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Michael Shulman  

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  • America's Banks: Are They Really Insolvent? [View article]
    Insolvency, in banking does not mean a bank shuts down in a meaningful way -- the customers can get their money, the loans are still serviced and so on. Insolvency means the banks have less tangible equity than liabilities -- and this is truly the case for several very large banks. Geither would not look like a deer caught in the headlights if this were not true -- and check out page 21 of the Citgroup town hall meeting presentation last November where they use acronyms to describe more than $1.2 trillion in off balance sheet assets. What insolvency means is shareholders in selected banks, over time, will be wiped out and so will some unsecured bond holders. Any solution you come up with, including bone head ones like suspending market rules, and there is so much dilution and so little of the current equity left shareholders get killed. And that is exactly the way it is supposed to play out. When I said this on Fox Business a week or two before Freddie and Fannie disappeared Ben Stein made fun of me, saying this was somewhere between improbably and impossible. So.....
    Feb 12, 2009. 08:47 AM | 16 Likes Like |Link to Comment
  • The Market Is Improving, Cancel the Coffin [View article]
    Fundamentals win out, always, over time. The market is driven by earnings and the multiple of that earnings. It is currently selling at more than 16 times the now mid-range case for S+P 500 earnings -- the multiple stocks get in a 3% plus growth economy. Large banks -- Citigroup and BOA, and come to mind -- are technically insolvent based on their current asset holdings and conservative projections for future mortgage defaults. JP Morgan Chase and Wells are sitting on more than $150 billion in option ARM mortgages they hold, so they are writing them down as the are impaired - they do not have to use mark to market rules on these assets. That is at least $75 billion -- probably more -- in write offs in the next three years, I could keep going -- listening to the bankers yesterday was like listening to the Wizard of Oz -- you are waiting until the stress tests are over and Toto pulls back the curtain.....
    Feb 12, 2009. 08:41 AM | 4 Likes Like |Link to Comment
  • How Did Citigroup End Up in Crisis? [View article]
    You confine your analysis to the balance sheet -- an Citi has more than $1.2 trillion in off balance sheet assets as shown in their town hall presentation last Monday - it is available on their website -- page 21 -- and even they admit several hundred billion, perhaps more than $600 billion, could end up on their balance sheet. The government intervention today pays no heed to these assets. Using current mark downs or historical default rates, these assets would and could overwhelm Citi. You notice the stock cracked after the meeting. The first hint of of the VIEs was in an obscure SEC filing in February and I have been following them ever since. With all de respect, an analysis of Citi or other banks without looking at off balance sheet obligations is worthless or worse.

    Michael Shulman
    ChangeWave Shorts
    Nov 24, 2008. 02:03 PM | 1 Like Like |Link to Comment
  • Citi May Be 'Cheap' but Isn't Necessarily a Bargain [View article]
    I suggest you all look at the town hall presentation from this Monday on the company website -- and look past all the acronyms and realize there are potentially hundreds of billions of off balance sheet assets hit their balance sheet, and even a small default rate would be, well, you can figure it out. Just do the math and forget about viewing the company view the official balance sheet or tangible book.Look at the whole if obscure picture.
    Nov 21, 2008. 12:11 PM | Likes Like |Link to Comment
  • The Odds in the Financial Sector: Damned If You Do, Damned If You Don't [View article]
    Charts are fine -- but the off balance sheet assets that will probably end up on bank balance sheets -- the major banks - say something solvent - the major banks are technically insolvent if not illiquid. The crash this week is justified if you look at the town hall presentation by Citi - page 21 -- it shows many hundreds of billions of potentially toxic off balance sheet obligations hitting their balance sheet.
    Nov 21, 2008. 12:08 PM | Likes Like |Link to Comment
  • How Much Longer Must This Deleveraging Process Go On? [View article]
    Your definition of leverage is a bit off. The first step is to reduce the "structural leverage" of individual banks, from let's say 33-35 to 1 (the investment banks) to 11-15 to 1 (the newly configured with access to the Fed investment and banks). Overseas, some banks are leveraged, excuse me, were leveraged, up to 50 to 1. This is coming down to a maximum of 15 to 1. THEN you will see leverage reduced as write offs exceed new capital. The IMF has said we already have a $700-$750 billion shortfall. Throw in the TARP, we are at break even, then we have more write offs to offset with new capital and we do not know where that is going to come from. Bottom line: a reduction in credit available to banks, businesses and consumers of at least 60%, maybe more. That willbe about $4.5-$5 trillion this year, maybe more next year.
    Oct 29, 2008. 06:59 AM | 3 Likes Like |Link to Comment
  • Why Oil and Gold Are Headed Much Higher [View article]
    The predicate of this argument is that the current reflating of the banks and financial markets is going to increase the money and lead to serious inflation and therefore debasement of the dollar. At present we are in a terrible liquidity trap and the Fed and Treasury are fighting tooth and nail to increase the money supply which they are not doing with any real success to date. The assumption is that once crdit markets calm down the money currently "trapped' will be free and rampage through the system.

    That assumption is not credible on its face. At least one trillion more dollars need to be injected into the world financial system to replace lost capital. Another $5-$10 trillion in credit is being permanently withdrawn from world credit markets as de-leveraging continues -- and will do so for the foreseeable future. This absorption of liquidity to replace lost capital and the reduction in leverage will reduce the velocity of money to the point the current and potential future injections by the Fed and Treasury will not be inflationary.

    Also, once the credit markets stabilize, all interest rates on T bills, short and long term, will rise, possibly dramatically, strengthening the dollar.

    Bottom line: you can print as much money as you want and if it does not circulate, there is no inflationary impact and no impact on the dollar. And the capital injected into markets to date and the next trillion will simply replace lost capital and not go into circulation.
    Oct 26, 2008. 09:30 PM | Likes Like |Link to Comment
  • Apple Earnings: What to Expect (And Who Not to Believe) [View article]
    Our (ChangeWave) surveys show Apple has reached a mature and increasingly positive place in the market - laptop and iPOD products now sell based on features and price and there is not buyer hesitation due to "newness." Apple is close to reaching this point with iPhones but as it reaches this level of customer maturity it will find more and more customers waiting until their current phone contract expires before buying an iPhone. This is all being said, Apple should beat estimates, especially in laptops.

    Apple's guidance is clearly driven by lawyers or a smart CFO - they have no obligation to anyone to change the way they do guidance. Why should they? Companies like Apple should worry about long term financial and stock performance, not making an analysts or trader happy on a given Wednesday in October.

    If and when you analyze Apple again, the key data point is money flows into tech or other mutual funds with a history of owning this sector. Apple's guidance will be much better than virtually any other tech company and money will flow out of other stocks into Apple as opposed to totally fresh money entering the market to play Apple. The stock does not have to fight Apple analysts - it has to fight continuing and massive withdrawals from mutual and hedge funds investing in tech.

    One thing Apple could so is spread it IR wings and start working consumer spending/retail analysts, something it does not realyl do at this time (or so I have been told).

    Bottom line: not a short (my specialty) and not a long based on investor concerns over the market. And we may not be at an appropriate entry point if the average multiple of an S+P stock continues to contract.
    Oct 21, 2008. 10:43 AM | Likes Like |Link to Comment
  • CNBC's Gasparino Problem [View article]
    I am happy to see someone write about Gasparino's comments. He is a beat reporter -- and a good one -- always making caveats about sources and quotes and advising listeners how he might be wrong. I am not sure what prompted him to lose his mind on the issue of politics but he knows less about what he id discussing than my high school age sons. I live inside the Beltway, know many people who have forgotten more than he knows about politics and the election and they find his comments, when I passed them, amusing. It could be worse -- we could be watching Fox.
    Oct 13, 2008. 11:46 PM | Likes Like |Link to Comment
  • This Uncertainty Is Unacceptable [View article]
    Your parallel to DNA is perfect -- the supposed "mapping of DNA" that says it is "complete" covers about 3% of genetic material. The other 97% is called "junk DNA" and scientists are decades a way from understanding its role. Ditto for many factors in financial markets.
    Sep 23, 2008. 12:15 PM | Likes Like |Link to Comment
  • Pfizer: Seeking Alpha in Pharma [View article]
    PFE has a $10-412 billion donut hole in revenues beginning sometime between November of 2010 and November of 2011. The Lipitor patent expires in 2010 and at the latest a generic version will be available one year later. The experience of Zocor, and other branded medicines coming off patent, widely used and not difficult to copy -- Prozac and Claritin come to mind - shows Lipitor will lose 75% or more of market share within 12-15 months of a generic hitting the market. That is roughly $9-$10 billion in revenue that in turn generates huge net profits. Barring some sort of magical acquisition -- nothing of size would currently be accretive - the stock is worth $8 in 2010/2011. It is being held up by the ultimate bribe - a 6.9% dividend. PFE is one of the good guys in the industry - these are serious, dedicated people -- but the stock price is unwarranted and will drift towards $8 over the next 2-3 years, propelled by the inevitable dividend cut. Anyone who thinks PFE can withstand the generic onslaught is being willfully blind - or can ask me for our survey data which shows how hard and fast Lipitor will fall to generic competition. It is a great drug -- I take it -- but insurers are already swtiching new and willing patients to generic Zocor, so the precedent is being set.
    Sep 22, 2008. 08:23 PM | Likes Like |Link to Comment
  • The Media Has Mistaken a Major Re-allocation for a Recession [View article]
    THere are of course two sides to a story --even about a recession -- but the comment forgets the epicenter of the recession, glabl credit crunch and slide in the stock market -- the fall in home prices and the rising invenstory of unsold and soon to be foreclosed homes. If you do simple math with published data on when mortgages were granted, subprime, Alt-A and now prime -- and take default arets -- and then foreclosure rates -- and then current inventory and home building rates -- home prices cannot bottom until the middle of 2011 at the earliest. The reduction in lending ability that will stem from the crisis with Freddie and Fannie and a noticeable lack of reduction in spreads between Fed funds and mortgage rates tells me, and should tell, demand will be reduced even among credit worthy borrowers and prices are more likely to begin rising again, modestly, in 2012. This means the main prop of consumer confidence about their personal finances -- and spending -- and small business formation -- is going to stagnate until the next McBama election year. economy and market. I have not even spoken of the massive credit contraction that will take 5-10 years to play out as leverage is reduced among financial institutions and consumers.....
    Jul 17, 2008. 10:00 AM | Likes Like |Link to Comment
  • Genentech: Britain's National Health Won't Pay for Avastin [View article]
    Your analysis would be fine if this was about engineering a bridge, not curing a human being. While the typical patient responds to Avastin and lives longer for 5.5 months, some live more than two years. What is the value of a human life? An advanced prosthetic device for a returning vet costs $65,000 -- should we give them a simple peg leg since we should not pay for them to enjoy life to the fullest with a more functional leg? The real issue is the government's role in determining who lives and who dies -- it should be minimal -- consumers should be choosing life insurance policies that clearly state what the company will and will not pay for in fairly general understandable terms.

    On another note, the NICE was overruled by British courts when they refused to pay for Herceptin for a breast cancer patient. My guess is the same thing will eventually happen for Avastin once Genentech publishes longer term survival data for a subset of the population being treated -- in the US, of course. Then the National Health Service can determine, statistically, how much money it saved by killing off some people prematurely.

    For the record, I write a biotech investment newsletter and recommend Genentech. I do not own the stock.
    Jun 25, 2008. 03:28 PM | Likes Like |Link to Comment