Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:961 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:1175 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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It's the Real Estate Crash That I Warned…

20-03-2017 Hits:1656 BoomBustBlog Reggie Middleton

It's the Real Estate Crash That I Warned You About (again)

I've issued several warnings late last year warning of the real estate bubble peaking and popping. I feel I'm especially qualified to do such since I quite accurately called the...

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When It Comes Time To Show and Prove, Eq…

20-03-2017 Hits:1415 BoomBustBlog Reggie Middleton

When It Comes Time To Show and Prove, Equity Markets May Drop Hard

The markets have gotten euphoric since the Trump election, apparently because someone believed what he was selling. Take a look at the broad market jump (powered greatly by the bank...

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So, Brexit Is Now Almost Official. Is Th…

20-03-2017 Hits:674 BoomBustBlog Reggie Middleton

Note: All downloadable legacy content is for subscribers only. We currently have a sale for $11 per month for basic access. Professional subscribers are now evevated to have direct access...

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In Less Than Two Weeks, Another Bitcoin …

17-03-2017 Hits:2195 BoomBustBlog Reggie Middleton

In Less Than Two Weeks, Another Bitcoin ETF Faces SEC Deadline - It's Denial Is NOT A Bearish Event

LedgerX's "SOLIDX BITCOIN TRUST" has an approval deadline this March 30th, 2017.If it is approved, Bitcoin is due for one hell of a bump, but...  

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The Fed Raises Rates While Still Baby Fe…

17-03-2017 Hits:2027 BoomBustBlog Reggie Middleton

The Fed Raises Rates While Still Baby Feeding the MBS Market With Billions in Monthly Purchases

The Fed has raised rates, officially making real what was mere signaling of the end of its expansionary era... Or is it? You see, from a practical perspective, QE is...

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A Bitcoin ETF or Similar Regulated Insti…

16-03-2017 Hits:2580 BoomBustBlog Reggie Middleton

A Bitcoin ETF or Similar Regulated Institutional Vehicle is a Forgone Conclusion - What Happens Next?

Someone with over 53 years on Wall Street sent me this article from Lex of the Financial Times...

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Why the Winelvoss Bitcoin ETF Was Reject…

13-03-2017 Hits:3390 BoomBustBlog Reggie Middleton

Why the Winelvoss Bitcoin ETF Was Rejected and How to Create a Regulated Vehicle That Passes Muster

 The Winkelvoss ETF application was rejected by the SEC, and bitcoin dropped about 20% in price. I repetitively warned those that followed me that a very low risk buying opportunity...

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Trump Calls Obama's Policies On Russia W…

10-03-2017 Hits:3059 BoomBustBlog Reggie Middleton

 Donald Trump's recent Tweet discusses how Russia has gotten stronger at the behest of President Obama.   For eight years Russia "ran over" President Obama, got stronger and stronger, picked-off Crimea and...

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SNAP's Greed Derived Self-Inflicted Woun…

08-03-2017 Hits:4125 BoomBustBlog Reggie Middleton

SNAP's Greed Derived Self-Inflicted Wounds Continue to Manifest

The day before the SNAP IPO, I penned "Goldman Sachs & Morgan Stanley Pull Off the Heist of the Decade, Bends Over Those Who Don't Read BoomBustBlog". Despite being rather...

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Bitcoin Is Reaching the Point of No Retu…

08-03-2017 Hits:3852 BoomBustBlog Reggie Middleton

Bitcoin Is Reaching the Point of No Return - Buy Side Should Take Note

Many bitcoin aficionados are waiting with baited breath as the SEC is to announce by this Friday whether they will approve the first registered bitcoin ETF. This is not the...

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modern_day_bank_run_northrock.gif
We actually had a modern day run on the bank in the UK and the equity markets shrugged it off.
It is a mistake, plain and simple. I normally don't like to tell people who specialize in a business how to run it, since they probably know more about their business than I do - but sometimes the mistakes are just so glaring. I don't care how many analysts are poring over how many books at Countrywide. BAC's error is not misjudging the value of Countrywide now, but misjudging the macro environment in which Countrywide operates.

 

My experience has been primarily understanding and evaluating companies from the equity perspective, but that definitely doesn't mean that I ignore the fxed income side. I am just not better at it than the other guys. What I have been noticing of late is that credit markets have been screaming murder for some time now, and the equity markets have been humming along new bullish highs and trading runs as if nothing is truly wrong. This is a strong indicator that momentum trading has again taken control of the markets. It is an environment where price trumps value. The last time this came to a head was the dot com bust. It took many institutional and individual investors 5 to 6 years to break even. Some never recouped their losses. Well, my gut has been telling me for about a year and change now that we are back there again. 2008 thus far has done nothing but confirm that we have come to a head. The pic above was an actual shot (one of very many at various locations) of the run on Northern Rock Bank in the U.K. This was real, and it was indicative of a real problem.

Well, we had a very recent run on the bank here in the states as well. There were pictures all over the web when it occurred, and now mysteriously, they are all gone. All I was able to retrieve was this screen capture of a thumbnail from Blownmortgage.com. Just as the pictorial remnants of the run have somehow disappeared, so has the equity markets prudence in the face of such a run. You can guess which bank got ran on.

 

cwide_bankrun.png

There were companies in the dot com era that made purchases that they thought were risky but potentially profitable, and in more severe cases such as the internet media companies, many have dwindled down to mere pennies per share, ex. Razorfish, et. al. So, historically, companies have had the hubris of BAC to go on and lose most or all of thier investment.

I have been using this chart a lot lately, and it looks like I will be using it a lot more.

If the housing market goes anywhere NEAR its historical trends, we are going to see 30% to 40% drops in real prices. Many people poo-poo this notion, calling it apocalyptic. This is silly to me. Why didn't they poo-poo the notion of 40% to 200% price increases in the same time frame? Isn't that even more dramatic? For some reason, investors - individual and professional alike - have a hard time avoiding following the crowd. They try to catch bottoms (a risky and foolhardy endeavor in my opinion), time tops, and always seem to believe something will bounce back or XYZ asset will never go down in price over the long term (ala Fitch Ratings HPA models or the Japanese real estate market).

 

But BAC is Value Investing Like Buffet

No they are not. They are gambling like cowboys. The caveat to the Buffet argument is that BAC didn't buy the assets of Countrywide, they bought the whole company, kit and kaboodle - including the liabilities. I can understand if they bought just the servicing arm, but they didn't. Believe me, it is possible to pay less than zero for a company. The last time Buffet bought a financial company steeped in liabilities and risks on the cheap, he regretted it and realized that no matter how cheap he got the assets, he still overpaid. Risk vs. Reward: don't just stare at the reward side of the equation. If you must, simlpy reminisce on Solomon Brothers. In other words, the cost for buying Countrywide could easily be more than what is paid for it.

CFC is dangerous, plain and simple. The residential housing chart clearly shows how far out of whack housing values are in historic real terms. Come on, this makes the remnants of the Gold Rush look mild. If values come anywhere near the mean values of growth, BAC will be paying the CFC bill for a long time, and they will be paying a lot more than $6 billion, the cost of acquisition. Now, I hear there are performance covenants and guarantees in the purchase which may smooth out the pain, but CFC is in a world of hurt, and doesn't have much wiggle room to offer incentives. As I have stried my best to insinuate, it is possible to get CFC for free and still lose money. I know BAC has been in the business longer than I have been short CFC, but I made more money on that short than they did on their $2 billion investment. Sometimes, you are just wrong.

As of last month, CFC had more nominal dollars in REOs than they did market cap. Now, just add all of those garbage loans, the plethora of law suits, a few SEC and state banking authority investigations in a pot with a market where housing value corrects 30% in real terms with inventory building higher and higher, and we have a bitter tasting brew indeed... I hope those BAC shareholders have strong stomachs.