Tag Archives: auto sales

Tesla’s Q3 GAAP “Net Income:” Manipulation If Not Outright Fraud

I perused Tesla’s Q3 10-Q and scrutinized the footnotes to figure out, to the extent possible, where Tesla manipulated GAAP accounting standards and outright “cooked” its numbers. Before I had a chance to analyze the 10-Q, others had already posted their findings on Twitter or in Seeking Alpha articles. In the analysis below, I’ve double-checked and confirmed the findings presented by others. In addition, where appropriate, I’ve added my findings to the previous work of others and explained how and why Tesla’s numbers are highly misleading, if not outright fraudulent.

Net income – Tesla reported GAAP income of $311.5 million. But what it did not disclose when it released its earnings report was that $189 million of that income was generated from selling regulatory credits – Greenhouse Gas (GHG) credits and ZEV (Zero Emission Vehicle) credits. Automakers in 10 States are required to sell a specified number of electric or hybrid vehicles within the State. Credits are earned for the number of emission-friendly vehicles sold. Automakers are required to maintain a level of credits based on each automaker’s overall vehicle sales volume within the State. GHG credits function in a similar way at the Federal level.

Some companies, like Tesla, generate more GHG and ZEV credits than required to be in compliance with the law. Companies with excess credits are allowed to sell their excess credits to car manufactures and other companies that manufacture carbon-emission equipment and do not generate enough credits to be in compliance with the regulation. Selling excess credits over the past few years has been a significant source of cash flow generation for Tesla. The money raised by selling these credits is accounted for as income under GAAP.

The problem is that, in its presentation of its Q3 earnings, Elon Musk and the CFO did not disclose that nearly 61% of its GAAP net income was derived from selling these credits. While Tesla referenced that $52 million was generated from ZEV credit sales in Q3, they did not disclose the $137 million GHG credit sales in the earnings press release or the analyst conference call. Rather, they postured as if the net income was generated thru cost-efficiencies and sales volume. The $137 million in GHG credit sales was buried in the 10-Q.

In the chart above, you can see that TSLA’s use of GHG credit sales has been inconsistent over time. In all probability, Musk chooses the timing and quantity of the credit sales based on when he needs to generate cash. It’s pretty obvious that he decided to unload a massive quantity in Q3 in order to help generate the GAAP net income and positive cash flow he had been promising for months.

Technically, the manner in which Musk utilized,and disclosed the use of, ZEV/GHG credits to manufacture income, is highly deceptive. Selling regulatory-derived environmental credits is a low-quality, unreliable source of income. As Tesla’s competition ramps up production and sales of EV’s, the supply of credits will escalate rapidly. This will drive down the resale value of these credits toward zero. And there’s always the possibility that regulatory requirements will be rolled back. Over time, this source of income and cash will disappear.

Warranty Provision – Every quarter companies that issue warranties have to take a warranty expense provision, which is an estimate of the quarterly expense that will be incurred under warranties on products sold by the company. The warranty provision hits the income statement as an expense. The idea is to match estimated quarterly warranty costs that will be incurred from selling products covered by the warranty each quarter. Warranty expense is part of the cost of goods sold. The information on warranty expenses is found in the footnotes (this is standard).

In Q3 this year, Tesla expensed $187.8 million, or $2,249 per car delivered, vs $118.6 million, or $2,913 per car delivered in Q3 2017. If Tesla had kept the cost per vehicle delivered constant, the provision for warranty expense in Q3 would have been $243.2 million, or $55.4 million higher than was expensed in Q3. In this case, Tesla’s cost of goods sold would have been $55.4 million higher and the gross profit would have been $55.4 million lower. This is part of the reason Tesla’s gross profit margin was much higher than anyone expected. It also translates into a $55.4 million net income benefit.

In Q3 2108, Tesla sold a little more than double the number of vehicles sold in Q3 2017. At the very least, and to be prudent, in Q3 this year Tesla should have at used at least double the warranty provision it used in Q3 2017. This is especially true since the Model 3 is in its debut model year and will likely require higher than expected warranty-based repairs. The probability of greater than expected warranty repairs for cars sold during Q3 is even higher when taking into account the high number of production difficulties the Company encountered – and about which Musk whined publicly.

Using a warranty expense estimation method simply based on doubling the warranty provision taken in Q3 2017 – given that Tesla sold more than double number vehicles, Tesla’s warranty provision expense would have been $237.2 million in Q3 rather than the $187.8 million recorded, which would have reduced net income by $49.4 million.

To be sure, the warranty expense provision can be adjusted based on using the actual amount of warranty costs incurred over time. But given the limited history of Tesla, and given that the Model 3 is a 1st-year production automobile with noted production and quality control issues, Tesla probably should have used a warranty provision that was higher on a per car delivered basis than the number used in Q3 2017. But, then again, Musk and his CFO were goal-seeking positive net income and thus likely decided to reduce the provision per vehicle delivered by nearly 23% and pray that they figure out a way to bury an increase in the actual amount spent on warranty repairs in future quarters.

Inventory Write-Down – An inventory write-down is recorded as an expense in the quarter in which it is taken. For a company like TSLA, an inventory write-down occurs for excess or obsolete inventories (unsalable cars, worthless parts and supplies) or when the carrying value of certain cars held in inventory is greater than the realizable value. The latter would primarily apply to cars taken back by Tesla under lease guarantees (keep this tidbit in mind for reference below) or cars held in inventory deemed unsalable because the cost of fixing manufacturing defects is greater than the gross margin generated from selling the car.

Over the last six quarters, Tesla’s inventory write-down as a percentage of total inventory has averaged 1.4%. In Q3 2017, the write-down was 1.1% of inventory; in Q2 2018 it was 0.9%). However, in Q3 Tesla’s inventory write-down was 0.4% of inventory. In terms of numbers, Tesla’s inventory expense in Q3 was $12.4 million vs $26.2 million in Q3 2017 and $24.6 million in Q2 2018. This chart shows the degree to which it appears as if Tesla purposely minimized the inventory write-down expense in Q3 2018:

(Kudos to @TeslaCharts for the charts he created illustrating the extreme inconsistencies in Tesla’s Q3 financial statements)

The effect of taking an inventory write-down that is far lower than the historical average reduces the cost of sales and thereby increases the gross, operating and net profits. If TSLA had used the historical average of 1.4%, the expense taken for the Q3 inventory write-down would have been $46.2 million, or $33.8 million more than the $12.4 million used. The reduced write-down had the effect of reducing cost of sales by $33.8 million and increasing gross profit and net income by $33.8. This also contributed to the large increase in the gross profit margin in Q3 vs historical quarters.

The inventory write-down charge was clearly an extreme outlier in relation to the historical application of this write-down over the previous six quarters. Make no mistake, the minimization of the inventory write-down expense in Q3 was a blatant effort to exploit accounting standards for the purpose of reducing GAAP expenses and thereby increasing GAAP income. The discrepancy between the Q3 charge vs historicals predictably was not addressed by the CFO or by analysts in the Q3 earnings conference call.

Tesla’s Actual Net Income? Telsa reported $311 million of GAAP net income. Of this, $83.2 million represents the highly questionable reduction in costs attributable to lower than usual warranty and inventory write-down expenses. Tesla also sold an unusually high amount of GHG/ZEV credits, which boosted net income by $189 million. While this is a source of actual cash income, it’s not a long-term sustainable source of income. Combined, these items accounted for $272 million – or 87.5% – Tesla’s GAAP net income in Q3.

In addition to the items presented above, Tesla “achieved” significant and highly questionable reductions in the expenses taken for R&D and SG&A. In Q3 Tesla recorded $350 million for R&D and $729 million for SG&A – $1.079 billion combined. In Q2 Tesla recorded $386 million for R&D and $750 million for SG&A – $1.36 billion combined. Tesla wants the market to believe that R&D and SG&A expense declined by $290 million from Q2 to Q3, despite the fact that Tesla’s overall operations were expanded to accommodate a large increase in vehicles sold in Q3 vs Q2. On average, over the last six quarters, R&D plus SG&A has been running at 39.5% of revenues. In Q2 2018, these charges were 33.84% of revenues. But in Q3 2018, R&D and SG&A dropped to 17.7% of revenues.

To be sure, there are “economies of scale” with respect to R&D and SG&A expenditures as revenues grow. But for R&D and SG&A to decline nearly 50% as a percentage of revenues from Q2 is simply not credible, unless Tesla intentionally drastically cut back on R&D and administrative/sales functions in Q3. Without question, Musk and his CFO played games with the R&D and SG&A expense accounts in order to reduce the charges expensed for these categories in Q3 vs the previous six quarters and especially vs Q2 2018.

It’s quite possible that Tesla loaded R&D and SG&A expenses into Q2 that technically belonged in Q3 knowing that it was going to report a big loss in Q2 ($717 million loss in Q2) anyway and had promised profitability in Q3. But it’s impossible to know if this occurred without having access to the inside books and bank statements. The stunning plunge as a percentage of revenues for these items in Q3 vs Q2 is the equivalent of asking us to believe in the existence of Santa Clause.

If we give the Company the highly doubtful benefit of synergies which reduced R&D and SG&A to just 20% of revenues – despite the fact that it has been running nearly double 20% over the last six quarters – the combined charge for these accounts would have been $1.219 billion rather than the $1.079 billion used by Tesla (note, at the very least it would have been reasonable to assume that the expense level at a minimum stayed flat vs Q2, meaning I’m being overly generous in my assumption). Under this scenario, Tesla’s operating expenses would have been higher by $140 million.

Adding this $140 million in incremental expense to the $49.4 million warranty expense manipulation and $33.8 million inventory write-down manipulation implies that Tesla’s GAAP net income was overstated by $223 million. Using the historical experience for these expense accounts, including an overly generous benefit in the assumption I use for “normalized” R&D/SG&A, Tesla’s GAAP income as reported would have been $88 million instead of $311 million. Tesla’s $88 of net income as adjusted less the $189 million in income attributable to GHG/ZEV sales turns the $311 net income reported as net income into a $101 million loss.

In addition to the questionable accounting used by Tesla to generate $311 million of GAAP “net income,” Tesla engaged in questionable, if not problematic, balance sheet maneuvers to boost the level of cash presented at the end of Q3. The purpose of this was to create the illusion of solvency. In the Q3 10-Q, Tesla shows a cash balance of $2.96 billion. At the end of Q2 Tesla had $3.11 billion.

Tesla’s accounts payable jumped jumped by $566 million from Q2 to Q3. Companies will stretch out their bills in order to conserve cash. Tesla has made a habit out of dragging its feet on paying vendors, suppliers and service providers as evidenced by the large number of court filings from smaller vendors who are forced to get a court order for payment. The same dynamic applies to “other accrued liabilities,” which contains other short term liabilities for which payment has not been made (payroll, taxes, interest and smallish items).

While accounts payable and other accrued liablities will naturally rise with the organic growth of a company, the rise in Tesla’s payables year over year is nothing short of extraordinary. Through the first nine months of 2018, per the statement of cash flows, Tesla generated $1.6 billion in cash “financing” from “stretching out” its payables vs $170 million in the first nine months of 2017. While Tesla’s revenues nearly doubled over the same period, this amount of unpaid bills has a reason behind it.  The net effect of withholding payment of its bills longer than necessary is that it makes the cash on Tesla’s balance sheet appear larger than otherwise. Accrued payables and other short term liabilities are the equivalent of a short term loan to a company. These liabilities should be treated as a form of short term debt.

Subtracting current liabilities ($9.78 billion) from current assets ($7.92 billion) shows that Tesla has negative working capital of $1.86 billion. Technically Tesla is insolvent, which explains the games the Company plays with its supplier/vendors.

Another curiosity on Tesla’s balance sheet was accounts receivable, which more than doubled, from $569 billon to $1.155 billion. In the footnotes under “credit risk,” Tesla disclosed that “one entity represented 10% or more of our total accounts receivable balance” at the end of Q3, whereas previously no entity represented 10% of receivables. In other words, one entity owed Tesla at least $115 million.

When asked about the big jump in A/R during the earnings conference call, the CFO dismissed it by claiming that the quarter ended on a Sunday. It’s beyond absurd that the analysts on the call accepted this answer without further interrogation. Subsequent to the release of the 10Q, a company spokesman told a reporter from the L.A. Times who had inquired about the 10% disclosure that the receivable was attributable to a large partner bank for car loans issued to U.S. customers. The spokesman said that “all of this receivable was cleared in the first few days of Q4.”

The inference was that Tesla sold $115 million or more worth of cars after 5 p.m. on Friday and over the last weekend of its quarter financed by one bank that could not be processed by the banking system. If this were truly the case, why not just state this as fact openly rather than leaving the market guessing what might have happened? 10% of $1.155 billion is considered “meaningful” under strict GAAP, which means this issue requires more detailed disclosure. The CFO’s vague response to the question about the issue reflects intentional obfuscation of the matter.

Unfortunately, we may or may not be able to figure out exactly what happened when the 10-K is released. I’m not optimistic that the Company will come clean. However, an analyst posted an assessment on Twitter (@4xRevenue) which seems to be a very reasonable explanation to this mystery. This analyst believes that the 10% receivable is from a lease partner (a bank) who has underwritten leases that contain Residual Value Guarantees from Tesla.

Tesla had been offering Residual Value Guarantees (RVG) on leases as an incentive to generate sales. The RVG is a guarantee from Tesla on the value of the car at the end of a lease. In order to stimulate lease-based sales, auto companies will guarantee the lease-end value of car at a level that is typically above the market value for that car at the end of the lease. It’s a “back-door” mechanism used to lower the monthly cost of a lease to the lessee.

If the receivable in question is from a bank that financed Model S&X leases, it means that a large number of vehicles came off lease at the end of Q3 and the bank was returning these cars to Tesla. The “receivable” is the guaranteed residualy value of these vehicles. It also means that Tesla likely will have a large cash payment (at least $115 million) to make to the bank that would be connected to the RVG. Based on actual market data, that the resale value of used Tesla’s has been declining rapidly. This being the case, Tesla has a large make-whole payment to make to the bank who represents at least 10% of the receivable. Tesla will then look to unload these used Teslas and recoup as much as possible, though it will be substantially less than the guaranteed make-whole made by Tesla.

This analysis would explain why Tesla’s payables and receivables were unusually high at the end of Q3. If this transaction had been processed before the end of Q3, Tesla’s accounts receivable would have been lower by the value of the cars being returned to Tesla under the RVG. The accounts payable would have lower by the amount Tesla owes to the bank. Tesla’s cash balance would have been lower by the amount that Tesla paid to the bank under RVG.

Recall that the Tesla spokesman said that this specific A/R was “cleared” in the first few days of Q4. Holding off on processing this transaction until after the quarter ended enabled Tesla to show a higher cash balance than it would have otherwise. It also kept the used Teslas out of Tesla’s inventory, which further enabled Tesla to manipulate the inventory write-down by taking a much lower write-down than historical write-downs. This is because the market value of the used  Teslas received is lower than the amount Tesla paid under the RVG. This would have required Tesla to write-down the value of the used Teslas, thereby increasing the inventory write-down charge, increasing cost of goods sold, lowering the gross margin and lowering the amount GAAP “net income” reported.

This also explains why Tesla moved $73 million worth of cars out of finished inventory and into the PP&E account on the balance sheet. Tesla accounts for vehicles used as service loaners as part of PP&E. I don’t have a problem with that. But moving $73 million of these vehicles allowed Tesla to avoid including those vehicles as part of its inventory write-down expense. It also allowed Tesla to move the cars taken back under the RVG transaction described above without causing an unusual change in inventory that required explanation. In other words, it’s entirely possible, if not probable, that Tesla wanted to “make room” for the used Teslas.

The bottom line – Tesla pulled out every accounting manipulation available to it in order to produce the promised positive GAAP net income, positive cash flow, extraordinarily high gross profit margins and a higher quarter-end cash balance. It was accounting deception, and in some areas probable fraud, at its finest. The Wall Street ass-kissing analysts did nothing other than cheer the results and lob easy questions at management on the conference call. Many of them are likely clueless about the degree to which Tesla manipulated reality.

It will be very interesting to see how Q4 turns out for Tesla. Based on reports from China and Europe, car sales have fallen off a cliff in October. Norway reported the first week of EV sales, which showed that Jaguar i-Pace deliveries, new to the market, were 44 vehicles vs. just 11 for the Tesla models S&X combined (the Model 3 has not been approved for sale yet in the EU). In October the i-Pace sold 441 units vs 201 for the Tesla S&X. This gives us a valuable glimpse at the effect competition will have on Tesla’s sales. Soon the Audi e-Tron will be available. It will likely smother any demand for Teslas.

Tesla had to make a $230 million convertible bond maturity payment in a couple weeks. It then has to start figuring out how to generate enough cash to make another $930 billion convertible bond maturity payment in March. On the assumption that Tesla’s sales are highly negatively affected by competition and the economy, Tesla will have a hard time raising the money needed to refinance the March convertible bond payment. Accounts payable will also become a problem, especially if Tesla is unable to raise more cash selling ZEV and GHG credits. On top of this, the tax-credit that Tesla car buyers receive from buying a Tesla EV will soon run out. This will make buying a Tesla more expensive.

The above analysis is from my Short Seller’s Journal from November 11th.  I also provided some ideas for shorting Tesla using short term and long term puts.  You can learn more about this newsletter here:  Short Seller’s Journal information.  Note:  one of my subscribers emailed me this morning that he just took $3500 in profits on January KB Home (KBH) puts that I recommended a few months ago.

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)

untitled

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.

Untitled