Tag Archives: Trump rally

Rare Honesty From A Corporate CEO

In my view, the mood of these markets is in stark contrast with the many unknown from our current economic and political landscape, both here and abroad. For me, it’s a major disconnect, and it concerns me.  – James Tisch, Loews CEO (call transcript sourced from from Seeking Alpha)

James Tisch shared some extraordinarily candid observations about the financial markets on Loews Corp’s Q4 earnings conference call on Monday.   I say “extraordinary” because I do not believe I have ever heard, in well over 30 years of capital markets experience, any corporate CEO – or any corporate officer – ever speak honestly about the condition of the financial markets.

With regard to the amount of capital and credit made available by the Fed:

In the credit markets, spreads on the high yield securities are approaching historically tight levels, while key credit metrics such as leverage and coverage ratios are showing signs of weakening. The leverage loan market has been overrun by such massive inflows of capital that you could probably get loan to buy a fleet of zeppelins at this point in time.

That statement references the flood cheap capital made available by the Fed that has facilitated the greatest mis-allocation of capital since Greenspan inflated the tech bubble and Bernanke inflated the housing/mortgage bubble.

The merger market is being driven by large pools of private and corporate buyers, the wave of private capital combined with the abundance of available leverage at remarkably low rates has enabled private equity firms to pay big prices for companies that haven’t already been gobbled up by strategic buyers.

That statement is quite remarkable.  Thinly veiled in diplomatic finesse, Tisch essentially acknowledges that the private equity investors have fomented a massive M&A bubble and are significantly overpaying for acquisitions.

And the coup de grace:

In my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely.

In short, the market is historically overvalued and it will not end well for those who continue to hold long positions in the stock market.

In 2000 Greenspan has created a tech bubble which he said he could not see.  In late 2007 there was a housing and mortgage bubble, the existence of which Bernanke denied.  And now there’s an “everything” bubble, to which Yellen is role-playing Hellen Keller.

Panera Bread stock is a text-book example of the insanity in the stock market right now. PNRA announced earnings yesterday and “beat” the Street.  But here’s a synopsis of its numbers:

System-wide same store sales increased just .7%.  Franchise SSS dropped 1.4%. Franchised stores are 55% of the store base. Operating margin dropped 40 basis points. Net income in Q4 dropped $22.8 million from $24.7 million in 2015. Company bought back nearly $400 million in stock during 2016. It just issued another $200 million in debt. If it wasn’t buying back shares, it would not have needed to issue that debt. The share buybacks make the EPS look better but the net income of operations fell quarter over quarter and year over year.  That’s how PNRA “beat:” financial engineering because its net income declined quarter over quarter (2016 vs. 2015) and year over year.  – excerpt from an email exchange with a Short Seller’s Journal subscriber

For that, PNRA stock is up 8.4% today.  A $4 million year over year drop in net income has generated a $400 million one-day jump in PNRA’s market cap. This stock is trading at 38x trailing income as its ability to generate profits.  No wonder insiders are selling stock more quickly than passengers jumped off the Titanic.

I look at dozens of companies every week and insiders are furiously shoveling their shares into the market at well over 90% of these companies.  They all understand the same problem in the capital markets to which Tisch addressed.  In that latter regard, it was as refreshing as it was unique to come across an insider who was honest.

Trump Dump Coming To The Stock Market

The stock market shot up like a Roman candle for idiotic reasons after the election.    The candle may have reached its apex when the Dow hit 19,999.67 last week.   As I stated in my Short Seller’s Journal, I was “stunned that bank traders were unable to push the index up to the holy grail number of 20,000.   Of course, in and of itself, the “Dow 20k” watch was moronic.  Thirty stocks do not an economic system make.  Sorry Fox, CNBC, Bloomberg, CNN etc.

I also stated in my Short Seller’s Journal, in the issue two weeks ago,  and long before Zerohedge posted the comment from some guy named DeMark who predicted the Dow would never hit 20k, that 20k might not happen.  In fact, I titled the issue, “Is Dow 20,000 Now Out Of Reach?”

The “Dow 20,000” financial media promotion has bordered on vulgar.  Fox Business (which I keep on mute at all times) kept a “Dow 20,000 watch” banner at the bottom of its broadcast during the entire trading day for the last 2 weeks of 2016.  It disappeared last week.  In the context of the entire stock  market and the U.S. economy, it’s meaningless for the Dow to hit 20k other than as a powerful propaganda tool.

The housing market is one of the most important segments of the economy.  The DJ Home Construction Index is down 9.7% today from its 52-week high in July.  Retail spending may be even more critical to generating GDP than housing.  The XRT retail ETF is down 9% from hits 52-week on December 8th.    This stock index has literally tanked during a period of time that is supposed to be the best seasonal period of the year for retail sales.  There’s a serious message there.   THAT’S where the rubber meets the road – not from meaningless platitudes and soundbytes from a President-elect.

Essentially Trump promised on election night to spend trillions and cut taxes deeply and to pay for those  based on borrowing trillions. These are  policy proposals that are destined to fail from the moment the words left Trump’s mouth.  But the stock market went nuts to the upside, culminating in what I would argue – based on using “apples to apples” accounting comparisons – the most overvalued U.S. stock market in history.   Perhaps in the modern era only the Weimar German and Zimbabwe stock markets were more overvalued.  Stay tuned because I am very confident that the Fed is not done printing trillions.

This is not the kind of stock chart in which I would want to be invested:

Yes of course this stock market could break up or down. But since Christmas, every attempted assault on 20k has been rejected. And the Dow opens higher every morning only to sell off every afternoon into the close. Monday was a perfect example.

Today (Tuesday, January 11) it looked the Dow was going to make another assault on 20k. But during Trump’s highly anticipated press conference, the Dow sold down hard from 19,970 to 19,840.  That is a preview of what is likely coming in the months ahead, as the U.S. economic fundamentals continue deteriorate, notwithstanding the barrage of economic fake news coming from the Government and certain industry pimp associations.

If you like the analysis laid out above, you can get similar commentary with even more in-depth analysis and research by subscribing to my Short Seller’s Journal.   I also present at least two short sell ideas along with ideas for using options.

I am a subscriber to both of your journals. I just want to say “WOW” to this post on your site. Thank you for all your work. As a financial professional of 28 years’ experience, I can tell you why there is no churn in your journal subscriptions. Your work is extremely sound and well done even in a massively
manipulated environment. – subscriber “Kevin”

Historic Market Blow-Up Is Brewing

I was chatting with a good friend who works at a pension fund. He said that pensions are historically overweighted in stocks right now. But it looks like the latest push higher in the stock market is coming from hedge funds, who apparently missed a large portion of the “Trump rally.”   We determined that the best reason to invest in stocks for both pension and hedge funds is “to avoid looking like an idiot.”

That’s it – that’s the “fundamental” justification for investing in stocks right now is because everyone else is and if your portfolio on Dec 31 is underweighted in stocks you’ll look like an idiot.

That stocks are more overvalued now than at any time in history except maybe 1999 is unequivocally undebatable.  However, if the GAAP accounting standards in force in 1999 were applied to current earnings, both the Dow and S&P 500 would be at record valuation levels.   I discuss this in more detail in the latest Short Seller’s Journal.

So, chasing stocks higher to avoid looking like a moron makes a lot of sense, right? Currently I can’t find evidence that the Fed is printing money to fuel this stock market so I have to believe that it has relaxed credit standards to enable banks, hedge funds and mutual funds (yes, many mutual funds now have the ability to tap credit lines) to borrow money with which to chase stocks.

Debt/credit behaves just like printed money until the debt has be repaid.  So creating credit is de facto printing.  But, what happens when debt defaults begin to pick up?  This is beginning to happen now in mortgage, auto and credit card debt.  Again, I provide proof of concept in the Short Seller’s Journal.

This is perhaps the most dangerous market – both stocks and bonds – in history.  It’s the largest money bubble in history that has been blown by the Fed, in conjunction with the ECB, BoE, BoJ and PBoC.   Silver Doctors/News Doctors invited me on to its Metals & Markets weekly podcast to discuss why 2017 could witness an historic market collapse:

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