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Wall Street’s Next Ticking Time Bomb: Pensions
Make no mistake, the criminality and fraud of most, if not all, DC politicians that is being exposed now is also occurring in corporate America and at pension funds, especially with regard to fraudulent financial reporting. As an example, Exxon is now being investigated by the SEC over its asset valuation and accounting practices. The same concept can be applied to pension funds (public and private). The Dallas Fireman and Police Pension fund is the postcard example of both investment and accounting fraud: LINK.
The pension time bomb has been activated for a long time but it’s now in the final countdown. Pensions are woefully underfunded even if we give them the benefit of doubt on their current use of market-to-market. Every pension fund under the sun in this country – because rates are so low – has monthly negative outflows of cash: beneficiaries are being paid more money than is flowing into the fund. If the stock market declines more than 10% for an extended period of time, nearly every pension fund in the country would blow up. This is why the last two stock plunges, which took the S&P 500 down over 10%, were met by heavy, if not blatant, Fed intervention which produced a steep V-bounce in the stock market both times.
Yesterday I spoke to a friend/colleague who works at a public pension fund. He said the latest fad in pension management land is to shift money out hedge funds – which are woefully underperforming the market – and to put even more money into private equity funds. This allows the pension funds to subject that capital to a quarterly mark to market test rather than an daily or monthly valuation accounting. The only problem: private equity investments are highly illiquid and the valuation of the underlying investments is an “art” that is not at all based on actual market transactions. This private equity investment mark-to-market “Picasso” leads to extreme “over-marking” of private equity investment valuations at pension funds.
This is also one of the primary reasons that the Fed can not raise interest rates even if it were true that the economy was improving and the labor market was tight, both conditions of which we know are not even remotely close to accurate but everyone seems content to play along with the joke.
Many pensions have now allocated as much as 20% of the fund to private equity. This is because they can control to a degree where the investments are marked and as long as the stock market does not decline, they never have to market them down. But with the example of the Dallas pension fund above, if the beneficiaries are allowed to withdraw all of their money, the fund will have to unload its illiquid private equity investments to meet the outflow requests. Good luck getting anything close to where those investments are marked in the fund. The beneficiaries won’t receive anything close to the current stated value of their pension account.
If the status quo in the markets were to continue for the foreseeable future – which it won’t – pensions funds will run out of cash to pay beneficiaries well in advance of the “foreseeable future.” Without cutting benefits drastically or, in the case of public pension funds raising taxes steeply to cover pension beneficiary outflows, some public pensions will hit the wall within 12-24 months. If you are worried about this and want to know more about building your retirement funds without solely relying on pensions, then you can find more information by clicking on the link.
Away from private equity investing – which is just another of the many asset bubbles spawned by the Fed’s near-zero interest rate and money printing policy (by the way, the Fed unbeknownst to many is still printing money) – Wall Street has been busy stuffing a plethora of high-fee generating asset-backed “investment” securities into the market. These securities exploit the need by pensions to generate much higher investment income. When you hear the term “reach for yield,” think: pigs are greedy, hogs get slaughtered. These securities are hog food.
The only problem is that interest rates are so low now the risk embedded in the underlying asset pools are much greater than the interest rate compensating the investor for buying these securities. Ratings agency fraud is also present again. This is another instance of the current period of financial insanity “rhyming” with the Wall Street-fueled insanity that led to the 2008 financial collapse.
A perfect example is the latest “brain child” of Wall Street in which the payables from cell-phone bills (the mobile carrier’s receivables) are packed into pools and securitized into “bonds” – LINK. Verizon is the first to do a deal like this. It’s receivables from cell-phone bills were packaged into bonds, received a triple-A rating and were priced at 55 basis points over the benchmark triple-A corporate index. That means it was issued around a 2.67% yield.
Think about this way, would you lend money to a stranger to pay his cellphone bill in exchange for receiving the amount you loaned plus receive a 2.67% annualized rate of interest on the loan next month? There’s a reason the bonds were priced at 55 basis points over standard triple-A bond. If the implied reason were apparent to all, the bonds would be yielding substantially more. Eventually that reason will come to light and the bonds will tank in price.
The Dallas police and firemen had the right instinct: if you are eligible, contact your pension administrator and demand to receive any pension money that can claw out of fund now. Your alternative is to face substantial payment cuts at some point. Eventually your fund will collapse and you will otherwise receive nothing more than an “Oops, Our Bad” letter from your pension fund.
The Housing Market Is Going To Crash Again
I’ve worked through four bubbles – they all end the same…I think the flippers in Denver metro are driving the under $400,000 price to a frenzy and the over $500,000 in the burbs are dropping in price. Some of these flippers have 8-10 houses at the same time. A little jiggle and they will dump. Then the part time rental landlords follow in selling as the rental market gets tough. A trashed house or eviction usually puts these houses on the market… – – Three decade-plus Denver real estate professional and subscriber to the Short Seller Journal
The homebuilders are getting hammered today – down 2.6% with the SPX up over 4 pts – on the news that housing starts for August dropped sharply, down 5.4% from July. Of course the report missed Wall Street’s “hockey stick growth” consensus estimate.
Funny thing about housing starts, it’s kind of a useless statistic. The data is collected and prepared by the Census Bureau, which is notoriously inept. The numbers presented are “seasonally adjusted” and converted into an annualized rate. Notwithstanding all other problems with the data sample and annualization calculation, presenting an annualized rate number for monthly report is idiotic.
But having said that, a housing start is counted when a shovel is inserted into a piece of land that has been permitted for building a home. When the market goes bad, many of those “starts” never become much more than a small pile of dirt.
All of that aside, the housing market in most areas of the country is anywhere from “soft” to “crashing.” Some of the high-end resort areas like Aspen and the Hamptons are experiencing 50% declines in year over year sales volume and prices are dropping like a rock.
The “inventory shortage” is a myth of epic proportions. Inventory problems arise when flippers begin to outbid bona fide home owners and then flip the home into another bona fide buyer (or another flipper) who was qualified to take out an even bigger mortgage than the original bona fide buyer. It’s the tulip bulb dynamic but fueled by debt. As soon as prices start slipping, the flippers fold and there’s plenty of “for sale” signs everywhere.
I was on a radio show last week and the host happened to mention that he couldn’t believe the number of “for sale” signs he was seeing when he drives to work. My response was that I’m glad I’m not the only person in Denver who has noticed that. Interestingly, I was driving through a neighborhood yesterday that I began scoping out in January and noticed three “for sale” signs, one with a “price reduced” sign – not “new price” but “price reduced.” This is an area that did not have any existing home inventory from January to June – literally none (though it has an oversupply of unsold new homes).
As for the reports that there’s a shortage of new homes, those are seeded either in fraud or complete ignorance. I look at the financials of every major public homebuilder every quarter and every quarter almost every single builder shows a new record in the value of its inventory. Some of that is attributable to price, but most of it is unit volume.
But don’t take it from me or the National Association of Realtors or the Census Bureau or the National Association of Homebuilders, the best housing market “canary” is Lending Tree stock (TREE). Lending Tree is a “derivative” of the housing market. TREE’s revenues are derived from fees paid to TREE by lenders who receive loan requests from borrowers, either via online clicks or call transfers.
Fees from mortgage products represent about 60% of revenues. Fees from auto, home equity, personal and student loans are about 40%. Auto loans would be the majority of its non-mortgage business. TREE’s revenues are 100% reliant on the number of borrowers who are looking to buy a home or car.
TREE reported Q2 results on July 28. Revenues from Q1 to Q2 were flat BUT mortgage product fees declined from Q1 to Q2 (auto and personal loans made up the balance). The drop in TREE’s revenues from mortgages in Q2 reflects the fact that less people were looking for mortgages, which means there’s less people looking to buy a home. It’s as simple as that.
I presented TREE as a short in the Short Seller’s Journal on Sept 11 when the stock was at $101.50. It’s trading as I write this at $89.90, down 11.4% in 6 1/2 trading days. The SPX is actually up 17 points in the same time period. There’s a message there about TREE and about the housing market.
In fact, the last 6 new ideas that I’ve presented in the Short Seller’s Journal have worked almost right out of the gate. I have not had this kind of streak since the stock market started tanking at the beginning of 2016. My ideas have worked despite the blatant intervention by the Fed to keep the S&P 500 and Dow propped up. This is because most of the “sub-sectors” of the market are melting down.
Another example is RL (Ralph Lauren), which I presented on August 14 at $108. It’s trading right now at $98, down 9.3%. I explain in my report why this stock will get cut in half from $108 within 12 months. The Short Seller’s Journal is published weekly and the ideas I present are based on the deteriorating economic, financial and business fundamentals of the stocks I present. You can subscribe by clicking here: SSJ Subscription. Note, it’s a monthly recurring payment subscription and you can cancel at any time.
By the way, TREE was a $5 stock at the beginning for 2012. The company’s business model is nothing more than a pure creation of the massive debt bubble that was created by the Fed’s money printing and credit creation policies. It will be back $5 in less time than it took for it to run up to its $135 all-time high in August 2015.
Bye Bye Deutsche Bank
It smells like death.
No way to know for sure when the Bundesbank, Fed and ECB lose control of Deutsche Bank’s balance sheet. But its stock price just hit an all-time low since its NYSE-listing in October 2001.
Anyone who owns the Deutsche Bank “Tier 1” bonds should sell them now. They are currently yielding about 8%, which puts on the same “tier” as U.S. triple-C (CCC/Caa) rated credits.
I’ve been wondering for quite some time if DB’s demise would be the 2016 “Lehman” event, but I don’t think it will be. Why? Because Germany has a fabled history in which it has demonstrated a willingness to print trillions to keep its system from collapsing.
Operation Mockingbird And The Mainstream Media
Notice how EVERYTHING – even the most trivial of events – on Fox News/Business, Bloomberg, CNBC, CNN and MSNBC is “BREAKING NEWS?” The presentation of the news and the exploitation of sensationalism has itself become an insidious form of propaganda.
Operation Mockingbird was implemented by the CIA in the early 1950’s as operation to influence the media. The idea is that, regardless of the truth, the first headline read by the public in the media was the version of the news that would stick with the public. As an example, whenever a bomb explodes somewhere in the U.S., the first headlines that hit the newswires blame it on ISIS.
The genesis of this propaganda tool was Edward Bernays (nephew of Sigmund Freud), who is credited with being “the guy” behind Joseph Goebbels and the father of the “Virginia Slims Girl,” among another nefarious accolades.
In this latest episode of the Shadow of Truth, we discuss the reasons why that, for almost anything connected with politics and economics, the opposite of anything reported by the mainstream media likely the truth.
Gold And Silver Getting Ready To Launch Again
Doc – Silver Doctors – and Eric Dubin – The New Doctors – invited me back on their SD Weekly Metals & Markets show this past week. We discussed the upcoming “most important ever” FOMC meeting this Tues/Wed (note the sarcasm as CNBC labels every FOMC meeting “the most important ever”), the “shock and awe” manipulation of gold and silver ahead of this meeting and the reasons why the precious metals are getting ready for another move higher. We also chatted about who might replace Hillary if/when she goes down for the count and we gave our predictions on whether or not the Fed will hike rates on Wednesday:
Orwell’s Nightmare In Real-Time
“They” know they are losing control. “THEY” are the elitists who stand silently – some invisibly – behind Capitol Hill and run the country. “They” includes the Deep State, CEO’s and directors of the largest corporations and the country’s wealthiest families and individuals. If you would like to see names of some of the latter, read this: Meet Wealthy Political Donors.
But that list is far from complete. Missing are people/families/foundations like Warren Buffet, Bill Gates, Phil Anschutz and the Walton family.
Also see, Rogue’s Gallery – Exposing the Group of 30, to better understand who writes the monetary policies and be introduced to another branch of “They”. These are real people, not made-for-TeeVee characters, but actually people that dictate our lives.
The United States’ system of Government has become a pure “Money-ocracy.” If you have enough money in your bank (and you might own the bank) and are willing to write the checks to the proper depositories (like the Clinton Foundation and the DNC, for instance) then you are part of the Money-ocracy. If you are not part of the Money-ocracy, you are a middle class yeoman and soon a serf (per Warren Buffet).
In today’s Shadow of Truth (aka the RUCK Report – Rainbows, Unicorns and Cute Kittens), we discuss the transformation of the United States into the largest Banana Republic in history:
There’s Lies, Statistics And Apple Corporation
Apple announced earlier this week that its “initial quantities” of the new iPhone 7+ had already sold out. Of course, it also announced a new policy in which it would not would disclose the first weekend sales volume of the new iPhone. Nothing like using opacity to boost the use of propaganda.
On the news that the new phone had “sold out,” Apple’s stock went parabolic, running up 13.5% in four trading sessions. Coincidentally, or not coincidentally, AAPL’s price surge this week helped the Fed prop up the S&P 500 and Dow. By the way, AAPL’s revenues are now declining every quarter.
But it appears that the iPhone’s first day in stores is a complete dud. Perhaps the most entertaining anecdote was the post on Zerohedge with several twitter posts showing no lines whatsoever outside of several mobile phone shops around New York City: Sold Out? USA Today wrote an article which contrasts the move in AAPL with the apparent lack of demand for the new product: Apple Shares On Fire; iPhone Lined Decidedly Chill.
A colleague of mine told me this morning that he received an email from Apple informing him that if he trades in his old iPhone he can buy a new IPhone 7 for $249. The retail list price $699.
Companies do not sell a product with a list-price of $700 for $250 if there is high demand for that product or if that product is sold-out.
Apple has transformed from the country’s most respected corporation into the same bag of lies, propaganda and fraud that has enveloped the entire financial, political and economic system.
Sure, Tim (Apple CEO), your new iPhone is sold-out just like Hillary Clinton is perfectly fit to run for President…
Someone Dumped 70 Tons Of Paper Gold At 8:30 a.m.
At 8:30 a.m. this morning, 10 minutes after the Comex gold pit opens, over 70 tons of gold was dropped into the entire Comex trading system. If this happened on the NYSE, one of the ECN’s (usually BATS) would have mysteriously “broke” and trading would have been halted – before the damaging effects of the systemic paper overload hit the market.
From 8:30 to 9:30 a.m. EST, a total of 6,289,900 ozs of paper gold, or 196.5 tons was unloaded on the Comex. To put this in perspective, the Comex is reporting 2.37 million ounces of gold in its registered account (the gold that can be delivered). That amount of paper gold that would unloaded was 2.7x the amount of gold available to be delivered. It represents 58% of the entire amount of gold reported to be in Comex vaults.
It’s hard to find any specific news trigger that would have motivated anyone to sell one ounce of gold, let alone nearly 3x the amount of physical gold available to be delivered.
Perhaps the worst economic news reported was retail sales, which dropped .3% in August vs. the expectation of no change. This is the 4th month in a row retail sales have dropped on monthly sequential basis. Retail sales have declined 6 out of 8 months this year.
There’s probably nothing to see in that chart above – just like the allegations of Hillary’s poor health…
Fed Intervention Has Completely Destroyed The Markets
Federal Reserve intervention has killed natural market processes. The Fed is also starting to lose control of its ability to manipulate the markets. Today is a good example. The S&P and Dow are negative as I write this (2:30 EST) after staging a big early day rally. Most sub-indices, like retail and housing, are also red. BUT, the infamous “FANG” (Facebook, Amazon, Netflix, Google) stocks + Apple are up anywhere from .2% (AMZN) to over 3% (AAPL). These stocks are the largest stocks in the SPX by market-cap and are part of the “tool kit” the Fed has been using to keep the S&P 500 and Dow from spiraling lower.
Since late 2012, the Fed has been able to orchestrate the markets with heavy doses of direct and indirect interventionary tactics. It’s used a combination of money printing, plunge protection and propaganda to keep the stock market propped up, interest rates near zero and the price of gold suppressed.
But, if the action over the last four trading days are any indication, the Fed is increasingly losing its ability to control the markets. This is most evident in the apparent break-down in market sector correlations.
From roughly late 2012 through early 2016, the Fed has been the US$/yen as a “lever” with which to push the S&P 500 up and the price of gold down. If you study these three graphs, you can see the correlations from 2012 to 2016 and the breakdown of the correlations in 2016: Weekly $/Yen Weekly SPX Weekly Gold
I happened to notice on Friday and yesterday (Tues, Sept 13) that, despite a move higher in the $/yen (the yen falling hard vs. the dollar), which is the level the Fed had been using to manipulate stocks, the stock market experienced steep sell-offs. Typically the $/yen and the U.S. stock market move in near-perfect correlation. Today they are inversely correlated.
Even more interesting, the bond market, even at the short end, also sold off (yields rose). This is unusual because typically when stocks get bombed, the money coming out of stocks floods into very short maturity T-bills and the dollar rises. Yesterday EVERYTHING was down except a few agricultural commodities and the dollar index. I have no idea where the money that came of stocks was parked.
Regardless, it was clear that hedge funds were selling everything that was not nailed down yesterday and Friday. At some point, as volatility increases, a significant portion of the money coming of stocks and bonds will be flowing into the precious metals sector. If you review the trading patterns in 2008 before and after the October, you’ll see that initially the metals/miners were correlated with the S&P 500. Subsequent to the end of October, the precious metals sectors dislocated from the stock market and moved higher while stocks continued to decline.
I believe all of this activity, especially the dislocation in correlations among the sectors as discussed above reflects the Fed’s increasing inability to manipulate the financial system. There are just too many factors for which they can not account. One perfect example is the disintegration of energy exploration and production sector assets. Debt recoveries in E&P bankruptcy restructurings have been averaging 21% – LINK. This means that lenders are getting back, in general 21 cents on every dollar lent to these companies. Some tranches received close to zero. Part of this “recovery value” no doubt includes some partially random value attributed to stock distributed to bagholders.
This is a problem because the big Too Big To Fail Banks were stuck holding a lot of this debt. In other words, the melt-down in the energy sector has the potential to blow big holes in bank balance sheets (this among many other deteriorating assets). If the Fed hikes rates, it will likely force recovery rates even lower. In fact, it will lower the value of collateral securitizing most bank debt deals, especially mortgages.
It’s a common notion that the Fed has “backed itself into a corner” with interest rates and its monetary policy. But there are several ways in which Fed has backed itself into a corner. These factors are beginning to emerge and they are removing the ability of the Fed to treat the financial system like its puppet.
Expect a lot more volatility in all market sectors going forward. The economy is clearly headed into a recession, if not already in one. An interest rate hike next week has the potential to trigger a plethora of unforeseeable chaos in the markets and I believe the Fed will once again defer on its threat to hike rates.
The Economy: It’s Worse Than I Thought
I got an email from a colleague today that said, among other things: “The economy is tanking and, while you may be the most pessimistic around, you may not be pessimistic enough.”
To that I would say that I’m significantly more bearish than is reflected in my public analysis. I spoke to a couple people today who offered anecdotal stories about their particular business niches – businesses in which new orders are somewhat tied to discretionary spending – and they both said that new business activity is unusually slow and that the last time they experienced new order flow this slow this was in 2008.
I’ve been suggesting for most of this year that retail sales were slowing and would fall off a cliff heading into fall. I presented RL as a short idea in my Short Seller’s Journal on August 14th at $108 after visiting the Ralph Lauren store in Aspen. I was the only person in the entire store and I was being hounded by the salesperson to the point of being uncomfortable. RL is at $100.80 as I write this, which is a 7.2% ROR in 4 weeks for anyone who shorted the stock. Based on the point of last trade and where I recommended them, the January 2017 $85-strike puts are up 35% – so far. But the bigger gains will be made holding RL short when it drops to $40, where it was in early 2009 before the Fed’s money printing stimulated credit-induced retail spending.
My outlook on retail is supported by the BAC credit card spending report posted in Zerohedge today. Based on BAC “aggregate card data,” retail sales ex-autos declined .1% in August from July and .3% in July from June. The 3-month average (Jun-Aug) is down .2%. These numbers are “seasonally adjusted,” which means the actuals are probably worse. BAC’s data for department store sales show that they’re down 4.6% year over year in August. Autopart sales are in a downtrend and beginning to comp negatively. Auto parts sales are highly correlated with vehicle unit sales, which are entering a downturn based on July and August numbers, especially if you strip out Chrysler’s fraudulent sales numbers LINK.
The week retail sales reflect the deteriorating income and financial status of the average American household. And so do restaurant sales. Restaurant industry sales tracked by Black Box Intelligence show a .6% decline in August in same store sales were down .6% but same store traffic was down 2.7%. This was the third consecutive month same-store sales declined, with monthly sequential declines in 6 out of 8 months this year.
It’s expected that Q3 corporate earnings will once again decline from Q2. This will be six quarters in a row that earnings drop. But it’s even worse than that because the changes to accounting standards (GAAP) have enabled companies to manipulate their earnings reports to the upside. Despite those accounting gimmicks, earnings continue to drop.
The stimulative effects of the Fed’s money printing program have faded. The subprime debt default crisis that plagued the housing market in 2008 has been replaced by a general reflation of subprime credit issuance that includes housing, autos, student loans and personal loans. Synchrony, formerly GE Capital Retail Bank, is advertising a high yield savings account that pays 1.1% interest, or 8x the national average. That’s because Synchrony is using depositor money to fund a plethora of high interest rate consumer lending platforms which primarily appeal to subprime borrowers. I would strongly advise avoiding this savings account because, even with alleged FDIC coverage, you might not see your money when Synchrony impales itself on the toxic loans it makes. Look for Synchrony to blow up sometime in the next 24 months. Same with Capitol One, Ally Financial and Credit Acceptance Corporation, among others.
The Fed will not only not raise rates this year – or anytime in the foreseeable future for that matter – but watch for signs that another big dose of “QE” is being tee’d up. Otherwise our financial system and economy is headed into that same abyss into which it stared in 2008.