I suppose Dennis Gartman, who has the attention-span of a fruit fly, conveniently forgot about this remarkably idiotic assertion in reference to Elon Musk:
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“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
According to the latest Commitment of Traders Report released Friday and which accounts for Comex trader positioning through Tuesday, August 21, the hedge fund net short position in Comex paper gold futures soared to an all-time high of 89,972 contracts. This represents nearly 9 million ounces of paper gold. It’s more gold than is produced by gold mines in the U.S. annually. As of Thursday, Comex vault operators reported a total of 8.4 million ounces of gold, only 282,000 of which were available for delivery. In other words, the hedge fund paper gold short position exceeds the total amount of gold in Comex vaults.
Conversely, the Comex banks are taking the other side of the massive hedge fund short bet. Given the history of extreme positioning by the hedge funds and the banks (the banks are normally short paper gold – thus a long position by the banks is considered “extreme”), it’s a safe bet that at some point in the near future gold (and silver) are set to soar. Perhaps the more interesting question would be to ask why the banks have assumed a large long position in gold. What is it that the banks “see” that has them positioned for a big move higher in the precious metals?
Meanwhile, Tesla is the ultimate evidence that no price discovery is not possible in the U.S. stock market. In a market with true price discovery, TSLA would no longer exist. It appears as if Elon Musk was indeed under the influence of illicit psychotropic drugs when he claimed that funding was secured for a going-private transaction.
In this episode of “WTF Just Happened?” we discuss the massive hedge fund paper gold short position plus lift our leg the idea that Tesla will be around in two year (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at Facebook.com/EricDubin):
In the next issue of the Short Seller’s Journal I explain why the housing market is headed south quickly, update my homebuilder short ideas and discuss Tesla. You can learn more about this newsletter here: Short Seller’s Journal information
In the next issue of the Mining Stock Journal, I dissect the latest COT report and update my favorite junior mining stock ideas, including a couple of interesting silver explorations stocks. You can learn more about this here: Mining Stock Journal information.
“Financial-market and economic prospects remain far shy of the hype and headlines, amidst tanking consumer optimism and negative revisions to recent reporting.” – John Williams, Shadowstats.com
The economy may seem like it’s doing well if you are part of the upper 10% demographic. Though, in reality, for most of the upper 10%, doing “well” has been a function of having easy access to credit. NASA Federal Credit Union is offering 0% down, 0% mortgage insurance for mortgages up to $2.5 million.
Someone I know suggested the tax cut stimulus had run its course. But the narrative that the tax cuts would stimulate economic activity was pure propaganda. The tax cuts stimulated $1 trillion in expected share buybacks and put more money in the pockets of corporate insiders and billionaires. The average middle class household spent its tax cut money on more expensive gasoline and food. Since the tax cut took effect, auto sales and home sales have declined. Retail sales have been mixed. However, it’s difficult to distinguish between statistical manipulation and inflation. I would argue that, net of real inflation and Census Bureau statistical games, real retail sales have been declining.
As an example, last week Black Box Intelligence released July restaurant sales. While comparable store sales were up 0.54% over July 2017, comparable restaurant traffic was down 1.8%. On a rolling three months, comp sales are up 0.46% but comparable traffic is down nearly 2%. With traffic declining, especially a faster rate relative to the small increase in sales, it means the sales “growth” is entirely a function of price inflation. If Black Box Intelligence could control it’s data for price increases, it would show that there is no question that real sales are declining. I have been loathe to recommend shorting restaurant stocks because, for some reason, the hedge funds love them.
On Wednesday last week, the Government reported July retail sales, which were “up” 0.5% vs June. However, June’s 0.5% “gain” was revised sharply lower to 0.2%. Revising the previous month lower to make the headline number for the reported month appear higher is a mathematical gimmick that the Government uses frequently. As an example of the questionable quality of the retail sales report, the Government reports that sales at motor-vehicle and parts dealers rose 0.2% from June to July. But the auto industry itself reported a 4% decline in sales from June to July. I’ll leave it up to you to decide which report is more reliable…
Housing starts for July, reported last Thursday, showed an 8% decline from June’s number. June’s number was revised lower from the original number reported. No surprise there, at least for me. The report missed the Wall Street brain trust’s expectations by a wide margin for the second month in row. The downward revision to June makes the report even worse. Additionally, housing starts are now down year-over-year for the second month in a row.
This report followed last Wednesday’s mortgage applications report which showed a decline in purchase applications for the 5th week in a row. The housing starts number continues to throw cold water on the “low inventory” narrative. While there still may some areas of housing market strength in the $500,000 and below price bucket, the mortgage purchase applications data has been mostly negative since April, which reflects deteriorating home sales. This reality is “magnified” by the fact that home sales have declining during what should be the strongest seasonal period of the year for home sales.
Lending Tree, Zillow Group and Redfin are “derivatives” of housing market activity. They reflect web searches, foot traffic and sales associated with mortgages and home sales. Lending Tree stock is down nearly 42% late January. Zillow stock is down 26% since mid-June. Redfin is down 39.5% since the beginning of the year, including an 18.5% plunge two weeks ago. unequivocally, these three stocks reflect the popping of the housing bubble. The Short Seller Journal recommended shorting all three of these stocks before their big declines.
Normally I’m hesitant to discuss the regional Fed economic surveys because they are skewed by their expectations/outlook (hope/sentiment) components. However, the Philly Fed survey for August was notable because it reinforced my view that the economy and the “hope” for a better economy is fading quickly. The overall index crashed to 11.9 from 25.7 in July. This is lower than just before the Trump election, when “hope” soared. Wall Street was expecting a 22.5 reading on the index. The new orders, work week and employment components plunged. Shipments dropped, inventories rose and prices paid fell. This report reflects the view that economy is much weaker than is conveyed by the political propaganda coming form DC.
I don’t know what it will take to cause a plunge in the Dow, S&P 500 and Nasdaq but, as we’ve seen with homebuilder stocks, there’s a lot of opportunity to make money on economic reality in the lesser-followed sectors of the stock market.
Myself and my Short Seller’s Journal subscribers have been raking in easy money shorting the homebuilder sector and, of late, Tesla. I’ve been including detailed analysis of Tesla, why it will likely be out of business within 2 years and ideas for using puts to short the stock. You can learn more about this newsletter here: Short Seller’s Journal information.
That egomaniac [Elon Musk] just paid for my new landscaping. LOL! Cashed in on some Jan 2019 100 & 200 puts for a 175% gain. Should be interesting to see how and how long this debacle plays on. – subscriber feedback.
Perhaps the most baffling aspect of the Elon Musk “Funding Secured” tweet is the number of financial media outlets and so-called “analysts” that are taking it seriously. The idea is a complete joke. Any valuation in excess of potential asset value minus the debt and other liabilities (included in “liabilities” will soon be a flood of lawsuits). Some bucket-shop stock analysts issued reports explaining why a buyout of Tesla could occur at an even higher price. We’re beginning wonder if the Tesla buyout idiocy will mark the end of the valuation insanity that has permeated the entire U.S. stock market…Meanwhile, hedge funds assumed a record short position in Comex paper gold futures. This along with the worst sentiment toward the precious metals since early 2001 and late 2015 suggest the potential for a bottom in gold, silver and mining shares.
In this episode of “WTF Just Happened?” we discuss these issues plus offer a view on the correlation between the dollar-price of gold and the $/yuan (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at Facebook.com/EricDubin):
Tesla is on its way to bankruptcy. I don’t know how long it will take that to occur but the Company will be insolvent if it can’t raise money before the end of the year. I explain why a buyout of the Company is next to impossible in the next issue of the Short Seller’s Journal and offer several ideas for using put options to express a bearish view of Tesla stock.
“Nobody, when they’re looking at a privatization, dangles this way and does this sort of teasing dance of choreography. Somebody only does this when they are trying to distract us with a shiny new thing…There’s a lot of problems here. He can’t afford to build the new factory that he says he wants to build. This is a distracting strategy like attacking the press” – Jeffery Sonnenfeld, Yale School of Management on CNBC
Elon Musk has turned the U.S. capital markets into a complete farce. He’s made of mockery of the fact that the regulators no longer enforce rule of law. The idea that any financial institution on earth would fund the largest leveraged buyout in history at a level that values Tesla on par with Volkswagen – the world’s larges car manufacturer – is beyond absurd.
We should hope and pray that some truth-seeking entity will hold Musk accountable for what is likely a highly fraudulent claim. Or, then again, perhaps Musk took one of his flying automobiles and went to Mars on Monday to “secure funding” from his Martian financiers.
A careful dissection of Tesla’s latest 10-Q reveals a Company with negative working capital and an unmanageable level of debt and other fixed commitments headed for eventual insolvency.
Beyond ranting about the obvious here, I’m posting an insightful, if not poignant, comment from a friend and colleague:
I am pretty amazed/disgusted that we haven’t come to terms (as a society) with social media. It is in this grey area where leaders of Government and corporations can walk a tight rope of truth/fiction without any consequence or regard for the affect of the immorality and illegality. Narcissistic psychopaths like Musk utilize cult of personality to harness the power of the hopelessly ignorant looking for a guru; looking for a reason to justify their worst impulses and implausible fantasies. From a social science standpoint: it is interesting. From a person of the society: it is mindblowingly frightening.
Tesla reported its Q2 numbers this past Wednesday. It reported $4 billion in revenue, up 43.4% year over year. Its net loss widened to $742 million, or $4.22 per share (some of you may have seen lower net loss and loss per share numbers but the numbers I’m using come directly from the SEC-filed 8-K, which means those are the “official” numbers).
The market was excited and the stock soared because the cash “burn” was lower than expected and Elon Musk reassured everyone that the Company is still on track to show positive net income and cash flow in Q3 and Q4. I can assure you that you have a better chance of standing on the eastern shoreline of Egypt and seeing the Red Sea part for Moses.
The cash balance of $2.23 billion that is presented on TSLA’s balance sheet was higher than expected – with an alleged implication that TSLA burned less cash than expected. But this was accounting sleight of hand. TSLA achieved this feat by stiffing its suppliers as evidenced by the ballooning of the accounts payable entry on the balance sheet. From Q4 2017 to Q1 2018, TSLA’s accounts payable rose $213 million, or 8.2%, to $2.603 billion. But from Q1 to Q2 this year, TSLA’s payables rose $427 million, or 16.4%.
In other words, TSLA slowed down the rate at which is pays suppliers by a considerable amount, which enables TSLA to hold the cash it owes to suppliers on its balance sheet, thereby giving the appearance of a higher cash balance.
Netting out customer deposits of $942 million, TSLA actually only has $1.29 billion in cash. That said, there are some other balance sheet items on the liability side of the balance sheet that increased and will require the use of cash, like “other long term liabilities,” that I won’t be able to analyze until the 10-Q is filed, which is when I can study the footnotes. Furthermore, the 8-K does not contain a full statement of cash flows – it’s missing the details of the “cash from operations” – which will enable me to determine other areas on its balance sheet TSLA stretched in order keep cash net of deposits above $1 billion.
All of that said, I have discovered a clever manner in which TSLA has rigged its financials to look better than they should by keeping cash expenditures it will have to incur off the income statement and balance sheet in Q2. To my knowledge, I am the only analyst who has figured out this devious form of accounting manipulation.
The commentary above is an excerpt from the latest Short Seller’s Journal, which was released today. Tesla shares several traits with Enron and some parallels with Bernie Madoff. Elon Musk is a gifted con-man.
In the latest Short Seller’s Journal I layout the methodical manner in which Musk’s financial architects manage to defer cash expenditures for the purpose of making the Q2 financials appear better than expected. I suspect the scam was used to set-up an attempt to raise more money later this year. You can learn more about my newsletter here: Short Seller’s Journal information.
Enron was a product of the late 1990’s dot.com / tech bubble. Similar to Tesla’s “production tent,” Enron would set entire floors of buildings to look like elaborate energy trading rooms. The operations were nothing more than a fraudulent shell game, set-up for the benefit of Wall Street analysts and journalists.
Bear Stearns was a product of the mid-2000’s mortgage bubble. It created catastrophically leveraged mortgage-backed securities hedge funds that would inevitably collapse. The managers of these funds kept these funds alive by hiding positions from upper management and fraudulently over-marking the value of the underlying assets, which eventually proved worthless.
And now, Tesla’s path to demise seems quite similar to the recent implosion of Theranos. Theranos was biotech company which collapsed after it was revealed that it had fraudulently promoted claims about its blood testing technology. This story resonates in Tesla’s decision to skip a critical brake test in order to meet a superficial production goal last week. Anyone who takes delivery and pays for a Tesla Model 3 is putting themselves and their families at risk.
While not widely reported, there has been a rapid exit of high level executives, including the chief engineer, who resigned the day after Elon Musk issued the command to skip the brake test. After this story broke, one of my subscribers emailed me: “I design and build (from my bare hands) electrical testing equipment for the automotive industry. Plants shutdown rather than let their stuff go out the door untested.” Now we know why the chief engineer bolted from the Company.
The proprietor of the Adventures In Capitalism blog published a comparison between Tesla and Theranos. He focuses on the recent erratic behavior of the CEO and potentially lethal production decisions implemented:
The question is, who would want to invest new capital when Tesla is now admitting to knowingly selling cars without testing the brakes in order to hit some arbitrary one week production target? When a company admits that it will sacrifice vehicle quality and even risk killing its customers to win a twitter feud and start a short squeeze, regulators must step in. The question is; what else has Tesla done illegally to hit its targets? We know that Tesla long ago passed over the ethical threshold of selling faulty products that have killed people—what other allegations will soon come to light? Elon Musk demanded that Tesla stop testing brakes on June 26. Doug Field, chief engineer, resigned on June 27. Is this a coincidence? Of course not—Doug Field doesn’t want to be responsible for killing people…
You can read the rest of this here: Tesla Is The New Theranos
The only ingredient missing from the chain of events that precedes the complete collapse of Tesla is a table-pounding, frothing-at-the-mouth “buy” recommendation from CNBC’s Jim Cramer.
And just like that, the VIX index crashes right back to where it was before the late-January 10% drop in the stock market – a reflection that the remaining stock market speculators and hedge fund bots have been completely cleansed of any fear impulse that hit daytrader keyboards in the first quarter of 2018:
Hedge funds went from insanely short VIX futures to long VIX futures after the market had dropped 10% and the VIX soared. They were slaughtered on their shorts, now they are getting bludgeoned on their long position. But guess what? They went net short again about four days ago. Selling volatility again at the bottom of the volatility index. Not a good omen for perma-bulls.
The Dow has recovered about 56% of the decline that occurred from January 26th to March 23rd. Correction over and on to higher highs? Possibly. The Russell 2000 broke out to all-time highs starting in mid-May. The Nasdaq hit an all-time high Tuesday. Everything appears to be heading higher…or is it?
The Dow is being driven primarily by Boeing (BA), Microsoft (MSFT), Caterpillar (CAT) and United Health. On Tuesday, I calculated by hand that the big move higher by AMZN was responsible for 43% of the performance in the S&P 500. If AMZN had just been flat that day, the SPX would have closed lower from Monday instead of up 8 pts. By all indicators, the move in the Russell is being driven by a short-squeeze. TSLA was up $28 – 9.6% – yesterday because Elon Musk whispered the phrase, “Model 3 production target,” into the ears of the romance-starved Tesla bulls. Also known as a “shot of short-squeeze Viagra.”
When the market was plunging earlier in the year, the hedge fund bots shifted from insanely long to recklessly short. Now they are being squeezed.
The Italian debt and Latin American currency crises have not only not gone away but they are getting worse. As long as the reports don’t hit the headlines, the problems do not exist for moronic daytraders and hedge fund computer program news spiders.
Economically in the U.S. the bold propaganda-laced, heavily “adjusted” Government-manufactured economic reports continue to diverge from the economic and financial reality on Main Street. Housing, auto and retail sales are deteriorating now as the majority of U.S. households have found themselves stuffed like a French goose readied for foie gras production.
Of course, the smart money is not hanging around for Part Two of what’s to come. The “smart money index” shows that professional money is leaving the stock market at a rate that has only been equaled in the last 20 years in 2000 and 2008…
There’s no telling how much longer this insanity can persist this time around. But it brings to mind Hemingway’s description of how to bankrupt as conveyed in “The Sun Also Rises” – “Two ways: gradually then suddenly.”
By the way. Keep an eye on gold. The majority of the market looking to the sky for stocks and down over the cliff for gold, we could get a surprise move higher in precious metals and mining stocks.