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Illinois On The Brink? The Whole Country Is On The Brink

The biggest problem facing Illinois is the public pension fund problem.  I don’t care what the “official” number is for the degree to which it is underfunded.  I can guarantee that even without marking-to-real-market the illiquid investments like private equity funds, derivatives, commercial real estate trusts and other assets that do not have truly visible markets, collectively the public pension system in Illinois is at least 60-70% underfunded.   Then apply a realistic assumed actuarial rate of return on assets, which would be lower than the current assumption (likely 7.5% ad infinitum) and the underfunding goes to 80%. The problem is unsolvable without a complete and drastic restructuring.

I was in a Lyft ride today and the driver happened to be from the northwest suburban area of Chicago.  There’s a lot bad things happening in that State that are not reported in the mainstream media.  All road public road work has been halted except toll roads.  The gun violence has worked its way from the South Side up through downtown into the Gold Coast neighborhood and is winding its way north.

He said that his old house at peak prices in northwest burbs was worth over $500k.   The current resident has it offered for $250k.   Housing and real estate prices are plunging.   He has a good friend who consults with Sears and the expectation is that SHLD could file bankruptcy any day (Short Seller Journal subscribers were shown this idea on April 2, 2017 at $11.49 – it’s been as low as $6.20 since then).

It’s not just Illinois.  The entire system is crumbling beneath the surface.  As long as the mainstream media isn’t reporting the truth, the “truth” can’t be that bad, can it?  The truth is worse than any of us can possibly know.

There’s a 1%/99% in this country that’s different than the assumed meaning for that term. For 99% of the population, economic reality and systemic truth has been covered up and kicked down the road for so long that this segment of the populace is willing to believe there may well be a such thing as a “free lunch.”  To 99%’ers, it’s inconceivable that the grim-reaper could or ever would show up to collect.  Of the 1%, a small percentage not part of the insider elite can see most of the truth and can imagine that the whole truth is far worse than what can be perceived from publicly available information.  The balance of the 1% are the insiders.

I stated in 2003, after watching the tech bubble collapse and the housing bubble inflate, that the inside elitists were going to keep the system propped up with printed money and easy credit until they had swept every last crumb of middle class wealth off the table and into their own pockets.  I also said that nation’s retirement assets would be last crumbs remaining.  Enabling pension underfunding is another form of debt used to confiscate wealth.  That’s why the catastrophic underfunding of pensions was allowed to persist.

For purposes of my analysis, anyone who does not have enough money in the form of cash in hand to buy a Federal politician or buy the direct phone number to the Oval Office is “middle class.”  There’s plenty of douche-bags running around with assets worth 8-figures but they don’t have enough spare change to buy their way in to the elitists’ card game.

We are at the point where the last crumbs are being swept off the table.  It looks like Illinois will be the first to fall but there will be several others that follow.  Part of the motivation by the Fed/Government to hold up the stock market like it has been doing is to keep the big State pension funds propped up for proper looting – like a prize-fighter being held up under the shoulders after passing out in order to deliver more punches to the face.

I suspect the time at which the system will be allowed to collapse is not too far off.  The only question for me is whether or not the “Mad Max” scenario engulfs the country before the outbreak of World War 3…

Amazon Prime Day! What Does This Mean?

Amazon stock is up $6 in pre-market trading because it’s…”Prime Day!”  But what does this really mean?  It means AMZN will burn more cash selling and fulfilling commodity products with free 2-day shipping. But it will likely get another $20 pop in its stock because “Prime Day” revenues today will grow X% over 2016’s “Prime Day.”

Am I the only person in the world who has figured out that AMZN’s e-commerce operating income margin is nearly zero?  Does anyone besides me know that AMZN’s non-North American e-commerce business loses money on an operating basis?  The numbers are posted in its 10-Q every quarter.   North America and ROW combined last quarter AMZN’s e-commerce business did a whopping 0.3% operating margin.  At least that’s 0.3 higher than Blutarsky’s grade point average in “Animal House.”  Short Seller’s Journal subscribers know this because I show them the numbers –  Wall Street’s institutional investor clients do not know this because these market “professionals” can’t be bothered with doing actual research).

AMZN has already been crowned as the new “grocery killer” by the Jim Cramers of the world.  It’s amazing that he can make this assertion without having ever looked at AMZN’s real numbers.  In fitting irony, the opposite of Cramer’s assertion is the truth based on real world numbers.  Walmart, Target, Bed Bath etc have 3-5% operating margins that they can “play” with to attack AMZN’s e-commerce model.

Is AMZN “killing” brick-n-mortar or are the healthy brick-n-mortars going after AMZN’s e-commerce business?

Go onto Walmart’s website.  It’s now offering 2-day free shipping on millions of SKU’s without any requirement to pay money up front to join a “club.”  I was wondering by Bezos decided to offer low-income people a big discount on Prime memberships.  He knew Walmart was going to offer 2-day free shipping to that retail demographic without a “club membership” requirement.  Guess what Jeff?  WMT can afford to ship for free.  Your company cannot.  It doesn’t cost much extra for WMT to offer 2-day shipping because it can fulfill most orders from store inventory in the same county or city or neighborhood from which the order was placed.  AMZN can not do that.

Walmart is more than 3x the size of AMZN and it is many times more profitable.  BBBY’s e-commerce business last quarter grew 20% year over year.   I got news for  Cramer and all the robotic Wall St. analysts, and the lemmings who slavishly worship both:   Walmart, Best Buy,  BBBY and TGT have room to subsidize sales even more and still operate profitably.  AMZN does not.  If you don’t believe me then look at the SEC-filed number yourself.

Stay tuned…there’s more…two major category-killer discount grocery chains from Europe are expanding aggressively in the United States and Microsoft is cutting back on certain of its operations to focus on its cloud enterprise business.  AMZN’s AWS business will be attacked aggressively by MSFT, ORCL, GOOG and IBM.  The price of cloud computing will eventually approach zero.  Did anyone out there realize that AMZN’s cloud margins decline every quarter?

Happy Amazon Prime Day!  AMZN will lose money on just about every item sold today.  I guess that’s a great reason to celebrate…

Paper Gold And Silver – A Tragic Reflection Of The U.S. Financial System

Dave, just a moment for some feed back on your Short Seller’s Journal. I just placed an order for 1oz gold eagles thx to my profits off Tesla and BBBY, thx as always. – subscriber email received today – Short Seller’s Journal information

Wow.  The hedge funds are almost net short silver contracts again, having had their algos steered into that predicament by the bullion bank market manipulation.  The fraudulent paper short position in both gold and silver – but especially silver – is many multiples larger than the available supply of physical metal that is supposed to legally back commodity derivatives.  This is evident from the Comex disclosures.

We have no idea what the total net short position would be including LBMA forward contracts and OTC derivatives.  That the entities who are paid by the public to prevent this continue to allow and enable this massive fraud is a tragic  commentary on the current U.S. economic, financial and political systems.

Craig “Turd Ferguson” Hemke invited me onto his weekly subscriber podcast show to discuss the trading action in gold and silver, the catastrophe otherwise known as the Federal Reserve and the slow-motion train wreck occurring in the stock market:

TO LEARN MORE ABOUT THE MINING STOCK JOURNAL OR SHORT SELLER’S JOURNAL – CLICK IN IMAGE:

Non-Farm Payroll Propaganda – Aka Fake News

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it.” Joseph Goebbels

I dislike giving the employment report any acknowledgment because the report is constructed for the purposes of political expedience. But I can’t help posting a few comments because, once again, the non-farm payroll report for June showed significant growth in sectors of the economy for which real world business economic reports showed economic contraction. The headline number purports that the 222k new jobs were created in June. This wailed on the consensus estimate of 170k.

The Government attributes 16k in new jobs to the construction industry. How can this possibly have been the case when construction spending declined 4.4% on a quarterly basis for April and May? Moreover, housing starts have been declining for the past few months, including June. Unless there’s a new model for running a business, contracting economic activity is accompanied by payroll cost-cutting. The number is just not credible. Same with retail, for which the Government wants us to believe that 8100 jobs miraculously were created despite the fact that retail stores are being closed at one of the fast rates in history.

Then there’s the nefarious “birth/death” model, which guesstimates the number of jobs created by new companies started in June net of jobs lost from new businesses closed in June. I have news for the Bureau of Labor Statistics: new business formation, according to Gallop, is at a 40-yr low. Furthermore, potential business owners are less likely to risk borrowing money for a new business when the cost of borrowing is increasing. Maybe the BLS statisticians forgot about the Fed interest rate hikes and forgot to plug the higher cost of capital in to their new business formations blender. The B/D model attributes 102k new jobs from new businesses net of business deaths. To convolute their reporting Hmmm…23k of those came from construction…need I say more?

The above commentary is a preview of this week’s Short Seller’s Journal.

TSLA Down 19% – $72 – In Eight Days

In my opinion, the ride down will be worth the pain and blood-loss of sticking with a short bet on TSLA, which is why I continue to buy small quantities of put options that have been expiring worthless. I know at some point I’m going to catch a $100+ reversal in TSLA stock which will more than make-up for the small losses I’m enduring in the puts while I wait for that occurrence. Using puts protects me from the unknown magnitude of upside risk from shorting the stock. Plus, I don’t have make a “stop-loss” decision because I don’t have the theoretic “infinite upside” loss potential that I would face shorting the stock. With my loss capped, I can hang on to the puts through expiration. With a stock like TSLA, often a stop-loss exit is followed up by reversal to the downside, leaving the short-seller without a short position.

As we saw on Friday, TSLA stock can reverse to the downside quite abruptly and sharply. I can guarantee that some number of shorts covered as TSLA was soaring over $370, leaving them with no position when the stock reversed, closing at $357. I don’t want to recommend specific puts to use but I can recommend giving yourself at least four weeks of time. If I were putting on a new put position today, I would probably buy a very small quantity of the July 7th $340-strikes. If TSLA sells back to the $310 area before expiry, which could easily happen as $310 is where the last 2-week push up in price began, the puts would have an intrinsic value of $30. The current cost is about $10.

TSLA reminds me of Commerce One (CMRC), a B2B internet company that went from $10 to $600 in a very short period of time in late 1999 – 2000. It eventually went to $0. I shorted and covered small quantities of stock starting around $450. I was fortunate to have been short from the high $500’s when it finally topped out a $600. The volatility of this stock was extraordinary but persistence and “thick skin” paid off.

The above commentary is from the Short Seller’s Journal. Subscribers who liked the idea have been short TSLA June June 12th, when the stock opened at $359. You can’t time the top or bottom with a stock like TSLA, but you can make a lot of money if you get 2/3’s of the ride down. You can learn more about the Short Seller’s Journal here:  LINK

YTD General Electric has been one of the 3 worst performing Dow stocks.  I presented GE as a short idea In the January 29th issue.  I said it would be a boring but no-brainer short.  So far it’s down 17.5% from that issue.  This has more than doubled the return on an SPX long position in the same time period.  Maybe it’s not so boring…

Auto Sales Tank Again In June – It’s Worse Than Headline Reports

June auto sales on a “SAAR” basis (seasonally adjusted annualized rate) fell 1.2% from May to 16.5 million “SAAR.”  The non-SAAR number available from sources like Autonews.com show a 3% year over year drop from June 2016.  The year over year comparison for the same month eliminates seasonality and it eliminates statistical errors compounded by the annualization calculation.

It was the 6th month in a row that auto sales declined.  June’s 16.5 million SAAR was 11.7% below the all-time high of 18.7 million SAAR (December 2016). This is a large decline that is not being given much attention in the financial media.

But it’s worse, especially for the domestic OEMs (GM, Ford, Chrysler).  GM’s sales dropped 4.8%, but its car sales plunged 38.2% (truck sales were up 11% with huge incentives).  Ford’s sales fell 5%, truck sales were up 2.2% but car sales tanked 23%. Chrysler’s sales were down 7.4%.   These numbers are on a year over year basis for June.

Sales are plummeting despite the fact that automakers spent a record amount on cash incentives.  Financing terms for the subprime debt being used to pay new cars continues to loosen.  The average monthly car payment increased to $517 from $510 in May and the average term rose to a record 69.3 months and the total amount financed hit another all-time high (just under $31,000). You’ll note that subprime delinquency/default rates are starting to approach 2008 levels.

As auto sales decline, auto manufacturing output will decline and production capacity will be shut down. All of this deteriorating economic activity in the sector will affect employment negatively. GM announced last week that its goal is to reduce the days inventory from 105 at the end of June down to 70. Note that GM had previously it would have its days inventory down to 90 by the end of June. The 105 days inventory is an all-time high.  The last time it approached this level of June 2007.  Clearly the optimism in the industry and on Wall Street is still far too high. With sales declining it will become harder to reduce inventory without substantial production cuts.  We can expect another round of big production cuts to be announced in the next 4-8 weeks from the industry, if not sooner.

US Dollar weakness – The U.S. dollar closed Q2 with its biggest quarterly drop in seven years, falling more than 6% during the quarter, which is a huge move for any currency let alone the world’s “reserve” currency. Compounding the bearish message of the dollar’s decline is the fact that this occurred during a period of time when the Fed is supposedly tightening money supply, which should drive the dollar higher.

I would suggest that the dollar’s decline in the context of a “hawkish” Fed reflects the growing systemic dysfunction and fundamental deterioration of the economic, financial and political condition of the United States. At some point the stock market will “take notice” of the falling dollar – as it did in 1987 when the Dow dropped nearly 25% in one day – which will trigger an abrupt sell-off like the two that occurred last week but which, unlike last week, won’t be followed with a “V” bounce the next day.

A portion of the above analysis is an excerpt the the Short Seller’s Journal.  Currently subscribers to the SSJ also receive IRD’s Amazon.con research report and a research report on Kinder Morgan (you will be surprised what I discovered about KMI;  both reports are somewhat dated in terms of the latest financial numbers but the reasons to short both stocks are intact).  You can learn more about subscribing here:  Short Seller’s Journal info.   (Note: there’s no minimum required subscription term and subscribers can get access to the Mining Stock Journal for a 50% discount).

Love all your interviews and articles…plus the the Great Mining Journal every month – subscriber testimonial received last week

Why Was Gold Slammed And The Dow/SPX Pushed Higher?

Something ugly could be hitting the financial/economic system soon. To blatantly hit gold like this when no one is around is a sign of desperation. The FANGS had an brutal reversal today despite the squeeze higher in the broad indices. TSLA soared early on Elon Musk’s shameless puffery – which often borders on outright fraud – and reversed to the downside, while the SPX and Dow were being pushed higher by the Plunge Protection Team.  Both indices closed well of their higher.  Auto sales for June were once again well below expectations.  GM’s inventory soared despite a stated goal to reduce it inventory from over 110 days to 70.  A lot of workers will lose their jobs.  Household debt – mortgage, auto, credit card – will go unpaid…

The Trump Presidency is floating on the fumes of questionable sanity as an impeachment Bill is being sponsored in the House by 25 Reps. The case to be made that Trump is not mentally competent enough to have his index finger on the red button that launches nukes at Russia grows stronger by the day.

Doc and Eric Dubin invited me on to their weekly Money and Markets weekly market recap/analysis to discuss – today notwithstanding – very interesting trading action in the gold/silver paper “markets” in the west and the physical, real markets in the eastern hemisphere:

CLICK ON EITHER BANNER BELOW TO LEARN MORE ABOUT EACH

“Tesla Is A Big Pile Of Sh_t”

Jason Burack (Wall St for Main St) interviews notable Tesla bear, Mark Spiegel. As readers know, I’m in agreement with Spiegel in thinking Tesla stock is worth zero.   In fact, I’ve stated publicly that I’m trying to decide if the world’s greatest Ponzi operator award goes to Jeff Bezos or Elon Musk.  Spiegel makes a great case that it belongs to Musk.

– “They’re losing a massive amount of money and actually showing negative scale [losing more as sales grow]. They’re losing more money on an operating basis with almost no direct long-range electric car competition. A massive amount of that competition rolls out at the of this year and then hugely in 2018, 2019 and 2020.”

– “No sustainable proprietary technology.”    There’s several companies with better technology but they don’t promote the way Musk promotes.

– “Every business Musk has is based on Government subsidies. And they still lose money. He’s the only guy who can pull down billions in Government subsidies and still lose money.”

– “Every business Tesla is in is a shitty business. And when you put together a collection of shitty businesses, you don’t get a good business – you just get a bigger pile of shit”

This is an interview that is a must-listen if you own TSLA and want to hear the truth about the Company and Musk:

TSLA’s market cap now stands at nearly $61 billion. It burns over $1 billion per year in cash and its financials are riddled with what would have been considered accounting fraud 20 years ago. It sold 72.6 thousand cars in 2016. Compare this to GM, which has a market cap of $51 billion and sold over 3 million cars in 2016, and Ford, which has a market cap of $44 billion and sold 2.5 million cars in 2016.

To say that the action in TSLA’s stock price and its market cap is “insane” does not do justice to the word in “insane.” TSLA is the “poster child” for the mass hysteria that fuels investment bubbles. The problem with shorting TSLA is that the hedge funds are chasing its momentum higher, as investors embrace the negative news events as a reason to pay more for the stock. As such, it’s hard to see a catalyst that will “correct” the price, like with retailers for instance. TSLA, along with AMZN, is one of the rare stocks which will continue levitating until it doesn’t – like a Roman candle that eventually burns out falls to earth.

In my opinion, the ride down will be worth the pain and blood-loss of sticking with a short bet on TSLA, which is why I continue to buy small quantities of put options that have been expiring worthless. I know at some point I’m going to catch a $100+ reversal in TSLA stock which will more than make-up for the small losses I’m enduring in the puts while I wait for that big pay-off.

Using puts protects me from the unknown magnitude of upside risk from shorting the stock. Plus, I don’t have to make a “stop-loss” decision because I don’t have the theoretic “infinite upside” loss potential that I would face shorting the stock. With my loss capped, I can hang on to the puts through expiration. With a stock like TSLA, often a stop-loss exit is followed up by reversal to the downside, leaving the short-seller without a short position.

The written analysis just above is from the Short Seller’s Journal. In that particular issue a couple weeks ago I outlined a put option strategy that will keep you exposed to the eventual $100 down-day in the stock that is going to come. You can learn more about the Short Seller’s Journal here: LINK.

On another note, Fidelity – specifically the OTC Portfolio mutual fund (TSLA is 9.2% of the fund’s assets) and the Contrafund – own 15% of the stock.  When TSLA stock ultimately fails, those funds will be hammered.  If you have money in either of those funds, foretold is forewarned.

JP Morgan Insider Rats Dumping Shares As Bank Ups Buyback

After it was announced that the Fed gave the big banks a pass on their “stress” test, the TBTFs announced huge dividend and share buyback plans:

If the banks had properly marked to market their Level 3 assets and some of their riskiest non-Level 3 assets, would they have still passed the Fed stress test, which essentially places a stress-test “bar” on the ground and lets the banks step over it? Probably not. This would explain why JPM insiders have been dumping shares en masse over the last three months:

The “buys” are deceptive because those “buys” are the exercising of compensation options. The most aggressive sellers have been CEO/Chairman, Jamie Dimon; General Counsel, Stacey Friedman (hmmm…); and CFO, Marianne Lake (hmmm…).

With JP Morgan’s announced 90% increase in its share buyback program, the shares will have an even bigger bid in the market from shareholders into which insiders can dump.

The question is – rhetorical, of course – why would these insiders be dumping shares if the outlook for the Company’s earnings, stock price and financial condition was positive?

Pension Apocalypse Is Coming

“It’s unequivocal now: We are taking money from the new employees and using it to pay off this liability for the old employees,” said Turner, a Gov. John Hickenlooper appointee. “And some might call that a Ponzi scheme.”Denver Post, 6/27/17

The people in Denver who bother to read the news, especially the ones who are or will be dependent on the Colorado public employees pension fund (PERA), were greeted with a shock Tuesday. PERA is now admitting to be 42% underfunded, down from an alleged 38% underfunding last year. How on earth is it possible for the underfunding of a pension to increase during a period of time when the Dow, S&P 500, Nasdaq and fixed income markets are hitting or are near all-time highs?

And what about the valuations of these funds using realistic mark to market prices for the illiquid assets, like private equity, commercial real estate and OTC derivatives?  Harvard University is about to sell its private equity assets.  My bet is that the value received will be covered up as much as possible.  And we’ll never know where the fund was marked on its books.  But judging of the failure vs. expectations of the SNAP and Blue Apron IPOs, private equity investments are likely over-marked on the books by at least 15-20%. A market to market here would devastate the stated funding levels of every pension fund.

It’s not just Illinois, which is de facto bankrupt, and the Connecticut State pension fund, which is also de facto insolvent.  Nearly every State’s pension fund is severely underfunded, as well as most private funds.

That 42% underfunding for PERA, by the way, makes very generous actuarial assumptions about the assumed rate of return on assets vs. the assumed payouts. Those assumptions have been wrong for at least 20 years and will continue to be wrong. That’s why PERA’s – as well as most every other pension fund – has become more underfunded over the last year.

The quote at the top is from Lynn Turner, who was one of the few competent, if not respected, SEC commissioners in my lifetime. In my view, when politicians and public officials are willing to state the truth about a dire situation in public,  it implies that the situation is on the precipice and they want to be disassociated with it – i.e the rats are jumping ship.  Yesterday the Illinois State Senate minority leader resigned…

I would argue that the one of the primary reasons the Fed is working hard to keep the stock market propped up is because, if the Dow/SPX/Nasdaq were to fall 5-10% for an extended period of time – as in more than a month – the entire U.S. pension Ponzi scheme would blow up and decimate the financial system. It’s a literal black swan in full view.

This is explains the “V” rallies in the stock market when the market abruptly drops 1% on a given day – like Tuesday and Thursday this past week. The fact that the market reversed Wednesday’s overt Fed intervention on Thursday signals the possibility that the Fed is losing control.

Meanwhile, the paper price of gold has once again withstood a vicious overnight attack that began in London and continued when the Comex opened by holding up at the $1240 level and bouncing. This is the fourth time since the so-called Fed attack last week disguised by the fake news as the “fat finger” trade.