Tag Archives: stock crash

WTF Just Happened? Stock Market Ignores Escalating Trade War & Spent US Consumer

Every month Government, corporate and household debt hits a new all-time high. The entire financial system is heading down an unsustainable path of debt issuance. The delinquency rate for auto and credit card debt is already at levels last seen in late 2008. The only reason the banks are not on the ropes – yet – is because they are still sitting on most of the liquidity the Fed injected into the banking system from 2009 to 2015.

This “slush fund for a rainy day” has been declining. As this money flows into the economic system, it’s starting to ignite inflation. Even the monthly Government-generated CPI and PPI reports, which are highly manipulated to minimize the true inflation rate, are starting to show rising inflation. Of course, with wage growth stagnant, the average household disposable income level is dwindling rapidly, which is why the personal savings rate is at a historically low level and revolving credit use is at an all-time.

Consumer sentiment has been trending lower off a recent peak. While the media puppets explain that trade war headlines are weighting consumers expectation, in truth consumer sentiment is falling because the average household is suffocating from the crushing weight of debt and a diminished ability to service that debt because real disposable income is declining. In most areas, home prices are falling. In fact, the home buying sentiment component of the U of Michigan sentiment survey is at its lowest level since 2008.

In this episode of WTF Just Happened?, we discuss these issues plus whether or not gold is forming a tradable bottom here (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

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I recommended Arizona Mining in May 2016 at  $1.26 to my Mining Stock Journal subscribers.  It was acquired for $1.3 billion, or $4.65/share.  My subscribers and I are making a small fortune shorting homebuilders plus this week’s issue features an idea that is the ultimate contrarian play.

Visit these links to learn more about the Investment Research Dynamic’s  Mining Stock Journal and Short Seller’s Journal.   

The Housing Market: A Bigger Bubble Than 2008 Is Popping

The XHB homebuilder ETF is decisively below three key moving averages after it knifed below its 50 dma last week.  KB Homes reported a big earnings and revenue “beat” on Thursday after the market closed.  The stock soared as much as 9% on Friday.  Per the advice I gave my subscribers about shorting the inevitable price-spike in the stock,  I shorted the stock Friday mid-day (July and August at-the-money puts).  The stock is down 6% from its high Friday and is back below all of its key moving averages (21, 50, 200).

Several subscribers have emailed me today to report big gains on put options purchased Friday.   When a stock sells off like this after “beating” Wall St estimates and raising guidance, it’s a very bearish signal.  I’ve identified the best homebuilders to short and I provide guidance on timing and the use of put options.

Housing is dropping and it’s demand-driven, not supply-driven – All three housing market reports released two weeks ago showed industry deterioration. The homebuilder “sentiment” index for May, now known as the “housing market” index for some reason, showed its 4th decline since the index peaked in December. The index level of 68 in May was 10 points below Wall Street’s expectation. The index is a “soft data” report, measuring primarily homebuilder assessment of “foot traffic” (showings) and builder sentiment.

While the housing starts report for May showed an increase over April’s report, the permits number plunged. Arguably the housing starts report is among the least reliable of the housing reports because of the way in which a “start” is defined (put a shovel in the ground, that’s a “start”). On the other hand, permits filed might reflect builder outlook. To further complicate the analysis, the report can be “lumpy” depending on the distribution between multi-family starts/permits and single family home starts/permits.

A good friend of mine in North Carolina was looking at the Denver apartment rental market earlier this week and was shocked at the high level of vacancies. I would suggest this is similar in most larger cities. It also means that multi-family building construction will likely drop off precipitously over the next 12 months.

Existing home sales for May reported Wednesday showed the second straight month-to- month drop and the third straight month of year-over-year declines. The headline SAAR (Seasonally Adjusted Annualized Rate) number – 5.43 million – missed Wall Street’s forecast for 5.5 million. April’s number was revised lower. Once again the NAR chief spin-meister blames the drop on low inventory. But this is outright nonsense. The month’s supply for May increased from April and, at 4.1 months, is above the average month’s supply for the trailing 12 months. It’s also above the average months supply number for all of 2017. If low inventory is holding back pent-up demand, then May sales should have soared, especially given that May is historically one of the best months seasonally for home sales. The not seasonally adjusted number for May was 3.4% below May 2017.

The primary reason for declining home sales, as I’ve postulated in several past issues, is the shrinking pool of buyers who can afford to support the monthly cost of home ownership. The Government lowered the bar for its taxpayer-backed mortgage programs every year since 2014. It lowered the down-payment requirement, broadened the definition of what constitutes a down-payment (as an example, seller concessions can be counted as part of a down-payment) thereby reducing even further the amount of cash required from a buyer’s bank account at closing, it cut mortgage insurance fees and it lowered income and credit score restrictions. After all this, the Government is running out of people into whom it can stuff 0-3% down payment, 50% DTI mortgages in order to keep the housing market propped up.

A lot of short term (buy and rent for 1-2 years and then flip) investors and flippers are holding homes that will come on the market as home prices fall. The majority of the MLS notices I receive for the zip codes in Denver I track are “price change” notices. All of them are price reductions. Whereas a year ago the price reductions were concentrated in the high-priced homes, now the price reductions are spread evenly across all price “buckets.” Denver was one of the first hot markets to crack in the mid-2000’s bubble and I’m certain what I’m seeing in Denver is occurring across the country in most mid to large metropolitan areas. Yes, I’m sure there’s a few exceptions but, in general, high prices, rising mortgage rates and stagnant wages are like poison darts being thrown at the housing bubble.

The analysis above is an excerpt from the June 24th Short Seller’s Journal.   My subscribers and I are making a small fortune shorting homebuilders and homebuilder-related stocks.  I will adding a couple other sectors in up-coming issues that are ready to shorted aggressively.  You can learn more about this service by following this link:  Short Seller’s Journal information.

Greatest Stock Bubble In History

Anyone who can’t see a dangerous bubble should not be managing, analyzing or trading stocks. Even Hellen Keller could figure out what is going here:

It’s not easy shorting the market right now – for now – but there have been plenty of short-term opportunities to “scalp” stocks using short term puts. I cover both short term trading ideas and long term positioning ideas.  You can learn more  about this newsletter here:      Short Seller’s Journal information.

“SSJ  provides outstanding practical advice for translating a company’s bottom line fundamentals into $$’s. Whether you’re a buy and hold long term investor or short term trader (or both), you’ll find all kinds of helpful advice on portfolio management, asset allocation and short term/long term options strategies. Really can’t recommend SSJ enough! Thanks Dave for your great service!” – subscriber “John”

WTF Just Happened? Gold, The Dollar And Interest Rates

What’s going on with gold, the dollar and interest rates – especially gold?  All of the variables that fundamentally support much higher gold prices are lined up perfectly.  Why isn’t gold moving higher?  The popular narrative in the mainstream financial media would leave one to believe that the dollar is soaring.  Eric and Dave put a big dent in that notion.  Additionally, in a long-term historical context, the recent rise in interest rates is tiny, yet marginally higher interest are already wreaking havoc on the economy (retail, auto and home sales).   What’s going to happen to the economy when the 10-yr Treasury hits 4%, which is still well below its long-run historical norm? (click on image to enlarge)

Eric Dubin and Dave Kranzler dig into these topics in the next episode of WTF Just Happened (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

Visit these links to learn more about the Investment Research Dynamic’s Mining Stock Journal and Short Seller’s Journal.  I recommended Almadex Minerals at 28 cents in April 2016 – it closed Friday at $1.13.  I recommended shorting Hovnanian at $2.88 in January  – it closed at $1.89 on Friday and has been as low as $1.70.

Amazon And Tesla Reflect Deep Fraud Throughout The Financial System

Not much needs to be said about Tesla.  Elon Musk’s performance on the Company’s conference call speaks for itself.  He basically told the lemming analysts who have been the Company’s Wall Street carnival barkers to go have sex with themselves in response to questions looking for highly relevant details on Model 3 sales projections and Capex spending requirements.

I believe Musk is mentally unstable if not mildly insane.  He would do the world a favor if he gathered up what’s left of his wealth and disappeared into the sunset.  When Tesla collapses, I hope analysts like Morgan Stanley’s Andrew Jonas are taken to court by class-action hungry lawyers.  My response to something like that would be justified schadenfreude.

Amazon is similar story on a grander scale of accounting fraud and fantasy promotion. AMZN reported its Q1 numbers Thursday after the close. It “smashed” the consensus earnings estimate by a couple dollars, reporting a questionable $3.27 per share. I’m convinced that Jeff Bezos is nothing more than an ingenious scam-artist of savant proportions, as this is the second quarter in a row in which AMZN reported over $3/share when the Street was looking for mid-$1 per share earnings.

I bring this to your attention because there’s something highly suspicious about the way Bezos is managing the forecasts he gives to Street analysts. Every company under the sun in this country typically “guides” analysts to within a few pennies, nickels or dimes of the actual EPS that will be presented. For the Street to miss this badly on estimates for AMZN two quarters in a row tells me that Bezos is intentionally misleading the analyst community, which typically hounds a company up until the day before earnings are released. Food for thought there.

I don’t want to spend the time dissecting AMZN’s numbers this quarter in the way I have in
past issues. This is because the earnings manipulation formula remains constant. One interesting detail that Wall St. will ignore is the fact that AMZN’s cost of fulfillment as a percentage of product sales increased to 24.6% vs 19.7% in Q1 2017. It cost 25 cents per dollar of e-commerce revenue vs 20 cents per dollar of revenue a year ago to deliver an item from the warehouse shelf to the buyer’s door-step. Apparently all of the money Bezos spends on fulfillment centers ($2.3 billion in Q1) is not reducing the cost of delivery as promised.

The financial media flooded the airwaves with hype when Bezos announced that AMZN Prime had 100 million subscribers. However, the fact that the cost of fulfillment increased 500 basis points as percent of revenue generated tells us that AMZN is losing even more on an operating business on Prime memberships. I love ordering $10 items that are delivered in 2-days because I know that AMZN loses money on that transaction.

For “product sales” in aggregate (e-commerce + Whole Foods + the portfolio of crappy little service businesses) the operating margin increased to 1.16% of sales vs. 0.3% of sales in Q1 2017. HOWEVER, in acquiring Whole Foods, AMZN folded a 5% operating margin business into its revenue stream. It should have been expected that AMZN’s operating margin would increase this year. I’m surprised that folding in a 5% business did not boost AMZN’s operating margin even more. See the cost of fulfillment. In effect, Bezos used positive cash flow from WFM to subsidize the growing cost of Prime fulfillment. I also suspect that Bezos will be running WFM’s margins into the ground in an effort to boost revenues. The prices of WFM’s house-label brands were slashed immediately. AMZN’s stock is driven off of revenue growth and Bezos does not care if that means sacrificing profitability.

What’s mind-blowing is that big investors have let him get away with this business model for nearly two decades.  If the Fed and the Government had not printed trillions starting in 2008, Amazon’s grand experiment would have expired.  More than any company or business on earth, Amazon is emblematic of a fiat currency system that has gone off the rails combined with Government-enabled fraud of historic proportions.

So far, AMZN has not segmented the revenues from the WFM business in its footnotes. I doubt this will occur despite the fact that it would help stock analysts understand AMZN’s business model. Again, the conclusion to be made is that Bezos will push WFM’s operating margins toward zero, which is consistent with the e-commerce model. Hiding WFM’s numbers by folding them into “product sales” will enable Bezos to promote the idea that Whole Foods is value-added to AMZN’s “profitability.” In truth, I believe WFM was acquired for its cash – $4.4 billion at the time of the acquisition – and for the ability to hide the declining e-commerce margins for a year or two.

In terms of GAAP free cash flow, AMZN burned $4.2 billion in cash in Q1 compared to $3.6
billion in Q1 2017. Again, this metric helps to prove my point that Bezos sacrifices cash flow in order to generate sales growth. Not only does AMZN now have $24.2 billion in long term debt on its balance sheet, it has $22.2 billion in “other liabilities.” This account is predominantly long-term capital and finance lease obligations. This is a deceptive form of debt financing, as these leases behave exactly like debt in every respect except name. One of the reasons AMZN will present “Free Cash Flow” at the beginning of its earnings slide show every quarter is because it excludes the repayment of these leases from the Bezos FCF metric. However, I noticed that AMZN now sticks a half-page explanation in its SEC financial filings that explains why its FCF metric is not true GAAP free cash flow. A half-page!

In effect, AMZN’s true long term debt commitment is $46.4 billion. Funny thing about that, AMZN’s book value is $31.4 billion. One of the GAAP manipulations that AMZN used to boost its reported EPS is it folded most of the cost of acquiring WFM into “Goodwill.” Why? Because goodwill is no longer required to be amortized as an expense into the income statement. For presentation purposes, this serves to increase EPS because it removes a GAAP expense. Companies now instruct their accountants to push the limit on dumping acquisition costs into “goodwill.” But most of the $13 billion in goodwill on AMZN’s balance sheet was the cost of acquiring WFM, which required that AMZN raise $16 billion in debt.

Regardless of whether or not WFM is profitable for AMZN over the long term, AMZN will still have to repay the debt used to buy WFM. In other words, the amount thrown into “goodwill” is still an expense that has be paid for. For now, AMZN has funded that expense with debt. If the capital markets are not cooperative, AMZN will eventually have a problem refinancing this debt.

In summary, the genius of Bezos is that he’s figured out how to generate huge revenue growth while getting away with limited to no profitability. Yes, he can report GAAP net income now, but AMZN still bleeds billions of dollars every quarter. It’s no coincidence that Bezos’ scam mushroomed along with the trillions printed by the Fed tat was used to reflate the securities markets. For now, Bezos can get away with telling his fairytale and raising money in the stock and debt markets. But eventually this merry-go-round will stop working.

The tragic aspect to all of this is that a lot of trusting retail investors are going to get annihilated on the money they’ve placed with so-called “professional” money managers. I don’t know  how long it will take for the truth about Amazon to be widely understood, but Tesla will likely be a bankrupt, barring some unforeseeable miracle, within two years.  Perhaps worse is that the fact that people appointed to the Government agencies set up to prevent blatant wide-scale systemic financial fraud like this now look the other way.  It seems the “paychecks” they get from the likes of Musk and Bezos far exceed their Government pay-scale…

When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.  – Francisco D’Anconia “Money Speech” from “Atlas Shrugged”

Auto Sales Forecast To Tank In April

JD Powers and LMC Automotive are projecting auto sales to drop 8% in April from a year-ago April:

For much of the past two years, the discounts offered by automakers have remained at levels that industry analysts say are unsustainable and unhealthy in the long term…Sales are expected to drop further in 2018 as interest rates rise and more late-model used cars return to dealer lots to compete with new ones. – April Auto Sales Forecast

General Motors reported lousy Q1 numbers this morning. Revenues dropped 3.2% year over year in Q1. Revenues would have been worse but GM joined the rest of the country and extended financing to future deadbeats who took out loans greater than their annual pre-tax income in order to buy a pick-up truck. In other words, GM’s financing unit generated 25% growth in revenues, which cushioned drop in GM’s automotive revenues. Operating income fell off a cliff, plunging nearly 80% vs. Q1. Because of GAAP manipulations, EBIT was down only 55% from Q1 2017.

BUT, GM was credited with a headline “beat” of the Street’s earnings estimates. Only in America can a company’s operating numbers go down the drain and yet still be credited with a headline GAAP-manipulated net income “beat.” I find much humor in this absurdity. Others might find it, upon close examination, to be pathetic or even tragic. Given the forecast for April automotive sales, at least now we know GM announced earlier this month why it will begin to report auto sales on a quarterly basis instead of monthly.

The economy is much weaker than the narrative promoted aggressively by Wall Street, DC and the financial media. This tweet from @RudyHavenstein captures perfectly the divergence between moronic mainstream financial media and Main Street reality. We’re bombarded daily with propaganda about the healthy economy. Yet plenty of statistics show that the average household in this country is struggling under a mountain of debt and is living paycheck to paycheck.

This mostly explains the why credit card debt hits a new record high every month now. The average household is using revolving credit to help make ends meet. The only problem is that, in aggregate, the credit debt is not getting paid down. Rather, it’s increasing by the day. To compound the problem, credit card issuers are aggressive about jacking-up rates when the Fed funds rate is rising. I have a friend who has a 670 FICO score and recently used a loan to buy a car. The interest rate on the loan is 8%. This means that credit cards in general are charging rates in the mid-to-high teens to users with a sub-720 credit score. The outstanding balance will double in 5 years for a card-user who only pays the minimum amount each month on a card with a 15% interest rate. The only problem: that user will likely default before the balance doubles.

But why listen to the Orwellian propagandists?  Just follow the money from corporate insiders: The graphic to the right shows the ratio of insider sells to buys. When the ratio is under 12:1, it’s considered “bullish.” When the ratio is over 20:1, it’s considered bearish. In the last couple of weeks, the ratio has spiked up over 35.

It would seem the Atlanta Fed agrees with the assessment that the economy is far weaker than is being promoted by politicians and Wall Street. Back in February, the Atlanta Fed was forecasting Q1 2018 GDP to be 5.4%. Since then the Atlanta Fed has cut lowering its forecast almost weekly. This past week it chopped its Q1 GDP forecast down to 1.9%.

How can you profit from this insight?   I’ve been presenting several “off the radar” short-sell ideas in my Short Seller’s Journal from which myself and several subscribers are making a quiet killing.  Right now the easiest money to be made in the market is shorting homebuilders.  I have have a subscriber who made 150% on DHI puts in the first 30 minutes of trading today. I have another subscriber who is short Lending Tree (TREE) from $340.  I got this email from him today, with the stock down $42 to $264:  “The TREE keeps on giving. Many thanks!”

Every time the market bounces now, or when individual “daytrader/algo” stocks pop on headline “beats,” it creates an opportunity to make easy money shorting stocks or buying puts.  The Short Seller’s Journal provides unique insight to the economic data and corporate earnings – insight you’ll never get from so-called financial “experts.”  SSJ then offers ideas every week for making money on this insight.   To learn more, click here:  Short Seller’s Journal subscription information. This week I’ll be presenting an oldie but goodie short that soared today on tepid numbers (no, it’s not Facebook).

Just wanted to give you kudos for for your Short Sellers Journal. i find myself waiting every Sunday to read your publication. Your research and conclusions ring true. One of the better newsletters I receive. – recent subscriber feedback

Stocks Dump Today – WTF Just Happened?

The stock market (per the Dow), after an initial spike up at the open, has sold off continuously today. The sell-off began to accelerate just before 2 p.m. EST on no specific news or event catalysts.  So what the heck happened?  To begin with, the stock market jumps at the open almost everyday no matter what type of news hits the tape overnight.  It’s clear that the Fed’s “unspoken” policy is to support asset prices.  But it’s the events developing behind the thick veil of propaganda that is starting to become obvious.

The real economy sucks.  The average household is sinking slowly under  the weight of debt that grows continuously and will soon become unbearable.  The fraud and corruption at all levels of Government and Corporate America has become glaringly blatant.   The Federal Government is going to issue well over $1 trillion in new Treasury debt this year – debt that not only will never be repaid but will continue to grow exponentially until the system collapses.

Gold has spiked up in response to the stock market turmoil.  Physically deliverable gold is running low in NY and London.  The clearest sign of this is persistent backwardation on the LBMA.  Eric Dubin and I discuss the ticking time bomb of rising interest rates and what it will take for gold and silver to finally break out and up in our “WTF Just Happened” podcast hosted by Jason Burack’s  Wall St For Main St:

“The System Will Have To Collapse”

The public pension fund system is approaching apocalypse.  Earlier this week teachers who are part of the Colorado public pension system (PERA) staged a walk-out protest over proposed changes to the plan, including raising the percentage contribution to the fund by current payees and raising the retirement age.   PERA backed off but ignoring the obvious problem will not make it go away.

Every public pension fund in the country is catastrophically underfunded, especially if strict mark-to-market of the illiquid assets were applied. Illinois has been playing funding games for a few years to keep its pension fund solvent.  In Kentucky, where the public pension fund is on the verge of collapse, teachers are demanding a State bailout.

If the stock market were sustain a extended decline of more than 10% – “extended” meaning several months in which the stock market falls more than 10% – every public pension in the U.S. would collapse.  This is based on an in-depth study conducted by a good friend of mine who works at a public pension fund.  He has access to better data than “outsiders” and I know his work to be meticulous.   Please note that the three big market declines since August 2015 were stopped at a 10% draw-down followed by big moves higher.  The current draw-down was stopped at 10% but subsequent outcome is to be determined. My friend and I are not the only ones who understand this:

The next phase of public pension reform will likely be touched off by a stock market decline  that creates the real possibility of at least one state fund running out of cash within a couple of years. – Bloomberg

I know a teacher in Denver who left her job that was connected to PERA in order to take a lump-sum payout rather than risk waiting until she retired to bankrupt pension plan. She took a job in the Denver school system, which is not part of the PERA system. She’s actually thinking about teaching in Central America, where there’s high demand for English-speaking teachers and the pay relative to the cost-of-living is much higher:

“Teaching sucks right now.  Teachers are underpaid for the work we’re doing.  After all of these years, I’m making about $60,000. That’s BS! I have a masters. Truthfully, the classroom is burning me out right now. The f#cked up world is spilling into kids’ lives. They’re largely defiant and off-track. I don’t have the energy to try to streamline whole classrooms.”   In reference to the pension system: “When the mother f#cking-f#ck is any of this going to be corrected?!?! I am beyond mad.  Ecuador has become an option, because this country is beyond f#cked up.”

Unfortunately, I was compelled to answer with the truth – a truth she already knows:  “It won’t be corrected. The system will have to collapse and then who knows what will happen. Criminals run everything now and the people who are supposed to enforce Rule of Law are well paid to look the other way. This has been building for at least 2 decades. It doesn’t help when the President is caught shoving a cigar up a staff interns vagina and then a joke is made of it in Congress. “Is oral sex, sex?” Answer: “it depends on what the meaning of the word ‘is,’ is.”

Now the corruption and fraud is out in the open and there’s nothing that can be done about it. The system will have collapse – its the final solution.

Tesla’s Irreversible Death Spiral Fait Accompli

The inevitable is finally starting to unfold. The downgrade to triple-C by Moody’s came as a surprise, at least to me. Historically Moody’s has been the last to downgrade collapsing companies. The most famous was its failure to downgrade Enron until about a week before Enron folded. Perhaps this time around it decided to get out in front of the obvious.

Tesla’s continued existence, despite obvious operational and financial problems that were growing in scale by the week, was enabled by the most lascivious monetary policy in U.S. Central Bank history. For me the coup de grace was the $1.5 billion junk bond deal floated last summer. It was emblematic of rookie money managers, unsupervised children in the sandbox, shoveling other people’s money into a cash-burning furnace.

Most managers running retail and pension money have no idea what a triple-hook rating means for any company with massive cash flow deficits operating in a financial environment in which the Fed is not printing trillions of dollars that can be recycled into bad ideas.

Even without the nearly $10 billion in debt on top of several billion in negative free cash flow, TSLA has billions in off-balance-sheet liabilities that don’t seem to exist as long as the Fed is injecting free cash into the financial system for inexperienced money managers to abuse.

All of that changes with a falling stock market and a triple-C credit rating. Now the obvious operational impossibilities and questionably fraudulent projections by Elon Musk will become quite relevant. If those don’t sink the ship, perhaps the SEC investigations, the ones that Musk forgot to disclose, will put an end to Tesla’s Waterloo. Unless the Fed reverses course and re-implements ZIRP and money printing, it will be next impossible for Tesla to raise the several billion it will need to keep its cancer-infested rodent moving its legs on the gerbil-wheel.

If you are invested in TRowe and Fidelity funds with large exposure to Tesla, I highly recommend selling them. At this point the only prayer the managers running those funds have is to throw more of other-people’s-money into Tesla’s furnace and pray for the Second Coming to save them.

Tesla is going to collapse. The collapse will likely occur in the next 12 months unless there’s some form of exogenous intervention. I doubt the Easter Bunny will deliver that sort of help this weekend. Moody’s “bold” downgrade to triple-C has sealed the fate.

Is It The Trade War Threats Or Extreme Overvaluation?

The stock market is is more overvalued now than at any time in U.S. history. Sure, permabulls can cherry pick certain metrics that might make valuations appear to be reasonable. But these metrics rely on historical comparisons using GAAP accounting numbers that simply are not remotely comparable over time. Because of changes which have liberalized accounting standards over the last several decades, current GAAP EPS is not comparable to GAAP EPS at previous market tops. And valuation metrics based on revenue/earnings forecasts use standard Wall Street analyst “hockey stick” projections. Perma-bullishness in Wall Street forecasts has become institutionalized. The trade war threats may be the proverbial “final straw” that triggers a severe market sell-off, but the stock market could be cut in half and still be considered overvalued.

The market action has been fascinating. I noticed an interesting occurrence that did not receive any attention from market commentators. Every day last week the Dow/SPX popped up at the open but closed well below their respective highs of the day. Each day featured a pre-market ramp-up in the Dow/SPX/Naz futures. However, the Dow closed lower 3 out of the 5 days and the SPX closed lower 4 out of 5 days. All three indices, Dow/SPX/Naz, closed the week below the previous week’s close.

My point here is that the stock market is still in a topping process. The 10% decline that occurred in late January/February was followed by a rebound that seems to have sucked all of of hope and bullishness back into the market. This is reflected in some of the latest sentiment readings like the Investors Intelligence percentage of bears index, which is still at an all-time low. I also believe that some hedge fund algos are being programmed to sell rallies and buy dips. We’ll have a better idea if this theory is valid over the next couple of months if the market continues to trend sideways to lower.

Deteriorating real economic fundamentals – The most important economic report out last week was retail sales for February, which showed at 0.1% decline from January. This was a surprise to Wall Street’s brain trust, which was expecting a 0.4% gain. Keep in mind the 0.1% decline is nominal. After subtracting inflation, the “unit” decline in sales is even worse. This was the third straight month retail sales declined. The decline was led by falling sales of autos and other big-ticket items. In addition, a related report was out that showed wholesale inventories rose more than expected in January as wholesale sales dropped 0.2%, the biggest monthly decline since July 2016.

Retail and wholesale sales are contracting. What happened to the tax cut’s boost to consumer spending? Based on the huge jump in credit card debt to an all-time high and the decline in the savings rate to a record low in Q4 2017, it’s most likely that the average consumer “pre-spent” the anticipated gain from Trump’s tax cut. Now, consumers have to spend the $95/month on average they’ll get from lower paycheck withholdings paying down credit card debt. As such, retail sales have tanked 3 months in a row.

In fact, the consumer credit report for January, released the week before last, showed a sharp slow-down in credit card usage. In December, credit card debt jumped $6.1 billion. But the January report showed an increase of $780 million. Yes, this is seasonal to an extent. But this was 16.4% below the January 2017 increase of $934 million.

Further reinforcing my thesis that the average household has largely reached a point of “saturation” on the amount of debt that it can support, the Federal Reserve reported that credit card delinquencies on credit cards issued by small banks have risen sharply over the last year. The charge-off rate (bad debt written off and sold to a collection company) soared to 7.2% in Q4 2017, up from 4.5% in Q4 2016. “Small banks” are defined as those outside of the 100 largest banks measured by assets. The charge-off rate at small banks is at its highest since Q1 2010.

Any strength in retail and auto sales related to the replacement cycle from the hurricanes last year are largely done. If you strip out “inconsistent seasonal adjustments,” the decline in February retail sales was 0.48% (John Williams, Shadowstats.com). Given the degree to which the Government agencies tend to manipulate economic statistics, it’s difficult for me to say that the three-month drop in retail sales will continue. However, I suspect that spending by the average household, strapped with a record level of debt, will continue to contract – especially spending on discretionary items.

A portion of the commentary above is an excerpt from the latest Short Seller’s Journal, a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here: Short Seller’s Journal information.