Tag Archives: stock crash

The Coming Run On Banks And Pensions

“There are folks that are saying you know what, I don’t care, I’m going to lock in my retirement now and get out while I can and fight it as a retiree if they go and change the retiree benefits,” he said.  – Executive Director for the Kentucky Association of State Employees,  Proposed Pension Changes Bring Fears Of State Worker Exodus

The public awareness of the degree to which State pension funds are underfunded has risen considerably over the past year.  It’s a problem that’s easy to hide as long as the economy is growing and State tax receipts grow.  It’s a catastrophe when the economic conditions deteriorate and tax revenue flattens or declines, as is occurring now.

The quote above references a report of a 20% jump in Kentucky State worker retirements in August after it was reported that a consulting group recommended that the State restructure its State pension system.   I personally know a teacher who left her job in order to cash completely out of her State employee pension account in Colorado (Colorado PERA).  She knows the truth.

But the problem with under-funding is significantly worse than reported.  Pensions are run like Ponzi schemes.  As long as the amount of cash coming in to the fund is equal to or exceeds beneficiary payouts, the scheme can continue.   But for years, due to poor investment decisions and Fed monetary policies, beneficiary payouts have been swamping investment returns and fund contributions.

Pension funds have notoriously over-marked their illiquid risky investments and understated their projected actuarial investment returns in order to hide the degree to which they are under-funded.  Most funds currently assume 7% to 8% future rates of return. Unfortunately, the ability to generate returns like that have been impossible with interest rates near zero.

In the quest to compensate for low fixed income returns, pension funds have plowed money into stocks, private equity funds and illiquid and very risky investments,  like subprime auto loan securities and commercial real estate.   Some pension funds have as much as 20% of their assets in private equity.  When the stock market inevitably cracks, it will wipe pensions out.

As an example of pensions over-estimating their future return calculations, the State of Minnesota adjusted the net present value of its future liabilities from 8% down to 4.6% (note:  this is the same as lowering its projected ROR from 8% to 4.6%).   The rate of under-funding went from 20% to 47%.

I can guarantee you with my life that if an independent auditor spent the time required to implement a bona fide market value mark-to-market on that fund’s illiquid assets, the amount of under-funding would likely jump up to at least 70%.  “Bona fide mark-to-market” means, “at what price will you buy this from me now with cash upfront?”

For instance, what is the true market price at which the fund could sell its private equity fund investments?   Harvard is trying to sell $2.5 billion in real estate and private equity investments.   The move was announced in May and there have not been any material updates since then other than a quick press release in early July that an investment fund was looking at the assets offered.  I would suggest that the bid for these assets is either lower than expected or non-existent other than a pennies on the dollar  “option value” bid.

At some point current pension fund beneficiaries are going to seek an upfront cash-out. If enough beneficiaries begin to inquire about this, it could trigger a run on pensions and drastic measures will be implemented to prevent this.

Similarly, per the sleuthing of Wolf Richter, ECB is seeking from the European Commission the authority to implement a moratorium on cash withdrawals from banks at its discretion. The only reason for this is concern over the precarious financial condition of the European banking system.  And it’s not just some cavalier Italian and Spanish banks.  I would suggest that Deutsche Bank, at any given moment, is on the ropes.

But make no mistake. The U.S. banks are in no better condition than their European counter-parts.  If Europe is moving toward enabling the ECB to close the bank windows ahead of an impending financial crisis, the Fed is likely already working on a similar proposal.

All it will take is an extended 10-20% draw-down in the stock market to trigger a massive run on custodial assets – pensions, banks and brokerages.  This includes the IRA’s.  I would suggest that one of the primary motivations behind the Fed/PPT’s  no-longer-invisible hand propping up the stock and fixed income markets is the knowledge of the pandemonium that will ensue if the stock market were allowed to embark on a true price discovery mission.

Like every other attempt throughout history to control the laws of economics and perpetuate Ponzi schemes, the current attempt by Central Banks globally will end with a spectacular collapse.   I would suggest that this is one of the driving forces underlying the repeated failure by the western Central Banks to drive the price of gold lower since mid-December 2015.   I would also suggest that it would be a good idea to keep as little of your wealth as possible tied up in banks and other financial “custodians.” The financial system is one giant “Roach Motel” – you check your money in but eventually you’ll never get it out.

“Stock Market?” What Stock “Market?”

“There are no markets, only interventions” – Chris Powell, Treasurer and Director of GATA

To refer to the trading of stocks as a “market” is not only an insult to any dictionary in the world that carries the definition of “market,” but it’s an insult the to intelligence of anyone who understands what a market is and the role that a market plays in a free economic system.  By the way, without free markets you can’t have a free democratic political system.

The U.S. stock is rigged beyond definition. By this I mean that interference with the stock market by the Federal Reserve in conjunction with the U.S. Government via the Treasury’s Working Group on Financial Markets – collectively, the “Plunge Protection Team” – via “quantitative easing” and the Exchange Stabilization Fund has destroyed the natural price discovery mechanism that is the hallmark of a free market.  Capitalism does not work without free markets.

Currently a geopolitically belligerent country is launching ICBM missiles over a G-7 country (Japan).   In response to this belligerence, the even more geopolitically belligerent U.S. is testing nuclear bombs in Nevada.  The world has not been closer to the use of nuclear weapons since Truman used them on Japan.  The stock markets globally should be in free-fall if the price discovery mechanism was functioning properly.

To compound the problem domestically in the U.S., the financial system is now staring down a potential financial catastrophe that no one is discussing.  The financial exposure to the tragedy in Houston is conservatively estimated at several hundred billion.  Insurance companies off-load a lot of risk exposure using derivatives.  The potential counter-party default risk connected to this could dwarf the defaults that triggered the AIG and Goldman Sachs de facto collapse in 2008.   The stock “market” should be down at least 20% just from the probability of this occurrence.  Forget the hurricane issue, Blackrock estimates that insurance investment portfolios could lose half a trillion in value in the next big market sell-off.  Toxicity + toxicity does not equal purification.  The two problems combined are the equivalent of financial nuclear melt-down.

Last night after the news had circulated of the missile fired by North Korea, the S&P futures dropped over 20 points and gold shot up $15.  As I write this, the Dow is up 50 points, the SPX is up over 3 points and gold has been taken down $20 from its overnight highs.  Yet the two catastrophic risks above have not changed in potential severity.   Pushing around the markets is another propaganda tool used by the Government in an attempt to control the public’s perception.  In the words of the great Jim Sinclair, “management of perception economics,” or “MOPE.”

The good news is that, while the systemic puppeteers can control the markets in general, they can’t control the individual parts.  There has been a small fortune to be made shorting individual stocks.  Today, for instance, Best Buy reported earnings that predictably “beat” the Street estimates but it warned about future sales and earnings.  The stock has plunged 11% from yesterday’s close.  The Short Seller’s Journal featured Best Buy as a short in the May 28th issue at $59.  The target for this stock is $12.50, where it was in 2013.  I recommended some January 2019 puts as high probability trade to hit a home run on this idea.

Other recent winners include Chipotle, General Electric, Tesla (short at $380), Bed Bath Beyond in December at $47 and may others.  The more the PPT interferes in the markets to keep the major indices propped up, the more we can make from shorting horrendously overvalued stocks that can’t hide from reality. There’s very few investors and traders shorting the market, mostly out of fear and the inability to do fundamental research.  The Short Seller’s Journal focuses on the areas of the stock market that are no-brainer shorts right now.  You learn more about this product here:  Subscription information.

I really truly look forward to every Monday morning when I get to read through your SSJ. Again, last nights one was great. I have added to the BZH short position and I have had a lot of success adding to CCA each time it has tagged its 200 dma from below. I have done it four times now and each time it has sold off hard within the next several days. I plan to do the same again if it tags it again this time as it has bounced again.  – subscriber feedback received earlier this week (James from England)

 

Household Debt At Record Level – Bigger Than China’s GDP

The economy continues to grow weaker despite all of the Fed, Wall St. and media propaganda to the contrary. The economy is growing weaker due to the deteriorating financial condition of the consumer, which is by far the biggest driver of GDP in the United States. The only way the policy-makers can avoid a systemic collapse is “helicopter” money printing, in which printed cash or digital currency credits is, in some manner, distributed to the populace.

The Fed reported that non-revolving consumer debt (not including mortgage debt) hit $2.6 trillion at the end of the first quarter. Student loans outstanding hit a record $1.44 trillion. Recall that at least 40% of this debt is in some form of delinquency, default or “approved” non-pay status. Auto loans hit a record $1.2 trillion. Of this, at the very least  30% is subprime. A meaningful portion of the auto debt is of such poor credit quality when it’s issued that it is not even rated. Credit card debt is now over $1 trillion dollars and at a record level. The average outstanding balance per capita is $9600 per card for those who don’t pay in full at the end of the month.  Just counting the households with credit card debt  balances, the average balance per household is $16,000.  The average household auto loan balance for all households with a car loan is over $29,000.

The data shows a consumer that is buried in debt and will likely begin to default at an accelerating rate this year. In fact, I’d call these statistics an impending economic and financial disaster. Credit card companies are already warning about credit charge-offs. Synchrony (which issues credit cards for Amazon and Walmart) reported that its credit card charge-offs would rise at least 5% in 2017. Capital One (Question: “What’s in your wallet?” – Answer: “Not money”) reported that credit card charge-offs soared 28% year over year for Q1.  Synchrony, Capital One and Discover combined increased their Q1 provision for bad loans by 36% over last year’s provisions taken.

The monthly consumer credit report last week showed a $12.4 billion increase over May. A $16 billion increase was expected by Wall St. Keep in mind that every month of credit expansion is another new all-time high in consumer debt. Credit card debt outstanding increased by $4.1 billion, which is troubling for two reasons. First, it’s likely that financial firms are lending to less than qualified borrowers, as evidenced by the rising credit card delinquency and charge-off rates. Second, given the declining household real disposable income and savings rate, it’s likely that households are using credit card debt to pay for non-discretionary expenses. The smaller than expected increase in credit is being attributed primarily to slower growth in auto loans.

Speaking of the auto industry, Bloomberg reported last week that auto dealers, in a desperate bid to increase sales and reduce inventory, cut prices on new cars and trucks in July by the most since March 2009. It also reported that used car prices dropped 4.1%. This graph from Meridian Macro Research captures the rapid deterioration auto sales (click to enlarge):

The chart shows rate of change in motor vehicle freight carload volume on a year over year basis vs. per capita auto sales. As you can see, the last time these two metrics were showing negative growth (a decline) and heading lower was 2008. The entire “boom” in auto sales since the “cash for clunkers” program, which ran from July 2009 to November 2009, has been artificially created by a massive expansion in Government-enabled credit and Fed money printing. The impending crash in the auto industry is unavoidable unless the Government resorts to outright “helicopter” money printing (i.e. giving cash directly to households rather than to the banks).

One of the best barometers of consumer financial health is restaurant sales, which are entirely dependent on the relative level of household disposable income that can be allocated to non-discretionary expenditures. Black Box Intelligence’s monthly restaurant industry snapshot,  released Thursday,  showed another monthly decline in restaurant sales and traffic – this one steeper than the past couple of months. I believe this is the 17th successive monthly year-over-year decline. Comp sales (year over year for July) were down 2.8% and comp traffic dropped 4.7%. The latter is more significant, as it better represents actual sales volume because dollar sales are boosted by price inflation. In contrast to these Real World numbers, the BLS reported in its employment report for July that the restaurant industry created 57,000 new jobs. This is not just flagrant misrepresentation of reality for propaganda purposes, it’s outright fraud.

In terms of specifics with the July restaurant numbers, sales declined in 183 of the 195 markets covered by the Black Box Intelligence survey. The worst region was the midwest, where sales declined 3.6% and traffic dropped 5.2%. The best region was California, with sales down 0.7% (price inflation) and traffic down 3.6%. Not surprisingly, the fine dining category outperformed the other industry segments, as it reflects the growing disparity in income and wealth between the upper 1% and the rest. The quick service segment turned in the worst performance.

The above analysis was excerpted from the Short Seller’s Journal, which is dedicated to digging truth out from the Government, Fed and  financial media propaganda.  Contrary to the message conveyed by the stock market’s inexorable climb higher, the average U.S. household, along with the Government at all levels (Federal to local municipal), is on the ropes financially and economically.  The Short Seller’s Journal exposes this reality.   Hundreds of stocks are plumbing 52-week and all-time lows. The Short Seller’s Journal helps you find these stocks before they plunge and take advantage of the most overvalued and most inefficiently-priced stock market in history.   You can find out more here:   Short Seller’s Journal information.

Why Is The Dow Outperforming The SPX And Naz?

“The combination of central banker-applied brute force (buying everything in sight) and deitylike central banker pronouncements has dampened market volatility and frisky free-lancing, but at the same time it has encouraged risk taking (in market positioning, not it business formation). We have thought, and still think, that confidence in central banks and policymakers has been unjustified and thus could erode or collapse at any time. Since the major financial institutions which comprise the financial system are still way overleveraged and opaque (in fact with record amounts of debt and derivatives at present), such a break in confidence could happen abruptly and without warning.” – from Paul Singer’s Q2 investor letter (note: Paul Singer is the founder of Elliot Management, one of the most successful hedge fund management firms since its inception in 1977).

Singer is considered one of the most shrewd and accomplished investors in the modern era. The quote above embodies two of the concepts I’ve been discussing for quite some time in the weekly Short Seller’s Journals:  Central Bank intervention will ultimately fail in spectacular fashion; the Too Big To Fail Banks (TBTFs) currently have more leverage and OTC derivatives – the latter well hidden off-balance-sheet – than just before the 2008 financial crisis/de facto collapse.

Singer has been quite vocal recently about the inevitability of an eventual market/systemic collapse. It’s not a question of “if,” but of “when.” I read an analysis last week from Graham Summers of Phoenix Capital in which he suggests that the Fed would lose control of the VIX – lose control of its ability to keep the VIX suppressed – and a large spike up in the VIX would trigger an avalanche of selling from the $10’s of billions in Risk Parity Funds. These funds buy stocks when the VIX falls and unload stocks when it rises – all based on algorithms which are automatically executed by “black box” computerized trading systems.

I have to believe that the Fed (not the FOMC figure-heads but the Phd “rocket scientist” personnel who work behind the scenes at the Fed) is well aware of this possibility and has
taken the necessary steps to ensure the readiness of a “safety net” that will buffer the selling deluge that would accompany an uncontrollable spike in the VIX.

Upon further reflection, I believe that the eventual “black swan” event will be an unanticipated derivatives explosion that occurs from an out-of-control OTC derivatives position buried deep off-balance-sheet on one of the TBTFs. This is what occurred in 2008. The Lehman bankruptcy/liquidation triggered a massive counter-party failure by AIG on OTC derivatives underwritten by Goldman Sachs. This was the event that prompted then-Treasury Secretary and ex-Goldman CEO, Henry Paulson, to scramble furiously to arrange a Fed/taxpayer bailout of AIG and Goldman. The bailout was extended to dozens of banks, domestic and foreign. But the Goldman/AIG implosion was the nexus.

Circling back to the relevancy of Paul Singer’s quote, the degree of risk embedded in TBTF bank OTC off-balance-sheet derivatives can not be properly assessed because, not only did changes to accounting regulations enable banks to hide derivatives more easily and thereby lie to the institutional investor universe, but bank officials (including CEO’s) lie about their risk exposure to the Fed and to Government regulators. Some bank CEO’s do not even know the full extent of risk hidden on their bank’s balance sheet. Jamie Dimon admitted this when the JP Morgan London derivatives “whale” catastrophe occurred (2012). Having been on a risky bond trading desk in the 1990’s, I can attest first-hand that trading desks have the ability to hide risky or bad positions from a bank’s upper management. We did this every year before our books were marked to market and squared for bonus pool assessment by the risk control and accounting people.

At this point, I thus think that stock market crash event-trigger will be the detonation of a derivatives bomb (Warren Buffet’s weapon of mass financial destruction). Likely a credit, interest rate or currency based derivatives position and related counter-party default. The Fed will not see it coming because it was covered up and never disclosed to the Fed. Is this the flight-to-quality that marks the beginning of the end for the stock market
run?

The Fed heads dating back to at least Alan Greenspan always remark that it’s impossible to know whether or not an asset bubble is occurring until after it pops. Yellen went as far as to suggest there would not be another financial market crisis in our lifetime. These assertions are so absurd that I don’t think a response is necessary. But I ran some varying duration index comparisons and discovered this (click to enlarge):

You can see that the SPX, Dow and Naz were tightly correlated in mid-July. This correlation extends further back in time. You see that the Dow began outperform the SPX/Naz starting Tuesday, July 25th, after AMZN reported an unexpectedly huge earnings miss (the plunge in the green line), the SPX and Naz entered a downtrend while the Dow continued higher.

Back in the day when investors were more likely to on focus fundamentals rather than stockprice momentum, a chart like the one above would elicit references to Dow theory, which asserts that the final stage of an out-of-control bull market culminates with a “flight-to-quality” from risky stocks into the lowest risk market sectors. Traditionally the Dow is considered less risky than the universe of stocks that comprise the SPX and Naz.

The idea behind this theory is that, as big investors sense that smaller-cap, higher-beta stocks have reached a point of overvaluation and high risk, these investors move money from the overvalued stocks into the Dow stocks, which are traditionally considered more stable and more liquid. Investors ride the Dow until the entire market rolls over. Some articles appeared last week which made note of the deterioration in technical indicators. For instance, one analyst noted that the recent string of Nasdaq new highs occurred with “negative breadth” to a degree that ha not been seen since 1999-2000. Negative breadth is when an index has more stocks declining than advancing. It’s a negative divergence that often signals that large investors are moving more cash out of the stocks than is flowing into stocks.

No one knows for sure which of the many hidden “financial bombs” will explode unexpectedly and cause a market melt-down.  But like all Ponzi schemes throughout history, the U.S. Ponzi scheme will implode under a massive weight of hubris, extreme greed and widespread ignorance disguised as complacency.

The above commentary is from the latest Short Seller’s Journal. Despite the inexorable climb to new records in the Dow, SPX and Naz, dozens of stocks are falling from the sky like pheasants in hunting season.  The Short Seller’s Journal can help you make money from the short side. You can learn more here:  LINK

 

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…

Short All Retail, Especially Amazon

“Bubbles require ever more money to sustain them. Currently that’s not happening. A severe market selloff could come at any moment.”

The quote above is from Fred Hickey, who writes the The High-Tech Strategist newsletter. Mario Draghi, Chairman of the ECB, is under pressure to reduce the Central Banks’ asset purchases (it’s buying corporate bonds, including junk-rated bonds). Apparently some Dutcn legislators presented Draghi with a tulip in reference to the Dutch tulip mania in the 1630’s.

The Bank of Japan and the Chinese Government are working to reduce their money printing. The Fed is still buying mortgages but it seems determined to slowly tighten monetary policy. The problem faced by these Central Planners is that they’ve created a massive global Ponzi scheme that requires an increasing amount of liquidity (money printing + credit expansion) in order to sustain valuation levels. Once they slow down the liquidity spigot, all fiat currency- driven assets (except physical precious metals) are at risk of collapsing.

The Dow finished the week closing down 4 days in row to close essentially unchanged for week (up 9 pts). The SPX also was flat for the week (up 6 pts). It managed to squeak out a slight gain on Friday to avoid 4 consecutive down days. Both the Dow and SPX started out Friday with a big rally from Thursday’s close but faded over the last 2 hours of trading on no apparent news triggers. This for me is a possible indicator that the stock market losing energy.

Bed Bath and Beyond (BBBY) was hammered Friday, down over 12%, as it badly missed earnings and revenue estimates. I presented BBBY as a short idea in the December 16th SSJ issue at $47.27. I hope some of you jumped on it then, as 4 days later it had closed at $41.38.

Amusingly, Jim Cramer, et al attributed BBBY’s lousy quarter to competition from AMZN. But nothing could be further from the truth. Its sales were up slightly from Q1 2016 and
its digital channel sales grew 20%. If anything, BBBY’s e-commerce business presents intensified competition for AMZN. Why? Because AMZN’s e-commerce operating margin is 0.3% vs. BBBY’s, which was 5.4% in Q1. BBBY has plenty room to go directly at AMZN on pricing.

BBBY’s net income dropped 39% vs. Q1 2016. The primary culprit was that BBBY lowered its free shipping threshold to $29 from $49. which in turn forced BBBY to absorb shipping costs on more orders. AMZN does not properly accrue the cost of its free shipping to its cost of sales (the SEC looks the other way on this one), burying the expense across the income
statement and balance sheet. But we know it has a reported 0.3% operating margin in e-commerce. The hit to BBBY’s operating margin, which declined 242 basis points (2.42%), gives us some insight about true cost inflicted on AMZN from its free shipping program.

My point here is that the overall retail environment is going to get more competitive and margins are going to decline even more. Companies like Walmart and BBBY have taken the gloves off and can afford to undercut AMZN across the board because they have significantly more room to cut prices and attack AMZN’s pricing and free shipping model without driving their operating margins down to zero. AMZN’s e-commerce profit margin, for all intents and purposes, is zero. The bottom line here is that retail in general remains a great sector to short.

I believe BBBY has a lot more downside and can still be shorted, with patience, for some nice gains:

The more interesting short is AMZN. About a month ago, right before completing the check-out process on AMZN, I received a message in which AMZN was offering a $5 shopping credit to fund a gift card with $100. Why is AMZN paying 5% to raise cash? It effectively is taking a 5% operating profit margin hit on the $100, because its overall e-commerce operating margin is essentially zero. And I discovered yesterday that AMZN was offering a $5 shopping credit to Prime members who opted for the slow shipping option rather than the 2-day shipping.

These cash-raising and cash-saving policies make no sense if AMZN is producing the billions in free cash flow as represented by Bezos (on a non-GAAP basis, of course). Something is very wrong beneath the surface. In fact, AMZN burns cash every quarter. I have demonstrated that in previous research I have produced. It’s a fact.

In the meantime, AMZN continues to be, along with TSLA, the greatest Ponzi scheme in history. Bernie Madoff is green with envy. The irony surrounding all of the analyst – and Jim Cramer – noise about AMZN is that its acquisition of Whole Foods makes it more vulnerable to competition. The idea that AMZN will now be a “grocery killer” is absurd. Just like the idea that it’s a retail killer. BBBY’s e-commerce grew at 20% year over year.

If anything is true, it’s that BBBY, Walmart, Target and Kroger present intensified e-commerce competition for AMZN.  And all four of those companies can cut prices to compete and still turn an operating profit.  AMZN does not have that luxury. That’s probably why AMZN is encouraging Prime customers to take the slow shipment option with a $5 shopping credit.

Most of the above analysis is an excerpt from this week’s Short Seller’s Journal, released Sunday evening. I discussed strategies for shorting BBBY. I also discussed shorting Kinder Morgan (KMI) in the context of declining energy price and usage and included for subscribers a somewhat dated, in-depth research report on KMI which details with proof the Ponzi scheme set-up at KMI. You can get more details about the subscription, including a “handful” of back-issues here:  Short Seller’s Journal info.  (Note: new subscribers also get a copy of the somewhat-dated full AMZN research report I wrote).

The Foundation Of The Stock Market Is Crumbling

The S&P 500 and Dow have gone nowhere since March 1st. The SPX had been bumping its head on 2400 until Wednesday. The Dow and the SPX have been levitating on the backs of five tech stocks: AAPL, AMZN, FB, GOOG and MSFT. AAPL alone is responsible for 25% of the Dow’s YTD gain and 13% of the SPX’s.  Connected to this, the tech sector in general has bubbled up like Dutch Tulips in the mid-1630’s. The Nasdaq hit an all-time high (6,169) on Tuesday.

But, as this next chart shows, despite a handful of stocks trying to rain on the bears’ parade, there’s plenty of stocks that have been selling off:

The chart above shows the S&P 500 vs the SOX (semiconductor index), XRT (retail index), IBM and Ford since the election. The SOX index was used to represent the tech sector. You can see that, similar to the culmination of the 1999-early 2000 stock bubble, the tech stocks are bubbling up like a geyser. IBM is a tech company but its operations are diversified enough to reflect the general business activity occurring across corporate America and in the overall economy. The retail sector has been getting hit hard, reflecting the general decay in financials of the average middle class household. And Ford’s stock reflects the general deterioration in U.S. manufacturing and profitability. Anyone who believes that the unemployment rate is truly 4.4% and that the economy is doing well needs to explain the relative stock performance of the retail sector, IBM and F.

Despite the levitation of the SPX and Dow, the “hope helium” that has inflated the stock bubble since the election has been leaking out since January 1st. While many stocks in NYSE are either below their 200 dma or testing 52 week lows, the price action of the U.S. dollar index best reflects the inflation and deflation of the Trump “hope bubble:”

I’ve always looked at the U.S. dollar as a “stock” that represents the U.S. political, financial and economic system. As you can see, U.S.A.’s stock went parabolic after the election until December 31st. Since that time, it’s deflated back down to below its trading level on election day. This has also been the fate of the average stock that trades on the NYSE. In fact, as of Friday’s close, 55% of the stocks on NYSE are below their 200 day moving average. Nearly 62% of all NYSE stocks are below their 50 dma. Just 4.37% of S&P 500 stocks are at 52-wk highs despite the fact that the SPX hit a new all-time high of 2402 on Tuesday. These statistics give you an idea of how narrow the move higher in the stock market has been, as the average stock in the NYSE/SPX/Dow indices is diverging negatively from the respective indices. The foundation of the stock market is crumbling.

The above analysis was a portion of the latest Short Seller’s Journal released last night. SSJ recommended shorting IBM in the April 23rd issue at $160.  It’s down 4.6% since then. The primary short idea presented in the latest issue was down 2.3% today despite the .5% rise in the SPX.  This idea is a stock trading in the mid-teens that will likely be under $5 within a year.  You can find out more about the Short Seller’s Journal here:  LINK

The Biggest Stock Bubble In U.S. History

Please note, many will argue that the p/e ratio on the S&P 500 was higher in 1999 than it is now. However, there’s two problems with the comparison. First, when there is no “e,” price does not matter. Many of the tech stocks in the SPX in 1999 did not have any earnings and never had a chance to produce earnings because many of them went out of business. However – and I’ve been saying this for quite some time and I’m finally seeing a few others make the same assertion – if you adjust the current earnings of the companies in SPX using the GAAP accounting standards in force in 1999, the current earnings in aggregate would likely be cut at least in half. And thus, the current p/e ratio expressed in 1999 earnings terms likely would be at least as high as the p/e ratio in 1999, if not higher. (Changes to GAAP have made it easier for companies to create non-cash earnings, reclassify and capitalize expenses, stretch out depreciation and pension funding costs, etc).

We talk about the tech bubble that fomented in the late 1990’s that resulted in an 85% (roughly) decline on the NASDAQ. Currently the five highest valued stocks by market cap are tech stocks: AAPL, GOOG, MSFT, AMZN and FB. Combined, these five stocks make-up nearly 10% of the total value of the entire stock market.

Money from the public poured into ETFs at record pace in February. The majority of it into S&P 500 ETFs which then have to put that money proportionately by market value into each of the S&P 500 stocks.   Thus when cash pours into SPX funds like this, a large rise in the the top five stocks by market cap listed above becomes a self-fulfilling prophecy. The price rise in these stocks has nothing remotely to do with fundamentals. Take Microsoft, for example (MSFT). Last Friday the pom-poms were waving on Fox Business because MSFT hit an all-time high. This is in spite of the fact that MSFT’s revenues dropped 8.8% from 2015 to 2016 and its gross margin plunged 13.2%. So much for fundamentals.

In addition to the onslaught of retail cash moving blindly into stocks, margin debt on the NYSE hit an all-time high in February. Both the cash flow and margin debt statistics are flashing a big red warning signal, as this only occurs when the public becomes blind to risk and and bet that stocks can only go up. As I’ve said before, this is by far the most dangerous stock market in my professional lifetime (32 years, not including my high years spent reading my father’s Wall Street Journal everyday and playing penny stocks).

Perhaps the loudest bell ringing and signaling a top is the market’s valuation of Tesla.  On Monday the market cap of Tesla ($49 billion) surpassed Ford’s market cap  ($45 billion) despite the fact that Tesla deliver 79 thousand cars in 2016 while Ford delivered 2.6 million.    “Electric Jeff” (as a good friend of mine calls Elon Musk, in reference to Jeff Bezos) was on Twitter Monday taunting short sellers.  At best his behavior can be called “gauche.”   Musk, similar to Bezos, is a masterful stock operator.   Jordan Belfort (the “Wolf of Wall Street”) was a small-time dime store thief compared to Musk and Bezos.

Tesla has never made money and never will make money.  Next to Amazon, it’s the biggest Ponzi scheme in U.S. history.  Without the massive tax credits given to the first 200,000 buyers of Tesla vehicles,  the Company would likely be out of business by now.

Once again the public has been seduced into throwing money blindly at anything that moves in the stock market, chasing dreams of risk-free wealth.  99% of them will never take money off the table and will lose everything when this bubble bursts.  And only the biggest stock bubble in history is capable of enabling operators like Musk and Bezos to reap extraordinary wealth at the expense of the public.   The bell is ringing, perhaps Musk unwittingly rang it on Monday with hubris.  The only question that remains pertains to timing…

If you are looking for ideas to take advantage of the inevitable stock market implosion, try out my Short Seller’s Journal.  It’s a weekly subscription newsletter delivered PDF form via email that drills down into the latest economic data and presents short-sell and put option ideas.  You can find out more and subscribe using this link:  Short Seller’s Journal information.

Will The SNAP IPO Mark The Top?

The only aspect of the SNAP IPO that was more horrifying than the media attention given to monitoring SNAP’s first trade of the day is the valuation assigned to it by investors. Janet Yellen undoubtedly was not thinking about SNAP when she happened to mention in her Congressional testimony last week that “valuation metrics do appear…stretched.” That assertion is unarguably one of the most shameless understatements in history.

SNAP is being marketed by its financial promoters as “a camera company.” In reality it’s little more than a glorified social media business model. The product empowers the user to send photos and videos to friends rather than using a text message. Big deal. In 2016, SNAP generated $404 million in revenues and but lost $514 million. That’s the manipulated GAAP number for net income. The Company’s operation burned $611 million. Note: these are the numbers prepared by the Company that were used to generate the highest possible price for the IPO, which means the numbers are likely not accurate.

At IPO SNAP was valued at 54 times revenues. That’s the kind of multiple that a venture capital company would pay for a newly emerging company with a unique product that is still embedded with largely unquantifiable risks of the investment going to zero. SNAP is a newly emerging company which offers just another “flavor” of social medial. Mind you, this is a social media tool that is primarily used by millennials and “Gen Z’ers” who quickly tire of the latest cellphone app fad du jour. In fact, new user fatigue is already showing up in the number.   Over the last 4 quarters, the quarterly growth in growth “active daily users” has slowed considerably – just 4% from Q3 to Q4 – and its flat-lined in the rest of the world outside of the U.S. and Europe.

As a social media company, SNAP’s user growth-rate curve is already significantly below that of Facebook and Twitter in their early stages as public companies.  In truth, if SNAP wants to insist on being a “camera company,” then its stock likely will follow the same path as that of GoPro.  GoPro IPO’d in June 2014 at $24.   The first trade was at $30. The stock ran up to $98.  It currently trades at $9.40.

The overarching issue here is whether or not the grotesquely overvalued SNAP IPO will mark the top of this seemingly indefatigable rise in stocks.   Since closing above the 20k holy grail level on February 3rd, the Dow has risen another 1,100 index points in just 17 trading days, while the meatheads on financial bubblevision have been mindlessly cheering on the action with drool sliding down the sides of their mouths.   27.5% percent of this move occurred after Trump’s congressional address Tuesday night.  Conspicuously absent from the speech was any new policy ideas which might have been responsible for causing the ludicrous spike up in stocks.

David Stockman has called this action in the stock market “the greatest sucker’s rally of all time.”  In today’s episode of the Shadow of Truth, we discuss the insanity that has drawn mom and pop retail investors into the “warm water” with its Siren’s call.

Guest Post: The Mysterious Guardian Of The U.S. Stock Market

Note:  Scott Rabinowitz owns Quarterwave Asset Management LLC and has been a professional investor in the precious metals sector for over 15 years.

Yes, this has all become mentally exhausting for anyone that has been around what are still referred to as “markets for the past 25 years. In fact, I’d say it has become mentally exhausting to anyone still capable of thinking on their own, not having to be spoon fed an explanation for every logical and illogical outcome that seemingly approaches at a more rapid rate as each day passes. To most thinkers, it is frustrating that fundamentals seem to be nothing more than an old pastime to everyone else. Our world has succumbed to an existence in which a mere few can and will dictate their desired outcomes as if it is a certainty and not just an experiment in which unintended consequences are nothing more than a potential nuisance.

So, when nothing makes sense anymore and every day feels like lunch with the Mad Hatter, one must seek out a potential explanation for the confounding behavior of “markets”. After all, fundamentals have clearly been deteriorating for some time now, whether it be corporate revenues (declining), earnings (declining), etc. Yet US equity markets are at all time highs – coated in as much Teflon as the political world. Oddly enough however, precious metals are having a great year despite the pullback in August. It should appear to both the casual and non-casual observer that there must be a conduit, instigator, call it what you will, mechanism, to help explain how “markets” seemingly either abruptly stop going down or up as if was magic.

The mysterious guardian of markets appears to be the USD:JPY (US Dollar:Japanese Yen). It is hard to imagine that the correlation to equity market bottoms and tops is correlated to anything other  than this magic elixir. This also includes the counter movement of precious metals to the USD:JPY as well. What am I saying? When the USD:JPY is rising stocks have been rising in lock step with it while precious metals have experienced the opposite move and vice versa.

Below are the two 4-hour charts (click to enlarge) of the USD:JPY and the S&P 500 back to December 2015 to show how there appears to be a potential mysterious guardian of markets. Furthermore, the takeaway are the dates of the “turns” in the USD:JPY because yes the decline YTD looks to be quite orderly even though the S&P 500 has moved higher.

The reason the USD:JPY appearUSDJPYs to be the chosen guardian of markets is due to the fact that it’s movement determines whether the carry trade (shorting JPY vs. the USD to buy risk assets) is turned on or off. The reason the Fed uses the yen rather than the euro is because the yen is the second most liquid currency in the world and its near-zero cost to SPXborrow efficiently enables the carry-trade mechanism – short/borrow yen and buy dollar fiat currency based assets (stocks, Treasuries). Also the U.S. has a much tighter political policy control grip on Japan than the EU.