From Bloomberg, Moody's Declines After Ratings Company Says It Got Wells Notice From SEC. It's about damn time!

Moody’s Corp. fell 8.1 percent to its lowest price since October after it disclosed that the U.S. Securities and Exchange Commission is considering cease-and- desist proceedings against it.

Moody’s is among credit-ratings companies that face scrutiny by Congress and state insurance regulators after it assigned top grades to U.S. subprime-mortgage bonds just before that market collapsed in 2007. The company said May 7 in a regulatory filing that it received a “Wells Notice” from the SEC in March related its application to become a nationally recognized statistical ratings company.

The SEC staff notified New York-based Moody’s on March 18 that it is weighing a recommendation to the commission that it begin administrative and cease-and-desist proceedings based on the company’s description of how it assigns credit ratings, Moody’s said in the regulatory filing. A finding by Moody’s that a rating committee policy had been violated by a company employee rendered its application false and misleading, the SEC said, according to Moody’s.

On a day when fellow financial stocks are flying, Goldman is showing weakness. Why? The stated the obvious, Goldman Warns of More Litigation, Investigations. Not to worry, though, they had an absolutely perfect trading quarter in which they didn't lose money during a single day of the entire quarter. Hmmmm!!! Monopolies 'R Us! My readers are too smart for me to insult their intelligence in bothering to even suggest that one run the math on the statistical likelihood of such a thing actually happening on a fair and level playing field. Goldman's Very Good Quarter for Trading‎ .

For more on this topic, see When the Patina Fades... The Rise and Fall of Goldman Sachs??? and Is the Threat to the Banks Over? Implied Volatility Says So.


Published in BoomBustBlog

I'm about to go over Goldman Sach's 1st quarter 2010 results, but before I do, let's recap the last quarter's price movement and the consequences of believing in infalliable name brands. This is basically a continuation of the rant -  So, How Many Banks and Analysts Were Bearish On Goldman Before Today? and Is the Threat to the Banks Over? Implied Volatility Says So. Some may ask why I'm being so generous in regards to the extent of this quarter's earning review. Well... A European institutional  subscriber recently stated he was able to get the same content found in my offerings from his investment bank research. Whaaatt!!! I told him that he probably wasn't reading the subscriber content. He wrote back stating that that wasn't the case. He also said that he doesn't see any fundamental analysis  in the work. I nearly fell out of my chair. Hmmmm. Well, on the day that Goldman executives are due to testify before the Senate, let's review the opinions of the ONLY entity that I know of that had a bearish perspective (rightfully and profitably so - twice and counting) on Goldman Sachs. If I am not mistaken, nearly every bank and analyst (save Meredith Whitney, you know I love you :mrgreen: ) had a strong buy or hold on this company both back in 2008 and last month. So much for relying on that name brand investment bank research.  For any others who may hold the sell side propaganda machine in such high regard (or is it me in such low regard), might I recommend the following two posts before we move on: For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and Blog vs. Broker, whom do you trust!”.

[caption id="attachment_1448" align="alignnone" width="640" caption="Map those base Jumping, spilunking, sky diving drops in Goldman's share price with the research linked below. This company is very, very risky and the risks are there for all to see. All you have to do is look for them!!!"]Map those base Jumping, spilunking, sky diving drops in Goldman's share price with the research linked below. This company is very, very risky and the risks are there for all to see. All you have to do is look for them!!![/caption]

To recap:

GS return on equity has declined substantially due to deleveraging and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike. Using your method, our valuation would drop from where it is to an even lower point.

gs_roe.jpg

Published in BoomBustBlog

In continuing my rant on why the mainstream media cannot charge for content, combined with the still deteriorating situation of many banks in the US and Europe, I release to subscribers the Bank of America Q1-2010 earnings opinion: File Icon BAC Q1 2010 Earnings Review, which is considerably less rosy than I have been reading in the mainstream media. To get up to speed on the MSM/blog rant, I suggest you read "Are Blogs Truly Competitive With the Mainstream Media in Terms of Quality of Content?"

For those who do not subscribe, here are some key excerpts:

Bank of America’s 1Q10 results are a reflection of the continued weakness in the commercial banking space. While the core operations’ revenues remained weak, the increase in trading profits and the consolidation of the securitized assets (due to FAS 166/167) made up for declines in revenue from the core portfolio and operations.

Published in BoomBustBlog

The JP Morgan Q1 2010 review and analysis is available to download for all paying subscribers: JP Morgan Q1 2010 Review. Just this morning I posted an article describing how much of the mainstream media suffers from diminishing revenues due to the fact that they simply rubber stamp soundbites and produce reports that are simply cardboard cutouts of what is pushed out by Reuters and the AP.org. Well, JP Morgan's latest quarterly earnings release is a perfect example. Before you go on, I recommend reading "Are Blogs Truly Competitive With the Mainstream Media in Terms of Quality of Content?".

A scouring of the news from last week yields (and this is from the cream of the crop, may I add):

WSJ J.P. Morgan Earnings: A Beat!

We're off to another day of earnings and the big one of the day comes courtesy of J.P. Morgan Chase, which beat earnings expectations from Wall Street analysts on both the top and the bottom lines in its report out earlier this morning... Importantly, a big part of the better-than-expected performance on the bottom line came from J.P. Morgan socking away less cash to cover loans it expects to go bad. Dow Jones reports that J.P. Morgan’s managed credit-loss provisions were $7.01 billion, down from $10.06 billion a year earlier and $8.9 billion in the previous quarter... As we mentioned before, onlookers are hoping that this earnings season brings a bit more clarity to weather the worst is over for the banks, and J.P. Morgan’s results are a good sign.

J.P. Morgan Earnings Takeaways

Short version: We’re at an inflection point for the loan losses that have dogged banks... Just as a refresher, better credit trends can translate into better earnings for banks, as they move some of the cash they socked away to cover the losses they previously expected, and move that money back into the earnings column.

Reuters JPMorgan earnings set bar high for U.S. banks

JPMorgan Chase &  Co (JPM.N) reported quarterly profit that beat forecasts and set a high bar for rivals, as investment banking earnings gained, loan losses slowed and Chief Executive Jamie Dimon sounded an atypically optimistic note about the prospects for a strong U.S. economic recovery.

NYTimes.com: JPMorgan's Profit Soars Despite Downturn

Jul 17, 2009 ... A new order is emerging on Wall Street — one in which Goldman Sachs and JPMorgan Chase are starting to tower over former financial titans.

Now, here are some excerpts from my reader's subscriber material (JP Morgan Q1 2010 Review):

Published in BoomBustBlog

After an allegedly 5.7% GDP rise in Q$-09 and a supposedly voracious appetite from China imports (you know, the nation who is supposed to lead the developed world out of recession, yet had a trade deficit last quarter), Alcoa reports a first-quarter loss of $201 million on revenue of $4.89 billion.

Alcoa's first-quarter loss narrowed as the company benefited from higher aluminum prices, which offset lower shipment volumes.

That equates to a 7% top like revenue MISS! For those that don't get the gravity of this occurrence, Alcoa is a bellwether of the global economy's use of Aluminum and there is a very slim chance the economic engine is humming along with this dismal performance.

In addition, it is very difficult to miss top line estimates by that much since it is Alcoa that guides the sell side estimates!  It is not as if those Wall Street guys come up with the numbers on their own.

I will release some interesting stats on global commodities in a day or two.

Published in BoomBustBlog

Prepaid Legal Services, the company that I believe is a publicly traded Ponzi scheme (this is my opinion, although I believe my research backs this opinion up), released  preview of earnings as well as an update to its SEC inquiry.ppd_4-15-10.png

Published in BoomBustBlog

For those who haven't been reading me, I am of the belief that Prepaid Legal, a publicly traded company, is actually running a pyramid scheme and a ponzi scheme (potentially illegal, but arguably legal due to the current share buyback laws of the land). They are also employing a self-destructive business (pyramid) model and instead of revamping that model and reinvesting heavily in marketing, they spend money on share buybacks (ponzi) to enrich management who are compensated in stock that is sold directly into the share buyback scheme.

Wikipedia defines "ponzi " as "any scam that pays early investors returns from the investments of later investors." The share buyback plan]. It defines a pyramid scheme as a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered (in my opinion, this hits PPD business model right on the head). Pyramid schemes are a form of fraudPyramid schemes are illegal in many countries including Albania, Australia,[1] Brazil, Bulgaria, Canada, China,[2] Colombia,[3] France,Germany, Hungary, Iran[4], Italy,[5] Japan,[6] Malaysia, Mexico, Nepal[citation needed], The Netherlands,[7] New Zealand,[8] Norway[9], the Philippines,[10] Poland, Portugal, Romania,[11] South Africa,[12] Sri Lanka,[13] Switzerland, Thailand,[14] theUnited Kingdom, and the United States.[15] according to the Wikipedia definition.

These types of schemes have existed for at least a century some with variations to hide their true nature and there are people who hold that multilevel marketing, even if it is legal, is nothing more than a pyramid scheme.[16][17][18][19]

A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula which is used for profit. The essential idea is that the mark, Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the "business" expands.

The "eight-ball" model contains a total of fifteen members. Note that unlike in the picture, the triangular setup in the cue game of eight-ball corresponds to anarithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme in the picture in contrast is a geometric progression 1 + 2 + 4 + 8 = 15. No matter how large the model becomes before collapse, approximately 88% of all people will lose.

Such "businesses" seldom involve sales of real products or services to which a monetary value might be easily attached. However, sometimes the "payment" itself may be a non-cash valuable. To enhance credibility, most such scams are well equipped with fake referrals, testimonials, and information. The flaw is that there is no end benefit. The money simply travels up the chain. Only the originator (sometimes called the "pharaoh") and a very few at the top levels of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Individuals at the bottom of the pyramid (those who subscribed to the plan, but were not able to recruit any followers themselves) end up with a deficit. Professor Benjamin Fine, PhD and director of the MS program in mathematics at Fairfield University explains the concept of market saturation as it relates to PPD, which elaborates on the pyramid diagrams above.

They are currently being investigated by the FTC and the SEC, but they are a slippery company. I would hope that the SEC takes notice of the third to the last chart of this review that shows the company, if whose shares are indexed to a fixed point in time, has made absolutely no material gain in value despite using company resources to enrich corporate insiders. As Senator Kaufman said in his recent speech and as excerpted from When the Patina Fades... The Rise and Fall of Goldman Sachs???:

"...fraud and potential criminal conduct were at the heart of the financial crisis".

"transactions as “window dressing,” a nice way of saying they were designed to mislead the public."

... Mr. President, it is high time that we return the rule of law to Wall Street, which has been seriously eroded by the deregulatory mindset that captured our regulatory agencies over the past 30 years...

we must help regulators and other gatekeepers not only by demanding transparency but also by providing clear, enforceable “rules of the road” wherever possible. That includes studying conduct that may not be illegal now, but that we should nonetheless consider banning or curtailing because it provides too ready a cover for financial wrongdoing. [BINGO!!!]

I addressed this issue when I first wrote about this company last year, see The
Flim Flam Scam gets SEC'd - I'm not going to say I told you so, again!
and A
Demonstration of How PPD Management is Destroying the Company
.

A Review of Prepaid Legal's Last Fiscal Quarter

Falling membership revenues and share buyback remains a key concern for the company

Published in BoomBustBlog
Sunday, 28 February 2010 23:00

HSBC is Performing as Expected

About a year and a half ago I warned that HSBC would be facing increasing and unanticipated (I was a contrarian on the China bubble) losses in Asia, as well as increasing losses on bad debt in the US. I believe I was one of the very few who threw this caution out there. I have included a free opinion along with the macro analysis to badk it up here: Part one of three of my opinion of HSBC and the macro factors affecting it . Subscribers can download the forensic reports: spreadsheet HSBC_Holdings_Report_04August2008 - retail 2008-09-16 06:38:38 87.28 Kb and HSBC_Holdings_Report_04August2008 - pro HSBC_Holdings_Report_04August2008 - pro 2008-11-06 10:11:09 138.89 Kb. As a refresher, the 2nd quarter 2008 review is available here: HSBC 1H 08 results update. There is a discernable trend.

From Bloomberg:

March 1 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, posted full-year net income that missed analyst estimates after impairments for bad loans rose and profit in Asia fell.

Published in BoomBustBlog
Sunday, 28 February 2010 18:00

HSBC is Performing as Expected

About a year and a half ago I warned that HSBC would be facing increasing and unanticipated (I was a contrarian on the China bubble) losses in Asia, as well as increasing losses on bad debt in the US. I believe I was one of the very few who threw this caution out there. I have included a free opinion along with the macro analysis to badk it up here: Part one of three of my opinion of HSBC and the macro factors affecting it . Subscribers can download the forensic reports: spreadsheet  HSBC_Holdings_Report_04August2008 - retail 2008-09-16 06:38:38 87.28 Kb and  HSBC_Holdings_Report_04August2008 - pro HSBC_Holdings_Report_04August2008 - pro 2008-11-06 10:11:09 138.89 Kb. As a refresher, the 2nd quarter 2008 review is available here: HSBC 1H 08 results update. There is a discernable trend.

From Bloomberg:

March 1 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, posted full-year net income that missed analyst estimates after impairments for bad loans rose and profit in Asia fell.

Sunday, 28 February 2010 18:00

HSBC is Performing as Expected

About a year and a half ago I warned that HSBC would be facing increasing and unanticipated (I was a contrarian on the China bubble) losses in Asia, as well as increasing losses on bad debt in the US. I believe I was one of the very few who threw this caution out there. I have included a free opinion along with the macro analysis to badk it up here: Part one of three of my opinion of HSBC and the macro factors affecting it . Subscribers can download the forensic reports: spreadsheet  HSBC_Holdings_Report_04August2008 - retail 2008-09-16 06:38:38 87.28 Kb and  HSBC_Holdings_Report_04August2008 - pro HSBC_Holdings_Report_04August2008 - pro 2008-11-06 10:11:09 138.89 Kb. As a refresher, the 2nd quarter 2008 review is available here: HSBC 1H 08 results update. There is a discernable trend.

From Bloomberg:

March 1 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, posted full-year net income that missed analyst estimates after impairments for bad loans rose and profit in Asia fell.