Bear Market

Gold Steadies, Inflation Rises in Eurozone, Stagflation Beckons

September 30, 2011 by · Leave a Comment 

A day after the German Bundestag passed into law the expansion of the EFSF fund, Europeans were greeted by headlines giving the unwelcome news that inflation is on the rise again. Indeed the inflation number was far greater than expected, coming in at 3% from 2.5% for September , and may be indicative of the massive injection of cash into the European banking industry over the past number of years.

gold-steadies-inflation-rises-eurozone-stagflation-beckons.htm>Read more….

Fundamental Oil Report (2011-09-30)

September 30, 2011 by · Leave a Comment 

Crude oil declines since the beginning of today’s session as concerns renewed on the European debt crisis and the leaders will contain the crisis from spreading after the German approve on expanding the EFSF, as leaders are considering the next move to contain the crisis.

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Silver Technical Precious Metals (2011-09-30)

September 30, 2011 by · Leave a Comment 

Technical analysis for precious metals with major support, resistance levels and recommendations for 30-09-2011

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Gold Technical Precious Metals (2011-09-30)

September 30, 2011 by · Leave a Comment 

Technical analysis for precious metals with major support, resistance levels and recommendations for 30-09-2011

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The Moral Question

September 30, 2011 by · Leave a Comment 

By Robert Reich, Robert Reich

We dodged another shut-down bullet, but only until November 18. That’s when the next temporary bill to keep the government going runs out. House Republicans want more budget cuts as their price for another stopgap spending bill.

Among other items, Republicans are demanding major cuts in a nutrition program for low-income women and children. The appropriation bill the House passed June 16 would deny benefits to more than 700,000 eligible low-income women and young children next year.

What kind of country are we living in?

More than one in three families with young children is now living in poverty (37 percent, to be exact) according to a recent analysis of Census data by Northeastern University’s Center for Labor Market Studies. That’s the highest percent on record. The Agriculture Department says nearly one in four young children (23.6) lives in a family that had difficulty affording sufficient food at some point last year.

We’re in the worst economy since the Great Depression – with lower-income families and kids are bearing the worst of it – and what are Republicans doing? Cutting programs Americans desperately need to get through it.

Medicaid is also under assault. Congressional Republicans want to reduce the federal contribution to Medicaid by $771 billion over next decade and shift more costs to states and low-income Americans.

It gets worse. Most federal programs to help children and lower-income families are in the so-called “non-defense discretionary” category of the federal budget. The congressional super-committee charged with coming up with $1.5 trillion of cuts eight weeks from now will almost certainly take a big whack at this category because it’s the easiest to cut. Unlike entitlements, these programs depend on yearly appropriations.

Even if the super-committee doesn’t agree (or even if they do, and Congress doesn’t approve of their proposal) an automatic trigger will make huge cuts in domestic discretionary spending.

It gets even worse. Drastic cuts are already underway at the state and local levels. Since the fiscal year began in July, states no longer receive about $150 billion in federal stimulus money — money that was used to fill gaps in state budgets over the last two years.

The result is a downward cascade of budget cuts – from the federal government to state governments and then to local governments – that are hurting most Americans but kids and lower-income families in particular.

So far this year, 23 states have reduced education spending. According to a survey of city finance officers released Tuesday by the National League of Cities, half of all American cities face cuts in state aid for education.

As housing values plummet, local property tax receipts are down. That means even less money for schools and local family services. So kids are getting larger class sizes, reduced school hours, shorter school weeks, cuts in pre-Kindergarten programs (Texas has eliminated pre-Kindergarten for 100,000 children), even charges for textbooks and extra-curricular activities.

Meanwhile the size of America’s school-age population keeps growing notwithstanding. Between now and 2015, an additional 2 million kids are expected to show up in our schools.

Local family services are being cut or terminated. Tens of thousands of social workers have been laid off. Cities and counties are reducing or eliminating their contributions to Head Start, which provides early childhood education to the children of low-income parents.

All this would be bad enough if the economy were functioning normally. For these cuts to happen now is morally indefensible.

Yet Republicans won’t consider increasing taxes on the rich to pay for what’s needed – even though the wealthiest members of our society are richer than ever, taking home a bigger slice of total income and wealth than in seventy-five years, and paying the lowest tax rates in three decades.

The President’s modest proposals to raise taxes on the rich – limiting their tax deductions, ending the Bush tax cut for incomes over $250,000, and making sure the rich pay at the same rate as average Americans – don’t come close to paying for what American families need.

Marginal tax rates should be raised at the top, and more tax brackets should be added for incomes over $500,000, over $1,500,000, over $5 million. The capital gains tax should be as high as that on ordinary income.

Wealth over $7.2 million should be subject to a 2 percent surtax. After all, the top one half of 1 percent now owns over 28 percent of the nation’s total wealth. Such a tax on them would yield $70 billion a year. According to an analysis by Yale’s Bruce Ackerman and Anne Alstott, that would generate at least half of $1.5 trillion deficit-reduction target over ten years set for the supercommittee.

Another way to raise money would be through a tiny tax (one-half of one percent) tax on financial transactions. This would generate $200 billion a year, and hardly disturb Wall Street’s casino at all. (The European Commission is about to unveil such a tax there.)

All this can be done, but only if Americans understand what’s really at stake here.

When Republicans recently charged the President with promoting “class warfare,” he answered it was “just math.” But it’s more than math. It’s a matter of morality.

Republicans have posed the deepest moral question of any society: whether we’re all in it together. Their answer is we’re not.

President Obama should proclaim, loudly and clearly, we are.

More articles from Robert Reich….

Lower Lows in the Cat-Like Real Estate Market

September 30, 2011 by · 1 Comment 

The Daily Reckoning

Cash is still king.

Cash is king because non-cash is a commoner and a loser…it’s losing its value. An article in yesterday’s Financial Times, for example, tells that:

“US inflation expectations at lowest point in year.”

In other words, forget inflation. Forget price increases. It’s cash…cash…cash.

Cash on the barrel…cash in hand…cash and carry. You got cash? You da king!

People expect cash to be more valuable. And if we’re right…it will be more valuable.

Stocks, for example, fell yesterday. The Dow dropped 179 points.

And gold. It lost $34.

Another article in yesterday’s financial press told us that “it’s a great real estate market…if you’re rich.”

Why? Because the rich have cash. They’re the kings, queens and jokers too. And now they can use cash to buy other assets at a discount. They get more for their money. When inflation subsides so do prices. And nowhere have they ebbed more than in the real estate market.

A friend sent us an investment opportunity…a 12-unit apartment building in Florida, a block from the beach. What does something like that go for? Well, in the glory days of the bubble in real estate, it might have sold for $3 million. Today, it’s available for $750,000 — with owner financing at 5%.

Let’s see…if you can get $800 per unit per month…whoa…this could be a good deal. Because you can probably cover the cost of operating and maintenance and still get better than a 5% yield. If that is true, over time, you get the building for free.

But the problem with real estate is that every deal is different. Every toilet backs up in its own unique way…and every roof leaks in a different spot. If you don’t know what you’re doing…don’t do your homework…and can’t manage a property, including collecting the rent from people who don’t have much money, you probably won’t do very well.

Here at The Daily Reckoning we prefer the public markets, where the tenants don’t give you hard-luck stories and the paint doesn’t peel. But what we see in the public markets is a lot worse than what we see in the real estate market. Where can you get a yield of 5% outside of housing?

All over the investment world — except for US government debt — yields will probably go up. Cash in king. But cash is probably going to become even more powerful. In real estate, for example, the bad news is not yet fully priced-in. People assume that prices will hit a bottom and then begin going back up again. They figure they just need to buy at the right time and all will be well. But as we keep pointing out, markets are more like cats than like dogs. They play with their prey…killing them slowly while having some fun at it.

Real estate has already been whacked hard. It’s down 30% to 50% depending on where you look. But is that all there is? Is that the end of it? We don’t think so. The trends that worked so happily together to boost real estate to bubble levels have now become surly and uncooperative.

  • Household income is going down, for example. It is almost back to 1990 levels, erasing 20 years of gains. Who wants to ‘move up’ the real estate ladder when his income is going down?
  • And the rate of new household formation is going down. Instead of setting up new households of their own, the young…and not so young…are moving back in with mom and dad. The unemployment rate for young people is 20% — near Great Depression levels.
  • Population pressure is easing. The rate of immigration, for example, is also going down. There are reports of illegal immigrants returning home in such numbers that there are now more leaving than coming. Besides, with so few jobs opening up, who wants to go to all the trouble to sneak into the country?
  • Most important, the Great Correction is far from over. We’re expecting a long period of stagnation, de-leveraging and depression. Prices don’t go up in a credit contraction. They go down. What we’ve seen so far is probably just the beginning of a long trend that will probably take prices down another 50%.

But wait, we know what you’re thinking. At today’s levels, houses in America are not over-priced. They’re about in line with the very long term trend. They’re about where they should be. And at today’s ultra-low interest rates — mortgages are below 4% — housing is a good deal.

Maybe so. But Mr. Market doesn’t care. Just as he didn’t mind pushing up prices to dizzying heights he also doesn’t mind pushing them down to dreary lows. He’s an equal-opportunity deceiver. First, he made people think that housing always goes up. Now, he’ll make them think that it always goes down. And when he’s finished, you’ll be able to buy a house for about half today’s price.

Of course, then…you won’t want to. Because you will have learned an important lesson that you can pass on to your children: ‘Don’t buy a house. Rent. It’s cheaper.’ Then, perhaps house prices will begin to rise again.

In the meantime…and perhaps for a long time…cash is king.

And more thoughts…

“Your problem is that you’re a prescriptivist.”

Among the many things couples may argue about is why they argue at all. Some argue about money. Some argue about the children. But some disagree about what they disagree about.

The subject set off declarations in the Bonner household recently. One of the team suggested that the reason for much of the (minimal) discord in the family was the tendency of the other member of the team towards prescriptivism. He had taken the term from linguistics, where two schools of thought have fought bitter battles. On the one hand, some linguists insist that language should follow certain prescribed forms. Saying ‘ain’t,’ for example, is thought to be incorrect. Other linguists — the descriptivists — believe the rules should be derived from actual practice…not imposed. They see nothing wrong with saying ‘ain’t.’

Back at home, the other member of the team denied the “prescriptivist” charge vigorously.

“You make it sound like I lack imagination.”

“Well, I’m not saying you lack imagination. I’m just saying that you insist on having things just so. And ‘just so’ happens to correspond with the way you want them…and how you think they should be.”

“What’s wrong with that?”

“Well, nothing, if the way you wanted them was interesting and imaginative.”

“I’ve learned over the years spent with you that there’s a reason why things are normally done the way they are usually done. You always want to experiment with things. New ideas. New places. New ways of doing things. You even dance funny.

“…all very well, but it’s really just another form of egotism. You turn your back on 2,000 years of accumulated experience…and then insist that your own innovation…or your way of looking at things…is superior.”

“Well, at least it’s not hidebound…backwards looking…and conventional. And I don’t dance funny. I just don’t get much pleasure out of doing the same stupid motions that everyone else does, over and over, all night long. I like to experiment.”

“Well, it ends up being eccentric, quirky, and not very nice.”


“Take architecture, for example.’

“Oh no…”

“Yes, take architecture. The classical column was designed thousands of years ago. It has withstood the test of time. Its proportions are graceful and beautiful. It tapers up from the bottom. Not the other way around. If you turn it upside down, you will have an original shape. But it will not be very nice. It will be stupid and ugly.”

“I don’t turn columns upside down.”

“No, but you do other things. And they don’t always work. And I prefer to have things that look nice. Things that work.”

“You’re just a rigid, stuck in the mud, prescriptivist.”

“Sticks and stones…”


Bill Bonner,
for The Daily Reckoning Australia

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Why Real Investors Love Political Incompetence

September 30, 2011 by · Leave a Comment 

The Daily Reckoning

The market is extremely volatile. An indicator of market volatility, the Volatility Index [WCB: VIX] crept back above 40 on Wednesday. The VIX is anticipating more market upheaval to come.

Why? The standard response you’ll get is ‘because there’s a lot of uncertainty… about the US… Europe… gold… stocks in general‘. But that’s just a symptom.

It’s the governments and central banks creating this uncertainty. You see, they don’t know they’re largely to blame for the world’s economic ills. Or that their attempts to fix matters only makes them worse.

The market has voted. The best way to move forward from the Euro crisis is for Greece to default. Yet the ruling powers are doing almost everything to avoid this fate.

The Americans, led by Tim Geithner, are upping the political pressure on Europe to create a highly leveraged rescue fund. They want to increase the ‘firepower’ of the €440 billion European Financial Stability Fund (EFSF) by having the European Central Bank (ECB) lend against it.

According to The Age, this could create a bailout fund of up to €2 trillion, with the difference made up of loans from the ECB (which would actually be newly printed money).

The Germans had a ‘print your way to prosperity’ mentality at the end of WWI. It led to hyperinflation.

So while they recognise the need to ‘do something’ to avoid another credit crisis, they are reluctant to put their credit on the line to bail out other Eurozone nations.

As a result, investor confidence is shattered.

This is why you’re seeing so much volatility.

So how do you invest in this mess?

Given this environment, it is prudent to continue to scale into the market selectively.

You’ll continue to see large rallies and sell-offs. So move into the market and buy on the down days – try to resist chasing the market on the way up.

You’ll still be rewarded for investing in good value companies in the current environment. But exactly when you’ll receive those rewards is the question. The skill is trying to find companies which are a good business, but they stock value has been beaten down.

The ongoing market volatility will present buying opportunities.

As always it comes down to patience.

Greg Canavan
for The Daily Reckoning Australia

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Bulls Go Backwards

September 30, 2011 by · Leave a Comment 

The Daily Reckoning

— Welcome to the new world of stock market trading, where no one really knows what is going on. Below is a chart of the S&P500, showing last night’s trading action.

— As you can see the market surged at the open as traders mistakenly thought the German vote to expand the European financial stability fund solves everything. It doesn’t. The S&P then spent the rest of the day in steady decline, falling around three per cent from the peak.

— Then, just after 3 pm, a buyer showed up to ensure the day finished in the black. Just as well too. A one per cent decline on the ‘positive’ German news would not have been a good look.

S&P500 all over the shop

S&P500 all over the shop
Click here to enlarge

Source: Stockcharts

— Such extreme intra-day volatility is a sign markets are trading in an information vacuum. You can trade the bullish outcome – which is to believe the European Central Bank (ECB), helped by the US dollar swap lines the Fed recently put in place, will flood the markets with liquidity. Or you can trade the bearish outcome – which is to bet on the whole bailout/default thing going pear shaped.

— The end result is in the hands of people who really don’t know what they are doing. That doesn’t inspire a lot of confidence, a feeling reflected in an erratic market.

— But the whole Europe thing is becoming a bit of a bore. While everyone sweats on the Greek outcome, the world economy continues to slow. Doctor copper, as shown in the chart below, is struggling. It’s down nearly 30 per cent from the peak reached in February. Adding impetus to the move, strong volume accompanied the recent sell-off.

— But it’s still got another 15 per cent to fall before it reaches the lows of 2010, which, as you’ll remember, was the point where the market began to discount QEII. Will it be the threshold for QEIII?

Copper looking precarious

Copper looking precarious
Click here to enlarge

Source: Stockscharts

— And copper could fall to that level pretty quickly if the slowdown in China gathers pace, which it will. China is at the tail end of an epic credit boom. The tide is now on its way out, exposing many property developers as having precarious finances. This is probably just the start.

— Hong Kong is a good proxy for what is going on in China’s real estate market, so let’s look at what’s happening in Honkers. Below is a three-year chart of the Hang Seng index. It’s not looking pretty. If the China property bubble is only just starting to show some cracks, then this market has much further to fall.

Hong Kong is looking sick too.

Hong Kong is looking sick too
Click here to enlarge

Source: Stockcharts

— Which is not great news for Australia. We’ve been riding the China boom for a while now. China’s credit bubble had a major impact on Australia’s post-2008 recovery, terms of trade, strong dollar and high relative interest rate structure.

— If China continues to slow, it will have flow-on effects for Australia’s nominal income growth, which in turn will see interest rates head lower by the end of the year.

— As far as investment strategies go, it could pay to have a look at beaten-down domestic cyclicals – like building materials companies – in advance of lower official interest rates. Commodity producers and mining services companies aren’t likely to gain much support while a China slowdown is in the news.

— But here’s a reason not to get too excited about growth (in any sector) in Australia. Our household debt levels are amongst the highest in the world. A recent ‘working paper’, called ‘The Real Effects of Debt’ released by the Bank for International Settlements (BIS) suggested there were debt thresholds where, once breached, they become damaging to growth.

— Before seeing what the thresholds are, take a look at the table below. It shows the systematic build-up of debt (combining household, corporate and government debt) across developed nations over the past 30 years.

Household, corporate and government debt
as a percentage of nominal GDP

Household, corporate and government debt as a percentage of nominal GDP


— Australia’s total debt levels are up there, but not as hefty as the G7’s debt burden (the first block of countries in the table). That’s because our non-financial corporate and government debt levels are pretty good, at 80 per cent and 41 per cent of nominal GDP, respectively.

— Household debt is where we stand out as world-beaters. Australia’s household debt is 113 per cent of nominal GDP, a level only exceeded by Denmark and the Netherlands.

— According to the BIS, 85 per cent is the threshold where debt becomes detrimental to growth. Australia is well beyond that point.

— This suggests a few things:

  • When (like now) China slows, the household sector won’t pick up the slack. Without the China boost, Australia could well slip back into recession.
  • Banks are facing a low growth environment, something their share price performance has suggested for a while now. Loans for residential property make up the bulk of household debt and these loans sit on the asset side of banks’ balance sheets. So if households rein in their debt levels, it will affect bank growth rates.
  • The economy is highly sensitive to interest rates. Because the household sector has such a high debt burden, debt-servicing costs soak up a lot of income. If interest rates fall, the interest rate sensitive areas should get a nice short-term boost.

— But any rally based on an interest rate cut will be purely cyclical. The world’s equity markets, Australia’s included, are in a ‘secular’ bear market. We are now suffering the consequences of decades of excessive debt growth. Total debt levels have grown to such an extent that they are damaging economic growth, not assisting it.

— And the refusal by officials to write off the bad debt and strengthen the global banking system is only making things worse. So make sure you have a ‘bear market’ strategy – plenty of cash, gold and good value, income-paying stocks to get through the next few years with your wealth intact. Because if you invest thinking it’s a bull market, you’ll go backwards.

Greg Canavan
forDaily Reckoning Australia

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I’m Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction

September 30, 2011 by · Leave a Comment 

Zero Hedge

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also demonstrate how BoomBustBlog research not only runs circles around the big name brand bank analysts in their missing this risk (once again), but has been doing so for years, since our proclamation that Bear Stearns would collapse in January of 2008 (Is this the Breaking of the Bear?) and the fishy things at Lehman Brothers just a few days afterward (Is Lehman really a lemming in disguise?). I urge the big media to catch on as the TRUTH goes viral, delivered raw and uncut. Now let’s go hunt some big Goldman game! You see, unlike some of the more meek (which is really to be read as conflicted), I am particularly well suited to go after the dangerous game…  Enjoy!


All paying subscribers are urged to download the latest forensic research: Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine? in order to get a head start on what will be publshed in parts 2 and 3 of this series!

Friday, 9/20/11, Bloomberg reports: Morgan Stanley Seen as Risky as Italian Banks, as excerpted

Morgan Stanley (MS), which owns the world’s largest retail brokerage, is being priced in the credit- default swaps market as less creditworthy than most U.S., U.K. and French banks and as risky as Italy’s biggest lenders.

The cost of buying the swaps, or CDS, which offer protection against a default of New York-based Morgan Stanley’s debt for five years, has surged to 456 basis points, or $456,000, for every $10 million of debt insured, from 305 basis points on Sept. 15, according to prices provided by London-based CMA. Italy’s Intesa Sanpaolo SpA (ISP) has CDS trading at 405 basis points, and UniCredit SpA (UCG) at 424, the data show. A basis point is one-hundredth of a percent.

… Moody’s Analytics, an arm of Moody’s Investors Service that’s separate from the company’s credit-rating business, said in a report yesterday that Morgan Stanley’s CDS prices imply that investors see the bank’s credit rating as having declined to Ba2 from Ba1 in the last month. The company is actually rated six grades higher at A2 by Moody’s Investors Service.

By comparison, Bank of America Corp. (BAC) and France’s Societe Generale (GLE) SA, which have CDS trading at 403 basis points and 320 basis points respectively, have prices that imply a rating of Ba1, higher than the implied rating on Morgan Stanley, said Allerton Smith, a banking-risk analyst at Moody’s Analytics in New York.

… Morgan Stanley was the biggest recipient of emergency loans from the Federal Reserve during the financial crisis and also benefited from capital provided by Tokyo-based Mitsubishi UFJ Financial Group Inc., now the biggest shareholder, and the U.S. Treasury, which it repaid with interest.

… While the price of Morgan Stanley’s credit-default swaps is at the highest level since March 2009, it’s nowhere near the peak reached in 2008. On Oct. 10 of that year, the annual price for five-year protection rose to the equivalent of 1,300 basis points, according to data provided by CMA, a unit of CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market.

… Trading in Morgan Stanley credit-default swaps has risen recently to 257 contracts last week, compared with 187 for Goldman Sachs Group Inc. (GS), according to the Depository Trust & Clearing Corp. That compares with a weekly average of 73 trades in Morgan Stanley and 91 in Goldman Sachs in the six months that ended on Aug. 26, DTCC data show.

… There was a net $4.6 billion of protection bought and sold on Morgan Stanley debt as of Sept. 23, according to DTCC. Even with the higher trading volume, investor skittishness in the face of Europe’s sovereign debt crisis may be leaving few market participants willing to sell CDS protection to meet the demand for hedges, said Hintz.

“With the EU teetering, few other firms are going to jump in and write CDS on a global capital markets player like MS,” Hintz said in his e-mail, referring to the European Union and to Morgan Stanley’s stock-market ticker symbol.

… The rise in Morgan Stanley’s CDS prices may also relate to an expected decline in third-quarter trading revenue or to the company’s exposure to French banks, Smith said.

… Morgan Stanley had $39 billion of cross-border exposure to French banks at the end of December before accounting for offsetting hedges and collateral, according to an annual filing with the U.S. Securities Exchange Commission. Cross-border outstandings include cash deposits, receivables, loans and securities, as well as short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements.

‘Galloping Wider’

While Morgan Stanley hasn’t updated those figures, Hintz estimated in a Sept. 23 note to investors that the bank’s total risk to France and French lenders is less than $2 billion when collateral and hedges are included.

As of June 30, Morgan Stanley had about $5 billion of funded exposure to Greece, Ireland, Italy, Portugal and Spain, which was reduced to about $2 billion when offsetting hedges were accounted for, according to a regulatory filing. The company also had about $2 billion in overnight deposits in banks in those countries and about $1.5 billion of unfunded loans to companies in those countries, the filing shows.

“Their spreads just are galloping wider,” Smith said. “Is it rational that Morgan Stanley CDS spreads would be wider than French bank CDS spreads if the concern is exposure to French banks? I don’t think that makes perfect sense.”

I have addressed this ad nauseum on the blog, but the answer to that questions has been put best by Tyler Durden, at ZeroHedge put it best:

…Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd’s bank “resolution” provision would do absolutely nothing to prevent an epic systemic collapse.

You see, despite the massive following that the big brand name bank analysts have, none of them warned on Morgan Stanley nor the banking industry in a timely fashion. That is none, except for none other…


  • In early August, when the French banking system was ripe for implosion and not a peep was available from any of the big brand names, who instead focused on Italy but apparently failed to inform clients that Italy fed contagion directly into the French banking system… The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
  • Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer: In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head. I then provided a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

  1. French Bank Run Forensic Thoughts – Retail Valuation Note – For retail subscribers
  2.  Bank Run Liquidity Candidate Forensic Opinion – A full forensic note for professional and institutional subscribers

Herein lies the rub, though. The Bloomberg article above rightfully states that Morgan Stanley has more gross exposure to France then its peers, but it totally leaves out the aggregate risk that its peers face. Is the media, led by the market, ignoring the squid canary in the coal mine?

A month or so ago (Monday, 22 August 2011), I penned the public blog post that also relased my most recent research on Goldman Sachs – The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can’t Trade In Volatile Markets? Who’s Gonna Tell The Shareholders and Tax Payer??? –  as excerpted:

The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don’t call Goldman the world’s most expensive federally insured hedge fund for nothing!

As you can see above, volatility ramped up in 2008 and Goldman reacted like any other beta-chasing, long only hedge fund (although they aren’t long only) – they lost money!

Now, with the benefit of BoomBustBlog hindsight, I’d like to announce to the release of a blockbuster document describing the true nature of Goldman Sachs, a description that you will find no where else. It’s chocked full of many interesting tidbits, and for those who found “The French Government Creates A Bank Run? Here I Prove A Run On A French Bank Is Justified And Likely” to be an iteresting read, you’re gonna just love this! Subscribers can access the document here:

As is customary, I am including free samples for those who don’t subscribe, so you can get a taste of the forensic flavor. Here are the first 2 pages of the 19 page professional edition, with illustrative option trade setups soon to follow.

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Is Goldman Sachs stock really the front running, Mo-Mo traders wet dream?

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Given the high correlation of Goldman’s prop trading desk to equity markets and taking into consideration the state of equity markets in Q2-Q3, it would be interesting to see how Goldman Sachs share perform in the coming quarters. Those who would have followed the traditional school of thought and bid the price up would have already seen their capital erode by 20% during the last quarter and by 12% over the last one month alone.

This warning given to both to my paying subscribers (in explicit detail) and my blog followers two months ago. Over the last few days, the sell side has followed suit, unfortunately not in enough time to capture much of the downward share price movement. Compare the difference between the two time frames from the perspective of catching/avoiding the sharp share price drop and it is clear that the BoomBustBlog one and a half month or so headstart/prescience had its advantages…

  • om: Goldman Sachs estimates cut at Meredith Whitney AdvisoryMeredith Whitney is slashing Goldman Sachs September quarter EPS estimate to 31c vs. consensus $1.45 and FY12 EPS estimate to $7.85 vs. consensus $15.14. Shares are Hold rated.

If one were to click through on the links above this chart leading to the various sell side downgrades, the main focus is on accounting earnings diminishing primarily as a result of potential trading issues. These issues were covered in our report two months earlier, yes, but there are several things we covered that the sell side missed, and apparently is continuing to miss. It is these “misses” that will be the focus of the next two articles on. As a teaser, I urge all to read (or reread) the controversial piece: So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn’t? and stay tuned as I post part two of this documented virtual squid hunt over the next few hours.

Related reading and media:

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street’s sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

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Morgan Stanley CDS Curve Inverts As Risk Highest Since Q4 2008

September 30, 2011 by · Leave a Comment 

Zero Hedge

We have been discussing US (and European) financial risk for some time (especially recently with regard MS exposure to French banks). Since we published that article, we have seen incredible shifts in MS CDS and bonds even as stocks appear to shrug of some of the reality of the situation. An excellent article on Bloomberg last evening pointed out that not only was MS CDS at rather extreme levels, it was quietly as risky (if not more so) than many of the European banks that are making the headlines. Not only is MS CDS its highest since its spike highs in Q4 2008, the curve is inverted with 1Y risk trading 500/550 against 5Y risk at 455/470 which strongly suggests jump risk (or counterparty risk) is being aggressively hedged. With over $4.5bn of debt maturing in Q4 (which we have been pointing out for months – TLGP issues) and the increasingly binary nature of any outcomes, it seems the only real buyer of any MS debt are basis traders as the difference between bond spreads and CDS has halved in the last few weeks.


The only time that CDS for Morgan Stanley was higher was during the middle of the crisis when they spiked massively higher – the situation is becoming increasingly binary.

And the spread between bonds (which are trading wider – cheaper than) and CDS is falling (an upwards bias in the basis chart above) as basis traders (remember we discussed these traders in yesterday’s closing market snapshot) step in to scoop up with 100-150bps differential. However, bond liquidity can disappear very quickly when outcomes are so uncertain (see Q4 2008 Q1 2009) and ask Boaz Weinstein – so don’t be left holding that bag.

Charts: Bloomberg

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