Throughout the last two quarters I have bandied about corny, colloquial, yet highly descriptive articles describing the factual representation of Spain's outlook, such as The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain or You Have Not Known Pain Until You've Tried To Limit The Borrowing Costs of Spain!!! Well, as humorous as my nascent stand-up routine may appear to be, the facts of the matter should have market participates on edge. 

Fact 1: As revealed in the post, The Embarrassingly Ugly Truth About Spain: The IMF, EC and ALL Major Rating Agencies Are LYING!!! Spain has serious asset/liablity mismatch and extreme issues with NPAs in its banking system. It will NOT be able to grow out of this situation in the near term and this was apparent 3 years ago! 

I warned that Spain was effectively ignoring some very large, bank related and budgetary problems as far back as 2009/10.... Reference The Spain Pain Will Not Wane: Continuing the Contagion Saga:

In the general our analysis Spain public finances projections_033010, the first four (of 12) pages basically outline the gist of the Spanish problem today, to wit here are the first two:

Spain_public_finances_projections_033010_Page_02

Fact 2: These NPAs will get much worse before they get better, detailed in As The Truth Catches Up With Spain, Will Banks Finally Be Forced To Mark To Market? You don't need my analysis to see the light. Spain currently sports more than  than 50% youth unemployment. Greater than 50% - and it's major grading partners are not far behind, or even far ahead!

See this chart from  ZeroHedge:

Data: Bloomberg and Greek Statistics Office

Fact 3: Spain is already on FIRE, yet so few refuse to smell the fumes.

What is FIRE? See Reggie Middleton Sets CNBC on F.I.R.E.!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set...

For more on this, see The F.I.R.E. Is Set To Blaze! Focus On Banks, part 1. A lot of people, even professionals, truly believed that the FIRE malaise would not be European in nature. Whaattt????!!!

Here are some more anecdotal facts fanning the FIRE...

Egypt Pays Less Than Spain for Euros as IMF Talks Persist

Businessweek- Egypt locked in lower borrowing costs than higher-rated Spain in selling a more-than-planned 640.2 million euros ($817 million) of debt, 

Spain's bad loan ratio hits new record of 10.7%: central bank

MADRID -- Spanish banks' bad loans surged to a new record level in September with more than one in ten classed as high risk, the central ...

Spain Sells 4.94 Billion Euros of Debt, Exceeding Maximum Target

Spain exceeded its maximum target at an auction of bills and its borrowing costs were little changed from a month ago as euro region finance ..

To bad the Spanish aren't Egyptians, though... Egypt Pays Less Than Spain for Euros as IMF Talks Persist

Egypt locked in lower borrowing costs than higher-rated Spain in selling a more-than-planned 640.2 million euros ($817 million) of debt, ..

The Spanish heat is not just in real estate and banking, either. Reference this European Insurer That Needs Insurance As $6B Of Its Bonds Are Instantly Subordinated Due To "Spain's Pain". Insurers are very heavy investors in European sovereign debt AND the debt of financial institutions. This is a wonderful place to be when you are recovering from the most expensive natural disaster that hit the US eastern seaboard, eh? But hey, weren't the European financial institutions getting killed by choking on Sovereign debt (reference Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead)? You know the saying, "You can run but you can't hide?" Well, banking officials have been doing a lot of hiding (of NPAs), and soon its going to be time for the running to come into play. In case you missed the pun, European Bank Run Watch: Spaniard Edition

It would be interesting to see who will be in the condition to feast at the Spanish barbecue...

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FB Sep 21 12 18 puts

A couple of weeks ago after Facebook reported, I posted Hey Muppets, Only Another 100% Climb In Share Price To Go Before You Break Even With MS/GS/FB Investment Advice. You see, I warned about FB a half of a year before the IPO (reference the FB IPO Analysis & Valuation Note - update with per share valuation released exactly 5 months ago on 05/21/2012 (click here to subscribe)) stating that this thing was coming to market at multiples of a realistic valuation. So, what did Facebook's bankers do? They raised the offering price even more. Makes sense doesn't it?

Well, it makes more sense than the lock-up of hundreds of millions of shares ending, flooding the market with excess supply and the price of the stock.... increases!!!

Well, there may be a logical reason for this. By now, the more astute early investors in Facebook either read my analysis or somehow have come up with similar conclusions independently. That being the case, these guys had massive unrealized capital gains and a strong incentive to preserve them. Thus, they did what every hedge fund should do but what so little ever seem to do. What is that you ask? They hedged. I would assume that as soon as FB shares became available for short and/or puts started trading, these guys competed with me to get short in order to lock in whatever gains they still had left. That being the case, once the lock-up period expired, and actual sales occurred it was offset (and possibly then some) by the supportive buying created by the short position covering.

Of course, this is just a theory, but its a plausible one. Only time will tell if it holds water, for if the upward price pressure was cause by short covering, it will be over by next week and we should see a marginal decline.

FB Sep 21 12 18 puts

 
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Last Friday I posted Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!!, wherein I outlined the profitability of the BoomBustBlog Apple research from a trading perspective. This crux of that article was to debunk the widely assumed notion that I was bearish on Apple's share price for 2 years. The reality of the matter was that the paid research and opinion clearly supported much of Apple's share price until right about the last earnings report, until I notably went bearish and Apple promptly lost 25%.

apple stock and front month options

Notice how this chart shows subscription research would have provided ample profits LONG and short, with the long presumed to be unleverred as a straight stock purchase. This is to put to bed any naysayers. Now, as to whether my many proclamations over the last two years regarding Apple were able to hold water, we let the facts speak on the reasoning behind the call and the accuracy of my call in the deterioration of Apple's margins, market share and status. The following was a document that was only available to paid subscribers (published in late 2010) but now is freely available since its message has come to pass. As you read this, please keep in mind that the document was published a year and a half ago, even though it does seem like it is recent. I have just released fresh research on Apple that details the lower bounds (pessimistic scenario) that I see for the share price. Subscribers can access it here Apple 4Q2012 update professional & institutional and Apple 4Q2012 update - retail).

If after reading the article linked in the first sentence and the material below, and you believe that I'm the best thing since Wall Street brokerages were private partnerships that could squander other peoples capital at insanely levered levels while misleading muppets with inanely bullshit analysis and sales pitches to 89% losses on their recommendations (reference Multiple Muppet Mashing Leaves Groupon Shareholders Holding The Bag After 89% Off IPO Coupon) just to get paid multi-million dollar bonuses instead of jsil time, then feel free to subscribe here. 

Apple -Competition and Cost Structure Page 08Apple -Competition and Cost Structure Page 10

As very accurately predicted in our report published above over a year ago, Samsung has eclipsed Apple in smartphone sales and capability!applApple -Competition and Cost Structure - unlocked Page 01Apple -Competition and Cost Structure - unlocked Page 02Apple -Competition and Cost Structure - unlocked Page 03 copyApple -Competition and Cost Structure - unlocked Page 04 copyApple -Competition and Cost Structure - unlocked Page 05Apple -Competition and Cost Structure - unlocked Page 07 copyApple -Competition and Cost Structure - unlocked Page 08 copyApple -Competition and Cost Structure - unlocked Page 09 copyApple -Competition and Cost Structure - unlocked Page 10 copyApple -Competition and Cost Structure - unlocked Page 11Apple -Competition and Cost Structure Page 08Apple -Competition and Cost Structure Page 10

 

 

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Following up on the post of Tuesday, 14 August 2012, Muppets Get MASHED Once Again - Groupon Half Off Share Price Coupons Selling for 20 Cents On The Dollar!!! Groupon is now trading at $2.61 after its most recent earnings announcement. We warned pre-IPO that this stock was pure trash. Let's see how that warning panned out... (spoiler alert: free BoomBustBlog Anti-sell side research available for download below)...

Groupon charg

An 89% drop since the IPO. For those not paying attention, that's damn near all of the share price... disappeared! You could have made a fortune selling this. You may have even made a dollar or two litigation with the issuers or the company itself. Don't forget,  At least eight brokerages slashed their price targets on the firm. Where were these firms when we were warning pre-IPO? 

Here are some key highlights: Groupon restates revenue, EXACTLY as I warned just three months earlier.

  1. Monday, 26 September 2011 What's The Best Way To Profit From Groupon's IPO?
  2. file iconGroupon Revenue Restated 09/26/2011
Groupon starts trading on the Nasdaq via IPO...
  1. Sunday, 13 November 2011 I Hope You Groupon IPO Investors Got Coupons At The IPO!!! Yeah, That's Right I Was The First To Say It
Favorite hits from said documents...
Groupon revenue restated Page 1
Groupon revenue restated Page 2
Groupon Valuation redacted Page 14
 
Groupon revenue restated Page 1Groupon revenue restated Page 2Groupon revenue restated Page 3Groupon revenue restated Page 4Groupon Valuation Page 01Groupon Valuation Page 02Groupon Valuation Page 03Groupon Valuation Page 03 copyGroupon Valuation redacted Page 11Groupon Valuation redacted Page 12Groupon Valuation redacted Page 14

You know that you really don't have to follow eight brokerages to make money on Groupon. All you really had to do was subscribe to BoomBustBlog, reference For Those That Want To Take A Peek Inside the Professional BoomBustBlog Paywall, Here's All of My Groupon Research - MUPPETS!!!

I have commented ad nauseum on the percieved need to do business with name brands, those who do God's work, and those who simply cannot trade - muppet masters and all - as I clearly articulated on the Max Keiser show last week.
... and on previous shows. 

Now, all of you Goldman, Morgan Stanley, et. al. lovers, don't get your muppetware in a bunch, you know that I know that you know that It Is Now Common Knowledge That Goldman’s Investment Advice Sucks???, as excerpted:

It's official, the mainstream media has turned on those "doing God's work" and come to the side of BoomBustBlog.

In case you still don't get it, the sell side research departments of these banks did not offer BoomBustBlog research to their clients. Oh no, then how in the hell can they dump their stock??? They issued glowing reports from their own analytical cum soft sales staff.

On that note, let's reminisce.... In June of 2011 I release proprietary research to BoomBustBlog Subscribers. You can now download said report absolutely free, here icon Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36). After reading said report, prepare for some real comedy, as reported by Dailypolitical.com:

Groupon (NASDAQ: GRPN) was downgraded by equities research analysts at Stifel Nicolaus from a “hold” rating to a “sell” rating in a research note issued to investors on Monday.

Other equities research analysts have also recently issued reports about the stock. Analysts at Bank of America (NYSE: BAC) downgraded shares of Groupon from a “buy” rating to a “neutral” rating in a research note to investors on Monday. They now have a $20.00 price target on the stock, down previously from $30.00. Separately, analysts at Benchmark Co. cut their price target on shares of Groupon from $32.00 to $28.00 in a research note to investors on Monday. They now have a “buy” rating on the stock. Finally, analysts at Goldman Sachs (NYSE: GS) reiterated a “buy” rating on shares of Groupon in a research note to investors on Thursday, February 9th.

Groupon traded down 3.20% on Monday, hitting $14.54. Groupon has a 52-week low of $14.85 and a 52-week high of $31.14. The company’s market cap is $9.376 billion.

Whoa!!! Goldman Sachs reiterated their "buy" recommendation just in time for their damn Muppet Clients to lose ~40% by the close of the market today. Go ahead, stuff those damn Muppets, fellas!For the record, in June of 2011, a full ten months ago, I made clear to my subscribers the following (as excerpted from the now free download)...

We value Groupon at $6.6bn using DCF. The current valuation is based on 10 years of revenue projections which are overly optimistic in our view.  We have forecasted revenues of $4.0bn in 2011 and expect revenues to nearly double to $7.5bn in 2012 and reach $35bn by 2020. We have assumed cost of equity of 12% and terminal growth of 3% from 2021 onwards. We have kept gross profit at stable levels and assumed operational gearing to (∆ Operating Profit / ∆ Revenue) to improve considerably. Despite these optimistic projections we were still not able to justify a valuation close to $10bn let alone $20-25bn. We only see downside risks to valuation of $6.6bn and believe that Groupon’s rejection of Google offer of $6.0bn was a mistake in first place. Google’s valuation of $6.0bn most assuredly included a premium for synergies that Google could have achieved with Groupon which would be clearly absent in the standalone entity. We see the fair value of Groupon close to $3.0-4.0bn if we assume a more realistic picture. Given all kinds of questions surrounding Groupon’s business regarding the sustainability of revenue growth, costs control and even the business model itself (i.e., the relationship with merchants) and external competition, we remain deeply concerned even on the sustainability of a successful IPO for Groupon. 

For the record, at about $3 per share, Groupon is market-valued at about $2.2 billion dollars!!!! Here are some key highlights: Groupon restates revenue, EXACTLY as I warned three months before the IPO.There's a WHOLE LOT MORE, but this post is long enough as it is. Simply download the links above, and don't forget to reference the valuation section of original forensic report. There's an early Christmas present in there for the stingy muppets!

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Many have asked me if I believe in austerity measures or the Keynsian approach of spending out of recession. I have stated, time and again, that the question is loaded - hence the answer can never be sufficient. When you are trying to go from your home to the market across town in a crowded urban environment, you cannot make the trip successfully by deciding ahead of time that you are just going to make left turns (austerity? Austrian?) or right turns (stimulus? Keynsian?). You come to an intersection and you make the turn that's necessary to get you where you want to go. It might sound overly simplistic and common, but I'll be damned if common sense is one of the most uncommon things I've come across over the last 7 years or so!

On that note, there does appear to be a misunderstanding on how government finances work as compared to finances in the private sector. The government is not a for profit player that competes directly with those in the private sector, but is instead a universal support network that benefits from the success of the private sector. Hence, the government must work in the best interests of the private sector in order to thrive. This sometimes entails taking the other side of the trade to ensure that a trade can take place. One pundit who has done a good job of explaining this through pretty charts that explain the peculiar situation that we are now in (a balance sheet recession), is Dr. Richard Koo of Nomura Securities. See the FT.com article abstract:

In 2008, Barack Obama told the US people the nation’s economic crisis would take a long time to overcome. In 2012, many of those voters are losing patience, because they have not been told why this recession has lasted so long or why his policies were the correct response. Here is the missing explanation – based on not only the US experience, but also that of Japan and Europe. 

when-the-government-tries-premature-fiscal-consolidation-things-get-much-worse-and-debt-goes-higher

Today, the US private sector is saving a staggering 8 per cent of gross domestic product – at zero interest rates, when households and businesses would ordinarily be borrowing and spending money. But the US is not alone: in Ireland and Japan, the private sector is saving 9 per cent of GDP; in Spain it is saving 7 per cent of GDP; and in the UK, 5 per cent. Interest rates are at record lows in all these countries.

For those who may not get the gravity of this statement, it makes no sense to save money with a negative risk/reward proposition, unless of course the saver does not see it that way. One must save if savings are in deficit, and the risk to invest funds is considered greater than the benefit of having said funds in the first place. We are still attempting to wade through the bursting of a massive bubble, and we are playing defensive - not offensive.  In other words, are Americans seeking return OF capital over return on said capital? We are over-leveraged, and to effectively delever you cannot borrow more money or take the risk of aggressive investments. This is so even if investment capital is being offered at zero interest rates. Mr. Koo illustrates the consequences of such behavior eloquently...

However, if someone is saving money or paying down debt, someone else must be borrowing and spending that money to keep the economy going. In a normal world, it is the role of interest rates to ensure all saved funds are borrowed and spent, with interest rates rising when there are too many borrowers and falling when there are too few. 

But when the private sector as a whole is saving money or paying down debt at zero interest rates, the banks cannot lend the repaid debt or newly deposited savings because interest rates cannot go any lower. This means that, if left unattended, the economy will continuously lose aggregate demand equivalent to the unborrowed savings. In other words, even though repairing balance sheets is the right and responsible thing to do, if everyone tries to do it at the same time a deflationary spiral will result. It was such a deflationary spiral that cost the US 46 per cent of its GDP from 1929 to 1933. 

Those with a debt overhang will not increase their borrowing at any interest rate; nor will there be many lenders, when the lenders themselves have financial problems. This shift from maximising profit to minimising debt explains why near-zero interest rates in the US and EU since 2008 and in Japan since 1995 have failed to produce the expected recoveries in these economies. 

For some reason, the Fed doesn't seem to get what Mr. Koo and BoomBustBloggers do!

With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector.

Wait a minute! The EU states are definitely borrowing, but they are not redploying the capital back into the private sector, they are simply bailing out banks! In addition, the banks are not deploying the capital into the private sector, they are simply sitting on it, just as Mr. Koo stated they would in the article excerpt above! So, after trillions of borrowing, there's no surprise why there's just relatively pennies making it into the private sector. What Mr. Koo and many who follow Keynsian economic theories seem to forget to include, is that upon borrowing the money to plunge into the private sector, you have to have a plan for paying said monies back. When you borrow said monies and simply waste them (ex. perpetual dead bank bailouts) you create a truly structural problem. Simply ask Greece, or see How Greece Killed Its Own Banks! and then move on to...

As The Year Comes An End The Ability Of Greece To Kick The Can Mirrors The Chances Of A Man With No Feet

Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.

Greece_Primary_balanceGreece_Primary_balanceGreece_Primary_balance

The primary balance looks at the structural issues a country may have.

Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!

Greece_Primary_deficit_copy

On to Mr. Koo's diatribe... 

Recovery from this type of recession takes time because the flow of current savings must be used to reduce the stock of debt overhang, necessarily a long process when everyone is doing it at the same time. Since one person’s debt is another person’s asset, there is no quick fix: shifting the problem from one part of society to another will solve nothing.

The challenge now is to maintain fiscal stimuli until private sector deleveraging is completed. Any premature attempt to withdraw that stimulus will result in a deflationary implosion – as in the US in 1937, Japan in 1997, and Spain and the UK most recently.

Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.

when-the-government-tries-premature-fiscal-consolidation-things-get-much-worse-and-debt-goes-higher

Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.

The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.

I have ventured along these lines several times in the past. Here is the subscription research that I feel is best poised to take advantage of the guaranteed mistakes to be made ahead, simply click your industry/sector for the most recent research (note, non-subscribers will only be able to view free reports, you may click here to subscribe)...

As for whether Mr. Koo is correct in the application of severe austerity when one should be trying to prime the pump....

Greece Is To Pathogen As Cyprus Is To Contagion As Spain Is To Infected...

CNBC reports Greece Austerity Strike Will Hurt GDP Further even as Cyprus Expects Bailout as S&P Cuts Ratings to Junk:

Cyprus said on Wednesday it expected talks to start with lenders on badly needed aid next week, as ratings agency Standard & Poor's pushed it deeper into junk territory, implying domestic political expediency lay behind a delay in clinching a deal. One of the smallest nations in the euro zone, Cyprus sought European Union (EU) and International Monetary Fund (IMF) aid in June after its two largest banks suffered huge losses due to a write-down of Greek debt.

Well, our Contagion Model showed clear paths of the knock on effects of Greek infection, and we haven't even gotten started with the economic pathogen party yet!

 

Although it seems as if Tyler is being a smart ass, he couldn't be farther from the truth. Reference my piece Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! concerning the accuracy of the IMF's baseline scenarios...

image005.pngimage005.png

And back to the ZH post:

....Breakdown of IMF deleveraging forecasts for the three scenarios, of which the realistic one is highlighted:

  • Under weak policies, the withdrawal of foreign investors accelerates to twice the pace seen since 2009. Periphery spreads widen by about one standard deviation above the baseline.

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ZeroHedge, in its snarky, smart ass, Reggie Middleton-like manner made me chuckle this morning with this headline: Mario Draghi Sends Risk Reeling After Exposing Bitter European Truth

It was shaping up like the perfect overnight ramp following yesterday's Goldilocks election result... and then Mario Draghi opened his mouth.

    • DRAGHI SAYS DEBT CRISIS STARTING TO HURT GERMAN ECONOMY
    • DRAGHI SAYS GERMAN RATES LOWER THAN THEY WOULD BE OTHERWISE

And so finally, after months and months of explaining the fundamental dichotomy in Europe (see here), it is finally becoming transparent. And it is as follow: Germany, which is the economic dynamo of Europe, needs a weaker EURUSD to keep its export economy running. Period, end of Story. The problem is that the lower the EURUSD, the greater the implied and perceived EUR redenomination risk, which in turns send the periphery reeling, and will force first Spain, and then everyone else to eventually demand (not request) a bailout.

A quick search on the topic reveals much more of the same...

Draghi admits Germanys f234ked

I emphasize this point because this problem was woefully evident nearly a dull year ago. On Thursday, 12 January 2012, after railing on the US education system (How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery), I made clear to all Harry Potter aficionados (you know, those Euro-types who would rather believe magic over math) that biggest threat to the 2012 economy was sitting right beneath their noses couched as a savior more than a threat. Reference The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You..., wherein I painstakingly took the tie to attempt to reassert the authority of math over magic. With the exclusion of central bank mysticism and the attrition of the belief that these bastards can create something out of nothing, or more to the point, can drive nearly everything towards nothing and then suddenly state that they have created something, I bring you my warning prescient warning on Germany and the macro-fundamental call to be aware of the bear Bund trade, to wit:

I believe Germany poses the biggest threat to global harmony for 2012. Here's why...

European banks are (in addition to borrowing on a secured basis from those customers they usually lend to) also paying insurers and pension funds to take their illiquid bonds in exchange for better quality ones, in a desperate bid to secure much-needed cash from the ECB, which only provides cash against collateral. This may not be as safe a measure as it sounds. Below is a sensitivity analysis of Generali's (a highly leveraged Italian insurer, subscribers see File Icon Exposure of European insurers to PIIGS) sovereign debt holdings.

image004image004

As you can see, Generali is highly leveraged into PIIGS debt, with 400% of its tangible equity exposed. Despite such leveraged exposure, I calculate (off the cuff, not an in depth analysis) that it took a 10% hit to Tangible Equity. Now, that's a lot, but one would assume that it would have been much worse. What saved it? Diversification into Geman bunds, whose yield went negative, thus throwing off a 14% return. Not bad for alleged AAA fixed income. But let's face it, Germany lives in the same roach motel as the rest of the profligate EU, they just rent the penthouse suite! Remember, Germany is not in recession after a rip roaring bull run in its bonds, and I presume the recession should get much deeper since as a net exporter it has to faces its trading partners going broke. Below you see what happens if the bund returns were simply run along the historical trend line (with not extreme bullishness of the last year).

image005image005

Companies such as Generali would instantly lose a third of their tangible equity. This is quite conservative, since the profligate states bonds would probably collapse unless the spreads shrink, which is highly doubtful. Below you see what would happen if bunds were to take a 10% loss.

image006image006

That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out. The same situation is evident in banks and pension funds as well as real estate entities dependent on financing in the near to medium term - basically, the entire FIRE sector in both European and US markets (that's right, don't believe those who say the US banks have decoupled from Europe).

thumb_Reggie_Middleton_on_Street_Signs_Fire

Now, all of this excerpt above was written BEFORE Tropical Storm Sandy hit the east cost. Now, its a whole difference ball game in terms of combined ratios and operating losses. Exactly how are those operating losses are going to be paid once the truth becomes widespread, re: Germany vs the periphery?

First: See FIRE Burns From Hurricane Sandy - Fear The Insurance Companies, Twice Over - Just Ask the ECB, Greece, Spain & Portugal

Second: Go long magic wands and Harry Potter paraphenalia!!! 

The damage to banks will probably be worse due to the higher level of leverage in European institutions. This is saying a lot since Italy's Generali is truly levered up the ASS! As excerpted from our professional series (subscribers see File Icon Bank Run Liquidity Candidate Forensic Opinion:).. (click here to continue reading)

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WSJ.com reports: The Financial Industry Regulatory Authority is investigating alleged unauthorized trading at Rochdale Securities LLC

Daniel Crowley, Rochdale's president, said Finra, a Wall Street self-regulator, was investigating trading that has put the company in a precarious financial position, adding, "The firm is recapitalizing and should be talking to the market shortly." He declined to offer more details on the trading or the investigation.

A person familiar with the thinking of Rochdale executives said a trader at the firm received an order for stock in Apple Inc. AAPL +0.63% but bought 1,000 times the number of shares requested. The trader is saying the extra shares were ordered by mistake, the person said, but the firm is alleging the actions were intentional. The company suspects the trader was working with an outside party to execute the trade and profit at the firm's expense, according to this person.

This is bullshit no matter which way you look at it. If you can mistakenly place an order for 1,000 times your intended purchases, then the risk management systems of this so-called institutional brokerage is less robust than grandma's retail web page at E-trade! If the trader did it on purpose, then he likely did it with management's consent and they didn't subscribe to BoomBustBlog - travesty within itself since all who subscribed knew it was time to short Apple! See The Blog That Could Have Saved Institutional Broker - Or - Beware Of Those Poison Apples!!

aapl research accuracy copy

Rochdale, based in Stamford, Conn., is an institutional broker and equity-research firm that employs prominent bank analyst Richard Bove. As of the end of 2011, Rochdale had $3.4 million in capital, according to a filing with the Securities and Exchange Commission. On Saturday, Mr. Crowley said the errant trading had left the company with a "negative capital position."

Amazingly enough, very few (if any) queried as to why Rochdale, with a capital base of $3.4 million dollars could execute a trade worth a billion dollars. Let's take an off the cuff measure of the leverage involved here... $1,000,000,000/$3,400,000 = roughly 294x the trader levered up the firms capital base, give or take. Who was the idiot(s) on the other side of the trade and more importantly where the hell was FINRA before this tiny bank had the nerve to go against BoomBustBlog research with a 294x levered trade? Methinks FINRA was a little less than effective here, no? Dick Bove, the rosk star bank analysts paid by Rochdale Securities (and probably paid nearly as much as Rochdale's capital base), should have alerted Rochdale to the risks therein, no?

Dick seems like a nice guy, but we don't always see eye to eye, reference CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!!:

Last week I posted a rather scathing diatribe, basically ridiculing the fact that Dick Bove get's so much MSM airtime for his virtually consistently wrong calls and analysis:, as excerpted: A BoomBustBlog Deep Dive on Dick

... 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?

Okay, I admit I was a bit harsh, and it appears as if Mr. Bove may have read said diatribe and used his cache with the MSM to post a response - very professional one at that - and one to which I must give him credit - alas, he was still wrong! To wit:

Bove: Why I Was Wrong on Bank Stocks

With a month left in 2011 and—barring a miracle—bank stocks headed for a negative year, Dick Bove is admitting he was wrong.

This is both commendable and respectable. It is honorable and healthy to admit when you are wrong, and we all have the opportunity to do so since nobody is right all of the time!...

It is my belief that this country idolizes Wall Street, and does so foolishly. Attempting a trade on Apple which is obviously on decline at 294 times leverage with no apparent risk management mechanisms rivaling that of a mere eTrade account is silly, and does not connote "Masters of the Universe" status. In closing, keep in mind that as I drove from my apartment shortly after the Sandy storm, I noticed that the Goldman Sachs HQ had lights and electricity almost immediately. Why? Because it was triple sandbagged against the elements with underground vents properly sealed. Notice that the surrounding hospitals and schools failed to receive similar attention. Where exactly are our resourced flowing and for what reason. Happy voting on this historical election day.

Subscribers expect fresh research and content later this week.

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 In the post After My Contrarian Calling Apple's 3rd Miss Accurately, I Release My Apple Research Track Record For 2 1/2 Years, I came clean with the historical performance of my Apple research. Of course, many a hater had their hearts crushed as math and common sense once again ruled the day. Still, we see herd mentality and brand loyalty effect even those who're really supposed to know what they're doing - to wit: Rochdale Trader Made Unauthorized Purchases Of As Much As $1 Billion In Apple Stock Last Month

... a trader at Rochdale Securities made unauthorized purchases of $750 million to $1 billion in Apple stock last month and now the firm is seeking a lifeline. 

It's unclear when the unauthorized stock purchases took place, but shares of Apple have dropped around 11.5% since Oct. 1.

Stamford, Connecticut-based Rochdale, which employs noted bank analyst Dick Bove, is looking for a possible deal to recapitalize such as a capital injection or a merger, Bloomberg reports citing sources familiar. 

Well, it's obvious the brokerage didn't buy that trader a subscription to BoomBustBlog. I've been following Apple for roughly two years now and have been one of the (if not the) most accurate fundamental pundits on said matter, with my valuations hugging Apple's share price rather tightly for the entire time I have followed it.

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Reference Apple - Competition and Cost Structure 05/16/2011, which is now available for download to all due to its dated nature - even those who do not subscribe. Please note that this report only includes base case scenarios, while the latter reports included base, optimistic and pessimistic scenarios - which is much more realistic. Although some of the later reports are also stale-dated, they contain valuable knowledge that I'm not prepared to release to the public for free at this time.

On Friday, 12 October 2012 I posted A Review Of The Accuracy Of Last Quarter's Apple Earnings Notes where in I went over the true value of my last quarterly review of Apple's performance. Please note that this was before the Q3 earnings release:

A subscriber convinced me to post the 1st quarter's valuation bands (subscribers, see Apple Margin & Valuation Note 03/15/2012) for Apple to squelch the comments of those who are guessing what's behind the firewall. Our base case scenario was right on target, and  during the target and after the earnings release I realized that we underestimated international (especially Asian) sell though and shifted the weight towards the optimistic band which also proved fairly accurate. As all can notice, the pessimistic band is not shown, and that is where the value lies here. I am now shifting my bias towards (that's towards, not to) the pessimistic band, for I feel Apple has now started to feel the competitive and margin pressures that I warned of, and has done so right at the deadline that I gave in 2010 (this is just as much a factor of luck as it is skill, alas, if it bears fruit it bears fruit). The latest valuation bands can be accessed by paying subscribers below (click here to subscribe):

Apple 4Q2012 update professional & institutional
Apple 4Q2012 update - retail
"iPhone Margin worksheet - blog download

Just to make this perfectly clear, I've been stating that Apple had margin compression stemming from extreme competition coming for two years now. That does not mean that Apple will collapse. As a matter of fact, I've included my stale Apple reports and a graph that shows I've pretty much been on target with Apple's share price the whole while. And for those who are so concerned with timing, I've highlighted in bold font where I've told subscribers to turn pessimistic on Apple's share price. This was October, roughly 12% ago in share price and many tens of billions of dollars in market value.

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Keep the following in mind as you peruse this post...

apple product chart growth

I discussed this in detail with Lauren Lyster on Capital Account. The margin discussion started at 7:55.

For those who haven't heard my description of Apple's arch competitor, Google's, business model, look here:

See Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money! for more on the mechanics of the margin compression theory for Apple.

The latest Apple valuation bands (including the advanced pessimistic bands) can be accessed by paying subscribers below (click here to subscribe):
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I have thoroughly warned (since 2009) that Spain will be one of the most catalyzing states suffering the Eurocalypse. Even more interesting, the rating agencies have a very significant (although not very utilitarian) role, see The Embarrassingly Ugly Truth About Spain: The IMF, EC and ALL Major Rating Agencies Are LYING!!!

thumb_Reggie_Middleton_on_Street_Signs_Fire

Looking at today's news, my ruminations take form, but the question of the day is that, unlike with Greece whose bonds have killed banks (see How Greece Killed Its Own Banks! and Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead) until the ECB bought the pain from the municipal muppets in a Pan-European Ponzi-style shell game (see ECB As European Lender Of Last Resort = Institutional Purveyor Of A Pan-European Ponzi Scheme), Spain's asset and credit bubble pop ramifications are much too large too large to simply stuff in an ECB side pocket. So, what happens to those banks that leveraged up and gorged on all of this risky ass, risk free European sovereign debt??? Well, first let's peruse today's media as Bloomberg reports Spain’s Economy Shrinks for Fifth Quarter Amid Bailout Talk

 Spain’s economy contracted for a fifth quarter, adding pressure on Premier Mariano Rajoy to seek more European aid even as the euro area’s fourth-largest economy met a bill-sales target.

Gross domestic product fell 0.4 percent in the three months through September from the previous quarter, matching the contraction of the second quarter, the Bank of Spain said in an estimate in its monthly bulletin released in Madrid today. That compares with a median forecast for a 0.7 percent contraction in a Bloomberg News survey of 10 economists.

Moody's passed on cutting Spain's sovereign rating (to below investment grade) recent and the general sigh of relief has been short-lived.  Moody's cut Catalonia's rating (by two notches to Ba3) and four other regions.  The rating agency cited two main factors.  First is the deterioration in the liquidity situation of the regions, as evidenced by the low levels of cash reserves.  Second, it cited the heavy reliance on short-term credit lines.    
Three of the regions that were downgraded (Catalonia, Murcia and Andalucia) face large redemption before year end.  Madrid had established a fund to help the regions secure financing of 18 bln euros.  Eight of the 17 regions have requested funds, including 4 of the five that were downgraded by Moody's.  These requests amount to a little more than 17 bln euros, practically exhausting the fund.   
Separately, Spain's finance ministry acknowledged that is year's deficit, as in recent years, will overshoot the government's target.  Indeed, this year's new projection of 7.3% overshoots not only the relaxed 6.3% shortfall, but even the 6.8% that Rajoy unilaterally suggested coming out of the EU meeting in which the leaders endorsed the fiscal pact.  The 10.5 bln social security (not just pensions, but unemployment compensation and other transfer payments) deficit is being blamed, which itself is partly a function of the austerity face of economic weakness.   

 You can't say I didn't warn 'ya...

Well, the most stringent warning is also probably the most profitable if timed correctly, and that was the warning on the FIRE sector on CNBC (Reggie Middleton Sets CNBC on F.I.R.E.!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set...):

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For more on this, see The F.I.R.E. Is Set To Blaze! Focus On Banks, part 1. A lot of people, even professionals, truly believed that the FIRE malaise would not be European in nature. Whaattt????!!! As expected, this European Insurer Needs Insurance As $6B Of Its Bonds Are Instantly Subordinated Due To "Spain's Pain". Insurers are very heavy investors in European sovereign debt AND the debt of financial institutions. But hey, weren't the European financial institutions getting killed by choking on Sovereign debt (reference Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead)? So, you know what's up next right?

European Bank Run Watch: Spaniard Edition

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You know, I don't even bother to go over banking statements anymore. They are so steeped in bullshit, quasi-fraudulent fallacy and muppetology, that I'm simply waiting for Bernanke to slip up and true market pricing to come to the fore before I jump back into the game. ZeroHedge comments on JPM's earnings as follows JPM Beats On Loan Loss Reserve Release Despite Drop In Trading Revenues And NIM, Surge In Non-Performing Loans:

There is a lot of verbiage in the official JPM Q3 Earnings press release which directs to a bottom line number of $1.40, or $5.7 billion on expectations of $1.24, with revenue of $25.9 billion on expectations of $24.53 billion. The primary reason for the lack of disappointment: no major losses in Corporate from CIO, with corporate generating $221 million in Q3, up from a loss of $(1.777) billion in Q2. And then come the adjustments:  $900 million pretax benefit ($0.14 per share after-tax increase in earnings) from reduced mortgage loan loss reserves in Real Estate Portfolios; $825 million pretax incremental charge-offs ($0.13 per share after-tax decrease in earnings) due to regulatory guidance on certain residential loans in Real Estate Portfolios; $888 million pretax benefit ($0.14 per share after-tax increase in earnings) due to extinguishment gains on redeemed trust preferred capital debt securities in Corporate; $684 million pretax expense ($0.11 per share after-tax decrease in earnings) for additional litigation reserves in Corporate; Then there is a DVA loss of $211 MM in banking. Net-net, after taking into account all one-off adjustments, the Q3EPS was really $1.26. But for all the data fudging, and attempts to make the reported EPS non-comparable to the expected one, following an avalanche of one-time adjustments, the bottom line is this: revenues from trading dropped both sequentially and Q/Q while banking expenses rose, Net Interest Margin dropped to a new record low, even as the firm too a major $967 million loan loss reserve release on its loans to $22.8 billion, even as its total Non-Performing Loans rose by a whopping $1.3 billion to $11.370 billion, the largest quarterly jump in years! Just how JPM can justify such a major contribution to earnings coming from loan losses when NPLs have soared is unclear to anyone with a frontal lobe.

On that note, let's reminisce to the days of Q2 2011, where I penned There's Something Fishy at the House of Morgan. Let me know if you've seen this story before. It's amazing that banks can dance this dance, over and over again and STILL not get called on it:

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): JPM Q1 2011 Review & Analysis.

JPMorgan’s Q1 net revenue declined 9% y-o-y ad 3% q-o-q to $25.2bn as non-interest revenues declined 5% y-o-y (down 5% q-o-q) to $13.3bn while net interest income declined 13% y-o-y and (-2% q-o-q) to $12.5bn. However, despite decline in net revenues, noninterest expenses were flat at $16bn. Non-interest expenses as proportion of revenues was 63% in Q1 2011 compared with 58% a year ago and 61% in Q4 2010. However, due to substantial decline in provision for credit losses which were slashed 83% y-o-y (63% q-o-q) to $1.2bn from $7.0bn, PBT was up 78% y-o-y (15% q-o-q).

Lower reserve for loan losses and consequent decline in Eyles test (an efficacy of ability to absorb credit losses) coupled with higher expected wave of foreclosures which is masked by lengthening foreclosure period and overhang of shadow inventory, advocate a cautionary outlook for banking and financial institutions. As a result of consecutive under-provisioning since the start of 2010, JP Morgan’s Eyles test have turned negative and is the worst since at least the last 17 quarters. The estimated loan losses after exhausting entire loan loss reserves could still eat upto 8% of tangible equity.

Non-interest revenues

Non-interest revenue declined 5% y-o-y (down 5% q-o-q) to $13.3bn from $14.0bn in the previous year. Investment banking fees were up 23% y-o-y as debt underwriting fees and advisory fees were up 29% y-o-y and 44% y-o-y, respectively partially offset by 8% decline in equity underwriting fees. Principal transactions revenues were up 4% y-o-y to $4.8bn, the highest at least since last 17 quarters. Asset management revenues were up 10% y-o-y $3.6bn. The bank reported a loss of $0.5bn on mortgage fees and related income compared with gain of 0.7bn in the corresponding quarter last year while securities gains for Q1 2011 declined to $102m from $610m in Q1 2010. Credit card income was up 6% y-o-y to $1.4bm while other income increased 40% y-o-y to $574m.

I have warned of this event. JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011.

Traditional banking revenues: manifest destiny as forwarned - Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks

Net interest income declined 13% y-o-y (-2% q-o-q) to $11.9bn versus $13.7bn in the previous year as interest income fell 7% to $15.6bn while at the same time interest expenses increased 19%. Interest income declined as a result of steep decline in yield on interest bearing assets despite a 2% y-o-y and 4% sequentially increase in interest bearing assets. Low interest rates and lower proportion of high yield assets have caused a strain on yield on interest bearing assets. The proportion of loans to interest bearing assets (high yield assets) have declined to 34% in Q1 2011 from 36% in Q1 2O10 and 39% in Q1 2O09 while at the same time proportion of Feb Funds rate (low yield assets) to interest bearing assets have increased.  Yield on interest bearing assets which is in a downward trajectory declined to 3.06% in Q1 2011 versus 3.35% in Q1 2010.

Interest expense increased to 19% as interest bearing liabilities increased 2% y-o-y while at the same time yield on interest bearing liabilities increased to 0.81% from 0.69%. Overall, the bank’s net interest margin declined to 3.1% in Q1 2011, the lowest since 2007 as low interest rate environment coupled with low risk appetite have taken a toll on banks net interest margin.

Again, I have warned of this occurrence as well. See my interview with Max Keiser where I explained how the Fed's ZIRP policy is literally starving the banks it was designed to save. Go to 12:18 in the video and listen to what was a highly contrarian perspective last year, but proven fact this year!

Provisions and charge-offs: I have been warning about the over-exuberant release of provisions to pad accounting earnings since late 2009!

Declines in provision was one of the major contributors to bottom line. JPMorgan reduced its provision for loan losses to $1.2bn (0.7% of loans) in Q1 2011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% of loans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans) in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9% of loans) in Q4 2010. Although banks delinquency and charge-off rate has declined, the extent of decline in provisions is unwarranted compared to decline in charge-off rates. As a result of higher decline in provisions compared to charge-offs, total reserve for loan losses have decreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At the end of Q1 the banks allowances to loan losses is lowest since 2009.

Although the reduction in provisions has helped the banks to improve its profitability it has seriously undermined the banks’ ability to absorb losses, if economic conditions worsen. As a result of under provisioning for the past five quarters, the banks Eyles test, a measure of banks’ ability to absorb losses, has turned to a negative 7.7% in Q1 2011 compared with +6.4% in Q1 2010. A negative Eyles test has serious implications to shareholders – the losses from banks could not only drain entire allowances for loan losses which are inadequate but can also wipe off c7.7% of shareholder’s equity capital. The negative value of 7.7% for JPM’s Eyles is the lowest in this downturn.

 

For those of you who believe the housing market has put in a bottom, JPM may be the company to believe in. For those a bit more grounded in reality, realize...

For those who still do not believe that the Fed's ZIRP is starving the banks, I strongly suggest reading Did Bernanke Permanently Cripple the Butterfly That Is US Housing? The Answer Is More Obvious Than Many Want To Believe Monday, March 28th, 2011, as excerpted:

Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!, Bernanke et. al. have snipped the chrysalis of the US markets and economy one too many times. He has interrupted the circle of life...

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable?as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

Reminisce while traipsing through our real estate analysis and research:

  1. On Employment and Real Estate Recovery Monday, April 25th, 2011
  2. A First In The History Of Mainstream Media? NAR Is Identified As A Joke! Tuesday, March 29th, 2011
  3. The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011
  4. Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
  5. Further Proof Of The Worsening Of The Real Estate Depression Thursday, February 24th, 2011
  6. In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011
  7. When Will the Mainstream Media Be Ready To Call The NAR The Sham That It Really Is? Tuesday, February 22nd, 2011
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