Tag Archives: auto sales

Fundamentals Supporting Stock Market Further Deteriorate

The Bureau of Economic Analysis calculates and publishes an earnings metric known as the National Income and Products Accounts which presents the value and composition of national output and the types of incomes generated in its production. One of the NIPA accounts is “corporate profits.” From the NIPA handbook: “Corporate profits represents the portion of the total income earned from current production that is accounted for by U.S. corporations.”

The BEA’s measurement of corporate profits is somewhat similar to using operating income from GAAP financial statements rather than net income. The BEA is attempting to isolate “profits from current production” from non-production noised introduced by GAAP accounting standards. “Profits from current production provide a comprehensive and consistent economic measure of the net income earned by all U.S. corporations. As such, it is unaffected by the changes in tax laws, and it is adjusted for non-reported and misreported income” (emphasis is mine).

Why do I bring this up – what is the punch line? Because the NIPA measurement of corporate profits is currently showing no growth. Contrast this with the net income “growth” that is generate from share buybacks, GAAP tax rate reductions and other non-cash GAAP gimmicks used to generate GAAP net income on financial statements. This does not surprise me because I use operating income when judging whether or not companies that are reported as “beating” estimates are “beating” with accounting gimmicks or actual products derived from the underlying business.

It’s quite easy for companies to manufacture net income “beats.” But it’s more difficult – though possible – to manipulate operating income. The deferment of expenses via capitalizing them (taking a current cost incurred and sticking it on the balance sheet where the cost is amortized as an expense over time) is one trick to manage operating income because expense capitalization reduces the quarterly GAAP expense that is connected to that particular expenditure (capex, interest, etc).

The point here is that corporate operating profits – or “profits from production” per the BEA – are not growing despite the propaganda from Wall Street and the President that the economy is “booming.” Furthermore, if we were to adjust the BEA numbers by a true inflation number, the resulting calculation would show that “real” (net of price inflation) corporate profits have been declining. Using this measure of corporate profitability as one of the measures of economic health, the economy is not doing well.

August Auto Sales – August auto sales reported the first week of September showed, on a SAAR (Seasonally Adjusted Annualized Rate basis), a slight decline from the July SAAR. The positive spin on the numbers was that the SAAR was 0.4% percent above August 2017. However, recall that all economic activity was negatively affected by the two huge hurricanes that hit south Texas and Florida. The SAAR for this August was reported at 16.5 million. This is 11.2% below the record SAAR of 18.6 million in October 2017. It was noted by LMC Automotive, an auto industry consulting firm, that “retail demand is deteriorating” (“retail” is differentiated from “fleet” sales). Sedan sales continue to plummet, offset partially by a continued demand for pick-up trucks and SUVs.

Casting aside the statistically manipulated SAAR, the industry itself per Automotive News reported 1.481 million vehicles sold in August, a number which is 0.2% below August 2017. In other words, despite the hurricane-depressed sales in August 2017, automobile manufacturers are reporting a year over year decline in sales for August. This was lead by a stunning 12.7% drop in sales at GM. I’ll note that GM no longer reports monthly sales (only quarterly). But apparently an insider at GM fed that number to Bloomberg News.  Automotive News asterisks the number as “an estimate.” Apparently GM pulled back on incentives. On a separate note, I’m wondering what will happen to consumer discretionary spending if the price of gasoline continues to move higher. It now costs me about 35% more a year ago to fill the tank in my car.

The commentary above is an excerpt from the latest Short Seller’s Journal.  I  recommended shorting GM at $42 in an early November 2017 issue of the Short Seller’s Journal. It hit $34 earlier this past week. That’s a 19% ROR over the time period. In the last issue of the Short Short Seller’s Journal, I recommended shorting Wayfair (W) at $149.92, last Friday’s close. W is down $3.50 – or 2.3% – despite the rising stock market. My recommendation include put option ideas You can learn more about this newsletter here:  Short Seller’s Journal Information

Consumer Spending Contraction: Two Charts That Horrify Keynesians

“While the decline in housing activity has been significant and will probably continue for a while longer, I think the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—have been largely allayed…” – Janet Yellen 1/22/07

The propaganda is always laid on the heaviest just ahead of The Fall.  The employment report showing sub-4%, with nearly 96 million working age people not considered part of the labor Force, is possibly the penultimate fabrication.

Consumer spending is more than 70% of the GDP.  A toxic consequence of the Fed’s money printing and near-zero interest rate policy over the last 10 years is the artificial inflation of economic activity fueled by indiscriminate credit creation.

But now the majority of American households, over 75% of which do not have enough cash in the bank to cover an emergency expense, have become over-bloated from gorging at the Fed’s debt trough.

As credit usage slows down or contracts, the economy will go off Bernank’s Cliff much sooner than Helicopter Ben’s 2020 forecast.

The chart above is the year-over-year percentage change in total consumer credit outstanding. Not only is the growth rate decelerating, credit card debt usage is beginning to contract. This the collective prose from the mainstream media is that households are paying down credit card debt with tax savings. But, again, this is a lie. For most households, the increase in the cost of gasoline more than offsets the $90/month the average taxpayer is saving in taxes.

The second chart shows that the growth rate in auto debt fell off Bernanke’s Cliff in early 2017. While the growth rate in the amount of auto debt has appeared to have stabilized – for now – there’s been  a decline in the underlying growth rate in unit sales. This is because the mix of vehicles sold has shifted toward more trucks, which carry a higher sticker price and thus require a bigger auto loan.  Larger loans per vehicle sold, less total units sold.

The Keynesian economic model – as it is applied in the current era to stimulate consumer spending – requires debt issuance to increase at an increasing rate. But as you can see, the rate of credit usage is decreasing. The affects are already reflected by a rapid slow-down in retail, auto and home sales. Most American households are saturated with debt.

The real fun begins as many of these households begin to default. In fact, the delinquency and default rate, in what is supposed to be a healthy economy, on subprime credit card loans and auto debt already exceeds the delinquency/default rate in 2008. Perhaps Bernanke’s Cliff is just around the next bend in the trail…

Auto Sales Forecast To Tank In April

JD Powers and LMC Automotive are projecting auto sales to drop 8% in April from a year-ago April:

For much of the past two years, the discounts offered by automakers have remained at levels that industry analysts say are unsustainable and unhealthy in the long term…Sales are expected to drop further in 2018 as interest rates rise and more late-model used cars return to dealer lots to compete with new ones. – April Auto Sales Forecast

General Motors reported lousy Q1 numbers this morning. Revenues dropped 3.2% year over year in Q1. Revenues would have been worse but GM joined the rest of the country and extended financing to future deadbeats who took out loans greater than their annual pre-tax income in order to buy a pick-up truck. In other words, GM’s financing unit generated 25% growth in revenues, which cushioned drop in GM’s automotive revenues. Operating income fell off a cliff, plunging nearly 80% vs. Q1. Because of GAAP manipulations, EBIT was down only 55% from Q1 2017.

BUT, GM was credited with a headline “beat” of the Street’s earnings estimates. Only in America can a company’s operating numbers go down the drain and yet still be credited with a headline GAAP-manipulated net income “beat.” I find much humor in this absurdity. Others might find it, upon close examination, to be pathetic or even tragic. Given the forecast for April automotive sales, at least now we know GM announced earlier this month why it will begin to report auto sales on a quarterly basis instead of monthly.

The economy is much weaker than the narrative promoted aggressively by Wall Street, DC and the financial media. This tweet from @RudyHavenstein captures perfectly the divergence between moronic mainstream financial media and Main Street reality. We’re bombarded daily with propaganda about the healthy economy. Yet plenty of statistics show that the average household in this country is struggling under a mountain of debt and is living paycheck to paycheck.

This mostly explains the why credit card debt hits a new record high every month now. The average household is using revolving credit to help make ends meet. The only problem is that, in aggregate, the credit debt is not getting paid down. Rather, it’s increasing by the day. To compound the problem, credit card issuers are aggressive about jacking-up rates when the Fed funds rate is rising. I have a friend who has a 670 FICO score and recently used a loan to buy a car. The interest rate on the loan is 8%. This means that credit cards in general are charging rates in the mid-to-high teens to users with a sub-720 credit score. The outstanding balance will double in 5 years for a card-user who only pays the minimum amount each month on a card with a 15% interest rate. The only problem: that user will likely default before the balance doubles.

But why listen to the Orwellian propagandists?  Just follow the money from corporate insiders: The graphic to the right shows the ratio of insider sells to buys. When the ratio is under 12:1, it’s considered “bullish.” When the ratio is over 20:1, it’s considered bearish. In the last couple of weeks, the ratio has spiked up over 35.

It would seem the Atlanta Fed agrees with the assessment that the economy is far weaker than is being promoted by politicians and Wall Street. Back in February, the Atlanta Fed was forecasting Q1 2018 GDP to be 5.4%. Since then the Atlanta Fed has cut lowering its forecast almost weekly. This past week it chopped its Q1 GDP forecast down to 1.9%.

How can you profit from this insight?   I’ve been presenting several “off the radar” short-sell ideas in my Short Seller’s Journal from which myself and several subscribers are making a quiet killing.  Right now the easiest money to be made in the market is shorting homebuilders.  I have have a subscriber who made 150% on DHI puts in the first 30 minutes of trading today. I have another subscriber who is short Lending Tree (TREE) from $340.  I got this email from him today, with the stock down $42 to $264:  “The TREE keeps on giving. Many thanks!”

Every time the market bounces now, or when individual “daytrader/algo” stocks pop on headline “beats,” it creates an opportunity to make easy money shorting stocks or buying puts.  The Short Seller’s Journal provides unique insight to the economic data and corporate earnings – insight you’ll never get from so-called financial “experts.”  SSJ then offers ideas every week for making money on this insight.   To learn more, click here:  Short Seller’s Journal subscription information. This week I’ll be presenting an oldie but goodie short that soared today on tepid numbers (no, it’s not Facebook).

Just wanted to give you kudos for for your Short Sellers Journal. i find myself waiting every Sunday to read your publication. Your research and conclusions ring true. One of the better newsletters I receive. – recent subscriber feedback

Is It The Trade War Threats Or Extreme Overvaluation?

The stock market is is more overvalued now than at any time in U.S. history. Sure, permabulls can cherry pick certain metrics that might make valuations appear to be reasonable. But these metrics rely on historical comparisons using GAAP accounting numbers that simply are not remotely comparable over time. Because of changes which have liberalized accounting standards over the last several decades, current GAAP EPS is not comparable to GAAP EPS at previous market tops. And valuation metrics based on revenue/earnings forecasts use standard Wall Street analyst “hockey stick” projections. Perma-bullishness in Wall Street forecasts has become institutionalized. The trade war threats may be the proverbial “final straw” that triggers a severe market sell-off, but the stock market could be cut in half and still be considered overvalued.

The market action has been fascinating. I noticed an interesting occurrence that did not receive any attention from market commentators. Every day last week the Dow/SPX popped up at the open but closed well below their respective highs of the day. Each day featured a pre-market ramp-up in the Dow/SPX/Naz futures. However, the Dow closed lower 3 out of the 5 days and the SPX closed lower 4 out of 5 days. All three indices, Dow/SPX/Naz, closed the week below the previous week’s close.

My point here is that the stock market is still in a topping process. The 10% decline that occurred in late January/February was followed by a rebound that seems to have sucked all of of hope and bullishness back into the market. This is reflected in some of the latest sentiment readings like the Investors Intelligence percentage of bears index, which is still at an all-time low. I also believe that some hedge fund algos are being programmed to sell rallies and buy dips. We’ll have a better idea if this theory is valid over the next couple of months if the market continues to trend sideways to lower.

Deteriorating real economic fundamentals – The most important economic report out last week was retail sales for February, which showed at 0.1% decline from January. This was a surprise to Wall Street’s brain trust, which was expecting a 0.4% gain. Keep in mind the 0.1% decline is nominal. After subtracting inflation, the “unit” decline in sales is even worse. This was the third straight month retail sales declined. The decline was led by falling sales of autos and other big-ticket items. In addition, a related report was out that showed wholesale inventories rose more than expected in January as wholesale sales dropped 0.2%, the biggest monthly decline since July 2016.

Retail and wholesale sales are contracting. What happened to the tax cut’s boost to consumer spending? Based on the huge jump in credit card debt to an all-time high and the decline in the savings rate to a record low in Q4 2017, it’s most likely that the average consumer “pre-spent” the anticipated gain from Trump’s tax cut. Now, consumers have to spend the $95/month on average they’ll get from lower paycheck withholdings paying down credit card debt. As such, retail sales have tanked 3 months in a row.

In fact, the consumer credit report for January, released the week before last, showed a sharp slow-down in credit card usage. In December, credit card debt jumped $6.1 billion. But the January report showed an increase of $780 million. Yes, this is seasonal to an extent. But this was 16.4% below the January 2017 increase of $934 million.

Further reinforcing my thesis that the average household has largely reached a point of “saturation” on the amount of debt that it can support, the Federal Reserve reported that credit card delinquencies on credit cards issued by small banks have risen sharply over the last year. The charge-off rate (bad debt written off and sold to a collection company) soared to 7.2% in Q4 2017, up from 4.5% in Q4 2016. “Small banks” are defined as those outside of the 100 largest banks measured by assets. The charge-off rate at small banks is at its highest since Q1 2010.

Any strength in retail and auto sales related to the replacement cycle from the hurricanes last year are largely done. If you strip out “inconsistent seasonal adjustments,” the decline in February retail sales was 0.48% (John Williams, Shadowstats.com). Given the degree to which the Government agencies tend to manipulate economic statistics, it’s difficult for me to say that the three-month drop in retail sales will continue. However, I suspect that spending by the average household, strapped with a record level of debt, will continue to contract – especially spending on discretionary items.

A portion of the commentary above is an excerpt from the latest Short Seller’s Journal, a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here: Short Seller’s Journal information.

The Government’s Retail Sales Report Borders On Fraud

As a quick aside, I got an email today from a colleague, a self-admitted “very small fish,” who told me he was now getting cold calls from Goldman Sachs brokers offering “very interesting structured products.” I told him the last time I heard stories like that was in the spring of 2008. One of my best friends was getting ready to jump ship from Lehman before it collapsed – he was in the private wealth management group. He told me he heard stories about Merrill Lynch high net worth brokers selling high yielding structured products to clients. He said they were slicing up the structured garbage that Merrill was stuck with – mortgage crap – that institutions and hedge funds wouldn’t take and packaging them into smaller parcels to dump into high net worth accounts. Something to think about there…

As conditions worsen in the real world economy and political system, the propaganda fabricated in an attempt to cover up the truth becomes more absurd.  Today’s retail sales report, prepared and released by the Census Bureau which in and of itself makes the numbers extraordinarily unreliable, showed a .6% gain in retail sales in July from June.  As I’ll show below, not including the affects of inflation, in all likelihood retail sales declined in July.

The biggest component of the reported gain was auto sales, for which the Census Bureau attributed a 1.1% gain over June.  While this correlates with the SAAR number reported at the beginning of the month, the number does not come close to matching the actual industry-reported sales, which showed a 7% decline for the month of July.  Note: the SAAR calculation is fictional – it implies that auto sales, which are declining every month, will continue at the same rate as the rate measured in July.  Per the stark contrast between the Census Bureau number and the industry-reported number, the number reported by the Government is nothing short of fictional.

The automobile sales component represents 20% of the total retail sales report on a revenue basis.  If we give the Government the benefit of doubt and hold the dollar value of auto sales constant from June to July (remember, the industry is telling us sales declined sharply) and recalculated the retail sales report, we get a 0.03% gain in retail sales.

Another huge issue is the number recorded for building material and sales.  In the “not seasonally adjusted” column, the report shows a huge decline from June to July (a $1.3 billion drop from June to July.  But through the magic of seasonal adjustments , the unadjusted number is transformed in a $337 million decline.   Given the declining trend in housing starts and existing home sales, it would make sense that building and supply stores sold less in July vs. June.  But the Government does not want us to see it that way.

Yet another interesting number is in the restaurant sales category, which the Census Bureau tells us increased .3% in July from June.   Restaurant sales are also one of the largest components of retail sales, representing 12.1% of what was reported.   This number was diametrically opposed to the Black Box Intelligence private sector report for monthly restaurant sales, which showed a 2.8% drop in restaurant sales in July (a 4.7% drop in traffic).   The Census Bureau survey for total retail sales is based on 4,700 questionnaires mailed to retail businesses.  The Black Box restaurant survey is based on data compiled monthly from 41,000 restaurants.   We don’t know how many restaurants are surveyed and actually respond to the Government surveys.

Here’s the Census Bureau’s dirty little secret (click to enlarge):

The sections highlighted in yellow are marked with an asterisk.  In the footnotes to the report, the Census Bureau discloses that the asterisk means that, “advance estimates are not available for this kind of business” (Retail Sales report).  In other words, a significant percentage of the Government’s retail sales report is based on guesstimates. Lick your index finger and stick it up in the political breeze to see which way you need to make the numbers lean.

I calculated the total amount of sales for which the Census Bureaus claims is not based on guesstimates.  45.3% of the report is a swing and a miss. Not coincidentally, the areas of its report that conflict directly with actual industry-provided numbers and area guestimate categories happen to be auto sales, building materials and restaurant sales.  Get the picture?

Just like every other major monthly economic report – employment, GDP, inflation – the retail sales report is little more than a fraudulent propaganda tool used to distort reality for the dual purpose of supporting the political and monetary system – both of which are collapsing – and attempting to convince the public that the economy is in good shape.

Crashing Auto Sales Reflect Onset Of Debt Armageddon

July auto sales was a blood-bath for U.S auto makers.  The SAAR (Seasonally Manipulated Adjusted Annualized Rate) metric – aka “statistical vomit” –  presented a slight increase for July over June (16.7 SAAR vs 16.5 SAAR).   But the statisticians can’t hide the truth.  GM’s total sales plunged 15% YoY vs an 8% decline expected.  Ford’s sales were down 7.4% vs an expected 5.5% drop.   Chrysler’s sales dropped 10.5% vs. -6.1% expected.  In aggregate, including foreign-manufactured vehicles, sales were down 7% YoY.

Note:  These numbers are compiled by Automotive News based on actual monthly sales reported by manufactures.  Also please note:  A “sale” is recorded when the vehicle is shipped to the dealer.  It does not reflect an economic transaction between a dealer and an end-user.   As Automotive News reports:  “[July was] the weakest showing yet in a year that is on tract to generate the industry’s first decline in volume since the 2008-2009 market collapse.”

The domestics blamed the sharp decline in sales on fleet sales.  But GM’s retail sales volume plunged 14.4% vs its overall vehicle cliff-dive of 15%  And so what?  When the Obama Government, after it took over GM,  and the rental agencies were loading up on new vehicles, the automakers never specifically identified fleet sales as a driver of sales.

What really drove sales was the obscenely permissive monetary and credit policies implemented by the Fed since 2008.  But debt-driven Ponzi schemes require credit usage to expand continuously at an increase rate to sustain itself.   And this is what it did from mid-2010 until early 2017:

Auto sales have been updated through June and the loan data through the end of the Q1. You can see the loan data began to flatten out in Q1 2017.  I suspect it will be either “flatter” or it will be “curling” downward when the Fed gets around to update the data through Q2. You can also see that, since the “cash for clunkers” Government-subsidized auto sales spike up in late 2009, the increase in auto sales since  2010 has been driven by the issuance of debt.

Since the middle of 2010, the amount of auto debt outstanding has increased nearly 60%. The average household has over $29,000 in auto debt.  Though finance companies/banks will not admit it, more than likely close to 40% of the auto loans issued are varying degrees of sub-prime to not rated (sub-sub-prime).  Everyone I know who has taken out an auto loan or lease has told me that they were not asked to provide income verification.

Like all orgies, the Fed’s credit orgy has lost energy and stamina.  The universe of warm bodies available to pass the “fog a mirror” test required to sign auto loan docs is largely tapped out.  The law of diminishing returns has invaded the credit market.  Borrower demand is tapering and default rates are rising.  The rate of borrowing is rolling over and lenders are tightening credit standards – a little, anyway – in response to rising default rates. The 90-day delinquency rate has been rising since 2014 and is at a post-financial crisis high.  The default rates are where they were in 2008, right before the real SHTF.

The graph above shows the 60+ day delinquency rate (left side) and default rate (right side)
for prime (blue line) and subprime (yellow line) auto loans. As you can see, the 60+ day
delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in
2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the
2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%,
which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about
200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day
delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this
year.

We’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is nearly 60% greater. But the real problem will be, once again, the derivatives connected to this debt.

The size of the coming auto loan implosion will not be as large as the mortgage implosion in 2008, but it will likely be accompanies by an implosion in student loan and credit card debt – combined it will likely be just as systemically lethal.   It would be a mistake to expect that this problem will not begin to show up in the mortgage market.

Despite the Dow etc hitting new record highs, many stocks are declining, declining precipitously or imploding.  For insight, analysis and short-sell ideas on a weekly basis,  check out the  Short Seller’s Journal.  The last two issues presented a uniquely in-depth analysis of Netflix and Amazon and why they are great shorts now.

Key Economic Data Continue To Show A Recession

Goldman Sachs’ net income declined 42% from 2009 to 2016.   How many of  you reading this were aware of that fact?  Yet GS’ stock price closed today 36% above its 2009 year-end closing price.  See below for details.

Auto sales in April declined again, with the Big Three domestic OEMs (GM, F and Chrysler) missing Wall St estimates by a country mile.  The manipulated SAAR (seasonally adjusted annualize rate) metric put a thin layer of lipstick on the pig by showing a small gain in sales from March to April.  But this is statistical sleight of hand.  The year over year actuals for April don’t lie:   GM -5.7%, F -7% and Chrysler -7.1%.  What is unknown is to what extent the numbers reported as “sales” were nothing more than cars being shipped from OEM factory floors to dealer inventory, where it will sit waiting for an end-user to take down a big subprime loan in order to use the car until it gets repossessed.

The growth in loan origination to the key areas of the economy – real estate, general commercial business and the consumer – is plunging. This is due to lack of demand for new loans, not banks tightening credit. If anything, credit is getting “looser,” especially for mortgages. Since the Fed’s quantitative easing and near-zero interest rate policy took hold of yields, bank interest income – the spread on loans earned by banks (net interest margin) – has been historically low. Loan origination fees have been one of the primary drivers of bank cash flow and income generation. Those four graphs above show that the loan origination “punch bowl” is becoming empty.

HOWEVER, the Fed’s tiny interest rate hikes are not the culprit. Loan origination growth is dropping like rock off a cliff because consumers largely are “tapped out” of their capacity to assume more debt and, with corporate debt at all-time highs, business demand for loans is falling off quickly. The latter issue is being driven by a lack of new business expansion opportunities caused by a fall-off in consumer spending. If loan origination continues to fall off like this, and it likely will, bank earnings will plunge.

But it gets worse. As the economy falls further into a recession, banks will get hit with a double-whammy. Their interest and lending fee income will decline and, as businesses and consumers increasingly default on their loans, they will be forced to write-down the loans they hold on their balance sheet. 2008 all over again.

Because of this, I think Goldman Sachs (GS) makes a great short idea, although I don’t want to suggest timing strategies. It’s an idea that, in my view, you need to short a little at a time and add to it if the stock moves against you. I could also be a good “crash put” idea.

Goldman will be hit by a fall-off in loan demand and by a big drop in the fees from securitizing the loans it underwrites into asset-backed securities (ABS). In addition, GS facea an even bigger drop in the fees from structuring and selling OTC “hedge” derivatives to the buyers of Goldman-underwritten loans and ABS.

Goldman’s net interest income has declined over the last three years from $4.1 billion in 2014 to $2.6 billion in 2016. This is a 36.5% drop. To give you an idea of the degree to which bank net interest income has dropped since the “great financial crisis,” in its Fiscal Year 2009, Goldman’s net interest income was $7.4 billion. That’s a 64% drop over the time period.  In FY 2009, Goldman’s net income was $12.2 billion. In 2016, GS’ net income was $7.1 billion, as 42% decline.

To give you an idea of how overvalued GS stock is right now, consider this: At the end of GS’ FY 2007, 6 months before the “great financial crisis” (i.e. the de facto banking system collapse), Goldman’s p/e ratio was 9.5x. At the end of its FY 2009, its p/e ratio was 6.9x. It’s current p/e ratio 13.5x. And the factors driving Goldman’s business model, other than Federal Reserve and Government support, are declining precipitously.

As for derivatives…On its 2016 10-K, Goldman is showing a “notional” amount of $41 trillion in derivatives in the footnotes to its financials. This represents the sum of the gross long and short derivative contracts for which Goldman has underwritten. Out of this amount, after netting longs, shorts and alleged hedges, Goldman includes the $53 billion in “net” derivatives exposure as part of its “financial instruments” on the asset side of its balance sheet. Goldman’s book value is $86 billion.

If Goldman and its accountants are wrong by just 1% on Goldman’s “net” derivatives exposure, Goldman’s net derivatives exposure would increase to $94 billion – enough to wipe out Goldman’s book value in a downside market accident (like 2008). If Goldman and its “quants” have mis-judged the risk exposure Goldman faces on the $41 trillion in gross notional amount of derivatives to which Goldman is involved by a factor of 10%, which is still below the degree to which GS underestimated its derivatives exposure in 2008, it’s lights out for Goldman and its shareholders.

Think about that for a moment. We saw how wrong hedge accounting was in 2008 when Goldman’s derivative exposure to just AIG was enough to wipe Goldman off the Wall Street map had the Government not bailed out the banks. I would bet any amount of money that Goldman’s internal risk managers and its accountants are off by significantly more than 1%. That 1% doesn’t even account for the “fudge” factor of each individual trading desk hiding positions or misrepresenting the value of hedges – BOTH crimes of which I witnessed personally when I was a bond trader in the 1990’s.

As you can see in the 1-yr daily graph above, GS stock hit an all-time high on March 1st and has dropped 12.5% since then. I marked what appears to be a possible “double top” formation. The graph just looks bearish and it appears Goldman’s stock is headed for its 200 dma (red line,$202 as of Friday). To save space, I didn’t show the RSI or MACD, both of which indicate that GS stock is technically oversold.

The analysis above is from the April 16th issue of IRD’s Short Seller’s Journal. I discussed shorting strategies using the stock plus I suggested a “crash put” play. To find out more about the Short Seller’s Journal, use this link: SSJ Subscription information. There’s no minimum subscription period commitment. Try it for a month and if you don’t think it’s worth it, you can cancel. Subscribers to the SSJ can subscribe to the Mining Stock Journal at half-price.

Here’s Why Dow 20,000 Is Meaningless

Central Bank intervention in the markets has completely destroyed the stock market’s value as a reflector of economic activity and business profitability. Rather, like the mainstream media, the stock market has become little more than propaganda tool used in an effort to manage public perception.

I was fooling around with some charts and discovered something interesting. Of the 30 stocks in the Dow index, 21 of them are below to well below their all-time highs despite the fact that Dow hit the 20k milestone and a new all-time high this past week. Only 9 of the stocks are pressing an all-time high along with the Dow:

The Dow index is price-weighted somewhat arbitrarily by Dow Jones & Company, which is now owned by News Corp (Rupert Murdoch). Each stock is assigned a weighting in the index. So for instance, Goldman Sachs – for whatever reason – has been assigned a weighting of 8.16%, which is by far the highest weighting. GE on the other hand has been assigned a weighting of 1.03%. What this means is that if both stocks move up in price by the same percentage, GS has a nearly 8x greater affect on the move in the Dow index than GE.

Of the nine stocks that are at their all-time high, the first four stocks listed are 4 of the 6 stocks with the highest index weightings (3 thru 6 and the numbers next to the symbols represent their respective weightings. Cumulatively these four stocks represent a 21.8% weighting in the Dow index. Goldman Sachs (GS) has the highest weighting in the Dow at 8.1%. IBM is 2nd highest at 6.08%.

In other words, primarily four stocks out of thirty are fueling the Dow’s move to 20,000. In addition, GS did most of the “heavy lifting” after the election, as it hit an all-time on January 13th. GS soared 27% for some reason between election night and December 8th. Think about how easy it would be for the Plunge Protection Team (Fed + Treasury Dept) to “goose” the four stocks on the right side of the list in order to induce hedge fund algos to chase the momentum.

The point of all of this is to show the insignificance of the Dow hitting 20,000. As discussed in a recent Short Seller’s Journal, the indices that represent the critical components of GDP – housing, autos and retail spending – are well below their all-time highs. In fact, the XRT S&P retail ETF is nearly 10% below its 52-week high hit in early December and 14.8% below its all-time high hit in April 2015.

You can read the rest of the accompanying commentary plus see the three short ideas presented in the last Short Seller’s Journal by clicking on this link:  Short Seller’s Journal subscription info.

I present compelling data and analysis of the public reports that explain why the housing and auto markets are getting ready to fall apart.   Just today an article was posted by Wolf Street that describes the impending collapse of the condo market in Miami.  Miami happened to be one of the first markets that cracked when the big housing bubble popped. What’s happening in Miami is also happening in NYC, San Francisco and several other cities (for sure Denver).  In the latest SSJ,  I describe several more indicators which are nearly identical to the pre-collapse signals that emerged in 2006-2007.

The Big Retail Sales Lie

There’s a direct correlation between the scale and quantity of lies coming from Hillary Clinton and the Government. Why? It’s election season, of course. It’s easy enough to dismiss Hillary’s plea for debate viewers to go to her campaign website to see “fact” checking.  We know how easy it is for her to hide the truth when she has assistance from the State Department, FBI and Obama.  If you believe Hillary Clinton, you also believe in the Easter Bunny.

But it’s also easy to fact check the Census Bureau’s retail sales reports.   Now, it’s easy enough to believe that the Government would manipulate the statistics in order to help the incumbent party maintain control the White House.  But it’s also easy to fact-check the Census Bureau’s tabulations for monthly retail sales, notwithstanding the fact that the Census Bureau is caught producing fraudulent statistics on a regular basis.

Today, for instance, they released their “advance estimate” for retail sales for September. The Census Bureau would have us believe that retail sales increased .6% from August to September.  But this was based on the Government’s politically expedient “seasonally adjusted” calculation.

Simple math disproves the validity of the “adjustments.”  The report shows “not adjusted” total retail sales as estimated by the Census.  August was $471.3 billion – or $15.2 billion per day.  September was $445.4 billion – or $14.8 billion per day – down 2.6% from August to September on a per day basis .   In retail sales terms, a 2.6% decline month to month is equivalent to a steep plunge.  (click image to enlarge)

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Theoretically, the seasonal “adjustment” offsets the day-count difference between August and September. But what about the 3-day Labor Day holiday weekend?   This year Labor Day fell on September 5.  Presumably that weekend should have compensated for any “seasonal”differences between August (back to school?) and September.  BUT on a sales/day basis, September retail sales plunged from August.

Here’s a definitive “fact check” on the Census Bureau retail sales report.  The retail sales report is showing a 1% increase per the “adjusted” number from August to September. However,  Black Box Intelligence, the best source for both private and public company restaurant industry data, is reporting that restaurant traffic fell 3.5% in September from August.  In fact, traffic counts have dropped at least 3%  in four of the last six months. Same-store-sales dropped .5%.

This private sector source of data is consistent with data that I have been presenting in the Short Seller’s Journal for trucking and freight shipments for August and September and for actual auto sales numbers, which are declining at an increasing rate, along with the rise in auto loan delinquencies.   In fact, according to Fitch the default rate in subprime auto loans is now running at 9% and is expected to be at 10% by year-end.  Fitch is usually conservative in its estimates.  I would bet the real default rate will be well over 10% by the end of 2016.

One final significant datapoint released last week was auto sales for September. The “headline” report showed a 6% SAAR (Seasonally Adjusted Annualized Rate) gain in September over August for domestically produced autos. However, auto sales typically increase from August to September as Labor Day sales drive September car sales. Year over year, domestic car sales plunged 19% and truck sales were down 1%.

Now for the reality-check. As reported by the Wall Street Journal, September sales for GM, Ford and Chrysler declined 0.6%, 8.1% and 0.9% respectively. Toyota and Nissan reported gains while Honda’s sale dropped. Moreover, it took heavy discounting to drive sales. In fact, incentive-spending by OEM’s on a per-unit average basis set a single-month record, topping the previous single-month record set in December 2008. Think about that for moment.  – from the October 9 issue of the Short Seller’s Journal

The bottom line is that most, if not all, data coming from private-sector sources conflicts and undermines the “seasonally adjusted” garbage data reported by the Government. Just like all other news reported by the media that is sourced from the Government, the Government economic reports are yet another insidious form of propaganda tailored for political expedience.  But propaganda does not create real economic activity and the middle class is becoming increasingly aware that it’s being told nothing but lies from the Government.  Today’s Government generated retail sales report for September is a prime example.

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The Economy Is Tanking

The FOMC can raise interest rates any time it desires, without prior approval from anyone outside the Fed. Accordingly, the ncreased hype primarily has to be aimed at manipulating the various markets, such as propping the U.S. dollar. Separately, it remains highly unusual, and it is not politic, for the FederalReserve to change monetary policy immediately before a presidential election. – John Williams, Shadowstats.com

The March non-farm employment report originally reported that 215,000 jobs were created (ignore the number of workers who left the labor force).  But five months later the BLS released “benchmark” revisions which took that original number down by 150,000.  However, the BLS reports a 74,000 upward revision to Government payrolls, which means that non-Government payrolls were down 240,000 in March.  So much for the strong jobs recovery…

A report out on August 19th that received no attention in the financial media showed that Class 8 (heavy duty) truck orders fell 20% from June and 58% year over year. This is after hitting a four-year low in June. The big drop was blamed on a high rate of cancellations. This is consistent with regional Fed manufacturing reports out two weeks ago that showed big drops in new orders. Again, the economy is starting contract – in some areas rather quickly.   Heavy trucking is one of the “heart monitors” of economic activity.

Another datapoint that you might not have seen because it was not reported in the mainstream financial media: the delinquency rate for CMBS – commercial mortgage-backed securities – rose for the 5th month in a row in July. The rise attributed to “another slew of balloon defaults.” Balloon defaults occur when the mortgagee is unable to make payments on mortgages that are designed with low up-front payments that reset to higher payments at a certain point in the life of the mortgage. This reflects an increasing inability of tenants in office, retail and multi-family real estate to make their monthly payments.

Again, I believe that evidence supporting the view that housing and autos are starting to tank is overwhelming. Last week Zerohedge featured an article with data that showed that prices in NYC’s lower price tiers are starting to fall, following the same path as the high-end market there LINK. I want to reiterate that I’m seeing the exact same occurrence in Denver in the mid/upper-mid price segment. Furthermore, I’m seeing “for sale” and “for rent” signs pile up all over Denver proper and I’m seeing “for sale” signs in suburban areas where, up until July, homes were sold as soon as a broker got the listing. NYC, Denver and some other hot areas in the last bubble began to fall ahead of the rest of the country.  I don’t care what the National Association of Realtors claims about the level of existing home inventory, their numbers are highly flawed and the inventory of homes on the market is ballooning – quickly.

I like to describe housing as “chunky,” low liquidity assets. It takes a lot of “energy” to get directional momentum started. Once it starts, it eventually turns into a “runaway freight train.” We saw the upside of this dynamic culminate over the last 6-9 months. But now that freight train is slowly cresting and will soon be headed “downhill.” I don’t think this dynamic can be reversed without extraordinary interventionary measures, even larger than 2008, from the Fed and the Government.

As for autos, I detailed the case that auto sales are heading south in previous blog posts. However, Ford disclosed in its 10-Q filing that charges for credit losses on its loan portfolio increased 34% in the first half of 2016 vs. 2015. GM’s credit loss allowances increased 14% vs. 2015. As credit losses pile up in auto-lender portfolios and in auto loan-backed securities, lenders will begin to constrict their auto sales lending activities. It will be an ugly downward spiral that will send negative shock-waves throughout the entire economy.

I find it highly improbable that the stock market will not continue lower unless the Fed steps in to prevent it.  The Fed is playing “good cop/bad cap” with its rate hike theatrics.  As John Williams points out, it does not require a formal FOMC meeting for the Fed to raise or lower interest rates.  In fact, there’s precedence for inter-FOMC pow wow interest rate changes.   This entire Kabuki theater is designed to support the dollar ahead of yet another meeting in which Fed stands still on rates.   Honestly, even a quarter point hike could act like dynamite on the financial weapons of mass destruction hidden on and off bank balance sheets.  The fraud at Wells Fargo is just the tip of the ice-berg.

The short-sell ideas I present in IRD’s Short Seller’s Journal have worked out of the gate four weeks in a row.  The last time SSJ had a streak like this was during the early 2016 sell-off.  Although my ideas are meant to be long-term fundamental shorts based on flawed business models and deteriorating business conditions, a couple of those ideas are down over 10% in less than a month.  I’m also sharing my strategies with the homebuilders, all of which will be trading under $10 within the next 18-24 months (except maybe NVR.

You can access the Short Seller’s Journal here:   SSJ Subscription.  This is a weekly report in which I present my view of the markets, supported with economic data and analysis you might not find readily in the alternative media and never in the mainstream media.  It’s a monthly recurring subscription you can cancel anytime.   Subscribers can access IRD’s Mining Stock Journal for half-price.

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