Tag Archives: Short Seller’s Journal

Housing: “Business Is Slowing Down – Quickly”

There has been no improvement in underlying consumer liquidity conditions. Correspondingly, with no fundamental growth in liquidity to fuel increasing consumer activity, there is no basis for a current or imminent recovery in the housing market. – John Williams, Shadowstats.com

The title quote is from a supplier to the homebuilding industry in south Florida, which had been one of the hottest housing markets in the country.  He said his business has suddenly fallen off a cliff and development projects that had “been on the board” have been postponed indefinitely.  Isn’t it a lot better to get information about what is going on at “ground zero” in the housing market rather than from some snake-oil salesman who bills himself as the National Association of Realtors’ chief economist or the sleazeballs on the financial “news” networks?

Make no mistake about it, regardless of the degree to which you want to put faith in the “seasonally adjusted, annualize rate” home sales reports generated by the National Association of Realtors and the Census Bureau, the housing market is a 10 mile train skid on a nine mile track.

Something is blowing up big time in the banking system.  Everyone is talking about the interminably collapsing price of Deutsche Bank stock, but Bank of America, down only 2% right now, was down as much as 6% earlier today – same with Citi.  The price plunge in these banks occurred in absence of any news reports or events that to which the sell-off could have been attributed.

The BKX bank stock index is down 25% from its high in mid-July:

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While the entire U.S. financial media/community seems to be obsessed with the sell-off in Deutsche Bank stock, I’ll note that Barclays stock is down 50% from its 52 week high and Citigroup and Bank of America are down over 33% from their 52 week highs.   Because of the incestuousness that has developed in the monstrous derivatives market, all of these banks are genetically connected.   It’s really irrelevant which bank blows up first because when one goes, they’ll all go.

I am tying together housing and the big banks because the Central Bank money printing has reincarnated the housing bubble Frankenstein and the big banks – via the catastrophically massive Ponzi derivatives scheme – have been the transmission mechanism of printed money into the housing market.

The unexplained 25% collapse in the bank index is telling us that the financial system is melting down and that’s the most direct evidence that it’s not just a Deutsche Bank problem.  Perhaps DB is merely 2016’s “Bear Stearns.”

The entire global financial system, including and especially the U.S., is headed for a collapse that will be worse than what occurred in 2008.  In fact, it will be nothing more than an extension of an unavoidable collapse back then that was deferred with QE and Taxpayer money.  The concerted Central Bank move to take interest rates negative are telling us that the QE rabbit is no longer available to pull out of the hat.  Negative rates are telling us that the skidding train mentioned above is on the 9th mile of that skid.

A colleague of mine called me today and told me that he’s been monitoring the housing market activity on the west coast of Floriday, a previously white hot housing market.  He said inventory is up about 15% from year end he is getting a constant flow of “price reduced” emails. I am seeing the same thing and getting the same number of “price reduced” emails from the MLS-based website I use to track the Denver market.  And a reader posted this comment yesterday about Las Vegas, which also had been red-hot market for home sales and buy-to-rent schemes:

Supply is building quickly (no pun intended) and sales are in the toilet. Housing in going to be one of, if not the lead horses that take this economy down. A friend of mine who lives in L.A. and lives in Vegas 3-4 days per week for business, just rented a furnished luxury two bedroom condo with all utilities including cable and internet for $1250 per month. He also said that there were many choices available in the Las Vegas area. We are just at the beginning of the end.

A Warning Signal For The Housing Market

PennyMac (PFSI) is a mortgage finance company that describes itself as  a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the production and servicing of U.S. mortgage loans and the management of investments related to the U.S. mortgage market.   The stock has been getting crushed and insiders have been dumping shares:

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The graph above (click on image to enlarge) shows PFSI vs. the BKX banking index.  Other mortgage finance stocks have been getting hammered as well.  That steep decline that started on Dec 24 in the graph above was not accompanied by any news triggers.  In fact, PFSI signed a new “warehouse finance” credit line with Credit Suisse for $100mm at the end of the year.  That should be great news if you are a housing and mortgage finance perma-bull.

When stocks decline steeply with no related news events to set-off the price-drop – and when one of the largest individual holders,  Leon Cooperman, is unloading shares – it’s the market’s way of signalling problems not yet recognized by the peanut gallery.  PFSI reported its Q3 earnings on November 4 and with a cursory glance they looked to be what the market expected.  The stock did not do anything unusual.

The action in PFSI’s stock and in some other related mortgage finance and real estate stocks tells me that the “invisible hand” in the market is signalling a significant downturn coming in both home sales volume and mortgage finance volume.  Per the invaluable work of John Williams (Shadowstats.com), when you remove the statistical manipulation and annualization of the existing home sales report for December, it turns out that existing home sales evaluated on an unadjusted monthly basis for the fourth quarter was down 20% from the third quarter.  That’s  not something that you’ll hear about or read in mainstream media or on venues like Seeking Alpha or Realmoney.com or the Motley Fool or Business Insider.

That is what I believe the market is seeing and is why stocks like PFSI are taking a beating outright and relative to the overall banking sector.   Anecdotally, I just got a call from a friend who told me house that would have sold for $620k on his block last year was put on the market two weeks ago for $599.  The neighbors all thought the price was too low.  Two weeks later, today, the price was lowered to $579.  I bet that price will be lowered at least once or twice more before it sells.  And this is an area that was still seeing bidding wars last summer.

UntitledSometime in the next few weeks I’ll be featuring another mortgage-related stock in my Short Seller’s Journal that still has a LONG way to fall before it gets back to its 2008 great financial crisis, pre-QE price.  My picks this week are significantly outperforming the market.   SHORT SELLER’S JOURNAL

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The weekly issue of the Short Seller’s Journal has been released this afternoon.  This is my best issue yet and includes an options trading resource (emailed separately).  I have identified a short-sell idea that takes advantage of a highly leveraged company exposed to a highly cyclical industry and has significant exposure to subprime counterparty risk.   I also have a leveraged energy sector “Quick Hit” play to take advantage of what appears to be yet another rumor-driven short-squeeze move in the price of oil last week.

Finally, I have some preliminary comments for subscribers on AMZN’s earnings report.   Every quarter I seem to discover more problematic aspects to AMZN’s business model.  By the way, as predicted, the growth in its cloud computing sales – the so-called AWS buiness – are starting to show signs of slowing down.

Click here or on the image above to subscribe:  SHORT SELLER’S JOURNAL

Thanks for putting together an informative report with actionable ideas. For years I have stared in stunned disbelief as the rigged up, QE inflated stock market kept defying gravity but it looks like the chickens are coming home to roost now. With the ideas you provide, I hope I can take advantage of the coming downturn with some profitable trades.

They Don’t Bother To Hide The Criminality In Silver And AMZN Trading

When they’re trading 1.5 billion oz. of silver each day in London, the ‘silver’ fix each day is a complete sham. Now the fix has been found to be openly manipulated, it will be interesting to see what happens with the London silver market. – David Jensen, “Silver: Is It The LBMA’s Greatest Rig?”

Strange things are happening in the global financial markets.  Most likely evidence of a massive systemic earthquake starting to shake.  As many of you know, the LBMA price fix “fixed” the a.m. priceUntitled of silver 84 cents below the front-month futures price right before the price was “fixed.”   This graph to the right shows how the criminal activity went down (click to enlarge).

I awoke this morning and had an email from Bill “Midas” Murphy asking me if the $13.98 low print shown on Kitco was correct.  I responded that it looked like there were some “low hanging” stop loss orders that were attacked in an attempt to get the price of silver down.  This was before I had learned of the crime committed on the LBMA.

I would love to have an explanation from the committee in charge of overseeing the LBMA fix.  The fact that paper silver bounced back almost immediately is evidence that the a.m. fix was a fraudulent act in its entirety.  But for what purpose?  The price fix is supposed to be the price that balances out the amount of physical silver bars being offered for sale and bid to purchase during morning trading.

The entities selling silver on Thursday morning didn’t just get their faces ripped off, they had their entire head decapitated.  These are the entities who should be pressing for investigation.  It’s money out of their pocket or their clients’ pockets.

This was my final comment to Bill on this matter:   The insider elite are laughing at everyone spending so many calories and so much energy reporting, discussing, analyzing and agonizing over the paper vs. physical issue.  Meanwhile the biggest theft in history is taking place right under our nose as they pluck every ounce of physical gold and silver out of the system from the idiots and the idiotic mining companies who are willing to sell it at the paper price levels.  The biggest wealth transfer mechanism is the Central and bullion banks.  The banking system has been ripping us off in every aspect of our lives for decades. Why on EARTH would anyone question or doubt that they’re ripping us off in the precious metals market? Seriously. Everyone in their heart of hearts knows that gold/silver are the ultimate root of any monetary system.  Why would the banks rip us off using paper currency schemes and not touch the metal?  For God sakes, the metal is what they’re ultimately after.  That’s why the first thing any military does when they take over a country is it takes the gold.  The most recent proof of this Ukraine.  That practice goes back to at least the Romans.

Someone sent me an excerpt from Ted Butler’s “news” letter in which he rationalized away the reason why the registered gold vault account at the Comex was so low now.  Bill, I seriously think he was on LSD when he dreamed that one up.

I guess what’s most troubling about the above incident is the blatancy with which the LBMA crooks implemented their crime.  They made no attempt whatsoever to cover up the crime scene.  It’s almost like they’re taunting us.

This brings me to the issue of AMZN’s trading today.  AMZN stock ran up $52, or 8.9% ahead of its quarterly earnings to be released right after the NYSE close on extraordinary volume of 14 million shares – 2.4x more than its 10-day average daily volume.   After the market closed, AMZN’s stock plunged as much at $95 from the close on a disappointing report.  It closed out the after-hours session down $85.

I bring this up because there is no question in my mind that the stock was likely run up by one of the hedge funds with a big position in the stock (or possibly two or three in collusion).  The purpose of this would be to generate a frenzy of buy activity into which the hedge fund could unload a chunk of stock.  This also implies that one (or more) of the big funds was given a “heads up” from inside AMZN about the nature of the report.

The reason I am convinced this is what happened is because I was part of a junk bond trading operation in which this occurred all the time.  Back then we had to be more careful because laws were actually somewhat enforced, sometimes with vigor.  But if I had a big position in say, Trump Casino bonds,  occasionally I would get a tap on the shoulder from one of the Trump bankers in corporate finance who would whisper, “uh, I don’t like your Trump position.”

In present times, the laws and regulations designed to prevent/discourage insider trading are rarely, if ever, enforced.  Insider information sharing is almost as blatant as the London silver price fix today.   Of course, I have zero sympathy for any of the idiots who chased the stock higher today.  Anyone who goes near that stock without doing extensive analytic work will get what they deserve.  Some of these big hedge funds who have massive AMZN positions are eventually going to get impaled on their holdings (or at least the pensions they manage money for will).  Here’s an example of one of the retail trading oriented dopes who was giddy about AMZN stock before it reported – Timothy Collins of TheStreet.com’s Real Money:  I’m Bullish On AMZN Ahead Of Earnings.   Nice trade, Tim.

Speaking of AMZN’s numbers, I will hopefully get around to updating my AMAZON dot CON report with the latest information sometime in the next 5-7 days.  If you have already purchased the report, please email for the update.  If you have not yet purchased the report but have thought about it,  I am going to raise the price again (it takes a lot of time and energy to work on this Company’s numbers) once the full research report is published with the update.

Today’s after hours action was just the start of the AMZN bubble deflation process.  I don’t know what path it will take, but I know that AMZN’s stock will eventually fall from the $550 after hours close today toponzi_scheme below $100.   To be sure, there will be periods of time when the stock moves up sharply because Jeff Bezos is the king of highly misleading stock promotion and there’s plenty of idiots out there who lap up his drool with blind greed.  My stock report will help you understand why AMZN is one of the world’s greatest Ponzi schemes.

FB/AMZN: Idiotic Retail Daytraders And Hedge Fund HFT Algos

Facebook reported it’s Q4 earnings today.  Its “NON-GAAP” earnings “beat” the consensus “NON-GAAP” estimates.   As it stands, “GAAP” accounting standards have become an outright joke.   The use of “NON-GAAP” reporting has transformed the entire accounting industry into an adult cartoon.  “Beavis an Butthead” for corporate earnings reports.

Why even report financials?  Why not just report NON-GAAP earnings per share?  Feed the ducks what they want to eat.  “NON-GAAP” translated into English means, “here’s our earnings if you exclude all the expenses we take every quarter that we consider to be non-recurring.”  It’s income not including recurring “non-recurring” expenses.  It’s an absolute unethical perversion of financial accounting – kiddie porn for Wall Street analysts and moronic institutional investors.

Based on today’s GAAP earnings and the after-market level of trading, FB trades at 78x trailing EPS, 16x revenues, and 36x cash flow (EBITDA).  This is an insane level of valuation for a company with sales derived primarily from mobile advertising.  I guess a fact that escapes most investors is that as the global economy sinks deeper into recession, the decline in consumer spending will accelerate and advertisers will cut way back on ad spending budgets.  I’ll let you figure out what that will mean for companies like FB that derive their revenues from corporate ad spending budgets.

Perhaps even more confounding is the fact that the stock of AMZN, which reports its Untitlednumbers tomorrow after the close, jumped $10 in after-hours when FB reported.  I’m not sure why online widget sales would be correlated with the growth rate of the number of people who log onto Facebook, but it exemplifies the degree which the U.S. stock market has become disconnected from economic reality. (click image to enlarge)

Having said that, making money by trading irrationalities in the stock market is a big part of what my Short Seller’s Journal is all about.  I deliver a weekly newsletter to your email with one long-term fundamental short-sell play and one or two “quick hit” trade ideas. The quick hit ideas are designed to take advantage of stocks which pop in price in absence of any true bona fide fundamental reasons.  The textbook example of this is Weight Watchers. Just today in fact, the idiots on financial news tv were reporting how a tweet by Oprah caused the stock to jump 23% to close at $13.75.

What they didn’t tell you is that she pulled the same stunt right after Christmas – only stock after that closed at $23.05.   I put this stock in my Short Seller’s Journal released on January 3 at $22.95/share.  Subscribers who took advantage of this idea and held until Friday that week made 34% on their short position.  The ones who played the puts I SubscriptonGraphicsuggested made 600%.

SSJ is a monthly subscription with four reports each week.  I include some fundamentals-based research, ideas for using puts and calls to replicate shorting a stock and capital management suggestions.

I am one of your new subscribers. I am a novice in Option trading field. I am just writing to let you know that I enjoy SSJournal and especially examples of how trading strategies could be executed, with actual described cases – to me that is the best way of learning. I think that is most valuable for me. Shorting companies symbols are, of course, very important to get one going in the right direction as well. – subscriber from Sparta, NJ

Energy Debt Is Imploding – Housing Market To Follow

“The banks are still clinging to their reserve reports and praying. The bonds are all toast. Most are in the single digits or teens.”

I asked a former colleague of mine from my Bankers Trust junk bond days who is now a distressed debt trader what was going on in the secondary market for energy sector bank debt and junk bonds. The quote above was his response.

Zerohedge posted a report last night with a Bloomberg article linked that describes what is going on – “Assets selling for far less than what companies owe lenders – Creditors are left holding prospects no one wants to buy.” the article further cites the ridiculously small reserves that four biggest banks in the energy sector have set aside: “Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — have set aside at least $2.5 billion combined to cover souring energy loans and have said they’ll add to that if prices stay low” – (Bloomberg).

Considering that those four banks combined probably have at least $100 billion of exposure to sector – not counting the unknowable amount of credit default swaps and other funky OTC derivative configurations the financalized Thomas Edisons at these banks dreamed up – the $2.5 billion in loss reserves is a complete joke. It’s an insult to our collective intelligence. Of course, Congress and the SEC took care of the problem of forcing banks to do a bona fide mark to market after the 2008 financial crash.

This is the 2008 “The Big Short” scenario Part 2. The banks underwrote over $500 billion in debt they knew was backed by largely fraudulent reserve estimates. I bet most of the “professional” investors at pension funds and mutual fund companies were not even aware that oil extracted from shale formations trades at a big discount to WTI. When creditors go to grab assets in liquidation, they’ll get a few handfuls of dirt to resell. And when the bondholders go to grab assets, they’ll get an armful of air.

The same dynamic is about to invade and infect the housing market. Notwithstanding the incredulous existing home sales report released on Friday – (how can the NAR expect us to believe that December experienced the largest one month percentage increase in existing home sales in history when the economy is sliding into recession and retail sales were a disaster?) – the housing market is on the cusp of imploding. I was expecting to see a unusually high number of new listings hit the Denver market right after Jan 1st and so far my expectations have been met. The acceleration of new listings is being accompanied by a flood of “new price” notices. I believe a rapid deterioration in home sales activity will take a lot of the housing bulls by surprise.

The stock market’s reflection of my assertions about the housing market is exemplified by the homebuilder stock I feature in this week’s issue of the Short Seller’s Journal. This stock is down 16% from when I first published a stock report on this Company in 2014. This is a remarkable fact considering that the S&P 500 is down only 4% in the same time period AND the Dow Jones Home Construction Index UP 8% in that time period. This company happens to originate a high percentage of the mortgages used to finance the sale of its homes.

The company relies on an ability to dump these mortgages into the CDO and Bespoke Tranche Opportunity configures conjured up by Wall Street in order to seduce dumb pension and mutual fund money into higher yielding “safe” assets. As the energy debt market implodes, it will cause the entire Wall Street supported asset-backed credit market to seize up. The next biggest losers after the energy sector will autos and housing. Businesses owners looking to improve their utility bills may want to check out commercial electricity quotes 2019 for more information on affordable energy.

This week’s Short Seller’s Journal features the above housing stock plus a copy of the report I originally published (the data is old but the ideas behind why the stock is a short are intact, if not more pronounced) plus I have presented two “Quick Hit” energy sector stock short ideas. All three ideas are accompanied with my suggestions for using puts and calls to replicate shorting the stock You can access this report here:Untitled

 

 

A Quick Note On Today’s Existing Home Sales Report

What about the biggest rise in existing home sales on record in December? These guys are offending my sensibilities. By virtue of all the fake statistics and bogus market action, there has to be something seriously wrong right now.  –  John Embry email to IRD

Existing home sales are based on a sample estimate of contract closings.   The actual “sale” took place when the contract was signed 30-45 days ago.  The headline report is based on a “seasonally adjusted annualized rate.”  The big farce about statistics, away from the obvious fact that “seasonal adjustments” are a polite way to say “statistically manipulated,” is that the metrics reported in terms of percentage changes can make an economic report sound a lot better than the underlying reality.

The underlying reality in today’s report is that allegedly a technical glitch cited by the NAR pushed some closings from November into December and therefore artificially depressed the November number and  artificially inflated the December number.  This is only part of the explanation for the 14% seasonally adjusted annualized rate of increase for December vs. November.   The balance of the 14% seasonally adjusted annualize rate metric is most likely attributable to the “seasonally adjustments” applied to the sample data.  It’s analogous to taking the scraps of pig of the slaughterhouse floor and putting these scraps though a grinder to produce “sausage.”

By the way, does anyone find it a bit suspicious that a “seasonally adjusted annualized rate” metric is used to describe what may or may not have occurred during one month? Think about that.

Notwithstanding this statistical smoke and mirrors, pending home sales for November dropped 1% vs an expected rise of .7%.  Pending home sales are contracts signed, most of which evolve into closings, which become existing home sales.  Some of this decline in pending home sales should have been reflected in December’s existing home sales – in other words, it calls into question the credibility of the existing home sales report.

Furthermore, the November pending home sale number should translate into lower closings, i.e. existing home sales, for January.  That latter assertion relies on an unwillingness of the NAR to completely lampoon the statistics for January’s report- an assumption that may be highly naive based on the degree to which the NAR has been adulterating the statistics for at least the last year.

One last thing.  If you find yourself wanting for some intellectual entertainment this weekend, compare the commentary from the NAR’s Larry Yun in the Pending Home Sales report and his commentary in the Existing Home Sales report.   It epitomizes the phrase, “through the looking glass.”

The homebuilder stocks are rebounding right now on the back of that rigged existing home sales report.  One of the featured stocks in this week’s report will either be a homebulder or a homebuilder supplier.  The last h/b supplier I featured is now up (i.e. down in price) over 13% from the 12/7/15 report.  The last h/b I featured 2 weeks ago is now down 8%.  You can access my Short Seller’s Journal here:   SSJ Subscription

 

The Oil And Gas Credit Collapse Is Going To Be Catastropic

We’re headed toward another big credit explosion and I think what’s happened in the oil market is will trigger that.  The perfect poster-child of what’s going to happen to the stock market is what’s happened to Kinder Morgan stock.  – interview with CrushTheStreet.com

It speaks volumes about the corrupted nature of our financial markets that this news report does not cause a huge downward price adjustment in the entire stock market:  Big Banks Brace For Oil Loans To Implode.  This is, minimally, t $500 billion issue and that number does not incorporate at all the size of the derivatives exposure to oil sector debt. Move along, nothing to worry about here…it’s reminiscent of circa 2007, when Bernanke stated that the problems developing in the mortgage market were “contained.”

And speaking of Kinder Morgan, I listened to the Kinder Morgan conference call because I’m working on stock report on KMI. I forgot what a Broadway play production these investor calls are. Richard Kinder is a grade-A snake-oil salesman. Everyone seems to have forgotten that he was the COO of Enron when Enron’s Ponzi scheme was being constructed. He was college buddies with Ken Lay. But he left in 1997, buying out an Enron pipeline subsidiary with William Morgan.  Everyone thinks Richard Kinder is squeaky clean and they don’t associate him with Ken Lay. It’s emblematic of the ignorance, denial and fraud embedded in our system. KMI has been issuing debt to make its dividend payments and the only reason they cut their dividend is because their bankers told them they would have trouble issuing more debt this year. Kinder kept referencing the possibility of stock buybacks on the call. Are you kidding me?  You can visualize the sycophantic big bank analysts writing everything down word for word in order to regurgitate them robotically in farcical equity reports designed to suck more idiots into the stock.

More on Kinder Morgan soon. As for the manipulation of the gold market, I’ve mostly managed to separate my emotions from the attacks on gold.  When you think about it, they have no choice.  The ONLY way they can support their lies about the relative health of the economy and financial system is by attacking gold and making sure the price doesn’t take off.  Just like they can print an unlimited amount of dollars using Bernanke’s infamous “electronic printing press” to defer the collapse of the banking system, they can print an unlimited amount of paper gold certificates in order to use the paper trading apparatus of the Comex to keep the price contained. Like all paper schemes, this one will fail spectacularly.  The only unresolved issue is timing.  That’s impossible to predict.

CrushTheStreet.com and I discussed these topics in depth and others, including China and the U.S. economy:

Hidden Financial Bombs Are Starting To Detonate

I am impressed, you answered very promptly even on a busy day;  Thank you for the note and the consideration of timing on my sign up. I appreciate both! I’m also already pleased with the value of your service.   – Comments from two subscribers to the Short Seller’s Journal

The S&P 500/Dow have started to sell-off relentlessly since the beginning of the year.  This morning’s excuse was IBM and, once again, China.  I guess Obama’s “America is exceptional” speech infected the brains of more people than I thought.  The sell-off in the stock market surely can’t be attributable in any small way to the fact that the U.S. stock market never been more overvalued in its history.    Not only is it trading at record valuation levels, the “value” of the stock market is resting on a mountain of debt and derivatives in the U.S. financial system of unprecedented size and diminished credit quality.

Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief.  – William White, form chief economist of the BIS – LINK

Unpayable debt and counter-party defaulted derivatives are the hidden financial bombs that are beginning to detonate both globally and in the United States.   Faux analysts like to point to the fact that consumer debt is lower now than in 2009.  However, the reason the amount of stated debt declined was a result lender write-offs – not consumers repaying any debt.   Now automobile and student loans are at all-time highs – over $1 trillion outstanding now in each.  Unlike mortgage debt, this debt is largely unsecured (cars are collateral that depreciate quickly in value).

Well-known/regarded hedge fund titan Ray Dalio of Bridgewater Associates was in the news today warning that “if assets remain correlated, there’ll be a depression”  LINK

Who am I to question Ray, but he’s got it wrong.  The mistake embedded in his assertion is that economic activity is currently connected to the massive global financial bubble. Sorry Ray, but if you use unmanipulated data, the world is already in an economic depression. The price of oil, the baltic dry index, the Cass shipping and freight index (LINK a volume-based index down almost 20% since 2013), etc – measurements of actual economic activity – are reflecting a level of economic activity globally and in the United States that is suggestive of a deep recession on Main Street.

I’ll say we are in trouble up here [Canada]. Aside from the obvious, oil and the Canadian dollar crashing in unison, we have a seriously over-priced housing market and a totally unsustainable condo boom in our two largest cities. Alberta is an unfolding disaster and, for all intents and purposes, the largest province by far Ontario, is bankrupt. Superimpose on that a neophyte federal government and a totally clueless central bank head and we are headed for very big trouble. At least gold is $1575 in Cdn. Dollars and will explode higher shortly.  – John Embry in an email exchange with IRD

The error in Dalio’s assertion is that financial assets drive economic activity.  The “wealth effect.” Unfortunately, while record hedge fund management fees might determine whether or not Mr. Dalio decides to bid on the latest Picasso up for auction or buy a new Ferrari this year, the majority of wealth accessible to most humans has nothing to do with the current price of AMZN or the dividend paid on KMI.  The “wealth effect” concept is yet another Keynesian rhetorical diaper wrapped around the mechanism by which the elitist suck wealth from the middle class.

Real Main Street economic activity has been receding since 2008.  The illusion of economic “growth” has been created by issuing more debt used by the hoi polloi to buy cars, unaffordable homes and online college degrees.  At this point in time, the relative trading level and correlation of financial assets has nothing to do with economic activity, other than maybe the ad rates that can be charged by the adult Nickelodeon channels:   CNBC, Fox Biz and Bloomberg.   This chart perhaps best illustrates this point – click to enlarge:

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This graph on the left plots Kinder Morgan stocks vs. the S&P 500 for the last two years.  KMI here represents real economic activity because its business is based on the price and demand for oil.   Even if you want to argue that KMI has take or pay contracts, if its customers can’t pay, KMI does not “take” revenues.  It’s no coincidence that KMI’s stock has crashed along with the price of oil (and gas).   The misnomer of “Dr. Copper” is that it should be “Dr. Oil.”  After all, for every pound of copper used it takes energy to mine that copper.  For every product produced with copper, it takes energy to produce that product.  For every copper-embedded product purchased, it takes energy to deliver to that product.  Get it?

It’s the human condition to believe irrationally that bad things can’t happen.  Denial and hope are the two strongest forms of the human emotional defense mechanism.  But bad things are starting to happen.  The price of oil is telling us that the world, including the U.S., is already entering an economic depression.

Referring back to that graph of KMI vs. S&P 500, KMI represents the “poster child” for the U.S. economic system.  KMI is loaded down with debt that will eventually become unpayable, some of it possibly by this fall.   It’s also emblematic of the proverbial stock idea that was supposed to be “can’t miss.”  It paid a huge dividend and it’s business model was “safe.” But KMI’s operating income has plunged 45% from Q3 2014 to Q3 2015.  How on earth is that reflective of a stable business model?

KMI is somewhat of a Ponzi scheme.  It relies on generating growth to fuel bullish stock reports and investor interest.  It relies on an unfettered ability to issue debt in order to pay its dividend.  I’m working on a big research report and you might be surprised at my conclusions.  Kinder Morgan stock has already decimated a large number of investor portfolios.  And yet, the indefatigable  bullishness on the stock coming from  the “it’s too cheap to sell” or “opportunity of a lifetime” CNBC zombies continues to blossom.

The orange line in the graph above is the S&P 500.  You can see just how disconnected the real economy, as represented by KMI stock, is from Ray Dalio’s “financial assets.”   And you can also see that the real economy is headed for a depression.  In other words, it’s too late to worry about whether or not correlation among financial assets will cause an economic problem.   “Financial assets” are a creature of Wall Street.   The real economy is a creature unto itself and adheres to natural laws uncorrelated with Wall Street’s money-making gimmicks.  Sorry Ray, but eventually your “financial assets” will be inextricably correlated with the real economy.

People want to believe that bad things don’t happen.  But the laws of nature don’t care about what people want to believe.  These laws are not necessarily correlated with human faith and bad things are about to happen out “there.”

If you want to hedge yourself against what is coming, subscribe to my Short Seller’s Journal.  Homebuilder stocks are getting hammered this week and I will be featuring two ideas connected to homebuilders that have not been sold down hard yet.

Tuesday Morning Massacre In The Large Cap Miners

Something very ominous is brewing behind the scenes.  It is systemic and related to a ongoing credit collapse behind “the curtain.”  The indicators are right in front of our eyes, regarded with indifference by a zombified, propaganda-infused public injected with the “hope heroin” greedily pedaled by Wall Street, the Fed and the Government.

The credit markets are in a slow state of collapse led by high yield bonds and leveraged loans, which have been declining for the better part of a year.  Recently that decline has turned into a tail-spin in the more toxic classifications of “high yield.”

It was revealed by Zerohedge LINK, in a display of adept journalism, that the Dallas Fed has quietly told its regional member banks to refrain from marking to market their distressed energy loans and to defer an initiative to foreclose on defaulting loans to technically bankrupt energy companies drowning in debt.

Of course the head of the Dallas Fed, a former high-ranking Goldman Sachs executive, has issued a polished denial.  We need to two more denials before the intel is confirmed to be true.  But I know from a source that it is indeed true.  A couple months ago a little birdie passed on the remarks made to his client from the President of a big regional bank in Texas:  the economic hurricane brewing from the collapse in energy prices is about to hit Texas hard and it will hit every sector of the Texas economy.

Back to the Dallas Fed issue, does this sound familiar?  Anyone happen to learn anything from “The Big Short” about the fraudulent behavior of the big banks when their fraudulent business activity hits the wall?   One well-read analyst dismissed this latest round of fraud by attributing it to the change in mark to market accounting rules passed in 2009.  But these rules were meant to enable the big banks to avoid reporting asset mark-downs for GAAP purposes, enabling them to mark-up bad assets.  This further enabled these banks to misrepresent their earnings per share in quarterly earning reports.  But that analyst is whistling past the graveyard on this issue.   This is much more insidious and fraudulent than changing the GAAP accounting rules.  This is about telling banks to let bankrupt companies pretend to be solvent, just like we saw in The Big Short with CDO’s and CLO’s.

This latest move by the Fed is an attempt to play Atlas and hold up the world of banking on its shoulders.  It’s about enabling these banks to avoid taking big hits to their reserve capital.  This lets the banks carry on as if nothing is wrong when they should be selling assets hand over fist and raising even more capital to use as reserves against collapsing energy assets.   The canary has died and the Dallas Fed is going to try and carry the canary out of the mine before anyone sees the corpse.

Now does it sound familiar?  This is exactly what happened in 2008 in the mortgage market. Only this time around it will be worse because this dynamic will encompass most of the biggest lending sectors of the financial system:   energy, auto loans and student loans.  Don’t worry, mortgages won’t be left out.  The pool of homebuyers sitting on 0-3% down payment mortgages has bubbled up.  I predict that within the next twelve months a large portion of the subprime mortgages disguised as FNM/FRE/FHA conventional loans will be come quite problematic for the banks.

How does this relate to the Tuesday morning massacre in the large cap miners?  Whenever something really bad is about to hit the system, one of the first places it manifests is with an unexplainable raid on the mining stocks.  I thumbed through the news announcements of every single component of the HUI index and could not find any news reports that would have triggered a 6% hit on the HUI.   Some of the biggest stocks, like BVN, Kinross and Newmont are down 7-10%.   Unexplainably down.

This could lead to a big attack on gold/silver, so brace yourself.   It won’t last and anyone who sells into it out of fear will regret doing so in 3-6 months.

The global financial system is collapsing.  It was reported yesterday that Italy’s big banks are melting down.   This will trigger a big daisy-chain explosion credit default swaps.  I expected to see the S&P futures down 2% on this report.  They were up 1.5% overnight. I guess a melt-down starting in the European financial system is a good reason to pile into U.S. stocks…But on the contrary, I knew I would wake up to find the SPX futures up big and that’s what confirmed for me that the system is collapsing.   The Tuesday morning slaughter in the large-cap miners is Fed’s attempt to get that canary past the last group of people entering the mine and it further confirms that the global economic system is failing.