Tag Archives: short sell ideas

The Size Of The Financial Avalanche Coming Grows Larger

Inflation vs deflation. The true economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in wealth output. Inflation is monetary in nature. Rising prices are the manifestation of inflation. Someone I follow on Twitter posted an ingenious example from which to conceptualize the true concept of inflation using the game of Monopoly:

The players all start out with reasonable amounts of money to speculate on real estate. As the game proceeds, players collect $200 by simply passing Go and use this money to speculate on real estate. By the end of the game, only $500 dollar bills are worth anything, the whole thing blows up, and most players end up destitute. In a twist of irony, an original game board sells for about $50,000.

A fixed amount of real estate and continuously increasing money supply, with “passing Go” functioning as the game’s monetary printing press. The monopoly analogy is readily applied to the current real estate market. The Fed tossed roughly $2 trillion into the mortgage market, which in turn has fueled the greatest U.S. housing bubble in history. The most absurd example I saw last week is a 264 sq ft studio in Los Angeles listed on 10/26 for $550,000. The seller bought it a year ago for $335,000. This is the degree to which Fed money printing and easy access Government guaranteed mortgages have distorted the system.

Here is monetary inflation as it is showing up in the stock market and housing markets:

The graphic above shows rampant credit-induced monetary inflation. On the left, home prices nationally are measured by the Case Shiller index going back the 1980’s. On the right is the S&P 500 going back to 1930. According to the Fed, real median household income has increased 5% between 2008 and the present. In contrast, based on Case Shiller, home prices nationally have soared 34% in the same time period.  Expressed as a ratio of average price to average household income, home prices are, at all-time highs in the U.S. This is the manifestation of rampant inflation in credit availability enabled by the mortgage “QE.” This growth rate in money and credit supply has far exceeded the tiny growth rate in average household income since 2008.

The stock market reflects the monetary inflation of the G3 Central Banks, primarily, plus global Central Bank balance sheet expansion. Please note that “balance sheet expansion” is the politically polite term for “money printing.” The meteoric rise in stock prices have never been more disconnected from the negligible rate of growth in nominal GDP since 2008. Real GDP has been, arguably, negative if a realistic inflation rate were used in the Government’s GDP deflator.

Inflation is not showing up in the Government CPI report because the Government does not measure inflation. The Government’s basket of goods is constantly juggled in order to de-emphasize the rising cost of goods and services considered to be necessities. In addition to the increasing cost of necessities like gasoline, health insurance and food, inflation is showing up in monetary assets. This is because a large portion of the money printed remains “inside” the banking system as “excess reserves” held at the Fed by banks. This capital is transmitted as de fact money supply via the creation credit mechanisms in the various forms of debt and derivatives. The eventual asset sale avalanche grows larger by the day.

Do not believe for one split-second that the U.S. has reached some sort of plateau of economic nirvana that will self-perpetuate. To begin with, it would require another round of even more money printing just to sustain the current bubble level. Read the inflation example above if that idea is still not clear. In 1927, John Maynard Keynes stated, “we will not have any more crashes in our time.” In the October 16, 1929 issue of The New York Times, famous economist and investor, Irving Fisher, stated that “stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” Two weeks later the stock market crashed.

The above commentary is from last week’s Short Seller’s Journal. Speaking of the housing market, admittedly my homebuilder short positions are crawling up my pant-leg with fangs as the housing stocks have entered into the last stage of a parabolic “Roman candle” apex and burn-out. The homebuilders appear to be cheap relative to the SPX on a PE ratio basis – approximately an 18x average PE for homebuilders vs a 32x Case Shiller PE for the SPX.  However,  in relation to their underlying sales rate, earnings and balance sheet, the homebuilder stocks are more overvalued now than at the last peak in 2005.

While the homebuilders are are squeezing higher, I presented two “derivative” ideas in recent issues of the Short Seller’s Journal:  Zillow Group (ZG) at $50 in late June and Redfin (RDFN) at $28 in late September.  ZG just lost $40 today and RDFN is down to $21 (25% gain in 6 weeks). Both ZG and RDFN are “derivatives” to homebuilders because they derive most of their revenues from housing market-related ads, primarily real estate listings. Their revenues as such are “derived” from housing market sales activity. These stocks are overvalued outright. But as home sales volume declines, the revenue/income generating capability of the ZG/RDFN business model will evaporate quickly.  With home sales volume rolling over, the decline in the stock prices of ZG and RDFN relative to the “bubble squeeze” in homebuilder stocks validates my thesis.

If you want to learn more about opportunities to exploit this historically overvalued stock market and access fact-based market analysis, click here: Short Seller’s Journal info.

TSLA Down 19% – $72 – In Eight Days

In my opinion, the ride down will be worth the pain and blood-loss of sticking with a short bet on TSLA, which is why I continue to buy small quantities of put options that have been expiring worthless. I know at some point I’m going to catch a $100+ reversal in TSLA stock which will more than make-up for the small losses I’m enduring in the puts while I wait for that occurrence. Using puts protects me from the unknown magnitude of upside risk from shorting the stock. Plus, I don’t have make a “stop-loss” decision because I don’t have the theoretic “infinite upside” loss potential that I would face shorting the stock. With my loss capped, I can hang on to the puts through expiration. With a stock like TSLA, often a stop-loss exit is followed up by reversal to the downside, leaving the short-seller without a short position.

As we saw on Friday, TSLA stock can reverse to the downside quite abruptly and sharply. I can guarantee that some number of shorts covered as TSLA was soaring over $370, leaving them with no position when the stock reversed, closing at $357. I don’t want to recommend specific puts to use but I can recommend giving yourself at least four weeks of time. If I were putting on a new put position today, I would probably buy a very small quantity of the July 7th $340-strikes. If TSLA sells back to the $310 area before expiry, which could easily happen as $310 is where the last 2-week push up in price began, the puts would have an intrinsic value of $30. The current cost is about $10.

TSLA reminds me of Commerce One (CMRC), a B2B internet company that went from $10 to $600 in a very short period of time in late 1999 – 2000. It eventually went to $0. I shorted and covered small quantities of stock starting around $450. I was fortunate to have been short from the high $500’s when it finally topped out a $600. The volatility of this stock was extraordinary but persistence and “thick skin” paid off.

The above commentary is from the Short Seller’s Journal. Subscribers who liked the idea have been short TSLA June June 12th, when the stock opened at $359. You can’t time the top or bottom with a stock like TSLA, but you can make a lot of money if you get 2/3’s of the ride down. You can learn more about the Short Seller’s Journal here:  LINK

YTD General Electric has been one of the 3 worst performing Dow stocks.  I presented GE as a short idea In the January 29th issue.  I said it would be a boring but no-brainer short.  So far it’s down 17.5% from that issue.  This has more than doubled the return on an SPX long position in the same time period.  Maybe it’s not so boring…

The Apartment Glut Cometh – Adios Housing Market

Driving by the west-side border of downtown Denver (on I-25), I can count 9 cranes in air plus one semi-finished high-rise building.  What’s amusing about this is that there’s already an oversupply of rental apartments and condos as the 1-2 month free + free parking incentives reflect.   What will happen when all these new projects hit the market?

This is not unique to Denver.   I witnessed it first-hand in New York City over the holidays. Douglas Elliman, the high profile NYC real estate brokerage, issued a report which showed that NYC real estate prices plunged in Q4, with the median sales price dropping nearly 9% from Q3. Days on the market increased 14.6% and the number of sales dropped 3.7% I can recall from the demise of the big housing bubble that the impending housing bust started first in NYC.  I remember walking around NYC in late 2006 and seeing several apartment complexes under construction on which work had been abandoned. I would
suggest that the current bubble is already popping in several bubble areas per this canceled contract data: LINK.  I also am confident that the weakness that is developing in NYC will soon spread to the rest of the country.  – from the  Jan 15th Short Seller’s Journal

Miami was the leading indicator of the demise of the mid-2000’s housing bubble.  An apartment glut quickly appeared as speculators took almost free money and put deposits on apartments being built by reckless builders.  Builders always get reckless when other people’s money is cheap. Greenspan and Bernanke made sure there was plenty of cheap capital for developers.   Wolf Richter details the current apartment market implosion occurring in Miami – LINK – and coming to city near you soon.

Ditto for San Francisco/Bay Area, which was right behind Miami during the big housing bubble and is concomitantly blowing up with Miami.  The SF/Bay Area market was driven by big foreign money laundering and a massive private equity tech bubble in Palo Alto. The foreign money has dried up and the PE tech bubble is fading quickly.  It’s like the cheap money rug has been pulled out from under reckless speculators and developers.  Mark Hanson describes the situation here:  Adios SF Housing Market.

Even some of the industry associations are starting to report the truth -something we’ll NEVER get from the National Association of Realtors, as the National Multifamily Housing Council reported a week ago that, “weaker conditions are evident across all sectors of the apartment industry.”  Its sales volume index dropped for the second quarter in a row.

At the same time that a glut in apartment/condo buildings is appearing everywhere, the luxury high-end market is falling apart as well, the latter of which was also a leading feature of the demise of the big housing bubble. Douglas Elliman reported recently, “that prices in the Hamptons real estate market dropped nearly 30% in Q4, with sales volume down 14.5% But in the luxury end of the market – homes with an average price of $7 million – prices were down 42.6% in Q4. This is an all-out crash in housing in one of the most high-end areas of the country. This is exactly what began occurring in 2006/2007 in the Hamptons.

CNBC reported last week that “luxury home sales continued to slump in Q4.” It cited the
Hamptons but also Aspen and Beverly Hills. I reported in SSJ a few months ago that Aspen
was starting to go into a price freefall. Prices and volume started collapsing in the summer.
Apparently in Q4 sales volume fell another 25% and prices were down another 11%. Beverly Hills sales volume plummeted 33%, though prices were flat. Again, the affects of the bursting big mid-2000’s real estate bubble was first felt in these same markets.

Record low mortgage rates combined with the U.S. Government’s providing the easiest, most accessible borrowing terms and credit standards in the GSE program history has enabled the greatest misallocation of financial resources in history.  It’s been manifest in every asset class but is particularly prevalent in stocks and the housing market.  While it may be somewhat easy to unload stocks when they are dropping out of the sky, housing is a different matter.  It’s easy to sell a home when the buying frenzy is rampant.  But as the market begins to head south, the entire real estate becomes “offered with no bid,” meaning that everyone stuck with an “investment” is looking to dump and buyers scatter like cockroaches when the kitchen light is switched on.

The home construction market is over-ripe with short opportunities.  I have been focusing on the sector (plus retail and autos) in the Short Seller’s Journal.  Since August,  shorting the retailers has been a lay-up.

In the SSJ, I present in detail the ways in which the industry associations, Wall Street – with the help of mainstream media cheerleading – distort the facts about the housing and auto markets.    As the reality of what I described above sinks in to the market, the price path of least resistance for home builders, home construction suppliers and auto-related equities will be down.   The same is true for the companies that provide financing to these industries.

In every issue of the Short Seller’s Journal I provide what I believe somewhat unique market analysis and commentary along with dependable research sources to back-up my assertions.  I also typically provide at least 2 or 3 short ideas, accompanied by suggestions for using options (although I first and foremost recommend shorting stocks outright).  I also disclose when I’m trading an idea presented, including which options contract if applicable.   You can subscribe to the weekly newsletter with this link:  Short Seller’s Journal

You certainly do provide research and with that, Value. But also… YOU actually are there responding to emails which says a TON about you, your commitment to your products, company, and us….the subscribers. For that, I thank you.  – Subscriber, Larry

 

Jim Cramer’s Christmas Gift To Short-Sellers

Wall Street’s best contrarian indicator has spoken. Jim Cramer issued a strong buy on the Dow last Wednesday. He references the “generals” that are “leading the charge” higher in the stock market.   He sees no end in sight to current move in market leaders. Those will prove, once again for Cramer, famous last words.   It will be more like Custard making his last stand.

Perhaps the most amusing section of his maniacal diatribe was his assertion that Goldman Sachs (GS) and JP Morgan (JPM) are “cheap” because of Trump. A colleague and I were, serendipitously discussing GS as a great short idea last week. Cramer is a bona fide lunatic who must relish the thought of leading the retail stock lemmings to slaughter. The financials have gone parabolic since the election and now the hedge funds who whisper sweet nothings into Cramer’s ear need an exit.   Please don’t give up your chair to the sound of CNBC’s Pied Piper.

The puts on JPM and GS are loaded with premium. I don’t want to recommend any specific put ideas.   If you have an interest in shorting shares, GS and JPM are among the best shorts in the Dow right now.

That was an excerpt from the latest issue of the Short Seller’s Journal.   Shorts are working again.   Four of the five short ideas in last week’s SSJ were down for the week (one was unchanged) – one retail idea was down 13.6% and the puts recommended were up 400%.  In fact, most of the short ideas since early August have been working, some better than others, with one them down nearly 40% since early August.

Beneath the facade of the Dow and the SPX, many stocks and sectors are down for year. For instance, the DJ Home Construction index is down 11.1% from its 52-week high early this year.  It’s 52% below its all-time high in July 2005.  The current SSJ presents an home construction-related stock that is technically and fundamentally set-up to fall off a cliff.  I also presented my for favorite homebuilder shorts along with put option ideas.

The SSJ is a weekly subscription-based newsletter.  It’s billed on monthly recurring basis with no required minimum subscription period.  Each issue is delivered to your email in-box and has at least 2 or 3 short ideas plus put option ideas.   New subscribers will receive a handful of the most recent issues plus a complimentary copy of the Mining Stock Journal.  SSJ subscribers can subscribe to the MSJ for half-price.  You can get more information and a subscription here:  Short Seller’s Journal subscription link.

Valeant (VRX): The Short Seller’s ATM Machine

Valeant stock bounced today on the news that it had completed an internal review of its accounting issues with respect to revenue recognition and did not find any additional problems (Wall St Journal).   Famous last words there…VRX announced that it intends to file its restated financials in its 10-K by the April 29 “drop dead” date to avoid triggering a default under its bank covenants.

This Company smells more like an “Enron-esque” situation every day.  The revenue recognition issues connected to Philidor RX Services is just one of many issues.   VRX is a literal “roach motel” of bad business decisions, unethical business practices and, most likely, embedded fraud.

The stock popped up  21% in pre-market when the news report hit the tape.  As you can Untitledsee from the graph to the right (click to enlarge), it’s been selling off since the initial spike.  It’s likely that a few panic’d short sellers rushed to cover.  However, I would bet most of the move up in the stock was triggered by a bevy of retail daytrader stock jockeys who thought it would be a good idea to chase momentum.

While the Company may avoid a technical default under its bank covenants, this does nothing to fix VRX’s deep-seated problems.  It has $30 billion debt that was amassed from overpaying for its several acquisitions over the past few years.  It has a self-assessed book value of $6.4 billion, or $18/share.  BUT, after stripping away goodwill/intangibles, its book value is negative $32.6 billion.  Too be sure, most of that goodwill is attributable the amount by which VRX overpaid for acquisitions, some of which it is already looking to unload.  

One last point about the news that juiced the stock today.  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.

I have no doubt that beneath the mess, VRX has a core business that is profitable.  But it is highly likely that core value of VRX’s enterprise is significantly lower that is implied by the current market cap.  Currently VRX’s June $17.50-strike put options trade at $2 and have an implied volatility of 1.477. This is a staggeringly high implied volatility and it reflects an imputed 35% probability that the stock price will be below $17.50 by the June expiration of the put contract.

The only problem I have with the idea of shorting VRX beyond price-spike daytrades is that the idea has not received the full “Cramer endorsement,” meaning Cramer has not issued a table-pounding “buy, the market is stupid” recommendation.   Other than that VRX is a daytrader’s dream ATM.

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Insanity Engulfs The Stock Market

I have no idea who is throwing cash into this highly overvalued stock market to push it higher right now. Any registered financial advisors or pension managers who are buying into this stock market right now are in serious breach of their legal fiduciary duty.  While there’s likely a modicum of retail daytraders and momentum-chasing “hedge” funds chasing the upward velocity, I have a an educated hunch that the Fed and the Treasury’s Working Group on Financial Markets – headquartered in the same building as the NY Fed – are behind this insane thrust higher in the S&P 500 and the Dow.

But as Shakespeare once said (in Macbeth) “nothing is but what is not.”  Beneath the facade of the S&P 500 index spike up over the past 2 weeks, smart money appears to be unloading long positions before this “Titanic” hits the iceberg (click to enlarge):

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With good reason, too. If GAAP earnings were calculated the way they were calculated 20 or even 10 years ago, the p/e ratio for the S&P 500 would be at its highest in history. Furthermore, “smart” investors would not be chasing stocks higher while earnings and revenues are declining, as they have been for several quarters.

The on-balance volume and positive volume indicator signals in the graph above show an extreme divergence from the direction of stock market.  This indicates that – away from the key stocks used to push the S&P 500 and Dow higher – big money is unloading stocks while the SPX/Dow appear to show strength.  It’s brings to mind the “Rome burns while Nero fiddles” metaphor.

In the graph above, you can see that the S&P 500 appears to be carving out a pattern similar to the path it took from last August through early November, before it dropped off a 12.5% cliff.  No one knows if this same pattern will repeat, but there’s always the chance that the Fed is trying to push the S&P 500 back up to its 200 dma (red line).  We’ll know if this gets accomplished soon enough.

Meanwhile, it’s still possible to make a lot money shorting the stock market as long as you are “nimble.”  On Monday mid-day, I emailed my subscribers with what I call a “quick hit” trade set-up that had developed in Big Five Sporting Goods ((BGFV) – click to enlarge:

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The suggested trade was to buy puts or short BGFV before the close on Tuesday and cover it or sell the puts right after the open on Wednesday (today).  I had some additional analysis to support the trade idea.  BGFV actually “beat” its earnings number but it required some hard-core GAAP engineering to accomplish this.  Revenues were in-line but the stock was hit for over 18% at the open today.

Several subscribers emailed me today with their success on this trade:  “Good call on BGFV. Scalped it twice…Thanks for this trade, 117% return in less than 24hrs, not too shabby, lol…Got small position in the $12.50 puts just before the close. Sold this a.m. as instructed for 112%…We did this trade-our first with your service–and got a little better than a triple!!

You can subscribe to the Short Seller’s Journal here:   LINK  or by clicking on the image to the right.  It’s been a difficult stretch for shorting this market but most of my emphasis and NewSSJ Graphicideas are focused on longer term trade ideas (12-18 month). I always include ideas for using options with specific examples.

The intra-week email “alert” was not originally part of the service but I tried it out several weeks ago and had a great response.  I only send them out when I come across an idea that merits doing so.  Finally, SSJ subscribers will be able to subscribe to the coming-soon Mining Stock Journal (hopefully Friday) for half-price.

The Latest Weekly Short Seller’s Journal Is Now Available

The stock market (S&P 500) jumped 97 points the first three days of last week.  That’s an average of 32 points per day for those three days.  The economic news continues to show quickly deteriorating U.S./global economic conditions.  U.S. Treasury debt is now over $19 trillion.  There is a near-100% probability that the U.S. Treasury will hit the new $20 trillion debt ceiling limit before the March 2017 borrowing authority extension date arrives.

I have no doubt that the Fed will re-ante its money printing program – aka  “QE” – before Labor Day.

My latest issue of the Short Seller’s Journal features a highly overvalued construction industry stock plus a tech/media stock with big operating losses. Click HERE or on the image below to subscribe.

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Hey Dave, loving your SSJ service. In fact it is just what I was looking for as the market rolls over. I expect to have my best year in the market ever, assuming the powers that be don’t step in to halt trading just when things are heating up, or some other such manipulation.

I think the journal provides just the right amount of depth, and your writing style makes me chuckle. Keep the great tips coming.   – Ken

Amazon.com Is “Prime” For Shorting

I have only just recently found your work through Craig Hemke of TF Metals, but I have been reading your reports on Amazon and decided to take the plunge and buy your full report – wow!  It is a great report, thank you.

Now I have found your work, I will keep checking your website to keep up to date with your reports.    – “Alex from the UK,”  who purchased my Amazon dot Con report

Amazon.com announced Wednesday that is was finally discontinuing its Fire Phone, which failed miserably.  Only the insider beancounters and Jeff Bezos know how much AMZN wasted on this product.

Consistent with its business plan, which spends enormous amounts of money in order to lose money every quarter (using true GAAP accounting, not Bezos “make it up” accounting rules) and to continue burning through the cash it raises from the bond and equity markets,   AMZN announced that it will roll out a $50 tablet with a 6-inch screen in time for the holiday season.

AMZN already has a table product on the market that, like the Fire Phone before it, is failing to generate consumer interest.  It’s been estimated that AMZN’s share of the tablet market is less than 1%.   While I expect the new 6-inch screen tablet to fall flat on its face, I would love to see a breakout of the amount of money AMZN spent developing the product.

But let’s look at a couple charts of AMZN’s stock – click graphs to enlarge:

AMZN1As I pointed out in previous post, AMZN can’t seem to push through the $530 price level (yellow line in the upper right).  It is likely that big hedge fund with a large position in AMZN is distributing the stock to hungry retail momentum traders. At some point the hedge funds with overweightings in AMZN will turn into dumpers rather than distributors.  AMZN reports its latest quarter on October 22.   “Street” consensus is for a loss of $0.12.  Last year when AMZN reported its Q3, the stock gave short-sellers a nice, quick ride lower.  I believe this year will repeat last year, as we already know that retail sales overall were negative in August and will likely be weak in September.

The next graph is a 5-yr daily of AMZN with 50 and 200 day moving averages. The 200 dma often acts as a AMZN2gravitational force which pulls the 50 dma toward the 200 dma whenever the 50 dma becomes significantly “dislocated” from its 200 dma in either direction.  In this case, the 50 dma is currently 23% above the 200 dma. The last time this degree of separation occurred, the stock rewarded short-sellers with a quick $100 drop for a 25% gain.

AMZN3Finally, lets look at today’s intra-day action in AMZN, which I believe was bearish.  The entire stock market shot straight up at today’s open (Wed, Sept 9). But at lunchtime, when the stock market reversed course and headed lower, AMZN was hit even harder.  For the day, the SPX closed 1.7% below its high of the day, but AMZN closed down 2.4% from its intra-day high.   In the context of the two graphs/analysis above, I believe this is a bearish omen for AMZN’s stock.  In fact, once again AMZN stalled out at $530 and sold off quickly from there.

To be sure, if the Fed is successful in propping the stock market up and pushing it higher, AMZN will move higher with the overall market.  However, AMZN’s current valuation is now just silly.  The stock trades at over 77x “forward” earnings.  Of course there’s one problem with this metric:   AMZN has lost money in two of the last three years, is losing money on trailing twelve month basis and is projected to lose money in this current quarter.  So what makes the Wall Street prognosticators think that AMZN will make any money over the next twelve months?

My report shows why AMZN is absurdly overvalued and how the patient investor can make a lot of money shorting AMZN.  The report includes a section on using options.  Several readers who have purchased this report in the last six weeks have reported back to me some impressive gains using puts:    AMANZON dot CON.

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Existing Homes Sales Fantasies

Seasonally adjusted, annualized numbers are in no way the actual number of housing units sold during a given month.  The National Association of Realtors takes samples from every region, statistically infers the number of homes sold countrywide during the month, “seasonally adjusts” that number, then computes an “annualized rate” based on its estimates and its adjustment to its estimates.

Not much different than Emeril Legasse taking a handful of this and a handful of that plus a pinch of his seasoning and “BAM” we got our stew.

Having said that, I have no doubt that there was a bounce in home resales in the late spring, early summer.  Why?  Because of this – click to enlarge image:

MortRatesExisting home sales on based on closings (escrow clears). When the NAR reports home sales for a given month, it’s based on contracts that were signed 30-60 days prior to a purchase closing. July sales are thus based on contracts signed in May/June.  You’ll note that mortgage rates starting moving higher in mid-May.  Historically this always triggers a rush into the market by potential buyers (“can’t risk rates going any higher”).  Furthermore,  I know from watching activity in Denver that there was literal mad scramble by mid/lower-segment buyers to get in on the rush into housing before prices go any higher.

It was stunningly analogous to watching the blow-off top of stock market bubble, when retail investors rush to get in on the action.  I’ll have more to say about today’s report later this week, but I have strong data which suggests that lot of the buying was being done by “investor/flippers.”  Anecdotally: I am seeing more “for rent” signs outside of houses all over Denver than I have ever seen before (even more than in 2008-2010);   Denver has become one big “new price” sign;  inventory is starting to flood the market, especially in the over $1 million segment.  Note:  the NAR’s inventory numbers are highly lagged (2-3 months).

On many days when the SPX gets hammered, the homebuilders rally because the algos sell stocks and buy the 10-30yr Treasuries (flight to “safety”/  earn yield trade).  They also pile into the homebuilders because their black boxes are programmed to buy housing stocks when rates drop (LOL).

But today was different:  the SPX fell off a cliff, Treasury yields dropped, but the homebuilders are getting demolished.  Here’s the 5-day graphs from my 2 favorite short-sell ideas.  You can access these reports here:   Homebuilder Short Sell Reports  – click to enlarg:

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Here’s a comment submitted to a reader of this blog today:

Just sold a home in the Chicago suburbs in an upscale neighborhood, on the market for 6 months, lower price 3 times, put money in to update kitchen, finally sold. We had lived there for 20 years, kids grown, most of the neighbors preping to sell next year. All I can say is good luck!

Short Seller’s Journal: More On Housing

The only data that gets more statistically distorted and incompetently analyzed than the housing data is the Government inflation, GDP and employment numbers.  In some cases it’s a toss-up.   The builder sentiment index is bordering on retardation.  Builders are always optimistic, especially because they use other people’s money and take fees off the top.  The “sentiment” index always seems to peak at the top of the market.

Housing starts and permits are are almost equally as useless, especially seasonally adjusting and annualizing the data.  Literally, a start is counted with a builder sticks shovel in the ground on land which has a permit attached.  Homebuilders will always file permits on land they own because it costs next to nothing.  “Starts and permits” do not necessarily translate into revenue producing events.  If anything, homebuilders always load up on too much land and end up writing it down and unloading a lot of it when the market turns.

Just to show you I’m not on drugs, I wanted to share a some comments I received today and yesterday about my views on housing:

Been reading your take on the housing market for some time and I agree completely. I sold my house located in a neighborhood of McMansions and downsized in April. This action freed-up a bunch of cash and also reduced my real estate taxes big time. I moved out to the sticks where neighbors are few, I can do whatever I want w/ my property (no HOA), and taxes lower. Considered following your advice and just renting, but the rental market here is not very good (high rents, few options) and I found a place I was able to pick-up on the cheap since I was a cash buyer and could act quickly.

If/when things really fall apart I would rather be where I am at vs where I was (around a bunch of clueless yuppie-types who are used to writing a check for everything).

Get this… the guy who bought my old place financed 104% of the sales price! He went VA which requires no down pmt, but charges all these crazy fees which are just tacked onto the loan amount. So he is already under water and will likely become another “victim of the banks” when the housing and mortgage market blow-up again. Unreal.

And this:

I’ve said it before and I’ll say it again: The market in Denver terrifies me. I am happy that we didn’t end up buying a home late last year / early this year, but according to “news” sources, people just keep snapping up apartments right and left in Denver, and vacancies still seem to be very low. After trying to rent something basic (when we realized buying was out of the question,) we were outbid on APARTMENTS; in some cases, there were 15 applicants for one unit. That’s why we’re living with family for another year to try to save up more money to either move out of state, get a decent apartment here, or try to buy. I am not optimistic.

On the other hand, I do see a lot of “new price” signs everywhere. Doing a simple search on Redfin reveals that a lot of the higher priced homes in the Highlands, Wash Park, etc. (assumed to be hot areas) are sitting for weeks and even months in some cases.

And this:

Thought you might be interested in this. We are also seeing a lot more houses on the market. Brokers are reporting that things are really slowing down. Remember, S.E. Michigan has been one of the strongest economies (fueled by sub-prime auto loans). Thank you for all you do!!!

As for the homebuilder stocks, they are at their most extreme valuation levels in history relative to their underlying financial fundamentals.  Debt and inventory levels now exceed the 2005/2006 highs in these metrics, at the peak of the housing bubble.  Nominal p/e ratios are also at historically high levels for market tops.  And net income is distorted by several accounting gimmicks, the most extreme being that every homebuilder with few exceptions has moved “interest expense” off their income statement and on to the balance sheet (capitalized interest).

Perhaps the only balance sheets more nuclear than homebuilder balance sheets are big bank balance sheets.  This will not end well and you can take profit from the extreme overvaluation in homebuilder stocks by taking advantage of my research reports.  Here’s my two favorite short ideas right now, although all of the companies I have written reports on will tank hard – click on pic to access reports):

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And here’s why – note that both of these homebuilders have substantially underperformed the Dow Jones Home Construction Index over the last year. The balance sheets of these two companies are nuclear – click to enlarge:

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You can access my homebuilder reports by click on this link: Homebuilder Short Sell Reports

Once I get my homebuilder reports updated with current financials, I will be raising the price.    Here’s a testimonial from someone who bought one of the reports and was able to time the big drop in early January with puts:

I’ve never got a bigger return for the value. $25 for the report, $4k invested in January 2016 near-money puts since August (2014)  and closed today (early Feb)  for $3.2k of benefit. 

As an added benefit, Cramer recommended the stock on the right about 6 months ago!!