Financial, Real Estate, Stock Markets Trends and Current Affairs

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

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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.

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

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. For the sake of those who do not subscribe, I will excerpt that page here:

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.

The amount of public resentment, potential for political backlash (yes, even Goldman can get stabbed in the back when a sacrificial lamb is needed), surfacing compensation issues (remember, on the Street, compensation is everything - there really is no company loyalty) and unwarranted premium added to this company's share price over the last few quarters appear to be culminating into another potential collapse in the company's share price. This is not investment advice, simply an anecdotal opinion.

I believe the Goldman premium will be reduced, along with its transient above market earnings potential/advantage (when the edge that it has is assimilated into the market). It probably cannot maintain its trading record for more than a few quarters (98% profitable days of trading out of a month is statistically impossible, but that is a story for another day), and its other value drivers still don' t look very promising. Last but not least, there is the matter of all of that trash still on the balance sheet. If the market's euphoric bear rally breaks, which it looks like it may (finally), then Goldman will break along with it. It has a long way to fall if it does.

The amount of public resentment, potential for political backlash (yes, even Goldman can get stabbed in the back when a sacrificial lamb is needed), surfacing compensation issues (remember, on the Street, compensation is everything - there really is no company loyalty) and unwarranted premium added to this company's share price over the last few quarters appear to be culminating into another potential collapse in the company's share price. This is not investment advice, simply an anecdotal opinion.

I believe the Goldman premium will be reduced, along with its transient above market earnings potential/advantage (when the edge that it has is assimilated into the market). It probably cannot maintain its trading record for more than a few quarters (98% profitable days of trading out of a month is statistically impossible, but that is a story for another day), and its other value drivers still don' t look very promising. Last but not least, there is the matter of all of that trash still on the balance sheet. If the market's euphoric bear rally breaks, which it looks like it may (finally), then Goldman will break along with it. It has a long way to fall if it does.

The market neutral option strategies analyzed and made available for download last quarter have effectively accomplished their mission, namely allowing one to maintain a bearish position while still being able to profit from spikes in the market. In periods of uncertainty, this is the methodology that I will fall back on personally, although the directional positions are the ones that reap my windfall profits. 

The following are the updated payoff's for selected optimal strategies for rhe S&P index, GS, JPM, AXP, HOT, STI, CAT and MAC (subscribers, see the downloads section for the strategies and the forensic analysis of each company). We have computed revised breakeven points, initial cost, payoff matrix, implied volatility and option parameter for the optimal strategies selected previously. I will post these figures in detail within 24 hours, but here is the synopsis.

The market neutral option strategies analyzed and made available for download last quarter have effectively accomplished their mission, namely allowing one to maintain a bearish position while still being able to profit from spikes in the market. In periods of uncertainty, this is the methodology that I will fall back on personally, although the directional positions are the ones that reap my windfall profits. 

The following are the updated payoff's for selected optimal strategies for rhe S&P index, GS, JPM, AXP, HOT, STI, CAT and MAC (subscribers, see the downloads section for the strategies and the forensic analysis of each company). We have computed revised breakeven points, initial cost, payoff matrix, implied volatility and option parameter for the optimal strategies selected previously. I will post these figures in detail within 24 hours, but here is the synopsis.

It looks as if a BoomBuatBlogger subscriber has made it into the news with a large option trade - STOCKS NEWS US-Bears flock to PNC Financial put options

PNC Financial Services fell 4.33 percent to $35.79. It reported a steep drop in quarterly earnings, hurt by credit losses and in its options, bears clawed at puts in the November contract, said Andrew Wilkinson, market analyst at Interactive Brokers Group. One player apparently enacted a ratio put spread in a bid to profit to the downside, he said. The Nov $36 strike had 20,000 puts bought for an average premium of $4.08 apiece spread against the sale of 40,000 puts at the Nov $31 strike for $1.97. The cost of the trade was 14 cents and yields maximum potential profits of $4.86 if shares fall to $31 by expiration. He also noted new put action at the Nov $29 strike and the $27.5 strike where 15,000 puts traded.

As subscribers know, we have determined that the overly lenient government stress tests (SCAP) will leave more than one bank requiring an additional capital raise before this credit malaise is all said and done. See The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets for our in depth take on loan losses to come for all banks who participated in residential real estate lending. These are the facts, unfiltered by green shoots mantra. PNC's government mandated $600 million capital raise was a joke,plain and simple. They will probably require multiples of that amount due to their National City acquisition and a careful glance at their balance sheet easily supports that assertion.

I have decided to show all a summary of what is arming subscribers to remain bearish against PNC, among other banks. 

It looks as if a BoomBuatBlogger subscriber has made it into the news with a large option trade - STOCKS NEWS US-Bears flock to PNC Financial put options

PNC Financial Services fell 4.33 percent to $35.79. It reported a steep drop in quarterly earnings, hurt by credit losses and in its options, bears clawed at puts in the November contract, said Andrew Wilkinson, market analyst at Interactive Brokers Group. One player apparently enacted a ratio put spread in a bid to profit to the downside, he said. The Nov $36 strike had 20,000 puts bought for an average premium of $4.08 apiece spread against the sale of 40,000 puts at the Nov $31 strike for $1.97. The cost of the trade was 14 cents and yields maximum potential profits of $4.86 if shares fall to $31 by expiration. He also noted new put action at the Nov $29 strike and the $27.5 strike where 15,000 puts traded.

As subscribers know, we have determined that the overly lenient government stress tests (SCAP) will leave more than one bank requiring an additional capital raise before this credit malaise is all said and done. See The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets for our in depth take on loan losses to come for all banks who participated in residential real estate lending. These are the facts, unfiltered by green shoots mantra. PNC's government mandated $600 million capital raise was a joke,plain and simple. They will probably require multiples of that amount due to their National City acquisition and a careful glance at their balance sheet easily supports that assertion.

I have decided to show all a summary of what is arming subscribers to remain bearish against PNC, among other banks. 

I have been getting emails from a few people who are interested in long research. I have started offering long biased research, and am in the process of implementing another scan for long candidates this weekend. What I want to remind many of is that this is a fundamental research site, and a pretty good one, at least in my opinion. We have been right roughly 90% of the time in reference to the fundamentals. With that being said, I cannot control stock prices. There are times when stock prices diverge from the fundamentals. Those are the periods that precede money making opportunities. The actual opportunity is (after recognizing the divergence) when reality and stock prices converge.

Now, there are many other methods of making money, ex. momentum/quant/algo trading, etc. That is not what I do. For those who feel that they are missing out on the market rally (which is quite understandable), I cannot give you advice, but I can tell you one simple maneuver that I have used. I have purchased SPX calls that allow me to participate on the broad market upside and provide a hedge against what I consider to be a divergence from the fundamentals. How much of a hedge is quite variable, of course.