Wednesday, September 14, 2011

Welcome to day-traders anonymous (French Bank edition)

At Bronte we talk a lot about French banks. But we have not owned any of the majors since Greece started looking shaky. We used to own Credit Agricole SA - indeed when we started Bronte it was one of our largest positions. But their exposure to Emporiki (the number 5 bank in Greece) scared me. Indeed I blogged about it once.

We have an estimate of their largest possible loss at Emporiki - and it is probably a good estimate - but hey - this is a crisis and its pretty hard to trade that estimate. The main issues are found on page 70 of 236 of their results presentation (that is where customer assets, customer liabilities and other funding needs are presented). Whether the loss in Greece is 4 billion or 12 billion Euro hardly counts...

Anyway I just bit the bullet and purchased a position in Credit Agricole. My business partner didn't like it - indeed he argued strongly against it.

So we sold.

We made a profit - after commissions - of 412 Euro on the only day trade Bronte has ever done.

My name is John and I am a day trader.

Kind of makes you feel dirty...



John

26 comments:

Andrew said...

Still not bad for a € 4,000 position.

Anonymous said...

Let's see... 412 Euros: subtract 2 and 20 fees, foreign taxes, 12b-1 fees, the new transaction tax, and lunch expenses, leaving 6 Euros for the investors :)

Still more than I've made this year.

More seriously, why did your partner nix the stock? Poor fundamentals, it'll get cheaper in the future, the numbers are wrong, poor risk/reward tradeoff, or he's just being conservative? These things look cheap to me.

John Hempton said...

The 412 euro was after brokerage - but hey - before the other stuff...

It was a joke. I was going to end the post by saying "412 Euro - beer and hookers all round".

It was bigger than 4000 euro - but it was still small - I had not discussed with my business partner. It was going to be bigger when I got off the hphone.

---

Now why did he nix it? Because he thought that Credit Agricole was OK - but he could not get his head around SocGen - and he said that the right time to buy Goldman Sachs (which was OK) was after Lehman failed... He said we had not had the big failure yet - and he thought one was inevitable...

He does not think - and I do not think - that Credit Agricole will fail - but we both think something will (but we debate what).

So he thought it would get worse before better - and there was no game being early...

But it is still possible that everything fails - and I guess it is still possible - at least with enough monetization - that nothing fails.

He just thought we were buying into something on which we did not have enough visibility.

J

buyersstrike said...

Could George Papandreou be Credit Agricole's Giancarlo Parretti?

French banks, Credit Lyonnais in particular, lost billions in the 80s with disastrous investments in Hollywood.

Perhaps some CL risk-management employees linger on at CA?

Anonymous said...

I would be very interested in hearing your thoughts on SocGen. I just can't see what is quite so bad about it, at least within the current set of circumstances.

If Spain/Italy go, well, likely all of the French and German banks do too. But SocGen in particular seems to have modest Greek exposure, and acc to them, negligible Portugal/Ireland. Funding is not bad. The legacy assets are not great but were already known about. And the key parts of the ongoing business generate decent income.

The CIB business seems, ahem, prone to problems and the nastier bits perhaps hived off, but it does not look like they've been doubling down on risk there.

Compared to many other banks, it doesn't even have that much in the way of goodwill (zero capital value).

But I haven't dug that deeply in the books, just interested in somebody else's analysis.

Anonymous said...

The simple reason is investing in the French in good times is dumb, let alone bad.

Anonymous said...

He does not think - and I do not think - that Credit Agricole will fail - but we both think something will (but we debate what).

My bet is on BNPParibas. And if it goes, CA is going to drop like a rock.

He just thought we were buying into something on which we did not have enough visibility.

And he's right. Especially since the French government could force one of its banks (no foreigners, s'il vous plait!!) to take over SocGen or parts of BNP so as to prevent the closing of the doors. CA is about the only bank capable of absorbing any of that crap, and it could wreck shares.

Or they could just shut down the markets for a bit, in which case you really don't ant your money in that country.

The only sane way (IMO) to play your long is with a very small up front purchase of deep out of the money LEAPS. If you're going to be making risky bets, you might as well use the appropriate instruments for them (and not fool yourself about the amount of speculation involved in them, either)

JMO

John Hempton said...

As a general rule we like France. They have managed to convince the Chinese that they are the arbiters of good taste - and several stocks are hedges to our China shorts.

Credit Agricole taking over BNP - alas that is possible. Would be ugly though.

J

Keith Hemstreet said...

Be strong. Take it one day at a time.

Richard said...

John,

There is nothing to be ashamed of!

I think that there is the dark taint of the Day Trader in all of us. It is a side of our natures that we must confront and defeat in order to become good investors.

Afterthought: The human instinct for "Fight or Flight" is very strong, and sometimes in markets (not always) it is a really good idea to take the money and run.

t said...

Pair trade? Agricole has most of its Greek exposure via its equity stake in Emporiki, and will walk away if it is shown to be insolvent (unlike the Irish government with its banks). BNP has its Greek exposure on its own balance sheet - much bigger and much more painful.

Anonymous said...

Hi
When you invest in big financials do you trust their financial statements?
After Lehman engaging in "actionable balance sheet manipulation", AIG's failure to disclose its CDS risks, securities lending risks, Anglo-Irish manipulation of their deposits with IL&P and loans to prop up their share price etc etc

Don't you feel that you would rather trust in the statements of a Chinese RTO than a Western bank these days?

Anonymous said...

A bit more colour on your thoughts on the French banks, why you favour CA and why Soc Gen scares your partner.
If I were to guess your thought process it would be- 1. fears on solvency re greek debt is irrelevent- overall solvency can't be accurately measured anyway so the arguments over what haircut on greek debt is irrelevent and can be covered by pre prov profits over time anyway.
2. Near term liquidity is the issue- CA is best positioned/last to go because of the funding from regional partners.
3. Socgen and BNP have been cutting liquidity to the wire relying on the TBTF french govt guarantee and us money mkt funds and now this is under question. Plus they have IB operations which are prone to runs due to the nature of repo and otc deriv markets. Hence you can't call the political nuances of what it means for equity holders if they become totally reliant on the ECB.
I would guess the Italians are more at risk.

Ben said...

To previous Anonymous,


Given the ECB's liquidity operations and the governments' forbearance in order to avoid a banking system collapse, why is liquidity an issue? Note that both the ECB and all the european governments have stood up to repeated test by the market in the last 3 years. That is a very strong evident of determination.

Only when there is a Greek default will major European banks be force to recognize their loss.

I think a good model is Japan after it blew up in the early 90s. Zombie banks can live on when given proper support.

Anonymous said...

Why look at French bank exposure if you can get German blue chips with solid balance sheets and cash flows at a discount?

I consider all bank shares to be options currently, liable to political influences and game changers. You can speculate on a brief relief rally, but until the Euro situation is resolved the risk is unquantifiable in banks.

Anonymous said...

There's nothing wrong with a day long trade...being a day trader on the other hand, well that's certainly debatable.

Sometimes short news driven gains are glaringly obvious and should be taken advantage of, IMO.

Anonymous said...

Given the ECB's liquidity operations and the governments' forbearance in order to avoid a banking system collapse, why is liquidity an issue? Note that both the ECB and all the european governments have stood up to repeated test by the market in the last 3 years. That is a very strong evident of determination.

And yet the TED spread is increasing...


Only when there is a Greek default will major European banks be force to recognize their loss.

That day seems to be approaching.

Anonymous said...

Can't find the presentation you are referring to in your post. What's the date on it?

Anonymous said...

I hear there may be some buying opportunities in a certain large Swiss bank.

Siddartha Bhattacharjee said...

John,

How do you get your hands around hidden exposures for banks? If I look at previous blow ups like AIG, the term CDS is not even mentioned once in their 2005/06/07 annual reports, so even if a diligent investor combed through all the financials and notes to accounts, they would have suffered huge losses in 2008.

Anonymous said...

Both SocGen and CA have been taking huge provisions in their Greek banks for a couple of years now, much larger than local Greek banks. Their Greek book is now small, so I guess the issue has been liquidity and general fear.

How can CA take over BNP? BNP to go? BNP is much larger with good deposit bases in France, Italy, Belgium and elsewhere and has a better rating than SocGen or CA. Have people been reading a lot of bad WSJ editorials? You don't believe its books? Why would you believe any books then?

John Short said...

Hmmmm John, still short CFSG? They are about to close the buyout in a weeks time. Looks like Bain is skipping due diligence?

Tom Lindmark said...

Whoever Ben may be, props to him for identifying the likely outcome of all of this. Indeed, the banks will survive in some form - walking dead perhaps - thanks to the ministrations of governments.

Eventually your experience with Japanese banks should prove of more than a little value, John.

Anonymous said...

Humility is the rule. If you chose a name with that idea as your guiding force, she'll be right mate.

Anonymous said...

What do you think of this ?

http://www.bbc.co.uk/news/business-15055243

People have been asking me (not because i'm an expert, but because they know I follow the markets a bit) what I think of the euro crisis. I've been saying as long as they are not printing euro's at a faster rate, I cant really see why the euro should drop much or have particular problems as a currency. Well that news is making me think the printing presses are being inked up. They are proposing 1.5 trillion being lent to EFSF from the ECB (where's that coming from btw ? Printed I guess). The funny thing is what they say later:

"The EFSF would take on the main risk of lending to governments struggling to borrow from normal commercial sources - governments like Italy - and it would do this by providing what's known as first-loss capital or equity.

In this way, the EFSF would make it less dangerous for the European Central Bank to lend alongside it."

So the ECB lends to EFSF who then lends to the distressed banks/governments, on a first loss basis, to reduce the risk such that the ECB can then lend alongside it ?? Please explain to me how that works. Utterly crazy. If this is an attempt to solve a problem I can only see things getting worse.

Anonymous said...

< thought that Credit Agricole was OK - but he could not get his head around SocGen - and he said that the right time to buy Goldman Sachs (which was OK) was after Lehman failed... He said we had not had the big failure yet - and he thought one was inevitable...>

CA has lagged BNP, and some others with similar leverage, like ING et al. Thoughts?

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.