Tag Archives: consumer spending

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.

Is Amazon.com Getting Desperate To Keep Cash Flowing In?

Amazon is desperate – its business strategy is spreading so in the end they will do a lot a businesses but not do them well.  – Observation from a long-time colleague of mine

Amazon announced recently that it is introducing a restaurant delivery service in Seattle. AMZN will deliver food orders from several area restaurants to AMZN customers.  The Company is offering free delivery to Prime members.

I know every city has more one existing company that specializes in restaurant delivery. Denver has at least two big ones and some smaller ones.  I’m sure has Seattle more than one as well.  The service is not cheap and the delivery personnel are well-paid.  This is a cash flow losing proposition for AMZN for as long as it offers free delivery to Prime member.

The catch here is obvious:  AMZN is trying to more Prime members who will pay $99/year upfront to reap the benefits – benefits Amazon admits to losing ten-figures on annually – that’s a couple billion dollars.   There’s also a 30-day free trial, which is great because you take advantage of the freebies – freebies which cost AMZN cash flow – when you know you want to buy a lot of products and then cancel.

“But I Thought Jeff Bezos Says That Amazon Produces Free Cash Flow”

AMZN has now implemented several “gimmicks” in the past year in order to generate cash flow into the Company.  We know that AMZN has raised $9 billion over the last three years by issuing junk bonds.  It has been furiously burning through that cash.   In fact, AMZN raised $6 billion in early December, 2014 and has already burned through $4.3 billion of that through June 30, 2015.

My AMAZON dot CON report shows in excruciating detail how and why this has occurred, despite all of the Company and financial media fanfare touting a highly misleading “free cash flow” number.   AMZN is literally bleeding negative cash flow.

I also show in fine detail – with guidance from a tech industry CPA who was tipped by an insider – how AMZN exploits GAAP accounting rules in order to hide the true cash expense of employment compensation.  This one could ultimately be the trigger that cripples AMZN financially OR cripples existing shareholders with a flood of equity dilution.

Finally, AMZN will be hit the rapid slow-down in consumer spending.   We’re already seeing a general decline in the revenues being generated by most companies in the S&P 500.  Now it looks like consumer spending is going to take a hit.   Per this Zerohedge report, Bank of America is reporting that its internal data, which tracks aggregate spending on credit and debit cards, is showing that consumer spending dropped again in August (what happened to back-to-school spending?).    From Zerohedge:

As BofA notes, “there was broad weakness in retail sales ex-autos and gas spending growth across metropolitan areas, with seven of the ten largest MSAs showing a monthly decline. The biggest monthly decline was in Dallas, followed by Miami and San Francisco. Both Dallas and San Francisco have experienced strong growth over the prior six months, showing a solid recent trend.”

AMZN will not be immune to this broad-based slowdown in consumer spending.  It also appears to be hitting what have been some of the hottest housing markets in the country.

While the path that AMZN’s stock takes in the short is highly unpredictable given that that it’s a big part of hedge fund algos, which follow the momentum being generated everytime the Fed halts trading in order to interfere with impending stock market sell-offs, I can assure you that AMZN is one of the most insanely overvalued stocks in the S&P 500.

My report on AMZN shows in detail why this is the case and why AMZN’s business model will eventually ponzi_schemefail.  It won’t hurt Jeff Bezos at all, because he’s milked the stock market for billions over the years with his Ponzi web of unprofitable businesses masked by highly misleading accounting and, perhaps, an unprecedented level of stock promotion hype from Wall Street drones and mindless financial media talking-heads (“meat with mouths”).

You can click on the link above or the pic to the right for access to my report: