Back in September of 2007 when I was preparing to launch a hedge fund, I came up with this interesting name for a blog. It was BoomBustBlog. What made it interesting is that I can literally blog ad infinitum on the synthetically crafted booms and busts of the global economy, for the method of shepherding the economy in this day and age is actually predicated on the existence and/or creation of Booms and Busts. Of course, from my common sense perspective, one would think that the job of a central banker would be to ameliorate the effects of, and in time eliminate booms and busts… Apparently, that doesn’t appear to be the flavor du jour. As a matter of fact, it appears as if central bankers are doing the exact opposite. Of course, attempting to cure a bust with a boom, or worse yet attempting to prevent a boom from busting with another boom is a recipe for disaster, and worse yet the probability of success is close to nil, yet central bankers try anyway. This leads to overt and explicit policy errors, which leads to outsized profit opportunities to those who pay attention. Enter “The Great Global Macro Experiment, Revisited“, from which I will excerpt below. Please keep in mind that this article was written in October of 2008, and turned out to be quite prescient, I will annotate in bold parentheticals the portions of particularly prescient relevance. The original macro experiment piece was posted on my blog in September of 2007… For those that are interested, I plan on discussing this topic live on Bloomberg TV today: “Street Smart” with Matt Miller & Carol Massar at 3:30 pm.
Posts Tagged ‘Banking’
The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream Media
Wednesday, September 1st, 2010 by Reggie MiddletonA New Spin on Bank Fraud: Banks Defrauding Their Investors, Auditors and Regulators, Which Also Helps Delinquent Mortgagees
Tuesday, July 27th, 2010 by Reggie MiddletonLast week, I made clear to my readers and subscribers that the bank malaise is not over, despite what may appear to be encouraging moves by the executive staff. Housing prices are still on their way down, save temporary blips from government bubble blowing and the outright concealment of non-performing assets by banks, see Anecdotal Evidence That Banks Are Hiding Depressed High End Real Estate. Now, many may see this as consipiracty theory, which is why I always included hard analysis behind my posts. After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????”
The boys over there at the “Morgan’ appear to be partying like it was 1999, releasing all types of reserves and provisions (which coincidentally padded a very weak earnings quarter) as if I didn’t make it “Very Clear In March, US Housing Has a Way to Fall”:
Recent Press Coverage and Media Appearances and Awards
Sunday, July 25th, 2010 by Reggie MiddletonRecent Press Coverage and Media Appearances & Awards
European Bank Investors, Don’t Look Now – You’ve Been Hoodwinked, BamBoozled…
Friday, July 23rd, 2010 by Reggie MiddletonPersonally, I consider the European bank stress tests to be a farce; an attempt to Bamboozle, Hoodwink and Dis-inform any who would be naive enough to drink the Kool-Aid – not to dissimilar from the US bank stress tests (see You’ve Been Bamboozled, Hoodwinked and Lied To! Here’s the Proof). CNBC reports that “NO” default scenarios will be played out, which I find to be rather unrealistic since the reasons why the banks are enjoying restricted access to the capital markets is the fear of default! Think long and hard about this…
You are showing signs of HIV, and nobody wants to come near you, make love to you or lend long term to you due to the symptoms of this most unpleasant and deadly disease despite the many proclamations you have made to the contrary. You decide to set the record straight by visiting a prominent doctor to diagnose your issues and placate your associates. The doctor comes up with a prognosis, but simultaneously declares that:
- AIDS (the syndrome), and death have not and will not be considered because the doctor will not let any of his patients catch AIDS or die! Whaaatt!!!??? Does the doctor really have that much control over who catches diseases and who dies? [Analogous to refusing to even consider the potential for default on sovereign debt, as if no European country has ever defaulted before – many have, and many probably will in the future as well). This analogy actually serves us quite well for the ECB has very limited control over who gets sick and how the contagions (both financial and economic) are transmitted (see below).
- The patient will be assumed to operate between 96% and 57.8% efficiency. This is, of course, a problem if the patient truly is terminally ill, for his health should receive significantly more of a…. Well, a haircut.
- Only the patient’s mucous membranes and other very short-lived tissue will be considered for examination, for the patience plans on keeping other body parts for the long term, hence they should not be affected by fluctuations by any potential illness. Yes, I know this statement doesn’t make any damn sense, but then again neither does the ECB excluding hold to maturity and portfolio inventory from the stress tests either. It really doesn’t matter how long you plan on holding said items, if they are permanently impaired in value, then they are permanently impaired, Right???!!! I know, we won’t even consider a default scenario, but since countries do default.. If a default occurs, or more realistically a restructuring, then wouldn’t longer term inventory be impaired – Permanently???!!! In the post A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina I demonstrated how much damage was done to the Argentinian bond holders after their restructuring. Too bad the Argentinian investors didn’t have the all-powerful ECB there to declare that restructuring and default are not part of the rules, hence not allowed. The following is the price of the bond that went under restructuring and was exchanged for the Par
After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????”
Friday, July 16th, 2010 by Reggie MiddletonJPM is leaving no stone unturned to prop up the operational performance and give out green signals, even if it involves the most unsustainable measures. While in 1Q10, trading income came to the rescue of the sagging core operations, in 2Q10, it was management’s over-exuberance (defying logic and rationality, to some extent) resulting in drastic reduction in loan loss provisioning and beefing up the bottom line. Although the credit quality has shown slight improvement (thanks to the enormous fiscal and monetary stimulus), it does not completely warrant for JPM’ unhealthy and hasty decision to substantially pare its loss provisions. I know many financial pundits second guess management as arm chair coaches, but when management error is egregious, well let’s let the numbers speak through graphics….
As Excerpted from As I Made Very Clear In March, US Housing Has a Way to Fall:
Trust me, the collateral behind many more mortgages will continue to depreciate materially as government giveaways and bubble blowing for housing fade!
JP Morgan, One of the First Big Banks to Report, Is Setting a Bad Precedent
Thursday, July 15th, 2010 by Reggie MiddletonIn a nutshell, a cursory glance of JP Morgan’s recent earnings announcement is middling, and that’s putting it optimistically. Revenue and profits have fallen nearly across the board, and the earnings beat is a result of moving capital from reserves to the earnings column. Even this may be suspect, for while credit metric trends appear to be improving (largely a result of massive government stimulus), the core, underlying cause of this malaise looks to be on the move downward again. See As I Made Very Clear In March, US Housing Has a Way to Fall.
I will be coming out with a detailed review of JPM’s results shortly. In the meantime and in between time, refresh your collective memories with past analysis and opinion:
An Independent Look into JP Morgan (subscription content free preview!)
The JP Morgan Professional Level Forensic Report (subscription only)
The JP Morgan Retail Level Forensic Report (subscription only)
If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 – JP Morgan
Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!
Anecdotal observations from the JP Morgan Q2-09 conference call
Reggie Middleton on JP Morgan’s Q309 results
Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results
Negative News Flow In the Investment Banking and Asset Management Space: Profitably Forewarned by BoomBustBlog Research
Friday, July 2nd, 2010 by Reggie MiddletonI wanted to share a series of negative news flow relating to the weakness in the core businesses of the investment banks owing to increased volatility in the capital markets over the last few months. This ebb from the sell side trails the opinion of BoomBustBlog research which forwarned of the same very early in the first quarter as well as last quarter of 2009l The news flow points out that the upcoming results of GS, MS and JPM might be disappointing or below expectations – as if we already didn’t know this.
- According to some of the recent MSM articles, the recent surge in volatility has led to record low activity in the underwriting and M&A activity.
Global M&A value for the first half of 2010 grew 3% to $1.18 trillion, compared with $1.15 trillion a year earlier, according to Dealogic’s figures. But while values were up against the year-earlier period, the $552.7 billion in value generated in the second quarter was down almost 7% compared with the first quarter of the year – WSJ.com.
Wall Street investment banks sold $1.36 trillion of stocks and bonds in the second quarter, down 33% from the second quarter of 2009 and the lowest quarterly total since the fourth quarter of 2008, according to Dealogic.
- Also, the capital markets volatility will have severe implications for the trading revenues of investment banks like GS and MS which derive substantial portions of their revenues from trading activities. Analysts have been downgrading earnings estimates for these banks and GS’s earnings have been particularly slashed since it generates nearly 60-70% of total revenues from trading.
Barclays Capital analyst, Roger Freeman, cut earnings estimates for Goldman Sachs Group (GS) and Morgan Stanley (MS) on June 23, 2010. Freeman slashed his second-quarter profit forecast for Goldman by nearly 64% to $1.95 a share from $5.35 a share. Freeman is expecting 40% lower trading revenues in FICC and equity segments in 2Q10 against 1Q10. His estimate for Morgan Stanley dropped 29% to 55 cents a share from 77 cents a share – WSJ.com.
Bank of America analyst, Guy Moszkowski, also slashed earnings estimates for GS and MS. He revised GS’ 2Q10 earnings estimates to $1.76 per share, 51% lower than the previous estimate of $3.57. The new estimates reflect a 45% decline in equity trading revenue and 40% drop in fixed-income trading revenue compared with the first quarter. MS’s 2Q10 EPS estimate was cut 35%, to 58 cents a share from 89 cents. The estimate on JPMorgan Chase & Co. was trimmed to 70 cents a share from 77 cents, and Citigroup Inc. was lowered to 2 cents a share from 4 cents – Businessweek.
IÂ would also like to add that the recent volatility and market decline has also impacted the AUM of asset managers and there has been downward price revision by analysts. The assets under management of BEN declined 5% (m-o-m) in May, 2010 and the June figures are not yet out. Consequently, the target price estimates have been lowered by many analysts. In June, FBR Capital lowered its target for BEN to $105 from $118 and Barclays capital lowered its target for BEN to $125Â from $133. Analyst at Goldman Sachs have also made significant downward revisions in this sector.
Now, the news flow in light of applied BoomBustBlog research:
The Asset Manager Trade is Printing Money Almost as Fast as Ben BernankeÂ
Who says only Americans are trying to delever? Quips from the UK Financial (In)Stability Report
Thursday, July 1st, 2010 by Reggie MiddletonWho says only Americans are trying to delever?
Even with exposure to foreign events and insolvent counterparties at the top of every financial institution’s worry list for the rest of 2010, the microeconomic picture for debtors in the UK remains mediocre. Americans were not the only ransacked with debt during the past decade, as Brits watched their securitized debt levels rise to incredible rates. The Bank of England makes a point to state that without record low interest rates, defaults would be another issue for banks to look out for (interpreted: the Democratic People’s Republic of Korea will win the World Cup before the central bankers at the BoE even consider raising interest rates). Soon after, they state that it would be easier to raise rates in times of robust growth than the uncertainty of current conditions, which is absolutely novel.
Domestic Credit:
- A majority of UK households have a large amount of equity in their home value
- Unsecured mortgages made up 2/3 of write offs since 2007, and even as they have stagnated, credit card write offs have increased to record highs
- The beginnings of a potential CRE resurgence in the UK have been limited to prime properties, with higher yield projects being shunned
- Even as prices are rising, they are still a third below 2007 peaks (and still probably overpriced if it is anything like the US CRE market)
- If tighter credit conditions prevent voluntary restructuring, CRE prices will fall further on corporate liquidations and forced foreclosures
The BoomBustBlog Pan-European Sovereign Debt Crisis Bankruptcy Search
Tuesday, June 15th, 2010 by Reggie MiddletonOne of the most apparent side-effects of the turmoil resulting from what I have coined as the Coming (now arrived) Pan-European (soon to be global) Sovereign (soon to be private as well) Debt Crisis is the spread of the awareness the markets have drastically undercharged for risk over the last 7 years or so. This, of course, is just a long winded method of saying bubble. Many companies, and some entire industries (ex. residential and commercial real estate [Commercial Delinquencies], banking, etc.) as well as entire nations (namely Greece [Calculate Your Haircuts Here] and Spain whose underestimated debt woes I just posted on yesterday[Spreads are Blowing Out]) have grown so used to this under-charging of risk that to wean them off of this cheap capital would be devastating. This means, in essences, the bankruptcies and restructurings are coming, and its not a matter of if, but when. This will probably portend a return to the 2008 lows, close to it, or worse, because in this global economic ecosystem you cannot have one part of the developed world’s import/export component do that bad without infecting the other components. This was explained in explicit detail in “Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?” and modeled out to show which direction the chain reaction may push the dominoes, as well as which countries were at risk from whom in the BoomBustBlog Sovereign Contagion Model.
We can see the effects of contagion driving market rates higher already, even as central bankers set negative rate policies. Reference Spain T-Bill Yields Jump; Doubts Emerge over Rating and the (still 3 months too tardy) dropping of Greece’s debt rating which exposes how politically exposed and potentially manipulable ratings agencies are even when they pussy foot around with should have been explicit downgrades months ago – reference EU Commissioner Attacks Moodys on Greek Downgrade.
It is only a matter of time (and I doubt it will be much time) before the popping rates of sovereign debt and the incessant demand from the market (or bailout vehicles to be funded in the market) start crowding out private debt consumers, and drive those rates higher. Those companies with weak balance sheet, minuscule margins and play-dough business models will crack like Easter eggs. The BoomBustBlog Bankruptcy Search Series will attempt to identify those companies before the market recognizes them and either warn our subscribers of the peril of holding said companies or allow them to potentially profit from their downfall. Let’s start with the banks, which are a special case. You see, explicit bankruptcy (actually, regulatory receivership candidates) are often priced accordingly, but if you move one or two notches up the food chain, you can find a bevy of overpriced candidates that may not be ready to collapse immediately, but are priced as if they will continue forever. Add in a little sovereign malaise as a catalyst and boom, there goes the chemistry set!
Throw a Little Conspiracy Theory into the Pan-European Sovereign Debt Crisis and an Impending Spanish Bank Collapse and Who Needs TV For Entertainment?
Monday, June 14th, 2010 by Reggie MiddletonThe global equity markets are in meltup mode again. I want to take this opportunity to reiterate that I am still quite bearish on much of the situation in Europe. Let’s glance at the credit markets, major banks and the state of sovereign indebtedness in Spain.
As you can see, Spain’s 3 yr CDS spreads are the highest they have ever been. They are significantly higher than they were during the entire Lehman fiasco, and they are even higher (or at least comparable) than they were right before the EU/IMF trillion dollar bailout package was announced in conjunction with threatening those who dared to speculate against Spain’s fiscal health!
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