Reggie's Blog & Proprietary Research

Reggie's Blog & Proprietary Research (1277)

From Bloomberg :

Dec. 15 (Bloomberg) -- The U.S. House is considering reinstituting the Depression-era Glass-Steagall Act, which barred bank holding companies from owning other financial companies, Majority Leader Steny Hoyer said today.

A renewal of the 1933 law “is certainly under discussion” by House members, Hoyer, a Maryland Democrat, told reporters in Washington. The Glass-Steagall law was repealed in 1999.

Hoyer made the comments when asked whether Congress and the Obama administration could do more to persuade banks to make more business loans to get credit flowing into the economy.

“As someone who voted to repeal Glass-Steagall, maybe that was a mistake,” Hoyer told reporters.

The repeal removed a regulatory obstacle to the $46.4 billion merger of Citicorp and Travelers Group Inc. to form Citigroup Inc.

 In the current environment, this will literally devastate many of the uber banks, for the trading arms are the only portions of the bank making money - and they wouldn't be making money if they didn't get nearly free access to capital through their insured banks status and access to the various government lending facilities.

As anticipated in the latest forensic analysis, JPMorgan Chase & Co., the biggest credit-card lender, said defaults climbed to a 2009 high of 8.81 percent from 8.02 percent in October. Delinquencies for the New York-based bank fell to 4.9 percent from 4.95 percent.

pdf  JPM Public Excerpt of Forensic Analysis Subscription 2009-09-22 14:33:53 1.51 Mb

pdf  JPM Forensic Report (092209) Final- Retail 2009-09-24 03:12:17 130.93 Kb

pdf  JPM Report (092209) Final - Professional 2009-09-24 03:13:31 550.72 Kb

Defaults at Bank of America Corp., the No. 2 card lender, fell to 13 percent from 13.22 percent, while late payments increased to 7.69 percent from 7.59 percent, the Charlotte, North Carolina-based bank said in a federal filing.

pdf  BAC Swap exposure_011009 2009-10-15 01:02:21 279.76 Kb   - Is BAC the next AIG?

Capital One Financial Corp., the third-biggest issuer of Visa Inc. credit cards, posted increases in defaults and delinquencies. Write-offs climbed to 9.6 percent from 9.04 percent, and payments at least 30 days overdue rose to 5.87 percent from 5.72 percent, McLean, Virginia-based Capital One said.

Since 42 pages is a lot to digest, let me post an excerpt from the pdf  CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb to illustrate a point.

REITs have ascended too far from their fundamentals -DJ US Real Estate Index has outpaced S&P 500 index by more than 50% during a time when their macro and fundamental outlook pale compared to that of the broad market. There is no "deal" to be had here! What you are witnessing is momentum trading, not fundamental value.

 S&P 500 increased 62.0% between March 9, 2009 and December 9, 2009, while the DJ US Real estate index increased by 96.2% over the same period. With many tribulations still plaguing the US REIT sector, the valuations appear quite stretched.


The ascending REIT index is again creating the potential for another upheaval similar to that witnessed after the Lehman debacle. The DJ US Real estate index which was at 228.91 on September 15, 2008 has reached at 171.6 as of December 9, 2009.



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.

I recently received a link to Ackman's (from Pershing Square) presentation basically pushing retail CRE malls (Ackman's CRE presentation). Several of my subscribers have commented on his success with GGP as well as the upward climb of REITs in general. I decided to go out of my way to create a comprehensive overview of the US commercial real estate market in order to illustrate exactly where my (more bearish than the consensus) views stem from. The following document started out as a reply to the Ackman presentation, but ended up as a full blown white paper. It is free to download here: pdf  CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb.

I invite all to read both documents thoroughly. It may take some time, but I feel it is definitely worthwhile for anyone with an economic interest in this space to review both the bull and the bear arguments from entities that actually invest in the markets. I welcome any and all "constructive" comments and feedback.

Here are a few choice graphs from the presentation...


Not to be a killjoy, but the bulk of the GDP boost came directly from government stimulus, which is apparently fading very quickly.


The fall in single family home values pales in comparison to the fall in CRE values... 


The US and UK single family home price bubble have outsripped - by far - that of Japan. If real asset pricing bubbles contributed to the lost decade, one can only imagine what we are in for stateside!



For those who are interested, my first exposure to Mr. Ackman was after reading a similar Powerpoint presentation on the monolines. I was stunned at the assertions and the alleged misvaluations. After I and my team went over it, I too jumped on the bandwagon. The man had a very valid point and the stocks were trading in the stratosphere in relation to the risk they carried. That was in 2007 at roughly $80, and they are trading for pennies now. Ackman held his bearish stance for 5 years through some apparently nasty drawdowns, to ultimately have been proven right. Kudos to the man. See my work on the monolines that I shorted in 2007-8:

I believe I was one of the first of this new wave of blogger/investors to short  Goldman publicly in early 2008 (see Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street and Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis). The impetus behind the short thesis was simple. Goldman is an investment bank, just like its bulge bracket brethren, and the risk in its environment threatened all of them the same. Contrary to popular belief, Goldmanites bleed red blood and spend green dollars, just like the rest of us.

Wednesday, 09 December 2009 00:00

Financial Innovation vs Financial Fraud

Written by

I was reading a post by George Washington over at ZeroHedge that actually spurred the following rant. An excerpt reads:

The Telegraph notes:

The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful".

Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.

When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk."

He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out of investment banks and to hedge funds where they belong".

It is not just George Soros.

Wednesday, 09 December 2009 00:00

The CRE Macro Outlook for 2010

Written by


 November 25 , 2009 update: The latest results of the Moodys/REAL CPPI show a return of negative 3.9% in September for the all properties national index.


Be aware that the Case Shiller Residential index has its own snafus which I feel are overestimating the values of homes (see "On the Latest Housing Numbers").  Credit losses will be pressuring home prices for the foreseeable future ("The Truth! The Truth? Banker's Can't Handle the Truth!!!")



 As a quick recap: I pointed out the illogical, self destructive, circular relationship between Goldman and its clients/customers as significant monies are lost following bad advice and purchasing trash in the form of financial and investment products. See "Reggie Middleton vs Goldman Sachs, Round 1". Goldman has recently issued a buy rating on the commercial REIT sector (of course, Goldman has started underwriting and selling REIT securities), something that I consider to be suicidal at best. Let's take some anecdotal glances into the commercial real estate world to see exactly what it is that Goldman would have us buy, and why.

Page 10 of 92