Utter Insanity…

That’s the only way to describe this stock market. It won’t end well for the hedge funds whose algos are chasing price momentum nor for the retail daytraders playing the game of “greater fool.” Apparently CSCO and WMT’s “beat” triggered a multi-hundred point spike in the Dow on Thursday. Funny thing about that. CSCO’s one-cent “beat” has been routine since the late 1990’s.

Walmart also “beat.” But for Walmart, the numbers below the headline sucked. The 1.1% revenue growth was well below 1% if you strip out gasoline price inflation from Sam’s Club numbers. Speaking of Sam’s, membership revenue was down 7.9% (these are FY Q1 vs Q1 last year). Operating income was down 4.1%. The “beat” was manufactured by one-time “other gain” that was not defined in the 8-K. This enabled WMT to generate the headline “beat.” Cash flow provided by operations dropped from $5.1 billion last year to $3.5 billion this year – not good. Despite the deteriorating financial fundamentals, the stock market added over $7 billion to WMT’s market cap.

But that’s a tempest in a teapot compared to the the IPO valuations of companies like Lyft, Uber and WeWork. These companies not only have never made a dime of profit, but they bleed billions negative cash flow. Yet, a $50 billion stock market valuation set by the underwriters is greedily bought into by hedge funds. That’s your pension money at work, folks. It’s amusing to watch the hand-puppets on financial cable tv frown when stocks like Uber and Lyft drop a quick 20% from the IPO date.

The prized “jewels” in the stock market – i.e. the stocks with the best performance over the last 4 months – are the ones with escalating operating losses on increasing revenues. But the stocks soar when the earnings announcement hits the tape with the phrase “beat estimates” – which means the company lost slightly less money than forecast by Wall Street’s brightest.

But these companies all share a common trait: a tragically flawed business model in which the only way to grow revenues is to charge the end user a price that does not cover the all-in cost of producing the product or providing the service but which attracts end-users because the price is lower than the competition. Despite eventual financial doom from the start, the stock market currently values this type of business model over companies that generate bona fide cash/economic profits.

I’m reviewing a company in my next issue of the Short Seller’s Journal which trades at a price/sales multiple that is 15-times higher than the industry average. Its operating losses grow at a double-digit rate every quarter sequentially and double every quarter year-over-year. We can’t use any of the other tradition valuation metrics because the company has negative cash flow, massive net losses and negative forward earnings. This is all nothwithstanding the fact it operates in a highly cyclical industry with declining sales.

I mention this to illustrate just how far off the rails the stock market has traveled. The current stock market bubble is at an historical extreme. It’s worse than 1999 or 1929 – I don’t care what the manipulated GAAP p/e ratio comparison shows. I was trading tech stocks in the late-90’s bubble and this current one is worse. IT’s utterly insane…

10 thoughts on “Utter Insanity…

  1. I think this time around it is about everything. They central banks in their co-ordinated effort of pumping stocks do know that if they lost control about the stock market bubble, they game would be over for a long period of time. Only think about the pension funds that are invested in these markets. If the markets tanked it would cause an avalanche of bankruptcies. They MUST keep this monster alive as long as possible. I guess they do not have decided yet to let things go into the abyss. And my gut feeling tells me they want to keep Trump in place for the time after the upcoming election.

    1. As a cousin of mine said recently [retired attorney, very sharp, has studied stocks & markets as a fervent hobby for decades]: “A lot of pension plans are going to bankrupt just on an actuarial basis alone”. As an attorney he handled a lot of bankruptcies.
      And one can’t assume every pension planner has adequately included demographics in their actuarial calculations.

  2. . Trillions in unfunded mounting debt , requires more tax increases ,
    this unsustainable debt , is bankrupting cities , states & towns , all across America.
    you are forced to live on less , become homeless or forced in to bankruptcy, from never ending tax increases that are constantly needed , just to feed the beast & prevent the growing nationwide unaccountable massive racketeering fraud- ponzi scam from collapsing .
    .. How can the American people get back nearly 30 years of stolen taxpayer money ?

  3. Well, we can always buy Luckin Coffee and see if we are truly lucky.

    Yep, each new day is more insane than the previous day.

  4. Hello Dave, There is one event that can push consumers in the US into destitution; a war between Iran and the US. In such a case the price of oil could go the $200/barrel particularly if the straits of Hormuz are closed. If the price of gas goes up three fold, a $400 emergency would turn into a permanent insolvency. Many US workers may club together to share a car but a lot of Americans will simply lack the funds to pay for the petrol to go to work. This would be the end of the current stock market mania.

  5. The ESF, NY Fed Trading desk & entire Western CB cabal has unlimited money to price all bonds, stocks & commodities at their desired prices. The entire world could be in an economic depression but all these markets are priced according to the wishes of the Cabal. And noone can do anything about it because they own the system and they are the system.

    China has not & will not enter into a trade agreement with the U.S. because China is looking at every possible way they can stop the U.S. unlimited dollar fiat fraudulent counterfeiting/printing scheme (totally abused as the world’s reserve currency). How can China put an end to the cabal printing madness and the devious algo pricing schemes. Nothing has worked. It’s forced on the world and they accept it.

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