bankatrisktradeThe first Bank At Risk trading supplement is available for download to professional and instiutional subscribers. See File Icon This is the introductory post to a series of trade setups for the European bank we feel is at risk of a bank run. There will be plenty more to come over the next few days.

Published in BoomBustBlog

This is the introductory post to a series of trade setups for the Bank At Risk featured in the subscription document Italy Exposure Producing Bank Risk. These trade setups are for professional and institutional subscribers only, for they are relatively advanced. Those who have not been following the European bank research and opinion of the past 30 days should reference the following in reverse chronological order.

  1. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
  2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  3. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
  4. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
  5. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
  6. Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par Using 30x+ Leverage: Bank Collapse is Inevitable!!! 

Below are the thoughts of one of the BoomBustBlog resident European traders, annotated. The following post (within 24 hours) will contain charts and option position setups for susbscribers.

Setting Up A Potential European Bank Run Trade

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Interestingly enough, and sounding a bit different from BOOMBUSTBLOG fundamental analysis, it is really difficult to find clear TECHNICAL evidence in the short term for the Subject Bank at Risk.

The longer trend lines have being violated. The violent down move, has been broken in 2010, the uptrend from the 2009 (by a significant amount of euros !!) low seems over as well.

So we have to look at the more recent past and 60 now looks as the big resistance level, it was 2010 (Q1) high and 2011 YTD (Q1) high as well. On the downside, 2010 lows held as well, and I drew on the graph 2 lines @42 and 46 which look significant.
We have not reversed all of the down move last week, which seems to indicate that the market doesn’t want to call it over and squeeze all the shorts quickly.

It’s very tough to make a short term call.

However, THE SUBJECT BANK traded off the highs on Friday to close just below it.

In my personal view, THE SUBJECT BANK is more a systemic risk play because though I’m negative on the industry's future earnings, THE SUBJECT BANK doesn’t seem to have a particular short term problem and
banks accounting bag of tricks is not empty yet.

I have addressed this in this post, in detail. It is not a straightforward topic.

Of important note, as well, the 10Y BTP, which I called for a quick 5.40-5.50 move and actually traded over 6, came back below that 5.50 level. It was indeed overextended in the short term as it exceeded my level. We’ve seen the low 5.20s on Friday but it bounced back then, almost as anybody could have expected...

Because as we know 10Y BTPs broke the 5% level decisively, and I explained to you my view of why I could only see getting it worse, if only for VAR reasons, absent massive intervention in the market by governments (active BTP buying, short selling banned in CDS AND bonds...which need to push 10Y BTP below 4.5% and on its way to 4% to declare victory). That’s not my main scenario.

So in such a context, we can expect banks to trade down, even if on the chart they seem resilient. The  resistance having worked in Q1, and selling on strength worked this year (when we hit Bollinger highs) can give "optimism" to a short position. I say "optimism" because alas if this happens, it probably means our system is one step closer to its destruction.

Risk Reward selling in the middle of the 2010/2011 range is not a 100% proof recipe for success.

On the CAC40 monthly chart, the uptrend line could have been clearly broken if we stayed last week at the lows, but the bounce near that trendline leaves all possibilities open, with next week being important to me. Similarly SPX is holding well and could go up to 2007 highs above 1500. Problem is Nasdaq is already there... so is Nasdaq breaking thru resistance and leading at least a test higher for indices ? But that would look bullish for equities...

Clearly I’m not bearish (yet) on equities, at least not on a chart point of view, and equities are still the BEST hedge against inflation (save for the indebted and overleveraged firms, which is a whole lot of them.). Firms with no debt, like AAPL ARE a hedge to inflation.

So how can we play downside for THE SUBJECT BANK?

Well the prudent investor, can just opt for a "BETA trade" sell THE SUBJECT BANK against CAC40 beta-adjusted.

Buy put/put spreads to play for the systemic risk especially given the dire situation on the PIIGS debt markets who can be once again, showing the lead to the equity markets.

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

Published in BoomBustBlog
Wednesday, 27 July 2011 11:32

What Happens When That Juggler Gets Clumsy?

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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.

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...

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...

Update:

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:File Icon 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.

Published in BoomBustBlog

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.

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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 File Icon Italy Exposure Producing Bank Risk and a series of blog posts leading astute followers to the inevitable conclusion...

  1. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
  2. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
  3. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
  4. 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 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 File Icon 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 File Icon The Inevitability of Another Bank Crisis? and well as File Icon 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).

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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!

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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 File Icon 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 

Published in BoomBustBlog

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.

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On Tuesday, 28 June 2011 I posted the first of many trade setups powered by BoomBustBlog proprietary research focusing on profting the upcoming Eurocalypse and overvaluation in the tech sector. In the post "More On Trading with BoomBustBlog Research" an illustrative Deutsche Bank equity trade set up contributed as follows:

Messages from Josef Ackermann reached the markets today:

    • 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 €.

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Near picture:

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As derived and excerpted from icon Euro Bank Soveregn Debt Exposure Final - Pro & Institutional (934.65 kB 2010-05-13 00:11:32):

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What is the result of throwing pound after pound of leveraged fiat currency meat into the hungary maw of an overweight European brown bear who is naught to give it back nor make good use of it? Let's ask one of the banks from year's report...

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The afore-linked document has Deutsche Bank's exposure to the PIIGS group oulined and detailed. There is another angle that we covered early last year as well. Reference file icon Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional or Deutsche Bank vs Postbank Review & Summary Analysis - Retail.

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...

Update:

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:File Icon European Bank's Greece exposure

Additional French bank solvency analysis will be out shortly.

Published in BoomBustBlog

Just a few snippets on currencies. This email was sent on the 8th, and should have been published then. It was actually rather prescient.

Now it could be time to look at charts on the EUR again

the natural fundamental trade is not EUR against USD or JPY, but to find a currency in a country will little or no debt.
despite their own real estate bubble, from what i read, CAD or much better AUD and NZD might be candidates.
CHF despite UBS and CSFB should be as well. notice how the Swiss authorities have tightened the management of these 2 institutions, pressing them to recapitalize as much as possible and targetting higher capital ratios than Basel III.
im thinking also of SGD and of course XAU.
but given the run in XAU, despite the trend being absolutely intact, from a fundamental point of view, i think there is more value in being long SGD or CHF than being long gold against the EUR. Gold can still go x2 from here, but then youre playing Gold, not shorting the Euro.

still for a trade, looking at EURUSD, you can see the mkt accelerated when we broke out the downtrend line
but dropped again the next month in a big reversal erasing and engulfing the previous months move to retest the downtrend line, which it held. surprisingly (to me) it was not followed by a total collapse of the EUR, we are about to retest this line again. its not clear to me what will happen from here;
on the weekly chart, it could look ugly like a reversal as well boding bad for the Eur if we close the week below 1.41 and the move continues next week. but i dont want to bet either way. it looks pretty digital to me from here.

on a long term monthly chart, USDSGD is at its lowest ever, but EURSGD is still a few % above its 2010 lows, and was trading much lower in 2000. There is no govt debt in Singapore and they have a big sov fund. it should be trading as the CHF of Asia, if not the CHF of the world, or the Gold of the World !!! 

20110707_-_EURSGD_monthly

20110707_-_EURUSD_monthly

20110707_-_EURUSD_weekly

For those who have interests in things such as currency pairs, may I refer you to our proprietary currency model available for download to all subscribers...

 

 

Published in BoomBustBlog

Greece and fellow members of the PIIGS group of distressed sovereign states are considerably worse off than those tumulted by the Argentenian debt crisis of the '90s. Here's why...

CNBC reports: In Europe, an 'Argentinean Re-Run': Fund Manager

The situation facing European countries like Greece and Portugal is directly comparable to the economic crisis which hit Latin America in the late 1990s, Andy Brough, co-head of Schroders’ Pan European Small and Mid Cap team, told CNBC Wednesday. 

"I get the feeling we're having an Argentinean re-run," Brough said. "In Europe, they've tried everything to sustain the system but it's unsustainable."

Argentina, together with the region's largest country Brazil and with Uruguay, suffered a sustained economic crisis last decade after building up a huge debt pile.

Argentina in particular continued to borrow heavily from the International Monetary Fund (IMF) without repaying its debts.

Tell me about it! For those who don't know the consequences of said actions I recommend you reference How the US Has Perfected the Use of Economic Imperialism Through the European Union!

"In the end the populace is going to say we didn't go into the euro for this," the Schroders fund manager said.

Fernando de la Rúa, then president of Argentina, had to flee the country in a helicopter after the unrest grew. While the political situation in Greece and Portugal is not yet that serious, there have been widespread protests on the streets of Athensagainst austerity measures demanded by the ECB and IMF as part of a second bailout of Greece. 

It may be even more difficult for Greece and the banks supporting it to recover from its economic problems than it was for Argentina and Brazil, according to Brough.

"If you look back then, we didn't have the transparency we do now, so all the banks that were funding Latin America could smooth over what was going on," he said. "Now, everyone is in the spotlight so it's much harder for banks to smooth it over."

"The middle class in Argentina couldn't just withdraw their money, whereas the middle class in Greece or Portugal can take it out and buy anything that isn't the euro," Brough added.

In Argentina, the government slapped a $250 a week limit on withdrawals from its banks to halt massive pulling out of savings.

I would be remiss in failing to mention that we made this comparison in explicit detail this time last year - A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

In order to assess the impact of sovereign debt restructuring on the market prices of the sovereign bonds that undergo restructuring (haircut in the principal amount or maturity extension), we retrieved price data of the Argentinean bonds that underwent restructuring in 2005. The sovereign debt restructuring in case of Argentina was a combination of maturity extension and principal haircut. Argentina defaulted on its international debt in November 2001 after a failed attempt to restructure the debt. The markets priced in the risk of a substantial haircut around this time and the bond prices plummeted sharply. We at BoomBustBlog are in the habit of taking market prices seriously, and have factored historical market reactions into our analysis in calculating prospective price action in distressed and soon to be Sovereign debt. Before moving on, it is highly recommended that readers review our haircut analysis for Greece (“With the Euro Disintegrating, You Can Calculate Your Haircuts Here”) and our more likely to occur restructuring analysis for the same (What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates).

The restructuring of the Argentina debt in default was occurred in 2005 when the government offered new bonds in exchange of old securities. The government gave the option of either accepting A) a par bond with no haircut in the principal amount but substantially lower coupon and longer maturity or accept B) a discount bond with a haircut in principal amount to the extent of 66.3% but relatively better coupon rate and shorter maturity than in case of Par bond. If the bondholder accepted A), for each unit of bond, one unit of Par bond will be allotted. If the bondholder accepted B), for each unit of bond, 0.33 unit of Discount Bond will be allotted. The loss to the creditor, which is decline in the NPV of the cash flows, was nearly the same in both cases as the lower principal amount in Option B was offset by better coupon rate and shorter maturity. The price of the par bond in the market and the price of the discount bond multiplied by the exchange ratio (real price to the bond holder) were largely the same when they were listed in the market in 2005.

The IMF estimated the average haircut (decline in the net present value of the bond) was on an average 75% and the market priced in most of this haircut before the actual restructuring in Feb 2005. The prices of the bond in default declined nearly 65% between Feb 2001 and Feb 2005.

One should keep these figures in mind, for in the blog post "How Greece Killed Its Own Banks!"I ran through a much, much more optimistic scenario that wiped out ALL of the equity of the big Greek banks. Remember, the Greek government stuffed these banks to the gills with Greek bonds in order to created the perception of a market for them. As excerpeted...

Well, the answer is…. Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)…

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The same hypothetical leveraged positions expressed as a percentage gain or loss…

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When I first started writing this post this morning, the only other bond markets getting hit were Portugal’s. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following:

To date, my work both free and particularly the subscription work, has shown significant returns. I am quite confident that the thesis behind the Pan-European Sovereign Debt Crisis research is still quite valid and has a very long run ahead of it.  Let’s look at one of the main Greek bank shorts that we went bearish on in January:

nbg since research

NBG since research

Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get...

Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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With this quick historical primer still fresh in our heads, let's revisit our Greek, Spanish, and Italian banking analyses (the green sidebar to the right), many of which are trying to push the 400% mark in terms of returns if one purchased OTM options at the time of the research release. It may be worthwhile to review the Sovereign debt exposure of Insurers and Reinsurers as well.


 

Published in BoomBustBlog

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! Cool

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

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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.

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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.

research_poll

I will be adding additional commentary throughout the day as well as a look at at European bank from an equity trader's perspectve.

 

Published in BoomBustBlog

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 -  File Icon RIMM Forensic Analysis and Valuation – Professional & Institutional or File Icon 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. For the sake of those who do not subscribe, I will excerpt that page here:

Published in BoomBustBlog

Due to popular demand, I will be including some basic sample trades and some directional tools for BoomBustBlog research, starting with the next dollop of fundamental research. The first set will arrive next week, where we will offer an option tool and currency trend analysis app. Soon, possibly tomorrow, I will discuss the placement of options using the Google research that I illustrated here - Navigating BoomBustBlog Subscription Material To Find The Google Valuation Drilldown.

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