Tag Archives: retail sales

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 Slow Death Of The U.S. Economy

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 boost to 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.

Paul Craig Roberts published a must-read essay on the slow death of the U.S. economy:

As for the full employment claimed by US government reporting agencies, how does full employment coexist with this reported fact from the Dallas Morning News: 100k Applications For 1000 jobs.

Toyota Motor Company advertised the availability of 1,000 new jobs associated with moving its North American headquarters from southern California to Texas and received 100,000 applications. Where did these applications come from when the US has “full employment?”

Clearly, the US does not have full employment. The US has an extremely low rate of labor force participation, because there are no jobs to be had, and discouraged workers who cannot find jobs are not measured in the unemployment rate. Not measuring the unemployed is the basis of the low reported unemployment rate. The official US unemployment rate is just a hoax.

You can read his full commentary here:    America Is Losing Its Economy

Navin R. Johnson Goes To The White House

(Note: with apologies to Carl Reiner and Steve Martin, who directed and co-wrote “The Jerk,” respectively)

Just when you thought Trump’s “leadership” could not get any more insane, he adds a third ring to the circus going on at 1600 Pennsylvania by hiring “economist,” Larry Kudlow to be the head of his economic advisors.

For those of you not familiar with financial market history beyond the last 10 years, which includes the majority of money managers and other sundry financial “professionals,” Kudlow was the chief economist at Bear Stearns from 1987 to 1994.  His tenure at Bear ended infamously when it was revealed that he had developed a nasty cocaine and alcohol addiction at some point in his career.

Prior to Bear, Kudlow began his post-college career as a Democratic political operative.  He parlayed his political connections to get a job as a junior staff “economist” at the Fed.  I use quotations marks around the term “economist” in reference to Kudlow because he does not have a degree beyond undergrad  from the University of Rochester, where he majored in history.

At some point Kudlow, likely for political expedience given the political “winds” of the country in the early 1980’s, became a Republican. He wheeled his political connections into a job in Reagan’s OMB (David Stockman was the Director).  From there, he moved on to Bear Stearns.  The rest is history.

I thought  it would be interesting to peer into the mind of an untrained economist to examine the thought process.  Clearly Kudlow excelled at wheeling and dealing his political connections.  But is he qualified to be the president’s chief economic advisor, especially at a time when the U.S. is systemically collapsing?

In November 2007, Trump’s new Chief Economic Advisor, Larry “Señor Snort” Kudlow wrote an article about the economy titled, “Three More Years of Goldilocks” for which he should receive the Darwin Award (credit goes to @RudyHavenstein for posting the article).  Let’s examine some excerpts – keep in mind Kudlow wrote this about 5 months before Bear Stearns collapsed, triggering a financial crisis that anyone with more than two brain cells could see coming:

“I think the election-year economy will be stronger than the Fed’s estimate — closer to 3 percent. Too much is being made of both the sub-prime credit problem and the housing downturn.” IRD note: Many of us predicted and made big bets on the outcome of “too much being made of the sub-prime credit problem;” a caveman could see what was coming.

“What’s more, the entire market in sub-prime debt is just 1.4 percent of the global equity market.” – IRD note: Maybe 1.4% of a global stock bubble – but that’s like saying a small nuclear bomb in the hands of a madman is just 1.4% of the total stockpile of nuclear weapons. Notice that Kudlow overlooks the $10’s of trillions of OTC derivatives connected to the sub-prime debt, something that was obvious to many.

In issuing a forecast for 2008, Kudlow goes on to say:  “Both consumer spending and business capital investment are advancing…Right now, stocks are in a classic declining-profits correction. This downward trend has so far reduced the Dow by roughly 8 percent. As a rough guess, a 10 percent correction ought to spell the end to the Dow’s slump. And Fed rate cuts should be a big booster for stocks.” IRD note – Where on earth was he getting his data on consumer spending? By November 2007, households that weren’t living in fear of foreclosure were living in fear of losing their job. Between October 2007 and March 2009, the S&P 500 collapsed 58%.

Kudlow’s assertions back in 2007 were a joke.  What happened to Kudlow’s “Goldilocks economy?”  This is the person who is now Trump’s lead economic advisor.   Now Kudlow once again is asserting that, “the profit picture is good. It’s looking real good, and growth is not inflationary just let it rip for heaven’s sakes. The market is going to take care of itself.”

Based on his track record of issuing bullish forecasts right before a collapse,  I’d suggest that the economy and financial system is closer to taking care of itself by  “ripping” off a cliff without a parachute than it is to producing real growth. Retail sales have tanked three months in a row, the housing market appears to be headed south, auto sales plummeting, restaurant sales have dropped 19 out of the last 20 months. Where is this growth you seeing, Larry? Please do tell…

The Four Most Dangerous Words In Investing…

“This time it’s different.” That quote is from Sir John Templeton, a legendary investor who is considered the father of the modern mutual fund industry. For most of the month of December, I’ve been hearing ads from mortgage brokers who are promoting the idea of refinancing your house in order to take care of holiday bills. It reminded of the early 2000’s when then Fed Chairman, Alan Greenspan, was urging Americans to use their house as “an ATM” by taking on home equity loans as a means of drawing out cash against home equity for consumption spending. Adding more debt against your house to pay off big credit card balances merely shifts household debt from one creditor to another. What’s worse, it frees up room under the credit card accounts to enable the consumer to take on even more debt.

In reference to the mortgage and housing market collapse in 2008, Ben Bernanke wrote, “Clearly, many of us at the Fed, including me, underestimated the extent of the housing bubble and the risks it posed.” It’s hard to know if that statement is genuine or not, given that many of us saw the housing bubble that was developing as early as 2004.

The Federal Government’s low-to-no down payment programs via Fannie Mae, Freddie Mac, the FHA, VHA and USDA, combined with the hyper-promotion of cash-out refinancings (bigger 1st mortgages and/or second-lien mortgages) tell me that, once again, most people in this country believe – or rather, hope – that the outcome will be different this time.

The graphic just below  is an interesting way to show the affect that Central Bank monetary inflation has on asset valuation vs income. Asset valuation should be theoretically derived from the income levels connected to the assets. Either the asset requires a certain level of income level to purchase and maintain the asset or the asset itself generates income/cash flow.

You’ll note the pattern that developed starting with the tech bubble era. Prior to the Clinton administration the Fed subtly intervened in the financial system by been printing money in excess of marginal wealth creation (GDP growth) once Nixon closed the gold window. But, in conjunction with the Greenspan Fed, the Government’s willingness to print money as an official policy tool took on a whole new dimension during the Clinton administration.  Note:  I’m not making a political judgment per se about the Clinton presidency, because the Fed’s ability to print money to prop up the stock market was established with Reagan’s Executive Order after the 1987 stock crash. You’ll note that the household net worth to income ratio began to rise at a sharp rate starting in mid-1994, which was when the Clinton-Rubin strong dollar policy was implemented. It’s also around the time that Greenspan began regularly printing money to address the series of financial problems that arose in the 1990’s.

The current ratio of household net worth to income is 6.75 – the highest household net worth to income ratio in history. It peaked around 6.5x in 2007 and 6.1x in early 2000. You’ll note that from 1986 to 1995 the ratio averaged just around 5.1x.

A graphic that is correlated to the household net worth/income ratio is the household net worth to GDP.  The pic to the right shows household net worth (assets minus debt) vs. a plot of the U.S. nominal GDP. As you can see, when the growth in household net worth deviates considerably from the growth in nominal GDP, bad things happen to asset values. Note: household assets consist primarily of a house and retirement funds. Currently the level of household net worth – that is, the value of homes and stock portfolios – relative to GDP is at its highest point in history. This will not end with happiness.

I wanted to present the two previous graphics and my accompanying analysis, in conjunction with the theme that “it is not different this time.” The extreme degree of household asset inflation relative to incremental GDP wealth output is yet another data-point indicating the high probability that a nasty stock market accident will occur sooner or later. To compound the severity of the problem, household asset inflation has been achieved primarily through massive credit creation. The amount of debt per home sold in this country currently is at a record level.

During this past week, the bullish sentiment of investors continued to soar.  A record level of investor bullishness never ends well for the stock market. Speaking of which, there has been an interesting development in the Conference Board’s Consumer Confidence metrics. The headline-reported index showed an unexpected declined from 129.5 to 122.1 vs 128 expected. This is a big percentage drop and a big drop vs Wall Street’s crystal ball. However, while the “present situation” index hit its highest level since April 2001, the “expectations” – or “hope” – metric plunged from 113.3 to 99.1. It seems the current euphoria connected to the stock and housing markets is not expected to last.

The chart above shows the spread in consumer confidence between “present conditions” and “future conditions” (present conditions minus future conditions). A rising line indicates that future outlook (“hope”) is diverging negatively from present conditions. I’ve marked with red lines the peaks in this divergence which also happen to correlate with stock market tops (1979, 1987/1989, 2000).

The above commentary in an excerpt from the last issue of IRD’s Short Seller’s Journal.  I think retail stocks are going to be hit relentlessly beginning some time this quarter. In fact, one stock I presented as a short in early December was down over 12% yesterday after it released an earnings warning.  Some of the best SSJ short ideas in 2017 were retailers.  You can learn more about this short-seller newsletter here:  Short Seller’s Journal subscription information.

“Congrats on the [retail stock short] call. What a disaster. You have to love how the chart collapsed with the news. These algos are going to destroy people when they unless selling on stocks eventually. I made a 8X on my puts. Now I need to roll them into something else.” – SSJ subscriber who actively trades

How To Go Bankrupt: Slowly Then Suddenly

In Hemingway’s, “The Sun Also Rises,” one of the characters, Bill, asks his friend, “Mike,” how he went bankrupt. Mike replied, “I had a lot of friends. False friends. Then I had creditors…” This passage from the novel comes to mind when I hear ads during the local sports radio programming from mortgage brokers urging listeners to use a cash-out refi or home equity loan to take care of credit card debt that piled up during the holidays.  Beneath the surface is the message, “c’mon in, the water is fine, go ahead and take on even more debt.”

If in fact the retail sales turn out to be as strong as projected, it’s because the average household has tapped into its savings and used an unusually large amount of credit card debt to fund holiday spending this year:

The chart on the left shows the 13-week annualized percentage change in household credit card debt. The data comes from the Fed. As you can see, the use of credit cards to fund spending has soared. Further compounding potential household financial stress, the personal savings rate in November dropped to 2.9% from 3.2% in October. It’s the lowest personal savings rate since November 2007. November 2007 is one month before an official recession was declared back then.

The 18% spike in credit card debt is perhaps more troubling than the plunge in the savings rate. It’s been theorized that consumers may have used credit cards to “pre-spend” an anticipated savings in taxes from the tax legislation. Unfortunately, the changes to the tax code will be neutral at best for the average middle class household.

Furthermore, borrowing to fund current consumption in the absence of future income growth or capital gains received from monetizing assets (stocks, homes, etc) merely shifts future consumption into the present. If retail sales come in “hot” for Q4 because of strong holiday sales fueled by credit card debt, it will be offset by a steep decline in consumer spending in 2018. This is because the rate at which consumer credit is rising at more than double the rate of growth in wages. The “cherry” on top of this scenario is that there will likely be an acceleration in the rate of credit card and auto loan delinquencies and defaults.  This latter development would a continuation of the rising trend in credit delinquencies and defaults that emerged during 2017.  Mortgage payment problems are sure to follow.

The “feel good about the economy” propaganda has been over-the-top this year.  Trump has been the primary cheerleader as he extols the virtues of a soaring stock market that he labeled “a massive bubble” when he was begging for votes on the campaign trail.  Now he points to the stock market as an indicator that the country is better off since he became president.

In truth, the middle class continues to be hollowed-out from an increasing need to assume more debt in order to maintain its lifestyle. More debt is necessitated by an income level that is not keeping up with the ravages of the inflation that the Government can’t seem to find in its CPI report.  “Middle class”  includes everyone who requires a mortgage to claim “ownership” on their home plus anyone not rich enough to pay for self-enriching legislative policy at the State and Federal levels of Government.  If you fit either of those of those or both,  you are strictly speaking “middle class.”

2018 is going to be a difficult year for most Americans.  I have no idea how much longer the stock market can continue transmitting the illusion that every one is becoming more prosperous.  I have a gut feeling that real inflation, resulting from the inexorable devaluation of the dollar since 1971, will rip through the system sometime in the next year or two and drive interest rates to a level that could bankrupt a major portion of the economy.  It really won’t take much of a bump in rates for this to occur…slowly, then suddenly.

Retail Sales: When The Government “Goal-Seeks” Economic Reports

The headline retail sales report, released today by the Census Bureau, showed a rather unexpectedly large 0.8% jump from October.  The Wall Street brain trust was expecting a 0.3% increase.   Of course, 99% of stock market investors and 100% of the financial media never looks at the details below the headline reports.   To do this, one has make an effort to scroll down to page four of the report.  There you will find this table (excerpt):

You’ll note that I highlighted this “(*)” in yellow. From the footnotes to the report, this “(*)” means this: “Advance estimates are not available for this kind of business.” For purposes of the advance estimate, the Census Bureau “imputes” the data. In other words, the CB fills in a guesstimate. According to the CB propaganda, over 30% of the data used in the monthly estimate is a guess “imputed.”  The beauty of this is that the CB has leeway to report a fictitious number for the advance estimate and then revise the original estimate when it reworks its numbers in the annual “benchmark revision” of the data,.  By then no one bothers to look or even cares the degree to which the original advance estimated was flawed.  The market only cares about the headline number when it’s reported.  I would bet a roll of American Silver Eagles that CNBC’s Steve Liesman has no clue about this aspect of the retail sales report.

My point here is that the headline report is a fairytale.  Furthermore, the headline report is based on nominal numbers.  In this case, gasoline sales – for which data for the advance estimate is available – were responsible for one-third of the 0.8% headline increase from October.  This increase is largely attributable to gasoline price inflation.  In truth, the actual “unit” volume of sales in November vs. October is largely a mystery.  Yes, online sales have been strong, but online sales represent less than 10% of total retail sales.

Interestingly, the stock market agrees with my analysis of the retail sales situation.  The XRT retail ETF was down nearly 2% today (Thursday).  The RTH retail ETF was down 0.6%.  RTH was down despite the fact that AMZN, which represents 18% of RTH’s assets, was up nearly 0.9%.

Government economic reports are notoriously manipulated and thus a highly unreliable indicator of economic activity. The reports have become little more than propaganda tools used to “goal-seek” the political agenda of both the Government and the economic agenda of the Federal Reserve.

As the publisher of a newsletter that is based on shorting stocks – the Short Seller’s Journal – I have featured several retail stock short ideas this year, some of which have been the best-performing shorts.  As a market bear, I love to see contrarian like this:

The graph shows the jump in investor dollars (largely retail investors) tossed at the retail sector (XRT) in November (top panel). The bottom panel shows the short-interest in XRT, which is at its lowest since mid-2015. Short interest dropped 22% over the last month in XRT and is down to 1% of total shares outstanding. Investors are exceedingly bullish on retail stocks and I believe this exuberance is absent fundamental justification (December 3rd, Short Seller’s Journal).

The next issue will of the Short Seller’s Journal will continue to introduce short ideas from the retail stock sector.  Click here for more information about this unique newsletter:  Short Seller’s Journal subscription information.

Overstock.com: A Dumpster Fire Waiting To Happen

Overstock.com stock price has run from $15.95 on August 2nd this year to a 12-year high of $65.70. If closed Monday this week at $46.10. The incredulous run-up in OSTK was ignited when OSTK decided to grab onto the coattails of the cryptocurrency mania. The company announced on August 8th that it would begin to allow shoppers to pay with Bitcoin and other cryptos. Then in October, OSTK announced that its tZero subsidiary would, along with two JV partners, launch an alternative trading system for ICO-issued crypto-coins. The announcement further fueled OSTK’s remarkable stock move since August.

While it’s too early to know if OSTK’s crypto stunt will generate any degree of financial success, its e-commerce business is eroding. From 2013 to 2016, OSTK’s net income plunged from $84 million to $12.5 million. For the company’s first 9 months of 2017, OSTK has generated a net loss of $14 million (10-Q).

Buried in the 10-Q is a disclosure that CEO Patrick Byrne’s mother and brother loaned the Company $40 million at 8%. Interest is payable monthly and is secured by the headquarters building. Proceeds were used to pay off the bank debt. Why would Byrne do this given the bank loan rate was a little over 4%? I would suggest OSTK may have been in violation of covenants and U.S. Bank tried to accelerate the loan. I would also suggest that a market-priced loan would have been at a significantly higher rate. It reflects a high degree of financial stress.

To read the rest of this article, please click here:  OSTK/Dumpster Fire – Seeking Alpha

IT’S ALL ABOUT THE “O”

“Never Let A Good Crisis Go To Waste” – And Short AMZN

The “crisis” quote above originated with Winston Churchill. Several U.S. politicians have referenced it since then (most recently Rahm Emanuel when he was Obama’s Chief of Staff). I’m sure the Wall Street snake-oil salesmen and economic propagandists are more than happy to attribute the deteriorating economic numbers to the hurricanes that hit Houston and southwestern Florida.

Retail sales for August were released a week ago Friday and showed a 0.2% decline from July. This is even worse than that headline number implies because July’s nonsensical 0.6% increase was revised lower by 50% to 0.3% (and it’s still an over-estimate).

Before you attribute the drop in August retail sales to Hurricane Harvey, consider two things: 1) Wall St was looking for a 0.1% increase and that consensus estimate would have taken into account any affects on sales in the Houston area in late August; 2) Building materials and supplies should have increased from July as Houston and Florida residents purchased supplies to reinforce residences and businesses. As it turns out, building supplies and material sales declined from July to August, at least according to the Census Bureau’s assessment. Furthermore, online spending dropped 1.1%. Finally, the number vs. July was boosted by gasoline sales, which were said to have risen 2.5%. But this is a nominal number (not adjusted by inflation) and higher gasoline prices, i.e. inflation, caused by Harvey are the reason gasoline sales were 2.5% higher in August than July.

Too be sure, the retail sales overall were slightly affected by Harvey. But the back-to-school spending is said to have been unusually weak this year and AMZN’s Prime Day no doubt pulled some August online sales into July. However, back-to-school spending reflects the deteriorating financial condition of the middle class. I have no doubts in making the assertion that the factors listed in the previous paragraph which would have boosted sales in August because of Harvey offset significantly any drop in retail sales in the Houston area during the hurricane.

Note – John Williams published his analysis of retail sales and it agrees with my analysis above (Shadowstats.com): Net of Hurricane Harvey Effects – Headline Economic Numbers Still Were Miserable, Suggestive of Recession – Hurricane Impact on August Activity: Mixed, Probably Net-Neutral for Retail Sales – August Real [inflation-adjusted] Retail Sales Declined by 0.61% (-0.61%) in the Month, Plunged by 1.24% (-1.24%).

The Fed Continues To Target Stock Prices. The Dow and the SPX continue to hit new all-time highs every week. At this point there’s no explanation for this other than the fact that, according to the latest Fed data, the Fed’s balance sheet increased by $18 billion two weeks ago. This means that the Fed pushed $18 billion into the banking system, which translates into up $180 billion in total leverage (the reserve ratio on high-powered bank reserves is 10:1).

The good news – for Short Seller’s Journal subscribers – is that, despite this overt market intervention, a large portion of the stocks in the SPX are trading below their 200 dma:

The chart above shows the percentage of stocks in the SPX trading above their 200 dma. In March nearly 80% of the stocks were above the 200 dma. By late August the number was down to 54%. Currently 60% are trading above the 200 dma, which means 40% are trading below.

It’s uglier for the entire stock market, as only 43.5% of the stocks in the NYSE are trading above their 200 dma, which means that 56.5% are trading below the 200 dma. This explains why neither the Nasdaq nor the Russell 2000 were able to close at new all-time highs.

Without the Fed’s direct support of the stock market, there’s no question in my mind that the stock market would be crashing. Perhaps more frightening is the increasing amount of debt being added throughout the U.S. financial system. The debt ceiling limit was suspended until December. The amount of Treasury debt outstanding jumped over $300 billion to over $20 trillion the day the ceiling was suspended. John Maynard Keynes’ macro economic model was one in which Governments could stimulate economic growth through debt-financed deficit spending. But once the economy was in growth mode, the Government was supposed to operate at a surplus and pay down the debt. Never did Keynes state that it was acceptable to incur deficit spending and debt to infinity, which is the current course of the U.S. Government.

Trump has suggested removing the debt ceiling. I’m certain it was “trial balloon” to see how vocal the opposition to this idea would be. The Democratic leaders love the idea. I have not heard much resistance from the Republicans. My bet is that by this time next year, or maybe even by the end of the year, there will not be a debt-ceiling on the amount of money the Government can borrow. In truth, this is no different than giving the Government an unlimited printing press.

Corporate high yield debt issuance has exploded globally, as you can see from the chart to the right, which shows the amount of junk bond debt issuance annually on a trailing twelve month basis. Globally the amount outstanding has increased by more than 400%. Close to 60% of this issuance has occurred in the U.S. In conjunction with this, U.S. corporate debt hits an all-time high every month. Most of this debt is being used either to re-purchase stock or over-pay for acquisitions (see the AMZN/Whole Foods deal).

Currently the amount of debt issued to complete acquisitions as a ratio of Debt/EBITDA is at an all-time high, with 80% of all deals incurring a Debt/EBITDA of 5x or higher. The last time this ratio hit an all-time high was, you guess it, in 2007. As an example, let’s look at AMZN’s acquistion of Whole Foods. AMZN issued $16 billion of debt in conjunction with its acquisition of Whole Foods. No one discussed this, but the Debt/EBITDA used in the transaction was 13x. Whole Foods operating income plunged 25% in the first 9 months of 2017 vs the first nine months of 2016.

A 13x multiple outright for a retail food business with rapidly declining operating income is an absurd multiple. That the market let AMZN issue debt in an amount of 13x Whole Food’s EBITDA is outright insane. What happened to all that “free cash flow” that Amazon supposedly generates? According to Bezos, it was $9.6 billion on a trailing twelve month basis at the end of Q2. If so, why did AMZN need to issue $17 billion in debt?  We know that the truth (see previous analysis on AMZN) is that AMZN does not, in fact, generate free cash flow but burns cash on a quarterly basis. Currently AMZN is busy slashing prices at Whole Foods, which will drive WF’s operating margin from 4.5% toward zero. This is the same model that is used in AMZN’s e-commerce business, which incurred an operating loss in Q2.

In my view, AMZN continues to be one of the best short ideas on the board – the graph below is as of last Friday (Sept 15th) when AMZN closed at $986, Short Seller Journal subscribers were given some put option ideas as alternatives to shorting AMZN outright (click to enlarge):

The chart above is a 1-yr daily. Technical analysis adherents would see the head and shoulders formation I’ve highlighted in AMZN’s chart. This is potentially quite bearish. Despite the Dow and SPX hitting a series of all-time highs this month, AMZN has not come within 5% of its all-time high on July 26th ($1052 close). It traded up to $1083 intra-day the next day before closing below the previous day’s close and then dropped its Q2 earnings bombshell when the market closed. Based on its $986 close this past Friday, it’s 9% below its July 27th intra-day high-tick. Some might say that’s “halfway to bear market territory.”

AMZN lost $31 last week despite the SPX hitting a record high on Wednesday. This negative divergence is bearish.  In addition, Walmart has taken off the gloves and is directly attacking AMZN’s e-commerce business model.  WMT offers 2-day free shipping on millions of items without the requirement of spending money upfront to join a “membership.”  WMT is also running television ads during prime time which attack some of AMZN’s marketing gimmicks.

Some other bearish technical indicators, a highlighted above: 1) Since the end of July, the volume on down days in the stock price has been higher than the the volume on up days; 2) The RSI has been declining gradually since early April; 3) the MACD (bottom panel) has been declining steadily since early June. All three of these indicators reflect large institutional and/or hedge funds selling their positions.

The stock is sitting precariously on its 50 dma (yellow line above). I would not be surprised to see it test its 200 dma, currently $904, before it reports Q3 earnings. If you want to speculate on this possibility, the October 6th weekly $920 – $930 puts, depending on how much premium you want to pay, might be a good bet. You might also want to out another week to the October 20th series. One caveat is that AMZN will no doubt manipulate its numbers using merger and acquisition accounting gimmicks, which give the acquiring a window in which to egregiously manipulate GAAP numbers. I don’t know if the market will “see” through this or not. But based on the performance of the stock since AMZN dropped its Q2 earnings bombshell, I’d say the stock on “on a short leash.”

The above commentary and analysis is directly from last week’s Short Seller’s Journal. If you would like to find out more about this service, please click here:  Short Seller’s Journal subscription info.

Shorting Stocks Will Outperform The Market

On December 1st, with a short-sell report I wrote on L Brands (LB) and published by Seeking Alpha (note:  that was the last article I submitted to Seeking Alpha – you can now find my work on Simply Wall St.)that I used to launch the Short Seller’s Journal, I explained why L Brands was a great short idea at $96.  Here was my rationale:

L Brands (NYSE:LB) is a specialty retailer that operates the Victoria Secret and Bath & Body Works chains. It also operates La Senza, a Canada-­based intimate apparel retail concept, and Henri Bendel, a high­end accessory products brand. The stock has run from under $7 in March 2009 to its current (November 27) price of $96.68. In that time period, it has outperformed the S&P 500 by over 350%. But, in the context of rapidly slowing revenue growth, declining operating margins, increasing financial leverage and a likely pullback in consumer spending, LB’s stock is extremely overvalued relative to its underlying fundamentals and relative to its peers. In my view, LB represents a compelling opportunity to short the highly overvalued stock of a company operating in a business sector facing significant economic headwinds.

Here’s how the LB short performed from 12/1/15 to present, after reporting an pre-arranged “beat” of Wall St’s earnings estimates (the big game that has developed over the years is for management to “wink wink” walk Wall Street’s robotic analysts’ quarterly estimates down to a level below the actual numbers the company plans to report) but was forced to warn about the rest of the year:

As you can see, shorting LB on December 1, 2015 has significantly outperformed the XRT retailer ETF. It has also outperformed going long the S&P 500 by a factor of nearly 400%. Nothwithstanding what to me was the onset of a consumer spending recession and an obviously overvalued stock market, LB at the time was overvalued relative to both the stock market and the retail stock sector:

The traits specific to LB, and that is based on information that is freely available to anyone who is motivated to do the research, included:   a stock priced for perfection, aggressive debt issuance to finance huge share repurchases, heavy insider dumping of shares into the share repurchases and a stock valuation far in excess of industry peers.

Despite the inexorable grind higher in the Dow, SPX and Nasdaq indices, hundreds of stocks are either at 52-week lows are getting ready to embark on a “price-seeking” mission to find their 52-week lows.  Just ask the Dick’s Sporting Goods (DKS) or Advance Autoparts (AAP) bulls.  LB, DKS and AAP are examples of stocks will get cut in half at least two more times in the next 12-18 months.

The Short Seller Journal was launched with the goal to expose the truth about the stock market and the truth about the manipulated economic and earnings reports fabricated with the intent to support the most over-valued stock valuations in history and, more important, to use those truths to find short-sell ideas that will outperform long strategies. LB is an example of the types of ideas uncovered by the Short Seller’s Journal.

You can learn about this newsletter here:  Short Seller’s Journal information.  There’s very few, if any, newsletters that focus on shorting the market.  The best time to invest in a market theme is when the rest of the market is doing the opposite.  As a testament the quality of the Short Seller’s Journal, the subscriber turnover rate is remarkably low. There’s no minimum required subscription period and subscribers receive a 50% discount to the Mining Stock Journal.

 

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.