Soros has nothing on BoomBustBloggers Cool, there's a new sheriff in town!

From Bloomberg, "Soros Imitators Reap Riches in Financial Crisis on Macro Funds":

Hedge fund managers on average lost
18.7 percent of their clients’ money in 2008, for the worst
performance since at least 1990, according to Hedge Fund Research
Inc. Combine the losses with investor redemptions, and total hedge
fund assets have been cut almost in half. TrimTabs Investment
Research and Barclay Hedge Ltd. estimated funds held $1.1 trillion
at the end of the year, down from $1.9 trillion a year earlier.

One rare bright spot: the resilience of global macro fund
managers, who wager on currencies, equities, interest rates and
commodities based on their fundamental analysis of world economic
trends.

Their funds gained 5 percent on average amid the carnage,
according to Chicago-based Hedge Fund Research, prompting
investors and managers to predict a renaissance for the once
ubiquitous strategy. [Hah! BoomBustBloggers gained 106% for the same time period, and most assuredly have considerably more transparent documentation to prove it, not to mention the ability to cap research costs at $2,500 - A new days is a dawning! See 2008 Performance Results] Preliminary estimates show macro funds up
another 1.4 percent in January.

“Twenty years ago, the words hedge fund meant global macro,”
says Colm O’Shea, founder of Comac Capital LLP in London, a macro
firm with $1.3 billion under management and returns of 30.7
percent last year. “I believe they will again in the future.”

Alan Lenahan, managing principal of Fund Evaluation Group
LLC, a Cincinnati-based investment advisory firm, says macro funds
will garner a bigger share of the money that he expects will flow
back into the industry. “You’re going to see investors flock to
global macro,” he says. [One would think they would flock to this blog instead. It's a lot cheaper, and apparently you'd make a lot more money as well!]

The multiyear performance of hedge funds overall, even
including 2008, justifies a place in most portfolios, he says.
Pension funds, endowments and wealthy individuals will return,
despite having withdrawn money since last summer, he says, and
they will favor what’s been working best. [Favor what is best??? Ok, the subscription form is here.]

For the record, and for those who don't know, I am in my element here. To learn more about my proprietary investment style, see "The Great Global Macro Experiment, Revisited". I don't mean to brag or boast, but my 8 year track record bests Soros' by at least 100% (at least that I know of). I may be a tad bit more humble as well. Remember what I told you about Name Brands Investors? To Soros' credit, he is an immensely fascinating and accomplished man. Apparently highly intelligent, he appeared to have literally had it go to his head for a time, suffering from a God syndrome where he went into a depression after realizing he wasn't superior. At least that is how I remember reading his book. His early books are an utterly fascinating read, and his philanthropic push to oust George Bush and fight abject poverty across the globe aligns him precisely along my interests, so I better stop making fun of him.Tongue out

In reference to the The Prudential Plc Forensic and Fundamental Analysis Sample Trade Addendum, see Bank of England May Cut Interest Rate Closer to Zero as Recession Deepens. Those that put the bearish USD/GBP trade in would have made good money, I still believe it is good on top of the spreadsheet Prudential Forensic Analysis Pro trade described therein. This is not for beginners, though it is excellent training in Real Reggie-style Global Macro.

I hope you guys realize how ridiculously under-priced these subscriptions are. Speaking of insurers, global macro, and the pound...

From Bloomberg:

The Bank of England will probably lower the benchmark interest rate closer to zero today as officials resort to buying securities to revive the economy.

The nine-member Monetary Policy Committee will cut the bank rate to 1 percent, the lowest since the institution was founded in 1694, according to the median of 61 economists’ forecasts. The decision comes at noon in London, and Governor Mervyn King will present updated forecasts on Feb. 11.

As conventional monetary policy tools lose their potency to aid an economy sliding deeper into a recession, Prime Minister Gordon Brown’s government has given the bank powers to spend up to 50 billion pounds ($73 billion) on bonds and commercial paper. Service companies shrank in January, consumer confidence fell and the inflation rate has dropped at a record pace.

“With unemployment rising, the bank will come under pressure to cut to zero,” said David Tinsley, a London-based economist at National Australia Bank and a former Bank of England official. “They’ll try to shift the focus to quantitative easing.”

King said Jan. 20 that the central bank will buy “high- quality” assets within “weeks and not months” to ease market strains. He and U.S. Federal Reserve Chairman Ben S. Bernanke are pursuing alternative measures to revive lending among banks stung by the global financial crisis.

The Bank of England has lowered its key rate by 3.5 percentage points from 5 percent in October. The Fed has cut its key rate to a range between zero and 0.25 percent. The European Central Bank will probably keep its rate at 2 percent today.

Published in BoomBustBlog

This is the sample trade addendum for the Professional Prudential analysis. As I have stated in the Banco analysis, these are illustrative sample trades, and are not to be taken as investment advice in any way whatsoever. I am just giving an oversimplified example of how I may or may not put a speculative trade together, particular when dealing with a company from overseas whose position may introduce currency risk/opportunity.

Below you find the currency payoff matrix for Prudential, similar to the one offered for the Banco Bilbao Vizcaya Argentaria SA Analysis. We have created pay off matrix for Prudential ADR option (since the options were illiquid we have assumed theoretical price using Black-Scholes model) as well as Prudential Options in local exchange for varying combinations of calls and puts of GBP. We have conducted analysis for PRU futures with currency futures.

Contents of the downloadable The Prudential Plc Forensic Analysis and Fundamental Valuation Sample Trade Addendum. The Prudential Plc Forensic Analysis and Fundamental Valuation Sample Trade Addendum. 2009-02-02 21:06:17 1.20 Mb

include:. 1

  • Sample Trade 1 - Sep - ADR PUK Option. 1
  • Sample Trade 2 - Sep PUK (GBP) Option
  • Arbitrage
    A. 7
  • Sample Futures Trade
  • The Currency ArgumentT. 12

Time permitting, I may be able to post a more advanced trade tomorrow.

Sample Futures Trade

Underlying

26-Jan-09

PUK LM

PUK US

Exchange rate 1.40

Note: 1 ADR = 2 Underlying shares of PUK

Price of PUK ADR (based on expected movement in currency and underlying)

Depreciation of GBP

Appreciation of GBP

% change in price

-25%

-15%

15%

25%

GBP USD - Exchange rate

1.05

1.19

1.40

1.61

1.75

-25%

PUK in GBP

€ 2.4

$5.0

$5.7

$6.7

$7.7

$8.3

-15%

€ 2.7

$5.7

$6.4

$7.6

$8.7

$9.5

€ 3.2

$6.7

$7.6

$8.9

$10.2

$11.1

15%

€ 3.7

$7.7

$8.7

$10.2

$11.8

$12.8

25%

€ 4.0

$8.3

$9.5

$11.1

$12.8

$13.9

Without hedging - (for someone who is short ADR)

% change in price

-25%

-15%

15%

25%

GBP USD - Exchange rate

1.05

1.19

1.40

1.61

1.75

-25%

PUK in GBP

€ 2.4

72%

52%

29%

12%

3%

-15%

€ 2.7

52%

34%

14%

-1%

-9%

€ 3.2

29%

14%

-3%

-16%

-23%

15%

€ 3.7

12%

-1%

-16%

-27%

-33%

25%

€ 4.0

3%

-9%

-23%

-33%

-38%

Assuming that an investor enters a short PUK ADR and simulaneously enters a long GBP / Short Dollar contract (3 m contract)

Current 3 month GBP exchange rate is 1.40 (against spot of 1.40)

With hedging

(Same as above - price of underlying ADR )

% change in price

-25%

-15%

15%

25%

GBP USD - Exchange rate

1.05

1.19

1.40

1.61

1.75

-25%

PUK in GBP

€ 2.4

$5.0

$5.7

$6.7

$7.7

$8.3

-15%

€ 2.7

$5.7

$6.4

$7.6

$8.7

$9.5

€ 3.2

$6.7

$7.6

$8.9

$10.2

$11.1

15%

€ 3.7

$7.7

$8.7

$10.2

$11.8

$12.8

25%

€ 4.0

$8.3

$9.5

$11.1

$12.8

$13.9

On underlying :

% change in price

-25%

-15%

15%

25%

GBP USD - Exchange rate

1.05

1.19

1.40

1.61

1.75

-25%

PUK in GBP

€ 2.4

72%

52%

29%

12%

3%

-15%

€ 2.7

52%

34%

14%

-1%

-9%

€ 3.2

29%

14%

-3%

-16%

-23%

15%

€ 3.7

12%

-1%

-16%

-27%

-33%

25%

€ 4.0

3%

-9%

-23%

-33%

-38%

On 3 month Futures :

Long 3 M GBP at

1.35

Expected exchange rate at expiry

1.05

1.19

1.40

1.61

1.75

Gain / Loss on long GBP

-22%

-12%

4%

19%

30%

Net return for Hedged investor (Short ADR and Long GBP)

% change in price

-25%

-15%

15%

25%

GBP USD - Exchange rate

1.05

1.19

1.40

1.61

1.75

-25%

PUK in GBP

€ 2.4

34%

34%

34%

34%

34%

-15%

€ 2.7

18%

18%

18%

18%

18%

€ 3.2

0%

0%

0%

0%

0%

15%

€ 3.7

-13%

-13%

-13%

-13%

-13%

25%

€ 4.0

-20%

-20%

-20%

-20%

-20%

Net benefits of Hedging :

% change in price

-25%

-15%

15%

25%

GBP USD - Exchange rate

-25%

PUK in GBP

-38%

-18%

5%

22%

30%

-15%

-34%

-16%

4%

19%

27%

-29%

-14%

4%

16%

23%

15%

-25%

-12%

3%

14%

20%

25%

-23%

-11%

3%

13%

18%

1) Investor in short ADR would benefit from decrease in value of underlying and depreciation of Euro.

2) However in case of appreciation of Euro, the gains in short underlying (BBV), if any, would be wiped out due to currency impact.

3) If an investor wants to play on weakening of Euro as well then he could keep his Short ADR un-hedged.

4) Otherwise if investor wants to play only on the underlying (with a negative view) without exposing himself to the currency risk then he could take a short position in the underlying and long Euros.

5) We have determined investment returns for hedged as well as un-hedged (short) investor in form of scenario analysis for various changes in price of BBVA and exchange rate in form of tables to gauge the relative performance of hedge and un-hedge investor in form of tables.

6) A hedged investor would perform better compared to an un-hedged investor when Euro appreciates while un-hedged investor would perform better than hedged investor when Euro depreciates.

Currency argument

As worsening economic news flow to continue from both Europe and US region both Euro and Dollar are expected to remain weak against major world currencies. As U.S. economy deteriorates and expectations of a protracted recession turn out to be a reality, dollar is expected to remain under pressure from major world currencies. Unless U.S. economy takes a u-turn or other regions deterioration sharply, dollar is expected to remain weak. Since economic conditions in US are expected to continue to remain challenging US dollar is expected to depreciate vis-a-vis major world currencies. However relative to Europe we expect the US dollar to perform better, as the European economy which until now has been relatively insulated by the slowdown (relative to US) it is showing increasing signs of weakness. As the European region crawls into a recession the European Central Bank which until now has held up interest rates will be forced to lower its bench mark interest rates. With Fed maintaining a zero interest rate policy as the ECB lowers its benchmark rates, the interest rate gap between Euro and Dollar is further expected to narrow down providing some strength to dollar. Also with US already maintaining a zero interest rate policy there will obviously not be any further Fed rate cuts of substance, which could provide some strength to dollar. Besides interest rate parity, swift policy actions and a massive stimulus package already announced by the US may may cause the US to emerge from recession much faster than Europe which could provide further support for US dollars vis-à-vis Euro.

Besides these fundamental arguments the data for Euro futures seem to imply that market participants are expecting Euro to weaken. As of December 31,2008 12 month Euro futures were trading at a discount of nearly 0.63% to Spot while 3 year and 9 year Euro futures were trading at a discount of 1.7% and 8.5%, respectively.

Published in BoomBustBlog
Sunday, 01 February 2009 23:00

As I Continue My Analysis of Global Insurers

Here is our presentation on Prudential. As is usual, the comprehensive argument has been made in the Professional report. I am very bearish on the insurers and would like my subscribers to take note that their potential for contributing to systemic risk is woefully under appreciated.

I think many forget exactly how insurers make their money (hint: its not necessarily through operating margins), as well as the vital role that they play in business and the economy.

pdf Prudential Forensic Analysis Summary - Retail 2009-02-02 13:45:46 251.44 Kb

spreadsheet Prudential Forensic Analysis Pro 2009-02-02 13:44:02 422.42 Kb

There will be more insurer and reinsurer analysis to come.

The downloadable pdf The Prudential Plc Forensic and Fundamental Analysis Sample Trade Addendum

Published in BoomBustBlog

This was a comment left on a thread that I had to unpublish, and I thought it would be of interest to the BoomBustBloggers:

Hi Reggie,

I just met with an industry analyst on the insurance sector. I found him very informative-his comments were much in line with what you have been saying on your blog although his published work would suggest he was very bullish on the group. I thought they would be of interest to your readers in addition to comments that you may have as to whether he is on target. Much of this you've already said, but it was interesting to hear it for a different perspective as well. He also had important comments on their annuity products that maybe aren't widely known.

Basically, he believes there is significant risk that many firms in the industry will need to raise capital (including HIG and PFG). The simple story is that they are heavily exposed to CRE and the companies have yet to record any losses as other than temporary impairment. The companies are assuming near zero loss expectations on their CRE portfolios, which in this environment is unlikely. Moody's has already moved the companies to negative watch, and a downgrade forthcoming is anticipated. Any downgrade will mean they will have to raise additional capital.

While much of this story is known by the market, and to some extent priced in, the companies also face significant problems with their annuity products. Over the last few years, the insurance companies have been in a escalating war for annuity clients and have written more aggressive policies that guaranteed the customer all the upside with complete downside protection. These products are requiring the insurance companies to have greater amounts of equity backing up the annuities as the guarantees are farther and farther underwater. Some investors recognize this problem and the need for more capital on the equity annuities but the same issue applies to the fixed income annuities. Fixed income annuities made up as much as 30% of total annuity sales for some insurance companies.

He thought there was a decent chance that the insurers would post a good (bullsh*t) quarter this quarter, but by June the situation would most certainly catch up with them as the regulators, ratings agencies, or their accounting firms would require the insurance companies face up to the required write-off and capital needs.

I wanted to pass this on to your readers and of course any input from you is always appreciated.

To continue the conversation on the Life Insurers, please revisit the older opinion if you haven't already:

... (graphs, charts etc.) Multii-meda Presentation (PowerPoint / Video): Reggie Middleton on the Hartford Insurance Group. ...
Thursday, 01 January 2009



Saturday, 22 November 2008



Saturday, 22 November 2008



Hartford Insurance Actionable Opinion Note
(Download:Research Reports)
This is an actionable opinion note. Not a full blown forensic analysis, but timely info that I acted on that may be of use.
Saturday, 22 November 2008



Thursday, 06 November 2008

I, unfortunately, have not had the time to perform a full fledged forensic analysis of the PFG but I did have my team do some additional digging and calculation. Here is what we found in the forensic detail (Pro level subscription required) - pdf Principal Financial Group Actionable Intelligence Note - Pro version 2009-01-15 03:26:26 252.74 Kb For those who do not have the higher level subscription, this is pretty much more of the same in terms of my opinion from the Principal Financial Group Actionable Intelligence Note, just significantly more detail on the forensics side. Again, for those who are very serious about investing in this market, I strongly suggest you upgrade. The nomenclature of the subscription is misleading. It is not for "professionals" per se, it is for people who are serious about their self guided, or managed, investment activities.

Published in BoomBustBlog

The National Association of Insurance Commissioners could revamp life insurers' regulatory capital requirements to eliminate redundancies in reserve requirements and adjust risk based-capital requirements to allow life insurers to reallocate funds for liquidity and capitalization purposes. (Following this news and a very slightly revised outlook by HIG management, HIG shares posted 91 percent gains.)

We believe that in the "long-term" relaxing regulatory capital requirements would not be beneficial for the industry since this would allow these companies to keep the riskier assets on their balance sheet for a longer period of time without having to raise corresponding capital; further increasing the balance sheet risk if (or in this environment, when) the losses mount up. Also, lowering regulatory capital requirements would enable these companies to further increase their leverage and allow for increased speculation by way of providing additional leeway in terms of capital flexibility. Although by lowering regulatory capital requirements these companies would appear to be sound (through relaxed regulatory standards) in any true economic sense these companies would most likely end up more vulnerable. We believe that relaxing regulatory capital requirements is just a bailout with window dressing, and by that I mean the very light, low calorie dressing, not the fatty ranch stuff. Despite this, in the short run lowering capital requirements could be beneficial for those life insurance companies' shareholders who would otherwise have been required raise capital in the current capital markets conditions, thus significantly diluting those shareholders in some form or fashion. What the casual observer seems to miss is that the regulatory regime put the reserve requirements in for a very valid reason, and forgoing adequate capital reserves simply puts the policy holder at greater risk, the tax payer who may have to pay into an insurer guarantee fund, as well as the shareholder has now traded in the risk of dilution for the risk of insolvency.

With regards to impact on our analysis of HIG, since there was not any requirement for additional capital the decision to relax regulatory capital requirements would be more psychological in nature. It could be beneficial for PFG only if it would be required to raise capital to adhere to regulatory norms in these market conditions. However since we have not performed a detailed modeling for PFG, the need for additional capital, if any, would be difficult to ascertain. With this in mind, remain cognizant of the fact that there is a distinct difference between economic risk and accounting risks, and the sprinkling of low fat Italian dressing on the window ledge does not change that fact.

Published in BoomBustBlog
Thursday, 11 December 2008 23:00

Timely Actionable Intelligence Note

This note stems from the research that I have been doing on the Hartford Insurance Group, AIG and their peers. AIG has been caught with their hand in the cookie jar, so to speak, writing naked CDS under the guise of synthetic securities. Basically, they were gambling. In this economic climate, the writers of CDS are most likely to take a loss, particularly those who wrote the swaps on anything related to a financial company or financial asset as an underlying. Those who bought the CDS have often recorded a paper gain, but counterparty risk is an issue as well. Realizing (after growing up in NY) that there is seldom only one cockroach, I had my team search for other insurance companies that basically gambled with their balance sheet under the guise of issuing insurance.

All subscribers are urged to read this note before the start of trading today. When time permits, compare and contrast this simple but hopefully timely not to the Hartford Insurance Group research.

icon Actionable Intelligence Note (162.29 kB 2008-12-12 06:01:55)

Published in BoomBustBlog

I've received a lot of email since releasing my HIG research to non-paying subscribers. Unfortunately, this wasn't the inquiries of a bunch of people who were just too stingy to pay a subscription. It was the heartfelt concern of those who worked for, invested in, and rely on the Hartford. I do not give financial planning advice and absolutely do not want to be responsible for yelling fire in a crowded theater, but I am also sensitive to those who are concerned. I know I would be if I was on the other end. So, I have decided to congeal my research into a simple visual, and present it on the blog for all to see. I am presenting the facts as I have found them through my research, and will leave it up to the readers to draw from it that they may. More extensive research is available to those who register (you must register and subscribe, but have the option to choose a free subscription if you desire).

Published in BoomBustBlog

I am a private, entrepreneurial institutional investor with a background in financial engineering, insurance, corporate valuation and real estate. I received an email from a reporter yesterday inquiring into the solvency of insurers, which prompted me to release the my timely subscription content regarding the Hartford Insurance Group to the public. I grabbed a substantial bearish position in the Hartford Insurance Group in early October, and released a timely actionable intelligence note on October seventeenth, followed up by a significant amount of research. Kudos and big ups go out to my research team for doing a phenomenal job crystallizing my strategy.HIG has joined, or is close to joining the increasingly growing 200%+ return on cash investment club.

hig.jpg

Published in BoomBustBlog

This report is a few days old, and the shares of HIG have spiked
significant since the comments of the CEO apparently have eased the
concerns of somebody. Therefore, please be aware that the share price
quoted in the report is nearly half what the current share price is.
That being said, any paying subscribers interested in my take on this
company can feel free to download the appropriate reports.


For
those who are not paying subscribers, I'll include this tidbit from the
professional subscription report (which goes in depth and significant
detail in illustrating exactly what the issues are with HIG).


Shrinking shareholder's equity is threatening solvency; the insurer likely to seek further capital infusion


The
margin between the tangible general account assets and general account
liabilities of the company is rapidly contracting. With the tangible
general account assets (general account assets excluding equities held
for trading which pertain to Japanese variable interest annuities,
goodwill, DAC and deferred taxes) at $109.7 bn and the general account
liabilities (general account liabilities excluding policyholder funds
and benefits payable on Japanese variable interest annuities) at $111.2
bn, the margin slipped to negative $1.5 bn as of September 2008 against
the postive $2.0 bn in June 2008 and $5.7 bn in December 2007. The
contraction in this margin accelerated in the first three quarters of
2008 owing to a significant erosion of the fair value of the
investments.

Published in BoomBustBlog
Saturday, 01 November 2008 02:00

Insurance sector update, update

I've been gone a day or two. As I have hinted earlier, my full time job is father/husband/son, and my parents just had their 42nd anniversary, yesterday was Halloween, and wifey's birthday is today. I've been a bit preoccupied. Hopefully, my subscribers have been placated by the prescient performance of the timely insurance update. There is more to come.

As was indicated in the last two udpates, Hartford Insurance Group is in realized loss hell (and unrealized loss puragatory). They have more problems coming down the pike as well. I should have a full blown forensice report for professional subscribers next week some time. In the mean time I will leave you with this.

The financial services industry (at least the portion that uses its balance sheet to generate revenues) is a vey incestuous beast. If one catches VD, a half a dozen must visit the clinic - Lehman Brothers being case in point.

Published in BoomBustBlog