Tag Archives: retail sales

Short All Retail, Especially Amazon

“Bubbles require ever more money to sustain them. Currently that’s not happening. A severe market selloff could come at any moment.”

The quote above is from Fred Hickey, who writes the The High-Tech Strategist newsletter. Mario Draghi, Chairman of the ECB, is under pressure to reduce the Central Banks’ asset purchases (it’s buying corporate bonds, including junk-rated bonds). Apparently some Dutcn legislators presented Draghi with a tulip in reference to the Dutch tulip mania in the 1630’s.

The Bank of Japan and the Chinese Government are working to reduce their money printing. The Fed is still buying mortgages but it seems determined to slowly tighten monetary policy. The problem faced by these Central Planners is that they’ve created a massive global Ponzi scheme that requires an increasing amount of liquidity (money printing + credit expansion) in order to sustain valuation levels. Once they slow down the liquidity spigot, all fiat currency- driven assets (except physical precious metals) are at risk of collapsing.

The Dow finished the week closing down 4 days in row to close essentially unchanged for week (up 9 pts). The SPX also was flat for the week (up 6 pts). It managed to squeak out a slight gain on Friday to avoid 4 consecutive down days. Both the Dow and SPX started out Friday with a big rally from Thursday’s close but faded over the last 2 hours of trading on no apparent news triggers. This for me is a possible indicator that the stock market losing energy.

Bed Bath and Beyond (BBBY) was hammered Friday, down over 12%, as it badly missed earnings and revenue estimates. I presented BBBY as a short idea in the December 16th SSJ issue at $47.27. I hope some of you jumped on it then, as 4 days later it had closed at $41.38.

Amusingly, Jim Cramer, et al attributed BBBY’s lousy quarter to competition from AMZN. But nothing could be further from the truth. Its sales were up slightly from Q1 2016 and
its digital channel sales grew 20%. If anything, BBBY’s e-commerce business presents intensified competition for AMZN. Why? Because AMZN’s e-commerce operating margin is 0.3% vs. BBBY’s, which was 5.4% in Q1. BBBY has plenty room to go directly at AMZN on pricing.

BBBY’s net income dropped 39% vs. Q1 2016. The primary culprit was that BBBY lowered its free shipping threshold to $29 from $49. which in turn forced BBBY to absorb shipping costs on more orders. AMZN does not properly accrue the cost of its free shipping to its cost of sales (the SEC looks the other way on this one), burying the expense across the income
statement and balance sheet. But we know it has a reported 0.3% operating margin in e-commerce. The hit to BBBY’s operating margin, which declined 242 basis points (2.42%), gives us some insight about true cost inflicted on AMZN from its free shipping program.

My point here is that the overall retail environment is going to get more competitive and margins are going to decline even more. Companies like Walmart and BBBY have taken the gloves off and can afford to undercut AMZN across the board because they have significantly more room to cut prices and attack AMZN’s pricing and free shipping model without driving their operating margins down to zero. AMZN’s e-commerce profit margin, for all intents and purposes, is zero. The bottom line here is that retail in general remains a great sector to short.

I believe BBBY has a lot more downside and can still be shorted, with patience, for some nice gains:

The more interesting short is AMZN. About a month ago, right before completing the check-out process on AMZN, I received a message in which AMZN was offering a $5 shopping credit to fund a gift card with $100. Why is AMZN paying 5% to raise cash? It effectively is taking a 5% operating profit margin hit on the $100, because its overall e-commerce operating margin is essentially zero. And I discovered yesterday that AMZN was offering a $5 shopping credit to Prime members who opted for the slow shipping option rather than the 2-day shipping.

These cash-raising and cash-saving policies make no sense if AMZN is producing the billions in free cash flow as represented by Bezos (on a non-GAAP basis, of course). Something is very wrong beneath the surface. In fact, AMZN burns cash every quarter. I have demonstrated that in previous research I have produced. It’s a fact.

In the meantime, AMZN continues to be, along with TSLA, the greatest Ponzi scheme in history. Bernie Madoff is green with envy. The irony surrounding all of the analyst – and Jim Cramer – noise about AMZN is that its acquisition of Whole Foods makes it more vulnerable to competition. The idea that AMZN will now be a “grocery killer” is absurd. Just like the idea that it’s a retail killer. BBBY’s e-commerce grew at 20% year over year.

If anything is true, it’s that BBBY, Walmart, Target and Kroger present intensified e-commerce competition for AMZN.  And all four of those companies can cut prices to compete and still turn an operating profit.  AMZN does not have that luxury. That’s probably why AMZN is encouraging Prime customers to take the slow shipment option with a $5 shopping credit.

Most of the above analysis is an excerpt from this week’s Short Seller’s Journal, released Sunday evening. I discussed strategies for shorting BBBY. I also discussed shorting Kinder Morgan (KMI) in the context of declining energy price and usage and included for subscribers a somewhat dated, in-depth research report on KMI which details with proof the Ponzi scheme set-up at KMI. You can get more details about the subscription, including a “handful” of back-issues here:  Short Seller’s Journal info.  (Note: new subscribers also get a copy of the somewhat-dated full AMZN research report I wrote).

The Public Is Getting Pissed – Ignoring Rule Of Law

“If liberty means anything at all, it means the right to tell people what they do not want to hear.”   – George Orwell

There’s a narrative here that the Government, the Fed, the Trump Administration, etc conveniently ignored.  Here’s the headline list this morning:

  • GM Extends Plant Shutdowns
  • 2nd Quarter GDP Hit As Inventories Tumble In April
  • Retail Sales Tumble Most Since January 2016
  • Pension Crisis Escalates
  • House Majority Whip Shot At Congressional Baseball Practice

Real Clear News reported that Representative De Santis stated to police that the shooter asked “whether Republicans or Dems were on the field before shooting.”  Fox News has confirmed  the report.

The public is getting pissed.  It is told daily, on no uncertain terms, by the White House that the economy is rapidly improving.  The Fed confirms that the economy is improving.  Wall Street chimes in confirming that “narrative.”

The public is told that the unemployment rate is under 5% and the labor market is tight.  But 95 million people in the working age population don’t have jobs.  They are not considered part of the “Labor Force” and have been removed from the statistics altogether by some BLS bureaucrat’s pencil eraser. To be sure, maybe 1/3 or even 1/2 of those people don’t want to work or need to work for some reason (wealthy, wealthy and lazy, inherited income, public assistance of some form, etc).  But 1/2 to 2/3’s of those people would like to find a job that doesn’t entail delivering pizza or washing dishes – in other words, jobs that pay to support a family.

A growing portion of the population understands the underlying truth about the economy that exists behind the propaganda and lies. And they are getting pissed. It’s become clear to anyone desperate enough in their fight to get by that the politicians, corporate elitists and Wall Street crooks are no longer beholden to Rule of Law.   The conclusion for the growing legion of desperate is obvious:  “why should we adhere to Rule of Law?”

At least this time the Deep State can’t shove the “it was ISIS” narrative down our collective gullets.

Beat Your Meat With The “Street”

Best Buy reported its earnings this morning for its Q1.  Revenues were up year over year for the quarter (qtr/qtr) by a scorching $85 million, or 1%.  But this came at the expense of price competition, as its gross profit declined 5.7%.  Operating income plunged 19.4%.  Net income dropped 18%.  Earnings per share declined 15% (share buybacks translated into a lower decline in e.p.s. than net income).  Cash provided by operating activities (from the Company’s “statement of cash flows,” not from the Jeff Bezos “free cash flow” comic book) took a 51% cliff dive, dropping $249 million qtr/qtr.

But because Best Buy “beat the Street” estimates, the stock jumped $8 this morning, adding over $2.4 billion in to BBY’s market cap.  To say this is absurd does an injustice to the word absurd.

When a stock gains $2.4 billion on declining economics and profitability because it “beats the Street,” you know it’s end of days for the stock bubble. This is quite similar to the late 1999 – early 2000 timeframe, when a Maria Bartiromo would breath the name of a tech stock and it would jump $10 almost instantaneously.

Those who cannot remember the past are condemned to repeat it. – George Santayana

Silver Demand Shows A Consumer In Trouble

Global demand for silver declined from 2015 to 2016 by 123 million ozs per numbers from the Silver Institute presented in an article on The Daily Coin yesterday.   In fact, for the demand categories primarily driven by the consumer, demand plummeted 125 million ozs, or 15.3%.   Industrial demand for silver increased slightly but this was because of the global expansion in the solar panel industry, primarily in India and China.

The consumer portion of global silver demand is derived from jewelry, coins and bars (investment), silverware and electronics.  The 15.3% plunge in demand reflects the fact that consumer disposable income is drying up.   After making required monthly expenditures – food, mortgage/rent, debt service, healthcare – consumers, especially in the United States, are out of money.

Disappearing disposable income explains only part of the equation.  The illusion of economic improvement in the U.S. was created by debt issuance.   Between Q3 2012 and now, total household debt expanded by $1.38 trillion dollars.  In fact, total household debt is now at an all-time high, driven by auto, student, credit card and personal loans.  The truth is that “discretionary” consumption was fueled by the Fed enabling the average U.S. household to accumulate a record level of debt.

The economy likely hit a wall in late 2016 and is now contracting.   Today’s retail sales report – to the extent that the numbers have any credibility – showed a .4% gain in retail sales for April vs. March.  But these are nominal numbers.   On an inflation-adjusted basis, retail sales declined.

While demand for silver products reflects the fact that the average consumer is out of money, restaurant sales confirm this.   April restaurant sales declined 1% in April and foot traffic into restaurants dropped 3.3%.  This was the 12th month out of the last 13 that restaurant sales fell.  Restaurant sales have dropped five quarters in a row.  The last time a streak like this occurred was 2009-2010.   Sound familiar?

Regardless of what the Fed says in public, the U.S. economy is in trouble.  The illusion of economic growth post-2009 was a product of debt issuance.  Now the consumer – 70% of the economy – has hit a wall with regard to its ability to take on more debt – look out below. In today’s episode of the Shadow of Truth, we review the silver demand numbers and discuss the implications for U.S. and global economy:

Make America Great Again: Buy Extremely Overvalued Stocks

Key Economic Data Continues To Show A Recession

The stock market assumed a decidedly bearish tone last week, in the face of apparent domestic political instability, increasing geopolitical tensions and, most important, a continued flow of hard economic data reflecting an economy that is in recession (click image to enlarge).

The SPX declined 3 out of the 4 trading days this last week to close down 1.1% from the previous Friday’s close. It’s down nearly 3% from the all-time high it hit on March 1st. Thursday’s big red bar took the SPX below the 50 dma. On all four days the SPX closed well below its intra-day high. This indicates to me that, at least for now, stock market traders are better sellers. Also of interest, for the first time in seventeen years, the stock market declined the day before the Good Friday market holiday.

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.  (The commentary above is an excerpt from the latest Short Seller’s Journal).

Despite the propaganda coming from the media, the housing market is in trouble.  37% of all transactions in 2016 were flips.  A flip double-counts a sale because the house trades twice before it ends up with the end-user.  I would bet that in the $300-$600k price-bucket that close to 50% of all transactions YTD in 2017 have been flips.  This is how the mid-2000’s housing bubble ended.

Today the housing starts report for March registered the biggest drop in four months.  Single family starts plunged 32% in the midwest and 16% in the west.   Both multi-family and single-family starts dropped.  Multi-family is going to be a big problem.  Prices in NYC and Miami are dropping like a rock and vacancies are soaring because of oversupply – just like in 2007.  Apartment rental rates are falling quickly and vacancy rates soaring across all the major MSA’s.   Manufacturing  output plunged in March, likely reflecting bulging car inventories at auto dealers, which are at  a post-2009 high.   OEM auto manufacturers are closing plants and laying off workers.  The latter, no doubt, will miraculously fail to register in the Governments next employment report.

Meanwhile, the stock market continues disconnect from underlying economic reality. Auto, retail and restaurant sales are plunging. The explanation for falling retail sales is simple: real average weekly earnings have dropped two months in a row. The consumer, as I’ve been suggesting, is tapped out on two fronts: disposable income and the capacity to take on more debt.

Despite the obvious intervention in the stock market by the Fed and the Government, via the Treasury’s Exchange Stabilization Fund, plenty of stocks are tanking. As an example, I recommended shorting Kate Spade (KATE) to my Short Seller Journal subscribers about a month ago at $23.50. The stock is trading at $18 this morning – 23% gain if you shorted the stock and even more if you used puts. You can get in-depth economic and market analysis plus ideas for taking advantage of the most overvalued stock market in U.S. history via IRD’s Short Seller’s Journal. For more information, click here:  Short Seller’s Journal Subscription Information.

The Market Has Its Head Buried Deep In The Sand

Several “black swans” are looming which could inflict a financial nuclear accident on the U.S. markets and financial system.   I say “black swans” in quotes because a limited audience is aware of these issues – potentially catastrophic problems that are curiously ignored by the mainstream financial media and financial markets.

The most immediate problem is the Treasury debt ceiling.  The Treasury is now projected to run out of cash by mid-summer.  Of course, in the spurious manner in which the markets evaluate the next trade, July may as well be a decade away.  My best guess is that the “market” assumes that, after drawn out staging of DC’s version of Kabuki Theatre, Congress will raise the debt ceiling, probably up to $22 trillion.  Then the Fed will extend its highly secretive “swap” operations to foreign “ally” Central Banks (hint:  Belgium and Switzerland) in order to fund the onslaught of Treasury issuance that will ensue.  Problem solved…or is it?

(Note:  Plan B would be another one of Trump’s bewildering Executive Orders removing the debt ceiling.  Plan B is another form of “fiat” currency issuance)

The second “black swan” seen by some but invisible to most is the ongoing collapse the shopping mall business model, erroneously blamed on the combative growth of online retailing.  But when I look at the actual numbers, that argument smells foul.

Is Online Retailing Actually The Cause Of Brick/Mortar Retail Apocalypse?

More than 3,500 stores are scheduled to be shuttered in the next few months. JC Penny,
Macy’s, Sears, Kmart, Crocs, BCBC, Bebe, Abercrombie & Fitch and Guess are some of the
marquee retailing names that will be closing down mall and strip mall stores. The Limited is going out of business and closing down all 250 of its stores.

The demise of the mall “brick and mortar” retail store is popularly attributed to the growth in online retail sales. To be sure, online retailing is eating into the traditional retail sales
distribution mechanism – but not as much as the spin-meisters would have have you believe. At the beginning of 2015, e-commerice sales were about 7% of total retail sales. By the end of 2016, that metric rose to 8.3%. However, looking at the overall numbers reveals that nominal retail sales have increased for both brick/mortar stores and online. In Q4 2015, total nominal retail sales were $1.186 trillion. Brick/mortar was $1.096 trillion and online was 89.7 billion, which was 7.6% of total retail sales. In Q4 2016, total sales were $1.235 trillion with brick/mortar $1.133 trillion and online $102.6 billion, which was 8.3% of total retail sales.

As you can see, there was nominal growth for both brick/mortar and online retailers. My point here is that the spin-meisters present the narrative that online retailers are eating alive the brick/mortar retailers. That’s simply not true.   Part of the problem that the total retail sales “pie” is shrinking, especially when analyzing the inflation-adjusted numbers.  I created a graph on from the St. Louis Fed’s “FRED” database that surprised even me (click to enlarge):

The graph above shows the year over year percentage change in nominal (not inflation-adjusted) retail sales on a monthly basis from 1993 (as far back as the retail sales data goes) thru February 2017, ex-restaurant sales, vs. outstanding consumer credit. As you can see, since 1994 the growth in nominal retail sales on a year over year basis has been in a downtrend, while the level of consumer credit outstanding as been in a steady uptrend. Since 2014, the rate of growth in debt has exceeded the rate of growth in retail sales. If we were to adjust the retail sales using just the Government-reported CPI measure of “inflation” retail sales would be outright declining.

The problem with the mall business model is debt.  The mall-anchor retailers who are vacating mall space like cockroaches vacate a kitchen when the light is flipped on have been leveraged to the hilt by the financial engineers who control them who in turn have been enabled by the most permissive Federal Reserve in U.S. history.   Too be sure, online retailing is cutting into the margins of Macy’s, JC Pennies, Sears, Dillards, etc.  But these companies would have no problem “fighting back” if they were not over-leveraged to the eyeballs.

Layer on top of that the leverage employed by the mall REITs and the recipe for a financial crisis larger than the 2008 “big short” mortgage/housing crisis has been created.  To compound this problem, mall owners are now starting to mail in the keys to financially troubled malls:   More mall landlords are choosing to walk away from struggling properties, leaving creditors in the lurch and posing a threat to the values of nearby real estate…[as] some of the largest U.S. landlords are calculating it is more advantageous to hand over ownership to lenders than to attempt to restructure debts on properties with darkening outlooks (LINK).

But it gets worse. I referenced the consumer’s ability to borrow in order to spend money. Economic activity in the United States has relied heavily on an increasing amount of debt issuance for several decades. At some point consumer borrowers reach a point at which they can no longer support taking on more debt, whether in the form of mortgages, auto loans/leases or credit cards. The problem for the U.S. financial system is that there will be widespread defaults on the consumer debt that’s already been issued.   The average U.S. household has “hit a wall” on the amount of debt it can absorb.  This is why restaurant and retail sales are dropping and why auto sales have rolled over.  All three will get worse this year.

This Will Crush The Pensions

Finally, the third “invisible” black swam is the looming pension crisis.  A colleague of mine who works at a pension fund did a study last year in which he concluded that, because of the extreme degree of public pension underfunding, a 10% decline in the stock market for a sustained period – i.e. more than 3 or 4 months – would cause every single public pension fund to blow up.  As he has access to better data than most, he also surmised that the degree of underfunding is 2-3x greater than is publicly acknowledged by the mainstream media (see this article for instance:  Bloomberg claims $1.9 trillion underfunding).

Circling back to the mall/REIT ticking time-bomb, while the Fed can keep the stock market propped up as means of preventing an immediate nuclear melt-down in U.S. pensions (all of which are substantially “maxed-out” in their mandated equities allocation), the collapse of commercial mortgage-back securities (CMBS) will have the affect of launching a nuclear sub-missile directly into the side of the U.S. financial system.

The commercial mortgage market is about $3 trillion, of which about $1 trillion has been packaged into asset-backed securities and stuffed into yield-starved pension funds. Without a doubt, the same degree of fraud of has been used to concoct the various tranches in these CMBS trusts that was employed during the mid-2000’s mortgage/housing bubble, with full cooperation of the ratings agencies then and now.   Just like in 2008, with the derivatives that have been layered into the mix, the embedded leverage in the commercial mortgage/CMBS/REIT model is the financial equivalent of the Fukushima nuclear power plant collapse.

It’s a  matter of time before a lit match hits one of the three lethal powder-kegs described above.  This is why the bank stocks were hit particularly hard last week when the Dow was in the middle of its 8-day losing streak.  Of course, all it took to spike the Dow/SPX higher was a couple of immaterial “consumer confidence” reports in order to reflate the stock market with some “hope.”   Don’t forget, the last time consumer confidence high-ticked was in 1999, right before the tech bubble imploded.

Unfortunately, the next financial catastrophe that is going hit the system, and for which the Fed is helpless to prevent, will make everyone yearn for just the tech bubble or “big short” bubble collapses.   Meanwhile, the stock market and its collective universe of “investors” will continue sticking its head deeper into the sand, oblivious to the sling blade that is swings closer to its neck.

Portions of the above analysis were excerpted from the current Short Seller’s Journal. That issue contained more in-depth data and two short ideas, a mall REIT and retailer that has bubbled up beyond comprehension.   You can learn more about the Short Seller Journal here:   SSJ Weekly Subscription.

Retailing Is Bad And About To Get Worse

Americans are filing for bankruptcy at the fastest rate in several years. In January 2017, 55,421 individuals filed bankruptcy. That’s a 5.4% increase over January 2016. In December 2016, 4.5% more individual bankruptcies were filed than in December 2015. It’s the first time in 7 years that personal bankruptcies have risen in successive months on a year over year basis.

Also notable, in 2016 the number of U.S. Corporate bankruptcies jumped by 26% over 2015. U.S. Corporations have issued $9.5 trillion in bonds. That’s 61% more than they borrowed in the eight years leading up to the 2008 de facto financial system collapse (aka “the great financial crisis”).

The Financial Times reported that over 1 million U.S. consumers – prime and subprime – were behind on their car loans and that the overall delinquency rate had reached its highest level since 2009. The FT also stated that “lending to consumers with weak credit scores has been one of the fastest growing parts of the [banking] industry.” It’s starting to smell like early 2008 out there.

This is information and data that you will not hear on any of the “Bubblevision” financial “news” programs or read in the mainstream financial media. It’s also information that is not being factored at all by stock prices.

Americans are bulging from the eyeballs with mortgage, auto, credit card and student loan debt. The amount of outstanding auto debt hits a new record every month. Of the $1.2 trillion in auto loans outstanding, over 30% is considered subprime. In fact, I would bet good money that the number is closer to 40%, as the same type of non-documentation loans that infected the mortgage market in mid-2000’s has invaded the auto loan market. It was recently disclosed that the 61+ day delinquency rate on General Motors’ securitized subprime loans has soared to levels not seen since 2009.

To put the amount of subprime auto debt in context, assume 35% of total auto debt outstanding is now below prime (subprime and “not rated”). This equates to $420 billion of below prime debt. The total amount of below prime mortgage debt during the mid-2000’s housing bubble was about $600 billion. In other words, the subprime auto debt problem could easily precipitate another financial markets catastrophe.

Although the retail sales report for January earlier this month purported to show a 4.9% year/year increase in retail for January, the majority of the “gain” came from the rising price of gasoline during the month (the gasoline sales category showed a 13.9% gain over January 2016, most of which can be explained by higher prices). In fact, the .4% “gain” from December 2016 to January 2017 reported for the overall retail sales number lagged the Government’s measure of inflation. Real, inflation-adjusted sales from December to January declined by 0.20%. (Note also that the retail sales report is derived largely from Census Bureau “guesstimates” due to the supposed unavailability of real-time data. This explains why typically previous reports are revised lower – I detail this in my weekly Short Seller’s Journal).

Debt-squeezed Americans are spending less on discretionary items, especially clothing. This is why Walmart has launched a new price-war agenda aimed at the grocery industry, big-box retailers and Amazon.com.    The retail spending “pie” is shrinking and Walmart intends to do fight hard to maintain the size of its piece.  For all the attention focused on Amazon, Walmart’s annual revenues are nearly 4-times larger than Amazon’s.   And make no mistake, Walmart has plenty of room to fight, as its operating margin is nearly double AMZN’s – and that’s before we adjust AMZN’s highly misleading accounting, which would reduce AMZN’s margins.

Despite the Dow hitting new all-time highs for a record number of days in a row, The S&P retail ETF, XRT, is currently 10.4% below its 52-week high.   It’s 15% below its all-time high, which it hit in mid-July 2015:

Target (TGT) is today’s poster-child for the retail sector, as its Q4 earnings missed expectations badly and it warned for 2017.  Its quarterly revenues dropped 4.3% year over year and its full-year 2016 earnings fell nearly 6% vs. 2015.   Operating earnings were crushed, down 42.2% in Q4 2016 vs. Q4 2015.  The stock is down over 11% right now (mid-morning trading on Tuesday).

I would also suggest that the revised GDP  for Q4, reported to be 1.9%, is derived from Government statisticians’ manipulation because most of the gain is attributed to consumer spending.  Tell that to holders of XRT and RTH.

The economy is sinking further into a recession despite the propaganda coming from Wall Street, financial bubblevision “meat with mouths” and the mainstream media.  Real median household income continues to decline and the Fed/Government intervention in the stock market is helpless to prevent this fact from being reflected in many sub-sectors of the stock market “hiding” beneath the headline-grabbing Dow and S&P 500.

My Short Seller’s Journal presents analysis like this to subscribers every week.  There’s a big difference between what gets reported and what is really going on.  My journal looks “under the hood” of the headline economic reports in order detail what’s really going in in the economy.  Most of the analysis and assertions are backed up with actual data.  I also “de-construct” the game of “beat the earnings” which makes headlines and stocks pop, but also creates short-sell opportunities.  Each issue presents at least two short ideas, along with suggestions for using options and managing positions.  The retail sector has been fertile shorting ground and the housing market is next.  You can subscribe by clicking on this link:  Short Seller’s Journal – plus receive a discount link to my Mining Stock Journal.

Most Overvalued Stock Market In U.S. History – Here’s Why

I find it to be mind-blowing when financial advisors and stock market gurus get in bubblevision or write Seeking Alpha articles and assert that the stock market is good “relative” value right now.   They are either dishonest, unethical or just stupid.  Likely a combination of all three in varying degrees.

Here’s a chart with which everyone is familiar:

Based on that graphic, it looks like the current stock market is only the third most overvalued in history, right? WRONG.

The problem comparing the current p/e ratio of the S&P 500 with that of previous stock bubble tops is that the accounting used to produce the “e” is not comparable. Over time, FASB and the SEC have colluded to make it easier for companies to hide losses and report non-cash income as GAAP cash flow and earnings..

As an example, in 2010 FASB issued a bulletin which changed the way big Wall Street banks were allowed to account for bonds and other forms of debt issued by others that are held as assets. Originally, banks had to market their bond/debt/loan holdings to market and accrue any market to market gains or losses at quarter-end as either income or expense. FASB decided to let banks classify any and all debt as “hold-to-maturity,” and allowed banks to hold this debt at face (maturity) value without ever marking to market. Any debt that was marked below maturity value (par value) could be marked up to par and moved into a “held to maturity” account. By doing this, the banks created non-cash gains in these holdings that was counted as income. Banks hold $100’s of billions in bonds/loans and, starting in 2011, this rule change allowed banks to create billions in phantom, non-cash income. This of course translates into lower p/e ratios.

There’s several areas of accounting over the years that have accomplished a similar feat for all publicly traded companies. The problem is that it has rendered p/e ratios over time incomparable. Of course, NO ONE points out this fact and certainly any Wall Street analyst would be fired if they went on a truth tirade. The bottom line is that, looking at the p/e ratio graph above, we don’t know how the current p/e ratio for the SPX compares with the p/e ratios at the market peaks in 2007 and 2000 and 1929. What we do know is that the current p/e ratio is significantly understated relative to the p/e ratios in 2007 in 2000 because earnings are overstated relative to those years because of the accounting gimmicks that enable companies to boost GAAP non-cash earnings.  It could be that the current p/e ratio is the highest on record if we could make an “apples to apple” comparison of p/e ratios across time.  In fact, I would assert that applying standardized GAAP across time would prove that the current market is more overvalued than at any time in U.S. history.

The above analysis is an excerpt from my latest issue of the Short Seller’s Journal.  In this issue I presented two retail stock ideas for shorting.   One of them was down 3.7% today and the other was down just under 1%.   In the past couple of issues I have explained in detail why the retail sector is short opportunity right now.  But that window will close quickly as more companies do what happened to Macy’s and Kohl’s last week.    You can get more details on the SSJ and subscribe clicking on this link:   Short Seller’s Journal.

Auto Sales: The Fake Economic News Bubble

The headlines are reporting that auto sales in December hit a record, when looked at on a “seasonally adjusted annualized rate” basis.  No one questions the validity of the seasonal adjustments.   The average news consumer sees or hears the headline word-byte/soundbyte and that becomes the truth.   Fake economic news is another form of Establishment propaganda:   seduce the populace into believing what you want them to believe rather than presenting the truth.  It’s Jim Sinclair’s “MOPE:”  Management of Perception Economics.”

Along with the geopolitical and domestic political fake news epidemic is an epidemic in economic fake news.  Collectively it’s a “fake news bubble,”  with one of the highly insidious consequences of this bubble being the messy abortion otherwise known as the “Presidential election.”

Turning to the auto sales fake news, based on the SAAR estimates, automobile sales allegedly hit a selling rate of 18.2 million units in December.  But seasonal adjustments notwithstanding the facts, does the data fit the facts of the related areas of consumer spending?   By this I mean restaurant and retail sales.

Though not reported yet for December, restaurant same store sales declined 1.3% in November from October and dropped 3.3% from November 2015.  It was the ninth consecutive month of negative same-store sales and the worst decline since July.  Perhaps with constrained disposable income, consumers cut out restaurants to buy holiday gifts?

Looking at what we know about retail sales during the holiday period so far, First Data reported that holiday spending is up 2% vs. last year (through Dec 12).  Last year that number was 2.4%.  So there’s a deceleration in retails sales growth spending.   Cowen research reported that foot traffic at malls was down 10% in December through December 17th.  Granted online sales growth of 9% this holiday season is taking some mall spending away, but online spending represents only 8% of total retail sales spending.  I guess maybe consumers cut back on holiday gifts this year to spend $40,000 (average cost of a new GM car according the auto sales report) on a new car?

Finally, I cover two companies that provide subprime auto loans.  Both companies were reporting declining loan application volume in their last financial reports.  Interest rates spiked up 100 basis points during November and December, which means the cost of auto loans spiked up as well.   Even though auto lenders are reporting lowered loan application volumes, we’re to assume that – despite significantly higher interest rates – consumers decided to skip eating out and buying holiday gifts in order to buy a new car during December?

Does any of this make sense?  To make matters less believable and uglier, GM reported that its unsold inventory of cars sitting on dealer lots exploded to 844,942 cars in December, a nearly quarter of a million unit increase over December 2015.  Call me skeptical but I would suggest that a large portion of those cars sitting in dealer lots were counted as sales when the cars left the factory floor.

The likely source of “record” auto sales is in the “seasonal adjustments” that are applied to the data. Moreover, I would suggest that the data itself is suspect.  I would like to see a study that correlates a “sale” with the actual transfer of title to either an auto finance company or to a buyer who paid cash – i.e. tie a “sale” to an actual end-user taking delivery and driving off the lot.  THAT number, based on all of the related supporting evidence as detailed above, is likely a much different (lower) number than what was reported.

It’s A Retail Sales Train Wreck

The Census Bureau reported that its advance estimates of retail sales for November show a .1% gain from October and a 3.8% gain over November 2015. Wall St. was forecasting a .4% gain. Oops. But there’s a bigger problem with that headline report of a .1% increase in retail sales for November:   it’s based on guesstimates by the Census Bureau for the largest retails sales categories.

If you go through the data tables that accompany the headline retails sales report – LINK – you’ll see asterisks in the “not adjusted” data for November in most of the business categories. In a footnote the CB discloses that, “Advance estimates are not available for this kind of business.”  Most people who see the headline news reports, or hear the news “soundbytes” on tv, do not realize that the retail  sales number is an “estimate.”

On an inflation-adjusted basis, the .1% “gain” reported for November is a decline.  Most are not aware of that fact as well.  Also, the .8% gain reported for October was revised down to a .6% gain.  It is highly probable that November’s number will be revised to negative when December’s retail sales report hits in January.  But the revision for November is typically not reported at all.

According to a research piece published by Cowen & Co. on December 14th, mall traffic fell 6.4% in November from October and December month-to-date traffic was down 9.9%. Granted, there’s no question that some portion of that mall traffic has shifted to buying online for its holiday purchases. However, even with the growth in online retail sales, e-commerce accounts for less than 10% of total retail sales (the Census Bureau estimated e-commerce represented 7.7% of total sales in Q3 2016.

I have no doubt that the Government’s Census Bureau is going to put forth its best effort to manipulate the sales data it collects in order to present a positive light on December and holiday sales this year. However, the actual reports coming from the retailers themselves reflects a retail environment in which the stores are fiercely competing for a “shrinking pie” of consumer disposable income.

Restoration Hardware stock did an 18% cliff-dive two weeks ago when it reported its Q3 earnings.   Over the last six trading days, the XRT retail ETF is down 4.2%.  It was down every day last week despite the SPX and Dow hitting new all-time highs.

In the latest Short Seller’s Journal released Sunday evening, I dive into the retail sales numbers in-depth and present a lot more information which should satisfy proof of concept that this year’s holiday retails sales will be a complete disaster.  Note:  I have no doubt the Census Bureau and industry promotion organizations will manipulate the data for the holiday season in order to report positive sales results.  But the reality check will come from the companies themselves, which have a harder time faking the numbers.

I present several retail-related short ideas in the latest SSJ, including options trading suggestions.  On of the ideas is already down 1.3% today.  You can access these ideas plus in-depth data and analysis using this link:  Short Seller’s Journal.   SSJ is a monthly subscription.  New issues are published weekly and there’s no minimum time commitment.