Tag Archives: stock crash

Why Are The Banks Long Gold And Silver Futures?

“The banks are very net long gold and silver futures. To the extent that banks can peer at what’s going on behind the proverbial ‘curtain,’ they must see something that has inspired them to take long position in the precious metals.”

Gold is behaving the same way it was behaving in the months leading up to the 2008 financial crisis.  Emerging markets are melting down and transmitting a financial and economic virus that infect the entire world.  The coming financial collapse will be magnified by the enormous amount of visible and hidden debt, the worst perpetrator of which is the United States.

Elijah Johnson invited me onto his Silver Doctors podcast to discuss the bullish set-up for gold and silver, along with the underlying factors that will lead to problems which have motivated the banks to go long gold and silver:

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You can learn more about this newsletter here:  Short Seller’s Journal information and more about the Mining Stock Journal here: Mining Stock Journal information.

The Economy Is Collapsing Under The Unbearable Weight Of Debt

“Those who see no Lehman-like episode on the horizon did not see the last one.” – highly regarded writer, George Will, in a National Review article titled, “America Is Overdue For Another Economic Disaster”

Lost in the largely meaningless political Kabuki theatre being staged on Capitol Hill is the fact that the economy is deteriorating. Real average weekly earnings in July declined for production and non-supervisory workers. It was down 0.01% from June to July and down 0.22% from July 2017. For all employees, real average hourly earnings declined 0.20% from June to July but was flat year over year.

Real earnings is not a statistic discussed in the mainstream financial media, but it reflects the ability of the average household to consume non-discretionary goods and services. It also reflects the ability and willingness of the average household to borrow.

The U.S. economy’s appearance of wealth creation and economic growth has been fully dependent on debt creation since 2009. As the graphic from John Williams’ Shadowstats.com shows, the rate of growth in real consumer credit outstanding is approach zero (no growth):

The chart above shows the year-over-year growth rate of real consumer credit outstanding with and without student loans. As you can see, ex-student loans (blue line) the rate of growth in outstanding consumer debt (not including mortgage debt) is close to zero. The increase in consumer credit reported for June (the latest month for which data is available) was $10.2 billion vs $16 billion expected. It was down from May’s increase of $24.6 billion. The perceived growth in GDP is inextricably tied to the growth rate in the use of debt. The near-zero growth rate in consumer credit is thus consistent with the view that the U.S. economy is weaker than the promotional propaganda flowing from Wall Street and DC.

“Student Loans Are Starting To Bite The Economy” – That was title of a Bloomberg article last week. With $1.4 trillion outstanding, student loans are the second largest category of household debt after mortgages. 22.4% of all households carry student debt. 44.8% of households in the 18-34 age demographic carry student debt – that’s up from 18.6% in 2001.

Not discussed by the article is the estimated that 40% of borrowers will default on their loans by 2023. The current 90-day “official” delinquency rate is 11.2%. But this number is highly deceptive because 30% of all student loans are in deferment or forbearance. These loans are put into “remission” for many reasons but the most common is that it enables the borrower who can’t make payments to defer the stopwatch on delinquency/default.

While it’s possible that the student loan problem is affecting potential demand from potential homebuyers, most people who have student debt also have credit card and auto debt. So it’s not clear that student loan debt alone has affected the ability of first-time buers (18-34 age cohort) to buy a home.

Rather, I would argue that it’s the accumulation of debt since 2012 that is affecting all areas of the economy:

As you can see in the chart above, total household debt through the end of March 2018 – which means the debt level is even higher now – is considerably higher than the previous peak at the end of Q3 2008. Not shown is a graph I constructed on the FRED site that added nominal GDP. The rate of growth in household debt has sharply surpassed the rate of growth in GDP since Q3 2015.

This is why the economy is stalling. This is why the housing and auto markets are now in definitive contraction. It has nothing to do with the trade war or low housing inventory. It has everything to do with an economic system that is losing its ability to support the massive amount of debt that has been issued since the last financial crisis (de facto collapse).

The weekly economic reports – both Government and private sector – continue to reflect a downturn in economic activity. Moreover, the reports almost always are below the hyped-up expectations of Wall Street’s brain trust. The chart below reflects the irrational optimism of anyone chasing stocks higher (primarily hedge fund algos):

As you can see, since the middle of August, the 30-yr Treasury yield has negatively diverged from the S&P 500 after being tightly correlated for the first two weeks of August. The spread between the 2yr and 10yr treasury is at its lowest since August 2007.

The Treasury curve “flattens” when the short end of the curve rises relative to the long end. The curve flattens when the market has decided that the Fed is wrong on its policy of raising the Fed Funds rates because the economy is slowing down. Large Treasury buyers pile into 10yr and 30yr Treasuries on the expectation that a deteriorating economy will force the Fed to reverse course and lower rates again. The chart above reflects the market reacting to the steady flow of negative economic reports.

If the Fed is right, we should see the 30yr yield “catch up” to the SPX. Conversely, if the market is right, the chart above is yet another warning sign of an eventual stock market “accident.” I have no doubt that the Fed is wrong. That said, the Fed has painted itself into a corner on rates. Contrary to the Fed’s public propaganda of “low inflation,” the Fed is well aware of the true rate of inflation – inflation created by the Fed’s monetary policy since 2008. If the Fed does not act to tighten monetary conditions, price inflation will continue to accelerate and inflict serious damage to the U.S. economy.

The commentary above is from the latest issue of the Short Seller’s Journal. I explain why the housing market is heading south quickly, update my homebuilder short ideas and discuss Tesla. You can learn more about this newsletter here:  Short Seller’s Journal information

Gold And Silver: Similar To 2008

In 2008, gold was taken from $1020 to $700 and silver was pounded from $21 to  $7 during the period of time that Bear Stearns, Lehman and the U.S. financial system was collapsing.  The precious metals were behaving inversely to what would have been expected as the global financial system melted down.   Massive Central Bank intervention was at play.

Currently the prices of gold and silver are being dismantled by what appears to be massive hedge fund shorting of Comex paper gold.  As of last Tuesday, the “managed money” trader category as detailed in the Commitment of Traders report showed that the hedge funds were short a record amount of paper gold.

As of yesterday the open interest in Comex paper gold was about 17,000 contracts higher than the open interest shown in last week’s COT report.  This represents another 1.7 million ozs – or 48 tonnes – of paper gold that has been dumped on the market.  It is highly probable, if not a certainty, that most of the increase in short interest is attributable to hedge fund algos chasing the paper price of gold lower.

Meanwhile, behind the scenes, the Bank of International Settlements (BIS) has been actively intervening in the physical gold market during July, as detailed by Robert Lambourne, a consultant to GATA:

Use of gold swaps and gold derivatives by the Bank for International Settlements, the gold broker for most central banks, increased by about 17 percent in July, according to the bank’s monthly report…The BIS’ July Statement of Account gives summary information on its use of gold swaps and gold-related derivatives in the month. The information is not sufficient to calculate a precise amount of gold-related derivatives, including swaps, but the bank’s total estimated exposure as of July 31 was about 485 tonnes of gold versus about 413 tonnes as of June 30.

That is an increase of about 72 tonnes or 17 percent. The increase came as there increasingly appeared to be a correlation between the gold price and the valuation of the Chinese yuan, both of which fell substantially during the month.

The BIS refuses to explain what it is doing in the gold market and for whom, engendering suspicion that it is helping one or more of its members to manipulate the currency markets through deception.  To place the bank’s use of gold swaps in context, its current exposure of 485 tonnes is higher than the gold reserves of all but 10 countries. (documentation and links: BIS gold market intervention increased by 17% in July)

While visible evidence of a declining gold price can be seen with Comex futures prices and the daily London gold price “fix,” the BIS is operating in the physical market to increase the supply of physical gold available for bullion banks on the hook to deliver physical gold to the countries buying large quantities of physical gold on a daily basis.  As long as the BIS can ensure the flow of physical gold remains uninterrupted, the demand for physical gold will not offset the effort to take-down the price of gold in the paper derivatives markets.

The effort to push down  the price of gold is to silence the alarm gold provides to signal global systemic distress. It’s not just the emerging market economies  and China. The U.S. economy, based on all the private sector data I dig up an analyze on a daily basis, hit a wall sometime between March and May.

This is most evident in the housing market nationwide, which  has been rapidly deteriorating (notwithstanding a few areas that may still have some flaming embers of activity).  Just one supporting data-point is  mortgage purchase applications, which have declined each week over the past 5 weeks. This is not a good omen for the housing market during the seasonally peak selling months. We know it’s not an inventory issue because inventory across the country in all price segments has been rising in most areas and soaring in some of the hottest areas.

While today’s headline retail sales number shows a 0.5% increase in July over June, the “increase” was manufactured for headline purposes by a large downward revision of June’s retail sales numbers. Furthermore, the headline number is a nominal number. Net of true price inflation, retail sales declined. There are other problematic inconsistencies between the Census Bureau-generated numbers and the actual numbers as reported by private-sector companies.

The bottom line is that the prices of gold and silver are being systematically taken down as a mechanism to help cover up the fact that a large-scale financial crisis is going to hit the global financial system. I don’t know the timing, but I would suggest that the EM currency melt-down that began in South America and has spread to the eastern hemisphere represents a series of earthquakes that  are generating a “tsunami.”

While I’m loathe to forecast a price-bottom for gold and the timing of the forthcoming systemic crisis, I would suggest that anyone who is shaken out of their gold, silver and mining stocks right now will regret selling when looking back a year from now.

My Short Seller’s Journal subscribers and I continue to rake in easy money shorting the homebuilder sector. Two of my short-sell picks, Zillow Group and Redfin, have been annihilated in price over the last week. In the last issue I also laid out why Tesla is technically insolvent and likely will be irrelevant as a company within 12-18 months. You can learn more about this weekly newsletter here: Short Seller’s Journal information.

Home Sales Data Show The Bubble Is Bursting

There’s no question in my mind now that the housing “snowball” has started downhill and it won’t take long to develop into an avalanche. In addition to all of the “for sale” and “for rent” signs I’m seeing with my own eyes popping up around Denver, I’ve been receiving emails from subscribers describing the same thing in their area.Short Seller’s Journal, July 22nd issue

The existing and new home sales reports this week were worse than even I expected.  Given the statistical manipulation tools used by the National Association of Realtors (existing home sales) and the Census Bureau (new home sales) – both entities use the same regression software – one can only wonder about the true rate of home sales decline.

Yesterday, CNBC.com featured a report titled, Southern California home sales crash, a warning sign to the nation.  I was surprised to see CNBC issue a bearish report on anything.  This report is similar to what’s occurring in New York City – rising inventory and falling sales.  Apartment rents in NYC are also dropping.  It’s similar in nearly all “bellwether” markets.

The Housing Bubble Blog (thehousingbubble.com), which was around during the mid-2000’s housing bubble, posted an article on Friday titled, “Discount sales can create a snowball effect.” The article featured articles from different cities, Portland, Dallas, Ft Collins (Colorado) and Minnapolis/St Paul which described rising inventory and falling prices.

This explains why the homebuilder stocks are in an official “bear market,” with some homebuilder stocks down over 30% since late January. I have yet to hear or read about this fact from the mainstream financial media or Wall Street.

Today’s new home sales report, along with the serial decline in the housing starts  data, disproves the “low inventory” narrative.  Affordability, rising rates and a shrinking pool of potential homebuyers who can qualify for a conforming mortgage has torpedoed demand.  The latest U of Michigan Consumer Sentiment report featured this chart on homebuying sentiment:


As you can see, the consumer “sentiment” toward buying a home is at its lowest reading since 2008. This is not a fact that would ever show up in the mainstream financial reporting on the housing market.

As for the low inventory narrative. The California Association of Realtors reported that June existing home sales plunged 7.3% from June 2017 and inventory is up 8.1%. A subscriber of the Short Seller’s Journal showed me an email in which Pulte Homes (PHM) was offering up to an unprecedented $20,000 bonus to realtors who sold Pulte homes in new developments in northern Florida.

Housing starts for June reported last Wednesday came in at 1.17 million (SAAR). The Wall Street brain trust was looking for 1.32 million. This was a 12.3% plunge from May.  May’s original report was revised lower. Starts for both single-family and multi-family homes were down sharply across the entire country. If inventory were “low,” housing starts would be soaring, not falling.

I’m sure northern Florida is not the only market in which Pulte is offering large selling bonuses and I’m sure Pulte is not the only homebuilder offering large broker incentives. I look at the inventory numbers across homebuilders every quarter. A lot of the inventory is “work-in-process.” But finished a new home does not necessarily show up in the MLS system unless the builder lists it. This is why, on the surface, new home inventory might look relatively low but the builders are showing huge inventory levels in their SEC-filed financials.

Because of the nature of the asset, and the relative illiquidity of the market relative to actively traded financial assets, change in the direction of the momentum in the housing market is like turning a large ocean-freighter around. The manic phase of the housing bubble is over. The momentum has been turning in the opposite direction since late 2017. Flippers who bought homes in the last 3-6 months will soon become desperate to sell. Some will look to rent and “wait for the market move through this valley and head up again” only find that rental prices in many areas are now below the cost of carry.  They forget to tell you that part in flipper seminars advertised on local radio stations.

Soon the “discount effect” of falling prices will snowball into an avalanche.  If you think this is wrong, take another look at homebuilder stock charts.  The commentary above is partially excerpted from the latest issue of the Short Seller’s Journal.  In this issue I discuss various strategies for building and managing short  positions in the homebuilder stocks in the context of the homebuilder earnings reports due out tomorrow (Thursday, July 26th).  New subscribers get a handful of back-issues, an option trading primer and a copy of my Amazon Dot Con report.

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