Tag Archives: Enron

Can Valeant Go To Zero?

Valeant (VRX) stock is now at $10. After a brief, Roman Candle launch to $260, $10 is the level where it traded in early 2009. It may be one of the few stocks that has gone back its financial crisis trading level. It is now likely on a long, slow death march to zero.

It was reported that Bill Ackman has completely liquidated his Pershing Square hedge fund position in VRX.  Any institutional investment manager or pension fund who left its investment in Pershing Square long enough to see this happen should be investigated for breach of fiduciary duty.   Ackman’s fund reportedly lost over $4 billion in VRX.  I suspect that number was massaged to the low side for public consumption purposes.

I began to look at VRX with a fine-tooth comb just about 12 months ago.  On March 15, 2016, I wrote:  “The SEC Should Suspend VRX Trading: The Company Smells Like Enron.” The stock had dropped fro $260 to $37 in less than a year:

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

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

On March 18, 2016, I wrote: “Valeant (VRX): ‘Hope’ Is Not A Valid Investment Strategy,” after the stock had dropped another 28% from March 15th:

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

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

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

On April 5, 2016, I wrote: “Valeant (VRX): The Short Seller’s ATM Machine” after the stock popped up on news that an “internal review” showed that its books were clean. There’s that “hope” trade again:

The Company’s declaration that its financials are now valid is based on a review of the matter conducted by a committee that was composed of VRX’s board of directors. In no way can the case be made that this review was in any respect independent or “arm’s length.” This is another trait of a Company that is on the ropes: self-declared exoneration.

Without a doubt, the path of VRX’s stock to much lower stock prices will be littered with news-driven price-spikes like today. This is why VRX stock is a short-seller’s ATM. Every spike can be shorted for short-term profits. Make sure to hold on to some amount of a “core” position in order to profit from the next eventual new-driven waterfall. This is how similar stocks before VRX – like Enron, Bear Stearns, Countrywide FInancial, etc – traded until they finally dropped below $10.

Over the next few months I followed the VRX drama including its attempted asset sales. The Company was unloading “core” businesses for a fraction of the price it had paid for them over the previous few years. To this day I can not understand how:  1) Ackman continued to throw good money after bad in an attempt to prop up a house of cards and 2) how Ackman’s investors allowed him to continue throwing good money after bad. It only took one detailed review of VRX’s business history and 10-K to see that VRX was quite similar to Enron.

The Valeant saga is emblematic of the entire U.S. political, economic and financial system. The entire system is enveloped by the criminality of the people and entities running it – a criminality cloaked in catastrophically unpayable debt and now blatant fraud. It was a similar environment in this country when Enron imploded and those of us who understood what was happening had hoped that Enron would be the warning signal to everyone that would inspire the badly needed reform. Unfortunately, Greenspan inflated an even bigger fraudulent asset bubble than the one he had previously inflated that had led to Enron. You know the rest of the story from there.

Now our system is beset with a monetary and debt bubble that has inflated all asset classes beyond any conceivably recognizable “intrinsic” value. The Valeants and Enrons were fair warning and no one listened. The next collapse is going to dwarf the implosion of the two asset bubbles that preceded it. Fortunately, for those who are willing to “see” and accept this inevitable fate, gold and silver (precious metals) is the one asset class that has been fraudulently held down well below their intrinsic value.

If you are still holding on to some Valeant stock, let go of that insanely irrational “hope,” sell your shares and use the money to buy some gold and silver.

Is Kinder Morgan The Next Enron/Bear Stearns?

I’m not saying that Kinder Morgan is a bundle of fraud, like Enron, and I’m not saying that KMI is about to impale itself on subprime mortgages, like Bear Stearns, but this graph is almost identical the graphs of Enron and Bear Stearns before they they went belly-up:


A stock does not have the chart pattern because it’s being attacked by short-sellers. It has the price pattern because there is something extraordinarily wrong with the business model and/or the balance sheet.

KMI has $40 billion in debt on top of $35 billion of stated book value.  That book value in no way can possible reflect the plunge in the price of oil.  KMI’s asset values have to be written down to some degree, at the very least.  There’s is something else going on.  I recommend getting out this stock ASAP.  I may be wrong, but it’s not worth taking the risk on a stock with a graph that looks like that.

Glencore Stock Is Tanking Again

After a hearty dead-cat short-cover bounce, Glencore – aka “Glenron” – stock appears to be headed quickly south again:


After a flurry of rumors about debt buybacks, asset sales and possible buyouts, it looks like the reality of gravity has gripped Glencore’s stock again, as Glencore’s stock bounced up to its plunging 50-day moving average and quickly headed south again.

A lot of unfounded assertions and articles written without factual references have surfaced, so I did a quick “drive-by” view of Glencore’s financials and recent presentations to get some truth. To begin with, 36% of Glencore’s operating income (EBIT) is derived from copper. Here’s what a long term copper chart looks like:


I don’t know about anyone else, but it appears to me that the global economic conditions are headed back down to where they were in 2008/2009 and probably even lower. That implies that the price of copper has a lot further to fall.  Another 17% of Glencore’s EBIT is derived from zinc, nickel and coal. All three commodities are close to or at very long term lows, with no bottom in sight.

I think it’s fair to say that the downside risk to Glencore’s cash flow is greater than the likelihood of upside potential at this point.

As for Glencore’s debt load.  In the latest management presentation, management stated the one of its goals is to maintain a “strong investment grade rating.”  This made me laugh. Why?  Because Glencore’s debt rating is triple-B flat (BBB/Baa).  This is two downgrades away from being considered “junk.”

Original reports were that Glencore had “net debt” of $29 billion at the end of June.  But let’s examine the truth before we become poisoned with propaganda.   As it turns out, Glencore was carrying $50 billion of funded debt at the end of June (bonds + funded credit lines):

GlenronCF Debt

The graphic above is from Glencore’s 1st Half financial report.   As you can see, the “$29 billion” is derived by netting out Glencore’s “readily marketable inventories.”   It’s a number used by Wall Street’s snakeoil salesmen and their financial media propaganda vassals (Steve Liesman, Joe Lavorgna, Jim Cramer, Mark Zandi, etc).    If these inventories are “readily marketable,” then how come Glencore does not readily sell them and pay down its debt?

Because the answer is  that the inventory consists of copper, zinc, nickel and coal, all of which are in abundant supply with falling prices.  The “net debt” number is therefore highly misleading and the real debt level is $50 billion, which means that Glencore is de facto a junk bond credit.

As an aside, the other day some dweeb from BlackRock, Evy Hambro, announced publicly that he backs Glencore’s big debt reduction “plan.”   Of course he backs it – BlackRock is the fourth biggest holder of Glencore’s stock and undoubtedly one of its largest non-bank creditors.   Tell me Evy, if Glencore’s plans are executable, why don’t they start by raising $17 billion from the “readily marketable inventory?”  “Readily” means you can sell it all into a deep market bid now.

$50 billion in debt on top of what will likely be about $8.5 billion of EBITDA and likely about $2.5 billion after CAPEX for all of 2015.  Glencore’s debt level, in other words, is   In other words, is 20x cash flow after capex.  This is a staggering ratio.  It is likely that Glencore’s cash flow will continue to decline along with commodities prices and the economic contraction in China.   Glencore has thus entered the realm of the Irreversible Debt Spiral.

I remember the Enron saga vividly because I was short the stock from about $42 down to where itUntitled2 bounced.  At which point I covered and after the bounce was over  I re-shorted Enron until it went below $10. I’m not suggesting that Glencore is going to be completely incinerated the way Enron was, but there’s certainly a lot of questionable events behind the “curtain” that covers Glencore, going all the way back to the time when Glencore existed as Marc Rich’s commodity trading company.    I would suggest that anyone who might be exposed to the stock or the debt of Glencore should get out of the way, because Glencore certainly does not pass the “smell test.”