Tag Archives: stock bubble

But We Were Told “It’s Different This Time”

“U.S. Officials Meet in Secret Over Junk-Loan Frenzy as Recession Alarms Flash”

U.S. Treasury Secretary Steven Mnuchin on Thursday led a secret meeting of top U.S. financial regulators on the risks to global markets from the recent surge in corporate borrowing…”No details were provided on the gist of the discussion, though according to the statement the panel heard an ‘update from Craig Phillips, a counselor to Mnuchin, on recent market developments involving corporate credit and leveraged lending'”. – Article link

Something(s) is(are) starting to melt-down “behind the scenes” in the global financial system.  The meeting referenced above is the “tell.”  Craig Phillips, “counselor to Mnuchin,” was formerly a managing director and member of the Global Operating Committee of BlackRock.   It’s quite likely that Phillips’ former colleagues have put Phillips on high alert about problems developing in the credit markets, both domestically and globally.

Even more interesting is that fact that Fed Chairman, Jerome Powell, gave a speech recently in which he denied that credits risks are mounting in the system:  “Business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate.”

Powell’s assertion eerily echoes a similar comment made by then-Fed Head, Helicopter Ben Bernanke in mid-2007 about subprime mortgage risk being “contained.”  But Powells’ statement followed by a meeting convened by Treasury Secretary Mnuchin under the advisement of a former BlackRock hatchet-man is the silent scream of insiders who see the probability of another financial system tsunami forming…

Of course, the yield curve has been sending these warnings for about a year.  But they keep telling us it’s different this time…

Utter Insanity…

That’s the only way to describe this stock market. It won’t end well for the hedge funds whose algos are chasing price momentum nor for the retail daytraders playing the game of “greater fool.” Apparently CSCO and WMT’s “beat” triggered a multi-hundred point spike in the Dow on Thursday. Funny thing about that. CSCO’s one-cent “beat” has been routine since the late 1990’s.

Walmart also “beat.” But for Walmart, the numbers below the headline sucked. The 1.1% revenue growth was well below 1% if you strip out gasoline price inflation from Sam’s Club numbers. Speaking of Sam’s, membership revenue was down 7.9% (these are FY Q1 vs Q1 last year). Operating income was down 4.1%. The “beat” was manufactured by one-time “other gain” that was not defined in the 8-K. This enabled WMT to generate the headline “beat.” Cash flow provided by operations dropped from $5.1 billion last year to $3.5 billion this year – not good. Despite the deteriorating financial fundamentals, the stock market added over $7 billion to WMT’s market cap.

But that’s a tempest in a teapot compared to the the IPO valuations of companies like Lyft, Uber and WeWork. These companies not only have never made a dime of profit, but they bleed billions negative cash flow. Yet, a $50 billion stock market valuation set by the underwriters is greedily bought into by hedge funds. That’s your pension money at work, folks. It’s amusing to watch the hand-puppets on financial cable tv frown when stocks like Uber and Lyft drop a quick 20% from the IPO date.

The prized “jewels” in the stock market – i.e. the stocks with the best performance over the last 4 months – are the ones with escalating operating losses on increasing revenues. But the stocks soar when the earnings announcement hits the tape with the phrase “beat estimates” – which means the company lost slightly less money than forecast by Wall Street’s brightest.

But these companies all share a common trait: a tragically flawed business model in which the only way to grow revenues is to charge the end user a price that does not cover the all-in cost of producing the product or providing the service but which attracts end-users because the price is lower than the competition. Despite eventual financial doom from the start, the stock market currently values this type of business model over companies that generate bona fide cash/economic profits.

I’m reviewing a company in my next issue of the Short Seller’s Journal which trades at a price/sales multiple that is 15-times higher than the industry average. Its operating losses grow at a double-digit rate every quarter sequentially and double every quarter year-over-year. We can’t use any of the other tradition valuation metrics because the company has negative cash flow, massive net losses and negative forward earnings. This is all nothwithstanding the fact it operates in a highly cyclical industry with declining sales.

I mention this to illustrate just how far off the rails the stock market has traveled. The current stock market bubble is at an historical extreme. It’s worse than 1999 or 1929 – I don’t care what the manipulated GAAP p/e ratio comparison shows. I was trading tech stocks in the late-90’s bubble and this current one is worse. IT’s utterly insane…

April Retail Sales Soiled The Bed Sheets

Perhaps the perma-bullish Wall Street analysts should contribute to retail sales by stocking up on Depends – like the Merrill Lynch analyst who forecast retail sales to climb 0.7% ex-autos. Retail sales, preliminarily, were said to have declined 0.2% from March.   The “core” retail sales group – retail sales not including autos and gasoline – were flat. Wall Street’s finest expected a consensus 0.4% gain.

I say “preliminarily” above because, if you scan the Census Bureau’s report you’ll note “asterisks” in several major line items.

This means that “advance” numbers were not available for those retail sales categories.  Thus, the CB guesstimates the number based on past numbers for that category.  It also means the Census Bureau can overestimate that category for headline purposes with the intent to revise lower in future reports.

Retail sales numbers are reported on a nominal basis.  If they were to be adjusted by a real rate of inflation, the month to month decline from April likely would have approached at least one half of one percent.

Funny thing about the guesstimate for new car dealer sales.  The OEM’s report actual deliveries to new dealers every month.  I would have to believe that new car dealers have highly automated sales tracking software. It would seem that the Census Bureau should be able to have a fairly accurate data sample and estimate for April new car dealer sales well before the middle of the following month. But using the (*) enables the Government to manipulate the number into a favorable outcome for the “advance” report.

We know that the average household – i.e the 80-90% of all households – are struggling under the weight of record monthly debt service requirements on a record amount of consumer debt. This plight is made worse by the fact that real wages are declining.  Not to judge Wall Street analysts harshly (said sarcastically), but it should be obvious that retail sales were going to show a decline in April.  Imagine how bad the actual number must be if the Government has to release a guesstimated report showing a nominal decline.

In my weekly Short Seller’s Journal, I present detailed analysis of weekly economic reports. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

Gold And Silver May Be Setting Up For A Big Move

The price of gold soared over $13 Monday as flight-to-safety money flowed into the precious metals sector while the stock market went into a downward spiral. I see Monday’s market action as a preview of what’s in store going forward as price discovery once again engulfs the stock market and causes the most extreme stock bubble in U.S. history to deflate.

Despite the fact that it seems to be taking forever for gold and silver to enter into a prolonged move higher, the chart below should offer encouragement.

Gold, silver and mining stocks are deeply oversold technically. It’s  obvious that the western Central Banks are throwing everything they can at the gold price via the paper derivative gold markets in London and NYC in an attempt to prevent a massive move higher.  The data for gold and silver futures on the Comex show that the banks are working hard to stunt any rally by unloading loads of paper gold on the market.

This effort is rewarding the large physical gold importing countries in the east. India’s net import of gold jumped by 27 per cent to 192.4 tonnes in the first quarter of calendar year 2019 from 151 tonnes in the same period last year. In April India unofficially imported 121 tonnes of gold, up significantly from April 2018. The increase in import activity is attributable to the lower gold price. Note that the official statistics do not include smuggled gold, which is thought to average around 25 tonnes per month. China also has stepped up its gold buying over the last several weeks.

At some point the Fed is going to be forced by the market to cut the Fed Funds rate, as the 1yr Treasury is now yielding less that the Fed Funds target rate. In addition, the yield curve is inverted from 1yr out to 7yrs, with a steep inversion between the 1yr and 3yr Treasurys. It won’t take much flinching from the Fed to ignite a rally in the metals. In addition, the investor sentiment as measured by MarketVane is about as low as I’ve seen it in a long time (34% bullish for both gold and silver).

Despite the 600 pt sell-off in the Dow today, complacency persists, along with an expectation that the Fed will continue to support wanton speculation in the stock market.  But the inverted yield curve, combined with an effective Fed Funds rate that is above the interest rate used to calculate the quantity of free money given by the Fed to the banks on excess reserves, is strong evidence that the Fed is losing its ability to control the financial markets.  At some point the Fed and its western Central Bank collaborators, led by the BIS, will also lose control of the gold price.

Massive Asset Bubbles And Cheap Gold And Silver

Notwithstanding today’s absurdly phony and propagandistic employment report, it’s becoming more apparent by the week that the Fed and the U.S. Government are once again preparing to print more money. I don’t know when the Fed will revert to more QE but I would argue that the intense effort by the banks to use the Comex as a conduit to control the price of gold is a probable signal – just like in 2008 from March to October. Several FOMC officials have already hinted at the possibility of employing “radical” policy measures to keep the system from falling apart.

Silver Liberties invited on its podcast to discuss the extreme overvaluation of financial “assets” and the extreme undervaluation of real money – gold and silver – and the related derivative of real money – mining stocks.

Semiconductor Chips Are The Modern Dutch Tulip Bulbs

The semiconductor stocks continued melting up last week until Intel threw some cold water on the Dutch tulip bulb price-chasing party. TXN reported Tuesday after the close. Revenues declined 5% from the year-earlier quarter. The management stated that “demand continued to slow across most markets. TXN then said Q2 revenues would drop 10% from Q2 2018. It said earnings would be down 13%. Management also explained that historically down-cycles last 4-5 quarters. With the Company 2 quarters into a down-cycle, it would seem that the “green shoots” sighted by some companies in Q1 are nowhere in sight. TXN insiders have been very heavy sellers of the stock.

The chart below is a good example of how the hedge fund algo and retail daytrader momentum chasers operate:

TXN closed around $116.50 before it reported. On the headline “beat,” TXN stock spiked up $6 almost immediately. Price-discovery then set in, as the after-hours traders dumped shares in response to the fundamental reality of TXN’s earnings report. The stock closed after-hours at $113.70, down nearly $9 from the initial reaction to the headlines.

But then on Wednesday Dutch tulip-mania gripped TXN’s stock price. TXN opened green from Tuesday’s regular close and traded as high as $118.99. This is despite the Company’s lowered guidance for the next few quarters. The last time TXN experienced a two-quarter sequential decline in revenues was in 2001 during a recession.

The only news that might have affected TXN’s stock price on Wednesday was a warning about possible further deterioration in its business that accompanied Amphenol’s Q1 earnings report. But Amphenol’s report should have affected TXN’s stock negatively. This market action is exactly like the price-chasing action in late 1999/early 2000.

Semiconductor stocks are the 2019 version of Dutch tulip bulbs. Recall the price of Dutch tulip bulbs rose to insanely high levels during the mid-1630’s, as people chased the price of Tulip bulbs higher, hoping to re-sell them for a profit. With no warning, the price crashed in February 1637.

That’s how the dot.com bubble behaved, including the sudden sell-off that began in March 2000 without any prior warnings other than common sense. I expect that is the same path that the chip stocks will follow. The chip stocks are melting-up in price in complete divergence from the underlying fundamentals. Whereas previously several companies expressed hope for green shoots in the second-half of the year, the last few companies to report (Siltronics, Nanya, TXN and Amphenol) have not mentioned the possibility of a recovery in the sector for the second half of the year.

Xilinx (XLNX) reported a “miss” on Wednesday after the close. Its stock plunged 17% on Thursday. Prior to that, the stock was trading at an insane 12x sales. XLNX’s data center business was down 12% sequentially and 7% yr/yr (the cloud growth is slowing).

Intel reported an obligatory revenue and EPS “beat.” But the market finally payed attention to guidance. INTC cut full-year and Q2 guidance. Management said customers were becoming more cautious, especially in China. Data center inventories are larger than was commonly thought. INTC also said it expected a much more difficult flash memory market. These are chips used in consumer electronics, scientific instrumentation, robotics and medical electronics. INTC stock dropped 9% on Friday.

The chip stocks are setting up for an epic sell-off. Trump can slap the Fed around like a race-horse’s ass while making juvenile demands for lower rates and more money printing all he wants. At some point the collapsing underlying economic fundamentals will remove the termite-eaten legs from beneath the market’s barstool.

The commentary above is an excerpt from the latest Short Seller’s Journal. To learn about the semiconductor stocks I’m shorting and recommending to my subscribers, please visit this link: Short Seller’s Journal information.

The Historical Stock Bubble And Undervalued Gold And Silver

When the hedge fund algos inevitably turn the other way and unload stocks, a meaningful amount of the capital that leaves the stock market will likely rush into gold and silver.  The record hedge fund net short position on the Comex will add fuel to the move in gold/silver.

James Anderson of Silver Doctors/SD Bullion invited me to discuss the largest stock bubble in U.S. history and why gold is extremely undervalued relative to the U.S. dollar.  (Note:  at the 20:44 mark I reference China’s foreign reserves to be $1.2 trillion. This is the dollar amount of China’s reserves; China’s total foreign reserve is $3 trillion).

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

The Stock Market’s Great Fool Theory

The current stock market is the most dangerous stock market I have seen in my 34+ year career as a financial markets professional. This includes 1987, 1999-2000 and 2007-2008. The run-up in stocks has been largely a product of momentum-chasing hedge fund algos on behalf of the large universe of sophisticated hedge funds which are desperate for performance. In the context of the obviously deteriorating economic fundamentals, the performance-chasing game has become a combination of FOMO – “fear of missing out” – and the Greater Fool Theory – praying someone else will pay more for the stock than you just paid. There’s also likely some official intervention going on as well per the chart below.

Most, if not all, of you are aware of the degree to which the Trump Administration – primarily The Donald and Larry Kudlow – are using the ongoing the trade negotiations to issue opportunistic headline statements about the progress of a potential deal at times when the market appears ready to drop off a cliff and for which Trump’s advisors know the hedge fund fund algos will respond positively. This chart shows this “positive trade war news” effect (from Northman Trader w/my edits):

The problem with relying on this device is that eventually the market will fatigue of “false-positive” news releases and revert to bona-fide price-discovery.

To see an example of the algos’ response to a headline report and the subsequent “price-discovery” action, let’s examine the release of Bed Bath and Beyond’s (BBBY – $17.99) earnings. BBBY announced its Q4 2018 earnings on Wednesday this past week after the close:

The initial headlines reported an earnings “beat.” The algos drove the stock from its $19.40 closing price to as high as $21.27 on those headlines. But in the real world, the details of BBBY’s financial statements showed that sales declined both in Q4 vs Q4 2018 and for the full-year 2018 vs 2017. Even adding back the large impairment charge which BBBY took in Q4 this year, operating income was still down 37% vs Q4 2017. The stock closed Wednesday’s extended hours trading session 18% below the headline-driven high-tick. This is what happens when reality gets its claws into the market.

The best example of the Greater Fool Theory right now is the semiconductor sector. Semiconductors are “hyper” cyclical. The companies mint money in a strong economy and come close to hemorrhaging to death in recessions. The SMH ETF has gone up 55% since the Fed/Trump began re-inflating the stock bubble. Some individual stocks have nearly doubled.

I’m sorry I missed the opportunity to get long this sector on December 26th. But, given that the move up has been in complete defiance of the actual industry fundamentals, would I have held onto a long position until today? Probably not. The momentum-junkies have been chasing the sector higher with fury based on the faith in the “second-half of 2019” recovery narrative currently preached by CEO’s who have to deliver bad results in Q1 and take a chain-saw to guidance for 2Q. But the message is: “trust me, there’s a huge recovery coming in Q3”

Semiconductor CEO’s are notorious for rose-colored forecasts for the market out in the future. Interestingly, a German wafer manufacturer issued stern, if not refreshingly honest, guidance for 2019 when it said that previous guidance was “under the condition that order intake would need to revive meaningfully in the second half of 2019.” The Company went on to explain that “because of the general economic slowdown and geopolitical uncertainties as well as ongoing inventory corrections in the whole value chain, the timing of a market rebound is not visible.”

Wafers are the building block for semiconductors and integrate circuits. Siltronic is a leading global wafer manufacturer. If Siltronic is seeing a meaningful decline in wafer orders, it means the companies that make the semiconductors and integrated circuits are flush with inventory that reflects lack of demand from companies that use chips to manufacture the end-user products.

The higher probability trade right now is to short the semiconductor sector (along with the overall stock market). Trading volume across the board is declining, standard market internals are fading and sentiment is back to extreme bullishness (Barron’s cover two weeks ago wondered, “is the bull unstoppable?”).

I can hear a bell in the distance signalling the top. I suspect a large herd of price-chasers will realize collectively all at once that there’s going to be a rush to find the next Greater Fool but the Greater Fool will be those stuck at the top.

The above commentary is an excerpt from my weekly subscription newsletter. I bought puts on a semiconductor stock today that has gone parabolic despite horrendous numbers for Q4.  I’ll be discussing that stock and a couple others this Sunday. To learn more, click on this link:  Short Seller’s Journal information

Gold And Silver May Be Setting Up For A Big Move

Gold and silver are historically undervalued relative to the stock and bond markets. The junior mining stocks overall are at their most undervalued relative to the price of gold since 2001. Gold’s relative performance during the quarter, when the stock market had its best quarterly performance in many decades, is evidence of the underlying strength building in the precious metals sector.

Furthermore, the stock market is an accident waiting to happen. By several traditional financial metrics, the current stock market is at its most extreme valuation level in history. This will not end well for those who have not positioned their portfolio in advance of the economic and financial hurricane that is beginning to “move onshore.”

Bill Powers invited on to his Mining Stock Education podcast to discuss the precious metals sector and the economy:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

When The Stock Market Reversal Happens, It Will Be A Whopper

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

Before I saw that quote from Hussman on Twitter, I was contemplating how the trading patterns this year in bond and precious metals markets remind of the way they were trading in 2008 before the financial system de facto collapsed.  Similarly,  the tech stocks right now remind me of the blow-off top that occurred in tech stocks in January/February 2000 just before the Nasdaq collapsed. Whether intentional or not, the Fed has quickly re-inflated the tech bubble that was punctured in September 2018.

Semiconductor stock bubble – The tech bubble in the late 1990’s was led by the semiconductor sector and the dot.coms. 98% of the dot.coms taken public during that time are no longer around. The semiconductor industry is “hyper”-cyclical. It has a beta of 11 vs. the economy. Right now the global economy is in melt-down mode. Just ask the IMF, BIS and World Bank. The Fed and Trump have recklessly reflated the stock bubble that led to the all-time high in the stock market. The semiconductors closed at an all-time high on Friday. It’s sheer insanity given that industry fundamentals are melting down.

The semiconductors seem to be the most responsive to trade war headlines that promote optimism. But the stock prices of these companies have completely disconnected from reality. Every possible consumer-driven end-user product market that uses semiconductors is contracting. As an example, Samsung warned on Thursday that it’s Q1 profit would be down 60% from Q1 2018, citing declines in prices for memory chips and lower demand from OEMs for screens, like the OLED display that Samsung makes for Apple’s iPhone.

Samsung’s inventory is now twice the size of two of its primary competitors. One of those competitors is Micron (MU – $41.72), which admitted that its inventory had soared to 137 days and was on its way to 150+ days in the current quarter. The slashing of capex by chip manufacturers has barely begun.

Semiconductor sales fell 7.3% in February from January and 10.6% from February. Globally semiconductor sales fell across all major categories and across all regional markets (not just China) in February. In North America, chip sales were down 12.9% from January and 22.9% from February 2018 (vs. down 7.8% in February in China sequentially from January and down 8.5% from Feb 2017).

The trade war has nothing do with the sales crash in the chip industry. And the “green shoots” seen in the “blip” in China’s PMI which ignited the stock market last Monday is not confirmed by the PMI data coming from Japan and South Korea, two of China’s largest trading partners. In short, when semiconductor stocks reverse from this insane run higher, they will literally rip in reverse. DRAM average selling prices (ASP) plunged over 20% in Q1 2019. The ASP is projected to drop another 15-20% in Q2 and a further 10% drop in Q3. So much for the 2nd half “recovery” that several chip company CEO’s saw in their crystal ball during the latest quarters’ conference calls (Micron, Lam Research, etc).

Inventories of all categories of semiconductors are extremely high because the demand for the end-user products (smartphones, autos, electronics) is plummeting, which means the inventory of those products is soaring as end-user demand contracts. The best news is for shorts looking for contrarian signals is that Cramer has been on his CNBC show recently pounding the table on chip stocks. This can only mean that his Wall Street sources are trying to move big blocks of stock out of their best institutional clients.

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The commentary above is an excerpt from my latest Short Seller’s Journal.  In that issue I present a detail rationale with data to explain why the U.S. economy is tanking and I provide several stocks to short, along with put option suggestions and capital management advice.  You can learn more about this weekly newsletter here:  Short Seller’s Journal information.

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