Remain Calm! All is Well!
by Zero Hedge - April 30th, 2010 2:49 pm
Courtesy of Chris Pavese
As we discussed in our Q4-09 Broyhill Letter, it appears that the EU’s initial plan of action (see illustration below) was not exactly a robust plan after all. At the time, we suggested that Mr. Almunnia consult his history books, when he claimed that “There is no bailout problem. In the euro area, default does not exist.” Actually, European nations have defaulted on their debt a stunning 73 times since 1800, with Greece in default more than 50% of the time!
It appears that we will soon add a few more defaults to that running total. PIMCO CEO, Mohamed El-Erian, summed up the bottom line as simple yet consequential, “The Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and what started out as a Greek issue has become a full-blown crisis for Europe.”
Plainly, we agree. In addition to our year-end letter, we shared our thoughts on Europe’s struggles here, here, here and here. We’d also recommend investors take a look at the Economist’s interactive guide to Europe’s economic woes, The PIIGS That Won’t Fly. With interest rates exploding higher and excessive fiscal spending likely to be reined in, the currency appears to be the only release valve. According to the Economist’s most recent “Burger Index,” the Euro still has a ways to go before reaching fair value on a purchasing-power-parity basis. Given the prospects for an extended deflationary period ahead, we think the odds of a downside overshoot are “strong to very strong.”
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DiggGoldman a Criminal? What's the Charge?
by Zero Hedge - April 30th, 2010 2:46 pm
Courtesy of Bruce Krasting
As of this writing there is no clarity as to what exactly the DOJ is looking at in the Goldman case.
The WSJ has this as the status:
Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.
What could a Federal prosecutor be looking at is a question to ask. I wish I knew. There is a lot riding on the outcome of this.
There are some things that are available to the public. I have some question about some it. Quite frankly it does not pass my smell test. Unfortunately I am not a lawyer, and therefore can’t really make any conclusions. Possibly those lawyers who read this well help us bloggers out.
We know from the Senate testimony by Josh Birnbaum that his unit, the Structured Products Group “SPG” shorted the common stock of public companies as part of their hedging strategy. Josh touted this in his annual review. The SPG made big money in a bad market. They made over three billion in revenues from shorts.
This from an Email from Josh in July of 2007:
Since 6/21, the SPG Trading group has paused in our equities trading while we work with management and market risk to come up with quantitative limits for these positions. It sounds like we are getting close to having something systematic in place, but in the meantime, we are looking for approval to opportunistically buy puts on certain mortgage originators, insurers, mortgage REITs, broker-dealers, and other related names exposed to RMBS, CMBS.
We also know from the testimony that Josh shorted the stock of Bear Sterns as part of his hedging strategy. He said that the SBG group used “mostly” puts in their activity. He described that he took a “macro view” of the market and hedged his risks accordingly. Josh made the link to his view of a declining sub prime/Alt-A market and the stocks of the financial companies who would be most impacted if things went south in high yield mortgage land.
Also in the testimony Josh stated that he had a number of names that he used in his short hedging…
Goldman a Criminal? What’s the Charge?
by Zero Hedge - April 30th, 2010 2:46 pm
Courtesy of Bruce Krasting
As of this writing there is no clarity as to what exactly the DOJ is looking at in the Goldman case.
The WSJ has this as the status:
Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.
What could a Federal prosecutor be looking at is a question to ask. I wish I knew. There is a lot riding on the outcome of this.
There are some things that are available to the public. I have some question about some it. Quite frankly it does not pass my smell test. Unfortunately I am not a lawyer, and therefore can’t really make any conclusions. Possibly those lawyers who read this well help us bloggers out.
We know from the Senate testimony by Josh Birnbaum that his unit, the Structured Products Group “SPG” shorted the common stock of public companies as part of their hedging strategy. Josh touted this in his annual review. The SPG made big money in a bad market. They made over three billion in revenues from shorts.
This from an Email from Josh in July of 2007:
Since 6/21, the SPG Trading group has paused in our equities trading while we work with management and market risk to come up with quantitative limits for these positions. It sounds like we are getting close to having something systematic in place, but in the meantime, we are looking for approval to opportunistically buy puts on certain mortgage originators, insurers, mortgage REITs, broker-dealers, and other related names exposed to RMBS, CMBS.
We also know from the testimony that Josh shorted the stock of Bear Sterns as part of his hedging strategy. He said that the SBG group used “mostly” puts in their activity. He described that he took a “macro view” of the market and hedged his risks accordingly. Josh made the link to his view of a declining sub prime/Alt-A market and the stocks of the financial companies who would be most impacted if things went south in high yield mortgage land.
Also in the testimony Josh stated that he had a number of names that he used in his short hedging…
Gerald Celente on Global Trends – Interview by Bill Meyer
by ilene - April 30th, 2010 2:42 pm
Gerald Celente on Global Trends – Interview by Bill Meyer
Courtesy of Mish
Here are some Gerald Celente quotes from his interview by Bill Meyer on April 26, 2010.
"Median household income is below 1999 levels. What kind of imbecile is out there saying we have to raise taxes to keep things going more?"
"This is a stimulus recovery. They are printing phantom money out of thin air based on nothing, and producing practically nothing. It’s digital money not worth the paper it’s not printed on."
"It’s not only the US by the way, and that’s why I want to make this clear. It’s China, It’s Japan, It’s Indonesia, It’s Australia. It’s the UK and all of Europe."
I do not care for Celente’s views on hyperinflation or the US breaking up, but the 48 minute long interview is interesting.
STOCKS HANGING TOUGH?
by ilene - April 30th, 2010 2:37 pm
STOCKS HANGING TOUGH?
Courtesy of The Pragmatic Capitalist
A barrage of bad news is hitting stocks today, but the S&P is just 0.8% off yesterday’s closing price. The risks appear to be mounting up quickly, but investors remain wildly confident in a long and sustainable recovery ahead:
- Goldman criminal probe increases risks of further bank investigations. As we said two weeks ago this sector cannot be touched with the White House’s war on Wall Street unfolding.
- GDP was weaker than expected and several economists and analysts question the sustainability of the growth. Edward Harrison at Credit Writedowns sees the news as a full blown negative.
- The sovereign debt problems in Europe appeared to be resolved, however, the painful austerity measures will not only weaken the European economy, but do nothing to resolve the actual issue at hand – it’s the currency, stupid! In addition, the potential for contagion is on the rise as Portugal and Spain will likely be forced into similarly painful austerity measures that further weaken the region and increase the risk of sovereign debt and a deepening recession in Europe. In my opinion, the precedent set by the bailout is nothing short of atrocious and will impose severe strains on the citizens of Europe.
- The Fed officially announced a tool to begin draining liquidity. In addition to the MBS program this is the beginning of a series of moves that lay the foundation for future rate increases.
- Updated: I forgot to mention the growing support for the Volcker Rule on Steroids….
Despite all this, the market is down just 0.8%. Is the market hanging tough or is this just more signs of investor complacency?
US Rail Traffic “Statistical Recovery”
by ilene - April 30th, 2010 2:30 pm
US Rail Traffic "Statistical Recovery"
US Rail traffic is improving on a year over year basis, but looks are deceiving as the comparison is against very feeble 2009 traffic. Let’s take a look at Railfax Data through April 24, 2010.
Total US Rail Traffic
The table shows the 4 week rolling average of auto traffic is up 32% from a year ago. However, auto traffic is still down 31.8% compared to 2008.
The same holds true for metals, up a whopping 71% from a year ago, yet down 18.5% from two years ago.
13 Week Rolling Averages – Year Over Year Comparisons
Please refer to the article for still more charts.
Traffic is up, but only based on anemic comparisons. This is what’s known as a statistical recovery. By the way, it took trillions of dollars of global stimulus to generate that "recovery". Guess what happens when the stimulus stops?
The Fab Fab Self Eval For Dummies
by ilene - April 30th, 2010 2:23 pm
The Fab Fab Self Eval For Dummies
Courtesy of Zero Hedge
Just Because Washing Down Endless Daily Porn Surfing With Some Taxpayer Funded Happy Hour Never Felt So Good
by Zero Hedge - April 30th, 2010 2:18 pm
Courtesy of Tyler Durden
From a reader:
Surprised to find out that the tax payer may be footing the bill for the SEC’s bar tab. Tried to grab a beer at the Gin Mill Bar in NYC the other night, but with 100 members of the SEC inside, it kinda killed the vibe. See attached.
Well, in all honesty this beats the AIG taxpayer funded trip to Ritz Carlton Half Moon Bay. Plus, being so corrupt and so incompetent (telling someone you work for the SEC creates a whole new category in mental visualization) as the average SEC worker, is in fact hard work. These are traits that in a different century, Charles Darwin would likely say should be critical for sexual selection… cue porn jokes here.
And seriously, what better use of their time to SEC staffers have? Suddenly Goldman isn’t hiring SEC drones direct into its Correlation and Mortgage trading desks. As for enforcement – well, they can always just read a blog or two and catch up on those criminals they fell like dealing with.
Now back to porn and bitching about a sub-$1 billion budget.
Full Letter From Marcy Kaptur And 61 Congressmen Demanding Erik Holder Investigate Goldman
by Zero Hedge - April 30th, 2010 1:03 pm
Courtesy of Tyler Durden
The noose is tightening, even though one could speculate the one doing the tightening ought to be on the other side of the rope as well. That said, we sure miss the days when Dick Bove used to provide instacommentary on Wells and Goldman, typically of the buy every dip format. That beard makes him look so wise and grizzled… That, or in dire need of grooming.
The Honorable Eric Holder
United States Attorney General
U.S. Department of Justice
950 Pennsylvania Avenue, N.W.
Washington, DC 20530-0001
Dear Attorney General Holder:
The U.S. Securities and Exchange Commission (SEC) announced on Friday, April 16, 2010, that it had filed a securities fraud action against the Wall Street company Goldman Sachs & Co (GS & Co.) and one of its employees for making materially misleading statements and omissions in connection with a synthetic collateralized debt obligation (“CDO”) that GS & Co. structured and marketed to investors. The SEC alleges that:
-
This synthetic CDO, ABACUS 2007- AC1, was tied to the performance of sub-prime residential mortgage-backed securities (“RMBS”) and was structured and marketed by GS & Co. in early 2007 when the United States housing market and related securities were beginning to show signs of distress. Synthetic CDOs like ABACUS 2007-AC1 contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.
-
GS & Co. marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS & Co. to buy protection on specific layers of the ABACUS 2007-AC1 capital structure.
-
In sum, GS & Co. arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to
…
Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look
by Zero Hedge - April 30th, 2010 1:01 pm
Courtesy of Reggie Middleton
To begin with , Goldman Sachs produces more accounting revenue and accounting profits than its peers. This is because Goldman benefits from virtual monopoly pricing and advantages in several markets. Despite this advantage, when one factors in economic RISK and the cost of capital, Goldman doesn’t fare nearly as well as the sell side makes it seem. Of course, the sell side rarely attempts to quantify risk, which is cool until reality rears its (sometimes ugly) head. Before we get to risk adjust returns, let’s look at the simple accounting numbers and attempt to throw some logic on them…
Above, you see that GS has enjoyed a significant premium over its peers in terms of book valuation. This premium has actually increased over the past year. Let me be the one to remind you that no US company has every survived a criminal judgment, none. Arther Anderson was driven into bankruptcy from charges stemming from the Enron collapse, and that is despite the fact that the Supreme Court overturned the guilty verdict! Assuming, for the benefit of the doubt, GS can somehow set precedence, or more realistically, criminal charges are not filed, we still have to contend with:
- the SEC lawsuit
- the increased regulation, in particular the Volcker rule and derivatives oversight
- follow on litigation, which is virtually guaranteed, and virtually guaranteed to be extremely expensive, time consuming, and distracting from the core businesses.
- a general decline in business since we are coming off of a credit and risky asset boom and going into a sovereign debt crisis that will make FICC much less predictable (see#3366ff;”>The Next Step in the Bank Implosion Cycle??? for a more on how this could end with the Pan-European Sovereign Debt Crisis drama unfolding).
Taking all of this into consideration, you tell me… Does Goldman really deserve to be trading at such a premium considering the myriad risks it is currently exposed to PLUS the murky business and regulatory environment? They are also losing talent on the sales side, and at the MD level to boot. Today’s market is starting to see things the Reggie Middleton way.
Now, let’s factor in some more reality. No matter what your broker says about accounting earnings and revenues, they don’t come free. They all have a cost of capital attached to them. Let’s reference an excerpt from When the Patina Fades… The Rise and Fall of Goldman Sachs???
GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.
Remember, practically everybody poo-poohed my research and opinion in 2008 when I said Goldman was drastically overvalued – Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis. Those 600% to 1000% gains on the put options proved otherwise. Speaking of which, those July 150 puts… Can you smell what the forensic analysis is cookin’???
For those who haven’t read my review of Goldman’s latest quarter performance, please do: A Realistic View of Goldman Sachs and Their Latest Quarterly Results
More of Reggie on Goldman Sachs
Reggie Middleton vs Goldman Sachs, Round 2
Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off
Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now!
§ As Reality hits, the Masters of the Universe are starting to look like regular bank employees
Reggie Middleton’s Goldman Sach’s Stress Test: Breaking Ranks with the Crowd Once Again!
Who is the Newest Riskiest Bank on the Street?
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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