Tag Archives: silicon valley bubble

AMAZON dot CON: Find Out Why The Stock Was Slammed After Q4 Earnings

A reader reports: Hi Dave, I’m in the Amazon puts with 300 strike price that I bought on Jan 17 before they reported earnings. I’ve made $7500 on the trade. Also I read that you think silver is the play of the decade! I’m going to take those profits plus $2500 and buy a box of silver eagles and put the rest of my capital from the put trade back into more AMZN puts!  Thanks!

NOTE:  AMZN has run up over $40 since its post-earnings slam.  Of course Jeff Bezos being the consummate stock market operator announced a $5 billion share buyback. He’s attempting to push the stock back up because he dumps shares every month and, more important, when AMZN drops back to earth (i.e. below $100) he’ll have a cadre of pissed off employees who agreed to take a high percentage of their salary in restricted stock units (RSUs).  At today’s current price, Bezos has paid out close to $500 million worth of RSUs at much higher stock prices.   Imagine thinking you are getting paid $100k but when you go to sell your stock, you find out that your salary during that time period was really $25k…My report explains these RSUs and shows why AMZN is the biggest Ponzi scheme in the modern era…

I’ve updated the AMAZON dot CON report and show what was in the numbers that triggered a $190 sell-off in the stock.  I’ve also updated the section of the report that outlines using calls and puts to short AMZN.

AWS will be one of the first cracks of the glacier but what will bring the whole thing down is when that RSU payment scheme unwinds itself.  Most analysts are overlooking one of the biggest accounting schemes at AMZN in the history of any large public company:  how they pay a good chunk of base salary in RSUs and walking through what that means. That is going to be a day of reckoning for the business school case studies.   – a contact of mine who is a former Silicon Valley insider that specialized in tech company accounting

My report details AMZN’s Restricted Stock Unit accounting scheme and the ramifications for this Ponzi compensation scheme when the stock engages in bona fide price discovery, i.e. tanks hard.  You can access this report here:  AMAZON dot CON

Pension “Armageddon” Got Closer Today

The IMF fears underfunded pension funds could be encouraged to chase returns through riskier investments such as direct credit exposure or by engaging in securities lending in order to improve their funding ratios….The IMF’s comments echoed similar warnings from the OECD in May, when the Paris-based body said pension funds’ move towards riskier asset classes could result in their solvency position being “seriously compromised” in turbulent markets.  The Financial Times

Yesterday I published a post in which I outlined the reasons why pension fund underfunding is likely much worse than the level admitted by the funds themselves and industry professionals.  The biggest culprit is “mark to market” of illiquid investments into which pension managers have “shoe-horned” themselves in order to give the appearance of rates of return that are higher on paper than in reality.  A good friend and colleague of mine, who happens to be very bright, had this comment in response to my post:

Pension funds are collectively insolvent.  Basically the asset managers running these funds have refused to MTM them properly, expecting the assumed X% annual return to normalize.  Sorry, buddy: this IS the new normal (which is why the unfunded situation gets worse every year… assume 8% and get 0% for enough years and the chasm only widens… in fact, by the rule of 72, your funding gap will double every 9 years if that 8% gap is reality).  This is where the rubber hits the road, the issue which is going to punch the middle class in the gut like a steel 2×4.

This is the same dynamic that torpedoed the big bank balance sheets when the housing/subprime credit bubble popped, as big chunks of home equity, mortgage and other credit products were marked close to par when in reality most of it was worth zero. And this is one of the primary reasons that the Fed is devoting significant resources to keeping the stock market propped up:  pension fund insolvency is at risk.

One of the biggest areas of concern for pension funds is their private equity investments. Most pension funds have been literally “throwing” cash at private equity firms who have been shoveling money into real estate rental schemes and, even worse, have fueled the private market Silicon Valley bubble.

No one ever admits to a bubble until after it’s popped and has destroyed trillions in value – just ask Alan Greenspan and Ben Bernanke.   Bernanke never saw the housing bubble that he and Greenspan blew and Janet Yellen can’t see the tech bubble that she and Ben inflated. Fortunately for Ben,  Yellen will get tagged with the Silicon Valley collapse.

It looks like the process has begun.   Dropbox tried to IPO at its private market valuation of $10 billion and had to pull it, as the public market disagreed with BlackRock, who led the last round of funding for Dropbox.  Dropbox has revenues of a little more than $200 milion and zero net income.  The $10 billion valuation was insane.  But the game is over now.

As more Silicon Valley “unicorns” fail to monetize at levels even remotely close to their private market bubble value, the value of the private equity holdings of pension funds will vaporize.  The valuation process for a tech start-up is typically a “bi-nomial” function.  It either works and is a home run or it’s worth close to zero because the company’s technology will never generate income (Amazon?).

This implies that private equity holdings held by pension funds are significantly overvalued on the “mark to fantasy” basis and will eventually be subjected to massive valuation write-downs.  It’s a vicious negative feedback loop that is magnified by the “leverage effect” created by the existing level of pension fund underfunding.

Here’s what the problem looks like visually (source:  Zerohedge):

This graphic shows five of the steepest declines in stock price for tech companies IPO’s in the last Untitledfew years. Note that the steep decline occurs since 2014. This means that private equity funds with investments in comparable companies have mark down their private market holdings to reflect better the valuations given to these companies in the “cash out” market. This also means that pension fund private equity fund holdings are likely already significantly overvalued.

As for real estate?   One of the primary source of funds for the buy to rent portfolios amassed by private equity firms like Blackstone has been pension funds.  A recent merger of two public buy-to-rent REITS valued one of the entities’ current home rental portfolio at 50% of its original carrying (i.e. investment) value.   As with tech p/e investments, this transaction effectively revalues down significantly pension fund investments in this sector.

The bottom line is that pension funds are already significantly underfunded.  Recent developments in the real estate and tech investment private equity market suggest that the level of underfunding is about to be bludgeoned.