World Of Wallstreet

Bretton Woods: Treasury Yields-Technical look

Thought I would chime in with what I am seeing for treasury's going forward. I have an upper target of about 4.75 on the 10 year but am actively looking for a move to 4.5%. Here's how I get there.

First 3 technical looks at yields(all are same chart looked at in different views):

(1)A look at the channel developed since bottom last year. Updates in green. Price has bounced on 100 day EMA and RSI has dipped below and crossed back above the 40 level, both bullish developments. Now watching the mid range of the channel around 3.9.

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=1&mn=0&dy=0&id=p62483307564&a=172265749

(2)A look at fibonacci retracements since bottom. You can see price also tested and held the 38% retracement level, another bullish development. [Editor's note: There is definitely something to these fibonacci numbers.]

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=1&mn=0&dy=0&id=p75105392655&a=167359335

(3)Another way to look at the bottoming process created at end of 09. Cup and Handle in yields, shows how the above movements are happening on top of a clear reversal pattern:

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=1&mn=0&dy=0&id=p05809609335&a=167550209

Given the obvious internal strength in the near term look at yields I am using the longer term 20 year chart to develop my target as to where this move should come under pressure. Here you can clearly see the longer term downtrending channel. My feel is given the above coupled with all the fundamental factors everyone knows from supply to currency flaws we are going to test the upper end of the channel. Currently it sits at 5%, but since this movement wont happen overnight I see that target coming in towards the 4.5-4.75 range as time passes.

20 year

http://stockcharts.com/h-sc/ui?s=$TNX&p=W&yr=20&mn=0&dy=0&id=p88026856183&a=173970303

Bretton Woods

Bretton Woods: Technical Look At The USD, Market Commentary, Securitization, Oil, Copper, Materials, And The Fed

[Editor's Note: World Of Wallstreet is grateful for more in-depth analysis from Bretton Woods. One thing I learned from this post was the use of trendlines on MACD indicators as a way of seeing when a rally (or decline) is about to fail. Also, Bretton Woods' highlighting the importance and brokeness of securitization provides yet another good, strong fundamental basis for my own bearish US economy and stock market.]

Bretton Woods, Senior Analyst:

I'm going to start this off with a technical look at the USD. I figure this is most important to investors here. For those interested I will follow this up with some comments on the securitization markets, a look at where I believe we are with regards to the stock markets(bigger picture), an outlook for oil, copper, and materials, and a quick comment on the fed.

Admittedly I have been wrong on the USD in regards to where I thought this rally would end. Part of my outlook was too quick to call the bounce over rather than respect the 'rebound rally'. In this analysis I will use a combination of the exponential moving averages and a 'fast' MACD(3,10,16-to get a closer look at what is happening in terms of momentum on subsequent price moves within the rally). Here in this first chart you can see the USD since its topping around 2001. What you can see is a clear divergence between price and momentum, prior to the 20 day EMA(Weekly) crossing below the 50 and the 100 EMA's(Weekly). This then leads the price down to its first downleg(see as 20 stays below 50 and 100 whole time) before the 20 day EMA then cross back over the 50 and 100 and constitutes the 1st 'rebound rally'(Mid-05). This rebound rally see's a second price high on declining momentum(divergence) prior to the 20 day EMA crossing back over(negative) and below the 50 and 100 EMA's. This leads the second leg down. Then you can see the latest 'rebound rally'. We now have a higher high on declining momentum and are quickly approaching a negative 20 EMA cross of the 50 and 100 EMA's.

Chart:

http://stockcharts.com/h-sc/ui?s=$USD&p=W&yr=10&mn=0&dy=0&id=p91456799330&a=171475633

To get an idea of where we are currently I have zoomed in on this rebound rally which began in late 08(mind you this is now a daily chart). Here you can see where the rally started and how its weakend in terms of momentum, and now price(look closesly at how the 20 DAY EMA had not fully crossed the 50 and 100 until now). The 20 DAY EMA is now fully sitting below the 50 and 100 EMA's(daily) The longer this condition persists the weekly will cross over and we will have the next downturn confirmed as judged by this technical view.

Zoom in of current rebound rally:

http://stockcharts.com/h-sc/ui?s=$USD&p=D&yr=1&mn=0&dy=0&id=p30014281545&a=167548762

Why is this important? Big picture USD we are at a serious cross roads. Another downleg would not just be any typical downleg, it would be combined as a confirmation of a completed 20 year head and shoulders and would likely anticipate a price of 40 on the USD index. This entire analysis again is technical in nature:

20 year USD:

http://stockcharts.com/h-sc/ui?s=$USD&p=W&yr=20&mn=0&dy=0&id=p93265866643&a=171478914

For those interested,

MARKET COMMENTARY:

With the fed meeting today and with the overall markets appearing to lose steam I thought it would be a good time to take a look at the markets and where I think we stand. What I am seeing has nothing to do with green shoots(investors should be weary of the source of that phrase) and more weakening in the economy(second stimulas noise is a good indicator of what is really happening). What started this line of thinking is two fold. First, much of my recent thinking been shaped by the fact that global industrial production has fallen almost in lockstep with what we saw in the great depression(now down about 15% about 15 months through crisis-see note 1).

Second has been the performance of the small caps in the spaces I have been mentioning. I will start with the two small caps stocks I highlighted here. The first is Hemisphere. I had commented here about what looked like some form of reversal and potential breakout. This simply has not happened and as you can see here the stock has cratered. I have been very very frustrated with this company and investing in general(been using extremely conservative metrics for longer term value plays) and I believe what we are seeing is a banking crisis that is NOT being resolved, and is now infecting many good companies and therefore threatening future wealth and potential prosperity for viable entities. First the chart:

http://stockcharts.com/h-sc/ui?s=HEM.TO&p=D&yr=4&mn=0&dy=0&id=p44304706794&a=167248964

This is also happening with regards to bolt technology, I had mentioned it was nearing resistance and sure enough it failed pretty hard.

http://stockcharts.com/h-sc/ui?s=BOLT&p=D&yr=4&mn=0&dy=0&id=p44304706794&a=157466728

The point I am making is my thinking is shifting now towards significant downward forces on this economy that simply are going to make overall growth quite difficult. What is also frustrating is the lack of rebound in the Ag's space as well(corn is now under $4).

Along this line of thinking, I kept saying to myself why is this all happening? Well to this point I think we need to go back to what started this mess, especially now that the market appears to be stalling. The point here is the securitization market. The securitization market at the peak supplied nearly 6 of every 7 mortgage dollars being created(meridith whitney). More importantly from a corporate standpoint(ex housing) it served as a mechanism for companies to turn recievables immediatly into cash flow and thus create more recievables rapidly(firms booked these recievables as operating cash flow-for better or worse). It also allowed for financing of many different assets as risk was taken off books and put into new 'bondholders' hands. This market DID work when ratings agency's were honest and there was some form of recourse. However the last few years of loans, in housing in particular(subprime and alt-a) created so many dangerous securitized products the whole market shut-off, even for those assets, markets, and company operations that were still viable. In speaking with a former mortgage broker this weekend I am still just shocked at how they would raise ltv's, tell borrowers to go buy cars with the equity. He said for himself it was a 3 month window, that was all the security the cash flows had to provide(on a 30 year asset mind you), by then it was off the books.

Furthering this, I have long argued the authorities needed to create real confidence in the securitzation markets by restructuring, penalizing, and actually fixing the markets(there have been some good proposals such as bond insurance that at least provides tangible confidence to these transactions-see note 2). Further for all the debates about bonus's and pay etc etc one would think a simple proposal that ties financial intermediaries CEO's or management's bonuses to the debt their firm securitize's actual long term performance would alone increase the confidence in those markets(imagine combined with real punitive policies on those involved). If I know my bonus only performs if my model matches or my securitized products perform this will increase the quality of assets securitized vs shutting the entire thing off(why is it a market with insane fraud or no market all together?)

Anyways we haven't had any of the above(I bring this up now because the big debate in the markets, in terms of bear market bounce vs bottom and will the fed buy more debts or not needs to take this into account). Instead the authorities did nothing, and the fed has instead attempted to act as lender of last resort thinking investors will magically come back. That hasn't happened(in terms of securitization), and now the fed is boxed in(we are seeing today, they cannot increase purchases without seeing interest rates shoot, and there has been no trust restored in the private capital markets with regards to securitizing markets-buying corporates or FDIC backed corporate debt does not count). If you look at the data you will find that securitzation collapsed in 08 by 80% to 150B in total issuance. Here is an example of a deal done very recently for 225M. This is nothing in the bigger picture but gives investors an idea of how this all works(we need to see this type of news in mass):

http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=WYN:US&sid=aFx4VDWsf9LM

Chart of the S&P(this is in a sense a loss of leverage to the system, which is why I think the visual of it mirrors bank stocks etc, its a massive loss of liquidity): 

http://stockcharts.com/h-sc/ui?s=$SPX&p=W=10&mn=0&dy=0&id=p41005321351&a=170918558

Moving forward lets look at what the overall markets are doing in the much much bigger picture. I commented a while ago about how the damage being done to the markets was taking out the 200 MONTH moving average(key metric here is MONTH moving average, not daily or weekly). This is important. The following charts will show how the 2003 bear market, all markets stayed well above this moving average. The distinction should be noted as the markets broke their 200 MONTH moving average in both the 1930's, 1970's, and in the 1990's in Japan. These were all periods of secular changes in the markets mirred with consistent economic and investor dissapointment(not to mention a great depression, mass inflation, and a lost decade).

First look, this is the SPX in 03, with fib retracements(I mention this because I noticed Saut over at Raymond James discussed how todays market is whipsawing like the 03 bottom, and my point here is the markets cannot be compared). See the SPX here, it held its 61% retracement to perfection and was well above its 200 MONTH moving average: 

http://stockcharts.com/h-sc/ui?s=$SPX&p=M&yr=20&mn=0&dy=0&id=p94250519734&a=171481309

Here is a look at the dow in 03, same exact story but held its 50% retracement level. See still well abov 200 MONTH moving average at that time: 

http://stockcharts.com/h-sc/ui?s=$INDU&p=M&yr=20&mn=0&dy=0&id=p94250519734&a=171481335

If we look now at this bear market in the same light(fib retracements and monthly moving averages we find that the dow for now is holding its 61% retracement but is below its 200 Month moving average. Meanwhile the SPX has breached its 61% retracement but is now trading back above, meanwhile it is solidly below its 200 Month moving average-I have left the fib retracements out to avoid clutter):

SPX 08-09 

http://stockcharts.com/h-sc/ui?s=$SPX&p=M&yr=20&mn=0&dy=0&id=p15164965892&a=171533261

Dow-same story: 

http://stockcharts.com/h-sc/ui?s=$INDU&p=M&yr=20&mn=0&dy=0&id=p15164965892&a=171533280

In an attempt to keep this as brief as possible I will move forward(notes 3 and 4 at bottom will have dow and SPX with fib retracements for those that want to see). However one last comment I will make about the potential structure of the markets. This is a technical look at the SPX. The markets had almost never been as oversold in march with regards to distance from its moving average, the rebound was predicted by some on these metrics solely(meaning quite possibly we have seen no green shoots whatsoever other than a technical bounce):

SPX: 

http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=10&mn=0&dy=0&id=p50365848154&a=171493451

In continuing with my belief that the markets are structurally impaired, the proper solutions have not been implemented, and that this wiIl weigh, I wanted some longer term looks at oil, copper, and materials. The building blocks to many extents of a growing global economy. What I believe is a robust securitization market seen in the early part of the decade fueled everything we saw is still stalled. I also hear alot about 'black gold'. I dont buy it. Unless you have a cave in your backyard and a tanker out front i dont see how oil serve's as a viable medium of exchange(we may be setting up for relative outperformance of gold over oil for an extended time frame, see ratio chart).

I have an oil price that is busted big time and has retested its old trend line now looking for lower prices. I have added a gold/oil ratio chart to show that I think this can happen and gold can still do will as there is significant room in the ratio for weakening oil. .

First, oil: 

http://stockcharts.com/h-sc/ui?s=$WTIC&p=D&yr=12&mn=0&dy=0&id=p98872003557&a=171210278

gold/oil Ratio chart: 

http://stockcharts.com/h-sc/ui?s=$GOLD:$WTIC&p=D&yr=20&mn=0&dy=0&id=p60821880170&a=171210635

Copper: 

http://stockcharts.com/h-sc/ui?s=$COPPER&p=W&yr=10&mn=0&dy=0&id=p90479468825&a=171492634

Materials: 

http://stockcharts.com/h-sc/ui?s=XLB&p=W&yr=10&mn=0&dy=0&id=p50365848154&a=171492734

Without question there were some technical positives at the bottom in March. One being the number of new lows being made in the market vs the new lows in October were lower(divergence with price of indexes), and the Mclellon Oscillator swung from a negtive 1200 to above a positive 1000(these are typically large enough moves to mark bottoms-both these metrics happened in 03). That said I cannot break from the fact that this is a different market and is far more complex and I think the combination of a lack of fundamental credit creation and technical breakdowns(monthly moving averages) will prove to be extremely formidable going forward.

One last comment on the federal reserve. With the fed now monitizing debt, there appears to be a massive conflict of interest between the president and the appointee of fed chairman. When the fed only controlled interest rates, the president could pressure the fed chairman to lower rates(or replace with a dove), this however only impacts monetary policy. With the fed possibly becoming the majority 'funder' of fiscal policy via treasury monetization it behoves the president to select someone who will burn the presses for him. The president's silence on Bernanke strikes me as an opportunity to make sure he will do as the president wants or is out. Can you imagine how long a volker like chairman would last in the age of treasury monitization with a determined and reckless political party with a majority? Appears to me any attempt here to control or manage a responsible money supply can be blunted by politicians, which ultimately is another reason to own gold.

BW

1-http://www.voxeu.org/index.php?q=node/3421
2-http://www.cohenandcompany.com/press/PressRelease20080924.pdf
3-http://stockcharts.com/h-sc/ui?s=$SPX&p=M&yr=20&mn=0&dy=0&id=p33649541588&a=171537005
4-http://stockcharts.com/h-sc/ui?s=$INDU&p=M&yr=20&mn=0&dy=0&id=p33649541588&a=171537061

Bretton Woods: Mid Year Look At Financials - Dollar, Gold And Silver Impact

On January 19 of this year I put out a post titled "Bank stock fundamentals, a look at the first two weeks of 09" (click here).

In it I took a look at the banks leverage ratio's using their tangible equity to get a feel for what kind of losses the assets of the banks could sustain before wiping out the common equity of the stock. What I found was massive leverage on top of significant deterioration in asset values(as determined using the case shiller index). Furthermore I looked at the equity performance of the bank sector for the first two weeks of the year vs the first two weeks of the prior year(if you remember everyone was very optimistic just because it was a new year). I found the first two weeks of 09 were worse than 08.

In any event, what I found and said at the time was:
"Anyone peddling these stocks as anything other than highly short term speculation should be looked at extremely skeptically. In theory the tangible equity capital of these banks or leveraged institutions can be wiped out in less than two months even if they are solvent today."

What followed over then next 8 weeks was a 50% decline in the bank stocks to their march lows.

Since then we have seen a significant rally in the bank sector combined with serious intervention. This intervention included federal reserve outright agency debt purchases(1.2T authorized), changes in foreclosure laws(short term), and most importantly, a complete change in how banks account for the same very assets causing all these problems on their books(mark to model). Since that time we have also seen significant amounts of both debt and equity capital being raised by financial institutions. At this juncture it's a good idea to take another look at the leverage ratio's as well as the fundamental outlook for these assets.

First and foremost I want to discuss one of the most important fundamental components of the bank stock assets imo. This involves the marking of assets to model vs what they are actually worth. In april of this year I commented on issues I saw with the cash flow model some banks would likely use to value these real estate assets. In it I discussed how cash flow models simply take prepayment risk into account and only work under strict(and highly irrational) assumptions that the asset in question always rises in value(home's up 2-3% per year) and that there is no default risk(fannie freddie will pick it up). Again, these models do not reflect the risk banks or other loan holders face today with regards to real estate. The real risk is no payment, not prepayment.-http://www.investorvillage.com/smbd.asp?mb=144&mn=21454&pt=msg&mid=6991041.

This is underscored today by data out of california that shows the average mortgage balance is 442K while the average home prices is 223k. Many of these models would have zero impact from data like this. In fact the cash flow model would simply not pick up on it and value the asset based on the assumed cash flow on a 442K asset. This simply is not what will happen and the bank stocks are likely technically picking up on this(charts later).

The second and important fundamental look at this juncture halfway through the year is the commercial market. We know from first hand data transactions(GGD bk and private transactions) that much of this debt is trading at 40 cents on the dollar. We also now know that the deliquency rate on CMBS has doubled to 2% since december to a total of approx 20B on 850B in assets(this is realpoints data). Furthermore there are very troubled loans currently that would put this number higher around 5% according to realpoint data. The point here is there is nearly 1T in loans in a space where tenants are simply breaking contracts(store closure data) on top of those that are staying who are negotiating down, on properties that are trading 60% cheaper, that were financed with majority(95 plus percent) debt. The point is implosion not reflected on the balance sheet but attempting to be talked up.

Furthermore lets take a look at the residential market going forward. There has been significant discussion of housing bottoming here. The case shiller futures market doesnt see it. I think the above dynamic of average price vs average mortgage puts a weight on this market that will keep prices capped for a long long time. There is shadow inventory as well on top of sellers holding back for higher prices. Most importantly however is what the market see's for future losses and again, how this will affect the banks balance sheets. Here one may want to check the case shiller futures index's which last I had seen still has double digit declines priced in for many US markets over the next 12 months.

Now all of the above only matters because of the way banks are set up, that is borrowing and lending, and the amount borrowed in order to make those loans determines what kind of loss they can aborb. So here lets take a simple look at the updated balance sheets based on current and the technical picture being painted for the 4 largest banks halfway through the year(now that they have raised significant capital). For the technical picture I am using the Chaiken Money flow indicator. A good summary of how it works can be found here:

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow

For the most part leverage has been reduced(you can see comparison vs January), however if you take into account how much damage has been done and capital raised you begin to see just how massive the problem is. Even after all this leverage is still massive at these institutions and the stocks are not looking positive:

Citigroup
Assets: 1.822T
Tangible Equity: 103B
loss absorbtion: 5.6% vs January's 3%

Citi:

http://stockcharts.com/h-sc/ui?s=C&p=D&yr=1&mn=0&dy=0&id=p25835258026&a=171086584

BAC:
Assets: 2.321T
Tangible Equity: 138B
loss absorbtion: 5.9% vs January 3.8%


http://stockcharts.com/h-sc/ui?s=BAC&p=D&yr=1&mn=0&dy=0&id=p25835258026&a=171086467

JPM:
Assets: 2.079T
Tangible Equity: 106B
loss absorbtion: 5% vs January's 4.17%


http://stockcharts.com/h-sc/ui?s=JPM&p=D&yr=1&mn=0&dy=0&id=p35665197735&a=156813087&listNum=6

WFC:
Assets: 1.285T
Tangible Equity: 61B
loss absorbtion: 4.7% vs January 6.3%(surprising increase in leverage at WFC)


http://stockcharts.com/h-sc/ui?s=WFC&p=D&yr=1&mn=0&dy=0&id=p25835258026&a=171086611

Finishing up how will this impact the dollar, gold, and silver? Well I went back and looked at the UYG(financials) with the dollar overlayed(the point is to look at these assets, financials, dollar, gold, and silver since the crisis began). If you look closely you find the USD made a strong rebound rally when Citi broke down in November of 08(lehman as well). Then when GE and the market went down hard in March the dollar made a higher high. However now all of that has rolled over and the dollar is actually lower pre november 08. My belief here is when the crisis first hit the dollar caught a bid, as it accelerated the dollar continued higher. Now as the world see's that the US will not let banks go and are going to print if neccessary, as well as the fact that the US is part of this crisis(as opposed to past crisis). This has caused the dollar to roll over and is now weak while the financials appear to be weakening. This should be on investors radar screens:

First that chart, UYG:

http://stockcharts.com/h-sc/ui?s=UYG&p=D&yr=1&mn=0&dy=0&id=p42213412283&a=171087035

Now moving to Gold, gold has not made a new post crisis(november 08) high however it has not rolled over:

http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=1&mn=0&dy=0&id=p25835258026&a=171087155

What I find most interesting, silver has made a new post crisis high and can be viewed as a leading indicator. If this is correct I see the market anticipating further bank losses and dollar printing(bailout) and money is exiting financials and flowing into PM's, and with a higher than usual risk appetitite(bullish for space in general):

http://stockcharts.com/h-sc/ui?s=$SILVER&p=D&yr=1&mn=0&dy=0&id=p25835258026&a=171087215

It should be noted the UK over the week has admitted to needing more capital for their banking instutions. The points above is one should be prepared for increased bank turmoil judging by the loan data we are seeing on top of the technical picture in the market place for the four largest US banks(wells I think will break down at some point). The dynamics even of employment(if stimulas can work) will not stop the dynamic of underwater loans which is why I think even the stress tests look at employment dont paint the real picture of what kind of metrics banks can withstand.

Bretton Woods, senior analyst

USA Bank Stock Fundamentals: A Look At The First Two Weeks Of 09

Editor's note: WorldOfWallstreet.us welcomes Bretton_Woods as senior analyst.

As CNBC continues to pump concepts of second half recoveries, mustard seeds, or buying for the 'long run' the depth of the problem continues to unravel at lightening speed leaving anyone in the above camps absolutely pasted and roadside(how does Vince Farrel have any capital left to buy with at this point????).

Everyone who was looking to the turn in the calendar to mark the end of this debacle and the start of some resolution has been sorely disappointed as the repriced assets in the case shiller data released in December is finally catching up with the financial stocks. As I showed in an earlier essay, there has been an astounding acceleration to the downside in the bay area housing market. We clearly saw this week what effect that had on SF based Wells Fargo (WFC). What is likely is massive government intervention in the very near future, and with this I expect desperate bulls to turn on a full court press. This could correlate with rises in SOME of the equity of the bank stocks, however IF this were to occur, it will surely be short lived.

I heard CNBC again this morning pump the idea that the bank stocks are declining on fear, or gov intervention in the equity or some other completely baseless idea. I thought I would quickly jot down some numbers just to keep in perspective the actual math behind the problem. I also thought this would be a good way to understand just how simple this massive problem is, and how absolutely PATHETIC all the the cheerleaders of these stocks are.

First off, the simple accounting equation, Assets=liabilities + Equity.

So for the big 4 banks(this data is from yahoo finance, as of sep 30th, there could be new data with the latest earnings, the point here is to highlight the issue, that is leverage, and how large this problem is): What I have done is shown the listed asset values, liabilities, equity, and tangible equity(I am using tangible equity for leverage and turnover ratio's). I have first calculated the max percentage loss on a total equity and a tangible equity basis the amount loss these banks can absorb and still stay solvent. I have then applied the case shiller data loss of 18% to the assets and have then used this remaining asset value figure and put it over the tangible equity to get an idea of how insolvent these banks in THEORY are(this figure would be the number of times you would have to recapitalize the current equity just to keep the bondholders whole).

I understand they arent holding only Case-Shiller assets, however all assets have been repriced, and if you look at their absorbable % loss, that is what these banks can MAX lose and stay solvent, I would argue whatever they are holding, it is down at least that much(CC receivables and auto loans etc are worth significantly less, in many cases 5-10 cents on the dollar).

Some of this may already be written down, guaranteed against, or recapitalized, the point here is to get an idea of what is actually happening in financial terms period.

BAC-leverage ratio, 26 to 1
Assets: 1.831 T
liabilities: 1.670 T
Equity: 160B
Tangible equity: 70B
Max Asset loss absorbable: -8.7%
Tangible loss absorbable: -3.8%
Theoretical insolvency ratio: 4.7 times(18% of 1831T=329B loss vs equity of 70B)

C-leverage ratio 33-1
Assets: 2050 T
liabilities: 1924 T
Equity: 126B
Tangible equity: 62B
Max Asset loss absorbable: -6.1%
Tangible loss absorbable: -3%
Theoretical insolvency ratio: 5.7 times(18% of 2050=360B loss vs equity of 62B)

JPM-23 to 1
Assets: 2251 T
liabilities: 2105 T
Equity: 145B
Tangible Equity 94B
Max Absorbable loss: -6.4%
Tangible absorbable loss: -4.17%
Theoretical insolvency ratio: 4.31 Times(18% of 2251T= 405B loss vs equity of 94B)

WFC-Note for WFC using 31% decline in assets(bay area) for insolvency ratio, leverage of 15 to 1
Assets: 595B
liabilities: 547B
Equity: 48B
Tangible equity: 38B
Max Absorbable loss: -8%
Tangible absorbable loss: -6.3%
Theoretical loss: 4.85 times(31% of 595=184B loss vs 38B in equity)

What is interesting to note on WFC is if one uses the 18% loss we are seeing across the board in the case-shiller data WFC is only insolvent by about 2.5 times which is half the industry average. However now that the Bay Area has accelerated down they are tracking the same 4 to 5 times and consequently the stock is under major pressure after holding up well relative to the other financials.

The takeaways here for me are three fold, one, the bank losses are spreading and the equity of these shares are a complete suckers bet. Anyone peddling these stocks as anything other than highly short term speculation should be looked at extremely skeptically. In theory the tangible equity capital of these banks or leveraged institutions can be wiped out in less than two months even if they are solvent today. This would mean the stock holders would have a claim on Asset Values that are less than the liabilities, making the stocks worthless.

This brings me to my second takeaway, the nature of leverage. It does wonders on the way up, but on the way down it is an absolute nightmare. This is the largest margin call the world has ever seen. I remember that complete idiot jerry boyer on CNBC railing on and on when FNM and FRE were in the 40's that only 1% of all US mortgages were in default. What he didnt understand is that if you own 60 plus percent of all those mortgages using a leverage ratio of 50-1 you are officially BROKE. FNM is 70 cents today.

FNM-this is what 50-1 looks like:

 

 http://stockcharts.com/h-sc/ui?s=FNM&p=D&yr=8&mn=0&dy=0&id=p41534929386&a=159387248

Citigroup-this is what 33 plus to 1 looks like:

http://stockcharts.com/h-sc/ui?s=C&p=D&yr=8&mn=0&dy=0&id=p41534929386&a=159387063

Extending this logic, I believe it was Bernanke who told us the losses would be approx 100B total, and Paulson who said the crisis is contained to subprime. IF they truly believed what they said then their approach of buying bank capital to date would make sense from THEIR standpoint, however one glance at the theoretical insolvency ratio's above and you can see this is a nonsensical solution. Its the equivalent to covering someone's margin call on a stock they bought at $35 with about $3 bucks in equity(in some cases just using $1.5), and the stock is now trading mid 20's at best, and heading lower. They have done nothing for asset value stabilization, if that is even possible post bubble, but the point is throwing capital at the banks is NOT a viable solution.

Third, is the issue of confidence. We hear about all about how if people were just more confident they would go out and borrow to buy a car etc etc and the market would somehow be fine. This is not the issue. What is not being discussed is that the securitization market was originating about 60% of the credit in the economy. That system is where the CONFIDENCE ISSUE is. The largest shadow banks are gone, kaput, and now the world is watching as the remaining major banks securitized inventory is going up in smoke and taking their institutions themselves down with it. When one thinks about this, they realize, this was PRODUCT the banks intended on selling to someone somewhere. Who is going to step up and buy another securitized product with this type of asset performance? Why would anyone use these banks as intermediaries for any yield related products? If a food company somehow ends up with a bunch of toxic meat stuck in their warehouse that will kill anyone who eats it, and they INTENDED TO FEED IT TO OTHER people while telling them it was fantastic, you're gonna need to do a lot more than to just refill the fridge and get the government to guarantee medicine to anyone who gets sick to get people to eat there again. This strategy is I believe the next major approach we will see, that is gov backing of banks asset backed paper, much like the 300B at Citi. Again, this WONT restart the securitization market, however here is the impact this loss of a financing mechanism is having on the overall markets:

SPX: 

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=8&mn=0&dy=0&id=p41534929386&a=159387403

Anyways moving forward as we now know these banks are too big to fail, and if you add up the above theory you get 1.2T alone, it appears investors are starting to understand these losses are going to be recapitalized one way or another(either through guarantees, injections, or outright purchases), and this will be dollar negative. It appears the market is starting to wake up to the realization that the largest banks are so insanely levered and the losses so brutal we are in deep deep shit(even the perma-bulls cant say much when current job losses alone insure enough of a loss on asset values to wipe out equity due to leverage). Again, the above losses dont take into account the fraud in the system I believe is there. That is loans that were extended to people they knew could never pay, they simply never expected to hold the paper.

So looking at the first two weeks of this year vs last year, it seems we have some major major hurdles directly infront of us as the crisis has spread from the shadow banks last year(bear, lehman) to the large banks today.

SPX performance:
First two weeks SPX 2008 -.6%
First two weeks SPX 2009 -8.5%

xlf performance:
First two weeks 2008 -7.5%
First two weeks 2009 -9.6%
-It is important to note other bank indexes have made NEW lows from their november 08 point. This points to a deteriorating situation and will likely take the indexes to new lows shortly.

In any event the above is certainly not new knews, I just think it is an important exercise for these markets. Even if the assets on the books were currently at market value, we have further to go in the real estate markets and these banks are too leveraged. What I do find rather intersting is the markets reaction to the news however in the first two weeks of the year. There has been a stark contrast with the four major banks and the gold stocks. I read somewhere online the second week of the year has an 85% correlation with the years return however I have NO VERIFICATION of this. The real point I want to show is how the markets have started the year off immediately with this news and how the HUI and silver have primarily responded. With the above bank news being mature, and the nature of the government response now concrete(we will what not let them fail) I am looking at how the market is going to position itself accordingly. The last week of trading to me signals the market is starting to wake up to the massive leverage at these institutions, the fact that even a conservative loss assumption will require massive bailouts, and the real problems with the currency this leverage and loss is going to create as the gov is forced to back all these losses.

C 

http://stockcharts.com/h-sc/ui?s=C&p=W&yr=2&mn=0&dy=0&id=p91194718780&a=159355442&listNum=10#

JPM 

http://stockcharts.com/h-sc/ui?s=JPM&p=W&yr=2=0&dy=0&id=p91194718780&a=159355519

HUI 

http://stockcharts.com/h-sc/ui?s=$HUI&p=W&yr=1&mn=0&dy=0&id=p28296194877&a=159358307

Silver 

http://stockcharts.com/h-sc/ui?s=$SILVER&p=W&yr=1=0&dy=0&id=p28296194877&a=148778592

Bretton Woods, senior analyst