Posts from the ‘Market’ Category

Sep 3

Goldman Research Note to Hedge Funds

Goldman Sachs published a research note a couple weeks ago that did a very good job summarizing what is frightening about the state of the world economy right now, and why I have reduced my exposure to everything but gold stocks and a few special situation oil stocks and banks.

The research not is discussed on FT here:

http://ftalphaville.ft.com/blog/2011/08/12/652166/the-feds-secret-qe-equivalent/

And the actual powerpoint was posted by ZeroHedge here:

http://www.scribd.com/fullscreen/63818804

While the powerpoint focuses on 3 distinct items (the US economy, the European debt problems and China’s potential credit collapse) I think the most important points for us investors are made with regard to Europe.

Europe’s problems have the potential to evolve into something really bad, it could happen really quickly, and the outcome would be widespread among all stocks. Its the sort of situation where we will wake up one morning and the world will have made a dramatic change for the worse.

So those problems need to be at the forefront of every investment decision right now.

I have snipped 3 slides that I thought were particularly poignant.

First, this slide demonstrates how leveraged the European banks have become. They have grown assets well in excess of deposit growth.

To cover the gap between deposits and assets, the banks increased their wholesale borrowing.

The problem is that wholesale borrowing is short term. A “bank run” is much easier to precipitate when your funding is made up of overnight, 7 day and month long durations. If you ask me, this is a recipe for a nasty storm. High leverage to likely insolvent assets that have been bought with funds that can be pulled away in an instant? Yikes!

Last slide I’ll post. PIIGS debt. Whether or not the German courts and German government agrees to EFSF, you have to remember that the size of the EFSF is not big enough to handle Italy and Spain. I have a feeling that if the market gets euphoric next week when the EFSF gets the head nod from Germany, it won’t last long.

So obviously, Italy and Spain are the keys here. Further signs of stress in those countries is a sign to get out. And ominously, Italian and Spanish bonds are rising again…

Italy:

Spain:

Aug 27

…Couldn’t Stay Away

I couldn’t stay out of Gramercy. I bought back in yesterday at the end of the day, at $2.80. I sold more Oneida Financial to keep my overall cash position the same.

I know, my decision making is flailing a little here. I admit, I’m finding it difficult to make decisions here. I see plenty of opportunities out there. Even beyond the stocks I own. There are oil companies, for example, trading at a third of what they were a few months ago.

Take Emerge Oil and Gas (EME.to). Does it deserve to have been cut down by 60% in a few months? Oil prices are still at $80/bbl after all. The company’s production has declined slightly but nothing too severe. Still, a 60% decline in share price?

There are lots of stories like that out there. Lots of stocks that I would jump on in normal times. But as I wrote about last week, I don’t think these are normal times.

The latest evidence I’ve read describing the lack of solidarity in the Eurozone came from this FT article. Don Coxe said on his call this week that the default of any European sovereign would be “a nightmare”, except that the analogy was flawed because you do eventually wake up from a nightmare.

Scary stuff.

So I bought back Gramercy. I saw the volume over the last few days and I have heard the company say themselves that they are getting closer to a settlement of realty, and so I was loathe not to be long the stock coming into a Monday morning where news might be sprung.

But that hasn’t changed my outlook or my strategy.

Aug 21

Time to Get Out?

So I’ve been doing some reading (lots of reading) and ‘ve come to the conclusion that this situation in Europe is most likely going to end in a disaster…

I’m going to start this post with Europe, and I’m going to end it with my portfolio. From the macro to micro, so we begin:

First of all, lets separate the immediate problem from the almost immediate problem.

The immediate problem is the concern that there is stress in the European banking system and that this stress is going to intensify and some bank is going to blow up.

This was brought to the forefront in this WSJ article on Thursday: Fed Eyes European Banks. The markets tanked on Thursday and were stressed on Friday because of this article. The basic problem that can occur is this.

Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations. They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.

If you are a little bank in Shreveport Louisiana you rely on deposits for liquidity. Unless your depositers decide to pull out all their money you don’t have to worry about having enough money to fund your operations. If you are a big bank that has foreign operations but no branches in that country to take deposits, you rely on debt markets for liquidity. When debt markets get worried, there is no more liquidity. Then you are screwed.

When you are a too big to fail bank and have no deposits and the debt market gets worried, then we are all screwed.

The actual or perceived stresses have led to further actual stresses (perception is reality in the finanical markets no matter what the EU Officials will have you believe):

The cost of protecting European financial debt surged to an all-time high today. The Markit iTraxx Financial Index of credit-default swaps linked to senior debt of 25 banks and insurers increased as much as 12 basis points to 243, a record based on closing prices, according to JPMorgan.

So the important question is, how immediate are these funding stresses and are they about to go parabolic. From a Bloomberg article on Friday:

“Our funding stress indicators continue to flash amber,” Citigroup Inc. analysts led by Kinner Lakhani said in a note to clients today. “Most indicators weakened yesterday, but remain below the highest levels of last week.”

Another Bloomberg article quotes Dominic Konstam, the New York-based head of interest-rate research at Deutsche Bank AG:

“Banks are still funded, they’re well funded,” Konstam said during a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. “I think the investors are more worried about funding than the banks themselves are.”

FT Alphaville, who I believe broke the story on the ECB funding being tapped, points out that the amount that it has been tapped for is not a lot (thus far):

$500m is not massive it’s still bigger than the $50m dribs and drabs that were allotted the last time the ECB swap was in use, around February. We think that use was about a bank taking a few precautions rather than needing the money.

It doesn’t sound like funding problems are going parabolic. Yet.

I wouldn’t expect them to really. I mean nothing has blown up yet. Right now we are just at the point where the specter of something blowing up is coming closer.

Which leads us to the almost immediate problem.

This problem was put succiently by JP Morgan in a recent report.

The JP Morgan report excerpt, titled The Maginot Lines, outlines the options that Europe has to deal with their sovereign debt problems. This has been posted in a few places but I read about it on Zero Hedge.

If you read through the list it does not provide a lot of hope. Expand the EFSF to a trillion euros or more? Get the EU to agree on Eurobonds? Get the IMF to backstop everything?

How is this going to end well?

Moreoever, JP Morgan drops the reality hammer with the following statement.

What we do know is that these steps are unlikely until there is some kind of market riot, which means asset prices may be much lower by the time they happen.

Lets bring this back home. What am I going to do with my investments on Monday, on Tuesday, and for the rest of the week?

To summarize the above points, the immediate problem of bank insolvency is probably not going to escalate in the immediate future. The almost immediate problem of national insolvency is likely to escalate in the next few weeks. So there is some time (hopefully) but not too much.

After perusing my portfolio, I’ve drawn the following conclusions:

Gramercy Capital has to go
All oil stocks need to be trimmed
Oneida Financial needs to be cut in half
Leader Energy Service needs to be cut by as much as I can cut it without affecting price.
Gold stocks need to be evaluated based on performance. If they continue their breakout: hold. If not: trim.

I’m going to start to do this on monday. I hope that I am right that I have at least a few days to finish these changes and that Monday is not a watershed event.

Aug 20

They Know Nothing!

In the summer of 2007 Cramer came out and gave one of his most famous clips. His They Know Nothing clip.

The Europeans appear to know nothing as well.

I get concerned with this kind of talk.

Van Rompuy said unwarranted panic sparked the selloff of Italian and Spanish bonds that led the European Central Bank to intervene earlier this month….“Markets aren’t always right,” Van Rompuy said. He cited purchases of the Swiss franc, which jumped 14 percent in value this year, as an example of investors overreacting to European debt concerns and the U.S. credit downgrade by Standard & Poor’s.

Its like they think they can show the market who is boss. Right, and markets can continue with unwarranted selloffs and not being right all the way until they have dragged the european banking system into insolvency and taken the world into another recession.

But nope, this is a time to be ideological, stand by your principles and ignore the reality of what is actually happening. Consequences be damned.

What does “right” mean? You’d think that europeans, given their history, might have a better grip on the existential nature of that question then they are exhibiting.