of last year, again! I made it clear to my subscribers that the
banks simply have too many
things going against them: political headwinds, nasty assets,
diminishing revenue drivers, over-indebted consumers, and a soft
economic cycle. I also warned explicitly that I didn't think Obama
would be nearly as lenient on the banks as Bush was. Well, the
headwinds are stiffening. On that note, let's take an empirical look at
just what this means in terms of valuation (note, I will following this
up with a full forensic re-valuation for all subscribers, incuding a
scenario analysis of varying extents of principal trading limits). Some
of these banks are I-N-S-A-N-E-L-Y overvalued
at these post bear market rally levels considering the aforementioned
headwinds. Methinks fundamental analysis will make a comeback in a big
way for 2010 as it meets the momentum and algo traders in a mutual BEAR
feast on the big investment banks cum hedge funds. I can't guarantee it
will happen, but the numbers dictate that it should. We shall see in
the upcoming quarters.
We have retrieved information about trading revenues for GS, MS, JPM and BoFA. We have also retrieved some balance sheet data to reflect the trend in investment holdings and the level of leverage, but I will address that in a future post for the sake of expediency. While the banks don't break out the P&L for principal trading, we can sort of back into it. Remember, traders are fed bonuses off of net revenue, not profit.