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!




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