Cynk or swim?

From Macro Man's perch, the most interesting part of yesterday's Fed minutes was the initial section on monetary policy normalization.  Contrary to his original expectations, it looks as if there will be quite a significant corridor between the reverse repo rate and the IOER rate; the minutes suggested a spread of the current 20 bps...or even larger.  At the same time, it seems as if the committee would prefer to keep the withered husk of the Fed funds market alive as well, presumably to revert back to using that rate as the policy tool in the distant future when the balance sheet is normalized, every American has a job, a house, and a GM car on the driveway, etc etc....

At the same time, the minutes paid lip service to the crowding out issue, suggesting that perhaps limiting the size of the facility could be a way around the problem.  The upshot of all of this is that it now appears less likely than before that we will get a 'LIBOR normalization' in the run-up to lift-off.  It was not altogether surprising, therefore, to see eurodollars stage a smart about-face after the release of the minutes.

Of course, some of this was also a result of the de rigeur hand-wringing and labour-market moaning from the FOMC.   Of course, it's hardly news to anyone even marginally more sentient than Rip van Winkle that the Fed carefully cherry picks its facts to support its prior conclusion.   Naturally, they are hardly alone in this behavioural foible...Macro Man has seen many a punter fall prey to the same trap.   Then again, most of those don't preface their names with 'Dr." .....

To be sure, the committee did pay lip service to financial stability, though it is unclear whether they are jejune enough to believe that this will actually work.   Then again, based on Greenspan's analysis of "the conundrum" a decade ago and the flaccid warnings of global authorities on low market volatilities in 2006, perhaps they are.

In any event, we appear to be entering a new phase of the market, one in which turds don't just float, they actually levitate.   A number of commentators recently highlighted price action in something  called 'Cynk', a one-employee 'social network' company with no revenue that has somehow risen in price from a nickel to more than $14- taking its market cap north of $4 billion.



Frankly, Macro Man is happy to see this kind of thing, because it would suggest that the misallocations of capital resulting from misguided monetary policies are becoming more acute- a necessary (if not sufficient) condition for a secular rise in volatility.  And in this case, the jokes will write themselves- you'd expect nothing less from a financial asset pronounced 'sink'.
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Anonymous
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July 10, 2014 at 9:51 AM ×

Excellent post. Thanks.

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Nico G
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July 10, 2014 at 1:18 PM ×

-4% on European banks ding dong ding dong

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72bat
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July 10, 2014 at 3:28 PM ×

or pronounced "cynic"?

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Leftback
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July 10, 2014 at 3:51 PM ×

Banco Espirito Santo always sounded like a line from a prayer to me. Now its investors are saying one.

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CV
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July 10, 2014 at 4:03 PM ×

What is going on today here today ... the gold nuggets just keep on coming, I am so tweeting that LB!

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Gnome of Zurich
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July 10, 2014 at 8:03 PM ×

Espirito Santo is a steal at this level. Only the holding company of their main shareholder is in trouble, not the bank itself. After the recent recap, they have a solid 9% equity to total assets (not the risk weighted crap), are the leading bank in Portugal with high exposure to the booming corporate and Export sector and are trading at just 3.5 times pre-provision income. Overall even more attractive than the Greek Banks a year ago or the Italians 18 months ago. I am a strong buyer but my Kevler gloves look a bit torn by now.

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abee crombie
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July 10, 2014 at 8:27 PM ×

interesting Gnome, European banks are getting interesting here. DB is cheap, though ppl are worried about FICC revenues and more litigation expenses.. but at 6x 2016 Earnings, you gotta wonder whose selling now

sell ahead of earnings, buy em back after analyst finally downgrade EPS. Not much to see here, YET

I love the bloomy headline with Bullard. He's not even voting! However Fischer will be speaking soon and on monetary policy later next week, which is something to watch

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CV
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July 10, 2014 at 9:05 PM ×

5Hmm, maybe so Gnome, maybe so ...

I am currently donning the kevlar trying to catch DB, but it ain't working so well right this minute. I can only second Abee though, I think it will be fine in the end, and offers a real sweet 6 month punt here.

I really hope Mr. Draghi is reading this! Bring on ze QE ...

Claus

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RL
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July 10, 2014 at 9:08 PM ×

Can you explain your comment about LIBOR rates and the lift off? You mean that since RRP won't converge with IOER before the first hike then LIBOR won't increase sooner than the first hike (or sooner than expectations of the first hike)?

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Gnome of Zurich
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July 10, 2014 at 9:08 PM ×

I don't like DB and all the other big international Investment Banks at all (the Swiss included). They are much more levered (only 3% or 4% equity to total assets) and traditional loans are less than half of their balance sheet. I think one can reasonably guess what the total losses for traditional loans will be and you now that they will be less if the economies of Portugal, Greece et al are recovering as they do now. Nobody has the slightest idea what sort of crappy securities are hidden in Deutsche's balance sheet and to what variables they are correlated to.

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CV
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July 10, 2014 at 9:17 PM ×

My problem with Portugal is that non-financial corporate debt is 160% of GDP even before the assumed recovery on the back of the TLTROs, government debt is ever rising. From a macro perspective it is a sink-hole just waiting to get cleaned up by the ECB/PSI. I think loan books will continue to contract there for a long, long time. I think bank equity in that environment likely to get stressed very quickly, but that is not to say that DB will do splendidly if THAT happens :). I agree with you on the big IBs too ... although the US regulator has to find another pet peeve at some point.

Claus

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Risk Averse
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July 11, 2014 at 10:02 AM ×

Interesting to read the comments of others here. My simplistic view is that european banks generally badly need re-capping, and have liabilities whose current MTM valuations (& assumptions) I'd take with a v large pinch of salt. Good luck though.

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Anonymous
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July 11, 2014 at 11:24 AM ×

DB *cough* agressive assumptions regarding risk weights *coughcough*

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Anonymous
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July 11, 2014 at 1:43 PM ×

Great post. abee Crombie spot on. Summer of 2011 all over again.

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JohnL
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July 11, 2014 at 2:55 PM ×

Breaking News: Cynk Tech shares halted by Finra
Very timely posted......LOL

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Anonymous
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July 11, 2014 at 3:04 PM ×

Some comment about CYNK on Seeking Alpha:

Cynk Technology Is The New Scheme In Town

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Leftback
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July 11, 2014 at 5:26 PM ×

Not very interested in the European banks at the moment. It seems as though they are all going to trade according to peripheral debt, and with those yields still very low, and EURUSD still quite strong, we are far from panic stations and fire sale prices. If we did see a reprise of major European debt market volatility then there will undoubtedly be interesting opportunities. For the time being, it is worth keeping an eye on a few things in Portugal, like the utility EDP, that offer some value. PT is still falling, that also bears watching. Just half an eye, no gloves.

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abee crombie
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July 11, 2014 at 6:49 PM ×

As for European banks, look I am not pounding the table (i think there is more value in US private equity plays, FYI) but it is an interesting situation.

Cough, cough, what is on their books (old casinos etc), good question. Could there be more fines (btw where does all that money go? to govt budget) Is iBanking revenue screwed, is their leverage high (yes bc its not a traditional bank) But I think a lot of these issues are not NEW.

Take a UBS, I mean at this price you pretty much get the investment bank for free and are paying 15x for the wealth mgmt unit. Not so bad if you are LT comfortable with all that baggage as tradition asset managers trade at 20x.

In the current equity markets, there arent many sectors that are really cheap and have washed out earnings. Banking is one of them. You are paying half the market multiple and you have big upside EPS leverage if they can grow revenues ever again. Cant say that about many other sectors. Utilities or telecoms trading at 18x and growing at 4%. Or industrials / staples trading at 18x growing at 6% ,etc, etc.

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Leftback
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July 11, 2014 at 8:32 PM ×

No argument, but it can get a lot worse from here before it gets better, b/c so little MACRO EU and global risk is currently priced in to equities in general. Gloves staying in the drawer, although Portugal is looking awfully washed out and BES probably is a steal at some point.

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Anonymous
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July 11, 2014 at 8:39 PM ×

I thought the issue with US banks was that all their earnings growth has come in the form of lowered loan loss provisions - a piggy bank that is running very low.

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Leftback
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July 11, 2014 at 9:11 PM ×

Don't fancy this silly season market one bit, took home some extra protection.

"Would you care for some protection, sir?"
"I beg your pardon?"
"Something for the weekend, sir?"
"Don't mind if I do, squire."

Something for the Weekend, Sir?"

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Anonymous
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July 12, 2014 at 4:59 AM ×

@abee - re : UBS, you may get the investment bank for free, however, it has been for sale for free for anyone who is prepared to assume the debt and there have been 0 takers.

A loss making business saddled with legacy assets that are questionable and an annual interest bill should have negative equity value IMO

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Gnome of Zurich
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July 12, 2014 at 6:06 AM ×

I would agree that BES will be kicked around by bond spreads and riskoff resurgence for quite a while. But from my value investor perspective, I can easily see 100-200% upside over the next 2-3 years. I am willing to eat a lot of volatility in between. The stock is moving into the strong hands. Seth Klarman's Baupost has just declared a 2% stake.

@Leftback: might be worth to also put CTT and RENE on your watchlist for a bottom fishing trip on the Portuguese coast. Both with high dividend yield but much better free cashflow coverage in my view.

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Anonymous
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July 12, 2014 at 12:20 PM ×

How many more BES's are out there trying to remain invisible?

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Anonymous
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July 13, 2014 at 1:03 PM ×

Wells Fargo...revenues fell...mortgage originations down 58 percent vs last year...39 percent decline in mortgage income...loss provisions reduced by 435 million...and they beat earnings estimates...complete fraud.

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July 15, 2014 at 11:41 AM ×

Online Business with hourly profit, Just Invest and Rest
AllTimeProfit.com

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