Category Archives: U.S. Economy

Short All Retail, Especially Amazon

“Bubbles require ever more money to sustain them. Currently that’s not happening. A severe market selloff could come at any moment.”

The quote above is from Fred Hickey, who writes the The High-Tech Strategist newsletter. Mario Draghi, Chairman of the ECB, is under pressure to reduce the Central Banks’ asset purchases (it’s buying corporate bonds, including junk-rated bonds). Apparently some Dutcn legislators presented Draghi with a tulip in reference to the Dutch tulip mania in the 1630’s.

The Bank of Japan and the Chinese Government are working to reduce their money printing. The Fed is still buying mortgages but it seems determined to slowly tighten monetary policy. The problem faced by these Central Planners is that they’ve created a massive global Ponzi scheme that requires an increasing amount of liquidity (money printing + credit expansion) in order to sustain valuation levels. Once they slow down the liquidity spigot, all fiat currency- driven assets (except physical precious metals) are at risk of collapsing.

The Dow finished the week closing down 4 days in row to close essentially unchanged for week (up 9 pts). The SPX also was flat for the week (up 6 pts). It managed to squeak out a slight gain on Friday to avoid 4 consecutive down days. Both the Dow and SPX started out Friday with a big rally from Thursday’s close but faded over the last 2 hours of trading on no apparent news triggers. This for me is a possible indicator that the stock market losing energy.

Bed Bath and Beyond (BBBY) was hammered Friday, down over 12%, as it badly missed earnings and revenue estimates. I presented BBBY as a short idea in the December 16th SSJ issue at $47.27. I hope some of you jumped on it then, as 4 days later it had closed at $41.38.

Amusingly, Jim Cramer, et al attributed BBBY’s lousy quarter to competition from AMZN. But nothing could be further from the truth. Its sales were up slightly from Q1 2016 and
its digital channel sales grew 20%. If anything, BBBY’s e-commerce business presents intensified competition for AMZN. Why? Because AMZN’s e-commerce operating margin is 0.3% vs. BBBY’s, which was 5.4% in Q1. BBBY has plenty room to go directly at AMZN on pricing.

BBBY’s net income dropped 39% vs. Q1 2016. The primary culprit was that BBBY lowered its free shipping threshold to $29 from $49. which in turn forced BBBY to absorb shipping costs on more orders. AMZN does not properly accrue the cost of its free shipping to its cost of sales (the SEC looks the other way on this one), burying the expense across the income
statement and balance sheet. But we know it has a reported 0.3% operating margin in e-commerce. The hit to BBBY’s operating margin, which declined 242 basis points (2.42%), gives us some insight about true cost inflicted on AMZN from its free shipping program.

My point here is that the overall retail environment is going to get more competitive and margins are going to decline even more. Companies like Walmart and BBBY have taken the gloves off and can afford to undercut AMZN across the board because they have significantly more room to cut prices and attack AMZN’s pricing and free shipping model without driving their operating margins down to zero. AMZN’s e-commerce profit margin, for all intents and purposes, is zero. The bottom line here is that retail in general remains a great sector to short.

I believe BBBY has a lot more downside and can still be shorted, with patience, for some nice gains:

The more interesting short is AMZN. About a month ago, right before completing the check-out process on AMZN, I received a message in which AMZN was offering a $5 shopping credit to fund a gift card with $100. Why is AMZN paying 5% to raise cash? It effectively is taking a 5% operating profit margin hit on the $100, because its overall e-commerce operating margin is essentially zero. And I discovered yesterday that AMZN was offering a $5 shopping credit to Prime members who opted for the slow shipping option rather than the 2-day shipping.

These cash-raising and cash-saving policies make no sense if AMZN is producing the billions in free cash flow as represented by Bezos (on a non-GAAP basis, of course). Something is very wrong beneath the surface. In fact, AMZN burns cash every quarter. I have demonstrated that in previous research I have produced. It’s a fact.

In the meantime, AMZN continues to be, along with TSLA, the greatest Ponzi scheme in history. Bernie Madoff is green with envy. The irony surrounding all of the analyst – and Jim Cramer – noise about AMZN is that its acquisition of Whole Foods makes it more vulnerable to competition. The idea that AMZN will now be a “grocery killer” is absurd. Just like the idea that it’s a retail killer. BBBY’s e-commerce grew at 20% year over year.

If anything is true, it’s that BBBY, Walmart, Target and Kroger present intensified e-commerce competition for AMZN.  And all four of those companies can cut prices to compete and still turn an operating profit.  AMZN does not have that luxury. That’s probably why AMZN is encouraging Prime customers to take the slow shipment option with a $5 shopping credit.

Most of the above analysis is an excerpt from this week’s Short Seller’s Journal, released Sunday evening. I discussed strategies for shorting BBBY. I also discussed shorting Kinder Morgan (KMI) in the context of declining energy price and usage and included for subscribers a somewhat dated, in-depth research report on KMI which details with proof the Ponzi scheme set-up at KMI. You can get more details about the subscription, including a “handful” of back-issues here:  Short Seller’s Journal info.  (Note: new subscribers also get a copy of the somewhat-dated full AMZN research report I wrote).

New Home Sale Reporting Borders On Fake News

Headline monthly reporting of New Home Sales remained of no substance, short term, as seen most frequently here with massive, unstable and continuously shifting revisions to recent history, along with statistically – insignificant monthly and annual changes that just as easily could be a gain or a loss.  – John Williams, Shadow Government Statistics

If anyone has the credibility and knowledge to excoriate the Government’s new home sales reporting, it’s John Williams.  The Census Bureau’s data collection has been marred historically with scandals and severe unreliability.  The reporting for new home sales is a great example.

New home sales represent about 10% of total home sales – i.e. the National Association of Realtors has about 9-times more homes for which to account than the Government.  And yet, the monthly reporting of new home sales has considerably more variability and less statistical reliability.  It is subject to  much greater revisions than existing home sales. How is this even possible considering the task of tabulating new homes sold is far easier than counting existing home sales?

Today’s report is a perfect example.  The Census Bureau reports that new home sales increased 2.9% over April. Yet, at the 90% level of confidence, new home sales might have been anywhere from down 10% to up 15%.   Care to place a wager on real number considering that spread?   April’s number was revised upward by 24k, on a SAAR basis.

Speaking of the SAAR calculation, it’s amusing to look at what that can do to the number. The seasonally adjusted annualized rate number takes a statistical sample, which in and of itself is highly unreliable, and puts it through the Government’s X-13ARIMA-SEATS statistical sausage grinder.  Then it takes the output and converts it into an annualized rate metric. Each step of the way errors in the data collection sample are multiplied.

I’ve never understood why the housing industry doesn’t just work on creating reliable monthly data samples that can be used to estimate sales for a given month and then simply compare the sales to the same month the previous year. There is no need to manufacture seasonal adjustments because the year over year monthly comparison is cleansed of any possibly unique seasonality for a specific month.  Go figure…

To make matters worse, new home sales are based on contracts signed.  Often a down payment, and almost always financing, are not yet in place.  The contract cancellation percentage rate for new homes typically runs in the mid-to-high teens. By the way the Census Bureau does not incorporate cancellations into its data or its historical revisions.

To demonstrate how the seasonal adjustments magically transform monthly data into many more thousands of annualized rate sales, consider this:  the not seasonally adjusted number – which is presented at the bottom of the CB’s report and never discussed by the media or Wall Street, is 58,000.  In increase of one thousand homes over April’s not adjusted number.  And yet, the reported headline fake news number – the SAAR for May – wants us to believe that 610k homes were sold on an annualized rate basis, an increase of 17k SAAR over April.  It’s nothing short of idiotic, especially considering that the reported average sales price was 10% higher in May vs. April.  You can peruse the report here:  May New Home “Sales.”

One last point, if today’s reported number is even remotely correct, how come homebuilders have been cutting back on housing starts for the last 3 months?  The last time starts declined three consecutive months was late 2008.  In short, the new home sales report for May is, in all probability, borderline fake news.  At the very least, it’s yet another form of Government propaganda aimed at creating the illusion that the economy is stronger than reality.

The next issue of the Short Seller’s Journal – published Sunday evening – will focus on the housing market, which is getting ready to head south – possibly at a shocking rate.  Unfortunately, lenders, homebuyers, and the Government failed to learn from the previous housing bubble and now all the attributes of the previous housing bubble top are emerging. I will be reviewing the market in-depth and presenting some ideas to take advantage of historically overvalued homebuilder stocks.

The stock I featured in early April is down 13.2% through today despite a 6.5% rise in the Dow Jones Home Construction index during the same time-period. This particular company will eventually choke to death on debt.  The Short Seller’s Journal is a unique subscription and you can learn more about the Short Seller’s Journal here:  LINK

Anti-Gold Propaganda Flares Up

Predictably, after the gold price has been pushed down in the paper market by the western Central Banks – primarily the Federal Reserve – negative propaganda to outright fake news proliferates.

The latest smear-job comes from London-based Capital Economics by way of Kitco.com.   Some “analyst” – Simona Gambarini – with the job title, “commodity economist,” reports that “gold’s luck has run out” with the 25 basis point nudge in rates by the Fed.  She further explains that her predicted two more rate hikes will cause even more money to leave the gold market.

Hmmm…if Ms. Gambarini were a true  economist, she would have conducted enough thorough research of interest rates to know that every cycle in which the Fed raises the Funds rate is accompanied by a rise in the price of gold.  This is because the market perceives the Fed to be “behind the curve” on rising inflation, something to which several Fed heads have alluded.    In fact, the latest Fed rate hike, on balance, has lowered longer term interest rates, as I detailed here:  Has The Fed Really Raised Rates?

Furthermore, to which “gold market” is Ms. Gambarini referring?  There’s the fractional paper gold markets of NYC and London and the physical importation and bullion trading markets in the eastern hemisphere.   While she does indeed acknowledge the upswing in gold demand coming from India and China, she downplays its significance.  Currently India and China are importing more physical gold than at the same time last year.  Several other smaller markets have been actively importing significantly more gold now than at the same time last year (Turkey, for example).

Finally, Ms. Gambarini – unbelievably – states that “she sees less safe-haven demand supporting the market as geopolitical concerns have started to disappear.”  I don’t even know how to respond to that idiotic assertion considering that Russian and U.S. military jets are antagonistically engaged in the sky over the Middle East as I write this.  Either Ms. Gambarini is tragically incompetent at her chose profession or she is purposely propagating fake news.

If Ms. Gambarini was smart enough to do thorough research on the topic or was interested in reporting the truth, she explain that, at least 80% of the time, the gold price rises during Asian trading hours and falls during NYC/London hours, like today:

The mining stocks have been strong relative to the price of gold this week. My bet is that this reflects the likelihood that the latest price-takedown of gold in the paper market has run its course. The dramatic drop in Comex paper gold open interest, as well as a drop in the net short position of the Comex bullion banks and a drop in the net long position of the hedge funds (per the COT report), reinforces the signal transmitted by the mining stock this week.

Any flinch from the Fed in its alleged desire to tighten its monetary policy, or if a “spark” hits the growing geopolitical powder-keg in the Middle East, and gold will quickly shoot over $1300 on its way to much higher levels.

The Housing Market Bubble Is Popping

As with all other highly manipulated data, the financial media has a blind bias toward the “bullish” story attached to the housing market. Understandable, as the National Association of Realtors spends more on special interest interest lobbying in Congress than any other financial sector lobby interest, including Wall Street banks.

New home sales were down last month, according to the Census Bureau, 11.3% and missed Wall Street’s soothsayer estimates by a rural mile. Strange, that report, given that new homebuilder sentiment is bubbling along a record highs. Existing home sales were down 2.3%. You’ll note that the numbers reported by the Census Bureau and NAR are “SAAR” – seasonally adjusted annualized rates. There is considerable room for data manipulation and regression model bias when a monthly data sample is “seasonally adjusted/manipulated” and then annualized.  You’ll also note that mortgage rates have dropped considerably from their December highs and May is one of the seasonally strongest months for home sales.

It’s becoming pretty clear to me that the housing market’s “Roman candle” has lost its upward thrust and is poised to fall back to earth. I believe it could happen shockingly fast. Fannie Mae released its home purchase sentiment index, which FNM says is the most detailed of its kind.

The report contained some “eyebrow-raising” results. The percentage of Americans who say it’s a good time buy a home net of those who say it’s a bad time to buy a home fell 8 percent to 27% – a record low for this survey. At the same time the percentage of those who say its a good time sell net of those who say its a bad to sell rose to 32% – also a new survey high. In other words, homeowners on average are better sellers than buyers of homes relative to anytime since Fannie Mae has been compiling these statistics (June 2010).

Currently the prevailing propaganda promoted by the National Association of Realtors’ chief “economist” is that home sales are sagging because of “low inventory.” He’s been all over this fairytale like a dog in heat. The problem for him is that the narrative does not fit the actual data – data compiled by the National Association of Realtors – thereby rendering it “fake news:”

The graph above shows home inventory plotted against existing home sales from 1999 to 2015 (note:  when I tried to update the graph to include current data, I discovered that the Fed had removed all existing home sales data prior to 2013).   As you can see, up until Larry Yun decided to make stuff up about the factors which drive home sales, there is an inverse correlation between inventory and the level of home sales (i.e. low inventory = rising sales and vice versa).   I’m not making this up, it’s displayed right there in the data that used to be accessible at the St Louis Fed website.

Furthermore, if you “follow the money” in terms of new homebuilder new housing starts, you’ll discover that housing starts have dropped three months in a row. The last time this occurred was in June 2008.   IF low inventory is the cause of sagging home sales – as Larry Yun would like you to believe – then how come new homebuilders are starting less homes? If there’s a true shortage of homes, homebuilders should be starting  as many new units as they can as rapidly  as possible.

Although the Dow Jones Home Construction Index is near a 52-week high – it’s still 40% below it’s all-time high hit in 2005.  Undoubtedly it’s being dragged reluctantly higher by the S&P 500, Dow, Nasdaq and Tesla.   Despite this, I presented a homebuilder short idea to subscribers of the Short Seller’s Journal that is down 13.6% since  I presented it May 19th.  It’s been down as much as 24.2% in that time period.   It is headed to $7 or lower, likely before Christmas.  I also  presented another not well followed idea that could easily get cut in half by the end of the year.

The next issue of the Short Seller’s Journal will focus on the housing market.  I’ll discuss housing market data that tends to get covered up by Wall Street and the media. I have been collecting some compelling data to support the argument that the housing market is rolling over…you can find out more about subscribing here:  Short Seller’s Journal info.

In the latest issue released yesterday, I also reviewed Amazon’s takeover of Whole Foods:

I just read it and the analysis on Amazon is awesome. This has the potential to be the short of year when the hype wanes and reality sets in – subscriber, Andreas

Has The Fed Actually Raised Rates This Year?

The answer is debatable but it depends on, exactly, to which rates you are referring.  The Fed has “raised,” more like “nudged,” the Fed Funds target rate about 50 basis points (one-half of one percent) this year.  That is, the Fed’s “target rate” for the Fed Funds rate was raised slightly at the end of two of the four FOMC meetings this year from 50 to 75 basis points up to 1 – 1.25%.  Wow.

But this is just one out of many interest rate benchmarks in the financial system.  The 10-yr Treasury yield – which is a key funding benchmark for a wide range of credit instruments including mortgages, municipal and corporate bonds, has declined 30 basis points this year.  Thus, for certain borrowers, the Fed has effectively lowered the cost of borrowing (I’m ignoring the “credit spread” effect, which is issuer-specific).

Moreover, the spread between the 1-month Treasury Bill and the 10-yr Treasury has declined this year from 193 basis points to 125 basis points – a 68 basis point drop in the cost funding for borrowers who have access to the highly “engineered” derivative products that enable these borrowers to take advantage the shape of the yield curve in order to lower their cost of borrowing:

In the graph above, the top blue line is the yield on the 10-yr Treasury bond and the bottom line is the rate on the 1-month T-bill.  As you can see the spread between the two has narrowed considerably.

Thus, I would place the news reports that the Fed has “raised in rates” in the category of “Propaganda,” if not outright “Fake News.”

One has to wonder if the Fed’s motives in orchestrating that graph above are intentional. On the one hand it can make the superficial claim that it is raising rates for all the reasons stated in the vomit that is mistaken for words coming from Janet Yellen’s mouth;  but on the other hand, effectively, the Fed has managed to lower interest rates for a widespread cohort of longer term borrowers.

Furthermore, this illusion of “tighter” monetary policy serves the purpose of supporting the idea of a strong dollar and enabling a highly orchestrated – albeit temporary – manipulated hit on the gold price using paper gold derivatives.

To borrow a term from Jim Sinclair, the idea that the Fed has “raised rates” is nothing more than propaganda for the primary purpose of “MOPE” – Management Of Perception Economics.  On that count, I give the Fed an A+.

The Public Is Getting Pissed – Ignoring Rule Of Law

“If liberty means anything at all, it means the right to tell people what they do not want to hear.”   – George Orwell

There’s a narrative here that the Government, the Fed, the Trump Administration, etc conveniently ignored.  Here’s the headline list this morning:

  • GM Extends Plant Shutdowns
  • 2nd Quarter GDP Hit As Inventories Tumble In April
  • Retail Sales Tumble Most Since January 2016
  • Pension Crisis Escalates
  • House Majority Whip Shot At Congressional Baseball Practice

Real Clear News reported that Representative De Santis stated to police that the shooter asked “whether Republicans or Dems were on the field before shooting.”  Fox News has confirmed  the report.

The public is getting pissed.  It is told daily, on no uncertain terms, by the White House that the economy is rapidly improving.  The Fed confirms that the economy is improving.  Wall Street chimes in confirming that “narrative.”

The public is told that the unemployment rate is under 5% and the labor market is tight.  But 95 million people in the working age population don’t have jobs.  They are not considered part of the “Labor Force” and have been removed from the statistics altogether by some BLS bureaucrat’s pencil eraser. To be sure, maybe 1/3 or even 1/2 of those people don’t want to work or need to work for some reason (wealthy, wealthy and lazy, inherited income, public assistance of some form, etc).  But 1/2 to 2/3’s of those people would like to find a job that doesn’t entail delivering pizza or washing dishes – in other words, jobs that pay to support a family.

A growing portion of the population understands the underlying truth about the economy that exists behind the propaganda and lies. And they are getting pissed. It’s become clear to anyone desperate enough in their fight to get by that the politicians, corporate elitists and Wall Street crooks are no longer beholden to Rule of Law.   The conclusion for the growing legion of desperate is obvious:  “why should we adhere to Rule of Law?”

At least this time the Deep State can’t shove the “it was ISIS” narrative down our collective gullets.

Gravity Rules: End Of The Bubble Is In Sight

“Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.

The quote above is from Ben Graham, considered to be the father of value investing. Graham followed the crowd in 1929 and lost a small fortune for himself and his investors. Graham collected his learning experience from that disaster and eventually wrote, “The Intelligent Investor,” which is considered to be the one of the best investment books ever written. Warren Buffet enrolled at Columbia to study under Graham. Graham’s teachings formed the foundation of modern money management theories. To this day it is considered the value investor’s “investment bible.”

Wall Street is incentivized to sell the idea that stocks only go up. When I started on the junk bond desk as a salesmen (before switching to trading), I was told my job was to “reach into the portfolio manager’s pocket and take as much money as you can from his pocket and put it into your pocket.”

Wall Street greed has been around as long as stocks have been trading (the NYSE was founded in 1792). But it’s hard to blame stockbrokers for the damaging effects of greed. Stock-peddlers are like well-paid psychologists. They take advantage of human greed. Without investor greed, the stock brokerage business would be considerably smaller than it is today.

A stock bubble can’t exist without investor greed. It starts with greed. It moves into the “bubble” phase when greed is consumed by hysteria. The U.S. stock market has moved into the “hysteria” stage. This would be the point at which the bubble has almost reached maximum inflation. The upward movement in stocks is dominated by a handful of the stocks that, for whatever reason, are moving higher at the fastest rate of levitation. The graphic on the next page shows visually what “bubble to hysteria” looks like.

I reached the conclusion the stock market has moved into the hysteria stage by spending time studying the “Five Horsemen” (AAPL, AMZN, NFLX, FB, MSFT) + TSLA. Even during periods of the trading day when the Dow and SPX are go red, most or all of those six stocks remain green, sometimes moving higher while the broad indices move lower. It’s incredible to watch real-time.

“It’s not to late to catch a ride on the FANG rally” was a headline seen on CNBC last week. This is the type of hysteria that is reflected in the media at bubble peaks.

In the image above (click to enlarge), the graph on the left is the NASDAQ index since the election (from Jesse’s Cafe Americain). The graph on the right is the price-path that occurred during the Dutch Tulip Bulb mania of the 1630’s. You can see that both graphs go vertical. The vertical stage is driven by hysteria in which investors are terrified of missing the next move higher. It also ends with a decline, the rate of which is typically stunning.

The push higher in stocks like AAPL and AMZN is irrational, but TSLA has been infected with outright hysteria.

The worse the news on Tesla gets, the more quickly the stock seems to move up in price. Early in the week last week, Triple-A (the Auto Club group) announced that it was going to raise the its insurance premiums on Tesla cars by as much as 30%. A highway loss data study revealed that Tesla’s vehicles have higher claim numbers and repair costs vs. other vehicles in Tesla’s category. The Tesla S model claims were said to be 46% greater than the average number of claims for similar vehicles. Servicing those claims cost twice as much. The X model car reported a 41% higher crash-rate than similar vehicles and cost 89% more to repair.

In addition, it was reported on Monday that Toyota had unloaded the last of its remaining stake in Tesla before the end of 2016. It marked the end of a collaboration between Tesla and Toyota that began in 2010. Toyota announced that it plans to release its own fleet of long-range mass produced electric vehicles by 2020. Despite this blow of negative news about Tesla, the stock powered up over 8% last week before a late-day sell-off in the 5 Horsemen + Tesla inflicted a $19 reversal in TSLA’s stock price from its high Friday to the close. My puts, the June 30th $317.50-strikes, traded from Friday from a low of $1.06 to close at $2.40 on the bid side.

The graph below shows the price-path of TSLA’s stock since the election. Note that the graph looks very similar to the graphs of the NASDAQ/Tulip Bulb mania. In the 1800’s, writer Charles Mackay wrote a highly acclaimed book called, “Extraordinary Popular Delusions and the Madness of Crowds,” in which he presented his studies on crowd psychology and how it leads to financial manias, among other destructive events. The chart below reflects “crowd” madness as it applies to TSLA stock (the inset price-box from last Thursday morning) – click to enlarge:

While the NASDAQ has appreciated 22% since the election, TSLA’s stock, on deteriorating fundamentals, has shot up 191%. 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 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 meteor 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 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 analysis and commentary is from the latest <ahref=”http://investmentresearchdynamics.com/short-sellers-journal/”>Short Seller’s Journal, in which I present a “Big Short” mortgage derivative stock that will eventually drop close to zero from it’s current price in the mid-teens.  You can find out more here:  Short Seller Journal info.

Orwell’s Theorem: The Opposite of Truth Is The Truth

All propaganda is lies, even when one is telling the truth. – George Orwell

A reader commented that the number of corporate lay-offs in America is escalating, yet the unemployment rate seems to keep going lower.  Part of the reason for this is that the 2008 collapse “cleansed” corporate america’s payrolls of a large number of workers who are eligible to file for unemployment benefits.

The Labor Force is derived from the number of people employed + the number of people looking for work.  To continue receiving jobless benefits during the defined period in which fired workers can receive them, they have to demonstrate that they are looking for work.  Ergo, they are considered part of the Labor Force.  Once the jobless benefits expire, they are removed from the Labor Force unless an enterprising Census Bureau pollster happens to get one on the phone and they answer “yes” when asked if they are/were actively looking for work.   Those who do not qualify for jobless benefits more often than not are removed from the Labor Force tally.  This is why, last month for example, over 600,000 people were removed from the Labor Force.

Reducing the Labor Force de facto reduces the unemployment rate.  Thus, there’s an inverse relationship between layoffs and the unemployment rate.  It’s an Orwellian utopia for the elitists.

Today’s stock market is a great example of the “opposite of truth is the truth” theorem.   It was reported by Moody’s that credit card charge-offs have risen at to their highest rate since 2009 – LINK.  This means that defaults are rising at an even faster rate, as finance companies use accounting gimmicks to defer actual charge-offs as long as possible.  A debt that is charged-off has probably been in non-pay status for at least 9-12 months.

The same story has been developing in auto loans. The 60+ day delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in 2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the 2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%, which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about 200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this year.

Now here’s the kicker: In Q3 2008 there was $800 billion in auto loans outstanding. Currently there’s $1.2 trillion, or 50% more. In other words, we’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is 50% greater. But the real problem will be, once again, the derivatives connected to this debt. It would be a mistake to expect that this problem will not begin to show up in the mortgage market.

Amusingly, the narrative pitched by Wall Street and the sock-puppet financial media analysts is that the credit underwriting standards have only recently been “skewed” toward sub-prime. This is an outright fairytale that is accepted as truth (see Orwell’s Theorem). The issuance of credit to the general population has been skewed toward sub-prime since 2008. It’s the underwriting standards that were loosened.

The definition of non-sub-prime was broadened considerably after 2008.  Many borrowers considered sub-prime prior to 2008 were considered “prime” after 2008. The FHA was the first to pounce on this band-wagon, as it’s 3% down-payment mortgage program enabled the FHA to go from a 2% market share 2008 to a 20% market share of the mortgage market.

Capital One is a good proxy for lower quality credit card and auto loan issuance. While Experian reports an overall default of 3.3% on credit cards, COF reported a 5.14% charge-off rate for its domestically issued credit cards. COF’s Q1 2017 charge-off rate is up 48 basis points (0.48%) from Q4 2016 and up 100 basis points (1%) from Q1 2016. The charge-off rate alone increased at an increasing rate at Capital One over the last 4 quarters. This means the true delinquency rates are likely surging at even higher rates. This would explain why COF is down 17% since March 1st despite a 2.1% rise in the S&P 500 during the same time-period.

To circle back to Orwell’s Theorem, today the S&P 500 is hitting a new record high. But rather than the FANGs + APPL driving the move, the push higher is attributable to a jump in the financial sector. This is despite the fact that there were several news reports released in the last 24 hours which should have triggered another sell-off in the financial sector. Because  the stock market has become a primary propaganda tool, it’s likely that the Fed/Plunge Protection Team was in the market pushing the financials higher in order to “communicate” the message that the negative news connected to the sector is good news.  Afer all, look at the performance of the financials today!

Days like today are great opportunities to set-up shorts. Most (not all) of the ideas presented in the Short Seller’s Journal this year have been/are winners.  As an example Sears (SHLD) is down 39% since it was presented on April 2nd.   I’ll present two great short ideas in the financial sector plus a retailer in the next issue.  You can learn more about the Short Seller’s Journal here:  SSJ Info.