Financial, Real Estate, Stock Markets Trends and Current Affairs

Here's proof, pulled off of the St. Loius Fed's site, and espoused in front of the actual entrance to the NY Fed.

More on the matter...

Bernanke's Lying Through His Teeth and Not A Single Pundit/Analyst/Banker Has Called Him On It!!!

Is The New US Consumer Consumption Bubble Primed To Pop? Yes, There's A Bubble!!!

Recent and related research

Below are three companies that probably will not do well even with Bernanke's machinations. When and if Bernanke fails, look out below.... Click here to subscriber!

Retailer Preliminary Analysis 08/03/2012

Consumer Discretionary Company Bear Note 09/13/2012

Consumer Discretionary Bear Note 2 _Aug 22_Final new!09/11/2012

No, I didn't even bother to listen to the Bernanke speech! It was a waste of perfectly good hot air. The MSM is all abuzz with the bullshit. A quick Google search for Fed QE3 reveals the cackle...

• Fed to launch QE3 by buying mortgage securities MarketWatch‎ - WASHINGTON (MarketWatch) — The Federal Reserve, worried that improvement in the unemployment rate has stalled, announced a third ...
• Fed Undertakes QE3 With $40 Billion Monthly MBS Purchases www.bloomberg.com/ – The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month ...
• Federal Reserve launches QE3 - (CNNMoney) -- The Federal Reserve announced plans to unleash more stimulus Thursday, in its third attempt at a controversial ...

• QE3 Decision: Fed Vows To Buy Bonds Until Economy Recovers ... www.forbes.com/.../feds-monetary-policy-decision-bernanke-...

• Fed To Markets: Take Some QE3, There's A Lot More Where That ... www.forbes.com – The Federal Reserve finally did what everyone was expecting: it unleashed a third round of quantitative easing (QE3), extended the Twist and ...
• Federal Reserve announces QE3 — RT  – The Federal Reserve announced Thursday that they will spent $40 billion a month on bond purchases in an effort to kick-start the US economy...

So, this is the scam story, in a nutshell - Bernanke says he will target the mortgage market to reduce unemployment by pledging to buy $40 billion USD of mortgage securities per month until a demonstrable improvement in the labor force materializes. What the F^ck!!!! So, is it just me or does everyone assume that the most common job in the US is MBS trader? Exactly how direct is the mechanism between MBS purchases and employment? Does anyone truly believe (obviously, from the links above, many actually do) that Bernanke can lift employment by buying mortgage securities? 

Okay, all bullshit aside, this is the skinny. The banks are in trouble again. Actually, they've been in trouble since 2007, but the stress seems to be approaching the acute phase again. The housing scam is once again catching up to this nation's lenders and credit gamblers. The pending downturn in the CS index will prove my point, as will the stress emanating from the inevitable break in Europe. Bernanke has come to save this market and its participants by a) buying the stuff that there is still really no market for, and b) announcing that he will do so indefinitely.

Do I sound conspiratorial? Well, mortgage rates are already at record lows, so what the hell is the purpose of trying to push them even lower, and by force at that? Oh yeah, I forgot... To increase employment. Let's not leave all of those MBS traders to fend for themselves in the unemployment line.

This is what I would do if I was Fed Chairman and I was serious about lowering unemployment - Which Bernanke is not!

 I would take the Fed's resources and purchase SBA bonds aimed at pumping cash into the small business sector, not the housing sector  which is still trying overcome the ramifications of the last bubble popping.  You see, the SBA guarantees loans to small businesses, a group which represents the single largest contributor to employment this nation has. $40 billion per month in SBA bond purchases which would be used to guarantee loans to business creating a significant multiplier effect of no less than 5x - 7x ~ around a quarter trillion US dollars per MONTH in direct small business and direct employment stimulus is like sparking a live wire in a vat of gasoline with a semtex lid - at least in terms of the potential explosiveness this would have in terms of invigorating the small business sector, hiring and within a very short order, the spiking of employment. Now, I admite that this would be blowing a new bubble, but Bernanke is trying to do this now with housing finance, no? Now I admit, the process would not be that simple, but its a whole of a lot simpler than what Bernanke is trying now - that is unless he's really not trying to boost employment... Hmmmm!!!!

The argument can't be made that the SBA loans are not that liquid either. I query, how liquid is the MBS market now?

Of course, the old Bernanke put - which has morphed and metastasized, and is now the Bernanke CDO cubed with inverse kickers - has lit a fire under the ass of stocks. As usual, fundamentals and common sense take second seat to momentum gambling and non-sense. When does the math return? When things get real ugly. This is why my team and I have been focusing on the sector that has mistakenly been seen as much stronger than it actually is - the retailers and vendors of consumer discretionary products and services!

Is The New US Consumer Consumption Bubble Primed To Pop? Yes, There's A Bubble!!!

Recent and related research

Below are three companies that probably will not do well even with Bernanke's machinations. When and if Bernanke fails, look out below.... Click here to subscriber!

Consumer Discretionary Company Bear Note 09/13/2012

Consumer Discretionary Bear Note 2 _Aug 22_Final new!09/11/2012

The presidential elections are coming up again. The last 4 years went by very quickly, and as always, we are confronted with BS blown all over the mainstream media. This time (like last time) the focus is on the POTUS and the economy. I fear many lay persons and even some who should know better fail to realize that the president has very little willful control over the economy - at least to the upside. Now, it is possible for a president to wreck the economy. For instance, we had one not too long ago who took it upon himself to start several concurrent wars while cutting taxes at the apex of a cyclical economic peak (aka, bubble about to burst), but that rarely occurs, right?

Generally, the POTUS is either blamed or glorified for things that are largely out of his control. Prominent examples have been:

• Reagan, whose policies actually sucked but rode a cyclical bull to acclaim...
• Clinton, whose policies sucked less, but still rode a cyclical bull to acclaim.
• Carter, the poor bastard... Wrong place at the wrong stagflationary time.
• And last but not least, Obama - there was no way in hell anyone, regardless of who it was other than the almighty God/Buddha/Allah [fill in the blank] himself could have extricated the country from the mess that Bush contributed to.

To be fair, although I would like to say he (as in George Bush Jr.) made the mess, in all actuality he simply was in office when the bubble burst. His greatest crime (other than being the worst president this country has ever seen - and despite the fact that he was re-elected [or re-appointed if you followed that whole hanging chad thing]) was that he exacerbated the effects of the downfall by squandering our resource cushion in unnecessary wars and tax breaks and failed to invest in the entrepreneurial spirit of American small and medium sized businesses, where ALL of the big business (his constituency) actually came from. 

My highly entrepreneurial and uber-cognitive 11 year old son (my older son is and artistic genius wrapped around a true scientist and my young daughter is a legitimate powerhouse and leader - yes, all three of my children are special and yes I am biased :-)) asked me to sit in on his homework assignment of critiquing the presidential candidate speeches. I explained to my boy that a tertiary (if not primary) labor of the POTUS is to pump BS to the masses. Jobs... Schmobs... As clearly articulated in BS At The BLS Leads To Profitable Short Opportunities As Hopium Smokers Get High Off Of Depreciated Dime Bags Of Manipulated Euphoria! Following up on the premise of that article is our next release in the follow of overpriced and over valued retailers. This time around, we get wet... Subscribers, download - Retailer_Final (801.03 kB 2012-09-11 01:30:21)

Now, back to the original premise - Guess what my 11 year old uncovered in the process...

Reggie Middleton on Obama vs Romney Acceptance Speeches

'Nuff said!

CNBC has as a headline “US Shares Seen Higher on Jobs Data Boost”, a very interesting (and rather bullish) take on the state of affairs given what I see as the actual situation. If you recall, I had a much less sanguine perspective last May, as illustrated in US Employment Hopium Smoking Idealists? An interesting contrast to the MSM title above comes from a much smaller publication (Hawaii News Daily) which ran this story a few days ago:

 Did you know that a smaller percentage of Americans are working today than when the last recession supposedly ended?  But you won't hear about this on the mainstream news.  Instead, the mainstream media obsesses over the highly politicized and highly manipulated "unemployment rate".  The media is buzzing about how "163,000 new jobs" were added in July but the unemployment rate went up to "8.254%".  Sadly, those numbers are quite misleading.  According to the Bureau of Labor Statistics, in June 142,415,000 people had jobs in the United States. In July, that number declined to 142,220,000. That means that 195,000 fewer Americans were working in July than in June. But somehow that works out to "163,000 new jobs" in July. “

And another interesting snippet...

... the "employment rate" gives a much clearer picture of what is actually going on in the economy.  The employment to population ratio is a measure of the percentage of working age Americans that actually have jobs.  When it goes up that is good.  When it goes down, that is bad.  In July, the employment to population ratio dropped from 58.6 percent to 58.4 percent.  Overall, the percentage of working age Americans that have jobs has now been under 59 percent for 35 months in a row.

The following is a chart of the employment to population ratio in the United States over the past 10 years....

The gray shaded bar in the chart represents the last recession as defined by the Federal Reserve.  As you can see, the percentage of working age Americans with a job dropped sharply from nearly 63 percent at the start of 2008 to a little above 59 percent when the recession ended.

But the "employment rate" kept on dropping even further.

It finally bottomed out at 58.2 percent in December of 2009.

Since that time, it has stayed very steady.  It has not fallen below 58 percent and it has not risen back above 59 percent.

This is very odd, because after ever other recession since World War II this number has always bounced back strongly.

But this has not happened this time.

In essence, it is starting to look like 4 percent of the working age population of the United States has been removed from the workforce permanently.

The good news in all of this is that things have at least not been getting any worse over the last couple of years.  Even though things have been bad, at least we have had a period of relative stability.

The bright guys over at RGE Monitor see it this way:

In July, the U.S. Bureau of Labor Statistics (BLS) employment report showed payrolls grew by 163,000 after rising by a downward revised figure of 64,000 in June;

This is a stunt designed to create a hopium-induced false sense of euphoria. Let's throw some common sense on this. The Bullshit Labor Statistics report show payrolls grew by 99,000 (yes, that's right! Last months report was revised downward, as it usually is on average). 

May job creation was revised slightly higher. Private payroll rose 172,000 after gaining 73,000 in June, while government payrolls fell 9,000; a piskup in services sector jobs led gains. The household survey showed the unemployment rate at 8.3% as both employment and the labor force dropped, and the broader U-6 unemployment measure increased to 15%...  In late July, initial unemployment claims increased 8,000, while the four-week moving average slightly edged down- in line with the improvement in job creation numbers in the July employment report. However, in July, the Conference Board survey of online job demand showed demand falling by 153,600, after showing modest growth in the second quarter.

So, what's the deal with the general state of the economy? 

U.S. Q2 2012 GDP Growth Falls 25% Amidst the Most Aggressive Fiscal and Monetary Stimulation This Country Has Ever Seen As Durable Goods Expenditure Declines

As per RGE Monitor: According to the advance estimate of Q2 2012 GDP by the U.S. Bureau of Economic Analysis (BEA), q/q growth was at a seasonally adjusted annualized rate (SAAR) of 1.5%, after growing at 2% in Q1 2012. The data show a slowdown in the growth rate of real final sales, to 1.2% q/q after rising 2.4% q/q in Q1 2012. The underlying data show a continued weakening in government spending and substantial deceleration in both business fixed structures and fixed residential investment. The data leave U.S. annual growth in 2011 at 1.8%. Clearly, the painfully slow recovery has been insufficient to heal the labor market.

U.S. Consumers: Confidence Continues to Decline in July; Personal Finances and Job Market View Pessimistic

The Reuters/University of Michigan survey of consumer sentiment index in July declined for the second consecutive month, with the index falling to 72.3 from 73.2 in June, but up from 72.0 in the early-July preliminary survey (its lowest level since December 2011, from 73.2 in June 2012). While sentiment around current conditions improved in the July survey, expectations dipped and consumers’ assessment of the labor market and personal finances were negative. The Conference Board Consumer Confidence Index in June fell further to 62.0 from 64.4 from May, registering a decline in the expectations index and painting a mixed picture about the labor market.

U.S. Consumption: Retail Sales Decline for Third Consecutive Month in June

Nominal retail sales in June showed a stronger 0.5% m/m decline, held lower by motor vehicles and parts, building supplies and gasoline spending, while core retail sales—excluding gasoline, autos and building supplies—dipped 0.1% m/m. 

 And on the topic of retail...

Although most see and are starting to admit that we have never really left the 2008 recession, share prices have been called "Cheap" by many "so-called" financial experts despite the S&P flirting with an all time high and Europe preparing to plunge the world back into a concerted global recession (again). Think about the gigantic swath of the S&P that exhibited negative revenue growth but whose shares still rose on higher earnings. They are being rewarded for bringing LESS money into the door. Combining the increasing weakness of the US consumer with the increasing revenue weakness of the US corporation and the upcoming (nearly guaranteed) defalationary shock out of Europa and near all time highs in the stock markets, and you have a recipe for a put parade, no???!!!

I had the BoomBustBlog team carry out a scan of consumer discretionary companies in 'Retail' industries. We started with 102 stocks and whittled them down to 17 based on revenue, operating profit and net profit trend. We also looked at their P/E mutliple, business model and a couple of other more subjective aspects such as analyst expecatation and YTD performance. The same was performed for consumer discretionary companies in the 'Consumer Durable' category. We have one very strong candidate for the consumer/retail short of the year crown, and subscribers (click here to subscribe) can download the preliminary here  Preliminary Analysis
(Consumer Discretionary).

In the meantime and in between time, here are examples of companies that made it to the shortlist but failed to get the crown!

Abercrombie & Fitch and Aeropostale. Two mall stocks and you know how I feel about those malls as Europe pops...

image001

By the way, these are two popular mall stores, and you know how I feel about those malls as Europe pops...

PEI 2nd Quarter Earnings Review - Why Aren't Analysts Asking The Hard, Or Even The Obvious Questions???

Much Of The Developed World Prints Today, But Where's The Wealth? Real Value Of Risk Assets Continue To Plunge!

Follow me:

Yesterday, I posted The Difference Between Money and Wealth and Why You Can Easily Print One But Must Actually Create The Other, and as if on cue, global inkjet nozzles 'round the world started whizzing - to wit:

• ECB Cuts Rate to Record Low of 0.75%, Deposit to Zero and Bank of England Prints Money Again to Boost Economy
• China Cuts Rates for Second Time in Month and China Set to Post Worst Growth Since 2008 Crisis
• BOE Restarts QE Amid Euro Crisis

Why such rampant printing? The whole world's afraid Europe's impending implosion will engulf global economies. They very well shoud be, this was quite evident 3 years ago (Pan-European sovereign debt crisis) and the can kicking is nearing the end of its useful cycle... ECB's Draghi: We See Now a Weakening of Growth in Whole Euro Area

Here's the secret that BoomBustBlog subscribers know yet seems to be lost on much of the European powers that be: cutting rates and printing will absolutely NOT prevent the nuclear winter in Real Assets. Since loans behind real assets are anywhere between a vast chunk and the majority of bank loans, when this thing goes the European banking system goes with it. This will manifest itself stateside (see sidebox), but the Europeans will get hit harder, at least initially... The reason? Well, it doesn't really matter how low interest rates are - if banks don't lend, borrows will not gain access to capital. Banks are too weak and skittish to lend despite "so-called" record profits, billions in bonuses and compensation, and trillions in bailouts. I repeat, and I repeat again, the only solution is to let the insolvent fail.

Reference the quite informative post from which the graphics below were excerpted: Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE

Slide21Slide21

image035

 So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

• •   Debt Analysis, Blog Subscriber Edition
  •  Preliminary Download

image040image040 

dddwwnnmmn

image045 

Fastforward to today, and NIEUWE STEEN INVESTMENTS N.V. - NSI (one of our shortlisted REIT) suffered the most due to revaluation of their Dutch office portfolio. It therefore witnessed 26% decline in last 4 months.

NSI

NSI is simply a microcosm of what's to come for many larger real asset investors. I have warned that the Dutch, with what many consider to be a strong and relatively stable economy, was not immune to the European contagion, reference Are The Ultra Conservative Dutch Immune To Pan-European Economic Contagion...

Many lay persons are misled by terms such as money printing. This misdirection is easily understood and stems from a basic misunderstanding of what money is, versus actual economic value. Let's assume we have a pie called the EU (or US?), with a 1 trillion euros of economic value. This is the European economic pie. The EU get's in trouble and the banks start to run out of money. Now, the fact of the matter is that those same banks failed to make incremental gains to their actual economic value (true profit) and everyone who's paying attention knows it, hence they faced a problem getting funding. So, they go crying to the central bank, who basically printed euros through various mechanisms in order to push new and additional little pieces of digital paper throughout the system. This is what the layperson sees as money appearing out of nowhere at the behest of the financial bailout gods of the governmental powers that be.

The problem with this viewpoint is that the money appeared out of nowhere, but said money was not backed by actual economic capital. Hence more euros (or dollars) are available in the system, but each of those euros/dollars are simply worth that much less.

This is not economic progress boys and girls. What we need to move forward is to bake bigger pies, not cut the existing and steadily shrinking economic pies into more pieces!!!

Economic pie 

Today's lead story on Bloomberg and the primary theme throughout the financial MSM is Merkel’s Isolation Deepens As Draghi Criticizes Strategy. This is general pressure to force Merkel to succumb to extreme short term thinking that will most assuredely bring the EU to its knees and potentially end the hegemony of what use to be the European empire - that is unless... You know.... This time is different! Yes, these are strong words, strong words are necessry for a dire situation. Let's consder this a massive economic changing of the guard, shall we. And as such, these occurrences portend the potential for MASSIVE speculative investment gains as those financial bastions of faux capitalism come toppling down amidst massive short positiions that the majority simply didn't have the foresight, temerity (or balls) to impliement and hold on to. At the end of this article, I will review FIRE sector (see Reggie Middleton Sets CNBC on FIRE!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set and Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!) entities that I feel are primed to pop as this plays out, yet are not priced accordingly.

On Thursday, 29 September 2011 I penned Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again, wherein I queried:

"If I were able to show in this article that it really ISN'T different this time, would it change any decision maker's path or actions? We all know the answer to that question. Time to get those outlier event short positions ready, it's going to be a rough ride!!! A complete recap of recent events..."

This is a very important post, for it will lay out the outline of the impetus behind the 450+% gains I achieced in 2008/9. As queried in the afore-linked article, "So, at what point do we ever learn the basic lesson that "You can't solve an indebted nation's debt problems with more debt"?" 

The original "Sophisticated Ignorance" post was made in response to Germany being lauded for voting to nearly double the size of the then largest EU bailout fund ever...  

German lawmakers approved by a wide margin legislation to boost the scope and size of the euro zone's rescue fund, in a major step toward tackling the bloc's sovereign-debt crisis.

Lawmakers passed the reform of the European Financial Stability Facility with 523 'yes' votes, while 85 lawmakers voted 'no' and three abstained. The vote was seen as a test of Chancellor Angela Merkel's center-right coalition.

All 17 euro-zone governments have to approve the expansion, which will boost the fund’s lending capacity to €440 billion ($595.94 billion) from €250 billion and expand its powers to allow it to extend credit lines to banks and buy bonds on the secondary market.

To conitnue to quote from "Sophisticated Ignorance"...

This was the problem that I had with Paulson's original TARP idea. It just won't work because it doesn't solve the problem. Instead, it attempts to conceal the problem in fashion that pretends it never existed. Let's walk through this so a 5 year old can understand it.

Of course EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts (this is rather a trick question, since the soveriegn states simply cannot afford to bailout their banks any more than a 100 lbs man can lift a 400lbs man). The fact of the matter at hand is that they simply can't afford to bail them out. The banking system is just too big. 

image015.png

As BoomBustBlog's above average prescience (see Pan-European sovereign debt crisis) and Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly have clearly demonstrated, the source of the sovereigns debt problems is related DIRECTLY to the attempt to bailout insolvent banks, taking private sector losses upon public balance sheets, and eventually bankrupting the public state while doing nothing to fix the problems of the private banks, and ulitimately witnessing the private banks fail anyway.

I have predicted FIRE sector (including banks) failure at a commendable rate (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall

Streets Best of the Best?). It's not rocket science, though. It's simply (and actually quite simple, since my 10 year old can do it) math, coupled with a pliable understanding of human nature couped in grasp of history. Listen, it was the (attempted) bailing out of the banking system that got these countries in this situation to begin with. Bailing out the banks just two years later??? Do you really thing that will help the sovereign debt situation or hurt it? If the bailout goes through, you eat the small losses (relative to the big gains that BoomBustBlog delivered subscribers) and roll your gains directly into bearish positions on the bailing sovereigns. It's really just that simple. Don't believe me, let's look at history, and remember that that is Germany being referenced in the graphic below, G-E-R-M-A-N-Y!!!

image022

On that note and after a quick education on how this time is no diffeent than any other time in the past 800 years, let's revisist today's MSM headline, ala Bloomberg... 

picsay-1338542900

Merkel’s Isolation Deepens As Draghi Criticizes Strategy 

German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.

Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.

Calling himself a devotee of German-style budgetary rigor, Monti told a Brussels conference yesterday that Merkel’s vision of a stable economy “risks being undermined because of lack of promptness in setting up the necessary instruments to limit the contagion.”

And therein lies the rub. You see, creating a direct conduit to zombie banks from teh ECB and bailout mechanisms will not limit contagion, it will materially exacerbate it by allowing the financial pathogens direct access to the mothership - the ECB! Look at the history of the western world for over 800 years. THE BAD BANK BAILOUT IDEALOGY SIMPLY HAS NOT WORKED, EVER!!!

Financial markets offered a snapshot of Europe’s stresses after more than two years of crisis, with the euro close to its weakest in two years against the dollar. German two-year note yields fell below zero today as investors paid for shelter from the market mayhem afflicting Italy and Spain.

“Countries that are at the core of the system and which have had the huge merit of instilling the culture of stability to the European Union in the first place, most notably Germany, should really reflect deeply but quickly,” Monti said via video link to the Brussels conference. “Europe should really accelerate the efforts, as the European Commission is doing, in order to limit the contagion.”

Oh yeah, I've commented on this in the past as well. What happens to a net export nation's economy when all of its export partners are in recession, depression, war and socio-political unrest while the banking system unfolds around them? The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

As Germany goes, so does the insurance industry's magically levitating FI porfolio. You see, German gains offset periphery losses. What happens when everyone realizes Gemany may be in the penthouse suite, but still resides in the same overindebted roach motel?

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  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

If you ddin't put your short on Generali back in 2010 when I first brought it to subscriber's attention, then it's too late now. It's not too late to jump on our latest insurance industry subject, though. The last forensic report was centered around an insurer - see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! and Our Next Forensic Analysis Subject Is In The Insurance Industry. The actual report is available here:

•  Insurance short candidate report_122511 - Professional/Institutional edition
•  Insurance short candidate report_122511 -Retail edition

Bank runs are invevitable! 

As excerpted from our professional series  Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008

Yes, European bank runs are inevitable, but the causes of the bank runs are not. That's the problem. Instead of addressing the root causes of the bank runs, EU decision makers opt to throw more paper money into a gaping furnace to be burned as fast as it can be shoveled. 

Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional), read the balance of this article for perspective, then populate the assumptions and inputs with what you feel is realistic. I'm sure you will come up with conclusions similar to ours. Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)

image014

A detailed and accurate picture of what is happening...

1. Now That European Bank Run Contagion Has Started Skipping Across That Big Pond... US Bank Risk Stands Woefully Underappreciated!!!
2. The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download
3. BNP Bust Up: Yet Another Reason Why BNP Paribas Is Still Ripe For Implosion!
4. Most Headlines Now Show French Bank Run Has Started, And It's Happening Just As Our Research Anticipated
5. I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
6. And The European Bank Run Continues...

A step by step tutorial on exactly how it will happen....

• The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
• What Happens When That Juggler Gets Clumsy?
• Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
• The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
• The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
• Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run 
• France, As Most Susceptible To Contagion, Will See Its Banks Suffer
• Observations Of French Markets From A Trader's Perspective
• On Your Mark, Get Set, (Bank) Run! The D…
• ECB As European Lender Of Last Resort = Institutional Purveyor Of A Pan-European Ponzi Scheme

Stacy Summary: We interview Reggie Middleton about a run on French banks. I notice today that Pimco’s El-Erian is also talking about a run on French banks. He must have watched the Keiser Report when it aired from late last night PDT. We know you’re taking our shtick Mr. El-Erian, we’ve got our eye on you!

Go to 13:07 marker in the video, contrast and compare and consider watching the smaller more independent shows for the real scoop every now and then.

For some back ground on the "Kick the Can Triumvirate Three" [BBB Trademark], go to 20:50 in the video and dedicate 5 minutes to it...

My April presentation in Amsterdam as Keynote detailing the inevitable...

Again, I believe the next big thing, for when (not if, but when) European banks blow up, is the reverberation through American banks and how it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

Note: This bank has members of its peer group who have been identified as at risk, but no one has pulled the covers off of this one as of yet. I think I may blow the whistle. It will be a doozy, and a potentially very profitable one at that since nearly 3/4 of it tangible equity is embroiled in a region that looks like it is about to blow up. As I type this, some of the puts have already doubled in price. I will be releasing additional analysis on this bank this weekend for paying subscribers.

•  Contagion Forensic Review - Retail
•  Contagion Forensic Review - Professional

Today's top MSM headline - European Commission Recommends Euro Banking Union:

The euro zone should move toward a banking union and consider recapitalizing its banks using its permanent bailout fund, the European Stability Mechanism, the European Commission said on Wednesday, in remarks that briefly boosted stocksand the euro. 

The European Union's executive arm said in documents laying out recommendations for theeuro [EUR=X  1.2422 (-0.51%)]area that the crisis had slowed the financial integration process and "ambitious steps to accelerate and deepen financial integration may be needed."

"More specifically, a closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a 'banking union' would be an important complement to the current structure of [the Economic and Monetary Union]," the European Commission said in the documents.

"In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM might be envisaged," it added.

Hmmmm... BoomBustBloggers crossed this intellectual Rubicon over 2 years ago. I was explicit in explaining that the bulk of the sovereign nations' debt woes stem from thier feeble and failed attempts to prop up their banking systems. I posted a refresher to this thesis a few weeks ago in So, Can Europe Nationalize All Of Its Troubled Banks? 

In a discussion that I had over at ZeroHedge there came the topic of whether bank runs are possible in Europe. Well, I believe we've already had some devastating one's (ex. Northern Rock) but if one takes the continent only or the EZ in particular, we still have a significant systemic threat. The gist behind the argument is that if the true economic capital is weakened to the point that depositors/creditors/counterparties make a run for it, the sovereign nation in which it is domiciled will simply nationalize it. Hmmm... Let's take a look at how that might work out, as excerpted from Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

Literally years later, the sell side is now chiming in: Banks No Longer 'Float Above Their Countries': Deutsche

Banks' countries of origin have become important again. 

No shit, Sherlock!!!

image015.png

 Most of the developed EU nations don't stand frozen raindrop's chance in hell of bailing out banking systems that are literally multiples of the GDP of the domiciles themselves. 

image009.png

The problems is getting worse over time, not better, as risk, leverage and unrecognized NPAs continue to pack the banking system. 

I warned heavily last year about the connection between overleveraged, garbage laden banks and over-indebteded sovereigns...

Just as in the case of my call on the fall of Bear Stearns (again, I believe I was the only to make such a call so far in advance), this situation consists of something you NEVER hear in the media or investment circles. This is not merely a liquidity crisis of even a solvency crisis. For the first time in recent history, it is BOTH!!! As a matter of fact, it's not just both. There is a another problem that came into play, and it is the direct result of tomfoolery at the hands of the sovereings themselves. The games that they played to assist the banks in hiding thier problems has materially weakened the entire financial system by sowing rampant mistrust. Plain and simple, government endorsed lying has made the entire system afraid to do business with itself. Let's walk through this step by step.

The Liquidity Issue 

From The BoomBustBlog BNP Paribas "Run On The Bank" series...  "As The French Bank Runs...."... Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

image014_copyimage014_copy

image017_copy 

The solvency issues

From the research note to subscribers,  The Inevitability of Another Bank Crisis followed by the free blog posts on the same, see Is Another Banking Crisis Inevitable?

Impact of bank’s banking books on haircuts

EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.

And last but not least...

The credibility crisis, whose sole responsibility lies dead center on the sovereigns themselves...

 BNP_Paribus_First_Thoughts_4_Page_01

You see, as you bend the rules to reporting, you resuce the banks for a day, but doom them for a decade (or in the case of Japan, 2.4 decades!!!). Now, the counterparties simply CANNOT trust each other!

BNP_Paribus_First_Thoughts_4_Page_07

... and why should the counterparties trust each other when all are privvy to the games that they are playing on each other! 

BNP_Paribus_First_Thoughts_4_Page_09

Before government officials start crying innocent, remember the tricks that you youreselves have played to bring use where we are now. In case your memory is failing, simply review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! 

Now, I ask all... How in the world will grouping all of these increasingly unmanageable individual soveriegn problems cure the overall problem. By gathering all of the roaches into a big pile, you don't get less roaches - you just get a big pile of roaches! The bank failures will increase in both speed and intensity as time progresses and the drag will simply engulf the EU as a whole versus engulfing the states individually. At least individually, the better run states will recieve less pressure, and suffer through crossborder and financial contagion and counterparty risk rather than through this pooled method wherein direct pipes of contagion are being engineered to transmit the problems deep within each country. Does it sound like a good idea to you? I have my own ideas, of course....

How To Prevent Bailouts, Bank Runs & Other Fun Things To Do With Your Hard Earned Dollars

Subscribers, see 

BNP Exposures - Professional Subscriber Download Version

BNP Exposures - Retail Subscriber Download Version

BNP Exposures - Free Public Download Version

 French Bank Run Forensic Thoughts - Addendum and Update 

Bloomberg reports Google’s Android Infringed Oracle’s Java, Jury Says:

Google Inc. (GOOG), the largest Web-search provider, infringed copyrights for Oracle Corp. (ORCL)’s technology in developing Android software running on more than 300 million mobile devices, a federal jury said.

The 12-member panel in San Francisco, however, was unable to come to a unanimous verdict on whether Google had made “fair use” of Oracle’s intellectual property.

The decision prevents Oracle from seeking damages for all but nine lines of computer code on Android, out of 15 million total lines, that the jury found were copied from Oracle, U.S. District Judge William Alsup said today. Oracle is seeking $1 billion in damages.

I'm far from an IP lawyer or anything of the sort, but it appears as if this registers as an epic #FAIL for team Oracle!

“There has been zero finding of liability on copyright, the issue of fair use is still in play,” Alsup said after the verdict was read.

Google attorney Robert Van Nest asked Alsup to declare a mistrial, saying the issue of whether it’s liable for infringement is directly linked to the question of whether it was fair use. Alsup said he would consider Google’s request later. He ordered the patent phase of the case to begin.

The decision came in the copyright phase of an eight-week intellectual-property trial that began April 16 and next will shift to Oracle’s claims of patent infringement. A third phase, on damages, will follow the other two.

See also..

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade. 

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

Google Q1-2012 Valuation Summmary 04/20/2012

Google Q1 2011 results 04/18/2011

Google Q3 2010 reveiw 11/08/2010

Google Final Report 10/08/2010

An Analysis and Valuation of Google's Android and AdMob 09/27/2010 

Google Valuation Model 09/21/2010 

 Google's VOIP and Telephony Services 09/16/2010

Google Cloud Based Services

Google TV Analysis

A couple of bits from our archives...

Vulture_Fights_Jackle_in_bubbleBelieve it or not, we actually have a mini-bubble within this bubble crash as vulture investors fight for the scraps disgorged by indebted sovereigns and over-leveraged banks. The time is not ripe just yet and I plan to allow the carrion feeders to price destruct amongst themselves as I await the coming interest rate storm which will truly bring about a once in a lifetime wealth creation opportunity.

Arguably, more millionaire money was made during the Great Depression than at any time in history. Well, if that's true then it looks as if history may be poised to repeat itself. The question is, who will be ready? I will discuss this live on RT's Capital Account show today at 4:30. 

Executive Summary

Asset sales by European sovereign nations, central and private banks have made global investors and speculators scour for cheap assets that have the potential to yield higher than average risk adjusted. However, the search process is not that easy, as sellers are adopting a ‘wait and see’ policy assisted by the European Central Bank’s facilitation of (extremely) cheap financing and liquidity measures. The market now witnesses by too many buyers chasing too few distressed assets. Hence the speculation about future returns has actually caused a mini-bubble in distressed asset prices. Professional subscribers should download the full version 

Asset sale by sovereigns is can be seen in the sale of stakes in government owned infrastructure assets and corporations. However, the approach adopted to dispose of these assets is to make partial sales in tranches in order to participate in any benefits of valuation recovery.

Professional and institutional subscribers should download the full version of this document ( The BoomBustBlog Pan-European Distressed Asset Acquisition Initiative) which outlines investment opportunities in the following nation/banks: UK, Portugal, Italy, Cyprus, Greece, Ireland and Spain.  Our initiative runs the gamut from whole companies and equities, to real estate, infrastructure assets, rare earth and hard tangible assets to IP.

Dispositions by Europeans banks have consisted mostly of foreign assets outside of Europe. Most of these assets had the potential for high returns but are being offered at prices reflecting the perception that future investment performance would be robust. This is why there is so much interest in the private equity and asset management space in scanning for strong deals among those assets. However, the competition among these entities to buy quality assets at reasonable valuations has created a micro bubble of sorts, the type that make profitable vulture investing a very difficult proposition.

Sale of Sovereign Assets

Faced with mounting debt burdens, many European nations are under tremendous pressure to cut fiscal deficits

by establishing and expanding austerity measures and reducing interest expenses. These nations include not only those faced with accelerating debt repayment obligations such as Greece, Italy, Spain, etc., but also some of the relatively better positioned countries – namely the United Kingdom and France.

In a bid to reduce accelerating debt burdens, many of these nations are selling their sovereign assets. We will probably see an even greater pool of sovereign asset sales as the futility of serially forced austerity drives the EU into a deep recession.

Even the Greek situation is just getting started, contrary to popular belief and the upcoming distress is not just CRE and RE assets that are available via fire sale, as clearly outlined two years ago in our subscriber (click here to subscribe) report 

 Greece Public Finances Projections see pages 5 and 6 following... (click to enlarge)

thumb_Greece_public_finances_projections1_Page_05

thumb_Greece_public_finances_projections1_Page_06

As a matter of fact, I warn those who do not subscribe to the BoomBust, this song is far, far from over... Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

Greece_Primary_balance

Greece is virtually guaranteed to re-default, with a structural imbalance that literally forbids the country from being able to service its debt, thereby chasing investors and bondholders with even remote access to a spreadsheet or calculator into the hills… Ne’er to return before the 720^th fortnight!

It’s not just in the periphery either. The core states have some stress coming their way.

Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

Interest rate volatility, at a bare minimum, is a given – with the potential for stagflation being the base case scenario…

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

Interestingly, Chinese corporations are increasingly interested in European assets. There have already been a number of indicators to prove that while China is not as attracted to European sovereign bonds, there’s material interest in buying infrastructure assets; and interest in perceived attractively valued corporations has increased over the recent past. Seeing profitable investment opportunities, private equity firms and global leading funds have also joined in. This has created a kind of rush to search for attractively valued assets that could yield attractive returns in the years ahead. The current scenarios, as such, have been of  a kind wherein too many buyers are chasing too few assets up for sale, particularly in view of the fact that countries like Italy, the United Kingdom and to a lesser extent Spain, can bargain with time - unlike Greece, to wait for fair valuation of assets before their disposal. This has created a market of buyers and sellers wherein prices for distressed assets are not being determined by fundamental valuation, but are influenced by speculation and demand-supply gap. In essence, what we have amidst this bursting of the sovereign credit bubble is a mini-distressed asset bubble.

Professional and institutional subscibers should download the full version of this document ( The BoomBustBlog Pan-European Distressed Asset Acquisition Initiative) which outlines investment opportunities in the following nation/banks: UK, Portigal, Italy, Cyprus, Greece, Ireland and Spain.  Our initiative runs the gamut from whole companies and eqiuities, to real estate, infrastructure assets, rare earth and hard tangible assets to IP.

Any who are interested in hearing more about this initiative can reach me via email or phone. All others are urged to follow me through my various social media assets: