Category Archives: U.S. Economy

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.

How Will Gold, Silver & Mining Stocks Perform In A Stock Market Crash?

It looks like the western Central Banks are having trouble pushing gold below $1240 right now.  After series of high lows in the price of gold since late December, it looks like there’s chance gold is forming the base for the next attempted assault on $1300.  At the same time, judging from the stock market trading action of the last three days, it appears as if the Trump “Hope” Bubble is getting ready to pop.

Bill Powell of MiningStockEducation.com invited me on to his podcast show to discuss how the precious metals sector will perform when the stock market inevitably crashes, among other topics.

Gold, A Banking Collapse And Cryptocurrencies

“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” – Fed Chairman, Ben Beranke – May 17, 2007.

“You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.” – Fed “Chairman,” Janet Yellen – June 27, 2017

Hmmm…

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.