Tag Archives: accounting fraud

Toll Brothers Stock Jumps On Declining Revenues And Earnings

Toll Brothers reported its Fiscal Q1 earnings this morning.  Year over for the quarter: Revenues declined nearly 1%, operating income plunged 46.8%, net income dropped 4.1%.   Net income was boosted by the reliable accounting management technique of reducing the estimated GAAP “effective” tax rate, which enables any management to goal-seek a specific net income number.  In this case the goal is to “beat” the Street.  Margins were down across the board.

Oh ya, TOL pulled another stunt that homebuilders use to pump up GAAP net income:  it increased the amount of interest it capitalized by $6 million dollars. This has the effect of boosting operating income by $6 million compared to the same quarter last year because it reduces the amount of GAAP interest expense by the amount that was capitalized. It did this despite a drop in sales.   Its net income would have missed the Street by a suburban mile if it had just maintained the same rate of interest expense capitalized.

For this, the stock jumped up 6% this morning at the open.

The Company blamed the drop in operating income and margins on inventory write-downs.  But these have been occurring every quarter recently and will of course continue going forward.  That write-down only explains $4 million of the $44 million plunge in operating income.

There’s so much more going in TOL’s numbers which point to the continued economic deterioration in its business model.  I will be reviewing this further in this week’s issue of the Short Seller’s Journal, including which put options TOL I bought this morning.

Too many layoffs and store closure news to mention but I’ve realized that there are a lot of school-district (including teachers) layoffs and colleges, or even hospitals staff layoffs. CSX just posted 1000 management level position cuts – link.  By the way, thanks for the Short Seller’s journal, very informative. – note yesterday from a subscriber

Tesla Reports Another Fraudulent Quarter

Tesla created massive confusion in the financial reporting and analyst community by allegedly coming clean and report actual GAAP quarterly financial results for its 3rd quarter.  But of course, just like the entire U.S. Banana Republic, the use of extreme obfuscation, deceit, propaganda and lies once again is the norm with Tesla’s quarterly report.

TSLA’s use of revenue recognition, deferred revenue and operating leases and its definition of “free cash flow” are enough to create a dedicated forensic accounting case study at the University of Chicago Graduate School of Business, where I did indeed nearly ace a forensic accounting course.

I don’t have enough time to lay out all of specifics and I’m not getting paid to write this blog post – but suffice it to say that several items in Tesla’s financials this quarter serve as big red flag warning flares.  Of course, the market probably won’t care, as it seems that the market cap of a company’s stock is directly proportional to the grandiosity of the Company’s accounting abuse and fraud.  And there’s no one in DC to enforce the laws already in place that are designed to prevent this fraud because the guys running these companies make substantial contributions to the Establishment politicians – just ask Jeff Bezos and Hillary Clinton.

But I’ll point out some of the glaring problems in TSLA’s “GAAP” accounting based on cursory sleuthing.

First and foremost, in his description of the results for the quarter, Musk stated that “residual lease risk” exposure was 32% of deliveries, down from 36% in Q2.  But this is a highly deceptive metric.  IN FACT, deferred revenue as a percentage of total revenue for the quarter soared to 61.4% from 44% in Q2.  Deferred revenue is the amount of revenue that is subject to “residual risk” from leasing financing.  This number is found on the liability side of the balance sheet.  The deferred revenue liability account went from $558 million in Q2 to $1.4 billion in Q3.   This is a huge jump in amount of risk-infused lease-based financing used to generate sales.

In and of itself, using deferred revenue accounting to this degree is highly subjective and susceptible to fraudulent risk assumptions.   But the fact that Musk tries to mask the truth by using a bogus metric to make it seem like TSLA’s exposure to the residual risk embedded in the profoundly questionable leases used to generate revenues and unit sales is a loud signal that there’s fraud embedded in TSLA’s “GAAP” financials.

When you look at what is being reported as  “GAAP operating income” consider that a huge proportion of that income is subject to the risk of coming back at the company in form of “one-time” GAAP charges which result from having to reverse out a large portion of the “GAAP” revenues when the value attached to the cars that will likely come flying back at TSLA when the leases expire is substantially lower than the amount guaranteed by TSLA.     This “GAAP” presentation makes a farce of bona fide accounting standards.

Another huge red flag is the huge jump in accounts payable.  In June, accounts payable were 87% of revenues.   But by September, accounts payable were more than 100% of revenues.   The only reason TSLA would stretch out its payables like this is if it needed the cash.   Not paying bills for a company like TSLA is a source of free financing.   But this is an extreme slow-down in bill payments.  There’s no way to know for sure what’s going on, but something is wrong.

A third huge red flag is the way in which Musk throws around the term “free cash flow.”  His definition is just as fraudulent as Amazon.con’s definition.  At this point in time, because TSLA has only released an 8k which does not contain an GAAP statement of cash flows, there’s no way to know the amount of free or negative free cash flow attributable to TSLA’s operations.  That is, “free cash flow” in the context of the deceitful manner in which TSLA’s financials are presented.

Having said that, Musk states in the 8k that TSLA generated “positive free cash flow.”  No, Elon, you did not.  Buried in the 8k is a section titled,  “selected cash flow information.”  He lays out his definition of “free cash flow” showing $176 million defined as cash flows provided by operating activities less capex.   The GAAP definition of free cash flow, however, also includes debt repayment and other sundry items that drain cash.  We won’t know the full extent of these items until the 10Q is released.

However, TSLA reported that it payed down $178 million on its borrowing facilities.   Using GAAP free cash flow, this takes Elon free cash flow negative.  Furthermore, if TSLA had maintained accounts payable at 86% of revenues, this would have sucked another $324 million of cash from TSLA’s operations, leaving the Company with a free cash flow deficit of $326 million.

There’s a lot more going on with TSLA’s operations that is deceitful, if not outright fraudulent.   This is just the “low hanging fruit.”   At some point the capital markets will stop funding this fraud and that’s when the fun begins.   Of course, by that time insiders will have sucked $100’s of millions of wealth out this Company that will never be retrievable.  In just the last 12 months, insiders have unloaded 4.1 million shares, or roughly $860 million worth of stock.   Oh wait, there was one open market purchase of  stock by an insider of a whopping 1,394 shares.

It’s my view the idiotic shareholders who give money to TSLA deserve what they’ll get eventually.  But then again, many of them are sheeple who have placed trust in financial fiduciaries, like pension managers and investment advisors, to invest their savings.

Valeant (VRX): “Hope” Is Not A Valid Investment Strategy.

A reader asked my opinion on the latest commentaries posted on Seeking Alpha about VRX.  Generally they had a bullish slant, permeated with gratuitous rationalization seeded in blind hope. “Hope” is not a valid investment strategy.  VRX is down another 8% today, which says a lot given that its probably the only stock in the Russell 2000 index that is red today.

One “analyst” explained away the reasons why VRX would not default on its debt.  But I laid this out pretty clearly yesterday.   Yes the banks will keep VRX alive. The banks are keeping EVERYTHING alive because they have $2.3 trillion in excess reserves that enable them to plug the cash flow deficits currently occurring from delinquent and defaulted assets.

VRX will not default because the banks will grant as much leeway to VRX as is needed to keep the corpse alive.  At this point in time, VRX’s assets likely are worth enough to cover the bank debt obligations.  Just like a vampire would want to keep a body warm and the pulse ticking while sucking out the blood, the banks will hold up VRX in order to get as much money out as possible.

Of course, the longer this drags out, the uglier it will become for all economically interested parties.  Because there’s accounting and disclosure fraud involved, we can expect the class-action shareholder lawsuits to pile up once the lawyers get a whiff of the blood being sucked out by the banks.Untitled

But keeping VRX alive for creditor purposes won’t help the stock. At this stage in the game,  VRX stock will descend – sometimes quickly, sometimes slowly – below $10.  In other words, VRX’s stock has entered the Irreversible Debt Spiral.

NewSSJ GraphicIn fact, VRX has already dropped another $1 while I have been writing this commentary. Money managers who like to keep their job are unloading this stock as if they were bailing water from the Titanic. 25 million shares have traded already vs the 90-day average daily volume of 13 milllion.  ANY money manager who holds on to this stock is in serious breach of its fiduciary duty.

Valeant (VRX) Is Now Selling “Furniture” To Keep The Lights On

Valeant stock is down another 10% today.  I’m wondering if some of the Wall Street Journal writers are reading this blog because the WSJ published an article late yesterday in which it reported that VRX could be forced to write-down its goodwill.  I published an article two days ago in which I analyzed why VRX’s goodwill “asset” was likely fraudulent.

VRX said it won’t meet the March 15th deadline to file its delayed 10-K.  It has until March 30th to file, otherwise it has 30 days before the bank creditors can declare an event of default and demand repayment of the debt.  Because VRX’s tangible assets are worth less than the amount of debt outstanding, the most likely scenario is that the banks will grant covenant relief.  At that point, VRX will attempt to sell assets in order to help pay down debt.

An analyst quoted in yesterday’s NY Times agrees with my assessment:   “I’m not sure that the businesses are worth the debt. The value of the assets depended in part on Valeant’s ability to take price increases and get insurers to pay for these overpriced drugs. The assumptions they made when they acquired these businesses no longer apply.”

VRX is entering the “IDS” stage of business failure – the “Irreversible Debt Spiral.” Reportedly VRX has signed confidentiality agreements with potential buyers of some of VRX’s businesses, some of which VRX overpayed to buy in the past few years (Bausch & Lomb, Obagi and Solta).   At this point VRX’s stock should begin another leg down, below $10.

VRX’s survival as a going concern will depend on two factors:  1)  the degree to which creditors are willing to restructure VRX’s debt obligations and 2) the amount of capital to pay down debt that VRX can raise through asset sales.  The latter variable is now more challenging because potential buyers know VRX is desperate.

Regardless of the VRX’s future as a going concern, VRX stock is headed lower.  Any professional money manager who continues to hold this stock on behalf of investors is, at this point, in  serious breach of its fiduciary duty.

The SEC Should Suspend VRX Trading: The Company Smells Like Enron

Valeant Pharmaceuticals (VRX) stock has plunged 86% since August 6. The latest plunge occurred today, with the stock losing 51% from its close of $78 yesterday (click to enlarge):

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The initial triggers were concerns over the Valeant’s drug-pricing policies and questions surrounding its methodology for booking revenues. However, with just a casual “look under the hood” at VRX’s SEC-filed financials, there is likely a great deal of fraud lurking beneath what’s already been questioned. In fact, this is starting to smell a lot like Enron or Bear Stearns.  The only component missing from this story is a CNBC rant from Cramer issuing a table-pounding buy on VRX stock.  That may yet occur.

To begin with,  the Company is carrying $30.2 billion in long term debt against just  $9 billion of tangible assets.  $39 billion of VRX’s assets is in the form of goodwill and intangibles.  VRX’s self-assessed book value is $6.4 billion.  But VRX’s tangible book value is negative $32.6 billion.

Goodwill is a nebulous concept that assigns value to the amount paid for an acquisition over and above the value of the assets acquired.  Often it’s nothing more than a “plug” number to account for the amount by which a Company like VRX overpays for an acquisition.  “Intangibles” are similar in that, in VRX’s case, it’s the value VRX has assigned to product brands, corporate brands, product rights, etc.  Both goodwill and intangible estimates are highly subjective and highly susceptible to judgement errors and fraud.   In just the 3rd quarter alone, VRX had to write-off $26 million of its intangible value related to its Zelapar drug because of declining sales.

The message the market is sending from the stunning collapse in VRX’s stock price is that something is very wrong with the Company.  It’s already on the ropes from allegations of fraudulent revenue booking practices and price-gouging.  Today the Company issued delayed and unaudited preliminary Q4 results which badly missed revenue and earnings estimates.

But that’s not the most troubling aspect.  On Feb 29 this year, VRX filed a notice with theUntitled1 SEC disclosing that it would be delaying the release of its 2015 10-K.  This is a big red flag, especially in the context of the accounting fraud allegations. This was followed by a reduction in 2016 earnings guidance the Company attributed to an “inadvertent error.”  But then the Company further lowered 2016 guidance with today’s unaudited Q4 earnings announcement.  Finally, the Company disclosed potential loan covenant violations that could lead to bond defaults.

If the SEC was in the business of protecting the individual investor, it would suspend trading in VRX’s stock because the frequent cliff-dive drops in the stock make it pretty clear that certain market participants have knowledge about the Company that is not being widely made available to the public.

I would suggest that given everything that has transpired in the VRX saga, there is some degree – if not a rampant amount – of fraud with this Company.  The stock price is signalling this:   VRX has the distinct odor of Enron or Bear Stearns coming from it.   Any investment advisor or institutional money manager who does not liquidate its holdings in this stock immediately is in breach of its fiduciary duty.  

Note: Short This Absurd Spike In AMZN

The Company burned through over $4 billion in cash in Q1.  This is because it has to sell its products and services for less than it costs to put them up for sale and deliver them.  I have documented this in fine detail in my report.   AMZN issued $6 billion in debt at the end of 2014.  2/3’s of that have already been spent.   It is using accounting gimmicks to present an operating income number that is not real.  This is an epic opportunity to short this stock for a short term gain.

This stock reminds me of Commerce One (CMRC).  Anyone remember that one in 1999-2000?  It ran from $10 to $600.  It was out of business about two years later but it plunged when the NASDAQ plunged in the spring of 2000.   This entire stock market is set up to plunge.  GOOG is up today on big misses across the board.  AMZN will drop like 100 lb weight disc dropped off the Empire State Building.

Amazon Is Ready Sell-Off Hard

Yet another reader testimonial on my Amazon.Con research report:

I have been involved in providing investment research for almost 30 years and have seen plenty of good and bad products in that time. During the 1998-1999 tech bubble, a select few of us used to gather and laugh at the lunacy that passed for research in order to justify tech company valuations (while we bought precious metals shares). No one was doing credible work when the public most needed it. And here we are again but this time we have your inputs establishing sanity, a true guiding light. The Amazon.con report is a seminal piece of work—thorough, easy to read, based on real proprietary investigative work demonstrating the lack of equity value and clear on both conclusions and trading strategy. Thanks for giving investors non-cheerleading reality, delivered in the name of moral decency.   – Mark in New Jersey

I’ve noticed that AMZN has quickly retreated every time it pops up to the $380 area.   Today, for example, AMZN was one of the few stocks that were green in the morning.  It was up $6 to $380 at one point, while the SPX was sliding lower.  AMZN ended down over $3 today.  It put in an “outside reversal day” down, which is when the high and low of the day exceed the previous day’s high and low.  It closed lower than yesterday as well, which is technical signal that hedge fund algos will likely pick up on and begin unloading shares.  Note:  the hedge fund world is significantly over weighted in AMZN.  Click to enlarge:

AmazonDotComStock

One fact I had not paid attention to until today is that AMZN hit an all-time high in late January 2014.  It sold off hard.  While it has traded higher on its fraudulent Q4 earnings report (see my research report for details), it has failed to come close to its all-time high despite the SPX having reached several successive all-time highs.  This is another very bearish trading signal the hedge fund black boxes will no doubt exploit.

When the downside momentum grips this stock, it will be a sight to behold.  AMZN has experienced declining operating margins since 2004.   In 2004 it was achieving industry norm 6% operating margins.  Now its operating margin is zero.   Plus it’s consuming cash like starving wild animal ($9 billion in debt issued in the last 24 months).

Now is the time to short this stock and my research report explains why this Company is at risk for eventually hitting the wall:  AMAZON.CON

 

Housing: LOOK OUT BELOOOOW….

First out this morning (Tuesday) was this:   “Oil crash may whack earnings of top U.S. homebuilders in Texas”  (Article Link).  Well that’s obvious.  I wrote a post a few weeks ago in which I surmised that the crashing price of oil was likely the U.S. economy’s “black swan.”   Sorry, it doesn’t take Einstein to figure that out.  In my year-end investor letter I stated that the housing markets in States like Texas and Colorado were going to get hammered hard.  I’m already seeing high-end housing inventory all around Denver pile up like litter in a junkyard.

THEN, KB Home (KBH) reported its fourth quarter (fiscal) ending November:

  • *KBH SEES 1Q BOTTOM LINE ABOUT BREAK-EVEN (against expectations of a 17c rise!)
  • *KB HOME CFO SAYS FIRST-QUARTER MARGINS EXPECTED TO BE DOWN
  • *KB HOME PULLED OUT OF `COUPLE’ HOUSTON LAND DEALS, CEO SAYS

Hmmm…the stock was annihilated today, down 16.3%.  But guess what?  45% of KBH’s sales revenue is derived from the West Coast – primarily California.  Yes, the Company reported “impressive” year over year revenue and backlog gains, but guess what?  That’s rear view mirror stuff.  You can completely ignore its reported GAAP net income number because 90% of it was from a NON-CASH massive income tax benefit it accrued into earnings.

KBH is a viper’s nest of accounting gimmicks and questionable use of capitalized interest, which also serves to inflate its GAAP earnings.  Oh, by the way, did anyone notice that KBH’s Q4 cancellation rate was 37%?   That means you can slash their new order and backlog report by at least 37%.

KBH’s debt/equity is 167%.  Once KBH is forced to start writing down the value of massively bloated inventory, it’s book equity to hit zero or go negative.   It’s inventory value is more than 200% of its book equity.  This stock is going to hit the wall eventually.

You can ignore reality but you can’t ignore the consequences of reality (Ayn Rand).  The reality is that my assessment of the housing market is correct.

Housing Permits, Starts Tank – SoCal November Home Sales Plunge

Closing market update:   Homebuilders were down 1-2% across the board.  HOV was down over 6%.  The company in my latest report was down over 2%.   Anyone who bought my report when it was first posted is now up almost 10%.  Shorting just 100 shares would have paid for the cost of my report my more than 2x.  I think there’s still another 8-10% of downside before any bounce…

Let’s start with real market data before we tackle and Un-Spin the Census Bureau vomit. Home sales in Southern California dropped to their lowest level in 7 years for the month of November.   They plunged 19% from October to November. Since 1988, the average decline from Oct to Nov is 8%.  This is actual transaction data and not estimated, adjusted and annualized drool coming from the Government or a real estate pimp organization like the NAR.  Here’s the LINK.

As for today’s housing starts/permits data for November from the Census Bureau.  The highly polished headlines reported that housing starts were down only 1.2% from October, with permits down 5.2%.  HOWEVER, please note that this is “seasonally adjusted and annualized” rates.  We have no idea what kind of absurdities are built into the “seasonal adjustments.”

BUT, if you look at the unadjusted data for November 2014 vs. November 2013, you find that actual starts dropped 7.5% and permits were down 5.5%.   This is the cleanest way to look at the numbers because it eliminates Census Bureau statistical manipulation and it is is not an annualized rate.  Note:  to the extent there’s errors in the “seasonal adjustments,” annualizing the number compounds that error by a factor of 12.  Here’s the data link from the Census Bureau if you want to see what I’m looking at:  LINK

The homebuilder stocks are going lower.  You can ignore reality, but you can’t ignore the consequences of reality. Despite 30-yr mortgage rates below 4% and a slight easing of FNM/FRE credit standards, mortgage purchase applications and sales are dropping.  Here is the link to my latest homebuilder short-sell report:  This stock is already down over 8% since I first published the short-sell recommendation on December 4th.  It’s going lower.  I would short the bonds too if you can locate a borrow.

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Don’t take it from me, here’s some actual market data from around the country (sourced from The Housing Bubble Blog):

Orlando:    Orlando-area home sales have slowed, the inventory of house listings is up, houses are taking longer to sell and sellers have less negotiating power than they did a year ago, according to a report.

Boston:   Everyone knows that the Luxury Glutpocalypse has hit Greater Boston: too many new higher-end apartments, too few tenants for them, and a lot of gobsmacking incentives to try and right the market ship. You can see that the decreases have been steepest in areas that have seen some of the briskest development of luxury apartments (Back Bay, downtown Boston, Chinatown).

Minneapolis/St. Paul:   A sluggish November for home sales and stagnant fall inventory has given buyers the upper hand in the Twin Cities housing market. ‘There’s kind of a hangover of inventory from the fall that isn’t selling.

Housing market guru, Robert Shiller:   “Historically, houses have not done well as investments. They haven’t really gone up much in value in the last 100 years. And on top of that, they’re a nuisance,’ he said. ‘You have to take care of them.”

The zero-interest policy of the U.S. Government/Fed has caused a massive misallocation of capital into a massive oversupply of rental buildings (I see this all over Denver) and single-family homes.  All of the homebuilders for which I have published research reports have loaded up their inventory with spec homes and have used mostly debt to finance the binge.

The next event will a massive “purge.”  Take advantage of the purge by shorting these homebuilders before every hedge fund out there looking for positive short-side alpha jumps on this trade.  You can access all my homebuilder short reports here:   Short The Homebuilders.

This is a volatile sector but there’s a lot money that can be made with prudent capital management and use of calls and puts to help manage the volatility.  All of my reports have a section which discusses both capital management/trading and options strategies.

Case-Shiller: Home Prices Decline For The Third Month In A Row

“The broad-based deceleration in home prices continued in the most recent data,”  says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices

The housing market was greeted with a double-whammy so far this week.  Yesterday’s Pending Home Sales Index for August showed a monthly and year over year decline in the number of home purchase contracts signed last month. Today the Case-Shiller home price index registered its 3rd monthly decline.

Perhaps most notably was the fact that the home price decline for San Francisco was the biggest factor in the decline of the C-S index.  This graph prepared by Zerohedge shows the significance of San Francisco home prices as leading indicator for the coming onset of financial and economic turmoil (click on graph to enlarge):

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Perhaps just as telling is the fact that the Dow Jones Home Construction is once again down over 1% today, despite the fact that the Dow and the S&P 500 are green.   Think about the implications reflected by this.  If housing stocks can’t rally with the general stock market – especially when the Fed’s obvious hand of intervention is at work – what will happen to the homebuilder stocks when the intervention fails and the general stock market turns inexorably lower?

I posted a new housing stock short-sell report last night.  Given the enormous amount of debt this company has taken on in relation to the number of homes it’s selling, I believe this company’s financials are going to deteriorate quickly as the housing market crumbles.  The situation is compounded by the company’s use of sleazy accounting, which I detail in the report.   You can access this report here:   Homebuilder Research Reports.

I am projecting a base-case 70% ROR with this trade over the next 18-24 months.