It has been hard for true fundamental investors to reliably make money since the bear market rally of this generation (c. 2nd quarter 2009) due to the fact that global market central planners world wide (read as central bankers and their cohorts) have been distorting price discovery and realistic valuations to an unprecedented extent. Counting the money just doesn't work when no one truly respects and valued money but you. In essence, central bankers world wide (starting here in the US, with our central bank) have disrupted and disrespected the economic circle of life. For a detailed explanation of this happenstance, see Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!! But..... Those very same central bankers/central planners have to juggle many, too many, balls in order to keep this charade afloat. Yes, sink this charade will - and when it does, it will probably look very ugly. Now, its a timing game. As the title inquires...
What Happens When That Juggler Gets Clumsy?
In continuing with the conversation with Eurocalypse concerning ALM and liquidity management, a bank that we previously warned about and whom our other resident trader set up a lovely trade on - Deutsche Bank - reported a couple of days ago. This is what it looks like: Associated Press: Deutsche Bank writes down Greek bonds in Q2
FRANKFURT, Germany -- Deutsche Bank's second-quarter earnings underperformed market expectations as it wrote down the value of its Greek assets in the wake of last week's agreement to bailout the country for the second time. The euro155 million ($224 million) writedown on bonds issued by Greece was one reason why the bank's earnings faltered.
Those who have been following our European research know that we had several observations on Deutsche Bank. First reference More On Trading with BoomBustBlog Research in which we read through the bank CEO sanskrit and found the translation:
- GERMAN-BANK-CHIEF - AM VERY GLAD THAT WE ARE WITH GREAT CHANCE TO BE COUNTING SIFIs
- GERMAN-BANK-CHIEF - ASSUME THAT INDUSTRY FIRST BEFORE TAXES FROM 16 TO ROE 19VH SEE IS ABOUT THE TIME AGAIN 25VH
- GERMAN-BANK-CHIEF - BY REGULATORY CHANGES WILL RETURN ON THE BANKS GO DOWN TEMPORARILY
- GERMAN-BANK-CHIEF - GREATER EQUITY LOANS ARE NOT FOR ALL EASY TO OBTAIN EUROPEAN BANKS START OF LOWER OUTPUT BASE
- GERMAN-BANK-CHIEF DBKGn.DE ACKERMANN - EQUITY CAPITAL AFTER THE CRISIS IS STILL MORE TO critically important competitive factor, POSITIVE AND NEGATIVE
- GERMAN-BANK-CHIEF DBKGn.DE ACKERMANN - BANKS OF REVENUE FROM OPERATING BUSINESS LIKELY TO REMAIN HUMBLE foreseeable future
- GERMAN-BANK-CHIEF DBKGn.DE ACKERMANN - ROME IS CURRENTLY WITH BANKS AND EU ON PARTICIPATION OF PRIVATE CREDITORS TO GREECE RESCUE DISCUSSED
One might consider this in bad faith as a hidden profit warning. Or what would like to say the Deutsche Bank? I'm short since the 39,50 level. The German bank leaves key support zones straight down. The critical 40 level has not kept the 39 and nobody seems to buy the Pavilion. There are now potential short term losses to be expected in the area of 37.50/38. Under these Levels shares will lost ground to the November support the low of around 36 €.
Shortly thereafter, we posted BoomBustBlog Traders Armed With BoomBustBlog Research Caught ~10% Deutsche Bank Fall, and it went a little something like this:
Deutsche Bank looks downright UGLY! Our new Forensic Analysis/Technical Trade combo called this one out about 2 weeks ago with impressive precission. Kudos to all who contributed.
This is the update (dated 6/29) to the trade setup illustrated above, which I haven't even published yet due to material grammar and translation snafus, but the cat is out of the bag now...
The fact is that Greece is like a smoldering fire. Sometimes Rest, then fire again, and you never really know when the next outbreak comes. This situation is unfortunately still get us some time.
Even New York's new proposal interpreted with some relief. The just enough to avoid the worst and the default is sufficient for today made to continue the tedious summer of consolidation. Again, as long as the S & P 500 above 1,250 and the Dow Jones is the defending 11.900, the technical picture is solid enough. Even the Wall Street optimists surprise with positive approaches. Eight days ago, it was just the opposite. A survey of Intelligence, "CNN Money" is: The number of optimists is increasing. Such surveys are always provided with a question mark, but still.
The banks respond to the new proposals for Basel III surprising positive, not the stock market. The deductions for COMMERZBANK and DEUTSCHE BANK may be an exaggeration, but the technical situation is both hard hit. It looks better with the Americans, according to these rules and regulations for the core capital ratio, all of which are on the safe side. We take this note, but I do not respond to U.S. banks.
COMMERZBANK is not to hold at the moment. € 2.70, of course, are fundamentally extremely low, however: The Greece-positions of around € 2.6 billion in the subsidiary EUROHYPO are in the current situation a mad speculative fears. It can stop each, depending on your taste. It would be good if COMMERZBANK not only keeps silent, but say something constructive. There is nothing worse than uncertainty. COMMERZBANK would announce today that these positions at half Price were sold, representing the market value, then they would have € 1.3 billion actually lost.
And one should expect values to get much worse from here!!!
More precisely, the daughter EUROHYPO. Whether this with, this amount by proposing to the consolidated financial statements is an open question. In any case, would then this disgusting toad swallowed. It is a courage to ask. The GERMAN BANK fighting for every technical resistance. This is all very scarce and an assessment is not possible while also here the Greeks topic the determined mood. Breaks through the price of the 39 € sustainably, everything is up to 36 € open. Then there is the real technical test, because under 36 € there is no resistance more on the inspiration to the actors. Probably not. I expect the continuation of the sideways trend in the range of 36-48 € but the €36 are to fill!
On that note, here is the latest (released yesterday) European bank and sovereign debt exposure research recalculated to show contagion paths: European Bank's Greece exposure
Additional French bank solvency analysis will be out shortly.
Please read this in the expansive context provided by the conversational post with Eurocalypse posted this morning -Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such. Although lengthy, this is a very important post that leads directly into the second of our European bank trade setups based upon BoomBustBlog forensic analysis.
Kudos to BoomBustblogger Glen Bradford (he posted a link on Seeking Alpha, which interestingly enough no longer published my work) for his title idea. Quite apt, if I must say so myself.
Although lengthy, this is a very important post that leads directly into the second of our trade setups based off of BoomBustBlog's fundamental and forensic European bank research (the first was Deutsche Bank, which paid off quite well). Please read through it in its entirety. The next post on this topic will be the actual trade setup itself.
CNBC reports: Italian Banks Slump After Bond Purchase Report
Italian bank shares were sharply lower in Wednesday morning trade after Reuters reported German Finance Minister Wolfgang Schaeuble said the euro zone's rescue fund should only purchase bonds on the secondary market in exceptional circumstances. Euro zone leaders agreed on a second bailout package for Greece last Thursday and said the European Financial Stability Facility (EFSF) bailout mechanism could buy bonds on the secondary market if the European Central bank recommended it do so.
"Even in the future, such purchases should only take place under very strict conditions when the European Central Bank deems there are exceptional circumstances on the financial markets and dangers for financial stability," Reuters quoted Schaueble as saying in a letter it obtained on Wednesday dated July 26. At 9:15 London time, shares in Intesa Sanpaolo were down 6 percent, while shares in Ubi Banca and Unicredit were trading just over 5 percent lower. Banco Popolare shares were off 5 percent.
This comes a week after releasing the very informative subscritpion document Italy Exposure Producing Bank Risk and a series of blog posts leading astute followers to the inevitable conclusion...
- 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
- Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par Using 30x+ Leverage: Bank Collapse is Inevitable!!!
Many are missing the contagion link between these countries and the banks that are domiciled within them. I have put out significant research in an attempt to map the path of said contagion:
- The Inevitability of Another Bank Crisis
- Sovereign Contagion Model - Pro & Institutional
- Sovereign Contagion Model - Retail
The question at hand is, "Can the EFSF outgun the global bond market in the pricing of insolvent nation, publicly traded debt?" I believe the answer is a resounding "NO!". Prices can probably be manipulated in the short term, but medium to longer term the global bond markes (particularly the 17 markets potentially covered by the EFSF) are simply too deep, too wide, too big to be centrally planned! We have seen an attempt at centrally planning large markets in the '90s when Soros broke the British Central Bank, as excerpted from The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!"
The portion about intervening in the secondary public markets brings one to mind of how the UK came to be outside of the EMU, and that is due to their hubristic mindset that they were bigger than the world's largest, deepest and most liquid markets as well in their attempt to manipulate the price of the pound upon (attempted) entry into the EMU. Speculators world wide, exemplified in the media by George Soros, apparently taught them otherwise. He became known as "the Man Who Broke the Bank of England" after he made a reported $1 billion during the 1992 Black Wednesday UK currency crises. Soros correctly speculated that the British government would have to devalue the pound sterling, as per Wikipedia:
Black Wednesday refers to the events of 16 September 1992 when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after they were unable to keep sterling above its agreed lower limit. George Soros, the most high profile of the currency market investors, made over US$1 billion profit by short selling sterling.
So, continuing with the thesis of EU officials attempting to ice skate uphill and consequently fostering a pan-European bank run in the process, I am posting the a followup discussion I had with Eurocalypse (click here for his background), the European CDS trader who is assisting in BoomBustBlog trade setups. This is a follow-up to the release of the subscription document Italy Exposure Producing Bank Risk.
I would like to comment on this as I ran an ALM [asset/liabiility management] department so I'm supposed to know what this is about!! I am not to say there is no "RUN ON THE BANK RISK", there ABSOLUTELY is, but this is not a feature of your featured bank only.
And I absolutely agree. Then again, two wrongs don't make a right, either. The ALM mismatch wasn't a unique feature to Bear Stearns either, but that didn't save them in the end, nor did it save Lehman. I would like to make it clear that the borrow short/invest long problem is truly not unique to our subject bank, but certainly adds to a plethora of issues weaken its position should things pop off. As a matter of fact, the prevalance of ALM mismatches will be the cause of serial bank run, if one were to occur. As a refresher, let's excerpt The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
The subject of our most recent expose on the European banking system has a plethora of problems, including but not limited to excessive PIIGS exposure, NPA growth up the yin-yang, Texas ratios and Eyles test numbers that’ll make you shiver and razor thin provisions. Focusing on the most pertinent and contagious of the issues at hand leads us back to the initial premise of a European bank run. I laid the foundation for said topic discussion last Thursday in "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style" and the fear du jour is a European version of the Lehman Brothers or Bear Stearns style bank run. The aforelinked at explanatory piece is a must read precursor to this illustration of what can only be described as the anatomy of a European bank run - before the fact. Remember how the pieces of the puzzle were perfectly laid together for a Bear Stearns collapse in January of 2008, two months before the bank's actual collapse? Reference "Is this the Breaking of the Bear?" in which Bear Stearns collapse was illustrated in explicit, graphic detail. Lehman Brothers wasn't impossible to see either (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008).
I would also like to make it clear that it is my opinion that the EU leaders who insist on issuing "alleged" bank stress tests that assume its constituency are moronic simply add fuel to the bank run fire. The refusal to test for the concern that the entire bond market has simply feeds uncertainty in lieu of alleviating it, reference Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run.
The "alleged" stress tests did not test for sovereign default and its effect on HTM inventory, which is already priced into the system and which is the primary worry of the markets. Thus, the stress test results are largely irrelevant.
It's as if I have AIDS and I go to the doctor and pass a test for measles... Does that make my multiple partners (counterparties , lenders and customers) more or less comfortable with my condition?
We have run our own numbers and produced alternative, more realistic scenarios including exposure, haircut assumptions and writedowns for individual countries. Specifically, we have applied writedowns on both banking and trading books with the results available in the subscription document The Inevitability of Another Bank Crisis? and well as European Bank's Greece exposure. In essence, after Lehman Brothers collapse, sovereign states appear to deem themselves obligated to bail out their respective insolvent banking systems, thus real stress tests should test both the banks' distressed portfolio carried at unrealistic marks and leverage and the sovereign's ability to aid said banks. Of course, this will be very unpopular from a political perspective because you will get a lot of nasty answers to the questions asked.
Below is a chart excerpted from our most recent work showing the asset/liability funding mismatch of a bank detailed within the report. The actual name of the bank is not at issue here. What is at issue is what situation this bank has found itself in and why it is in said situation after both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM!
Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).
Overnight and on demand funding is at a 72% deficit to liquid assets that can be used to fund said liabilities. This means anything or anyone who can spook these funding sources can literally collapse this bank overnight. In the case of Bear Stearns, it was over the weekend.
Now, back to the Eurocalypse discussion...
If you look at how they constructed this table, their (huge) deposit base under the heading classified as "Dette Envers la Clientèle" shows they are indeed funding long term assets with their retail deposits. There is regulatory ground for it and practical experience. I cant remember the exact rules, but by experience (ie. everytime, as long as there is no run) the retail deposits are stable, and typically in an ALM.
And therein lies the rub. Liquidity is always available, until it is needed. Ask Bear and Lehman, and Merrill, and Goldman, and Morgan Stanley, and... Well, you get the picture. I explained how this happened not once, but several times in the US just 3 years ago in "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":
The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors. In cases of the perception of extreme risk, these counterparties are prone to pull funding or request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!
I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence. The risk of a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable. A more important concern appears to be the threat of short-term liquidity and funding difficulties for European banks stemming from said haircuts. This is the one thing that holds the entire European banking sector hostage, yet it is also the one thing that the Europeans refuse to stress test for (twice), thus removing any remaining shred of credibility from European bank stress tests. As I have stated many time before, Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run!
The biggest European banks receive an average of US$64bn funding through the U.S. money market, money market that is quite gun shy of bank collapse, and for good reason. Signs of excess stress perceived in the US combined with the conservative nature of US money market funds (post-Lehman debacle) may very well lead to a US led run on these banks. If the panic doesn’t stem from the US, it could come (or arguably is coming), from the other side of the pond. The Telegraph reports: UK banks abandon eurozone over Greek default fears
UK banks have pulled billions of pounds of funding from the euro zone as fears grow about the impact of a “Lehman-style” event connected to a Greek default.
Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to euro zone banks, raising the prospect of a new credit crunch for the European banking system.
Standard Chartered is understood to have withdrawn tens of billions of pounds from the euro zone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.
Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal.
... One source said it was “inevitable” that British banks would look to minimise their potential losses in the event the euro zone crisis were to get worse. “Everyone wants to ensure that they are not badly affected by the crisis,” said one bank executive.
Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.
Make no mistake - modern day bank runs are now caused by institutions!
And back to the Eurocalypse discussion:
We would make some stress scenarios. suppose deposits for example drop by 30% and look if there is a problem for short term funding,
basically they this would amount to -180bn, they need to be able to sell 180bn assets. There are 180bn of short term assets (less than 1 month)
they can sell, plus they probably can some of their trading book.
And this appears to be a weakness of modeling real life events. You see, by modeling just the effects of a 30% drop in deposits, you are ignoring the real world effect of counterparties pulling liquidity in tandem in an effort to minimize exposure -as detailed in the excerpt above. You are also negating the fact that much of the so called "trading book" is being carried on the books at prices that are significantly above what can be fetche in the market, which I illustriously detailed in the blog post Is Another Banking Crisis Inevitable? and whose empirical evidence was laid bare in the accompanying subscription document The Inevitability of Another Bank Crisis. I also went over this in detail at the large European bank, ING, as the keynote speaker at their CRE valuation conference in Amsterdam...
It looks like the subject bank is using 170bn of its deposits to fund its trading activities (this is the gap between asset and liabilities for undetermined maturities) and the rest of it to fund longer term assets (loans bonds etc...)
I'm not so shocked at the numbers, but its true European banks, and French banks in particular make money taking this liquidity risk. Basel III is designed to reduce this gap, at least up to 1 year through the DSCR ratio (implemented in 2018, they can still change their mind about it, because this is a big game changer for the industry forcing banks to have much more stable funding, which is difficult for non-retail banks and force them to reduce their assets or change them to "liquid" govt bonds, or secure more funding, but as all banks need to do the same, long term funding cost is going up, and it can't be known if there is sufficient demand for it... We're probably speaking trillions of euros.
This gap risk IS managed, even though the assumptions may prove one day too optimistic...
I prefer the term "unrealistic" as exemplified above...
Actually ALM managers have bad incentives to take risks, as traders... One way to do it, is assume deposits are stable. in practice, with the Fractional Reserve System, and Monetary aggregates growing together with (eligible or not) Total Oustanding Debt, Deposits have grown in rapidly in most financial institutions, boosting confidence among bankers to buy assets (they may think they're good because they get more deposits, but thats just a consequence of the monetary system !)
On that note, reference Fractional Reserve is Not the Problem...
By the way, the term "stable" refers to assigning a maturity to retail deposits. you have a client, he's not going to withdraw his money tomorrow. Maybe 10% tomorrow, and then 10% the 1st year, 10% of what is left the 2nd year etc.... basically every bank uses its own assumptions, but I would guess in the typical French bank, the average duration of a retail deposit would range between 4 to 10 years.
Using these assumptions, the ALM managers "hedges" accordingly the interest risk and liquidity risk. "Fair value hedge accounting" permits to receive fixed on swaps or buy bonds against those deposits without suffering the adverse Mark to Market of the hedge. which does make economic sense as long as the deposits stays indeed for (4 to 10) years on average.
Herein lies the rub. I went to pains to describe how patently unrealisiic the logic above is in a panic. Correlation comes close to 100% as depositors move in unison, motivated by the same impetus, and that is "to get the fuck out of dodge". In "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style", as referenced:
This phenomena essentially discredits the thinking at large and currently in practice that “since individual expenditure needs are largely uncorrelated, by the law of large numbers” banks should expect few withdrawals on any one day. The fact of the matter is that in times of severe distress, particularly stemming from solvency issues (read directly as the Pan-European Sovereign Debt Crisis, and Greece, et. al. in particular), the exact opposite is the case. Individual depositor and counterparty actions are actually HIGHLY correlated and tend to move in tandem, particularly when that move is out of the target fiat bank. They tend to take heed to the saying “He who panics first, panics best!"
Asset/liability mismatch can, at the margin nearly assure a Lehman-style fiasco in the case of an impetus that sparks herding mentality, whether it be among depositors/savers or institutional counterparties.
Back to Eurocaplyse:
French banks are among the ones most guity of playing this game, and they are among the ones pushing for accounting rules which are being revised, to still allow for this accounting procedure (typically American accountants were traditionally against this).
All in All, according to their "model" the subsctiption docs subject bank probably thinks they are fine, and in a liquidity crisis, they could stand up for several months, which is the time for a miracle, or rather the govt. and CBs to intervene. Of note 2010 and 2009 numbers for their gap look similar which is a clue for me that these are the numbers they are targetting.
That doesnt prevent systemic risk of course, and something worse than the worst scenario (and we know it can happen, of course), and given the subject bank owns subsidiaries in suspect PIIGS states, if there is a panic in any one of them, they could be identified as a risky bank (or on the contrary being seen by those PIIGS banking customers [as compared to from 100% local banks] as a "safer" bank and actually benefit from it ?)
Regarding the ALM gap, i think it would be very instructive to make comparisons within banks. it could be more telling than just marvelling at the subject bank's numbers. I would like to see whether the subject bank is more or less aggressive in its ALM exposure than other European banks or not.
We have done this, although the opaque reporting makes it labor intensive. Next up, we will be coming out with plenty of charts and trade setups for the subject bank.
Disclosure: Eurocalypse has no positions in the stocks referenced above, doesnt trade CDS, and doesnt intend to take positions in those financial instruments"
"Eurocalypse actually owns a small quantity of Italian (inflation-linked) bonds at its own risk. Please do your own due diligence and trade at your own risk
Research in Motion has been one of the most successful tech shorts of this blog's history (thus far). We first recommended a short last year and reiterated it in the fist quarter of this year. Reference:
This is a snapshot of RIMM as of the writing of this article...
As you can see, the results have been spectacular, particular if well timed puts have been put to use. In January I posted:
I personally see a clear leader in mobile computing becoming visible in 2012. Using options, a minimum of 2012 expiration OTM and ATM contracts can be purchase at the most optimistic break points demarcated by the model above after being populated with assumptions you feel most valid. I will have a proprietary BoomBustBlog option model available for download to paying subscribers by the end of next week, at which time we will revisit the analysis above.
A 50% drop in price later... On that note, Bloomberg reports: RIM to Cut 2,000 Jobs as BlackBerry Loses Share to IPhone
The reductions, across all functions, are part of a plan to “focus on areas that offer the highest growth opportunities,” RIM said today in a statement. The job cuts will leave the Waterloo, Ontario-based company with about 17,000 employees.
RIM predicted last month that sales this quarter may drop for the first time in nine years. The company is losing market share in the U.S. to the iPhone and handsets running Google Inc.’s Android software, in part because it hasn’t introduced a major new BlackBerry model since August. Cheaper Google phones are also making inroads in Latin America, Asia and Europe, threatening the popularity of less expensive BlackBerry models like the Curve.
... RIM fell 85 cents, or 3.1 percent, to $27.06 at 10:26 a.m. New York time in Nasdaq Stock Market trading. The stock had dropped 52 percent this year before today.
Page 5 of our Research in Motion forensic analysis (released in the summer of 2010 - RIMM Forensic Analysis and Valuation – Professional & Institutional or RIMM Forensic Analysis and Valuation – Retail) clearly stated that while we expected RIMM’s handset shipments to rise as a result of a rapidly expanding smartphone market, it will lose considerable market share....
As it turns out, it appears that we were erred slightly to the optimistic side with an 18% market share estimate for 2010. By the end of the 3rd quarter, RIM has fallen to 15.3% according to information calculated from IDC, and its decent has accelerated far faster than even we (the bears) have anticipated – a full 350 basis points for the quarter. This is 6x the decent of last quarter and 7 x the decent of the quarter before that. It is quite safe to assume that they will be materially below this point at year end (the data that we crunch is lagged by a quarter). This market share loss is most assuredly caused by the outsized growth of Android, which I will demonstrate in a minute. Below are charts generated from an updated version of the subscriber document Smartphone Market Model – Blog Download Version:
As you can see above, for the full year of 2010 RIM has trailed smartphone market penetration growth and that trail has increased each and every quarter with the rate of decent rapidly increasing.
RIM’s share price has benefited from an increasing equity market as well as the announcement of new products. The Torch, although possessive of redeeming new qualities, is essentially still a generation behind Apple and 1.5 generations behind Android. See RIM Smart Phone Market Share, RIP?…Research in Motion is following the EXACT path we at BoomBustBlog had laid out for it since the 3rd quarter of 2010.
This story is far from over, primarily because we are just entering the chapter in which Android does what it does best, and that is compress margins. Due to the unique open source component of the Androd business model, it actually slashes prices and spikes the technology bar both simultaneously and quite rapidly. So rapidly that not only is it without precedent, but literally tramples all over Moore's law.
Moore's law describes a long-term trend in the history of computing hardware. The number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years. This trend has continued for more than half a century and is expected to continue until 2015 or 2020 or later.
The capabilities of many digital electronic devices are strongly linked to Moore's law: processing speed, memory capacity, sensors and even the number and size of pixels in digital cameras. All of these are improving at (roughly) exponential rates as well (see Other formulations and similar laws). This exponential improvement has dramatically enhanced the impact of digital electronics in nearly every segment of the world economy. Moore's law describes a driving force of technological and social change in the late 20th and early 21st centuries.
The law is named after Intel co-founder Gordon E. Moore, who described the trend in his 1965 paper. The paper noted that the number of components in integrated circuits had doubled every year from the invention of the integrated circuit in 1958 until 1965 and predicted that the trend would continue "for at least ten years". His prediction has proved to be uncannily accurate, in part because the law is now used in the semiconductor industry to guide long-term planning and to set targets for research and development.
It is safe to say that Android chops the half-time to obselence implied by Moore's law by at least 50%, with a doubling of capabilities happening annually, and arguably even every two quarters. This has not gone unnoticed by those who are paying attention. The truly remarkable feat is that prices are simultaneously dropping towards zero out of pocket cost to the consumer. How does RIMM compete with that? Well, the same way all of Android's other competitos will if Android isn't significantly slowed down - again from Bloomberg's article:
“Thorsten, with his Siemens background, is known as somebody who is exceptionally operationally efficient,” Shah said. “That’s a positive for the upcoming margin pressure that is likely.”
You see, Bloomberg didn't go into detail regarding this phenomena, but luckily BoomBustBlog did more than just a little detail on the margin compression thesis, and for good reason. This will be the theme that will drive this industry to produce unprecendented functionality for the retail consumer and entperprise alike while simultanesouly putting those who can't compete at light speed with decreasing margins out back to the wood shed, metaphorically speaking, of course:
Android’s Disruptive Advance: Technology Refresh Cycles Previously Measured In Years Are Now Measured By Weeks? Wednesday, March 23rd, 2011
The Tablet Pricing Wars Have Commenced, Targeting Apple’s iPad 2 Which Is Not Even For Sale Yet… Monday, March 7th, 2011
Those that chose to follow this short recommendation had plenty of tools to assist in the decision making:
- RIMM Forensic Analysis and Valuation – Professional & Institutional: a 45 page analysis of RIMM, it’s strengths, weaknesses and prospects and probably the most thorough valuation that I know of concerning this company.
- RIMM Forensic Analysis and Valuation – Retail: a 10 page abridged version for my retail clients, containing all that you need to know including the market scenario valuation analysis (see Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion for more information).
- Smartphone Market Model – Blog Download Version: the interactive smart phone market analysis and penetration model, includes data for HTC, Apple, Nokia and Research in Motion
- RIMM Multivariate Valuation Mode: the big Kahuna, for professional and institutional subscribers only. Please review the following overview of the model.
RIM Model Assumptions
RIM Model Factors Driving Growth
After populating the assumptions tab, jump to the “Factors Driving Growth” tab and choose the player whose market share and penetration data you want to populate the valuation model for the sake of comparison. The choices are “Nokia”, “RIMM”, “Apple”, “HTC” and “Others”. This tab is annual data only.
RIM Model Quarterly Factors (driving growth)
On the next tab, you can do the same as the previous (this tab is quarterly growth). Each of the growth tabs has charts that are print and presentation quality. Just be sure to tell everyone where you got thesis, data and analysis from .
Other tabs in the model…
RIM Model Income Statement
RIM Model Device Market Analysis
RIM Model Revenue Analysis
RIM Model Device Revenues
Valuation and Multivariate Scenario Output
Final output is RIMM’s valuation using our analytics and your assumptions as input in the assumption tab above, as well as a multivariate scenario analysis showing changes in quite a number of variables (assuming all others remain the same) and their effects on your base valuation, as well as the percentage upside/downside from the current price.
In continuing the discussion of trade setups and related strategies started with As Requested By Our Constituency: Trade Setups Based on BoomBustBlog Research, and continued in …
I bring you the next installation in the discussion of trading the Pan-European Sovereign Debt Crisis. The annotated email chain is actually quite long so it will be continuously broken up. I will also include the comments of the European equity trader in later posts. Any accomplished tradeer who wishes to join the crowdsourced debate is more than welcome to throw their hat into the ring.
Eurocalypse, the European CDS trader
At this stage i have a remark/question in your « the inevitability of a banking crisis »(dated when ?) you were waaay too optimistic (!!) seeing 172bn of losses related to PIIGS. We may be over that only on Greece exposure!
Reggie Middleton, the American Realist
For those that don't read me regularly, Eurocalypse is referring to my work below...
Attention subscribers: A new subscription document is ready for download The Inevitability of Another Bank Crisis
Banks NPAs to total loans
Source: IMF, Boombust research and analytics
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.
We have also presented an alternative scenario since we believe that EU stress test had failed not only to include banks HTM books but also the loss estimates were highly optimistic, as has much of the economic and financial forecasting that has come from the EU. It is highly recommended that readers review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for a detailed view of a long pattern of unrealistically optimistic forecasting. Here's and example...
In an alternative scenario, we have assumed weighted average haircut of 10% (exposure, haircut assumptions and writedowns for individual countries are presented in detail in the tables below) and have applied writedowns on both banking and trading books with the results available in the subscription document The Inevitability of Another Bank Crisis? Individual and more explicit haircut calculations are available for the following nations for professional and institutional subscribers:
- Greek Default Restructuring Scenario Analysis
- Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
- Portugal’s Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy – Professional Analysis
- The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers
- Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
Eurocalypse, the European CDS trader
Certainly, if we compare the fiscal trajectory of the Eurozone as a whole with the US, the US is not really on a better path. Austerity has started in Europe. US seems still in full spending spree.
Reggie Middleton, the American Realist
I disagree, in a way. The US situation is truly FUBAR, indeed, but it is a slightly differently FUBAR'd than the EU. The US still:
- is the world's reserve currency,
- has the world's pre-eminent military and technological forces (which go hand-in-hand with number 1, hence is essentially the same thing if history is any indicator),
- has a much more contiguos economy than the EU,
- although is prone to lie about its book keeping situation, is definitely not as detached from reality as the EU states. Reference:
- Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!,
- LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?
Then there is the commercial real estate issue looming in the EU. The two strongest economies in the EU are being looked to pull the rest of the EU out of the fire through bailouts, but the ugly truth is that they are tied to the proflicate (and not so profligate, but still hampered) states by the waist. Outside of the (borderline recessionary) EU being their major trading partner(s), they have pretty much bankrolled CRE lending throughout the entire trading block. Those loans are due to be rolled over, and they are due to be rolled over on property that has materially declined in value - leaving a significant equity gap. We're talking close to 70% to 80% of CRE loans coming due in the next year and a half on properties that have significant oversupply, weakening rents, recesionary economies, sovereign debt issues and staunch austerity plans, and generally devalued properties leaving many a loan underwater. Haircuts, anyone? Inflation Misconceptions Hide A Downright U-G-L-Y Real Estate Landscape! - Part 1
You see, there is a highly reflexive relationship between overvalued sovereign debt held on a higly leveraged basis on EU bank balance sheets and CRE loans coming due on devalued and underwater real estate. The sovereign debt crisis is straining lending capacity at the same time that excess lending capacity is needed to fund underwater property loans that need to be rolled over. No one is discussing the real estate portion of the EU banking crisis to be, but it is very real!
I have delved deeply into this topic during my lectures in Amsterdam. Reference my featured article in Property EU, one of Europes leading real estate publicatios
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.
Now, the US is in a similar situation, but we have managed to fudge the books to such an extent that some of our CRE investors have actually risen in price. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
With the dearth of synthetic profit streams to support accounting earnings (as banks did in their supposed recover of 2009/10), Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks. I believe, due to major policy errors in dealing with our crash, that we will see our own lost decade(s) in the US...
There are those who believe US CRE is on a bullish trend, but I believe they have been mislead by accounting and regulatory shenanigans. Commercial real estate rarely thrives in high unemployment, increasing interest rates, stagflationary, sluggish economic times. Then again, maybe I'm wrong... Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate
The US CRE situation is overshadowed (and possibly rightfully so) by the popular realization that Reggie was accurate in his 2007 assertions that we are in a residential real estate depression, further complicating any truly organica economic recovery - at least until true price discovery is allowed by the financial markets central planning cartel of government and central bankers. Reference:
I have received several requests for trading recommendations and advanced setups. Since I am not a trader (or at least not one of the best traders) I have refrained from offering such. Well, now we have several members of the community that are stepping up to offer their expertise and opinion. I will be posting their combined contributions as Eurocalypse. Here is some information on the credit trader below.
...As I said I have traded mostly on the fixed income markets. What I mean by that is:
- government bonds, euro-area, (or before it existed, peseta, lira, french franc,...), Sweden, Denmark, UK, US, Japan
- short term interest futures in those markets Euribor, Euro$ etc...
- bond futures & options in those markets (tnotes, gilts, bunds, btps, jgb.
- swaptions & caps & floors
- inflation linked securities (US TIPS, Euro-CPI linked, etc.
- G7 FX & options
I did not trade credit, or mortgages. I did trade on CDS on sovereign names (the stuff which is blowing up as you predicted :-) )
In my best years, i managed more than 10 billion euros equivalent of bonds (and the corresponding derivatives)
I was doing 'proprietary' trading, in contrast with 'flow trading" - flow trading is quoting to clients (pension funds, banks, insurers, hedge funds...), and basically stuffing and frontrunning them - or in contrast with exotic derivatives book where you stuff the client selling complex products he doesn't understand and he cannot price by himself ;-)
On average, I made for the firm more than 30M euros a year. Return on asset not that big! Those were the years where you had to be leveraged to make money due to low vol! I was doing mostly "relative value", picking pennies with "hedged" strategies. So not a big trader like Brevan Howard and co, but I was not in the minor league either. I must say im quite proud of having stuffed a few times the likes of GS, JPM, DB and co....
And I'm proud of you to, my friend!
I also ran the asset-liability department of a French bank so I saw also the other side of the business with all the accounting shenanigans, and I know how banking CEOs run their company...
I have to say the curious thing seen from far away from the screens, is that banks seem tight to sovereigns, but in the end, they should share the same fate and I tend to believe if we have big failures, we will have a domino effect, even affecting the strongest banks. The whole system is f$cked up!
I actually disagree slightly here. The banks are literally quite leveraged into the sovereigns (the European banks even more so, but they're all leveraged enough to blow up 3x over if a serious credit event occurs). Thus, the banks will not share the same fate as the sovereigns, but a fate much worse!!! The reason why anyone was even able to be convinced to buy the banks was because Bernanke and his minions funneled trillions of dollars of rescue efforts into the banks, gouged from public coffers. This is the reason why the sovereigns are in the state that they are now - reference Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe:
Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns
This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.
There are no additional trillions to give to the banks,thus its relatively safe to say that some of these banks may have to actually trade on fundamentals some day - and that could get very ugly.
The trade which should make the most sense, is to short financials vs the indexes, but even if there should be much more to come, (in real crisis, all banking shares should converge towards 0) it must have moved so much, I guess technicals are key, if not, risk of being short squeezed...
If/when short selling of financials becomes forbidden [like in 2008 as this blog was racking up deep triple digit gains], you can still do it by buying...
Yes, we will be having some very interesting stuff coming up this summer. I have responded to the requests to dig deeper into the US and European banks and I will try to deliver the first of the refreshes by the end of the week.
I will be adding additional commentary throughout the day as well as a look at at European bank from an equity trader's perspectve.
As you can see from the chart below, it appears as if the gravity of fundamentals is slowly returning to the markets. Linkedin is trading at nearly half of its IPO high, reference "LinkedIn Shares Debut With A Near 100% Pop In Price, Annualized PE Over 1,000!!! Next Question, Whose Gonna Write Me Those Bubble Puts???" Many believed this to be too high, but BoomBustBlog attempted to meticulously demonstrate how high is too high.
In the post "A Realistic Forensic Valuation of LinkedIn – There Ain’t No Surprises Here…" of Monday, May 23rd, 2011 we offered a full valuation of LNKD, and as you can see we were right on the money - as excerpted:
You see, fundamental analysis still works - and it works well. Double to triple your money simply buy counting the numbers... Click the graphic below to enlarge. This is at least the 2nd time my subscribers have dipped into this well to pull out bearish honey instead of water!
As excerpted from Research in Motion Drops 10% After Hours, Precisely As We Warned Two Months Ago – MARGIN COMPRESSION!!! Thursday, March 24th, 2011 (I also warned again in April - Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute! Friday, April 29th, 2011):
On January 20th, I posted "Blackberries Lost More Market Share Than We Bearishly Anticipated While RIMM’s Share Price Spikes: Is It Time To Revisit the Bear Thesis?". I turned bearish on RIM last summer and made some money on its dip back then. Shortly afterward, its shares did the QE thing, despite the fact Android started sucking up market share everywhere while simultaneously squeezing margins like orange juice. As excerpted from the aforementioned post:
We have updated our mobile OS and handset manufacturer market share model and will make it available to subscribers as an online app by next week. In the meantime, let’s review some of the findings – vendor by vendor. First up is Research in Motion. This was a profitable short in 2010, with the share price hitting our targets within 100 pennies. Since then, the stock has risen appreciably. Let’s take a look to see if the rise was justified.
Page 5 of our Research in Motion forensic analysis (released in the summer of 2010 - RIMM Forensic Analysis and Valuation – Professional & Institutional or RIMM Forensic Analysis and Valuation – Retail) clearly stated that while we expected RIMM’s handset shipments to rise as a result of a rapidly expanding smartphone market, it will lose considerable market share....
Last week I posed the question, "Is The Evidence For An Apple Margin Collapse Now Incontrovertible?". I received some interesting, albeit rather passionate answers, many of which failed to address the core core issue, which is can Apple compete with the rapidly rising technological bar that is simultaneously facing rapidly dropping prices without suffering a hit to margins. Phrased differently, can Apple's brand allow it to charge materially more for less product in the face of over 400 competing devices connected by the fastest growing and most diverse ecosystem in the business? Sounds like a tough sell, doesn't it? This is not about who is better, who is worse, who will win, and who will lose. It is about margins. Apple may not eve be in the race if it doesn't run, and to run may very well mean margin compression.
Well, if margin compression wasn't "Incontrovertible" last week, it certainly should be this week. Let's walk through margin compression as a result of excessive competition step-by-step, starting by solidifying the thesis behind the recommended updates to the Apple Margin Compression Thesis & Google's valuation model. Subscribers, adjust your BoomBustBlog Valuation Models Accordingly:
- Apple – Competition and Cost Structure Forensic Analysis and accompanying Apple iPhone Profit Margin Scenario Analysis Model - suggested use with Apple Earnings Guidance Analysis
- Google Final Report and the accompanying Google Valuation Model (pro/institutional subscribers)
Apple's iPhone launch on Verizon did a lot to boost market share, reference Apple chews away at Nokia, posts best smartphone share growth in Q1 and Android increases smart phone market leadership with 35% share. It's success was enough to push it to 2nd place in terms of US handset vendors and 3rd place globally. Despite this success, it is still losing considerable ground to Google's Android, reference Even With Apple’s Successful Launch On Verizon, Google Continues To Increase It’s Lead In The Smarthphone Space Friday, May 6th, 2011, and Google’s Android Market Share Explodes As It Expands Its Reach To Cars, Toys, Home Automation, Music & Movies – All In The Cloud Wednesday, May 11th, 2011 Verizon’s Earnings Confirm The Economic Impact of Android vs iPhone In Regards To Carrier Profitability Thursday, April 21st, 2011.
Many don't realize why the amassing of significant dominance in market share makes such a difference. Basically, its the reason why Apple has historically been able to charge a premium (although not currently due to Android - high end Android phones are either at par or slightly more expensive than the iPhone yet Android's market share increases at en ever more rapid pace). Apple's key advantage lies in the network effect stemming from majority market share (embedded in its iTunes and app store ecosystems). Wikipedia on the Network Effect:
Summary: I called it the coming RE Depression in 2007! I put MY money where my mouth was and sold off all of my investment real estate. I put YOUR money where my mouth was and shorted all that had to do with real estate (REITs, banks, builders, insurers). I called almost every major bank collapse months in advance. I warned the .gov bubble blowing does not = organic economic recovery. Now I'm saying we need to, and will, continue what's left of the crash of 2009, with ample global company. There will be no RE recovery this year, and there will be a crash. OK, you heard it here!
First, let's go through the headlines for the day then proceed to breadcrumb trail that clearly led us to where we are now and where we will ultimately end (oh yeah, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011)
Commercial Real Estate
U.S. commercial property prices fell to a post-recession low in March as sales of financially distressed assets weighed on the market, according to Moody’s Investors Service.
The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement today.
The national index has fallen for four straight months as sales of distressed properties hurt real estate values. Investor demand is strongest for well-leased buildings in such major markets as New York and Washington as vacancy rates decline and the economy grows.
The index “continues to bounce along the bottom as a large share of distressed transactions preclude a meaningful recovery of overall market prices,” Tad Philipp, Moody’s director of commercial real estate research, said in the statement. “Indeed, the post-peak low in price has been reached in the same period as a post-peak high in distressed transactions has been recorded.”
So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported. Prices of properties of $10 million or more have risen 23 percent since their July 2009 low, according to a separate report issued today.
No Recovery Signals
The overall index shows “no sign of recovery,” Moody’s said.
Almost a third of all March transactions measured by Moody’s were considered distressed, meaning the properties’ owners faced foreclosure, had difficulty covering their mortgage payments or experienced other financial problems. It was the largest proportion of distressed property sales in the history of the index, Moody’s said.
For all of those wondering how CRE can be doing so bad while REITs are doing so well, well I explained it in explicit detail several times in the past. Once we eliminate rampant fraud and bring back mark to market, all will be good again...
Technology Bubbliciousness Is Back With A Vengeance!
LinkedIn (LNKD) went public with an absolutely unrealistic valuation that illustrates the dangers of ZIRP policy that has carried on for too long. The marketing machinations of investment banks combined with a total lack of respect for risk and the cost of capital has allowed such to happen – and we all know how this is going to end!
In 2010 LinkedIn generated $15m of PAT (profit after taxes) as quoted by the popular financial media. But that’s PAT. What the media and pop media readers are forgetting is what’s available to common share holders, you know the guys holding that stuff trading on the exchanges. LinkedIn has total redeemable convertible preferred stock of 10.8m (4m Series C and 6.8m series D, Convertible preferred stock of 38m (17.2m series A and 17.5m Series B). After accounting $11m for undistributed earnings allocated to preferred stockholders the PAT attributable to common share holders was $3.4m. For those perpetual pessimists who are not well versed in calculating 5 digit PEs… The math already denotes LinkedIn trading at a PE of… well... I’m actually damn near embarrassed to print this… 29,000x.