A few points on the situation rocking the markets. Guess what, the US (and the German) decoupling just got crushed today. By Peter Tchir of TF Market Advisors.
It is a global economy. Europe is a mess. China is struggling. Whatever strength the U.S. economy had earlier this year has now dissipated. The theory that somehow the U.S. can “decouple” is taking a serious beating, and the even less realistic view that Germany could “decouple” is also being torn to shreds.
The current crisis has its roots in Europe and Europe needs to address it. European finances and debt are far too interconnected to make a Greece exit anything but a nightmare for Europe. Governments and the ECB have lent too much money to Greece, and to Ireland, and to Portugal, and to Spain, and to Italy. All the “backstops” and “firewalls” have the same governments and central banks lending more money. The plan is flawed and creates contagion. Greece may eventually leave, but not until Greece and the EU have done a lot more preparation and planning. In the meantime currency devaluation risk, even more than solvency risk, is putting the entire Spanish economy in jeopardy, with Italy not too far behind. This has to be addressed immediately.
They tell us; “it is all fine, we don’t need more capital”. Then suddenly, in matter of short time, they come back and ask us for more money. The latest of banks first telling us all was fine, and then asking for help, is Spanish Bankia. From Golem.
Some time ago in the Propaganda War series (Markets don’t Fail, Risk Weighted Lies, Balance Sheet Instabilities, Toxic Bloom of Lies and The Banker’s Mexican Standoff ), I questioned the system of jargon which banks and their regulators use to assure us, and perhaps themselves as well, about the risks they run, and their claims of having it all under control. I suggested that the concepts, for all their pretensions to mathematical precision, were dangerously stupid and actually little more than self-serving piffle.
In Toxic Bloom of Lies, I looked in particular at the technical sounding notion of Risk Weighted Assets. A bank’s Risk Weighted Assets are just the amount the bank expects to make back on the loans it has given out, multiplied by some estimate of the risk that some or all of the income from the loan might not be paid back. Not that complicated really but essential if you want to really know how solid a bank is. Of course the obvious question is who gets to set the risk factor?
Guest post by Azizonomics.
So Facebook keeps falling, and is now floating around the $27 mark. We’re a third of the way down to my IPO valuation of FB as worth roughly $2-4 a share (or 5-10 times earnings), although I wouldn’t be surprised for the market to stabilise at a higher price (at least until the next earnings figures come out and reveal — shock horror — that Facebook is terrible at making money).
The really stunning thing is that even after all these falls, FB is still trading at 86 times earnings. What the hell did Morgan Stanley think they were doing valuing an IPO without any viable profit model at over 100 times earnings? The answer is that this was an exit strategy. This IPO was about the people who got in early passing on a stick of dynamite to a greater fool which incidentally is precisely the same bubble mentality business model as bond investors who are currently buying negative-real-yielding treasuries at 1.6% hoping to pass them onto a greater fool at 0.5% (good luck with that).
This was achieved by convincing investors to ignore actual earnings and instead focus on projected future earnings. From Bloomberg:
Facebook, with a market capitalization of $79.1 billion, is trading at 29.5 times the company’s projected 2014 profit of $2.69 billion, data compiled by Bloomberg show.
Or much more simply, counting chickens before they hatch.
As we suggested back when the JPM whale trade was announced, the trade(s) was supervised by hopefully more than one risk manager, with the trades being that large. Bloomberg reports that Mr Iksil traded big size before, and was used to carry more VaR solo, than the bank in total. VaR or not, the question is most probably as, often in finance, “Did the bosses understand what kind of trades Iksil was putting on,( and what the closing cost would be)”? From Bloomberg.
Iksil’s value-at-risk, a measure of how much a trader might lose in one day, was typically $30 million to $40 million even before this year’s buildup, said the person, who wasn’t authorized to discuss the trades. Sometimes the figure, known as VaR, could surpass $60 million, the person said. That’s about as high as the level for the firm’s entire investment bank, which employs 26,000 people.
Investigators are examining how long senior executives knew about Iksil’s swelling bets at the chief investment office before losses approached $2 billion. One focal point is why the formula used to calculate Iksil’s VaR was altered early this year, cutting the reported risk by half. The change followed an internal analysis in late 2011 and was approved by top risk executives, said a person close to the bank. About the same time, half a dozen managers typically involved in such decisions moved to new jobs.
“If it was something that had that large an impact, it would have to be agreed to at the very-most-senior level within risk management,” probably including the bank’s chief risk officer, said Steve Allen, a former head of risk methodology for JPMorgan who retired in 2004. “You’re not going to make a change of that magnitude on the basis of one risk manager.”
An important gauge of China’s manufacturing sector has weakened sharply, adding to the pressure on the government to take more decisive action to support the flagging economy. The official purchasing managers’ index for manufacturing fell to 50.4 in May, its lowest in five months, from 53.3 in April. Although it was the Chinese PMI’s sixth straight month above the 50 level, which signals an expansion of activity, the fall in the index highlighted a clear softening of growth momentum. High quality global journalism requires investment. As the first item of official economic data for May, the PMI offers a timely glimpse into how the Chinese economy performed over the past month. Many analysts and officials had believed that China was on track for a “soft landing” until a raft of poor data in April led to a flurry of growth forecast downgrades. http://www.ft.com/intl/cms/s/0/d2f17014-ab87-11e1-b675-00144feabdc0.html#axzz1wQ4tZnA1
The dramatic drop in Indian economic growth isn’t bothering the likes of Mahendra Saraf. A farmer, he works in a sector that has seen growth shrink to 1.7 per cent in the first three months of 2012 against 7.5 per cent in the same period last year. But Mr Saraf, 26, is confident the blow to his profits will be cushioned by government agricultural subsidies. “Global and domestic demand was not been very strong,” he says, “but the government buys excess grain at a fixed price, so we will get that money anyway.” High quality global journalism requires investment. Such safety blankets – the size of which vary from state to state and industry to industry – are among the targets of those who say the government of Manmohan Singh needs to take radical measures to restore growth in the Indian economy. With growth in the first quarter of 2012 rising at 5.3 per cent, the slowest rate in nine years, policy makers are panicking about how to turn things around. “It’s an absolute disaster,” says Omkar Goswami, head of the Corporate and Economic Research Group in New Delhi. “We went from nearly growing at 10 per cent to 5 per cent in less than two years . . . it’s very, very concerning.”http://www.ft.com/intl/cms/s/0/d9928116-ab13-11e1-b875-00144feabdc0.html#axzz1wQ4tZnA1
Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the country in the first three months of the year and the head of the European Central Bank lambasted its handling of Bankia, the troubled Spanish lender. Data published by Spain’s central bank showed €97bn had been pulled out in the first quarter – around a 10th of the country’s GDP – as concerns mounted over Madrid’s ability to contain its twin economic and financial crises, which have forced government borrowing costs to euro-era highs. http://www.ft.com/intl/cms/s/0/25c39204-ab01-11e1-b875-00144feabdc0.html#axzz1wQ4tZnA1
and much more below…