Thursday, September 29, 2016

Commerzbank -- cuts dividends and 20% headcount reduction

Well its official

Monday speaking to some friends at Commerzbank it was clear that something was in the air!  No one knew what but senior staff was busy and unavailable for the past few weeks.  Now we know, dividends are out of the door this year (very very serious) and 20% of the staff will be let go -- blaming automation, but in reality what we are seeing is a cut back to the profitable business only. The bank did the same thing in the early '00; They looked at shutting down business and cut a lot of  "fat". Of course, the problem is that today's star can become tomorrow's dog, but that is of no concern to management.  Stop the bleeding is the first order of business!  In reality is that from the mount of the gods (e.g. the CEO's office) came down an edict: "Cut 20% of the workforce".

The impact is always the same:  going down the various levels the bosses decide what team to keep and what team to let go; its easier to get rid of entire teams -- its better for the overall moral, than cutting 20% of each team -- which creates paranoia (justified by the way).

The second round (because that's never enough to meet the 20% target) is get rid of people that have a "bad performance" followed by those who don't get a long, and then cut more because you have to cut numbers by 20%.  I've seen situations where a country team was let go and where the boss remained...

Independently of how painful the firing process is, the real issue here is the decision to cut the dividend -- bank stocks are considered blue chip income stocks, with a lot of pensioners counting on their dividends as income, it shows how serious the situation is as the bank now takes an aggressive stance on fixing its balance sheet.

Yesterday's words from Credit Swiss' CEO sound as powerful indication of things to come

No position on CS or Commerzbank

Wednesday, September 28, 2016

Credit Swiss statement on European banks -- That's very serious!

I started writing about the US presidential debate this morning, 48 hours after the event to be able to have some clear thinking:  Its easy, Clinton won, she was prepared and Trump showed us that he remains the "winging kind of guy"  but he did not confirm the reason for not giving his tax returns -- he doesn't pay federal income taxes.

What is much more serious is what's going down in Europe with the banks.  Slightly over a year ago Tidjan Tiam became the CEO of Credit Swiss, a good-ish financial institution that actually has enough capital.  His statement:
“You get extreme movements on the basis of relatively minor piece of news because there’s a lot of uncertainty,” he said, citing “regulatory uncertainty” about future capital requirements and concerns about “potential fines like you’ve seen on Deutsche Bank this week”.
 “I think there is also a lot of doubt, a fundamental doubt, is there a viable business model that covers its cost of equity?” Mr Thiam added.
 “That’s the big big big question,” he said, describing it as something that “makes banks not really investable as a sector”. 
Deutsche Bank is an old institution, a great institution and I really wish them well, I hope that they come out of their current predicament”.
These are the statement that one of Europe's premier bank is making about DB in particular but also of the entire banking network.  His view is that Europe's banks are seriously undercapitalizes since they can hardly absorbe the hits from regulatory fines.  It also explains the sudden withdrawal of many new issues.  The woes of the European banking system yields are spreading and the issuers are not ready to absorbe the increased price (or they are rethinking their current pricing strategy).  Of course this was all at 5 am, by 1 pm, the markets were all up and the end of the world had once again been postponed. is however a real issue here;  rumors are that the several prime banks will be coming to the market for more capital, because although the business of CLO/CDO is pushing assets out of the door as fast as possible, the totals are not nearly substantial enough for them to meet their Basel III requirements.

I am guessing some long dated sub debt expensively priced that has an impact on the whole market spread, the whole market will be repriced; everyone prices their issues off the best risks and not the worse. There is a perception that German banks (including the Landesbank) have some serious undercapitalization issues  that need to be resolved ASAP-- they ALL thought they could ignore Basel III but it turns out that this may not be the case, as banks in the rest of the world have for the past 4 years been strengthening their balance sheet, and resent the Europeans trying to finess their way out of trouble.  BTW we are not even discussing Italy here -- its the core, its Germany and its France...

Anyway, its Wednesday and the world keeps on turning

Note:  No position on CS or DB

Friday, September 23, 2016

What the hell?

Ok so I don't look at the markets for a whole day and this is what happens:

  • Stocks are off big time (now what)
  • Oil prices are in "free fall", well down to $44
  • The Loonie (CAD) just took a big dive
Now, the CAD and the price of oil have been linked (correlated) for some years, so the drop of one will impact the other, still the CAD is not doing well today -- a big dive off the USD.  The is also definitive economic weakness in Canada -- but then the rest of the world is not doing too great... As a export country that's bad.

It seems that the new trade agreement between US and Europe are going badly (in fact both France and Germany have said the talks are going badly -- moreover, with elections in the US -- and inEurope) there is limited appetite for new trade deals right now.

Why the markets are off there are the usual culprits; indications are that Q4/16 growth will be sub 2% and therefore its a sign... a sign of something.  Lets be clear after nearly 8 years of an ever growing stock market there is a (warranted) perception that the market is over due for a correction,  

I will tell you this, there is no real sign of recession right now, there are sign of economic slow down, but that's not the same thing, rumors are that the FEDs are looking at raising rates in Q4, but the market has been saying that for more than a year, so...It could all be nothing, Dennis Gartman who's always the seller of doom and gloom is long again.  You pay your money you get your bet..

Overall, and this is important, the market is looking for an excuse to correct, it has not found it yet, but the pressure on the downside is getting very strong.  

Have a pleasant weekend.

Thursday, September 22, 2016

Markets are falling, save yourself its all going to end...NOT

As expected after a rash of doom and gloom articles, punditry and other lesser events the markets are back up, VIX is way down (low low volatility) and the whole world is good again.  Of course the boys at Zero Hedge (conspiracy nutters the lot) are seeing the end of the world everywhere, I just don't.  Also I don't see massive growth anywhere, I see a stagnant world with little inflation (maybe a bit of deflation), excess labour availability and very low growth.  Companies continue to generate massive profits, although its hard to see how they can squeeze  that lemon anymore than they have so far.

The case of Wells Fargo is a case and point.  It is evident now that all "the little people" will pay for the desires of senior management.  Apparently the person in charge of the entire department took retirement last year and a US$ 125 MM payoff, and senior management "knew" that things were rotten in their new accounts and credit card groups.  Moreover, the banks is trying the pass off all the errors on ex and future ex-employees.  As if they had nothing to do with the rot!  Priceless -- and will go out of their way not to help clients' with the destruction of their credit rating...

Back to the market, at one point you have to start believing the labor numbers; the crazies have for years been saying that the labor stats were made up or wrong, but in reality the numbers are consistent, anecdotal evidence seems to point to a labour pool squeeze in the US.  So the truth is that Barak Obama's economy for the past 8 years has been good.

Where are the shoals that may destroy the world economy?  

Trump:  Well there are the US election, Trump is a lot closer int he polls than he should be based on his plans (make America great again) that are at best scribbled on restaurant napkins.  Turns out that he's even backing out of Obama being a US citizen.  

Banca Monte de Paschi de Siena: More serious is the Italian banking sector that seems to be in deep trouble...again.  Monte de Paschi the Siena is looking at its third bailout in three years, they are looking for Euro 5 billon.  The stock trades at 0.19 --- which implies a market cap of Euro 560 million, so raising Euro 5 billion will be a challenge (looks like the Italian government will probably have to step in here.  The only reason is that the bank's EV stands at Euro 12 billion -- its just the market is uncertain about the bank's future and its total capitalization's requirements.

Deutsche Bank:  The big unknown (and this is serious) the bank has seen the value of its stock halved over the past 12 months, from Euro 22 to Euro 12 now (thereabouts) so that's not too good -- its especially hard when your bankers are paid with vestable options that are now way out of the money...  The first issue is the recent fine that DB(USA) had to pay of about US$ 14 billion -- for a number of things they did wrong (Most of this stuff goes back to 2008).  The real issue is that DB doesn't have a natural home -- its one of the few world class banks who has a very small market presence in their domestic banking market.  Such a large bank with little direct risk to its "country's economy".  I pray for the best but suspect that this will not be a happy place.   Right now the bank is undertaking a bunch of CDO/CLO that will declutter the bank's balance sheet, but will also impact the bank's P&L in the long run -- because they will have to sell good well performing assets and it will not be cheap, since the market is waiting for DB.

Seriously, I have a hard time believing that America will elect Trump, they cannot be that insane? As for the Italian banking sector, I just don't know.  The impact on the local bond market -- Europe's third largest (after Germany and the UK) is certain to be impacted, and while BMP may go down in the annals of banking as the world's oldest, the rest of the sector is not exactly in good health either so that even if BMP is saved trouble could emerge elsewhere in Italy.  In my opinion that's the biggest risk

Note: No position in DB, BPM or Trump!

Tuesday, September 20, 2016

Bankerster -- Wells Fargo

Last week the press announced that Wells Fargo had let go of 5,300 employees following the discovery of a massive fraud.  Turns out that WF's bankers were creating fake accounts for customers and then charging fees on these fake accounts.  this is a multi year fraud that has been going on for some time.  This morning the CEO of WF was testifying before congress, turns out he could not remember anything, nada, probably not entirely sure of his name.

For the CEO of WF there are two choices:  (a) I knew of the whole thing and I will resign and go to jail for defrauding clients orrrr (b) I remember nothing, I will maybe keep my job, I will keep my bonuses and will not go to jail.  Guess what road the CEO chose; really this cannot be a surprise to anyone.

The system is such that you can be a liar (or economical with the truth) or not remember your name and it will a go away, probably.  Now if I am Warren Buffet (he owns a big chunk of WF) I will make sure that the CEO, the COO, the CFO, the compliance officer, the board and the ombudsman/women all get fired.  I do it quietly, say: "we are sorry I didn't know" fine of a few billion and move along an try to rebuild the franchise.

Now, all this is run of the mill stuff it will end with some lowly vice president going to jail -- because he got a $200,000 bonus two years ago, but the CEO and his friends will walk away retire and find new, well paying jobs.  When I worked in the financial industry, I never though there was that much fraud. In fact, now I am having a hard time finding a market that was not rigged sometimes in the past decade (you would think that opening new accounts would be difficult...).  Turns out that my entire industry is one big massive scam!  Who knew -- well the crazy lefties, they knew -- although they also think that the moon landing was faked and that George Bush stole the election (damn they go that one correct too...maybe the moon landing was, never mind).

Anyway, this is where I sit, the world I have worked for my entire career is full of crooks -- sure there are many good guys (and gals) but there are a lot of crooks and people who are more than happy to look elsewhere.  The truth is that the whole system is corrupt; the regulators jump back and forth between regulator and regulatee -- getting nice fat bonus to make up for the small(er) salaries.  They have little incentive to go after the big fishes, cause the big fish will give them their pay offs!  All this is legal, the mortgage market, the CDO/CLO, gold, interest rates swaps structured products, metals everything has been touched by malfeasance over the past decade.  

The truth is even worse, because the banks are bigger today than they were a decade ago, sure there is less leverage (in America) and less stupid trades, but the market is unhealthy because so many now are too big to fail, they get an sure thing backstop from their national government.  While the American government has been pushing (successfully) for more capital, in Europe the pushback and the lack of movement has been unbelievable.  Several Italian banks are in trouble today because they were able to shovel the shit ahead -- hopping that an eventual recovery would float all boats (ask the Japanese how that turned out), well the recovery never occurred in Europe and now some are in dire straight (Monte the Pashi de Siena) -- ok all the Italian banks, some are in some trouble (DB) and some seem to be ok but we are not sure (the entire French banking industry). 

In the end, we have another scandal, 5,300 lost their job at WF, its certain that the rot went higher, but no one has interest in the corporate office to take a hit and lose their jobs (they will eventually if Warren has his way -- but they will walk away with multi-million separation bonus).  Just watch what emerges in the next few weeks.

How very depressing!

Tuesday, September 13, 2016

the great correction? Maybe maybe not!

Yesterday the market was awash with rumors of market collapse; sure the S&P500 was off a bit (not doing too great this morning), but its still above the 20 day moving average -- so not really a correction yet.

The problem is always the same; corrections are brutal, but market rises are slow and gradual -- with occasional retracements -- hence the 20 day moving average, as a sounder barometer of market health.  Sur prices are high with a p/e of 25x the market is very expensive, but then what do you compare it against?  I was reading an article about Mexico's economy; with regards to the economic achievements of the country -- GDP growth is in the range of 2.5%, inflation is at 3% and government spendings are out of control -- in 5 years they have nearly doubled.  However, over the past five years the government has enacted several major reforms (educations, energy and telecommunication).  However, there was a promise of 5% GDP growth.  Therefore the journalists call the current administration a failure!  But where is the context?

[Granted the President's decision to invite Trump and Clinton was strange, there was no upside for Mexico, and when Trump alone showed up (I presume that Clinton made the same assessment), the whole thing turned into a "shitshow" for the ages.]  

What I mean is that context is everything.  In 2012, everyone expected Europe to have meaningful economic growth (didn't happen), we expected China to return to double digit growth (ditto) and for the US to be an economic power house -- when in fact, GDP growth has been around 2%.  Therefore to call GDP growth for Mexico of 2.5% per annum as a failure is a mischaracterisation of what world we live in; In context, if you consider that Mexico is one of the most open economies and therefore is dependent on global GDP growth for its own performance, expectations where for the rest of the world to pull its own weight -- that didn't happen, and hence Mexico's GDP growth target of 5% is unachievable.

Being Grand Poobah market prognosticator for the ages where do I think the markets will go?  Well the pundits have for years (literally since Obama has taken power -- and this is not a figure of speech by the way) preached for the end of the world (in terms of market performance) was nigh!  That clearly didn't happen, most institutional investors have to invest, despite the view that the economy could be on the verge of a massive correction.  In fact, if you had followed most pundits and stayed in gold or other precious metals, at best you would be even, at worse down over 8 years.  If like all institutional investors you were forced to allocate to stocks and bonds -- then your returns have been nothing short of spectacular.  On February 20th, 2009, the S&P 500 stood at 700, it stands at 2,132 today for a 276% return over 7 years excluding dividends -- not too bad!  

So back to my initial point.  Question is are the market over leveraged, do we have the crazy ingredients of 2008 in place?  Housing prices are rising, but there are no longer any liar's loans or crazy complicated CDL/CLOs -- there is still securitization, but most products are vanilla -- investors remember the last 8 years rather well.  There is no doubt that quantitative easing has created a mass of money, most of it invested in the market, there are a lot of junk bonds out there, and these have been used to buyback stocks -- so that the quantity of stocks available has shrunk -- and new listing requirements (plus the expense of keeping a company on the main bord) is less and less attractive -- moreover the scrutiny can become a problem in its own right.  So there is fewer stocks available -- and new companies are reluctant to list.  That creates some pressures on prices.

Finally, there is the question were will all the money go, with the invest in bonds with negative returns?  The fundamental problem is that there are few attractive options outside of stocks (and bonds) that provide the liquidity and benchmark pricing favourer by investors.  Could there be a correction?  Certainly, in fact the market is well over due for a 10% to 20% correction -- It has been nearly 8 years since a real massive correction; proof again that democratic administrations are good for the investors!

Personally as the Grand Poobah I have zero idea where the markets will go -- they are expensive but what else is there, corporate bonds that pay nothing sovereign bonds that pay less than nothing? Statistically the US market is well overdue for a correction, but that has been true for some time now (maybe we are in the New Normal after all).  When asked I always have the same reply as to how to invest:

  • Understand what you are buying 
  • You are buying people not assets -- understand that
  • Understand the limits of what you understand/know
  • Have a return target for all your investments 
  • If it looks too good to be true, it probably is
  • No one has a cristal ball and can tell you where the markets are (if they did, they would not tell you)
  • Do your homework and be diligent in admitting (and correcting) your errors
  • Technology can screw your investment theory
These 8 points are all I ever say.  When I asked people what they invest in, they always tell me their good investments (could be talent, could be luck -- and its usually mostly luck) and very rarely their mistakes.  My point is that investing requires work, diligence and luck (my guess is 50% of the latter), most investors don't have access to good research (its very very rare) and when they read they read static and not dynamic.

Good luck

Monday, September 12, 2016


It has been 15 years since that faithful evening -- yes evening because the events that occurred Monday morning in NYC occurred at 9 pm in Hong Kong, where I had just landed.  In fact, I had just checked into the Grand Hyatt in Hong Kong had had tuned on the TV, where on CNN the events were unfolding.  Like everyone else I had assume that a small(er) plan had hit the World Trade Center, as it had happened nearly 40 years earlier to the Empire State Building.  Then other news started trickling in, the attack against the Pentagon, the second tower and finally the aircraft that suspiciously crash.

The reason for my being in HK was that I had schedule a number of meetings with Asian airlines, as I was then an aerospace banker.  As the news unfolded I and my colleagues first digested the news and by midnight (local time) we had booked flights out of Hong Kong for the morning -- going back home to Singapore and LA.

Those scheduled to go to LA took 10 days to get home, and in fact eventually flew to Singapore -- at least they had access to an office (our NYC offices were in the World Financial Center -- about 400 meters from the world trade centre -- it was shut for 2 weeks).

I remember from that night the boredom that comes from catastrophic events.  We went to dinner (the four of us) since there was nothing that could be done, and watching a building burn is very boring (it was also terrible because we discovered much later that the debris that was falling from the tower was actually people jumping off -- faced with a slow firey death they chose a painless one of jumping from the building, but that was much later).  We came back from our quick dinner to find the first tower collapsed and the second one was not far behind it. We knew nothing of the tragedy since phones to the US were always busy (too much traffic).

The strangest thing was the next mornings normality as we bored our flight to Singapore, no additional security not additional military -- I think that Asia was in a state of denial as to the events; or more probably they saw these attacks particular to America, and of little significance to them.  In the weeks that followed -- and at the time America's commander in chief was less than impressive, the true nature of the attack become clear -- once again America was involved in a war -- this time not with a country, but a group of well financed fanatics.  Osama Bin Landed, sion of one of Saudi Arabia's richer family had decided that America had to be punished.   

I remember September 11 2001 for the details and not the big events -- I have no memory of the attack on the Pentagon, I have little memory of the events -- aside from these first CNN images -- because independently of how horrible an act of aggression is, your mind rationalises and finds it boring and of little consequence.  I remember the dinner very well, better than the events which is incomprehensible, but I guess that's how the mind works!

I lost no friends in the disaster, one guy that I did know from Cantor (the broker that was on the last two floors of the WTC and lost 90% of its NYC staff) was out at client meetings in Texas -- he eventually drove home since the skies were closed.  For me it was second hand stories -- acquaintances of friends, rather than anyone directly.  The only person I ever knew who died in a disaster was a SVP at Amex in Singapore -- she was on a flight from Indonesia to Singapore to disintegrated in flight...

Anyway, 15 years already! 

Friday, September 9, 2016

Trump Fatigue

Is this how he wins?  Last night Trump said:  I was against the war in Iraq -- not true, there is tape that shows he said the exact opposite.  He was for the war until he was not for the war -- actually when it turned into such a nightmare for G.W. Bush.  Back to my point, we don't even pay attention anymore.

I fact, I am almost certain that a vast majority of Americans just don't care anymore of the incessant lies, because they have been though that all politicians are liars, and so Clinton must be lying too, about her emails, Benghazi, Clinton Foundation -- pay to play etc etc.  America has not had a candidate like Trump, ever, a brazen self aggrandising lying lier that cares nothing about details (or facts) who is uncurious. aggressive and vengeful, just the kind of guy you want with the nuclear codes...

Last night there was a little TV thing where a TV morning host (should have stayed there) asked insipid questions of Trump (who even then didn't answer) and basically treated Clinton like a '60s housewife -- interrupting here and going on at lengths about things that don't matter in the context (national security).

The entire main stream media felt that the entire show was a joke and an insult, to women because Clinton was treated very differently than Trump, and it was evident.  it was a hatchet job against Clinton a nearly pro Trump who said lies after lies and was not once challenged.

So very sad, I suspect that Trump has good chance of winning now, the polls are not Clinton's friend, nor is the press.  Clinton's biggest sin:  Being a women that achieve -- and that its all bad for 'merica.