Tag Archives: stock market bubble

World’s Most Speculative Mania?

The western media – especially any mainstream U.S. news source – has made it a habit to blame the world’s problems on Russia and China.   The U.S. economy is aces – when the U.S. stock market drops it’s China’s fault.

Bloomberg published a report yesterday which presented China’s commodities futures market as the world’s most speculative mania:

What started as a logical bet — that China’s economic stimulus and industrial reforms would lead to shortages of construction materials — quickly morphed into a full-blown commodities frenzy with little bearing on reality.  Bloomberg News

But let’s put China’s commodities trading frenzy in the context of the stock that I estimate is the biggest corporate Ponzi scheme in U.S. history:

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AMZN trades at a trailing GAAP p/e of 562x.  I use the term “GAAP” here quite loosely because there’s GAAP and then there’s Jeff Bezos GAAP.  It trades at 23x book value, 30x tangible book value and 40x EBITDA.    Bezos claims that AMZN threw off  a couple billion in “free cash flow” for Q1.  Yet, if this is a provable fact, how come AMZN’s cash balance declined $3.4 billion from the the end of Q4 2015 to the end of Q1 2016?   Someone is not telling the truth…

It did not hit me until this morning (this was well before the Zerohedge article reporting a similar concept later in the day) that the reason the SEC and Congress do not open an investigation into Amazon’s accounting is because Jeff Bezos owns the Washington Post. That’s a very powerful weapon to dangle in front of a Washington, DC politician or bureaucrat.

AMZN stock hit an all-time high today because some chode from a Wall Street bucket shop issued a “buy” with a price target of $1,000.  The analyst did not have any specific fundamental reasons for why the stock was worth $1,000/share.  But then again, I’ve never seen anyone besides this blog and a few others attempt to hold these Wall Street hand-puppets to any reasonable degree of accountability.

The Bloomberg article references the the Dutch Tulip bulb mania of the 1600’s and the internet bubble of the late 1990’s in the U.S. when referencing the frenzied activity in the Chinese futures markets.   How convenient for Bloomberg to overlook that the fact that the greatest investor fraud of all-time is domiciled right here in America.

Yes, I suppose just like Bloomberg’s assertion that Chinese commodities futures “started off as a logical bet,” at time in its infancy as an online book reseller Amazon’s stock was a logical bet.   But fueled by Fed money-printing, regulator-enabled fraudulent accounting and extreme investor greed, Amazon stock is the embodiment of a financial system that is completely corrupted to the core.

SoT Market Update: Gold, Silver And The End Of The Biggest Ponzi Scheme In History

The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation – which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion, and thus bring about the crisis. The depression follows in both instances – Ludwig Von Mises

I re-watched the movie “The Big Short” this past weekend.  It’s worth watching twice if you are interested in learning about how corrupt the entire U.S. financial system is.  Now, my guess is that a lot of viewers left the theatre after watching the movie thoroughly horrified by what was presented in understandable form to the typical “main street” American.

However, most are likely unaware that the original sources of corruption and fraud were never addressed.  In fact, if anything, legislative “reforms” like Dodd-Frank did nothing more than enable the big banks to continue using derivatives and Ponzi-scheme financial structures as mechanisms to continue sucking wealth out of the system.  Perhaps what’s most humiliating about this is that Obama Government and Congress blindly let former Goldman Sachs CEO, Henry Paulson, in his capacity as Secretary of Treasury give these banks an $800 billion blank check from the Taxpayers to continue on with their criminality.

The credit and derivatives problems are, in reality, are worse now than they were in the period leading up to the financial market collapse.   The legislative “reforms” served two purposes:  1) allow the banks to continue their ways under the illusion that the problems were fixed;  2) provide the banks with accounting tools which enable them to better hide the fraud.

It was reported today that the Central States Pension Fund, which handles the retirement benefit programs for Teamster truck driver unions across several large States, has formally filed an application to cut benefits up to 60%.  It stated that the fund would be empty by 2025 if the application is denied.

This reflects how catastrophically underfunded this pension fund was in the first place. And make no mistake, if you are covered by a large institutionalized pension fund, public or private, your fund is equally as underfunded – it just has not yet been affected but it will be sooner or later.

This begs the question:   with the stock market at near-record levels and Treasury bond prices at all-time highs, how is it at all possible that these pension funds are still underfunded to this extent?

The truth lies in the fact that the entire U.S. financial system is one gigantic Ponzi scheme. The Shadow Truth podcast show presents another Market Update in which we discuss the fact that the U.S. financial system is a giant mirage that has been fabricated by the Federal Reserve and the U.S. Government. It’s not a question of IF the next financial market collapse will occur – it’s a question of WHEN:

“It’s Worse Than Bad” – We’re On The Cusp Of Global Economic Depression

Since 1971, when the world officially abandoned the gold standard, economic growth has been stimulated through vigorous applications of aggressive Central Banking monetary policies:  the imposition of artificially low nominal interest and boundlessly unrestrained credit issuance.   Eventually the global economic system becomes immune to the stimulative effects of low interest rates and the financial system reaches a point at which it can no longer absorb additional debt issuance.

The de facto financial collapse, nee Great Financial Crisis,  in 2008 was the manifestation of these destructive financial policies.  Central Banks globally shifted gears into outright money printing in order to defer the inevitable.  This served the purpose of keeping the big banks from collapsing and created a temporary mirage of “real” economic growth.  The money printing also enabled a post-2008 reinflation of the credit markets well beyond the proportions of  the bubble that popped in 2008.

What’s been billed as “economic growth” by a highly propagandistic media since 2008 is nothing more than debt-fueled inflation in the form of “nominal” economic growth.  In truth, the U.S. has been in a state of economic contraction since 2007 if a true inflation rate were used in the GDP deflator.  What’s been billed as “recovering housing and auto markets” is in reality nothing more than an abundance of cheap debt that has been made available to millions of borrowers who can ill afford to service that debt over an extended period of time.  This fact is already being confirmed by sky-rocketing auto loan delinquencies.

Amusingly, a reader sent me an email accusing me being wrongly a bear on housing for quite some time.  The truth of the matter is that I have wrongly underestimated the extent to which the Fed and the U.S. Government would intervene to reinflate the housing bubble.  The value of housing is the most disconnected from the underlying “organic” market fundamentals than at any time in history. Furthermore the Fed/Government market intervention has succeeded in putting a significant number of people and small investors into homes that soon will be unaffordable for them support.

My short call in Beazer has returned close to 60% in the last 17 months.  My short call in KBH is nicely green.  I shorted TOL over two years ago and that short is up over 10%.  All three are remarkable feats given the amount of Fed/Govt intervention in both the housing market and the stock market.

Market intervention masquerades as a “bull” market until it the costume falls off.  We are very close to this point of “undressing” and the consequences of the extreme moral hazard generated from seven years of monetary lasciviousness will make the 2008 housing collapse look like a polite tea party.

Steve “Wake Up With Steve” Curtis on KLZ-560 radio in Denver hosted me on his show recently.  We discussed topics ranging from the collapsing global economy, the fraudulent stock market and China’s aggressive gold accumulation policy.   You can listen to discussion here:  Wake Up! With Steve Curtis.

The latest issue of the Short Seller’s Journal is out.  It features the high-flying stock of company that extremely overvalued and is riddled with misleading, if not fraudulent, accounting (even worse than AMZN).  This stock looks ready to drop about $100.  It also discusses the next move in oil and a bank stock that is highly leveraged to the energy market and which looks ready to shed $10-20 points quickly once oil starts heading lower. You can subscribe by clicking HERE.

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The System Will Implode When Central Bank Intervention Fails

The economic reports released this morning added to the near-continuous flow of information reflecting a U.S. economy that is likely contracting, for the most part.  Perhaps the only “fundamental” variable not contracting is the hot air coming from the Fed.

In today’s release of its “services” PMI, Markit explains:  “The US economy is going through its worst growth spell for three and a half years…and the worst may be to come as the greatest concern is the near-stalling of new business growth.”

The core durable goods new orders index released today dropped for the 13th month in a row – Zerohedge points out that it is the longest “non-recessionary” stretch of consecutive monthly drops in 70 years.

In fact, a good argument can be made that if a bona fide rate of inflation was applied to the Government’s GDP calculations, the U.S. economy has not produced real, inflation-adjusted economic growth since 2006.  Review the work of John Williams’ Shadowstats.com for evidence of this fact.

The Swiss National Bank admitted that it has spent $470 billion on currency manipulation since 2010.  Given the Fed’s refusal to disclose any information about its currency swap programs – including denying all FOIA requests on this matter – there can be no doubt that the Fed has been actively funding the SNB’s endeavors. The same goes for the SNB’s huge U.S. stock portfolio, which includes insanely overvalued gems like AAPL and AMZN.

We are witnessing the western Central Banks’ last gasp at preventing total systemic collapse.  The Fed et al were able to defer this event in 2008 with many trillions of direct money printing – deceptively marketed as “Quantitative Easing” – and many more trillions of direct Government income and spending subsidization.  After all, a Government willing to underwrite and guarantee 3% down payment, subprime credit mortgages is creating nothing more than a form of “helicopter money” dressed in drag.

A reader who is a self-professed real estate expert took issue with my blog post the other day in which I stated that the housing market is tipping over now.   He said: “Until proven otherwise, the U.S. housing market is still alive and well right now – and Denver is still doing very well too!”

Quite an assertion given that his opinion is based almost solely on the corrupted data produced by the National Association of Realtors (I refer you to one of several blog posts in the  past in which I demonstrate in detail why the NAR data is highly flawed, if not intentionally fraudulent to some degree).   To which I responded:

We’ll have to agree to disagree. Despite the propaganda, prices have been falling in Denver since last summer. Inventory is going through the roof. The “bubble” neighborhoods everywhere in metro-Denver are starting to look like they did in 2008, littered with for sale and for rent signs. I’m not sure where your “Denver” data is coming from but I conduct actual “boots on the ground” due diligence. I am getting emails from readers in Florida, DC/Virginia, NY and other regions describing the same thing I’m seeing in Denver.

The NAR data is highly manipulated. Yr over yr SAAR is useless as is the NAR data collection methodology. The “seasonal adjustment” regression program is the same program the Government uses in its data manipulation scheme.

At the lower end of the spectrum, we are seeing the last fumes of a regenerated subprime mortgage bubble sponsored by FNM/FRE/FHA/VHA/USDA. Yes, the USDA, which sponsors 0% down pmt mortgages in “rural” areas where “rural” turns out be the outermost suburban band of most MSA’s. Were you even aware of that?  There’s also been a “last gasp” surge in investor/flipper volume. They will be stuck holding the bag on homes they can’t sell or rent, just like in 2008.

My point in all of this is that the only “trick” left in the Fed’s bag right now is direct intervention in the stock market.   It’s a last gasp effort in an attempt to generate a “confidence” and “wealth effect” dynamic.  Hey, if the stock market isn’t going down things can’t be that bad, right?

The problem is that, for the most part, the world can no longer absorb any more credit expansion. We’re seeing this in the U.S. with the rapidly rising delinquency rates for auto and student loans, soon to be followed by another round of mortgage delinquency/defaults.

The Fed knows this and that’s why it continues to defer raising rates despite the constant barrage of threats to do just that at “the next meeting.”  Even the boy who cried “wolf” is blushing on behalf of the Fed.  I believe that the Fed’s inability to inflict a meaningful price take-down of gold and silver – especially silver – may be an indication that the Fed’s manipulative powers are beginning to atrophy.

It’s likely that this latest bear market bounce in stocks – the one for which Jim Cramer has ceremoniously proclaimed “a new bull market” – is going to start tipping over.  It won’t happen all at once but it will likely lead to yet another “waterfall” drop in the S&P 500.  Incredibly, the last two times around witnessed an incredible amount of screaming from the “peanut gallery” for the Fed to do something in response to just a 10-15% drop in stocks.  Bear markets typically don’t end until stocks have dropped 60-90%.

At some point the Fed will be completely helpless to prevent the market from going lower. That’s the point at which the system will collapse.  In my upcoming issue of the Short Seller’s Journal, I outline why I believe both oil and stocks are getting ready to head down the roller coaster tracks once again.  I have an idea that will capitalize on another move lower in oil plus accelerating defaults in the energy sector.  Subscribers also received an update email last night that presented a stock that I think is getting ready to experience an “elevator shaft” drop.  This company’s accounting is more misleading than Amazon’s, if that’s possible.

The Fed has been working overtime to hold up a stock market that is the most overvalued in U.S. history based on using traditional GAAP earnings.  My Short Seller’s Journal will help you find stocks that will ultimately fall at least twice as much as the overall market, either because of misleading accounting that gets exposed or rapidly deteriorating fundamentals, or both.  (click below to subscribe)

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Stranger Than Fiction: The System Is On Full Retard

I said half-facetiously in early 2004 that if a small nuke detonated in Times Square that the Dow would probably shoot up 200 points.  Today I reiterate that assertion with full sincerity.  All of the markets, but especially the stock market, are now openly manipulated. The Fed and the Treasury never bother even to tacitly deny it.

Yesterday in our conversation with Paul Craig Roberts, Dr. Roberts rhetorically asked, “why does the Fed operate a massive and highly sophisticated trading desk in New York?”  I add to that question, rhetorically of course, why does the U.S. Treasury’s Working Group On Financial Markets office in the same building as the NY Fed in NYC?

The Fed officials are back at it threatening us with interest rate hikes in April once again after weeks of bluffing before blinking at the March FOMC meeting.  If these guys can’t raise rates just one quarter of one percent – if for no other reason than to avoid looking like village idiots – then the true condition of the underlying economic system must be far worse than any of us can imagine.

This rate-hike “meme” dove-tails well with Chicago Fed National Activity report  released last week showing a sharp contraction in economic activity, as its index fell from +.41 to -.29 in February.  It takes a lot to move the needled on that index, which means economic activity contracted precipitously during February.  This was reinforced by the big plunge in existing home sales during February per the NAR yesterday.

Lewis Carroll’s imagination could not make this stuff up.

By now everyone is well aware of the fact that the S&P 500 has retraced nearly the exact path that it took after the 11.2% plunge in August (click image to enlarge):

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Here’s a few interesting statistics: Through yesterday, there have been 26 trading days and only six have been down days; during the September rally there were a total of 26 trading days before the market rolled over and only eight of them were red; from the Feb 11 bottom through today (Mar 22), the SPX has rallied 12.3%; from the bottom on Aug 25 to the top on Nov 4, the SPX rallied 17.3%; as you can see from the two bottom panels in the graph, the RSI and MACD momentum indicators are as “overbought” now as they were at the top of the last plunge/spike-up rally;  in both cases, the SPX has rallied back above its 200 dma (red line).

Currently the stock market is more dislocated from the underlying fundamentals of the U.S. financial, economic and political system than at any time the history of the country. While it seems that current push higher in the stock market is climbing the euphemistic “wall of worry,” at this point the current rally is less powerful than the previous move off of the September 2015 lows.

I was chatting with a prominent cycle theory analyst, Longwave Group’s Ian Gordon, who successfully forecasted the 2008 market crash in 2007.  He thinks the Fed will be unable to contain the next stock market sell-off the way it was able to in September.  He thinks this current move has, as most, another three months.  I told him I thought the market would tip over sooner than that…

In the meantime, one has to wonder if both Fed officials – Dennis Lockhart and John Williams – have somehow been wandering around Alice’s Wonderland with their heads firmly inserted where the sun never shines.

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The U.S. Economy Is Headed Into A Deep Recession

A reader contacted me earlier today after seeing the absurd article on the Wall Street Journal heralding in the “7-year bull market” in stocks:

Absolutely amazing they can put out crap like this:   “Still, with GDP growth expected to be 2.3% this year, according to a group of more than 60 economists surveyed by the Journal, market strategists project the current bull market has more room to run.”  The WSJ editors just lost all credibility they may have had with that end to the article. How could they find more than 60 delusional [or shill] economists that all say the sky will be blue for years?  I’m tired of worrying for myself and my family. Where can I find what they are smoking? Must be some really good hopium.

It has not been a seven-year “bull market” in stocks or housing prices, it  has been the biggest bull market in money printing and credit creation in history.

While the media clowns and Wall Street shills celebrate the seven year “bull market” in stocks, the fundamentals underlying the U.S. economic and financial system continue to deteriorate – quickly.

The most recent economic activity “end zone” dance was over February’s domestic auto sales, which seem to be occurring at an all-time high when viewed on an “annualized rate” basis.  Of course, no one wanted to discuss the fact that Ford’s sales would have been flat or negative if their huge jump in rental fleet deliveries were stripped out of their numbers.  GM’s sales were down slightly, and dealer inventories continue to balloon.

What’s worse, subprime auto loan delinquencies are spiking up to their 2008 pre-financial collapse level (click to enlarge):

UntitledIt’s no secret that the banks have been willing to extend to auto loans to anyone who can fog a mirror.  Credit score is largely irrelevant and there’s no requirement to show proof of income.

The prelude to the 2008 de facto financial system collapse, washed by trillions in QE and added credit, is now starting to repeat again.  An article in the Wall Street Journal (source: Zerohedge) is reporting that used car prices are headed lower again.   With over 32% of all car “sales” accounted for by leases, as these cars come off lease and flood the used car system, prices fall.  This in turn affects the amount for which someone with a used car can get paid in order to “buy” a new car.  Add that inventory to the already sky-high repo inventory, and the auto sector is set-up for a huge “pile-up” crash.   But go ahead and just conveniently ignore the record level new car inventory sitting on dealer lots…

Meanwhile, the wholesale trade “gap” – the difference between the level of wholesaler Untitledinventory and sales – is now at a record level.  Furthermore the wholesale inventory to sales ratio has spiked up to its late summer 2008 level (click to enlarge):

This ratio is spiking up from both excessive inventory accumulation at the wholesaler level of the distribution system and declining sales of this inventory to the retail sector, reflecting weak consumer spending and an outlook for continued weak consumer spending.

What’s perhaps the biggest factor contributing to what I believe is a rapid deterioration in economic activity?  “Americans are buried under a mountain of debt:”  LINK  Per findings in the article from Gallup:  “The amount of debt Americans carry is staggering and grows every day.”

The “celebration” of the seven year “bull market” is emblematic of the degree to which propaganda is being used to cover up the truth.   If you give me a printing press to print money or an ability to issue an unlimited amount of credit, I can make any object increase in value.  The big run-up in the stock market and home prices and in auto sales was enabled by $4.5 trillion in printed money from the Fed and the enabling of an insane amount of credit creation, including derivatives which are nothing more than another form of credit.

When this hits a wall – and I think the gold market action is telling us that the collision is occurring or is imminent – it will cause a systemic upheaval that will make 2008 look like a civilized tea party.  

Insanity Engulfs The Stock Market

I have no idea who is throwing cash into this highly overvalued stock market to push it higher right now. Any registered financial advisors or pension managers who are buying into this stock market right now are in serious breach of their legal fiduciary duty.  While there’s likely a modicum of retail daytraders and momentum-chasing “hedge” funds chasing the upward velocity, I have a an educated hunch that the Fed and the Treasury’s Working Group on Financial Markets – headquartered in the same building as the NY Fed – are behind this insane thrust higher in the S&P 500 and the Dow.

But as Shakespeare once said (in Macbeth) “nothing is but what is not.”  Beneath the facade of the S&P 500 index spike up over the past 2 weeks, smart money appears to be unloading long positions before this “Titanic” hits the iceberg (click to enlarge):

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With good reason, too. If GAAP earnings were calculated the way they were calculated 20 or even 10 years ago, the p/e ratio for the S&P 500 would be at its highest in history. Furthermore, “smart” investors would not be chasing stocks higher while earnings and revenues are declining, as they have been for several quarters.

The on-balance volume and positive volume indicator signals in the graph above show an extreme divergence from the direction of stock market.  This indicates that – away from the key stocks used to push the S&P 500 and Dow higher – big money is unloading stocks while the SPX/Dow appear to show strength.  It’s brings to mind the “Rome burns while Nero fiddles” metaphor.

In the graph above, you can see that the S&P 500 appears to be carving out a pattern similar to the path it took from last August through early November, before it dropped off a 12.5% cliff.  No one knows if this same pattern will repeat, but there’s always the chance that the Fed is trying to push the S&P 500 back up to its 200 dma (red line).  We’ll know if this gets accomplished soon enough.

Meanwhile, it’s still possible to make a lot money shorting the stock market as long as you are “nimble.”  On Monday mid-day, I emailed my subscribers with what I call a “quick hit” trade set-up that had developed in Big Five Sporting Goods ((BGFV) – click to enlarge:

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The suggested trade was to buy puts or short BGFV before the close on Tuesday and cover it or sell the puts right after the open on Wednesday (today).  I had some additional analysis to support the trade idea.  BGFV actually “beat” its earnings number but it required some hard-core GAAP engineering to accomplish this.  Revenues were in-line but the stock was hit for over 18% at the open today.

Several subscribers emailed me today with their success on this trade:  “Good call on BGFV. Scalped it twice…Thanks for this trade, 117% return in less than 24hrs, not too shabby, lol…Got small position in the $12.50 puts just before the close. Sold this a.m. as instructed for 112%…We did this trade-our first with your service–and got a little better than a triple!!

You can subscribe to the Short Seller’s Journal here:   LINK  or by clicking on the image to the right.  It’s been a difficult stretch for shorting this market but most of my emphasis and NewSSJ Graphicideas are focused on longer term trade ideas (12-18 month). I always include ideas for using options with specific examples.

The intra-week email “alert” was not originally part of the service but I tried it out several weeks ago and had a great response.  I only send them out when I come across an idea that merits doing so.  Finally, SSJ subscribers will be able to subscribe to the coming-soon Mining Stock Journal (hopefully Friday) for half-price.

U.S. Economy Is Collapsing Underneath Flood Of New Debt

Debt creation behaves like printed money until the time at which the creditor demands to be repaid in full rather than extended through refinancing.  The continuous expansion of debt is therefore no different than continuous money printing up to the point at which the credit markets will no longer tolerate more debt.

The U.S. economic system is riddled with more debt now than in 2008 when a de facto financial collapse the Great Financial Crisis occurred.   Debt behaves like printed money until the time at which the debt has to be repaid.  The Federal Government never repays the debt is issues.  It rolls over maturities while at the same time it issues more debt.  This happens every two weeks.   There’s now $19 trillion in Treasury debt outstanding.  That number was about $10 trillion when Obama took office in 2008.

Perpetual debt refunding and increased issuance is NO DIFFERENT THAN OUTRIGHT MONEY PRINTING.  Until of course, the creditors will no longer tolerate the refinancing of existing debt.  That’s what happened in 2008.  The market forced the issue and the financial system was collapsing until the Treasury facilitated an eventual $4.4 trillion in outright money printing.

The difference between then and now is that the amount of debt issued  is significantly greater today than it was in 2008.  While everyone was watching the Fed’s printing press to monitor the creation of money, no one was keeping track of  the spending “power” being created by the fractional banking system’s credit market funding mechanism.

This illusion of economic “wealth creation” is perhaps best represented by the auto market, in which sales have soared to record levels over the past few years.  The problem is that the amount of auto loans issued to drive this level of sales is, by far, at an all-time Untitled1high.  At least one-third to half of this debt issued since 2010 can be considered sub-prime, even though the bankers may not have labelled it as such.  While the headlines today might herald “strong” auto sales in February, bear in mind that it is primarily funded by artificially low interest rates and non-income verification 100%+ loan to value debt. Private market credit companies that are now offering “equity” loans to people who own cars with little or no debt.

The level of debt issuance currently in many respects is even more insane than it seemed during the period leading up to the 2008 credit market collapse.  The same is true for mortgage debt.  The Government has begun guaranteeing, via Fannie Mae, Freddie Mac, the FHA, the VHA and the USDA (yes, the U.S. Dept of Agriculture), this issuance of 0-3% down payment mortgages down to scores as low as 500.  Even more absurd, the  .01 – 3% portion of the down payment does not have to be in the form of cash contributed by the buyer.  That “down payment” can take the form of seller concessions or loans to the buyer. Home equity loans are back in full force just as prices in most areas are starting fall rather quickly.  While not quite as crazy as the non-doc 125 LTV option-ARMs underwritten during the big housing bubble, the destructive force that will occur when these mortgages go into default will be even greater than the first time around.

I get irritated by all of the financial analysts out there who point to the rest of the world – especially China – as being the source of global economic weakness.  A global economy sinks or swims together and the U.S. economy is one of the biggest “swing” factors in the global economy.   Make no mistake, the U.S. economy is likely already technically in recession despite small pockets which are still showing some pulse.  Moreover,  United States’ contribution to global economic growth over the past six years has been nothing more than the illusion of economic activity which was fueled by both the outright money printing from the Fed’s printing press and the de facto money printing of the Fed’s electronic credit creation mechanisms.

The time-tested economic law of diminishing returns is starting to engulf the U.S. economic system. The credit markets are starting resist additional credit issuance and the U.S. economy, notwithstanding the phony Government economic reports, is starting to head south quickly – click on image to enlarge:

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Formal headline activity continues to run well above economic reality as signaled by a number of business indicators, such as corporate revenues, domestic freight activity and a variety of better-quality economic series, such as industrial production, new orders for durable goods and real retail sales. Even housing starts and construction spending are signaling a fourth-quarter contraction. – John Williams, Shadowstats.com

The stock market is spiking higher on the expectations that western Central Banks will start printing more money again. That may juice the markets for a bit longer than expected but the graphs above show that more printed money will not stimulate real economic activity. The credit markets started to collapse in the fourth quarter, led by defaulting energy debt and lower quality junk bonds. Those were just warning tremors of the massive credit market heart attack coming through the arteries of the U.S. financial system.

I sent out a mid-day notice to the subscribers of my Short Seller’s Journal  mid-day yesterday alerting them to an opportunity to make money today. Despite the 1.8% spike up in the SPX today, the stock I recommended as a “quick hit” short is down over 5% right now.  If it misses its earnings when it reports after the market closes, this stock will drop at least 25% tomorrow.

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Fundamentals Uber Alles – Are You Prepared For The Next Leg Down?

Certain aspects of this market have become relatively easy to predict. I told my partners yesterday that they would take silver below $15 once the U.S. paper market was the only market open market on Friday (today). Soon as the London p.m. fix was set, the NY paper market manipulators went to work and they hammered silver.  Interestingly the mining stocks have been very reluctantly going down these past two trading sessions. This is quite remarkable given that, from the HUI’s low-close of 100.77 on January 19, the index has run up as much as 67%. It’s due for a “technical” pullback but it seems to be yielding rather grudgingly.

There may be a message in that. I’ll be rolling out a Mining Stock Journal next week to complement my Short Seller’s Journal. Subscribers the SSJ will be able to join the MSJ for half-price.

Everyone is getting frustrated with this bear market rally.  In 9 trading days the S&P 500 has gone up 122 points, mostly in big “chunks,” despite increasingly negative economic developments.  If anything points to the fact that this stock market is broken, it’s the fact NYSE circuit breakerthat exchange operators had to “unplug” the electronic markets early yesterday morning to halt an imminent rout in stock futures.  At it’s nadir yesterday during the NYSE session, it looked as if the S&P 500 was about to drop off a cliff but mysteriously a big buyer appeared and stimulated a “V” rally.

“The mispricing of assets across world markets has reached epidemic proportions” – This Is Why You Can Expect Another Global Stock Market Meltdown (Marketwatch).

When the fundamentals don’t “fit” the valuations, eventually the valuations “regress” toward the fundamentals.  This is not an opinion – this is a law of markets.  Currently the global Central Banks are attempting to change this law.  It’s a pretty pathetic visual of Ben Bernanke or Janet Yellen confronting Atlas, who merely shrugs.

As an example, in my January 3rd issue I defied CNBC and Oprah and issued a short recommendation on Weight Watchers (WTW), which had spiked over $22 when Oprah was dropping stock pump bombs on Twitter (for which she should be investigated by the SEC but won’t be):

After selling back down to $18 from $28 by Dec 24, Oprah tweeted out a video ad promoting her participation in Weight Watchers (“come join me ladies”). The stock jumped 26% from the December 24 close, to close out 2015 at $22.80. Based on the December 31 close, the stock trades at 26 p/e and 13x trailing EBITDA. The Weight Watchers brand name is quite stale with little to no growth prospects despite Oprah’s “quick fix” presence, the stock is significantly overvalued. Especially given that the stock was trading at $4/share in August. I find it testament to the insanity of the current stock bubble that the market value of a company like WTW can move up 700% in four months based on the presence of Oprah Winfrey on its board of directors.

The stock dropped down below $11 by Feb 8, when Oprah again tried to pump the stock (note: she owns 10% of the stock and her promotional pump was 2 weeks before earnings). The stock ran up over $15.  WTW announced earnings after the close last night and the stock is getting drilled for 27% back down to $11 today.  Nothwistanding the fact that I’m calling for an investigation of Oprah and her stock manipulation games, WTW fundamentally is not worth $5, let alone $15.

I wanted to use this example to illustrate my point that, regardless of the short term zigs and zags in the stock market, eventually the gravitational pull of fundamentals take over and the stock market will seek its intrinsic value.  There’s still a plethora of stocks trading at insane multiples of revenues, cash flow and book value.  The market bottom won’t be seen until all of these stocks have either gone out of business or are trading at valuation levels which reflect the ability of their business models to generate bona fide  – not “adjusted non-GAAP” – cash income based on the actual demand for their products or services.

Rest assured we are a long way from that level on the Dow/S&P 500.  The Short Seller’s Journal is a weekly research and trading report which presents at least two short ideas per issue.  It also provides ideas for using put and call options and capital management/trading advice.  It emphasizes a long term, fundamental approach to shorting the market.   You can access it clicking here:   Short Seller’s Journal.

Hey Dave,   Loving your SSJ service. In fact it is just what I was looking for as the market rolls over. I expect to have my best year in the market ever, assuming the powers that be don’t step in to halt trading just when things are heating up, or some other such manipulation.   I think the journal provides just the right amount of depth, and your writing style makes me chuckle. Keep the great tips coming.  – Ken

Let’s Have Lunch With The Mad Hatter

I’m trying to free your mind.  But I can only show you the door.  You’re the one who has to walk through it.   – The Matrix

The overnight computerized stock market futures trading systems mysteriously “broke” once again as the futures were heading south (see this and this).   This  glaringly overt intervention reeks unmistakably of desperation.

Corners of the global economy – and specifically the U.S. – are collapsing behind the smoke and mirror cloak of ebullience emanating from a sharp bear market dead-cat stock market bounce and from absurdly manipulated data reports on employment and housing.

I was looking at a daily graph of AIG earlier today and comparing it to a couple other insurance company stock charts (Allstate and Progressive).   Contrary  to other insurance Untitledstocks, AIG has not participated at all in this stock market bounce.  In fact, it’s been hitting new 52-week lows almost everyday since early February.

The same problems that caused a temporary systemic collapse in 2008 are back in full force again.  Only they are much larger and much more insidious because rules were changed in a way that enabled the big financial firms to better disguise their Ponzi schemes.   AIG is the born-again poster-child of this evolving financialized nuclear melt-down.   I was chatting with a colleague earlier who told me that a  contact of his at the Company said that everyone who stayed on at AIG after 2008 are now being let go. Something ominous is going on there…

The Kansas City Fed survey reported today that its index has dropped to 7-year lows.  Yes, the Government reported today a bounce in durable goods, but it was driven by a huge order for aircraft parts from the Dept of Defense (great, we’re preparing for war in the Middle East).  Here’s what the real economy looks like:

Untitled While the Government insults our collective intelligence with tall tales of 5% unemployment and Janet Reno Yellen lobbies the public on the view the economy is improving, the actual numbers coming from Main Steet show an economy slipping into recession. Treasury yields continue to compress. This is not the signal that it’s time to take out a 100% mortgage from a private lender and overpay for a crappy house, it’s the unmistakable onset of economic collapse.

Today both Dominos Pizza (12%) up and Lending Tree (up 22%)  spiked up after “beating” their earnings.  Here’s what was missed in the reporting:  Dominos trades at 16x EBITDA and Lending Tree trades at 25x EBITDA.  This is sheer insanity.  Oh, by the way, TREE’s trailing EBIDTA is “adjusted,” which means EBITDA  after the financial Kreskins at the Company add back all of the recurring “non-recurring” expenses.

It’s incomprehensible the way the market can ignore the bad news piling up.  JP Morgan admitted earlier this week that it is woefully under-reserved against defaulting energy loans it was unable to unload onto the market.  Bloomberg News featured a story today which reports that “the biggest wave of oil defaults looms as the bust intensifies” – LINK.   I think this is already becoming a hidden problem in the financial system and it explains why we seeing financial firms like AIG (credit default swap issuer) and DB (lender to defaulting energy companies) not participating in this bear market bounce.

We know that the middle class is running out of money – “more subprime borrowers are falling behind on their auto loans”  and “Retail Apocalypse: Major US Chains Closing 6,000 Stores Nationwide” – but Restoration Hardware yesterday told us that upscale shoppers have stopped spending money now as well.

The “Minsky Moment” occurs when too much borrowed money has fueled too much asset valuation speculation.  The market will no longer absorb increasing levels of debt and the current borrowers can no longer support what’s already been borrowed.  A severe collapse in asset values ensues.

In early 2015 the Government allowed Fannie Mae and Freddie Mac to offer 3% down payment mortgages.  This is because the system had run out of borrowers capable of taking down a 5% mortgage.  Later in the year the Government began offering a zero-percent down payment program.   Private, non-Government pools of capital are offering  reconstituted versions of the type of mortgages which led the collapse in 2008.  The mortgage market is now searching for the last non-mortgaged stragglers who can still fog a mirror and are willing to overpay for a chance at the American dream.

Currently we are seeing the Minsky Moment swarm the energy market and begin to engulf the auto loan market.  Soon it will start creeping into the housing mortgage market.  The gerbil is almost dead but it’s still making the wheel spins albeit slowly.  Not surprisingly the stock market is looking at the gerbil as it dies and interpreting any sign of life as a reason to party on…