Yesterday I commented on the folly of promising big money to throw at a myriad variety of highly indebted nation without a central authority to enforce the structural change needed to actually cure the problems that created the need for the monies in the first place. See The EU Has Set Up An Oppurtunistic Entry Point for Shorts Instead of Expressly Offering a Solution to the Pan-European Sovereign Debt Crisis! and What We Know About the Pan European Bailout Thus Far. The primary flaw, by far, that I perceive in this most grand of grand bailout schemes is that it is just that - a bailout, not a solution. Methinks the market is about to call the EU on their bluff pretty much along the same lines that I espoused above. For those subscribers who follow my belief that the ECB and EU leaders are making one of the largest policy blunders of modern times, this may be an opportunity to set up a short position that makes the Lehman Brothers' debacle look like a day rally. All subscribers are welcome to download our latest Euro Bank Sovereign Debt Exposure Preview. A more verbose summary will be released for pro and institutional subscribers shortly. Reference the following articles in this early morning edition of Bloomberg:
Anybody who has been following for the last fiscal quarter or so (or has seen my Spanish bank work in 2009) knows that I believe that the EMU as it stood in 2009 would probably be non-existent by the end of 2010. All of the pundits who proclaimed that the European debt crisis was over with the mere declaration that Greece may receive some additional debt either were abjectly lying or truly didn't understand the gravity of the situation. To be honest, there are a lot (and I mean a whole lot) of data points, angles and contingencies to grasp thus it is not necessarily easy. Then again, isn't that what these market professionals get paid for.
Very early in the year, I virtually guaranteed that the Greek banks would fall, or at least have to be rescued (a 2nd time) before they fell. I practically promised it. In the news today...
Lagarde to discuss Greece support with banks: French Finance Minister Christine Lagarde will meet with bank leaders on Wednesday to discuss how its banks could participate in the Greek rescue package. Lagarde told the French parliament the country's banks will reiterate their support for the rescue process on Wednesday but she said tomorrow's meeting could lead to them taking on a more active role, along the lines of what German banks have done. French banks have so far not been asked by the government to participate directly in the Greek rescue package, two sources in France's banking sector said earlier on Tuesday. They have only been asked to maintain their exposure to Greece and have agreed to do this, the sources said. "Nothing beyond this has been requested by the government," one of the sources told Reuters. France has overall the highest exposure to Greek debt, with about $75.2 billion worth of assets in total, according to Bank of International data as at end-2009. Germany's top banks and insurers offered support on Tuesday mainly by keeping open credit lines to banks and by agreeing not to sell Greek bonds for the duration of a wider IMF-led bailout. Germany's Finance Minister Wolfgang Schaeuble said that German financial firms had agreed to buy bonds issued by state controlled bank KfW as a way to help finance the bailout. Deutsche Bank Chief Executive Josef Ackermann said it was important to extinguish the fire in Greece and pledged to help the country. Ackermann is helping to coordinate efforts by the private sector to support the Greek rescue package.
I suggest one references my post, How Greece Killed Its Own Banks!.
The Wall Street Compensation issue is being made much more complex than it needs to be. Let's take Goldman for example. - Bloomberg: Self-Evaluations Seen as New Source of Concern After Goldman Sachs Hearing
April 28 (Bloomberg) -- Wall Street employers, long concerned that their staff’s e-mails may be used against them, now have another thing to worry about: the self-evaluations employees fill out.
At a 10-hour congressional hearing yesterday, senators pointed to Goldman Sachs Group Inc. employees’ self-evaluations, which included boasts about making “extraordinary profits” by betting against the subprime market, as proof the company misled investors into a mortgage-linked investment. [If they made "extraordinary profits", then the transactions shouldn't be considered an economic hedge]
The fact that self-evaluations were used against Goldman employees could keep companies from being open in their own review process, hampering feedback that makes evaluations productive, said Gary Hayes, co-founder of management consulting firm Hayes Brunswick & Partners in New York. [Or they could just be more open with their clients, and wouldn't have to worry about being secretive in their self reviews - duhh!]
“That’s fairly chilling,” Hayes said. “It would make many senior executives very cautious, if not guarded in what they say in evaluations. You’ll hinder the kind of dialogue that’s necessary.” Such evaluations are “a standard part of corporate America,” he said. [Again, why doesn't this guy say "It would make many senior executives very cautious, if not guarded in how they treat their clients"!!!!????? It's as if it is expected that GS will screw their clients, and the hurdle is how to conduct a review without getting busted for it!]
Senators used e-mails and self-evaluations produced by Goldman, which is being sued by the U.S. Securities and Exchange Commission, to attack the firm. Goldman denies the charges.
I have warned my readers about following myths and legends versus reality and facts several times in the past, particularly as it applies to Goldman Sachs and what I have coined "Name Brand Investing". Very recent developments from Senator Kaufman of Delaware will be putting the spit-shined patina of Wall Street's most powerful bank to the test. Here is a link to the speech that the esteemed Senator from Delaware (yes, the most corporate friendly state in this country). A few excerpts to liven up your morning...
Mr. President, last Thursday, the bankruptcy examiner for Lehman Brothers Holdings Inc. released a 2,200 page report about the demise of the firm which included riveting detail on the firm’s accounting practices. That report has put in sharp relief what many of us have expected all along: that fraud and potential criminal conduct were at the heart of the financial crisis.
... Only further investigation will determine whether the individuals involved can be indicted and convicted of criminal wrongdoing.
Let's get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying "How the hell did he know that?"
- Is this the Breaking of the Bear? It wasn't hard to see Bear Stearns collapsing 3 month before bankruptcy. Why didn't our regulators see what I saw?
- As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades It wasn't hard to see that nearly all of these 32 banks would be facing the threat of insolvency. Why didn't our regulators see what I saw?
- The Commercial Real Estate Crash Cometh, and I know who is leading the way! It wasn't hard to see that commercial real estate was ready to implode and that GGP was about to collapse under its own weight. Why didn't our regulators see what I saw?
- Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide Countrywide and Washington Mutual's collapse were visible AT LEAST a year in advance!
- The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk - Beware what lies beneath! 'Nuff said...
- ... and even Lehman Brothers: Is Lehman a Lying Lemming?
The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain't so and I'm not going to lie to you. The truth of the matter is I sniffed these incongruencies out because 2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating "This time is different", "There is a new math" (as if there was something wrong with the old math), etc. and so on and associated bullshit.
The Financial Times has published an Op-Ed piece I penned on bonuses in the banking industry. Enjoy!
A bank employee recently asked me: "As a trader, my bonus is derived directly from my profit and loss, which is accrued over the quarter and kept in a separate account. It does not go into the firm's bottom line and then back out to me. Also, like most traders, I accrue 2% of my gains in a loss provision account in case I have a major write-down in the year. My bonus is 10% of my profit for the year. If I make $50m for the year my bonus is $5m. What does my bonus have to do with the mortgage-backed securities [MBS] trader who is sitting on losses? Did I or did I not show a profit of $40m to the firm's bottom line?"
Main Street is absolutely flabbergasted that bankers do not understand the core issues of this bonus question. Allow me to clearly outline the problem and propose a solution. Assuming this trader works for a prominent US bank that received a bailout, he is not entitled to a $5m bonus if he made $50m for the year. Why not? Because he generated that 10% return from taxpayer capital, not firm capital. For example, Goldman Sachs would have had the drawdown from purgatory had it not been rescued from a $30bn credit default swap deal with AIG.
Let's assume AIG would have negotiated a 40% payout to Goldman Sachs, which is realistic given that litigation with an insolvent company that had many more contingent and direct claims would probably have resulted in a lower net receipt to Goldman. This alone would have resulted in a hole of about $7.8bn for the bank.
Some of the top secret AIG bailout info is out. Guess who's at the heart of it, making money by creating straight trash, selling it to its clients then buying insurance to benefit from its inevitable crash?
I have been warning about Goldman's ability to sell trash to its clients
for some time now.
This is not a short post, for it is packed with a lot of supporting information, analysis and data. If you are looking for quippy paragraph, soundbyte or quick headline to get an overview of,,, well whatever, click here, or better yet, click here. For everyone else who may be looking for deeper investigative analysis and the unbridled TRUTH for a change, please continue on.
First a little background info. Goldman is supremely overvalued in my opinion. It is even more so considering much of its profit is generated solely from the raping of its clients. I say this holding absolutely no ill will towards Goldman. This is strictly factual. Let's walk through the evidence, of profit potential, valuation, and the stuff behind some of the value drivers in their business model, like brokerage and investment banking...
In continuing the rant on the possibility of the US entering a stagflationary environment, as was hinted by Alcoa's quarterly report (see "Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?"), I have decided to graphically illustrate the historically most successful inflation hedges. Click graphic below to enlarge.
For those "gold bugs" who have never ran the numbers, gold offers less inflation protection than your house does. The same goes for WTI crude and probably most other categories of oil.
Note to my subscribers and readers for the year end and the new year.
I will be the first to admit that 2009 was a disappointing year for my investment results. Although the first quarter of the year was the strongest that I ever had during the Asset Securitization Crisis, and I clearly saw the trend reversal coming at the end of the quarter (actually almost to the day since I put a comment out on BoomBustBlog that I was preparing for a very aggressive bear rally, but that granularity in timing was more luck than anything else), I significantly underestimated the length, breadth and depth of the trend reversal. I want all to be clear that I am not making excuses, but the probably reason for the lack of clarity was rampant and clandestine intervention in the equity and debt markets (moe on this later). There has been a lot of chatter in around the web about my performance, and although I am very disappointed at how the year turned out, I would like to put this into perspective. I am not a daytrader nor a swing trader and my research is not aimed in those directions. My stated investment horizon for the research on the blog is 3 to 18 months with a likely targeted range of action of 6 to 9 months. Since I rely primarily on the fundamentals and can't control markets and stock prices, I need to wait for my thesis to pan out.This entails taking some volatility at times. Of course I am the first to admit that the most aggressive rally in 70 years may be a bit much, but one must be able to ride the ups and downs of irrational market moves until one's thesis plays and your are proven right or wrong.This recent bear market rally was probably a once in a lifetime event, and in the case that it was not, we now have the tools to deal with it on an invested basis - even as a pure fundamental investor.
Click any graphic to enlarge.
Note: A formatting error cut this article short yesterday. Please take the time to read it in its entirety.
Maybe, it just may be the total collapse in credibility and trust in the US Federal Reserve and Treasury. I mean, come on. Have you hear the bullsh1t that they spouted this morning? Quick Bloomberg scan:
... Fed Chairman Ben S. Bernanke said yesterday it’s “not obvious” there’sa bubble in the US and Yellen said today the US stock market is not overvalued. ...
... low interest rates don’t appear to be fueling another asset-price bubble in US ... Kohn’s remarks echoed comments made by Fed Chairman Ben S. Bernanke in an ...
... regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.
I would love to see Bernanke's personal investment accounts, just to note how many long bonds and equities he is piling into over the last few months. Yeah, price misalignent is "not obvious", equity market is not over priced, there is no bubble. They are right, the market is not over priced, it is priced for idiots, fools and the follow me crowd. I remember when Bank of America (the company that just bought the two largest, and the two sickest financial entities around at than time - Countrywide and Merrill Lynch, with no government subsidy on Countrywide) announced the price of a follow on equity offering at about $12 and its share price shot up to around $14 or so (going from memory, so don't hold me to the penny). You know things are bad when the company's own CEO says he doesn't know why the hell his stock is shooting up. For those who are not financial types, all anybody who wanted to buy $14 BAC stock had to do was to purchase it $12 directly from the underwriter. Whoever it was that was buying the stock was "literally" throwing the money away!