Category Archives: U.S. Economy

Amazon’s Shock And Awe Earnings

Yesterday ahead of earnings, AMZN’s stock dropped $60, with $30 of that drop occurring in the last hour of trading.   It’s almost as if market-makers, with their customary preview of the impending AMZN headline EPS report in hand,  intentionally took the price down to set-up a short-trap.  AMZN stock closed at $1390, down $60 from Wednesday’s close.

Shortly thereafter, AMZN’s earnings headline showed $3.85/share, more than double the consensus estimate produced by Wall Street’s Einstein Center For Earnings Forecasts.  $1.85 was the expectation.  AMZN’s stock shot up to as high as $1480 in after hours, up as much as $90 from the close.  Imagine how much money the Big Bank trading desks made assuming they bought all the shares that were sold short in the last hour of trading on Thursday.

Within the first eight minutes of today’s open, AMZN stock shot up to as high as $1495, up $105 from Thursday’s close.  As I write this, AMZN is trading below Wednesday’s close of $1450:

A round-trip to nowhere, essentially. Here’s the funny thing about AMZN’s earnings that Wall Street’s finest will never report, if they even know the truth. Embedded in AMZN’s net income is a $789 million non-cash “provisional” tax benefit for the estimated impact of the new tax law. Note that this is a somewhat arbitrarily determined number – which is why its labelled “provisional” – and it’s non-cash. This GAAP, non-cash tax “benefit,” as guesstimated by AMZN’s accountants, added $1.63 per share to AMZN’s headline EPS report.

Regardless of how you want to account for this, at face value AMZN’s stock is trading at 233x trailing earnings.  Not including the GAAP, non-cash tax benefit, AMZN stock is trading at 315x trailing earnings.

This is not the only problem with the quality of AMZN’s earnings.  I’ve dissected AMZN’s entire  financials for my Short Seller’s Journal subscribers, as reported, showing the areas in which AMZN has exploited the current highly liberalized GAAP accounting standards to generate the  appearance of financial performance that is not real.

Despite Jeff Bezos’ claim that AMZN generated $8.4 billion LTM “free cash flow,” this misleading metric was down 20% from the end of Q4 2016.  But that’s on display in the earnings slides that AMZN publishes every quarter.  On a true GAAP basis, AMZN generated an LTM cash flow deficit – i.e. negative $1.46 billion.

This is just a small portion of AMZN’s accounting abortion.  Unfortunately, until the capital markets are no longer willing to finance AMZN’s cash burning Rube Goldberg operational structure, the stock is very difficult to short.  There will come a time, however, when sand gets blown into Jeff Bezos’ elaborate gears of deception.  When this occurs, the rush for the exits by shareholder will be epic.

Is Tesla Drowning In Liabilities?

Tesla must be burning cash a lot more quickly than the rate at which its operations were burning cash in the first 9 months of 2017.  Through the first three quarters, TSLA had incinerated $570 million, or roughly $2 million per day.  Its Model 3 sales are horrifically below Musk’s bold predictions.

Now Tesla is going take part of its “leased” vehicle portfolio and attempt to raise $546 million by letting Wall St. “engineer” the lease payments into an Asset-Backed Bond (ABS) deal.  The problem with Tesla’s leases is that any of the leases issued before June 30, 2016 contain a “resale value guarantee” from Tesla.  This  is a “put option” issued to the lessee of a Tesla vehicle in which the value of the “put option” is worth significantly greater than the resale of the vehicle.  And the resale value of a Tesla is declining rapidly on a daily basis, along with value of the entire used car inventory across the U.S.

The ABS bonds are structured from leases thrown into a pool of leases – the Trust – that will be used to fund the bond payments .  One of the problems with this deal are the leases held by Tesla that contain a guaranteed re-sale value of the leased vehicle.  To the extent that cars turned in under the guaranteed value payment  are worth less than the value of the guarantee, the bond trust takes the hit.

I noticed that the resale value of a Tesla S model is dropping like a stone they are almost giving away 2 year old models for free. Who wants to be a guarantor of that? – comment from a reader in Sweden

However, I would bet my last nickel that the residual values in the plain-vanilla leases that will be tossed into the trust exceed the market value of the underlying vehicles.  In this case the bond trust also takes a capital hit.  I have a hunch that Elon Musk is trying to pull a fast one on yield-hog bond fund managers by transferring leases with overvalued residual values embedded in them into this ABS Trust.

With so much printed Central Bank currency sloshing around the financial system, I’m sure if the underwriters dress this pig with enough lipstick in the form of a high coupon, the deal will get done.  I have to believe that this trust will have tobe  over-collateralized by a significant amount, meaning that the implied value of the leases tossed into the ABS Trust exceeds the par value of the Trust by a considerable amount.

But it  makes me wonder why Tesla is coming back to the capital markets with the equivalent of a “furniture sale” in order to raise high-cost capital given that the Company raised nearly $2 billion in August – just five months ago.  How much cash has Tesla’s operations incinerated since the end of September?  Judging from the collapse in Model 3 sales, it smells like Tesla and Elon Musk are beginning to get desperate to keep the lights on.

The Stock Market Is Setting Up For A Historic Collapse

There is no history to suggest this is sustainable. This price move remains the most extreme technical disconnect in the $DJIA ever.   – Northman Trader

The U.S. dollar has had the worst January since 1987.  There’s a lot of reasons why the stock market crashed in October 1987, but the declining dollar was one of the primary catalysts.  The rest of the world, led by China, is methodically and patiently removing the dollar as the world’s reserve currency.  The cost for the U.S. Government to fund its rapidly expanding spending deficit is going to soar. Absent the ability to print unlimited quantities of electronic dollars, the U.S. Government’s credit quality is equivalent to that of a Third World country.

Silver Doctor’s invited me to join Elijah and Eric Dubin for their weekly Metals and Markets podcast.  We discuss the issues above plus have a little bit of fun:

The cost to buy down-side protection has never been cheaper.  No one, I mean no one is short or hedged this market.  When slide starts, it will quickly turn into a massive avalanche.  You will have to be set up with hedges and short positions or you will miss the money that will be made from taking a lonely contrarian view of the market.

My subscribers who shorted my homebuilder stock idea two weeks ago are now up 17.7%. That’s if they shorted the shares. They are up even more if they used puts. If you are interested in learning how to take advantage of the coming stock market crash, you learn more about the Short Seller’s Journal here:   Short Seller’s Journal information.

Hidden In Plain View / Eyes Wide Shut

The impending economic collapse is hidden from most. People only see a rising stock market, not the negative underlying factors that will cause the whole system to crash. – Peter Schiff

The average middle class household is getting squeezed by an income that is not keeping up with the cost of living. Unfortunately, a major portion of the cost of living has become debt service. Most car buyers assume an almost insane amount of debt to buy a new car. Credit card debt is being used to make ends meet. Low-to-no down payment mortgages have funded most of the homes sold over the last few years. The problem, however, is that the financial system enables this behavior. One has to wonder if this was not intentional…

The quote above is from a recent Peter Schiff podcast. He goes on to say the it’s unclear how quickly the financial system will unravel but “it is close” to happening. I wanted to use that quote because one of the goals of the Short Seller’s Journal is to present hard evidence that brings to your attention the “negative underlying factors” which contradict the “official” narrative about the economy and financial system.

A subscriber of mine sent an article to me in which the Wall Street economist, Joe LaVorgna, was forecasting today’s GDP report to surprise everyone by coming in at 5%. I literally laughed out loud. LaVorgna is a hack who has spent his career on Wall Street preaching fairytales about the economy as a means of assisting the snakeoil salesmen at his bank in their efforts to stuff as much high-commission junk into investor accounts as possible. People like LaVorgna would sell their mother for a small commission. I know this because everyone who was above me in the food-chain in the securities division of Bankers Trust in the 1990’s was like that.

Ultimately the truth will prevail but by then it will be too late. In the meantime, here’s a tell-tale indicator that criminals on Wall Street and at the Fed can’t hide:

The chart above shows the rate of return comparison between the S&P 500 and junk bonds (HYG). Historically going back at least to the 1990’s, stocks tend to move in the same direction as junk bonds on a lagged basis. That lag when I was trading junk bonds was usually anywhere from a couple weeks to a couple months. The massive Central Bank intervention has largely removed the ability of the stock market to perceive fundamental problems developing in the financial and economic system. But the junk bond market is starting to smell problems.

Morgan Stanley’s wealth management division announced right after New Year’s that it was taking its recommended portfolio allocation in junk bonds down to zero. The rationale was that, while tax cut euphoria might inject fresh momentum into “high-flying stocks, the boost may be short-lived and will mask balance sheet weaknesses” – i.e. developing credit problems. The Morgan Stanley report further explained that “credit markets figure this out before equities” and that they are preparing “for a deterioration in lower-quality earnings in the U.S. led by lower operating margins.”

I nearly fell off my chair when I saw this commentary from Morgan Stanley. In my 32 years of active participation in the financial markets I can not recall any brokerage firm ever issuing a stark warning like this about any sector of the financial markets.

At some point the fundamental problems will become too obvious for stocks to ignore and there will be abrupt sell-offs. The 360 point drop from top to bottom last Tuesday was a hint of what’s to come. Eventually the Central Banks will be unable to intervene and manipulate the type of bounce that was engineered at Tuesday’s bottom and that followed-through on Wednesday and beyond.

All of this is going on in plain view. But the sheeple are too worried about whether or not they can take out enough debt to buy the cars and homes required to keep up with everyone else. But “everyone else” is doing the same thing. Default rates are starting to soar on credit card and auto loan debt. This will soon spill over into mortgages. My thesis on the housing market was confirmed by an industry-insider – a point which I will detail for my subscribers this weekend. We’re already seeing signs that the economy hit a wall in December. It will only get worse.

My subscribers who shorted my homebuilder stock idea two weeks ago are now up 17.7%. That’s if they shorted the shares. They are up even more if they used puts. If you are interested in learning how to take advantage of the coming stock market crash, you learn more about the Short Seller’s Journal here:   Short Seller’s Journal information.

Housing Market Supply And Demand: Just The Facts

“Housing – people are insane if they think housing isn’t going to get crushed with rising rates. As you outline often, it’s already happening in ( NY, Den, etc. ) I live in LA and most of my friends/ coworkers are telling me how dumb I am to not jump in. I know to just stay quiet, but I think they are about to walk into a buzz saw (again).” – email from a subscriber

The National Association of Realtors reports that December  existing home sales fell more than the NAR led its Wall Street lap-dogs to believe they would decline.   Larry Yun, the NAR’s market elf, has been blaming phlegmatic housing sales over the last two years on low inventory. There’s only one problem with this assertion: it’s not true based on historical data:

The chart above is drawn from data that the Fed, for some inexplicable reason, purged from its FRED database.  It illustrates the inverse relationship – generally – that exists between inventory and sales.   The bigger factor driving the economics of the housing market right now is the deteriorating financial condition of any household that might want to buy a house.  The Fed and Government have largely exhausted the population of would-be mortgagees that can make a 0-3% down payment on a conventional mortgage plus carry the monthly burden of servicing that mortgage.  The tax advantage from deducting real estate taxes was stripped from the equation.

I suspect the Fed is getting worried about the housing market. The Fed’s QE holdings rose $5 billion last week. The entire increase is attributable to an increase in mortgage holdings. Not only is the Fed not reducing its balance sheet, it felt compelled to inject capital into the mortgage market.

One thing to keep in mind. A large percentage of homes purchased and financed with 0-3% down payment mortgages in the last couple of years are underwater. When a buyer puts almost nothing down on a mortgage-financed home, the transaction costs all-in are about 10% of the value of the home. These homes are underwater at closing. Except in certain bubble areas, homes have not appreciated in value enough to make up for the amount that low down payment buyers are underwater when they closed. When the stock market eventually tanks, it will take home values down at least 30-40%, and possibly more.

Just like any market bubble, I believe the housing market is reaching the point of exhaustion. As households continue to get squeezed financially, there will be a lot of homes put on the market hoping for last year’s price. As I’ve mentioned before, when home prices are rising quickly, there’s an oversupply of buyers. When home prices start to drop, the buyers disappear. When prices are rising continuously, it’s very easy to sell a home. When prices begin to fall, it becomes difficult to sell a home. It’s been very easy to sell a home for the last 5+ years. I believe it’s going to start to become difficult to sell a home at current general price levels. The smartest sellers will price their home to move. This will begin the process of “re-pricing” the market lower, which in turn could trigger a flood of flipper homes to hit the market – just like 2007/2008.

Greenwich, Connecticut housing values are down 20%. Greenwich would be the “poster child” for the high-end housing market. NYC values are starting to get hammered. For taxpayers who itemize, the new tax law limits the deduction for State, local, sales and property taxes to $10,000. This will hammer the high-end market, which in turn will put downward pressure on everything below it.

The commentary above is an excerpt from the latest weekly Short Seller’s Journal.  If you are interested in learning how to make money from the most overvalued stock market in U.S. history, visit this link for more information:  Short Seller’s Journal subscription information.

Gold Set Up For Big Move This Year – What About Cryptos?

Gold and silver had a sharp run-up in the last two weeks of 2017.  However, the abrupt move in gold has been accompanied by a rapid rise in the gold futures open interest on the Comex. Furthermore, based on the last COT report the banks have dramatically increased their net short position and the hedge funds have gotten, once again, extremely net long.  I don’t like the looks of the COT report right now plus I anticipate a possible brief “relief” rally in the dollar index.

But what about cryptocurrencies?  Over the past few weeks the largest and most actively traded cryptocurrencies have been massacred in price.  This follows on the heels of the news that the founders of Bitcoin and Litecoin sold 100% of their holdings.  Nothing like insider selling as a signal about the value of what was sold…

Phil Kennedy invited me on to his podcast to discuss precious metals, cryptocurrencies and the U.S. dollar. We engage in a friendly (I want to emphasize “friendly”) debate on the merits of cryptocurrencies:

The bottom line for me is that gold has been declared a Tier 1 bank asset by the Bank of International Settlements. This means that gold is considered the highest form of bank asset. I believe there’s a good chance gold will move toward and over $1400 this year. As for a price prediction for the cryptos – it depends on the degree to which the fear of losing money overwhelms the fear of missing out on gains for the momentum-chasing speculators – most of whom are Asian-based. We may be approaching that point of no return:

Who’s Going To Stop The Madness?

Every month consumer debt in aggregate hits a new record. Auto loans and student loans have been hitting monthly record highs for quite some time. In November credit card debt hit a record high in total and increased a record monthly amount for any one month. Mathematically this can’t go on forever. In fact, there are signs – indicators not reported widely by the financial media and, predictably, completely disregarded by Wall Street – that indicate the debt party is coming to an end. Events that follow the end of the party will be less than pleasant for the majority of U.S. households.

Every week in the Short Seller’s Journal I present data which reflects the deteriorating condition of middle class America. For definitional purposes, “middle class” is defined as any household that is unable to afford their own politician, which means 99.5% of all households.

As an example, buried in Wells Fargo’s Q4 earnings presentation was data that showed charge-offs in WFC’s credit card loan portfolio in Q4 soared 21% vs. Q3. The charge-off rate as a percent of average loans outstanding increased to 3.66% in Q4 from 3.08% in Q3. This is a 19% increase in the charge-off rate. While this might seem like a low number outright, not only is it headed in the wrong direction, it’s not too far below the nationwide bank credit card charge-off rate in 2007 of 4.15%. Again, this fits my thesis that the financial condition of the average household is deteriorating.

In addition, the dollar volume of auto loan originations at WFC declined 33% and home mortgage originations fell 26%. in Q4 2017 vs 2016. WFC’s mortgage applications in Q4 dropped 16% in dollar volume from Q4 2016. And its application pipeline (applications submitted and waiting for the purchase to close) declined 23% for the quarter vs Q4 2016.

WFC is the second largest mortgage originator after Quicken Loans. It is also a major player in auto loan underwriting. If auto and mortgage loan origination statistics are declining at a double-digit rate at WFC, it’s a good bet that this is a secular trend across the industry. Simply put, middle America – the 99.5%’ers – are running out of capacity to assume even more debt. This in turn will translate into a unexpectedly precipitous drop in consumer spending, especially on large-ticket items like cars, furniture and homes.

I stumbled on a blog a couple weeks ago called  A Cold War Relic. The proprietor works at an auto dealership and presents valuable insight on the factors that will drive auto sales into the ground and send auto loan defaults soaring. His latest post, “What’s Going To Stop Me,” is well worth reading:

This dark momentum could strangle the industry, but everyone refuses to stop it. Every time a customer accepts a $500 monthly payment on another overpriced compact crossover, they are feeding that momentum. When dealers structure deals for far more than the car is worth, they are feeding that momentum. The problem is: who is going to actually tell anybody “no?” Customers want their cars and refuse [do not have the funds] to put money down to get them. A large number of dealerships are fighting to attain sales numbers the market can’t currently support.

I get cursed out every month when our store misses the targets set for us by the manufacturer, even though I’m fighting against larger stores offering deeper discounts on new cars. On top of that, it’s not just your credit criminal customer that isn’t reading what they’ve signed anymore. When you have consumers with 700+ FICO scores rolling over portions of debt they already couldn’t handle on top of new debt and financing the whole thing over increasingly long terms at interest rates they arguably no longer deserve. The problem is that prime credit customers are slowly becoming credit criminals.

You can read the rest of this here (highly recommended):   Auto Loan Crack-Up Boom Coming

In the latest issue of the Short Seller’s Journal, I present a no-brainer homebuilder short idea plus I illustrate the mechanics of shorting a stock for those who only use put options.  In addition I review the Company’s fundamentals.  This is probably the only homebuilder for which unit sales are dropping – in this case falling at a double-digit percentage rate. I believe shorting this stock is good – at the very least – for a 30% ROR by the end of the year, if not sooner. You can find out more details about the Short Seller’s Journal here: Subscription Information.

The Blockchain Name-Change Game And Securities Fraud

The rape and pillage of the blockchain name-change game took on a whole new dimension with Kodak (KODK) this week.  KODK was on the way to its second bankruptcy filing this decade (first one was January 2012).  On January 9th it announced that it implement a “major blockchain initiative.  This “initiative” would use digital ledgers to help photographers license and get paid for their work.  The stock soared:

Notwithstanding whether or not this “block chain initiative” will ever generate meaningful profits for KODK, it turns out that insiders at the Company filed S-4’s with the SEC disclosing that they were awarded 10’s of thousands of “restricted stock units.” The problem with this? The RSU’s were awarded on January 8th, the day before the “blockchain” announcement was released on January 9th.  The timing of this filing is quite curious.

The Company released its Q3 10-Q on November 8th.  Revenues plunged 32% yr/yr for the 3rd quarter; operating income swung from $15mm in Q3 2016 to a $54mm loss in Q3 2017. The Company is dying on a vine.  Ordinarily compensation stock in the form of RSU’s is awarded at the end of each quarter. The issuance of RSU’s is disclosed in the 10-Q.  No mention whatsoever of management or employee stock compensation awards.  No mention whatsoever in the MD&A of a plan to incorporate “blockchain” in any part of the business model.

All of the above, in conjunction with the sudden disclosure of large quantities of free stock in the form of RSU’s the day before KODK’s “blockchain initiative” announcement tells me that this was a scheme hatched sometime well after the Q3 10-Q was filed by unscrupulous corporate executives who saw an opportunity to exploit the massive blockchain stock and cryptocurrency bubble.

In all probability, these insiders have likely arranged to hedge the gains on the underlying stock represented by the RSU’s using OTC derivatives underwritten by Wall Street banks. These would be derivatives structured in a way that would escape the requirement to disclose the transaction in an SEC filing.  Instant profits on derivative stock that was awarded the day before news was released by the Company – news that upper management knew would send the stock to the moon.

Based on the black and white letter of the law, KODK upper management technically has not violated a strict interpretation of insider trading laws.  However, 20 years ago it’s highly likely that, if lawsuits were pressed, KODK’s upper management and board of directors would have been prosecuted and convicted of insider trading.

Fast-forward to 2018, near the end of a stock and fraud bubble that is multiples of the one that occurred with dot.com’s in the late 1990’s, and everyone looks the other way including the NYSE, SEC and Justice Department.

It’s a good bet this “blockchain initiative” will never generate any meaningful profits for the Company.  Most likely KODK is headed for a Chapter “22” filing before the end of this decade because bleeding cash profusely and it is mired in large pension and debt liabilities.

This is an example of the blatant fraud and corruption that accompanies the top of stock market bubble and the collapse of a political and economic system.  The blockchain and cryptocurrencies will not revolutionize life as we know it nor will they generate real economic wealth for anyone other than those in a position to exploit the greed and fear of missing out of the idiots who buy into the fairytale.

As expressed by Fred Hickey in his High-Tech Strategist newsletter, {Bitcoin/blockchain} “is the cherry on top of the world’s first truly global market bubble.”