Tag Archives: accounting fraud

The Truth Behind Amazon’s Reported Earnings

This article below is from my Seeking Alpha post earlier this week.  I’ve studied AMZN’s financials and business model for several years. I’m probably one of the few analysts who bothers to scour the footnotes of AMZN’s financials. I was taught by the best at University of Chicago to start with the footnotes and work “up” when pulling apart GAAP financial statements.  I can say with 100% certainty that the “Free Cash Flow” that Jeff Bezos promotes with ardent zeal is a fictional number, if not fraud.  The SEC looks the other way.  Suffice it to say that AMZN’s true trailing twelve month free cash flow  based on strict GAAP is nearly negative $4 billion. I demonstrate this below.

Amazon Perfects the “Beat the Street” Game – Amazon (AMZN) reported 52 cents per share “earnings” on October 26th vs. the consensus 2 cent estimate after the market closed. The stock soared 7.8% after hours as hedge fund algos and retail daytraders chased the stock higher on the headline report. AMZN “walked” Street analysts’ estimates down to a number that was easy to “beat.” Ninety days ago the consensus estimate for Q3 was $1.09, with one estimate as high as $1.59. cents. By the time AMZN was about to report, the consensus estimate was two cents. This is how the game is played.

The graphic below from Yahoo Finance shows a 3-month timeline of this “walk-down” process for AMZN’s consensus earnings forecast for Q4 2017, Q1 2018 and the full-year 2017. The current estimates were again revised after the Company’s Q3 report (source: Yahoo.com/finance w/my edits):

Make no mistake: the company knowingly “guides” analysts down in order to engineer a “headline” surprise. The “beat the numbers” game is one of the many games connected with corporate earnings reports. That said, AMZN’s actual EPS in Q3 2017 was the same as Q3 2016 – zero EPS growth. Bear in mind that GAAP acquisition accounting is heavily at play here. Acquisition accounting enables a company to boost revenues and hide expenses.

[Note: All numbers are taken directly from AMZN’s Third Quarter 10-Q]

Here’s a fact that Wall Street or Bubblevision won’t report: in Q3 2016, AMZN’s GAAP tax rate was 47% vs 18% in Q3 2017. Anyone who has taken a basic accounting course knows that the GAAP tax rate is highly arbitrary and a major source of EPS manipulation. If AMZN had simply used a constant GAAP tax rate in Q3, its net income in Q3 would have declined to $200 million this year from $252 million in Q3 last year (remember these are GAAP earnings, not actual cash earnings). On this basis, AMZN’s EPS would have shown a drop from 53 cents last year to 41 cents this year. Anyone paying the current price of AMZN at a PE of 290 is likely ignorant of the fact that AMZN’s operating income is declining and its debt outstanding is increasing.

AMZN’s operating income plunged yr/yr for Q3 by $228 million, or nearly 40%. Operating income in its North American e-commerce business plunged $143 million, or 56%. AMZN’s e-commerce business lost $824 million on an operating business in Q3 (see p. 26 from the 10-Q linked above). YTD AMZN’s e-commerce business has lost nearly $1 billion). It likely would have been worse without Whole Foods numbers in mix. This is because, when AMZN acquired WFM, WFM’s operating margin was 4%. AMZN’s has been running near zero – it was 0.7% in Q3. Acquisition accounting, among other things, allows AMZN to present its numbers “as if,” meaning “as if” AMZN owned WFM since AMZN’s inception.

One of the primary reasons that AMZN’s operating margins decline continuously is the cost of fulfillment. “Fulfillment” is the cost of getting a product from the warehouse to the customer’s doorstep. In Q3 2016, AMZN’s fulfillment costs were 19.4% of product sales. By Q3 2017, it had jumped to 22.3%. Fulfillment is a cornerstone of AMZN’s e-commerce model. Offering free shipping to Prime members is a guaranteed money-loser.

In general and on average, AMZN loses money on every e-commerce sale. AMZN’s e-commerce/consumer products operating margin will continue to decline because the Company is implementing an aggressive price-cut program at Whole Foods. This will drive the WFM business margins toward zero.

AMZN’s only source of operating income is the AWS (cloud services) business. The revenue growth rate from 2016 to 2017 for Q3 was 41%. This is down from the 55% growth rate that occurred year over year from Q3 2015 to Q3 2016. Part of this is a function of “scale.” As the business grows in overall size, the growth rate will tend to decline mathematically. But the AWS revenues are just 10% of AMZN’s total revenues.

Furthermore, AMZN’s AWS business is now under heavy attack. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Cisco (CSCO) announced that they are teaming up to go after AWS’ cloud territory. More ominously for Amazon, Microsoft (MSFT) is quickly moving into and taking away AMZN’s market share in the commercial cloud space. Based on its FY Q1 numbers released Thursday, MSFT’s commercial cloud revenue annualized now exceeds AMZN’s AWS revenues annualized. AMZN historically has held the largest market share in cloud computing services. Given the new competition from dedicated tech companies, the profitability and growth of AMZN’s AWS business segment is at risk.

AMZN’s deceptive presentation of free cash flow – Every quarter AMZN presents an earnings slideshow, the first slide of which prominently shows trailing twelve month free cash flow. But this presentation of FCF is highly deceptive. On the first slide, AMZN shows its latest trailing twelve month FCF to be $8.050 billion. But that is a cherry-picked, non-GAAP derivation of actual free cash flow. Here’s AMZN’s actual GAAP FCF as derived from its Q3 10-Q (source: AMZN 10-Q, with my edits):

Free cash flow is technically defined as operating cash flow less capex expenditures and debt payments, the latter of which is negligible for AMZN – for now. Note the difference claimed to be $8.050 billion in “free cash flow” by Jeff Bezos and the negative $3.969 bullion actual GAAP FCF. Here’s the deal. Jeff Bezos conveniently omits the amount of cash AMZN spends to acquire property and equipment using capital leases and build-to-suit leases. To the extent that these expenditures are non-recurring, that presentation of FCF is valid. However, not only are AMZN’s expenditures under capital leases serially recursive, the payments increase every quarter and have been for several years. In 2014 AMZN’s full year cap lease expenditures was $4.9 billion. Thru Q3 2017, AMZN’s trailing twelve-month expenditure was $12 billion.

Furthermore, a “build-to-suit” property is built specifically for AMZN’s purposes. It likely is not easily sold re-leased for a next best use. Because of this, the lease functions as debt used to fund this capex. As such, the payments under build-to-suit leases should be treated as capex and not excluded from the derivation of free cash flow. Again, it’s an accounting sleight-of-hand employed by Bezos for the purposes of deception.

The use of capital leases to manipulate financials is not uncommon. However AMZN intentionally uses this financing techniques as mechanism to manipulate its numbers. Among other superficial accounting “benefits,” using capital leases rather than debt to fund expenditures enables keeps the appearance of debt off the balance sheet. It also allows AMZN to keep the cash used to fund capital leases out of the “Financing Activities” section of AMZN’s Statement of Cash Flows. AMZN is required to disclose the amount spent on cap leases, which it accomplishes in the footnotes. Very few analysts or investors bother to read the footnotes.

AMZN’s debt load – AMZN used $16 billion in near-junk bond rated debt to finance the Whole Foods acquisition. Its long term debt is now $24.7 billion. At the end of 2007, its long term debt was $1.2 billion. AMZN’s debt-load has grown by over 20x. However, at the end of Q3 2017, AMZN also had $18.8 billion in “other long-term liabilities.” This is almost entirely the capitalized leases used to fund property and equipment acquisitions. At the end of 2007, this number was $292 million. Use of cap leases has grown by a factor of 64x. Now, imagine if AMZN were forced by GAAP to include cap leases as part of its long term debt – not an unreasonable standard in this case. AMZN’s debt load would be $43.5 billion – nearly double the current disclosed level of debt.

See how this works? If AMZN were forced to consolidate cap leases into “long term debt,” its recent $16 billion bond deal would have been rated as non-investment grade – aka junk. The average cost of the $16 billion issued is 3.56%. If AMZN had been rated junk, it would have raised the cost of this deal by at least 100 basis points (1%) and likely more. Assuming an added cost of 1%, this would have added $160 million in interest expense. It might look like a smart move for Bezos to exploit GAAP accounting like this but it serves to pull the wool over the eyes of the investors who bought the bonds. This is because the true credit quality and ability to service the debt is significantly lower than that assumed by these investors.

The point here is that every facet of AMZN’s financials is highly misleading. AMZN is not what it appears to be. Yes, the stock has done remarkably well considering the ugly nature of the underlying truths. Note that AMZN did have a brush with insolvency in 2003-2004, but Warren Buffet bailed out AMZN by loading up on junk bonds Amazon had outstanding at the time. This was a temporary stay of execution that was followed up with the rapid inflation of the mid-2000’s credit and stock bubble, which enabled AMZN to refinance the junk bonds Buffet had bought. This gave AMZN plenty of cash to keep spending money to generate sales. AMZN also was bailed out by the bond market a couple years ago, as it issued $3 billion in debt in 2012 and $5 billion of debt in 2014. If AMZN is truly generating free cash flow, why does it continuously have to issue debt to fund its operations?

Amazon has thus been given a free pass by the financial markets for most of its existence. Make no mistake, AMZN can do this only for as long as market bubbles inflate. If the current credit/stock bubble is in the process of deflating or has popped when it comes time for AMZN to start paying down its heavy debt load, including the capital leases, it’s highly likely that the market won’t enable AMZN to continue kicking the can down the road by refinancing the debt payments. AMZN clearly does not generate free cash flow that can be used to make the debt payment obligations. Thus, in this scenario, there’s a strong probability that AMZN would hit the wall, inconceivable as that may seem right now.

AMZN’s stock has had a remarkable run this year in defiance of the true underlying fundamentals (click to enlarge):

Amazon is a difficult stock to short because of its correlation with the overall stock market. However I’ve been able to scalp profits on an intra-day basis using near-money weekly puts. Anyone who is willing to manage a short position on a daily basis will eventually be rewarded. When AMZN surprised the market by missing its Q2 earnings, the stock sold off $140 from top to bottom over 2 months. If AMZN misses Q4 earnings the stock could, minimally, fill the gap in the graph above ($980) – a $160 decline using the closing price on November 21st.

If you are interested in short-sell ideas like AMZN, please visit this link:  Short Seller’s Journal, where I offer a weekly newsletter that focuses on shorting the stock market.

As A Dog Returns To Its Vomit, Stock Jockeys Return To The Ponzi Stocks

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. – Sir John Templeton

I’ve always admired John Templeton. Not as the “father” of the modern mutual fund but because I considered him to have been one of the most intelligent thinkers in at least my lifetime (55 years). In 2003 he gave an interview from his retirement “perch” in the Bahamas to one of the financial media organizations. He stated at the time that he would not invest in the U.S. housing market until “home prices go down to one-tenth of the highest price homeowners paid.” Imagine what he would say today…

“As a dog returneth to his vomit, so a fool returneth to his folly” (Proverbs 26:11). That proverb is particularly applicable to today’s “everything bubble,” especially stocks and housing. The current en vogue is to compare today’s market to 1987, when the Dow crashed 22.5% in one day. Honestly, I don’t think it matters whether you use 1929, 1987,
2000 or 2007. By just about any conceivable financial metric, the current stock market is the most overvalued, and thereby the most dangerous, in U.S. history. The other “vomit” to which analysts “returneth” are the attempts to explain why today’s extreme valuations are “different” from the extreme overvaluations at previous pre-crash market tops. I find the “interest rates are record lows now” to be the most amusing.

On Friday, the momentum-chasing hedge funds and retail daytraders couldn’t get enough of the FAANGs (FB, AMZN, AAPL, NFLX, GOOG) + MSFT. AMZN’s stock ran up $128, or 13.2%, which was still less than AMZN’s biggest one-day percentage jump of 26.8% on October 23, 2009.  AMZN’s stock price has been highly correlated with  amount of money printed by the “G3” (U.S./Japan /EU) Central Bank money printing machine.  But since July, AMZN’s stock began to diverge negatively from the growth path of G3 money supply. The FANGs in general had been losing steam starting in June. AMZN was particularly weak after it reported that big loss in July. It took one absurd headline “beat” for AMZN to “catch back up” into correlation with the growth line of G3 money printing (FYI, the Fed’s balance increase slightly in October, despite the announcement that it would be reduced by at least $10 billion in October).

The stock market will head south quickly sooner or later. The “curtain” is being “pulled back”on stock Ponzi schemes one by one. The truths about Tesla (TSLA) are beginning to emerge in public finally. Eventually the stock market will take a hard look behind the Amazon (AMZN) curtain. Ponzi schemes can flourish during periods of bubble inflation. But when bubbles deflate, Ponzi schemes fail. It’s no coincidence that Bernie Madoff’s Ponzi scheme fell apart in late 2008 (he admitted guilt in December 2008). It began to become unmanageable during 2007, when the stock market started to head south. Eventually it will become impossible to cover up fundamental facts from the investing public. Fundamental facts about the economy, corporate earnings and the financial system. That’s when the rush toward the exits will commence.

The above commentary/analysis is from the latest issue of the Short Seller’s Journal. In that issue I review AMZN’s Q3 financials in-depth. This includes excerpts from the SEC-filed 10-Q used to demonstrate why Jeff Bezos’ LTM “Free Cash Flow” of $8.05 billion is a Ponzi number and the true GAAP Free Cash Flow is -$3.9 billion. AMZN is a cash-burning furnace and I prove it. To find out more about this and other ideas for shorting this bloated stock market, click here: Short Seller’s Journal information.

Amazon: The Devil Is In The Details

Jeff Bezos/Amazon is the poster-child for the degree to which this entire economic and political system is profoundly corrupt. – Investment Research Dynamics

Amazon stock made a big after-hours “shock and awe” move after it reported a huge headline “beat” of its Q3 earnings.  It’s a funny thing how the “beat the Street” game works.  Ninety days ago the consensus estimate for Q3 was $1.09, with one estimate as high as $1.59. The estimates were systematically “walked down” over the last 3 months to a mean estimate of 2 cents and a high-end estimate of 26 cents. This is how the game is played.

Make no mistake, the Company knowingly “guides” analysts down in order to engineer a “headline” surprise. This is how absurd this game has become. The “beat the numbers” game is one of the many frauds connected with corporate earnings reports. That said, AMZN’s EPS in Q3 2017 were the same as Q3 2016 – zero EPS growth. Bear in mind that GAAP acquisition accounting manipulation is heavily at play here.  Acquisition accounting enables a company to boost revenues and hide expenses.

Here’s just a cursory look at the “Devil in the details” (Short Seller Journal subscribers will get the in-depth, eye-opening analysis in the next issue released Sunday afternoon).

Amazon’s headline revenue “growth” cost AMZN a lot money in terms of operating earnings.  Despite the “marquee” 34% sales “growth” rate, AMZN’s operating income plunged nearly 40% year/year for Q3.  This drop in operating income has accelerated, as YTD for the first 9 months of 2017, AMZN’s operating income has dropped 32%.

This should have been the quarter that AMZN literally “printed” GAAP income because the quarter included its highly touted “Prime Day” record sales.  Furthermore, AMZN should have been able to reap the benefits of merger/acquisition accounting from its Whole Foods acquisition.  M&A GAAP standards enable companies literally to manufacturer GAAP accounting profits.   I would suggest that Bezos’ price-cut strategy at Whole Foods has driven WFM’s operating margin toward zero (from 4% pre-acquisition) – like the rest of Bezos’ consumer sales businesses.  But there’s more…

AMZN’s GAAP net income showed no growth – literally in Q3.  In 2016 AMZN reported $252 million in net income for Q3.  In 2017 it reported $256 million.  EPS were flat at 53 cents (basic).  Zero growth.  For this, AMZN’s market cap after hours increased by $37 billion.  But there’s more…

Without going into the monotony of GAAP tax rate accounting, suffice it to say that anyone who has taken a basic accounting course knows that the GAAP tax rate is highly arbitrary and a major source of EPS manipulation.  Again, the Devil is in the details…

In Q3 2016, AMZN used a 47% GAAP tax rate.  This latest quarter, AMZN capriciously applied an 18% GAAP tax rate.  Had AMZN maintained the same GAAP tax rate used last year, its net income in Q3 2017 would have declined to $200 million, or 41 cents/share. For this, the last buyer after hours ($1,047) was willing to pay 266x trailing twelve month earnings.

This is just the beginning of an in-depth look at the rotting condition of the numbers buried in AMZN’s financial statements.  The next issue of the Short Seller’s Journal will pull back the curtain on areas of AMZN’s SEC-filed numbers where no Wall Street analyst or financial media cheerleader would ever dare venture.  AMZN’s cash flow is declining – and its true free cash flow – not the Bezos non-GAAP “free cash flow” – is negative.  I can prove it.

The highly-touted acquisition of Whole Foods could turn out to be Jeff Bezos’ “Wings of Icarus.”  He may have flown too close to the sun on this one.

The information I present in the Short Seller’s Journal is actionable.  The last two times AMZN’s stock shot up I put a short recommendation on AMZN’s stock (including put option ideas) which led to profitable short-covering opportunities.  In the last issue I advised waiting until after Q3 earnings, stating that a big gap-up in after-hours would lead to another opportunity to short the stock.  You can find out more about the Short Seller’s Journal here:  Subscriber Information link.

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