Displaying items by tag: UK and Eurozone

Spain has crossed the rubicon, and entered into bad decision nirvana as it too decided to ban short selling, which has worked so well for all of those other smart countries which have done so. For instance, when the US did it in 2008, they helped their bank's shares float to the tune of -48%! Hey, with friends like that, who needs enemies. When will they learn that tempering/tampering with financial markets is not ever as good as it sounds. Keep in mind that short sales put a natural floor under weak securities by creating natural sellers at the end or a trade (whether the trade is successful or not). If the stock is truly overvalued (hear's to you European banks), then the shares are going to drop anyway as the holders of those shares sell to get out of them. Without shorts, there will be no buying on the way down as speculators and astute investors cover profitable short sales and the only bids you will get are at rock bottom where fundamental guys feel there "deals that can't be refused" (except for the occasional BTFD fools along the way). That is usually a bid that's much higher than would have been achieved through the short sale. Of course, nobody explained this to the Spanish.

An additional issue is that the banning of short selling broadcasts a message that Spain should want to mute, and that is the message of FUD (Fear, Uncertainty and Doubt)! Why else would one make the normally legal and necessary action of selling bad stocks illegal? Fear of the facts! Of course, as word gets out it just makes situations that much worse...

From CNBC:

Spain's stock market regulator banned short-selling on all Spanish securities on Monday for three months and said it may extend the ban beyond October 23. 

The ban, which will not apply to market makers, will apply to any operation on stocks or indexes, including cash operations, derivatives traded on platforms as well as OTC derivatives, the regulator said in a statement.

European shares extended their losses following the move by Spain, which raised fears that the region's sovereign debt and banking crisis may be worse than expected.

Subscriber's related reading (click here to subscribe):

 The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers

 Spanish Banking Macro Discussion Note

 Spain public finances projections_033010

Hopefully all remember my proclamamtions on the FIRE sector and France suffereing from Italian exposure. I also warned on Italy itself, two year ago (subscribers reference Italy public finances projection). Thus, in today's news...

Moody's downgrades three major Italian insurers:

(Reuters) - Moody's lowered the credit rating of three major Italian insurers on Tuesday, piling more pressure on the euro zone's third largest economy after a string of downgrades on Monday and a sovereign downgrade last week.

Italy's largest domestic insurer Generali Assicurazioni and its subsidiaries were lowered to Baa1, while Unipol Assicurazioni, and Allianz Spa had ratings cut by two notches each.

"The downgrade of Generali reflects the insurer's direct exposure to Italian sovereign risk in terms of both investment portfolio and business profile," Moody's said in a statement.

By the end of 2011, Italian government bonds represented 19 percent or 46 billion euros ($56.18 billion) of Generali's total fixed-income portfolio, or 253 percent of shareholders' equity, according to the statement.

Government bonds constituted 47 percent of the fixed income portfolio of Unipol Assicurazioni with 222 percent of shareholders' equity.

All the institutions mentioned in the statement were given negative outlooks.

Included in this group were the insurers that I cautioned on in 2010 (subscribers reference Sovereign Debt Exposure of European Insurers and Reinsurers (439.61 kB 2010-05-19 01:56:52)

My warning on the Italian banks have come to pass (subscribers reference Italian Banking Macro-Fundamental Discussion Note) as Moody's slashes ratings of 13 Italian banks: The move follows a cut in the Italian government's long-term issuer rating last week. Italian banks had previously been downgraded in mid-May, as part of an international bank rating review. Ratings agencies rarely rate banks higher than the country in which they are headquartered, as they assume that if the sovereign goes, so will the bank. Therefore, the downgrades aren't exactly surprising, but could increase pressure on the already troubled lenders.

As a result Italian yields went up a few days ago - Italian Yields Forced Higher on Rating's Cut Ahead of Debt Sale, and went even higher today as Bund yeilds were actually issued with negative yields pushing that spread/gap ever wider... Bunds rise as Germany sells debt at negative yields

Italian 10-year yields were four basis points up at 6.07 percent, with two-year debt underperforming, yielding 8 bps more on the day at 3.96

Mish (Mike Shedlock) adds... Italy GDP expected to contract by 2% globaleconomicanalysis.blogspot.com/.../

So, when are the alarms going to be sounded by anybody other then BoomBustBlog for France??? I have made this quite clear in the past, namely in Watch The Pandemic Bank Flu Spread From Italy To France To ... where I simply quoted the arithmetical obvious, then in French Banks Can Set Off Contagion That Will ... where I basically did the same.  Subscribers can reference French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian Exposure: As Italy pops with outrageous funding yields (just like Greece), France will be forced to bailout its banks once again, leaving the socialist country facing the dilemma of potentially having to ask for a bailout itself. As you may know from my previous writings, the French banking system is bigger than France itself so a true bailout cannot practically come from within.

Subscribers, see also 

•  Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
•  Sovereign Contagion Model - Pro & Institutional
•  Irish Bank Strategy Note
• Euro Bank Soveregn Debt Exposure Final -Retail
•  Euro Bank Soveregn Debt Exposure Final - Pro & Institutional

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LIeBOR is all over the MSM today...

• The Must Read: Changing Barclays, Monetary Policy
• Wall Street Bank Investors in Dark on Libor Liability

I wonder how many realize how deadly this is to big western banks workwide. I have commented on this in detail in my most recent Max Keiser interview, which aired last night. Download the Barclays Submission, aka the "Smoking Gun".pdf for more insight to what happened. Here's a taste...

Quick translation...

BOE inquires why Barclay's LIBOR rate was always so high,  realistic...

Barclay's asks BOE reps to brand the liars as liars...

BOE says, "are you out of your fucking mind???"

BOE rep says, this is coming from on top, lose the truth, or lose your ass! But you didn't hear that from me...

Of course the most daming part of this email is this "I asked [Tucker] if he could relay the reality, that not all banks were providing quotes at the levels that represented real transaction". This clearly shows that the BOE was on alert (as if they didn't already know, and probably orchestrated) of the fact that most banks were outright lying.

See my extensive comments on Max Keiser's show earlier this week, starting at 12:48 in the following video...

Additional (in depth) commentary can be found starting at 3:10 in this video with Lauren Lyster...

So, who are these other banks???

From Matt Taibbi's blog:

 The Royal Bank of Scotland is about to be fined $233 million (£150 million pounds) for its role in the Libor-rigging scandal. It joins Barclays as the first banks to walk the plank in what should be, but so far is not, the most sensational financial corruption story since the crash of 2008.

Many of the banks implicated in the Libor mess have also been targeted in the various municipal bond bid-rigging investigations, and RBS is no different – its subsidiary Natwest is also a defendant in the major civil lawsuit in the bid-rigging case. The cases aren't related, except in the sense that they both involve manipulation and anticompetitive cooperation. It's going to be harder and harder to make the case that the major banks do not routinely cooperate at the expense of the public when it serves their purposes to do so.

The news that RBS is involved comes with a perverse twist. This is from the Times UK:

The bank, which is 82 per cent owned by the taxpayer, is preparing for a political firestorm over the affair because it believes that it has no power to claw back bonuses from the traders responsible. Instead, the expected fines would be borne by the shareholders — largely the Government.

Libor manipulation is a crime that already robs the public to create bonuses for bankers. By artificially lowering interest rates, the banks caused cities, towns, countries, and other public entities to receive smaller returns on their variable-rate investment holdings. If it turns out that taxpayers end up paying the fine for RBS's crime of robbing taxpayers, how perfect would that be?

More importantly Matt, synthetically depressed LIeBOR rates artificially lowers the bar for economic profit, in layman's terms it makes the bank look more profitable and less risky than they actually are. As you stated, this leads to bigger bonuses funded by bigger taxes borne by financially smaller taxpayers. Hmmmm....

Who else is in the sights of the upcoming truth? Citbank, Bank of Lynch (robbing) America Coutrywide and JP Morgan! Have I commented on these big banks' risks ad nauseum? The litigation risks in these institutions are enormous, and are not discounted in their pricing - Banks face crippling Libor litigation costs

Not only do the share prices of these banks fail to reflect the true litigation risks, the bank management themselves are failing to come clean, despite astute BoomBustBlog analysis....

There's imprudent risk management litigation stemming from JP Morgan's massive derivative's exposure, first brought to light in 2009 by yours truly...

Listen Carefully and You Can Hear the Crumbling ....May 11, 2012 – First, pardon my tardy response to this JP Morgan news. ... Equity segment, net income (excluding Private Equity results and litigation expense) ...

In 2009 I noticed that JPM's exposure to Fraudclosure-gate and to a greater extent, mortgage putbacks, was much, much more than what was being reported by managment. There's much more, see:

JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies

JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Mar 2, 2011 – JP Morgan Purposely Downplayed Litigation Risk That Spiked 5000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!

The Rating Agency Endorsed BoomBustBlog Big Bank Bash Off ... Feb 16, 2012 – JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP Morgan Purposely Downplayed Litigation Risk That Spiked ...

You see, what many believe to be a UK bank thing can drag these big American banks deeper, much deeper, into the quagmire. Beware, the F.I.R.E.! The F.I.R.E. Is Set To Blaze! Focus On Banks, part 1

Yesterday, I posted The Difference Between Money and Wealth and Why You Can Easily Print One But Must Actually Create The Other, and as if on cue, global inkjet nozzles 'round the world started whizzing - to wit:

• ECB Cuts Rate to Record Low of 0.75%, Deposit to Zero and Bank of England Prints Money Again to Boost Economy
• China Cuts Rates for Second Time in Month and China Set to Post Worst Growth Since 2008 Crisis
• BOE Restarts QE Amid Euro Crisis

Why such rampant printing? The whole world's afraid Europe's impending implosion will engulf global economies. They very well shoud be, this was quite evident 3 years ago (Pan-European sovereign debt crisis) and the can kicking is nearing the end of its useful cycle... ECB's Draghi: We See Now a Weakening of Growth in Whole Euro Area

Here's the secret that BoomBustBlog subscribers know yet seems to be lost on much of the European powers that be: cutting rates and printing will absolutely NOT prevent the nuclear winter in Real Assets. Since loans behind real assets are anywhere between a vast chunk and the majority of bank loans, when this thing goes the European banking system goes with it. This will manifest itself stateside (see sidebox), but the Europeans will get hit harder, at least initially... The reason? Well, it doesn't really matter how low interest rates are - if banks don't lend, borrows will not gain access to capital. Banks are too weak and skittish to lend despite "so-called" record profits, billions in bonuses and compensation, and trillions in bailouts. I repeat, and I repeat again, the only solution is to let the insolvent fail.

Reference the quite informative post from which the graphics below were excerpted: Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE

Slide21

 So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

• •   Debt Analysis, Blog Subscriber Edition
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image040 

dddwwnnmmn

Fastforward to today, and NIEUWE STEEN INVESTMENTS N.V. - NSI (one of our shortlisted REIT) suffered the most due to revaluation of their Dutch office portfolio. It therefore witnessed 26% decline in last 4 months.

NSI is simply a microcosm of what's to come for many larger real asset investors. I have warned that the Dutch, with what many consider to be a strong and relatively stable economy, was not immune to the European contagion, reference Are The Ultra Conservative Dutch Immune To Pan-European Economic Contagion...

Many lay persons are misled by terms such as money printing. This misdirection is easily understood and stems from a basic misunderstanding of what money is, versus actual economic value. Let's assume we have a pie called the EU (or US?), with a 1 trillion euros of economic value. This is the European economic pie. The EU get's in trouble and the banks start to run out of money. Now, the fact of the matter is that those same banks failed to make incremental gains to their actual economic value (true profit) and everyone who's paying attention knows it, hence they faced a problem getting funding. So, they go crying to the central bank, who basically printed euros through various mechanisms in order to push new and additional little pieces of digital paper throughout the system. This is what the layperson sees as money appearing out of nowhere at the behest of the financial bailout gods of the governmental powers that be.

The problem with this viewpoint is that the money appeared out of nowhere, but said money was not backed by actual economic capital. Hence more euros (or dollars) are available in the system, but each of those euros/dollars are simply worth that much less.

This is not economic progress boys and girls. What we need to move forward is to bake bigger pies, not cut the existing and steadily shrinking economic pies into more pieces!!!

Bloomberg EU Eases Spain Debt Rules as Merkel Retreats and Euro Rises After EU Leaders Renounce Spain Loan Seniority

Euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy as an outflanked German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis.
After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, chiefs of the 17 euro countries dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s blighted banks and opened the way to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. Stocks and bonds in Spain and Italy rallied and the euro posted its biggest gain this year.

Oh yeah, that's a damn good idea. Take a murky pool of depreciating, hard to value, illiquid assets and make them even murkier, harder to value, yet easier to pledge since it's now acceptable to look in the other direction as you receive said "trash assets". To make matters even worse, the Europeans are now attempting to perfect their method of throwing good money after bad by denying preferential status to the only money that can save (or at least buoy) these zombie banks. Of course, no lender will want to go in knowing that they can be instantly subordinated, but then again when the only lender that can realy make a difference goes in, why should it take a bow to anyone else. Trust me on this one... Taxpayers will offer loans and see that money disappear... Poooffff!!! Don't believe me? Reference CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?"

Bloomberg also reports  Spain Gets Relief as Europe Leaders Outflank Merkel in Bid to Blunt Crisis. Listen, pressuring Germany, the one remaining relatively stable/robust large economy in the union is a recipe for disaster. There's no wonder why 16 or so failing economies are in opposition to the wants and desires of the 1 or so successful economies. See any common threads here. Germany is far from bulletproof, as the same MSM page sports this headline...

German Retail Sales Unexpectedly Fell for a Second Month in May on Crisis
German retail sales unexpectedly fell for a second month in May as the sovereign debt crisis worsened, damping the economic outlook.

Germany is a net export nation whose primary trading partners range from extremely hard landing to recessionary to outright depression. Exactly where is all of the economic growth going to come from to fund the world, or at least the European version of the world. I have written extensively on this... Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream

Things are so predictably dead beat that I don't even have to write new material anymore. Seriously! Let's just cut and paste from the BoomBustBlog archives: Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead

I have broached the argument in the past that the ECB is not god, or even close to it, and that it can only play the bond buying ponzi for but so long before negative consequences occur. Reference: 

• ECB As European Lender Of Last Resort = Institutional Purveryor Of A Pan-European Ponzi Scheme 
• Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!

 

Below is my mini-debate with Doug Kass on Twitter. Let it be known that I have respect for Doug, for he called the market turn in 2009 with precision, an did it publicly. Of course, I can't agree with him on this latest proclamation though...

Douglas Kass ‏@DougKass
The EU initiatives reduce tail risk (a crash) but dont address the deep structural issues - buy the rumor, sell the news. What I will do.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass How does the EUinitiative reduce risk/crash? Still not funded? Simply shifts dirt from 1 hole to the next, much dirt still missing

Douglas Kass ‏@DougKass
@ReggieMiddleton yes reggie... and it worked in the U.S. four years ago. Dont be dogmatic.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Stocks did double, though. Unfortunately neither economic output or asset quality nor true economic profit bothered to follow suit

ReggieMiddleton ‏@ReggieMiddleton
@DougKass It all depends on how you define "worked". US banking system is still a mess. Lending is sparse. We never really left recession..

ReggieMiddleton ‏@ReggieMiddleton
@DougKass ex. of how well it worked for banks: BAC,/C/MS/Manfinancial, soon GS, JPM, et. al. Its anathema to say, prices aren't everything.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass In essences, that means that stock prices went one way, and actual value failed to follow.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Stocks did double, though. Unfortunately neither economic output or asset quality nor true economic profit bothered to follow suit

ReggieMiddleton ‏@ReggieMiddleton
@DougKass It all depends on how you define "worked". US banking system is still a mess. Lending is sparse. We never really left recession..

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Taxpayers will offer loans without which banks will fail, yet don't get preferential status. that money will disappear

And a supplementary tweet from Tyler: Last Night's Critical Phrase "No Extra Bailout Funds" tinyurl.com/7nstlg2

Anyway, back to the Bloomberg story. So, now taxpayers will cough up and additional several hundred billion euro to be absolutely incinerated and vaporized once it hits that gaping oven of insolvency needing at least 500 billion euro to make a difference. Translation: Central banks will take another very big hit and not get paid for it. 

Speculators should have alreday started selling French and German bonds because they are the major contributors to the ECB. I've discussed France in detail earlier this week in Now Is The Time To Prepare For The (Next) French Bailout Of Their Banking System & Potential Bailout Of France. The French are not particularly well situated. I also took a find toothed comb to Germany as well, as archived... The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... You see, as you read through this last link, if Germany's Bunds so much as return to trendline, it absolutely wrecks EU insurance, bank HTM and pension portfolios. I mean negative equity everywhere.

Finally, check this out. If you don't want to watch the whole thing then start at 2:38...

An update of "shortable" (as in still having some meat on the bone) French banks is available for download to subscribers - French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian Exposure: As Italy pops with outrageous funding yields (just like Greece), France will be forced to bailout its banks once again, leaving the socialist country facing the dilemma of potentially having to ask for a bailout itself. As you may know from my previous writings, the French banking system is bigger than France itself so a true bailout cannot practically come from within.

I have outlined the upcoming EU bank runs up to two years in advance (see the many links below). Whenever one expects a bank run, the first things TPTB do is institute capital controls to stem said bank run - which of course makes the bank run that much more necessary to get your capital out - wash, rinse, repeat! Remember, by treaty, no country in the EMU may use capital controls without automatically being removed from the union. Well, do you believe that to be fact that will last? Yeah, I don't either. Simply watch as the money bleeds from the banks and the bumbletrons attempt to staunch the flow using mechanisms that will simply exacerbate the flow. Even more incredible is the fact that even to this date, with the existence of publications such as BoomBustBlog, entire nations as well as their financial advisors, leaders, regulators and politictians STILL DO NOT EVEN COMPREHEND the nature of the modern bank run. You cannot stem the tide with capital controls, you can only exacerbate it. 

Now, As Predicted Last Year, The French and the Greeks Are In A Race For The Biggest Bank Run!

On Saturday, 23 July 2011 I penned "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" wherein I went through both the motive and the mechanism of a European bank run, focusing on Greece and France as impetus.

You see, the problem with this bank holiday thing is that the real damaging bank run will not be staunced by the conventional bank holidays, et. al. because it is a counterparty run that will cause the damage, not depositors. TPTB in Europe don't have the chops to stem this one, at least not from what I've seen. As for how that institutional bank run thing works, we excerpt "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 are 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!

Make no mistake - modern day bank runs are now caused by institutions!

And Yes!!! The fodder for bank rungs are ALL OVER THE EUROPEAN SPACE!!!!

Today's MSM headlines make this quite clear, but before we get to them, just remember how obvious this was two and three years ago and why NOBODY should be shocked or surprised! See Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe from Wednesday, 31 March 2010 and Is Another Banking Crisis Inevitable? from Feb 4, 2011 and a complete video tutorial based on early 2010 work that has yet to be even one iota inaccurate... 

Now, why would anyone be concerned about a bank run today? Oh yeah...

 CNBC reports Spain Officially Requests Cash for Bank Bailout From Europe, right after I made it clear that CNBC is asking the wrong questions - to wit: CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?" 

You also have CNBC reporting that Fitch Cuts Cyprus to Junk as Greek Exposure Hits (exactly as the Greek bailout constructionist lawyer from Gottlieb in the video above said it would last week). Exactly one year ago today I claimed Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par at 30x+ Leverage: Bank Collapse is Inevitable!!! I wasn't joking. Bank collapse is INEVITABLE!!!

If you remember, Greece was supposed to be in the clear right? Let's bring back Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! All said Greece would never default while I made it clear multiple defaults were literally guaranteed as far back as 2010:

The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino 2010

Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! 2010

and the list goes on...

1. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?

2. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

As I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!

How Greece Killed Its Own Banks!

Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

Spain was even called as an unrecognized problem back in 2010: As We Have Warned, the Fissures Are Widening in the Spanish Banking System

So what's the purpose of all of this reminiscing? Well, the contagion trade is on and popping my friend. Those BoomBustBlog Armageddon Puts That Became Fashionable At Goldman are ready to be strategized. My next post on this topic will be on that big EU bank that was the last to be priced for contagion. In the meantime, remember (subscriber only - click here to subscribe) contagion model research:

•  Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
•  Sovereign Contagion Model - Pro & Institutional

Next up is an updated take on that big bank hooked to deep into Greek and Italian exposure. I'll try to have the subscriber document and a free preview opinion up in a few hours on BoomBustBlog. In the mean time and in between time, follow me:

Goldman's strategy desk just came out with a recommendation that mirrors my guidance to subscribers, a 3 weeks later, reference Armageddon Puts Versus Truly Busted CRE REITS: Looking for that 5x-10x ROI 

Yesterday, I received a couple of emails along the lines of the one displayed below...

"Hi Reggie,

Can you please put out any guidance on your Armageddon Puts for your lowly retail subscribers?

Thanks"

Well, I would like all to know that I'm not a typical mo-mo type trader. I'm a strategist. With that being said, I'm also not the one to look a strong risk/reward proposition in the face and do nothing. Below is a set of charts that should drive the mindset home.

The actual chart with the series and strike of the puts can be found in the retail investor's discussion forum. I will also be available to chat there as well.

If one would have averaged small OTM put purchases with with ample time value attached over the last week and a half, one would have amassed a neet little collection of Armageddon puts that will start popping into the money today. They were cheap enough to throw away in the rallying market, and if things go awry (quite likely) three digit returns are virtually guaranteed. The following is Goldman's note from this morning...

Published 10:46 AM Thu Jun 21 2012 ________________________________

Noah Weisberger

Aleksandar Timcenko

We are recommending a short position in the S&P 500 index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390. This morning, the Philly Fed print of -16.6, down sequentially and worse than expected, provides further evidence that weakness has extended into June. Although yesterday's FOMC delivered easing as expected, with a dovish statement, positive risk sentiment ahead of the FOMC had already buoyed markets. And we now think, with incremental US monetary policy on hold, the market will need to confront a deteriorating growth picture near term. The risk to our recommendation is that the data soon reverts to the 2-percent growth path our economists expect, that China growth turns, or that European policy-makers' rhetoric buoys risk sentiment further from here, with the upcoming end-of-June summit a focal point on this count.

The MSM headline barrage continues to confirm my multiple warnings on the increasingly ugly macro situation both here and abroad...

• US Mid-Atlantic Factories Slow; Leading Indicators Rise The US never really left recession
• Manufacturing, Jobs Reports Add Up to More Bad News Ditto
• Spanish Banks Need Up to $79 Billion in Capital: Auditors Yeah, right - that's before you mark assets to market, right?
• Beware the Looming 'Monetary Cliff': Hatzius yep!
• Europe May Have Found a New Use for Its Bailout Fund This is dangerous. The ECB wants to lax collateral rules to assist southern banks (read Italy, Greece and Spain) in obtaining funding. That means the ECB will be filled with even more trash than before. Reference my work on this topic 
  • You Have Not Known Pain Until You've Tried To Limit The Borrowing Costs of Spain!!!
  • Is Morgan Stanley Once Again The "Riskiest Bank On The Street"?
  • CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?"

This is how the European banks were killed in the first place -  Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead. The ECB will become the world's largest insolvent hedge fund (sans the hedges, of course) if it is not so already...  Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What.

More MSM headlines to drive the point home

• ECB Mulls Scrapping Sovereign Rating Rules: Sources - See what I mean? And the rating agencies have been much, much to soft and slow to rate the soveriengs accurately, to boot. What in the world would happen if you really had a thorough analytical force in there to guide clients in the clients (not the sovereings or the banks) best interests? Reference Rating Agencies vs Reggie Middleton, Part 3 and the Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts
• China's Factory Activity Shrinks for 8th Straight Month - Uh Huh! Reference A Quick Note On China's Rate Cut and Reggie Middleton Speaks On China, Greece Playing Chicken and US Ponzinomics, then Will China Hit That Inflation Deer In The Global Macroeconomic Headlights Anyway, Despite The Fact They Are Slamming On The Brakes?
  
  

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CNBC asks So Why Are Spanish Bond Yields Falling? Well, that's a good question. Short answer: Well rates spiked dramatically, and we are seeing some retracement from the psychological balm of even more liquidity thrown from the global central planning cartel, otherwise known as the central banks. Of course, this begs the question, "Should the rates go down since the 'Global Central Planning Cartel' has failed for 5 years and running to put this monster to bed with liquidity injections?" Alas, I'm already ahead of myself. Let's peruse said CNBC/Reuters article, shall we?

Spanish and Italian bond yields fell on Friday as sentiment toward riskier asset improved thanks to plans for coordinated central bank liquidity injections to help stabilize markets if Sunday's Greek elections cause turmoil.

The prospect of easy access to central bank cash helped settle nerves ahead of Sunday's Greek vote which could put Athens on a path to exit the euro zone if parties opposed to the conditions of Greece's international bailout come to power.

"It's having a good impact... on the bond side we see Spanish yields turning lower. It tells us that central banks at least won't let markets collapse on Monday," said Emile Cardon, market economist at Rabobank in Utrecht.

After reaching a euro-era high above 7 percent on Thursday, Spain's 10-year bond yield eased 12 basis points from its closing level to 6.84 percent, while Italian yields fell 10 bps to 6.06 percent.

What???!!! Isn't this still quite close to a record? Sovereign bonds spike to record yields, after being forced upon private banks, causing insolvency, then said banks request bailouts from said sovereigns who do bail them out, thus bankrupting the country and forcing said bailed out banks to lend the bankrupt countries money again. Wash, Rinse, Repeat! Remember in Dead Bank Deja Vu? How The Sovereigns Killed Their Own Banks & Why Nobody Realizes They're Dead… I have explained this nonsensical methodology in detail. I also showed how well it worked out for:

1. Greece How Greece Killed Its Own Banks!
2. the ECB Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What.
3. Italy Bank Run! Italiano Style?
4. and now for Spain, as I will demonstrate a little further on in this post.

Bund futures were flat at 141.83, recovering after a fall in after-hours trading on Thursday when Reuters reported that major central banks were ready to pump in liquidity, if needed, to prevent a credit squeeze.

Of course, as more and more investors ever so slowly start to realize that The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You.

Some of the relief in Italian and Spanish debt was due to speculative traders buying back bonds to close out short positions that profit when prices fall, traders said.

"People had probably gone quite short (on Italy) after the moves this week on Spain, so I'd expect, with the weekend coming up, people don't want to be short risk and are squaring up," the trader said.

In the medium term, Spanish debt was expected to stay under pressure despite the liquidity contingency plans, analysts said.

The agreement of a 100 billion euro ($125 billion) rescue for Spain's banks has sparked concerns about whether existing bondholders would be pushed further down the queue for repayment, denting appetite for new debt and driving borrowing costs toward unsustainable levels.

"Spain is still in deep trouble, let's not forget that. It has fundamental problems so liquidity to help hold things together doesn't really solve that," a second trader said.

On Thursday, 10-year Spanish bond yields hit 7 percent for the first time since the launch of the euro. The breach of this level raised expectations that the country would be cut off from funding markets and forced to seek a bailout for public finances on top of the agreed banking rescue.

So, as clearly articulated in Dead Bank Deja Vu? the sovereign debt shell game cum financing Ponzi of creating artificial demand through private banks simply assist in destroying both banks and sovereigns when initially you just had to worry about the banks. But in the case of Spain, there's a lot more to worry about - A lot more. Our current subsccriber update (click here to subscribe): Spanish Target Bank Update 6-2012 outlines the problems of a Spanish bank we have covered that is poised to suffer from a gargantuan issue that it simply cannot wiggle away from any longer. As a matter of fact, this issue, when coupled with its state imposed sovereign debt problem means "here comes the next big bailout!". As excerpted from the subscriber report....

KEY OBSERVATIONS

Asset / loan Portfolio deterioration off weakened macroeconomic environment

The Subject Bank, like other major Spanish banks, is being forced to buy sovereign debts as the country finds fewer international buyers for its bonds. The Bank therefore continues to struggle from an asset quality perspective, weighed down by its sovereign & toxic property loans and assets. This has been a major cause for the deterioration of Subject Bank's portfolio over the past couple of years.

The Bank derives ~70% and over 20% of its total gross revenues from net interest income and fees & commission, respectively. The quality of its asset portfolio is therefore extremely important in determining the health of the Bank.

The Bank’s value of financial assets in Spain as of Dec 31, 2011 is over quarter trillion EURO, comprising nearly 50% of the total financial assets in its balance sheet or more than 600% of its total equity (think the negative effects of leverage and gearing as you witness asset value depreciation). In addition, of the bank’s total loans and receivables, over 50% are in Spain. 

With that being said, a picture (or a chart) can be worth a thousand words (or even more Euros considering the rate of depreciation that I see ahead)! When viewing the chart below, keep in mind that the asset values used to calculate this chart are most assuredly overstated, and even then the numbers really look pretty bad. Simply imagine what happens when truth (margin/collateral call, haircut, resumptions, etc.) start calling...

Spain's Ugly Real Estate Crash Will Wreck Banks and Force One of Europe's Biggest Banking Bailouts. Remember a run on one big bank causes counterparties to panic. Counterparty induced bank runs do the most damage.

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