Tag Archives: Tesla

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”

Tesla (TSLA): “It’s Not A Lie If You Believe It”

TSLA stock has levitated on statements from Elon Musk that TSL A would be cash flow positive by Q3, an announcement that TSLA would roll out a Model Y “crossover” SUV by November 2019 and the reiteration of ambitious Model 3 production milestones. All three will never happen.

Elon Musk’s attorneys must be giving Elon the same advise given to Jerry Seinfeld by George just before Jerry took a polygraph test: “Elon, just remember, it’s not a lie if you believe it it.”

It looks like reality is catching up to TSLA and TSLA is going into a death spiral.  An amended complaint to an existing class-action suit against the Company, Musk and the CFO was filed. The suit accuses Musk and the CFO of knowingly making false and misleading public statements with regard to production and quality targets for all of TSLA’s models. The amended complaint includes testimony from several former employees.  The amended allegations give the lawsuit far sharper teeth than the original court filing. When I find the time, I’m going to read the entire court filing.

In addition, recently a judge denied Elon Musk’s request to dismiss a class-action suit stemming from TSLA’s acquistion of Solar CIty (which is turning into a disaster) against Musk and TSLA’s board

As for TSLA generating positive cash flow by Q3 and avoiding the need to raise more money, I found an analysis of TSLA’s current liabilities which shows TSLA’s current cash position is worse than it appears.

At the end of 2017, TSLA showed a cash balance of $3.3 billion. Of that, 25% or $840 million is refundable customer deposits. Another $1.3 billion is current payables which are due over the next few months. This includes $753 million owed for equipment, $378 million in payroll and $185 million in taxes payable. Netting out customer deposits and the accrued payables, TSLA’s net cash position at the end of 2017 was $1.3 billion.

TSLA’s current assets minus current liabilities showed a working capital deficit of $1.1 billion at year-end. TSLA generates a cash loss on every vehicle sold. It’s highly likely that TSLA’s cash net of current cash payable obligations is now well under $1 billion. Elon Musk must have taken LSD before he made the announcement that TSLA would be operating cash flow positive and would not need to raise money in 2018.

Although nothing would surprise anymore in this market, I just don’t see how TSLA breaks higher from the current chart formation. Lawsuits are piling up. Last week the NTSB kicked TSLA out of its participation in the NTSB’s investigation of that fatal accident involving a Tesla in California. The NTSB stated that TSLA violated agency protocols. Consumer Union, the consumer advocacy division of Consumer Reports, issued a report last week which stated that Tesla needs to improve the safety of its autopilot. On top of all of this, I’m convinced that Elon Musk, based on his erratic and volatile behavior, is certifiably insane.

2008 Redux-Cubed (at least cubed)?

There is plenty of dysfunction in plain sight to suggest that the financial markets can’t bear the strain of unreality anymore. Between the burgeoning trade wars and the adoption in congress this week of a fiscally suicidal spending bill, you’d want to put your fingers in your ears to not be deafened by the roar of markets tumbling – James Kuntsler, “The Unspooling

Many of you have likely seen discussions in the media about the LIBOR-OIS spread. This spread is a measure of banking system health. It was one of Alan Greenspan’s favorite benchmark indicators of systemic liquidity. LIBOR is the London Inter-Bank Offer Rate, which is the benchmark interest rate at which banks lend to other banks. The most common intervals are 1-month and 3-month. LIBOR is the most widely used reference rate globally and is commonly used as the benchmark from which bank loans, bonds and interest rate derivatives are priced. “OIS” is an the “overnight indexed swap” rate. This is an overnight inter-bank lending benchmark index – most simply, it’s the global overnight inter-bank lending rate.

The current 1-month LIBOR-OIS spread has spiked up from 10 basis points at the beginning of 2018 to nearly 60 basis points (0.60%). Many Wall Street Einsteins are rationalizing that the LIBOR-OIS spread blow-out is a result of U.S. companies repatriating off-shore cash back to the U.S. But it doesn’t matter. That particular pool of cash was there only to avoid repatriation taxes. The cash being removed from the European banking system by U.S corporations will not be replaced. The large pool of dollar liquidity being removed was simply masking underlying problems – problems rising to the surface now that the dollar liquidity is drying up.

Keep in mind that the effect of potential financial crisis trigger events as reflected by the LIBOR-OIS spread since 2009 has been hugely muted by trillions in QE, which have kept the banking system liquefied artificially. Think of this massive liquidity as having the effect of acting like a “pain killer” on systemic problems percolating like a cancer beneath the surface. The global banking system is addicted to these financial “opioids” and now these opioids are no longer working.

Before the 2008 crisis, the spread began to rise in August 2007, when it jumped from 10 basis points to 100 basis points by the end of September. From there it bounced around between 50-100 basis points until early September 2008, when it shot straight up to 350 basis points. Note that whatever caused the spread to widen in August 2007 was signaling a systemic financial problem well in advance of the actual trigger events. That also corresponds with the time period in which the stock market peaked in 2007.

What hidden financial bombs are lurking behind the curtain? There’s no way to know the answer to this until the event actually occurs. But the market action in the banks – and in Deutsche Bank specifically – could be an indicator that some ugly event is percolating in the banking system, not that this should surprise anyone.

The likely culprit causing the LIBOR-OIS spread is leveraged lending. Bank loans to companies that are rated by Moody’s/S&P 500 to be mid-investment grade to junk use banks loans that are tied to LIBOR. The rise in LIBOR since May 2017 has imposed increasing financial stress on the ability of leveraged companies to make debt payments.

But also keep in mind that there are derivatives – interest rate swaps and credit default swaps – that based on these leveraged loans. These “weapons of mass financial destruction” (Warren Buffet) are issued in notional amounts that are several multiples of the outstanding amount of underlying debt. It’s a giant casino game in which banks and hedge funds place bets on whether or not leveraged companies eventually default.

I believe this is a key “hidden” factor that is forcing the LIBOR-OIS spread to widen. This theory is manifest in the performance of Deutsche Bank’s stock:

DB’s stock price has plunged 33.8% since the beginning of January 2018. It’s dropped 11.3% in just the last three trading days (thru March 23rd). There’s a big problem behind the “curtain” at Deutsche Bank. I have the advantage of informational tidbits gleaned by a close friend of mine from our Bankers Trust days who keeps in touch with insiders at DB. DB is a mess.

DB, ever since closing its acquisition of Bankers Trust in the spring of 2000, has become the leading and, by far, the most aggressive player in the global derivatives market. During the run-up in the alternative energy mania, DB was aggressively underwriting exotic derivatives based on the massive debt being issued by energy companies. It also has been one of the most aggressive players in underwriting credit default swaps on the catastrophically leveraged EU countries like Italy and Spain.

DB is desperate to raise liquidity. Perhaps its only reliable income-generating asset is its asset management division. In order to raise needed funds, DB was forced to sell 22.3% of it to the public in a stock deal that raised US$8 billion. It was originally trying to price the deal to raise US$10 billion. But the market smells blood and DB is becoming radioactive. The deal was floated Thursday (March 22nd) and DB stock still dropped 7% on Thursday and Friday.

Several U.S. banks are not far behind in the spectrum of financial stress. Citigroup’s stock has declined 15.1% since January 29th, including a 7.5% loss Thursday/Friday. Morgan Stanley has lost 11.8% since March 12th, including an 8.8% dive Thursday/Friday. Goldman Sachs’ stock has dumped 11% since March 12th, including a 6.3% drop on Thursday/Friday. JP Morgan dumped 6.7% the last two trading days this past week (thru March 23rd).

If Deutsche Bank collapses, it will set off a catastrophic chain reaction of counter-party defaults. This would be similar to what occurred in 2008 when AIG defaulted on counter-party derivative liabilities in which Goldman Sachs was the counter-party. While it’s impossible to prove without access to the inside books at DB and at the ECB, I believe the primary driver behind the LIBOR-OIS rate spread reflects a growing reluctance by banks to lend to other banks for a duration longer than overnight. This reluctance is derived from growing fear of DB’s deteriorating financial condition, as reflected by its stock price.

The commentary above is from last week’s issue of the Short Seller’s Journal. In addition to well-researched insight into the financial system, the SSJ presents short-sell ideas each week, including ideas for using options. This week’s issue, just published, discusses why Tesla is going to zero and how to take advantage of that melt-down. You can find out more about this service here: Short Seller’s Journal information.

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 Tesla Drowning In Liabilities?

Tesla must be burning cash a lot more quickly than the rate at which its operations were burning cash in the first 9 months of 2017.  Through the first three quarters, TSLA had incinerated $570 million, or roughly $2 million per day.  Its Model 3 sales are horrifically below Musk’s bold predictions.

Now Tesla is going take part of its “leased” vehicle portfolio and attempt to raise $546 million by letting Wall St. “engineer” the lease payments into an Asset-Backed Bond (ABS) deal.  The problem with Tesla’s leases is that any of the leases issued before June 30, 2016 contain a “resale value guarantee” from Tesla.  This  is a “put option” issued to the lessee of a Tesla vehicle in which the value of the “put option” is worth significantly greater than the resale of the vehicle.  And the resale value of a Tesla is declining rapidly on a daily basis, along with value of the entire used car inventory across the U.S.

The ABS bonds are structured from leases thrown into a pool of leases – the Trust – that will be used to fund the bond payments .  One of the problems with this deal are the leases held by Tesla that contain a guaranteed re-sale value of the leased vehicle.  To the extent that cars turned in under the guaranteed value payment  are worth less than the value of the guarantee, the bond trust takes the hit.

I noticed that the resale value of a Tesla S model is dropping like a stone they are almost giving away 2 year old models for free. Who wants to be a guarantor of that? – comment from a reader in Sweden

However, I would bet my last nickel that the residual values in the plain-vanilla leases that will be tossed into the trust exceed the market value of the underlying vehicles.  In this case the bond trust also takes a capital hit.  I have a hunch that Elon Musk is trying to pull a fast one on yield-hog bond fund managers by transferring leases with overvalued residual values embedded in them into this ABS Trust.

With so much printed Central Bank currency sloshing around the financial system, I’m sure if the underwriters dress this pig with enough lipstick in the form of a high coupon, the deal will get done.  I have to believe that this trust will have tobe  over-collateralized by a significant amount, meaning that the implied value of the leases tossed into the ABS Trust exceeds the par value of the Trust by a considerable amount.

But it  makes me wonder why Tesla is coming back to the capital markets with the equivalent of a “furniture sale” in order to raise high-cost capital given that the Company raised nearly $2 billion in August – just five months ago.  How much cash has Tesla’s operations incinerated since the end of September?  Judging from the collapse in Model 3 sales, it smells like Tesla and Elon Musk are beginning to get desperate to keep the lights on.

A Conversation About Tesla, Amazon and Gold

Allegedly (note: emphasis on “allegedly”) Craig “Turd Ferguson” Hemke was awarded a Nobel Prize for his weekly A2A podcast.  If true, the award is more legitimate than the Nobel Peace Prize given to Obama and the Nobel Prize for Economics given to Paul Krugman.  Perhaps those latter two folks should have been awarded the Nobel Price for Charlatanism.

Craig invited me onto his show this week to discuss a variety of issues, including the economy, Tesla and Amazon and, of course, the precious metals market.  I explain why I think there’s one more “shock and awe” attack by the Comex paper bandits on the gold market before the precious metals make a stunning move higher.  I also discuss a couple of my favorite mining stock ideas and the head-scratching market cap of Novo Resources

You can access the podcast here:  TF Metals A2A Conversation

In my latest issue of the Mining Stock Journal I feature a $27 million market cap gold exploration company that I think will eventually be worth at least $100 million.  If you would like to find out more about my Journals click here:  Mining Stock Journal  and Short Seller’s Journal.

TSLA Down 19% – $72 – In Eight Days

In my opinion, the ride down will be worth the pain and blood-loss of sticking with a short bet on TSLA, which is why I continue to buy small quantities of put options that have been expiring worthless. I know at some point I’m going to catch a $100+ reversal in TSLA stock which will more than make-up for the small losses I’m enduring in the puts while I wait for that occurrence. Using puts protects me from the unknown magnitude of upside risk from shorting the stock. Plus, I don’t have make a “stop-loss” decision because I don’t have the theoretic “infinite upside” loss potential that I would face shorting the stock. With my loss capped, I can hang on to the puts through expiration. With a stock like TSLA, often a stop-loss exit is followed up by reversal to the downside, leaving the short-seller without a short position.

As we saw on Friday, TSLA stock can reverse to the downside quite abruptly and sharply. I can guarantee that some number of shorts covered as TSLA was soaring over $370, leaving them with no position when the stock reversed, closing at $357. I don’t want to recommend specific puts to use but I can recommend giving yourself at least four weeks of time. If I were putting on a new put position today, I would probably buy a very small quantity of the July 7th $340-strikes. If TSLA sells back to the $310 area before expiry, which could easily happen as $310 is where the last 2-week push up in price began, the puts would have an intrinsic value of $30. The current cost is about $10.

TSLA reminds me of Commerce One (CMRC), a B2B internet company that went from $10 to $600 in a very short period of time in late 1999 – 2000. It eventually went to $0. I shorted and covered small quantities of stock starting around $450. I was fortunate to have been short from the high $500’s when it finally topped out a $600. The volatility of this stock was extraordinary but persistence and “thick skin” paid off.

The above commentary is from the Short Seller’s Journal. Subscribers who liked the idea have been short TSLA June June 12th, when the stock opened at $359. You can’t time the top or bottom with a stock like TSLA, but you can make a lot of money if you get 2/3’s of the ride down. You can learn more about the Short Seller’s Journal here:  LINK

YTD General Electric has been one of the 3 worst performing Dow stocks.  I presented GE as a short idea In the January 29th issue.  I said it would be a boring but no-brainer short.  So far it’s down 17.5% from that issue.  This has more than doubled the return on an SPX long position in the same time period.  Maybe it’s not so boring…

“Tesla Is A Big Pile Of Sh_t”

Jason Burack (Wall St for Main St) interviews notable Tesla bear, Mark Spiegel. As readers know, I’m in agreement with Spiegel in thinking Tesla stock is worth zero.   In fact, I’ve stated publicly that I’m trying to decide if the world’s greatest Ponzi operator award goes to Jeff Bezos or Elon Musk.  Spiegel makes a great case that it belongs to Musk.

– “They’re losing a massive amount of money and actually showing negative scale [losing more as sales grow]. They’re losing more money on an operating basis with almost no direct long-range electric car competition. A massive amount of that competition rolls out at the of this year and then hugely in 2018, 2019 and 2020.”

– “No sustainable proprietary technology.”    There’s several companies with better technology but they don’t promote the way Musk promotes.

– “Every business Musk has is based on Government subsidies. And they still lose money. He’s the only guy who can pull down billions in Government subsidies and still lose money.”

– “Every business Tesla is in is a shitty business. And when you put together a collection of shitty businesses, you don’t get a good business – you just get a bigger pile of shit”

This is an interview that is a must-listen if you own TSLA and want to hear the truth about the Company and Musk:

TSLA’s market cap now stands at nearly $61 billion. It burns over $1 billion per year in cash and its financials are riddled with what would have been considered accounting fraud 20 years ago. It sold 72.6 thousand cars in 2016. Compare this to GM, which has a market cap of $51 billion and sold over 3 million cars in 2016, and Ford, which has a market cap of $44 billion and sold 2.5 million cars in 2016.

To say that the action in TSLA’s stock price and its market cap is “insane” does not do justice to the word in “insane.” TSLA is the “poster child” for the mass hysteria that fuels investment bubbles. The problem with shorting TSLA is that the hedge funds are chasing its momentum higher, as investors embrace the negative news events as a reason to pay more for the stock. As such, it’s hard to see a catalyst that will “correct” the price, like with retailers for instance. TSLA, along with AMZN, is one of the rare stocks which will continue levitating until it doesn’t – like a Roman candle that eventually burns out falls to earth.

In my opinion, the ride down will be worth the pain and blood-loss of sticking with a short bet on TSLA, which is why I continue to buy small quantities of put options that have been expiring worthless. I know at some point I’m going to catch a $100+ reversal in TSLA stock which will more than make-up for the small losses I’m enduring in the puts while I wait for that big pay-off.

Using puts protects me from the unknown magnitude of upside risk from shorting the stock. Plus, I don’t have to make a “stop-loss” decision because I don’t have the theoretic “infinite upside” loss potential that I would face shorting the stock. With my loss capped, I can hang on to the puts through expiration. With a stock like TSLA, often a stop-loss exit is followed up by reversal to the downside, leaving the short-seller without a short position.

The written analysis just above is from the Short Seller’s Journal. In that particular issue a couple weeks ago I outlined a put option strategy that will keep you exposed to the eventual $100 down-day in the stock that is going to come. You can learn more about the Short Seller’s Journal here: LINK.

On another note, Fidelity – specifically the OTC Portfolio mutual fund (TSLA is 9.2% of the fund’s assets) and the Contrafund – own 15% of the stock.  When TSLA stock ultimately fails, those funds will be hammered.  If you have money in either of those funds, foretold is forewarned.

Gravity Rules: End Of The Bubble Is In Sight

“Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.

The quote above is from Ben Graham, considered to be the father of value investing. Graham followed the crowd in 1929 and lost a small fortune for himself and his investors. Graham collected his learning experience from that disaster and eventually wrote, “The Intelligent Investor,” which is considered to be the one of the best investment books ever written. Warren Buffet enrolled at Columbia to study under Graham. Graham’s teachings formed the foundation of modern money management theories. To this day it is considered the value investor’s “investment bible.”

Wall Street is incentivized to sell the idea that stocks only go up. When I started on the junk bond desk as a salesmen (before switching to trading), I was told my job was to “reach into the portfolio manager’s pocket and take as much money as you can from his pocket and put it into your pocket.”

Wall Street greed has been around as long as stocks have been trading (the NYSE was founded in 1792). But it’s hard to blame stockbrokers for the damaging effects of greed. Stock-peddlers are like well-paid psychologists. They take advantage of human greed. Without investor greed, the stock brokerage business would be considerably smaller than it is today.

A stock bubble can’t exist without investor greed. It starts with greed. It moves into the “bubble” phase when greed is consumed by hysteria. The U.S. stock market has moved into the “hysteria” stage. This would be the point at which the bubble has almost reached maximum inflation. The upward movement in stocks is dominated by a handful of the stocks that, for whatever reason, are moving higher at the fastest rate of levitation. The graphic on the next page shows visually what “bubble to hysteria” looks like.

I reached the conclusion the stock market has moved into the hysteria stage by spending time studying the “Five Horsemen” (AAPL, AMZN, NFLX, FB, MSFT) + TSLA. Even during periods of the trading day when the Dow and SPX are go red, most or all of those six stocks remain green, sometimes moving higher while the broad indices move lower. It’s incredible to watch real-time.

“It’s not to late to catch a ride on the FANG rally” was a headline seen on CNBC last week. This is the type of hysteria that is reflected in the media at bubble peaks.

In the image above (click to enlarge), the graph on the left is the NASDAQ index since the election (from Jesse’s Cafe Americain). The graph on the right is the price-path that occurred during the Dutch Tulip Bulb mania of the 1630’s. You can see that both graphs go vertical. The vertical stage is driven by hysteria in which investors are terrified of missing the next move higher. It also ends with a decline, the rate of which is typically stunning.

The push higher in stocks like AAPL and AMZN is irrational, but TSLA has been infected with outright hysteria.

The worse the news on Tesla gets, the more quickly the stock seems to move up in price. Early in the week last week, Triple-A (the Auto Club group) announced that it was going to raise the its insurance premiums on Tesla cars by as much as 30%. A highway loss data study revealed that Tesla’s vehicles have higher claim numbers and repair costs vs. other vehicles in Tesla’s category. The Tesla S model claims were said to be 46% greater than the average number of claims for similar vehicles. Servicing those claims cost twice as much. The X model car reported a 41% higher crash-rate than similar vehicles and cost 89% more to repair.

In addition, it was reported on Monday that Toyota had unloaded the last of its remaining stake in Tesla before the end of 2016. It marked the end of a collaboration between Tesla and Toyota that began in 2010. Toyota announced that it plans to release its own fleet of long-range mass produced electric vehicles by 2020. Despite this blow of negative news about Tesla, the stock powered up over 8% last week before a late-day sell-off in the 5 Horsemen + Tesla inflicted a $19 reversal in TSLA’s stock price from its high Friday to the close. My puts, the June 30th $317.50-strikes, traded from Friday from a low of $1.06 to close at $2.40 on the bid side.

The graph below shows the price-path of TSLA’s stock since the election. Note that the graph looks very similar to the graphs of the NASDAQ/Tulip Bulb mania. In the 1800’s, writer Charles Mackay wrote a highly acclaimed book called, “Extraordinary Popular Delusions and the Madness of Crowds,” in which he presented his studies on crowd psychology and how it leads to financial manias, among other destructive events. The chart below reflects “crowd” madness as it applies to TSLA stock (the inset price-box from last Thursday morning) – click to enlarge:

While the NASDAQ has appreciated 22% since the election, TSLA’s stock, on deteriorating fundamentals, has shot up 191%. TSLA’s market cap now stands at nearly $61 billion. It burns over $1 billion per year in cash and its financials are riddled with what would have been considered accounting fraud 20 years ago. It sold 72.6 thousand cars in 2016. Compare this to GM, which has a market cap of $51 billion and sold over 3 million cars in 2016, and Ford, which has a market cap of $44 billion and sold 2.5 million cars in 2016.
To say that the action in TSLA’s stock price and its market cap is “insane” does not do justice to the word in “insane.” TSLA is the “poster child” for the mass hysteria that fuels investment bubbles. The problem with shorting TSLA is that the hedge funds are chasing its momentum higher, as investors as investors embrace the negative news events as a reason to pay more for the stock. As such, it’s hard to see a catalyst that will “correct” the price, like with retailers for instance. TSLA, along with AMZN, is one of the rare stocks which will continue levitating until it doesn’t – like a meteor that eventually burns out falls to earth.

In my opinion, the ride down will be worth the pain and blood-loss of sticking with a short bet on TSLA, which is why I continue to buy small quantities of put options that have been expiring worthless. I know at some point I’m going to catch a $100+ reversal in TSLA stock which will more than make-up for the small losses I’m enduring in the puts while I wait for that occurrence. Using puts protects me from the unknown magnitude of upside risk from shorting the stock. Plus, I don’t have make a “stop-loss” decision because I don’t have the theoretic “infinite upside” loss potential that I would face shorting the stock. With my loss capped, I can hang on to the puts through expiration. With a stock like TSLA, often a stop-loss exit is followed up by reversal to the downside, leaving the short-seller without a short position.

As we saw on Friday, TSLA stock can reverse to the downside quite abruptly and sharply. I can guarantee that some number of shorts covered as TSLA was soaring over $370, leaving them with no position when the stock reversed, closing at $357. I don’t want to recommend specific puts to use but I can recommend giving yourself at least four weeks of time. If I were putting on a new put position today, I would probably buy a very small quantity of the July 7th $340-strikes. If TSLA sells back to the $310 area before expiry, which could easily happen as $310 is where the last 2-week push up in price began, the puts would have an intrinsic value of $30. The current cost is about $10.

TSLA reminds me of Commerce One (CMRC), a B2B internet company that went from $10 to $600 in a very short period of time in late 1999 – 2000. It eventually went to $0. I shorted and covered small quantities of stock starting around $450. I was fortunate to have been short from the high $500’s when it finally topped out a $600. The volatility of this stock was extraordinary but persistence and “thick skin” paid off.

The above analysis and commentary is from the latest <ahref=”http://investmentresearchdynamics.com/short-sellers-journal/”>Short Seller’s Journal, in which I present a “Big Short” mortgage derivative stock that will eventually drop close to zero from it’s current price in the mid-teens.  You can find out more here:  Short Seller Journal info.

Orwell’s Theorem: The Opposite of Truth Is The Truth

All propaganda is lies, even when one is telling the truth. – George Orwell

A reader commented that the number of corporate lay-offs in America is escalating, yet the unemployment rate seems to keep going lower.  Part of the reason for this is that the 2008 collapse “cleansed” corporate america’s payrolls of a large number of workers who are eligible to file for unemployment benefits.

The Labor Force is derived from the number of people employed + the number of people looking for work.  To continue receiving jobless benefits during the defined period in which fired workers can receive them, they have to demonstrate that they are looking for work.  Ergo, they are considered part of the Labor Force.  Once the jobless benefits expire, they are removed from the Labor Force unless an enterprising Census Bureau pollster happens to get one on the phone and they answer “yes” when asked if they are/were actively looking for work.   Those who do not qualify for jobless benefits more often than not are removed from the Labor Force tally.  This is why, last month for example, over 600,000 people were removed from the Labor Force.

Reducing the Labor Force de facto reduces the unemployment rate.  Thus, there’s an inverse relationship between layoffs and the unemployment rate.  It’s an Orwellian utopia for the elitists.

Today’s stock market is a great example of the “opposite of truth is the truth” theorem.   It was reported by Moody’s that credit card charge-offs have risen at to their highest rate since 2009 – LINK.  This means that defaults are rising at an even faster rate, as finance companies use accounting gimmicks to defer actual charge-offs as long as possible.  A debt that is charged-off has probably been in non-pay status for at least 9-12 months.

The same story has been developing in auto loans. The 60+ day delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in 2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the 2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%, which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about 200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this year.

Now here’s the kicker: In Q3 2008 there was $800 billion in auto loans outstanding. Currently there’s $1.2 trillion, or 50% more. In other words, we’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is 50% greater. But the real problem will be, once again, the derivatives connected to this debt. It would be a mistake to expect that this problem will not begin to show up in the mortgage market.

Amusingly, the narrative pitched by Wall Street and the sock-puppet financial media analysts is that the credit underwriting standards have only recently been “skewed” toward sub-prime. This is an outright fairytale that is accepted as truth (see Orwell’s Theorem). The issuance of credit to the general population has been skewed toward sub-prime since 2008. It’s the underwriting standards that were loosened.

The definition of non-sub-prime was broadened considerably after 2008.  Many borrowers considered sub-prime prior to 2008 were considered “prime” after 2008. The FHA was the first to pounce on this band-wagon, as it’s 3% down-payment mortgage program enabled the FHA to go from a 2% market share 2008 to a 20% market share of the mortgage market.

Capital One is a good proxy for lower quality credit card and auto loan issuance. While Experian reports an overall default of 3.3% on credit cards, COF reported a 5.14% charge-off rate for its domestically issued credit cards. COF’s Q1 2017 charge-off rate is up 48 basis points (0.48%) from Q4 2016 and up 100 basis points (1%) from Q1 2016. The charge-off rate alone increased at an increasing rate at Capital One over the last 4 quarters. This means the true delinquency rates are likely surging at even higher rates. This would explain why COF is down 17% since March 1st despite a 2.1% rise in the S&P 500 during the same time-period.

To circle back to Orwell’s Theorem, today the S&P 500 is hitting a new record high. But rather than the FANGs + APPL driving the move, the push higher is attributable to a jump in the financial sector. This is despite the fact that there were several news reports released in the last 24 hours which should have triggered another sell-off in the financial sector. Because  the stock market has become a primary propaganda tool, it’s likely that the Fed/Plunge Protection Team was in the market pushing the financials higher in order to “communicate” the message that the negative news connected to the sector is good news.  Afer all, look at the performance of the financials today!

Days like today are great opportunities to set-up shorts. Most (not all) of the ideas presented in the Short Seller’s Journal this year have been/are winners.  As an example Sears (SHLD) is down 39% since it was presented on April 2nd.   I’ll present two great short ideas in the financial sector plus a retailer in the next issue.  You can learn more about the Short Seller’s Journal here:  SSJ Info.