Financial, Real Estate, Stock Markets Trends and Current Affairs

For those who are new to my writings and research (those who follow me should skip down to the next section), I have had relatively strong results in ferreting out weak companies which the sell side, the ratings agencies and the media consider "buys", "conviction buys", and AAA/AA credits - only to collapse, be acquired on the cheap or fall into bankruptcy less than a year later. Despite the painful rides necessary to ride out volatile markets that absolutely ignore fundamentals, in the end broke is broke and insolvent businesses tend not to last very long. The list of companies called out as insolvent against the rating agencies/sell side analysts/super smart billionaire investment crowd include:

• Bear Stearns: Is this the Breaking of the Bear? and Lehman Brothers (Is Lehman really a lemming in disguise)
• Washington Mutual and Countrywide
• Hovnanian: Credibility is the Key to Success for a CEO � Hovnanian has Lost that Key: A letter to Mr. Hovnanian
• General Growth Properties: “GGP and the type of investigative analysis you will not get from your brokerage house“ (BoomBustBlog professional subscribers can download the entire GGP composite history in .pdf format)
• MBIA and Ambac:  A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton
• among approximately 50 other similar calls..

These calls provided 5 quarters in a row of phenomenal returns (see performance) until the massive market melt-up of 2009 where we saw fundamentals get thrown down the sewer drain while math and common sense were turned on their respective heads. Well, guess what boys and girls... Methinks math is back and it may be here to stay for a while.

The EU Denies Planning Spain Credit Line with IMF, US, although rumors and leaks are propping in more places that a Swiss damn being plugged with a bunch of slender, fair fingers of those many blond maidens - after all, Greece did not want and was not looking for aid either. That trillion dollar bailout fund was the result of a bunch of politicians with too much money on their hands having absolutely nothing else to do with their time.

Cliff Wachtel gathers much of the evidence:

After 2 German newspapers reported that Spain was seeking aid, now add a Spanish newspaper, El Economista, as the third to report a coming aid package for Spain, after 2 German papers reported this last week. All reports have been denied by the Spanish Government, which is rapidly losing credibility as the reports build. See details here from Bloomberg.

Yesterday, the German newspaper Frankfurter Allgemeine, citing an unnamed source in Berlin, reported that Spain was discussing a bailout with EU officials following last week’s freeze in interbank lending as markets have lost confidence in the Spanish banking sector. Spain denied the report, did Greece had done the same thing earlier, so EU credibility isn’t what it once was. If the allegations prove true, look for A LOT more downside in risk markets. This was the second such report, the first was last week from from FT Deutschland

Remember that just last week Spain had a 3 year bond sale at an average yield of 3.32%, roughly double the yield needed to sell 3 year bonds as recently as April, an ominous sign given that Spain needs to sell about € 25 bln in bonds in July. It is unclear how long Spain can continue to withstand a doubling of its borrowing costs, which will counteract efforts to cut its deficit.

Cliff provides significantly more anecdotal evidence of an impending Spanish bailout in the link above. I harped on the increase in expenses yesterday:

As a follow-up to our piece on the Australian macro outlook (Australia: The Land Down Under(water in mortgage debt), We looked into the four largest Australian banks - Australia and New Zealand banking Group Limited, Commonwealth bank of Australia, National Australia Bank Limited, Westpac Banking Corporation. All the banks, except Commonwealth bank of Australia, have ADR.

The banks are trading at very high multiples when compared with their US counterparts. The current average price-to-tangible book value of the four Australian banks is 2.5x against the current multiples of less than 1.5x for US banks. The Australian banks are enjoying a premium largely owing to lower charge-off rates, delinquency levels and the NPL levels than their US counterparts. While the housing loans account for a substantial portion of the total portfolio of Australian banks, the housing bubble in Australia is yet to burst to result in defaults in this sector. Also, the Australian banks have additional shelter from two factors:

• The housing loans in Australia are recourse loans (borrowers are personally liable to pay even after foreclosure)
• The loans given in excess of LTV (Loan-to-value) of 80% have Lender Mortgage Insurance which covers the losses of the lending bank

The average Texas ratio of the four Australian banks is 25% and average NPL coverage ratio ( NPL+90 days past due to allowance for loan losses) is 68%. While the NPLs and the past due loans of the Australian banks have increased over the last year, a major portion of the increase is coming from business loans and commercial property while the delinquency rates in residential mortgage in Australia have remained stable (except for Commonwealth bank where substantial increase has been seen in the past due loans in the housing sector). The reported delinquency rates for mortgage or housing loans in Australia for the four banks are summarized below.

• Commonwealth bank of Australia – The total delinquent loans (1+ days past due) remained at 3.0% in 1H10, equal to the level of 3.0% in 1H09. However, owing to the aging of the some portion of the delinquent loans, the mortgage delinquency (90+ days) rate increased to 0.77% in 1H10 against 0.45% in 1H09 while the mortgage delinquency (30-80 days) rate remained stable at 0.86% and mortgage delinquency (less than 30 days) rate declined to 1.36% in 1H10 against 1.72% in 1H09.

The full analysis is available for download to subscribers below. Subscribers are also urged to review the Macro outlook document as well.

• Australian Bank Analysis Pro
• Australian Bank Analysis Retail
• Australia Macro Outlook

As excerpted from Australia: The Land Down Under(water in mortgage debt:

A few minutes ago, I posted an informational piece on Australia’s creeping protectionism in the form of taxing multi-national mining companies in ”In Australia, Tax as a Contagion“. This begs the questions, “Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?” Well, the answer most likely is because it is actually a ”Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!

As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese

investment slowdown.  Those at risk are the countries and regions that have supplied China with the commodities necessary to build empty cities.  While the (comparatively, in terms of GDP) enormous Chinese stimulus package from the first part of the financial meltdown in 2008 has generated incredible growth in GDP and asset prices, the game appears to be over for flipping 1000 square foot apartments in Shanghai.  After the direct hit taken to China, the picture looks very grim for Australia, where a bursting Chinese housing bubble could drive industrial commodities lower, sparking higher unemployment in one of the nation’s largest sectors, and in turn pop their domestic housing and property bubble.  In the near to medium term, Australia is showing some major red flags.

Australian property bubble, wikipedia

Yesterday, I sat through a conference sponsored by Andrew Schneider's Hedgeco.net on starting and marketing hedge funds. As I sat through the various presentations focusing on transparency, performance results, etc., I though to myself, " You know Reg, you probably rank in the top echelon of these guys in terms of absolute performance, and in terms of transparency you actually publish what you do on the web for all to see." Shortly thereafter I glimpsed at the latest issue of HedgeWeekly2010_No21 and decided to compare my blog results with that of the top funds.

For 2008

fund 2008

As you can see, many funds were hurt in 2008, but there were some who did quite well, with the top of the pile pulling just over 72%. That's pretty damn good! Below is an excerpt from the BoomBustBlog post "Updated 2008 performance":

Below are the raw, absolute returns for my proprietary account. These returns are calculated by calculating the difference between my starting point and ending point, and is the number that I use for comparison (since it is the number that shows how much money I actually made).

The numbers below are average monthly numbers. They are posted for the sake of uniform comparison.

I have been bearish on European banks since the UK mortgage banks collapsed several years ago. To this day, despite mounds of fundamental and macro evidence pointing to very bad things happening, there are still cheerleaders stating that concerns are overblown. A good example can be found in the post "Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!", on March 14th:

“The worst of Greece’s financial crisis is over and other European nations won’t follow in its path", said former European Commission President Romano Prodi. “For Greece, the problem is completely over,” said Prodi, who was also Italian prime minister, in an interview in Shanghai today. “I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.””

Okay, I shouldn't have called him a liar, but a tad bit optimistic, maybe? I actually agree with the last part of his statement. The euro system will not suffer greatly because of Greece, it will suffer greatly because of individual member countries' problems collectively weighing on the union. As for Mr. Prodi's accuracy, let's take a look at the Greek CDS over the time period in question...

Greece cds spreads

Yeah, that's right! Listening to the former EC President would have gotten you on the wrong side of the TRIPLING of CDS spreads. Not to fret though, the ECB allocated 1 trillion dollars to alleviate this problem, and now spreads have just more than doubled, but are still rising. And for those of you who believed me over Prodi (I apologize again for the "liar, liar pants on fire" bit, though)...

nbg - may 15 - June 8th

In continuing my data intense, hardcore, uber-objective dissection of the stuff that is proffered through the mainstream media (MSM), I bring you:

•Payrolls in U.S. Climb Less Than Estimated as Confidence in Recovery Wanes

June 4 (Bloomberg) -- Employers in the U.S. hired fewer workers in May than forecast and Americans dropped out of the labor force, showing a lack of confidence in the recovery that may lead to slower economic growth.

Payrolls rose by 431,000 last month, including a 411,000 jump in government hiring of temporary workers for the 2010 census, Labor Department figures in Washington showed today. Economists projected a 536,000 gain, according to the median forecast in a Bloomberg News survey. Private payrolls rose a less-than-forecast 41,000. The jobless rate fell to 9.7 percent.

This was not hard to see coming if you studied the numbers with an objective eye. If we dig up last year's BoomBustBlog article on the topic, we'll ponder... "Are the Effects of Unemployment About To Shoot Through the Roof?" as excerpted below.

A recent zero-hedge article rightly questioned the reliability of the reported unemployment figures by comparing the reported increase in the unemployment benefits paid with the reported increase in the number of insured unemployed. According to the figures reported by Department of Labor (DOL), the total number of insured unemployed in the US has risen by nearly 400% since September 2007 and has reached nearly 10.5 million as of Dec 19, 2009. However, if we look at the monthly withdrawals on the unemployment insurance account (according to the Daily Treasury Statement prepared by the Financial Management Service), the expenditure has risen by nearly 550%. The difference has been widening since April 2009 (coincidentally, right about the time the S&P 500 rocketed skywards, and the housing market made several month to month gains [see If Anybody Bothered to Take a Close Look at the Latest Housing Numbers..."]) and has increased substantially in Dec 2009.

Subscribers (click here to subscribe) should review the research not released last year before the market run-up. A bearish position hurt immensely back then, but methinks now it may be time for them to pay the piper, particularly if the market dips significantly further causing equity asset outflows.

Download the 2009 Intelligence Note here.

Take note of the price movement as well (see below).

For those who have been following me in the Asset Securitization and Pan-European Sovereign Debt Crisis series this may be old news, but let's go through the exercise anyway. It looks as if we are back to those non-sense games being played by those that manipulate the market. Taking a look at Bloomberg.com's front page, you'll see "Stocks, U.S. Futures Rally on Economic Outlook; Yen Weakens, Bonds Decline" (hey, good times are here again) followed directly by "Banks Deposit Record $394 Billion With ECB, Avoiding Loans to One Another"(hey, isn't this the exact same environment wherein Bear Stearns, then Lehman Brothers collapsed leading the Treasury Secretary Hank Paulson to proclaim the end of the financial world was coming?). Then there's "Covered Bond Sales Surge; Transocean Tumbles: Credit Markets": Sales of covered bonds are accelerating as investors seek debt backed by collateral amid concern about the creditworthiness of governments and banks.

Okay, let's take this by the numbers....

For those who feel that the simple application of arithmetic and math amounts to "Doomsday Scenarios", Fear-mongering, and vultures in the market place, I present to you BoomBustBlog's scenario analysis of the Portuguese Haircut.

You think those are ugly? You ain't seen nothing yet!

The Mathematical Truth Concerning Portugal's Debt Situation

Before I start, any individual or entity that disagrees with the information below is quite welcome to dispute it. I simply ask that you com with facts and analysis and have them grounded in reality so I cannot right another "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!". In other words, come with the truth, or at lease your closest simulacrum of it.

A few minutes ago, I posted an informational piece on Australia's creeping protectionism in the form of taxing multi-national mining companies in "In Australia, Tax as a Contagion". This begs the questions, "Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?" Well, the answer most likely is because it is actually a "Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!

As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese