Tag Archives: short sell ideas

“Mother Of All Blow-Offs?”

People who look for easy money invariable pay for the privilege of proving conclusively that it cannot be found on this earth. – Jesse Livermore

Boeing’s stock has gone parabolic. It’s doubled since April 2017:

The stock now trades at a 31x PE ratio, for whatever that’s worse. I’m sure if I went through the numbers closely, I could find numerous accounting manipulations which added a copious amount of non-cash income to BA’s numbers. BA’s revenues on a trailing 12 month basis are flat. From 2015 to 2016, its revenues declined 1.7%. On a trailing twelve month basis vs. 2016, its revenues have dropped 3.2%.

Historically paying a nose-bleed PE ratio for a company with deteriorating revenues and an enormous amount of debt does not produce a good result. Chasing the price-momentum higher and waiting for a bigger idiot to buy shares from you works well until the music stops. Then everyone gets hurt.

The Dow moved up an average of 120 pts per day in the nine trading days since the end of 2017. This includes one day in which the Dow dared to close 12 pts lower. That one day felt like a bear market. Over this entire period the Dow has appreciated 4.4%. Since the election, including the 1,000 pt plunge in the Dow futures that occurred when it was apparent Trump would win, the Dow has soared nearly 50%.

What’s driving this? Since late August, the public has literally thrown money blindly into passively managed ETFs which automatically distribute the cash inflow by market cap weighting into the stocks in the index that underlies the ETF. This means that most of the gains are concentrated in the stocks in the Dow/SPX with the largest market caps, which then drives the Dow/SPX higher. For instance, last Friday, the Dow was up 0.89% but AMZN was up 2.2%, Netflix was up 1.8%, GOOG was up 1.5% etc.

There’s no telling how much longer this can persist without some type of accident. Judging by the data on cash in customer brokerage accounts at the big online brokers , I would have to believe that this last push from the retail investor is nearing its completion. Data from the fund industry has shown a massive migration of investor cash moving out of actively managed mutual funds and into passive index funds. This would include money managed on behalf of individuals by registered investment advisors.

Most investor sentiment indicators are showing extreme levels of bullishness – historically unprecedented levels.  The short interest on the NYSE has melted down nearly to zero.   The Acting Man blog has written an excellent post which details the sentiment indicators flashing bright red warning lights – I recommend a perusal:   Mother Of All Blow-Offs

For now, the raging bulls chasing momentum conveniently ignore  the deterioration in “new orders” and “employment” numbers in deference to the statistically manipulated headline reports that purport to show economic growth. Most of the bullish reports are overweighted with “sentiment” and “hope” metrics that offset declining real economy statistics.  Credit card and auto loan delinquencies – both subprime and “prime” –  continue to increase a double-digit rates (see WFM or COF’s latest quarterlies, for instance).  As for the “prime” credit rating designation of 2017, it’s not your mother’s “prime” credit rating.

At this point I don’t want to speculate on how much longer that Dow/SPX/Naz can go straight up. Historically this is the type of market behavior which has marked the blow-off top of speculative manias and has preceded serious market accidents.

Is this the “Mother Of  All Blow-Offs?” Probably.

Part of the commentary above was excerpted from the last issue of the Short Seller’s Journal. Believe it or not, there’s 100’s of stocks that declining or have set-up short-sell opportunities.  Long term puts are historically cheap and shorting certain companies is a no-brainer.  I had my subscribers short Sears at $12.   Last week I presented homebuilder to short that is down 6.7% on the week, so far.  To learn about about this newsletter, click here:  Short Seller’s Journal information

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

For Clues On The Economy, Follow The Money

“There is nothing new on Wall Street or in stock speculation. What has happened in
the past will happen again, and again, and again. This is because human nature does
not change, and it is human emotion, solidly built into human nature, that always
gets in the way of human intelligence. Of this I am sure.” –Jesse Livermore

The profitability of lending/investing money is a function of both the rate of return on the money loaned/invested and the return (payback) of the money. The historically low interest rates are squeezing lenders by driving the rate of return on the loan toward zero (note: “lenders” can be banks or non-bank lenders, like pension funds investing in bonds).

As the margin on lending declines, lenders, begin to take higher risks. Eventually, the degree of risk accepted by lenders is not offset by the expected return on the loan – i.e. the probability of partial to total loss of capital is not offset by a corresponding rate of interest that compensates for the risk of loss. As default rates increase, the loss of capital causes the rate of return from lending to go negative. Lenders then stop lending and the system seizes up. This is what occurred, basically, in 2008.

This graphic shows illustrates this idea of lenders pulling away from lending:

The graph above from the St Louis Fed shows the year over year percentage change in commercial/industrial loans on a monthly basis from commercial banks from 1998 to present. I have maintained that real economic growth since the initial boost provided by QE has been contracting for several years. As you can see, the rate of growth in lending to businesses has been declining since 2012. The data in the chart above is through October and it appears like it might go negative, which would mean that commercial lending is contracting. This is despite all of the blaring media propaganda about how great the economy is performing.

The decline in lending is a function of both lenders pulling back from the market, per reports about credit conditions in the bank loan market tightening, and a decline in the demand for loans from the private sector. Both are indicative of declining economic activity.

This thesis is reinforced with this graphic:

The chart above shows the year over year percentage change in residential construction spending (red line) and total construction (blue line). As you can see, the growth in construction spending has been decelerating since January 2014. Again, with all of the media hype about the housing market, the declining rate of residential construction suggests that the the demand side of the equation is fading.

The promoters of economic propaganda have become sloppy. It’s become quite easy to invalidate Government economic reports using real world data. Using the Government-calculated unemployment rate, the economic shills constantly express concern about a “tight labor market.” Earlier this week, Moody’s chief economist Mark Zandi asserted that (after the release of the phony ADP employment data) the “job market feels like it might overheat.” The problem with this storyline is that it is easy to refute:

The graph above is from the Bureau of Labor Statistics productivity and costs report. The blue line shows unit labor costs. As you can see, unit labor costs have been decelerating rapidly since 2012. In fact, labor costs declined the last two months. The last time labor costs declined two months in a row was November 2013.

See the problem? If labor markets were “tight” or in danger of “overheating,” labor costs would be soaring, not falling. This is why I say the shills are getting sloppy with their use of manipulated Government economic reports. It’s too easy to find data that refutes the propaganda. I remember Mark Zandi from my junk bond trading days in New York. He was an “economist” for a fixed income credit analysis service (I can’t remember the name). I thought his analytic work was questionable at best back then. I continue to believe his analysis is highly flawed now. Recall, Moody’s is the rating agency that had Enron rated triple-A until shortly before it collapsed. That says it all…

Speaking of the labor market, I wanted to toss in a few comments about November’s employment report. The BLS headline report on Friday claims that 255k jobs were created in November. However, not reported in any part of the financial media coverage, “seasonal-adjustment gimmicks bloated headline payroll gains, where unadjusted payrolls were revised lower but adjusted levels revised higher” (John Williams’ Shadowstats.com).

The point here is that, in all likelihood, most of the payroll gains in the BLS report were a product of the mysterious “seasonal adjustment” model used. Per the BLS report, another 35k were removed from the labor force as defined. Recall that anyone who has not been looking for a job in the previous four weeks is removed from the labor force statistic. Furthermore, and never mentioned by the media/Wall St., the BLS report shows the number unemployed increased by 90k in November.

I don’t know when the stock market bubble will lose energy and collapse.  What I do know is that each time the U.S. stock market disconnects from reality, there’s a period of “it’s different this time,” followed by the crash that blind-sides all of the so-called “experts” – most of whom like Dennis Gartman do not have their own money in the stock market (it’s well-known that Jeremy Siegel invests only in Treasuries).  The retail lemmings who think they’ll be able to get out before the crash will see their accounts flattened like a Japanese nuclear power plant.

Most of the commentary above is from my Short Seller’s Journal, in which I present stocks  to short every week (along with options suggestions).  You can learn more about this newsletter here:   Short Seller’s Journal subscription info.

I’ve been a subscriber for a good part of the year and really enjoy my Sunday evening read. Thank you – received sent this morning from “William”

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