Is 2008 Unfolding All Over Again?
The Fed and U.S. Treasury have made to decision to back-stop depositors at U.S. banks – a liability that could potentially hit $2 trillion. More interestingly, there must be a considerable amount of counter-party default risk embedded in the banking system because several Too Big To Fail U.S. banks have agreed to commit as much as $30 billion in capital to rescue First Republic Bank, which would next to collapse. The Swiss National Bank is ponying up $54 billion to prop up Credit Suisse, which is teetering on the brink of collapse. My bet is that $54 billion won’t be enough. The Central Banks have signaled that bank bailout 2.0 is a go. However, the scale of the problem this time, compared to 2008, is multiples larger. Furthermore, the legislation after the great financial crisis that was pimped as preventing another banking crisis served only to make it easier for the banks to hide their indiscretions.
The following commentary is an excerpt from the latest issue of my Short Seller’s Journal. For the record, I pegged Silicon Valley Bank as a short about 18 months ago. How? Because I spend most of my time analyzing public financials filings in the footnotes to those disclosures, where the good stuff is buried.
Aside from what the Fed is doing, the stock market is ignoring several event risks that could potentially trigger a stock market crash. First is the debt ceiling issue. Second is the conflict in Ukraine, which is a de facto war between Russia and the U.S. Third is the U.S. economy, which is in far worse shape than is reflected by the stock market. And finally, and perhaps foremost, is what could be the start of a series of bank and financial firm blow-ups.
Janet Yellen says the Treasury, at the current cash burn rate, will run out of cash by September or October. Everyone just assumes that Congress will go through the mating dance required to reach enough support to raise the debt ceiling. But right now the one-year credit default swap spread is 80 basis points. This means that the cost to buy insurance against the Government defaulting on its debt payments is close to 1% on the principal amount of the Treasury bond being insured. The cost of Treasury default insurance is at its highest level since 2011, when a previous debt ceiling impasse led S&P to downgrade the Government’s debt rating from triple-A to AA+.
Another risk the market is ignoring is the escalation of the de facto war between the U.S. and Russia being fought in Ukraine. The U.S. has rejected Russia and China’s call for peace talks. By all indications this conflict could take a turn for the worse, the potential of which is not remotely priced into the stock market.
And the economy is in much worse shape than indicated by some of the economic reports – particularly the major reports conjured up by the Government. A prime example is the employment report, which is statistically manipulated to show a much higher rate of employment than reality. As an example, the report for January purported the economy added 517k jobs, comprised of 894k new jobs less 377k jobs lost. However, 810k jobs were created using a statistical gimmick the BLS refers to as “population control effect:”
The “population controls” are statistical hocus pocus that uses the latest decennial population survey and adds an estimate of births and deaths and estimates of net international migration. It’s basically a statistical sausage grinder fed with dubious statistical ingredients to produce a highly unreliable statistical estimate of new jobs created. Per the graphic above, the “population control effect” manufactured 810k new jobs. We already know (as detailed in a prior issue of SSJ) that most of the jobs created since March have been part-time and most of those part-time jobs are people working multiple part-time jobs. I literally cringe when I hear “experts” like Jerome Powell say that the labor market is strong…
Nevertheless, not only is the economy much weaker than is reflected by some economic reports like the employment report but it is starting to look like the rate of inflation is heating up again, as some of the price measurement metrics are trending higher again and energy prices are starting to rekindle, led by the price of gasoline futures which are up 32% since mid-December. Additionally, Wall Street 2023 corporate earnings estimates have been trending lower and are expected to be cut further in the coming months. While P/E ratios on stocks have fallen over the last year, if earnings head south, P/E ratios will head south, which means stock prices head south.
In another indication of economic stress and soaring costs, General Motors is offering voluntary buyouts to a majority of its 58,000 salaried workers in an effort to cut $2 billion in structural costs over the next two years. It is encouraging as many as possible to take it. I would bet those who don’t will be forced to “retire” at some point in the future. This to me is a “realignment” of costs in response to the expectations of higher manufacturing costs and lower sales volume over the next couple of years.
Finally, the collapse of Silicon Valley Bank (SIVB – $0.00) may be a signal that a financial system melt-down is beginning. But SIVB is not the first indicator. Credit Suisse has been on death watch for several months. FTX blew up and appears to have taken down Silvergate Capital with it. And now SIVB has been taken into receivership by the FDIC. How does anything go bankrupt? Slowly then suddenly – this shows just how inefficient the NYSE is in terms of discounting risks – largely because of stupid retail money and hedge fund/CTA algo trading programs. It was known by those who bother to take the time to analyze fundamentals that SVB was a ticking time-bomb of asset/liability mismatch – a socially correct way to say that SVB was egregiously mismanaged:
I actually recommended SIVB as a short maybe 18 months ago or so. I made some money on puts but then the stock ran up $750 by early November 2021. The chart above is deceptive because the stock traded down to $35 in the extended hours before the NYSE opened. It was halted in pre-market and never opened. The FDIC took SIVB into receivership Friday morning. The stock is worthless.
Many people were under the impression that SIVB was a conservative commercial/consumer bank. But that’s what happens when you listen to Jim Cramer on CNBC and do not do proper due diligence. A month earlier, Cramer was recommending SIVB, saying it was “still cheap” and has “room to run.” Earlier in the week SIVB launched a $2.25 billion capital raise via stock, convertible preferred and money from a PE firm (General Atlantic). That deal failed almost as quickly as it was announced. Two days earlier (Wednesday) SIVB told investors in a mid-quarter update that it had $180 billion in liquidity – it turned out to be a fraudulent claim.
SIVB has $211 billion of assets against $173 billion in deposits $22 billion in other liabilities. $120 billion of the deposits were invested in Treasuries, agency-issued bond trusts (mortgages, collateralized mortgage obligations, commercial mortgage-backed securities, etc). On the surface those look safe. But with the big jump in interest rates, those securities are underwater vs SIVB’s cost. SIVB booked a $1.8 billion loss on part of those holdings when it sold its “available for sale” securities in a desperate attempt to raise cash.
What happened? SVB is a case-study on how not to manage a bank for which the primary source of funding is demand deposits. 54% of SIVB’s assets were in long-maturity, somewhat risky assets:
Because SIVB classified these as “hold-to-maturity” securities, it was not required to run mark-to-market losses through the income statement and it was entitled to show these assets on the balance sheet at their cost of acquisition. But in fact the market value assets at the end of 2022 were worth $15.1 billion less (16.5%) than the stated value. GAAP permits a Company is bury this mark-down in the shareholder equity section of the balance sheet.
Then, SIVB has a $73 billion loan portfolio of questionable credit quality:
This is how the Company describes the assets (from the 10-K footnotes): “We serve a variety of commercial clients in the private equity/venture capital, technology, life science/healthcare, commercial real estate and premium wine sectors. Loans made to private equity/venture capital firm clients typically enable them to fund investments prior to their receipt of funds from capital calls.” The bear market and Fed rate hikes shut off the money flow to PE and VC funds and it shut down the IPO market, which shut off the funding for these loans.
We don’t know the true nature of each individual line item because each separately is not big enough to require details from a regulatory standpoint. But the “investor dependent” and “cash flow dependent” loans are mezzanine securities that are worthless unless the private equity and venture capital funds that used those loans for portfolio companies are able to attract later-round financing for the companies or take them public. This part of the loan portfolio is $17.2 billion, or 23.8% of the total loan portfolio and it might be worth, best case, 10-20 cents on the dollar. I also suspect that the “innovation C&I (commercial & industrial)” loans are also likely not worth very much. That’s a big capital hole to fill.
SIVB had a book value of $16.2 billion at the end of 2022 per its 10-K. Per the math shown in the 10-K footnote, the investment securities, assuming SVB still had $13 billion in cash (mostly likely not), were down 16.5% – or $17.6 billion, on $107 billion of investment securities. Assume the $17 billion in investor/cash flow-dependent securities plus the “innovation C&I” loans are worth 15 cents (a generous assumption), that’s another $14.4 billion in losses. Among these assets, SVB was sitting on $32 billion in losses. That means SIVB had a real negative book value of $16 billion (minimally) at the end of 2022. It was technically insolvent before 2022 was over.
Earlier in the week there was a capital call on SVB in the form of depositors who wanted to withdraw their cash from the bank. According to media reports, some venture capital titans advised their portfolio companies to withdraw their money held as deposits from SIVB, which led to $42 billion in withdrawals. This means that there were some people who understood the degree to which SVB was potentially insolvent.
Bank runs are the market’s method of signaling information to the market that has been concealed by accounting gimmicks and unscrupulous management. However, the information was publicly available in the footnotes to the 10-K filed on February 23rd. The CEO, CFO and CMO (chief marketing officer) sold $4.5 million in shares representing a large percent of the stock holdings of each on February 27th. It would be naive to assume that they did not know what was about to unfold. This was a classic bank run which overtly exposed the truth about SIVB’s assets and liquidity.
On Wednesday last week, the CEO of SVB gave a presentation in which he made the claim that the bank had $180 billion in available liquidity. But $180 billion of “available liquidity” should have been ample to cover 100% of the deposits. If the assets were truly liquid, SVB would have been able to sell enough to cover 100% of the deposits, not just the $42 billion in withdrawals during the week. The CEO thus lied about the nature of SVB’s assets. Even if SVB had managed to bamboozle those looking at the $2.25 billion equity raise, it would have not come close to keeping SVB liquid.
SIVB is emblematic of the giant asset bubble in which lending and Wall St institutions used near zero-cost capital to leverage up and take risks beyond the ability to manage while the regulators looked the other way. But in many ways this is a replay of 2008 only, I believe there will be bigger blow-ups coming. And SIVB is not the first warning flare. Credit Suisse has been under care and maintenance by the Swiss National Bank and the Fed for several months. While SIVB likely won’t initiate contagion with the Too Big To Fail Banks, Credit Suisse will. Furthermore, the FTX blow-up, which has now taken down Silvergate Capital, shows the degree to which the financial system is infested with financial Ponzi schemes.
I believe what is starting to unfold will be 2008 x five unless the Fed and the other big Central Banks print enough money to monetize the fraud in the banking system. But if the Fed takes that kind of action, the dollar will likely collapse. It may take bigger blow-ups for the Fed to act. In which case, I am confident that Blackrock (BLK), Citigroup (C) and Goldman Sachs (GS), among several others, are at risk. It’s also worth looking at some of SVB’s regional peer banks, like Signature (SBNY), Pacwest Bancorp (PACW) and First Republic (FRC).
Dead Cat Bounce In Housing Followed By More Downside
The following commentary is from the March 5th issue of the Short Seller’s Journal. Follow this link to learn more about this newsletter: Short Seller’s Journal info.
The U.S. housing market is currently the least affordable in at least 25 years:
Affordability is, generically, the ratio of monthly income vs the median price of a home. Essentially the degree to which a potential home buyer can afford the basic monthly payments on a home. Here’s another way to look at affordability in terms of the monthly cost (mortgage, taxes, insurance) to buy a house:
Currently the average house payment is $2,503 per month. This is nearly double the amount at the beginning of 2021. Note that this does not include the cost of maintenance, HOA dues, utilities, etc. In many markets, it’s now much cheaper to rent than to buy.
The mortgage purchase applications index took another hit for the week ended February 24th, falling 5.6% from the prior week. The index is down 45% from a year ago and is at its lowest level since 1995. The base 30-year fixed rate mortgage rose to 6.71%, its highest since mid-November. Keep in mind the “base” rate if for an agency-guaranteed (conforming) mortgage with 20% down and at least a 740 FICO. For most potential homebuyers, the mortgage rate is well over 7%.
The pending homes index for January jumped 8.1% vs December on a seasonally adjusted, annualized rate basis, though it dropped 24.1% YoY. December was revised lower to +1.1% vs November from the +2.5% originally reported. This is not surprising given the big bounce in mortgage purchase applications during January. In addition, the downward revision to December’s number makes the MoM percentage increase appear larger. Pendings are based on contracts signed on existing homes during the month Per the stunning plunge in the mortgage purchase applications index, the January bounce in home sales activity will be very short-lived.
And let’s put the false narrative that there’s a “housing shortage:”
Per the Bureau of Economic Analysis and the Census Bureau, the housing stock per capita in the U.S. is considerably higher than at the peak of the previous housing bubble. Compounding this problem is the fact that a record number of new homes are under construction, many started based on contracts signed that have now been canceled.
The homebuilder and related stocks continue to trade at lofty levels vs what I would expect given the deteriorating fundamentals and intensifying headwinds (rates moving higher, low affordability, falling prices). The entire stock market seems to be hanging on the hopes of a Fed pivot, particularly homebuilder investors.
But even if the Fed were to start cutting rates, affordability will remain an issue, particularly for first-time buyers. According to the National Association of Realtors, first-time homebuyers dropped to a record low in 2022, making up only 26% of all buyers, down from 34% in 2021 and a peak of 50% in 2010. First-time buyers are the most likely purchasers of homes being sold by prospective move-up buyers. If the latter are unable to sell their home, it removes a large percentage of potential buyers of upper-middle priced and luxury homes. As such, it’s my strong view that new home sales volume and prices will continue to head south, homebuilders will eventually start losing money and the stock prices will tank.
DHI has had a big run-up since late October but reported ugly new order numbers and is now lagging the sector. It now looks attractive as a short:
I don’t show the comparison in the chart above, but DHI has lagged the sector (DJUSHB, XHB, ITB) since February 21st. I reviewed DHI’s FY 2023 Q1 numbers after it reported in late January. Its new orders fell 38% YoY, the backlog of homes under contract dropped 46% and the dollar value of its backlog declined 43.6%. But the backlog will become uglier. DHI’s cancellation rate was 27% vs 15% a year ago. I anticipate that the cancellation rate will continue to climb and the current backlog will continue to incur a rising rate of canceled contracts.
I believe that DHI will fall back minimally to the $68 level, a 26% decline from its current price, within six months. From there I think it could drop to $40 or lower over the next 12 to 18 months. $40 is the price from which it took off higher in April 2020 after bouncing from its pandemic low of $30.
Wayfair Circles The Drain While Insiders Sell
The following analysis is an excerpt from the February 26th issue of the Short Seller’s Journal:
Wayfair reported its Q4 and year-end numbers last week. They were a complete disaster for the Company. Revenues declined 4.6% YoY in Q4. The Company’s operations lost $330 million on $3.1 billion in revenues vs losing $196 million in Q4 2021. For the full-year W generated a $1.3 billion operating loss vs $131 million operating loss in 2021. Active customers declined 19% YoY in 2022. W lost $12.54/share vs losing $1.26/share in 2021 and earning $1.93/share in 2020.
The question remains, “does Wayfair (like Bed, Bath and Beyond) need to exist?” At the end 2022, W had $1.27 billion in cash/short term investments, down from $2.39 billion at the end of 2021. However, based on the most stringent test of solvency, W is close to being insolvent. Including receivables, W has $1.5 billion in potential liquidity vs $1.2 billion in payables. At the current quarterly burn rate, W could be insolvent by the end of Q1 2023. W also has a $2.5 billion negative book value, which definitionally means it’s technically insolvent.
W’s operations managed to generate $98 million in cash (from the statement of cash flows) but for the full-year its operations bled $674 million in cash. The Company has $3.2 billion in convertible debt for which the conversion prices are beyond any reasonable hope that the bonds convert (conversion prices ranging from $63 to $417). These bonds should be regarded as straight debt that will need to be paid off at maturity. $200 million is due November 2024. I’m not sure the Company will be operating outside of bankruptcy protection by then.
Remarkably, if not unethically, management and employee stock-based compensation was $513 million vs $322 million in 2022 and $276 million in 2020, the latter year being the last time W generated profits. It blows my mind that the Board approves lavish compensation for horrific performance. Insiders unloaded over 11,000 shares from zero-cost compensation options at the beginning of February when the stock was trading in the high-$60’s. I suspect quite a bit more stock will be unloaded over the next several weeks now that the 10-K has been filed.
Wayfair’s stock price plunged 23% from the $49.81 previous day’s close after it reported its numbers. It ended the week at $37.43, which is still 30% higher than the $28.75 close on November 9, 2022, before W was swept higher by the bear rally in both unprofitable tech and heavily-shorted stocks. $28 is my near-term downside target. However, W closed at $23.52 at the market bottom in March 2020. I would not be surprised to see the stock trade down to that level or lower before the end of the summer.
Bear Market Rallies, The Missing COT Reports and Gold, Silver, Mining Stocks
I believe the current bear market, which started in early 2022, has at least another year left before it bottoms. Regardless of the time frame, I think the current bear market will take the SPX down to the mid-2000’s (it’s currently at 4,090) and the Nasdaq down to the 6,000 area (currently at 11,718). These levels correspond with severity of previous bear market declines.
There are many indicators flashing now that have signaled an impending reversal of the bear rallies that have occurred since this bear market began. Reckless YOLO speculation has reached a fever-pitch once again, as a week ago 250 million options contracts, the highest weekly volume in history. A large percentage of these options were one-day to expiration and weekly expiration calls. It’s the high volume in these calls that creates gamma squeezes.
Alternatively, the precious metals sector – gold, silver and mining stocks – are extraordinarily undervalued in relation to the general universe of financial assets as well most commodities.
Jason Burack and I discuss the bear market rally, corruption at Wall Street banks (with actual stories from my days as a junk bond trader) and, of course, the precious metals sector with a couple of my favorite junior plays.
John Titus: “Why Is the Federal Reserve Provoking a Financial Crisis?”
This video builds on and extends the explosive (but largely overlooked AFAIK) analysis done by Chris Whalen, “Is JPMorgan Chase Insolvent?” While Whalen is imo the best independent bank analyst in the business, he doesn’t have a crystal ball. (At least I couldn’t find one when I ransacked his home many moons ago.) He put out that post, which is nominally about Dimon’s bank but covers the entire banking industry, on Monday, November 28, 2022. He thus didn’t have access to the F.D.I.C.’s Quarterly Banking Profile for the 3rd quarter of 2022, which came out three days later. Whalen’s analysis focused on the dubious valuations of bank assets, which is certainly germane as far as they go and are discussed in greater detail in this video.
The real action in the third quarter QBP, though, is on the liability side of the industry’s balance sheet. There we find evidence that aside from being broke, the banks know they’re tapioca and are panicking about it.
But here’s the real kicker: the Fed isn’t helping the banks this go-round. It’s a new ballgame, and it goes by the name ALL. BAD.
You can find more detailed written treatments of this video and others I’ve done at John’s substack: https://bestevidence.substack.com
Amazon.com: The Growth Narrative Is Dead – The Stock Is Overvalued
The commentary below is from a recent issue of my Short Seller’s Journal. I have covered $AMZN for many years and thus did not do a “deep dive” into the Company’s 10-K. It’s not necessary at this point. You can learn more about this newsletter here: Short Seller’ Journal information. I put my money where my mouth (or keyboard, as it were) is and provide ideas for using options to express bearish bets. Currently I’m sitting AMZN June $105 puts.
AMZN reported its Q4 numbers on Thursday, February 2nd after the close. Net sales increased 9% YoY, with the North America products segment (e-commerce + Whole Foods) up 13% YoY, the international segment was down 8% YoY and AWS (cloud services) up 20% YoY. The 20% increase marked a substantial slow-down in its growth rate, as it was down from a 27% YoY growth rate in Q4 and a 39.3% YoY rate of growth in Q4 2021. AMZN’s operating income in Q4 declined 20.8% YoY for the quarter and 50.7% YoY for the trailing twelve months (TTM).
The North America products segment showed a $240 million operating loss, up from a $206 million loss a year ago Q4. The international products segment’s operating loss was $2.2 billion, up from $1.6 billion a year ago. For the TTM the operating loss in North America was $2.8 billion and $7.7 billion for international. AWS’s operating income was flat in Q4 YoY, while it was up 23.2% for the TTM YoY.
These numbers suggest that AMZN implemented large price cuts in Q4 to move product inventory and generate revenues. AWS’ sales growth appears to be slowing considerably. Based on the fact that revenues grew in Q4 but operating income was flat, it appears that AWS is experiencing rising costs and increased price competition from the likes of MSFT, GOOG, ORCL and IBM.
The stock price dumped 8.4% on Friday (Feb 3rd) on very heavy volume. The slow-down in AWS growth is likely the biggest reason for the stock price hit. However the market was also disappointed by AMZN’s outlook, which was weaker than expected, with management forecasting a 6% growth rate in revenues, which would be the lowest growth rate in the company’s history. Furthermore, AWS’ operating margin is eroding. For the full year 2022, AWS’s operating margin was 28.5% vs 29.7% in 2021. But the Q4 operating margin was 24.4% vs 29.9% in Q4 2021.
AWS is the only engine of profitability for AMZN. It’s the primary reason that the stock market assigns a high valuation to the Company. On a TTM basis, AWS generated $22.8 billion in operating income. With the products business generating a big operating loss, this implies that the market is paying 44.8x operating income for the AWS business. However, annualizing Q4’s operating income, which would be roughly 8.9% below the TTM operating income, the market is paying 49x operating income for AWS. Either metric represents an insane overvaluation for the cloud business. Especially considering that AWS’ growth is rapidly slowing and its profitability is declining. With big companies cutting back on capex, the market should not expect a turnaround in AWS’ growth rate. AMZN’s EPS was 3 cents in Q4, or 12 cents annualized. It generated a net loss for the full-year. But the Q4 annualized P/E ratio is an absurd 858x.
While AMZN’s share price will be tied to the fate of the overall stock market, particularly the Nasdaq, it looks like the stock is headed back to the 2-yr low just below $85:
Since dropping below its 200 dma at the beginning of 2022, the 200 dma has been a consistent level of resistance. AMZN retested its 200 dma on the day of its Q4 earnings and failed. Based on the movement and positioning of the RSI and MACD, it looks like the stock price is headed lower, especially if the stock market rolls over here. Not shown is a long-term (10-yr) chart, on which I base my view that AMZN is headed eventually down to the $40-$50 area, or a 50% haircut from the current level. I believe the catalyst will be mounting losses in the Company’s Products segment and the continued deceleration and margin compression of the AWS business.
Stock Speculators Were On Amphetamines During January
The following commentary is from the latest issue of the Short Seller’s Journal. SSJ analyzes economic developments and presents fundamentally-driven short-sell ideas on a weekly basis. You can learn about this newsletter here: Short Seller’s Journal information.
A massive disconnect between consumer sentiment and the retail stock allocation has developed. The graphic below (allstarcharts.com) shows the U of Michigan Consumer Sentiment index (blue line, left y-axis) and the AAII (American Association of Individual Investors) equity exposure (orange line, right y-axis) going back to 1990. The two metrics have been highly correlated up until the stock market took off after March 2020.
Despite the onset of a bear market, the allocation of investment portfolios for retail investors and mainstream, dumb-money institutional money managers remains historically high. Consumer sentiment reflects the growing contraction in economic activity (as discussed below), while the historically high stock holdings (65%) reflects the persistence in perma-bullish sentiment. A similar set of data shows that household average allocation to equities on a percentage basis is back to early 2000 levels (right before the tech bubble popped). The bear market in stocks will not be complete until stock allocations are down to the levels seen in March 2003 (32.8%) and November 2008 (22.2%).
The rally in the SPX, which is up 13.7% from the bottom of the sell-off that started at the beginning of August, began on October 12, 2022. That was when the idea of a “Fed pivot” began to intoxicate the perma-bulls. While the Naz trended laterally from 10/12/22 until the end of December, it’s up 13.8% since the 12/28/22. The Naz has jumped 7% in just the last six trading days.
According to Morgan Stanley’s Quantitative and Derivative Strategies team, other than normal short-covering most of the buying is coming from “systematic” and retail buyers (“systematic” would be the hedge fund and CTA money flow dictated by algorithm programs). The group said that there was $20 billion of systematic demand this week on top of roughly $11 billion of net retail buying over the last nine days.
But the usual indicators that have marked the previous bear rallies over the last year once again reflect the frantic FOMO YOLO urgency of stock chasers on amphetamines. The melt-up over the last couple of days this past seek was fueled by a huge buying in Friday-expiry “gamma squeeze” call options. On Friday Goldman’s most-shorted stock index soared 7%. And Goldman’s index of unprofitable tech stocks shot-up 13% off of Wednesday’s lows. This index is up 30% YTD. Additionally, the market decided to completely ignore bearish earnings reports and guidance from 3M, Microsoft and Intel this past week.
It’s anyone’s guess how much longer this insanity can persist. But I would suggest that it’s closer to the end than the beginning. It took a couple of days into the month, but January is usually a strong month seasonally for the market, as pension and 401k funds have to put new cash to work and there’s a general “New Year’s” optimism. Fundamentally the stock market is expensive. The SPX is trading at 18x 2023 guesstimated earnings. After each of the bear rallies in 2022, the market sold off when the SPX traded back up to an 18 forward P/E. I am confident, moreover, that earnings estimates will be lowered several times by the Street this year, which means the market needs to go lower just to maintain an 18 forward P/E.
All three broad stock indices are above their key moving averages (21, 50, 100, 200). The Nasdaq closed over its 200 dma for the first time since knifing below it in January 2022:
While the Naz managed to close over its 200 dma, it double-topped in the last hour of trading and sold off 70 index points (0.6%) in the last 25 minutes. The SPX and Dow also sold off 0.6% in the last 50 minutes of the day.
In reference to 3M, MSFT and INTC mentioned above, it’s becoming more clear that the bottom is falling away from the economy, particularly household disposable spending. The chip sector is a leading indicator for economic activity as chips are used in a wide swathe of end-user products as well as manufacturing/industrial applications at every level of the economic system. At some point I believe that the market will shift its focus from pivot hopes to the deteriorating corporate earnings.
Does Wayfair ($W) Need To Exist?
Last summer I pounded the table on BBBY as short, making the argument that it was headed for bankruptcy (actually first recommended $BBBY as a short in July 2021 when it traded briefly over $30). I made the assertion that BBBY may end up eventually liquidating and that it did not need to exist. The bonds are now trading at 11 cents, which suggests the strong possibility that BBBY will be liquidated. Whether or not this is the case, the shares will be canceled in Chapter 11 or 7.
The following brief analysis on Wayfair is from my latest issue of the Short Seller’s Journal (information link). I’ve been all over W as a short since it was trading over $300 more than 18 months ago. At the current cash burn rate, W could be out of cash by year-end. Note: this analysis was written last Friday. I have added to my Wayfair puts this week as it squeezes higher.
Wayfair (W – $46.79) – Wayfair, which I recommended at much higher stock prices intermittently throughout 2020-2022, announced that it was cutting 10% of its workforce. A big workforce reduction is the unmistakable sign that upper management and the Board of Directors are bracing for a contraction in a company’s business prospects. Yet, the stock market right now prefers to continue chasing “unicorn” sightings.
In this case, W jumped 20.3% Friday on that announcement on the notion that the cost reduction from the job cuts would boost earnings. In addition, the Company announced that initiatives were underway that are expected to cut $1.4 billion in costs by late 2023 (the unicorn). Of course, the Company did not identify specifics. It also said that it is expected to be “adjusted EBITDA breakeven” earlier in 2023 than was projected in August 2022.
The Company did not say anything about revenues for Q4 other than that it was encouraged by the “recent topline (sic) performance” and “the momentum in orders,” whatever “momentum” is supposed to mean. We know retail sales declined in November and December. If W generated revenue growth from November to December, it was at the cost of steep discounts, which means lower gross/operating margins.
W generated a $282 million operating loss in Q3. Through nine months its operating loss was $977 million vs a $77 million operating profit through nine months in 2021. Between year-end 2021 and the end of Q3, W’s cash + cash equivalents were nearly cut in half, from $$2.39 billion to $1.28 billion, a $1.1 billion cash burn.
Now, Wayfair will be incurring up-front cash costs connected to the job cuts, but its alleged cost cuts will not fully kick-in until late 2023. By then I am betting its revenue base will have declined a material amount on a year-over-year basis. If not, it means W continued to slash prices in order to move inventory and generate revenues, which in turn take a blow-torch to margins. W’s revenues dropped 12.5% from Q2 2022 to Q3 2023. October may or may not have improved, we know November likely did not and December remains to be seen. We’ll find out in late February when it reports its Q4/full year for 2022.
With a 34% short interest on a 72.8 million share float, I believe 80-90% of the upside action in W’s price Friday was from short-squeeze covering. The CEO’s hot air about expense cuts and “adjusted” EBITDA that accompanied the job cuts announcement got the momentum going. The last time when W ran up starting in late November from $28.75 to $42.20 in three trading days, I contemplated buying puts but did not. I regretted it when W fell back to $31 about 10 days later.
I’m not even sure Wayfair needs to exist in a nasty recession scenario, which is what I believe will unfold this year in conjunction with a consumer that has little liquidity remaining after paying for necessities and servicing credit card debt,. I’m not making that bet yet – crash puts – but I might after I see Q4 numbers.
The Consumer Is Dying – Amazon $AMZN Could Get Cut In Half
The following commentary is from the latest issue of the Short Seller’s Journal. You can learn more about this newsletter for stock bears here: Short Seller’s Journal info.
New data two weeks ago by the Census Bureau shows that more than 35% of all households used credit cards or personal loans to make ends meet in December (for non-discretionary expenses). That’s up from 32% in November and 21% in December 2021. Along those lines, Bank of America’s debit and credit card data shows that spending per household on holiday items during the holiday shopping season (last eight weeks of the year) was down 3.4% YoY. This is a nominal number, which means real spending on holiday items was down at least 10.5% using just the CPI YoY “inflation” rate. Based on the big increase in consumer debt in recent months, I suspect debt-strapped household spending will decline more quickly this year.
The dying consumer is accompanied by numerous indicators of economic contraction. Amazon announced that it is taking its job cuts up to more than 18,000 from the 10,000 originally announced late last year. It also appears to be in cash conservation mode, as it will eliminate or curtail experimental and unprofitable businesses. It’s also trying to sell excess capacity on its cargo planes. Good luck with that, as logistics companies are starting to drown in excess freight hauling capacity.
One of the CNBC reporters was excited to announce that online holiday sales “jumped” 3.5% YoY. Of course I had to point out to her via a tweet that adjusting the nominal sales data by just CPI inflation implies a 4% decline YoY in real (“unit”) online retail sales. The attribution for the 3.5% nominal increase was record high discounting. That’s even worse news for e-commerce companies like AMZN because the discounting will hammer profit margins. Recall that in Q3 AMZN’s e-commerce business generated an operating loss and generated a $2.6 billion YTD operating loss.
While the easiest money shorting AMZN has already been made, I think AMZN could get cut in half, at least, over the next twelve months. This view, of course, depends on the perform-ance of the entire stock market. Despite falling 55% from the all-time high the stock hit in July 2021, AMZN still trades with a 78x trailing P/E and a 52x forward P/E (next twelve months earnings estimates, which will prove to be too high). This compares with Walmart, which trades with a P/E of 44, Target with a 20 P/E and Best Buy with a 12 P/E. Roughly 15% of AMZN’s revenues comes from its cloud services business, for which the rate of growth is rapidly decelerating. Microsoft, which is one its biggest cloud competitors, trades at a 25 P/E.
These comparative numbers suggest to me a real possibility that AMZN’s earnings multiple has room to fall at least 50%. A worse than expected Q4 will be a catalyst that would set the earnings multiple contraction in motion. The reason I say AMZN may be in cash conservation mode is the dramatic fall in its cash during 2022. Through the end of Q3, AMZN’s cash (plus marketable securities) was $58.6 billion, down from $96 billion at the end of 2021. Against this cash AMZN has $69 billion in debt, or nearly $11 billion of debt net of cash. At the end of 2021 AMZN’s cash exceeded its debt outstanding by $29 billion. A bad Q4 earnings report should crush the stock. I’ve started accumulating June 2023 near-money puts.
Gold As A Wealth Preservation Asset And An Investment
This article explores whether investing in gold can still be profitable, looking into the history of the metal through the lens of it as an investment vehicle as well as a currency. I wrote this article for Kinesis Money.
Gold has been a valuable asset for thousands of years. Not only is it used as money, but it also helps preserve wealth and protect against the decline in the value of paper currencies. Until 1971, governments and central banks used gold to back their paper currencies.
Before 1971, people could exchange dollars for gold at a fixed rate of $35 per ounce. However, when the United States stopped allowing people to convert dollars into gold, the price of gold was determined by the market. As a result, the price of gold quickly rose.
Gold is a valuable asset for wealth preservation and protection against inflation. In 1971, the price of gold measured in U.S. dollars was $35, and it has since risen to the mid-$1600s. This means that the purchasing power of gold has increased considerably. For example, in 1971 the average price of a home was $25,000, which required 714 ounces of gold to purchase. Now, the average price of a home is $391,000, but it only takes 236 ounces of gold to buy one.
In this example, gold not only appreciated in value compared to the dollar, but it also increased in purchasing power. To determine whether or not gold is a good investment, it is useful to compare its purchasing power to the rate of inflation or the rate of devaluation of fiat currencies.
Between 1971 and now, gold has performed well in both regards. In relation to the M2 measure of the U.S. money supply, gold is currently undervalued. This analysis applies to all major fiat currencies, including the euro, pound, yen, and yuan.
The chart above shows the relationship between the M2 US$ money supply and the price of gold from 1990 to present. At the start of the current bull market in precious metals (2001), the ratio was at its highest point in the last 30 years, indicating that gold was undervalued relative to the money supply.
Since bottoming in 2011, the ratio has been steadily increasing, indicating that the money supply (and therefore inflation) is growing faster than the price of gold. It is my opinion that the current scenario presents a prime time to convert fiat currency into gold and silver for both wealth preservation and as an investment.
The easiest way to invest in gold is through the purchase of shares of gold ETFs, such as the SPDR Gold Shares ETF (GLD). However, while GLD enables you to index the price of gold, it is emphatically not recommended for use as a wealth preservation vehicle. It is also possible to invest in gold is through purchasing sovereign mint bullion products like U.S. gold eagles or silver eagles.
Another good way to invest in physical gold is through precious metals service like Kinesis Money. The advantage is that you can buy at the spot price of gold instead of paying the premium to spot charged by coin dealers. Reputable digital gold services allow you to redeem your investment in the form of the physical gold units fully backing the digital gold held in your account.
The stock market, residential real estate market and bond markets have been inflated into bubbles of historic proportions. The Fed and other central banks created a financial market Frankenstein that is now causing historically high price inflation. It is worth considering alternative investments during times of market bubbles and high price inflation. Some people may look to gold and silver just as an asset for preserving wealth. But currently the precious metals sector is undervalued to such and extreme that gold and silver are also highly prospective as total rate of return investments.