Friday, 07 October 2011 11:17

Subscribers, Look To The Discussion Forums

All paying subscribers, please make more use of our private discussion forums. I've left a not there about my position in Apple to get the discussion started.

Published in BoomBustBlog

I recieved this in the mail from a connected media editor regarding Goldman's very recent investment advisories...

Buy calls for a likely relief rally on earnings (Oct 20th)

We see the potential for a rebound in MS shares on earnings, but the event is not without risk. We believe concerns regarding its European swap and loan exposures appear overdone, as the firm signaled its net exposures to France and the periphery are modest if not immaterial. Uncertainty generated by press reports, as well as difficult markets have driven shares below levels reached when the market was at its March 2009 lows.

Balance sheet strengthened; sell short-dated CDS as fear falls

We believe the recent widening in MS CDS spreads does not reflect actual credit fundamentals. MS appears to have enough capital and liquidity

($182 bn in global liquidity pool + its bank status) to withstand significant market duress. Its 14.6% Tier 1 common ratio is at the high end of the industry. We expect the market focus to remain on European sovereign exposures and liquidity levels, and expect management to discuss this, highlighting the strength of its cash position, hedging and collateral, and progress in reaching its strategic goals, somewhat calming fears.

I responded with the rant below...

A)     Goldman’s investment advice sucks, big time – see Is It Now Common Knowledge That Goldman's Investment Advice Sucks?

B)      The term “net” exposures is misleading and in many cases, make believe. The offsetting hedges used to “alledgedly” hedge the gross exposure were written off of counterparties in the same businesses, trading the same products in the same markets as Morgan. When the feces hits the cooling machine blades, everyone’s liquidity will move in the same direction – downward. There is no true diversity, hence there is no true hedge – only academic hedges written, and traded, in paper form.

a.     I have addressed this ad nauseum on the blog, but the answer to that questions has been put best by Tyler Durden, at ZeroHedge put it best: ...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky. The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

C)    There is evidence that corroborates bullet point “B” in Goldman’s own missive, and I quote “Balance sheet strengthened; sell short-dated CDS as fear falls.” Are we to believe that Goldman is only giving this advice to those clients large enough, liquid enough, solvent enough and adequately diversified from the financial services, asset management and investment industry (this can be read as absolutely no hedge funds, HNW, pension funds and family offices – Yeah, right!) so as to ensure the ability to pay out these CDS in a fat tailed event? Or is Goldman peddling this advice that is not paid for to incentivize clients act in a fashion that Goldman is paid for, ex. Market maker/broker/principal/agent in the CDS market? As Goldman pushes CDS sales onto any willy nilly who’s willing to wright them, Goldman compounds the risks already inherent in a much less than perfect system. Isn’t that why AIG had to be bailed out to the tune of over a fifth a TRILLION US dollars?

D)    As for the last comment “MS appears to have enough capital and liquidity ($182 bn in global liquidity pool + its bank status) to withstand significant market duress. Its 14.6% Tier 1 common ratio is at the high end of the industry. We expect the market focus to remain on European sovereign exposures and liquidity levels, and expect management to discuss this, highlighting the strength of its cash position, hedging and collateral, and progress in reaching its strategic goals, somewhat calming fears.” I direct you to my latest post on what Superheroes may look like in real life –  Hunting the Squid, Part 5: Sometimes You…

Published in BoomBustBlog

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3: 

  1. I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction
  2. Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?"
  3. Reggie Middleton Serves Up Fried Calamari From Raw Squid: Market Perceptions of Real Risk in Goldman Sachs

So, what else can go wrong with the Squid? 

Plenty! In Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?" I included a graphic that illustrated Goldman's raw credit exposure...

So, what is the logical conclusion? More phallic looking charts of blatant, unbridled, and from a realistic perspective, unhedged RISK starring none other than Goldman Sachs...

 image006

And to think, many thought that JPM exposure vs World GDP chart was provocative. I query thee, exactly how will GS put a real workable hedge, a counterparty risk mitigating prophylactic if you will, over that big green stalk that is representative of Total Credit Exposure to Risk Based Capital? Short answer, Goldman may very well be to big for a counterparty condom. If that's truly the case, all of you pretty, brand name Goldman counterparties out there (and yes, there are a lot of y'all - GS really gets around), expect to get burned at the culmination of that French banking party
I've been talking about for the last few quarters. Oh yeah, that perpetually printing clinic also known as the Federal Reserve just might be running a little low on that cheap liquidity antibiotic... Just
giving y'all a heads up ahead of time...

And for those who may not be sure of the significance, please review my presenation as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam, below. After all, for all intents and purposes, Dexia has officially collapsed - [CNBC] France, Belgium Pledge Aid for Struggling Dexia... and its a good chance that it's a matter of time before BNP follows suit - exactly as BoomBustBlog predicted for paying subsccribers way back in July.

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

 The European banking debacle was predicted at the start of 2010, a full year and a half before this has come to a head. If I could have seen it so clearly, why couldn't the banking industry and its regulators?

Now, back to GS, and considering all of the European falllout coming down the pike, of which Goldman is heavily leveraged into, particulary France (say BNP/Dexia/etc.)...

image009

Let's go over exactly how GS is exposed following the logic outlined in the graphic before this series of videos, as excerpted from subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?, pages 3,4 and 5.

GS__Banks_Derivatives_exposure_temp_work_Page_3

GS__Banks_Derivatives_exposure_temp_work_Page_4

GS__Banks_Derivatives_exposure_temp_work_Page_5

Booyah!

There you go. The markets and the media have concentrated on Morgan Stanely because Goldman has successfully hid much of its risk from those who didn't subscribe to BoomBustBlog. Of course, those who did subscribe picked up those puts ridiculosuly cheap, and are/will reap the benefits as the TRUTH goes VIRAL!

Those who wish to jump on the gravy train of our next US bank analysis featuring those susceptible to this malaise can subcribe here and now!

The many ways to reach Reggie Middleton:

  • Follow us on Blogger
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Or simply email me.

Meet Reggie Middleton in person in NYC and London!

I will be hosting two BoomBustBlog meet and greets, for those who aren't too put off by my truthful, fact-based style. One in the next couple of weeks in a swank, pretty people laden lounge in downtown Manhattan, and the other potentially in London in mid-November - both wherein we sit down and chew the fat about things financial, global macro and socio-economic over drinks and heated debate. I will have plenty of gratis BoomBustBlog research there as well. Those who are interested should email the blog Customer Support for info.

Published in BoomBustBlog

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300% to 500% investment gains as well (as of the posting of this message from the beginning of the month)...

image019

Goldman's share price went down to nearly $50 during the 2009 crisis, and I believe things are worse this time around. Of course BoomBustBlogger, you shouldn't be greedy, subscribers. Cash in your fried calamari chips now, or at the very least hedge them - while you have them and prepare for the next opportunity. There will be plenty, rest assured. Remember how Goldman's stock actually trades...

.. I'd like to announce to the release of a blockbuster document describing the true nature of Goldman Sachs, a description that you will find no where else. It's chocked full of many interesting tidbits, and for those who found "The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely" to be an iteresting read, you're gonna just love this! Subscribers can access the document here:

As is customary, I am including free samples for those who don't subscribe, so you can get a taste of the forensic flavor. Here are the first 2 pages of the 19

page professional edition, with illustrative option trade setups soon to follow.

 Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01Goldman_Sachs_Q3_Forensic_Review_Page_01

Is Goldman Sachs stock really the front running, Mo-Mo traders wet dream?

Goldman_Sachs_Q3_Forensic_Review_Page_02Goldman_Sachs_Q3_Forensic_Review_Page_02Goldman_Sachs_Q3_Forensic_Review_Page_02

 

Published in BoomBustBlog
ZeroHedge dutifully reports: Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely." True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 

...

Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

 Let Me Post This Paragraph ONE MORE TIME!

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

Super, Duper, B-I-N-G-0!!! It is so relieving to hear someone else espouse what really should be common damn sense, yet happens to be one of the uncommon commodities to be found on the Isle of Manhattan.

Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010

Mr. Middleton discusses JP Morgan and concentrated bank risk.

Hey, there ain't no concentration risk in US banks, and any blogger with two synapses to spark together should know this...

An Independent Look into JP Morgan.

Click graph to enlarge

 image001.pngimage001.pngimage001.png

Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide.

This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent - particularly if that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent). I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.

  1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
  2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
  3. As the markets climb on top of one big, incestuous pool of concentrated risk...
  4. Any objective review shows that the big banks are simply too big for the safety of this country
  5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish.

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

 

Oh yeah, and while we're at it, this Morgan Stanley thing has been a concern of mine for well over a year now. The interest rate storm is coming, that is unless Europe can maintain historically low rates as several countries default. Then again, they never default, right...

Don't belive me, let's look at history...

image022

image021_copy

image034

So, as I was saying...

Check this out, from "On Morgan Stanley's Latest Quarterly Earnings - More Than Meets the Eye???" Monday, 24 May 2010:

Those who don't subscribe should reference my warnings of the concentration and reliance on FICC revenues (foreign exchange, currencies, and fixed income trading).  Morgan Stanley's exposure to this as well as what I have illustrated in full detail via the  the Pan-European Sovereign Debt Crisis series, has increased materially. As excerpted from "The Next Step in the Bank Implosion Cycle???":

The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png

So, How are Banks Entangled in the Mother of All Carry Trades?

Trading revenues for U.S Commercial banks have witnessed robust growth since 4Q08 on back of higher (although of late declining) bid-ask spreads and fewer write-downs on investment portfolios. According to the Office of the Comptroller of the Currency, commercial banks' reported trading revenues rose to a record $5.2 bn in 2Q09, which is extreme (to say the least) compared to $1.6 bn in 2Q08 and average of $802 mn in past 8 quarters.

bank_trading_revenue.png

High dependency on Forex and interest rate contracts

Continued growth in trading revenues on back of growth in overall derivative contracts, (especially for interest rate and foreign exchange contracts) has raised doubt on the sustainability of revenues over hear at the BoomBustBlog analyst lab. According to the Office of the Comptroller of the Currency, notional amount of derivatives contracts of U.S Commercial banks grew at a CAGR of 20.5% to $203 trillion by 2Q-09 from $87.9 trillion in 2004 with interest rate contracts and foreign exchange contracts comprising a substantial 84.5% and 7.5% of total notional value of derivatives, respectively. Interest rate contracts have grown at a CAGR of 20.1% to $171.9 trillion between 4Q-04 to 2Q-09 while Forex contracts have grown at a CAGR of 13.4% to $15.2 trillion between 4Q-04 to 2Q-09.

In terms of absolute dollar exposure, JP Morgan has the largest exposure towards both Interest rate and Forex contracts with notional value of interest rate contracts at $64.6 trillion and Forex contracts at $6.2 trillion exposing itself to volatile changes in both interest rates and currency movements (non-subscribers should reference An Independent Look into JP Morgan, while subscribers should referenceFile Icon JPM Report (Subscription-only) Final - Professional, and File Icon JPM Forensic Report (Subscription-only) Final- Retail). However, Goldman Sachs with interest rate contracts to total assets at 318.x and Forex contracts to total assets at 11.2x has the largest relative exposure (see Goldman Sachs Q2 2009 Pre-announcement opinion Goldman Sachs Q2 2009 Pre-announcement opinion 2009-07-13 00:08:57 920.92 KbGoldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb, Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb,). As subscribers can see from the afore-linked analysis, Goldman is trading at an extreme premium from a risk adjusted book value perspective.

bank_forex_exposure.png

As a result of a surge in interest rate and Forex contracts, dependency on revenues from these products has increased substantially and has in turn been a source of considerable volatility to total revenues. As of 2Q-09 combined trading revenues (cash and off balance sheet exposure) from Interest rate and Forex for JP Morgan stood at $2.4 trillion, or 9.5% of the total revenues while the same for GS and BAC (subscribers, see BAC Swap exposure_011009 BAC Swap exposure_011009 2009-10-15 01:02:21 279.76 Kb) stood at $(196) million and $433 million, respectively. As can be seen, Goldman's trading teams are not nearly as infallible as urban myth makes them out to be.

bank_ficc_trading_revenue.png

Although JP Morgan's exposure to interest rate contracts has declined to $64.5 trillion as of 2Q09 from $75.2 trillion as of 3Q07, trading revenues from Interest rate contracts (cash and off balance sheet position) have witnessed a significant volatility spike and have increased marginally to $1,512 in 2Q09 compared with $1,496 in 3Q07. Although JPM's Forex exposure has decreased from its peak of $8.2 trillion in 3Q08, at $3.2 trillion in 2Q09 the exposure is still is higher than 3Q07 levels. Even for Bank of America and Citi , the revenues from Interest rate and forex products have been volatile despite a moderate reduction in overall exposure. With top 5 banks having about 97% market share of the total banking industry notional amounts as of June 30, 2009, the revenues from trading activities for these banks are practically guaranteed to be highly volatile in the event of significant market disruption - a disruption aptly described by the esteemed Professor Roubini as a rush to the exit in the "Mother of All Carry Trades" as the largest macro experiment in the history of this country starts to unwind, or even if the participants in this carry trade think it is about to start to unwind.

The table below shows the trend in trading revenues from Interest rate and Forex positions for top banks in U.S.

Click to enlarge...

bank_ficc_exposure.png

Banks exposure to interest rate and foreign exchange contracts

With volatility in currency markets exploding to astounding levels (with average EUR-USD volatility of 16.5% over the past year (September 2008-09) compared to 8.9%  over the previous year), commercial and investment banks trading revenues are expected to remain highly unpredictable. This, coupled with huge Forex and Interest rate derivative exposure for major commercial banks, could trigger a wave of losses in the event of significant market disruptions - or a race to the exit door of this speculative carry trade. Additionally most of these Forex and Interest rate contracts are over-the-contract (OTC) contracts with 96.2% of total derivative contracts being traded as OTC. This means no central clearing, no standardization in contracts, the potential for extreme opacity in pricing, diversity in valuation as well as a dearth of liquidity when it is most needed - at the time when everyone is looking to exit. Goldman Sachs has the largest OTC traded contracts with 98.5% of its derivative contracts traded over the counter. With the 5 largest banks representing 97% of the total banking industry notional amount of derivatives and most of these contracts being traded off exchange, the effectiveness of derivatives as a hedging instrument raises serious questions since most of these banks are counterparty to one another in one very small, very tight circle (see the free article, "As the markets climb on top of one big, incestuous pool of concentrated risk... ").

bank_ficc_otc_exposure_and_currency_volatility.png

The table below compares interest rate contracts and foreign exchange contracts for JPM, GS, Citi, BAC and WFC.

JP Morgan has the largest exposure in terms of notional value with $64,604 trillion of notional value of interest rate contracts and $6,977 trillion of notional value of foreign exchange contracts. In terms of actual risk exposure measured by gross derivative exposure before netting of counterparties, JP Morgan with $1,798 bn of gross derivative receivable, or 21.7x of tangible equity, has the largest gross derivative risk exposure followed by Bank of America ($1,760 bn, or 18.1x). Bank of America with $1,393 bn of gross derivatives relating to interest rate has the highest exposure towards interest rate sensitivity while JP Morgan with $154 bn of Foreign exchange contracts has the highest exposure from currency volatility. We have explored this in forensic detail for subscribers, and have offered a free preview for visitors to the blog: (JPM Public Excerpt of Forensic Analysis SubscriptionJPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is free to download, and File Icon JPM Report (Subscription-only) Final - Professional, orFile Icon JPM Forensic Report (Subscription-only) Final- Retail as well as a free blog article on BAC off balance sheet exposure If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC).

bank_ficc_otc_exposure_jpm.png

bank_ficc_otc_exposure_bac_and_gs.png

Subscribers, see WFC Research Note Sep 2009 WFC Research Note Sep 2009 2009-09-30 13:01:30 281.29 Kb, ~ WFC Off Balance Sheet Exposure WFC Off Balance Sheet Exposure 2009-10-19 04:25:53 258.77 Kb ~ WFC Investment Note 22 May 09 - Retail WFC Investment Note 22 May 09 - Retail 2009-05-27 01:55:50 554.15 Kb ~ WFC Investment Note 22 May 09 - Pro WFC Investment Note 22 May 09 - Pro 2009-05-27 01:56:54 853.53 Kb ~ Wells Fargo ABS Inventory Wells Fargo ABS Inventory 2008-08-30 06:40:27 798.22 Kb to expound on our opinions of Wells Fargo, below.

bank_ficc_otc_exposure_wfc_and_c.png

bank_ficc_otc_exposure_ms.png

Subscribers, see MS Simulated Government Stress Test MS Simulated Government Stress Test 2009-05-05 11:36:25 2.49 Mb and MS Stess Test Model Assumptions and Stress Test Valuation MS Stess Test Model Assumptions and Stress Test Valuation 2009-04-22 07:55:17 339.99 Kb

Published in BoomBustBlog
Friday, 23 September 2011 01:00

Trading Tips Update Sep 22nd to 23rd

Below is the latest from Eurocalypse. Before we get to his opinion, let's remember... This time really is different! Einstein has his definition of inssanity, but Middleton says the definition of a cental banker/planner is more and more borrowing & expecting insolvency this time around. Reggie, logging off (for now).

First I (Eurocalypse, the credit trader) must apologize for not updating for a while despite those very volatile markets. I am currently on a business trip in Europe, totally jet lagged, and with a lot of personal stuff to fix.

Well, Reggie has been totally right in his call for the French Bank Run as the French banks have continued to being hit hard, especially BNP, Socgen and Crédit Agricole. Paribas is looking for capital when their stock is at 23 and they denied they needed any

Last updated: September 22, 2011 9:27 am

BNP Paribas in Mideast push for funding

By Patrick Jenkins in Singapore, Alan Beattie in Washington and Sharlene Goff in London

Yesterday,

French banks could push Europe “into a full-blown banking crisis” that “renders certain another economic recession,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., wrote in a commentary on the Financial Times’ website.

 “There are all the signs of an institutional run on French banks,” he said. “Europe is on the verge of losing control of orderly solutions to its debt crisis.” Credit markets are pricing the chances of French banks defaulting at levels that indicate a “BB” rating, “which is fundamentally inconsistent with sound banking operations,” El-Erian wrote.
 

El-Erian said governments and the European Central Bank must work together to inject capital into banks and to protect depositors.


I will not go into details about all the debt crisis, Reggie is doing a wonderful job, and there are plenty of very good articles in the usual places (ZH, FTAlphaville, just to name a few).

However what I find interesting, and which is not difficult to judge for non-Europeans, is that clearly the mindset of people, including politicians has changed here. Reading French mainstream newspaper like Le Monde, les Echos, le Figaro... there is clearly the realization that things cant go on like this and the prospect of a deeper and systemic crisis is real.

For example, the day before, there was a long debate on French television showing the ex-French minister of Industry (under Sarkozy), far-right Marine Le Pen who is anti-immigrant and anti-Euro, socialist Cahuzac whos heading the finance commitee in the House of Representatives, and an economist.

Well the 2 mainstream parties were of course pro-Euro, and for helping Greece, but the 2 others against, and clearly the Socialist and the Sarkozist were not at ease during the debate.

The economist said yesterday on the prime time evening news that there was no other choice than for the French govt to enter in size in the capital of the banks (magnitude 10bn each...). There is no more taboo in the media to talk about these scenarios.

Yesterday, Le Monde's headline was "Zone Euro Peut-on encore éviter la catastrophe" which can be translated as EuroZone, can we still avoid disaster???

http://www.lemonde.fr/economie/article/2011/09/19/zone-euro-peut-on-encore-eviter-la-catastrophe_1574160_3234.html#ens_id=1268560

Basically everything which was dismissed as fantasy is now gaining credibility with the events unfolding, and one can feel that even governments dont believe their own words or lies, which are perhaps only destined just to calm markets and people, but in reality they feel helpless.

The average French guy grasps that, and believe me they are not very optimistic about the future.

One thing is becoming clear:
The European banks, and the French banks in particular, will be RBSised, with the state the only entity who has the firepower to put money in it. contrarily to 2008 where in France there were just loans (which have been all repaid in full), this time, probably it will be de facto nationalization as the stock is so low, with the dilution effect, if private participation is not enough, the French govt will end up owning 30%-50% or more of the likes of SG BNP CA...There is now public and political pressure from all sides to do that, and the govts wont be as generous as the Dexia deal when they overpaid at the time... the price will be at the current quote, with a discount more likely than a premium paid. However, the market in those stocks should enjoy a huge short term rally (maybe like 50% to 100%)  on the announcement, even if that proves short lived. Even PIIGS would stabilize somewhat as the fear of massive liquidation from the banks subside.

Then, in time, they will merge up the retail banking activities and investment banking activities and try to sell them separately. Good luck with that, with all the new stringent regulation in place, banks will never be able to have so much leverage as before, will fight to earn a dime with govt bonds. Actually it will be "sound" policy (from the new govt imposed management) to buy more govt bonds, even PIIGS if necessary.

At the same time there is a crackdown on bankers, bonuses, and all kind of taxes are going up, including capital gain taxes. There is a strong shift towards this. In France or Germany, the Left parties (Socialists in France, SPD and Green in Germany), which are pro-European are gaining ground. The anti-Euro parties are gaining ground as well, but Left seems a clear favourite right now to win the next elections in France (personally, I think it will be a tight race between the Socialists and the Far Right). It probably means more state intervention, higher taxes, a Federal Europe, repressing the financial sector. I also think they will try to avoid sovereign defaults by all means, including massive ECB monetization (talking trillions of Euros, 10x times the current ECB program..) and FORCING the recapitalized banks to buy all the govt debt.

In such a scenario, Id like to make a remark, if they succeed in that and BTPs yield -say- 2%, a lot of the current issues we are discussing would disappear, that would be the Japanization of Europe. Some will say it will be worse than allowing defaults, and that may or not be true, but it would have definitely a lot of impact on the markets. Food for thought.

On the markets

As I write, after the FED, the stock markets resumed its selloff led up by financials and Europe crashing again. (CAC 2800 -5%) Click to enlarge...

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Also the USD is continuing its massive strenghtening against virtually everything EUR, CHF, CAD, AUD, GBP, but also Asian Currencies are hit very hard too (except the JPY for now). There is a rush for USD and deleveraging is in full mode. Our bearish call for EURUSD to keep its downtrend is a hard winner. I still believe low 1.20s is achievable in a short period of time.

I had recommended earlier to get out of our short on BNP when it was still trading 27, more than 15% up than now, but hey, the stock did trade above 30 thereafter. My motivation was not to say that was THE LOW on BNP. I fully agree with Reggie that the stock could go to 20,15,10 or 0 if/when it gets ugly.The thing is about risk/reward. a 10% move today is only a 5% move compared to when we recommended shorting the stock. Implied vols means a 7% daily move in the stock is noise only (1STD).

And my stance is a bit different from Reggie (we cant agree on everything). I spoke to a clever HF manager yday, and he believes the stock could easily be worth 35 if the govt puts a big ticket in BNP. If the govt puts 10bn in all French banks at the same time, I think its not unwise to believe this will happen in a matter of seconds. BUT, I replied to him as well, waiting for this to happen, we could see the stock down to 20,15,10 and still see 35 behind! Remember 2009. Banks are being squeezed by (USD) liquidity and some kind of run starting.

Its becoming a casino now and insiders have a clear advantage on us. Play at your risk. But a way to minimize risk in a bear market, is to sell bounces, not to try to go long to catch the falling knife, but also not to try to sell with the momentum as there are always vicious squeezes. bear markets trade sideways or up most of the time!

On SP, which was resilient to selloff, well I will admit that yday before the FED I was feeling quite nervous with the positions with a fear of a squeeze, as the Daily Chart wasn't overbought yet. However the 1210-20 level (where we recommended to sell calls to buy put spreads in previous comments) was also the Weekly MA10, which was retested and now were heading logically lower again. Luckily (or not Cool) I'd say, our recommended strikes fit well with the price action.

(More to come soon, sorry for the short post).

Opposing opinion

This is Reggie here, forcing my two cents into this post (the rest of these posts regarding trading strategies and tactics will be subsciption only). I have no doubt the French government along with the other 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. The fact of the matter at hand is that they simply can't afford to bail them out. 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 belive me, let's look at history...

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 So, as I was saying...

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 outout 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)

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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....

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...

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

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.


Published in BoomBustBlog

Eurocalypse is back with his trading recap for tbohe past 24 or so hours...

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Subscribers can continue reading this 6 page summary opinion and analysis hereFile Icon Trading Opinion and Analysis 9-7-2011. For those of you who have not had the opportunity, register for and download the BoomBustBlog Currency Trend Model, along with the accompanying instructional video.

I have made an FX trend model available for all to download. Its 10 mb, containing a lot of data, but you'll definitely get your money's worth. The model is available here: BoomBustBlog Complimentary FX Index model

Published in BoomBustBlog

A more advanced approach to monetizing volatility in the US equity broad markets (at least comparison to the introductory subscription document SPY option strategies in violent down moves) is to trade the SPX options or futures directly. The spreads in the options are MURDER and the volatility has already jumped. If you would have acted when we first indicated, you would be in profit heaven right now. Reference The 830% One Week Armageddon Trade Commentary: Tuesday, 8-9-2011, Continuing The Easily Seen Market Crash?, as excerpted:

All subscribers are welcome to download this full document This is the introductory post to a series of trade setups for European Bank at Risk, complete with sample trade setups. Since then, my Armageddon put trade has come a long way...
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So, the question for all of new comers, Johnny Come latelys, skittish or those following the all will be well because the Fed/ECB are all powerful... Is it too late to set up new, profitable bearish positions? My answer is an unqualified "No" once it comes to our subject banks/countries (althought the risk/return on the French candidate is now diminishing save an all out rout, which is quite possible referencing the post The French Government Creates A Bank Run). We are working on the US contagion bank (reference File Icon Actionable Note on US Bank/ French Bank Run Contagion) and have yet to provide a valuation band, but if things kick off this will throw off considerable alpha. As for the simpler and more generic broader market, it all really depends on whether you belive the "long-only" asset management and sell side analyst crew are more credible than I am (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? for more on this topic). If you feel that I have a point in that the European situation will not end favorably without debt destruction, and said debt destrucion will destroy massive amounts of bank TEC, than the decision is easy. See the link list at the bottom for more on this topic. We also have the real estate problem hiding in both the US and European banking markets. These, in addition to insolvent sovereign states add up to an event worse than post-Lehman. If that's truly the case, then this is a no-brainer, even with nosebleed volatility levels. Take a look at the comparison of where we stand now and where we stood at the Lehman blow up...

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Now, don't get me wrong. The path back to the bottom is fraught with risk, excessive volatility and markets so choppy as to be able to remove your head. Remember the bear market rally of 2009 that lasted until just a few months ago? Even correct calls this week proved to be considerably less profitable due to the heightened vol levels, at least in comparison to my 850% put trade referenced above. See what I did this week in relation to the broad market.

The SPX Oct. 20 1005 puts that I OVERPAID for on the 16th (as a result of getting stopped out of my previous Armageddon trade at 350% return down from 850% due to my ignoring my own advice and not gamma hedging/taking profits), went for $13.81, as was logged in my inventory. Today, with several significant drops in the broad market, these puts are currently bid at 23.70 and asked at 27.8. That's barely a 100% gain, wherein I posted a 550% gain last time around due to purchasing them when volatility was at a discount. Yes, the returns do sound good, but they are also rapidly diminishing... At this point, I would like to make it clear that this is not the market, and these are not the instruments for novice, meek, first time investors with a typical sell side directed brokerage account.

I will be posting more advanced trade setups over the next few weeks for professional and institutional subscribers and will post trading opinion slightly contrary to this piece later on today or tomorrow to give readers and subscribers a broader purview.

My warnings on the most recent banking crisis started in 2010, but here are the most recent rants starting with...

  • a keynote speech in Amsterdam,

Over the next few days I will offer advanced trading techniques to allow BoomBustBlog subscribers to monetize their view via the market, despite the attempts by those who do not see to manipulate free markets. In the mean time I will excerpt portions of the Pro/Institutional report on the French bank most at risk for a run, available for download right now -File Icon Bank Run Liquidity Candidate Forensic Opinion.

 Here are a few screen shots from the free public abridged version (File Icon French Bank Run Forensic Thoughts - pubic preview for Blog), that easily demonstrates the problem with the French banks cannot be solved by banning short selling. The problem is inherent in the banks themselves. Please click to enlarge to printer quality...

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Published in BoomBustBlog

bank_collpse_youtube_video_shotBank Run Candidate Option Trading Update (referencing native exchange pricing, ADRs are available for US investors)
As opined in the subscription trading setup available for download (This is the introductory post to a series of trade setups for European Bank at Risk), there was vacuum below the trading range drawn below the graph on page one (and similar levels for the other bank at risk) so it wasnt surprising we had this -20% (intraday on Tuesday) move in French banks when we broke the support convincingly. We already rallied significantly from the previous lows, because of the short selling ban but banks are clearly f*cked and even the short ban will not help much for recovery, and to the contrary will thoroughly assist prices in their collapse on the way down - reference The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely.

The conservative struck puts will probably end up making in excess of x3. The 40 gamma trade put already made a killing trading around 6 (x4) still, while having plenty of gamma on the way down. Rmember, volatility literally exploded as I update this slighlly dated report at 3:58 am EST, the European markets opened sharply down - led by the banks, of course.

Remember, after EVERY violent move in your favor, but particularly downward, it is YOUR DUTY to take profits and DELTA HEDGE!!!

Relevant material for capturing maximum alpha duing this European banking meltdown:

File Icon French Bank Run Forensic Thoughts - pubic preview for Blog - A freebie, to illustrate what all of you non-subscribers are missing!

The timeline of European bank run research and opinion...

Published in BoomBustBlog

Attention subscribers! The French Bank run has BEGUN! Below is grab of the CDS chart of just one our subject banks as run candidate featured in the subscriber document, Italy Exposure Producing Bank Risk...

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Those who followed the recommendations in the subscriber documentFile Icon This is the introductory post to a series of trade setups for European Bank at Risk should be doing quite well. I am preparing a pro/institutional document for distribuion today, and may relasee the bank's ID to the public if it gets beat up bad enough today. For those that do not subscribe, re-read the following, for I will be writing the next leg of this saga very soon:

  1. Game Over For The European Ponzi Scheme?…
  2. France, As Most Susceptble To Contagion,…
  3. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

  4. What Happens When That Juggler Gets Clumsy?

  5. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such

  6. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year

  7. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

  8. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

  9. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run

  10. Observations Of French Markets From A Trader's Perspective

  11. On Your Mark, Get Set, (Bank) Run! The D…

 Update: As illustrated in my twitter stream from yesterday...

Yesterday was a rough, tumultuous ride. I went from supreme confidence to getting bloodied up. If you remember, the BoomBustBlog traders recommended a grab for profits or a gamma hedge. I decided to go all in to FIRE sector short risk, with just a wide trailing stop to protect me. I was quite comfortable up to the last 40 minutes of the session, wherein it seems as if Bernanke's floor traders swept in to teach smart asses such as my self a valuable lesson. Fortunately, CBs can only affect the markets, they can't control them. All short biased positions flourishing today as that French bank run that I promised looks to be coming to fruition and that 830% One Week Armageddon Trade moves right along... From my Twitter feed:

ReggieMiddleton: Load Up On Bank Puts? Futile Attempt To Make Insolvent Look Solvent By Interefering With Markets, Short Ban Has Started http://bit.ly/plfrwl


ReggieMiddletonReggieMiddleton:All wide trailing stops are still in place, allowing me (barring a violent gap up) a guaranteed 300% on the SPX, although it was 800%.


ReggieMiddletonReggieMiddleton: Nearly all of them are better traders than I, but instead of selling vol, I'm buying further up the ladder of risk at cheaper prices.

Update, my OTM cheaply bid puts are being hit. I'm getting deeper in the [short risk]  game. I will offer mini-reports on the companies in question soon

I went against the grain of both the consens and even the BoomBustBlog traders and loaded up on shorts in lieu of selling off profit and/or hedging. It was a bloody ride, and I was [mentally/emotionally] wiped after the Fed's intervention during the last 40 minutes of trading. Many of my FIRE sector and French bank positions were actually stopped out by the bell, making it difficult to even maintain a position with a semblance of risk management. I actually felt bad... You know regret, even though I moved wtih both the fundamentals and my gut. The following morning, my bold contrarian move was vindicated and we march on.

Time To Load Up On Bank Puts? The Futile…

Time To Load Up On Bank Puts? The Futile Attempt To Make The Insolvent Appear Solvent By Interefering With Market Pricing - Short Ban Has Started

Let's see hear... It didn't work during the last market crash. Actually, I don't think there was ever a time when it DID work. Nevertheless, let's try it anyway. You can't sell insolvent companies short! As anticipated last week in our post Didn't Anyone Notice The Seemingly Irreparable Damage To The Eurozone Last Week? Global Short Ban, Here We Come!...

The 830% One Week Armageddon Trade Comme…

The 830% One Week Armageddon Trade Commentary: Tuesday, 8-9-2011, Continuing The Easily Seen Market Crash?

A timely tidbit from one of contributing BoomBustBlog traders, Eurocalypse, basically an extension of what was expoused last week in Timely Trading Tips For 8/5/2011,which I excerpt: I deeply hope your readers and yourself have benefited from the options strategies, market has been so quick; I dont know if it could be published in time. ...I'd recommend to take partial profits....

Armageddon Put Trade Up Over 500% For Th…

Armageddon Put Trade Up Over 500% For The Week, More Room To Go And More Trades To Set Up!

As those who have been reading me for a while know, I have been crowing about sovereing debt default leading to a European bank collapse, causing global contagion for some time. For those who haven't, reference last years posts in the Pan-Europan Sovereign Debt Crisisseries, or The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run...

Published in BoomBustBlog