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The Dollar Is Screaming “Buy Gold (and silver)”
First this, but don’t take our word for it:
The US Dollar is under considerable pressure. Week after week, we talk about how the dollar has been going down for the count. It can only take so many hits. Gold and silver are the safe haven assets to own through a currency crisis, and for the moment, the precious metals have been on the clearance sale rack since July. At what point do the dollar bulls capitulate? It has been years since the dollar has come under pressure, and the frequency in which everybody is a genius yet bouncing from job to job, including in the financial sector, there are now so few analysts/financial advisers/traders who have seen a bear market, that one wonders if anybody will hear it when it roars?
The pressure is building. Just look at copper and ask these questions:
- Is mining supply down for everything, or just copper?
- How is copper rallying, yet silver price action has found everything except for a bid?
- If copper finished the quarter with 2nd place overall gains, across all asset classes, second only to crude, then why are the precious metals so far behind?
Here’s a closer look at copper action of late:
The consolidation is impressive, spanning several months. With the recent 7% gains in just the month of July, is copper set for another leg up, or will it come crashing down to the weakness of gold and silver? Gold prices have been trading in a $20 range since last week. Seriously. To the penny. At a price of approximately $1275 going into Friday’s trading action, gold looks ready to either break-out or break-down:
Silver prices are looking very bullish:
Earlier this week, we reported that mining sector 2nd quarter earnings have now hit full stride. Second quarter earnings from the miners have been mixed. Gold miners seem to be weathering the storm, but silver miners not so much:
| GOLD | CONSENSUS EPS | ACTUAL | RESULT |
| Barrick (ABX) | $0.2 | $0.22 | BEAT |
| Rand Gold (GOLD) | $0.74 | $0.88 | BEAT |
| SILVER | CONSENSUS EPS | ACTUAL | RESULT |
| Endeavour (EXK) | $0.02 | $0.00 | MISS |
| First Majestic (AG) | $0.05 | $-0.02 | MISS |
The performance of the miners begs a the question:
Are the silver miners no longer able to compete, or is silver under-priced when compared to current market conditions?
On the fundamental front, we have several issues to be concerned with. ADP Payroll data suggests poor labor market conditions. According to the most recent report, the manufacturing sector shed 4,000 jobs in July, 2017. Today is the official Bureau of Lies and Statistics BLS Nonfarm Payrolls report, and as we are now over half a year into 2017, this employment data is perhaps the most important release ever. We shall not reiterate what a disaster the rest of the economy has become. The “Stock Market” is at record highs, though the barrage of incoming data paints the picture of a seriously sick economy, and it is perhaps terminal.
SilverDoctors.com has been on the leading edge of Gold News and Silver News Since 2011. Each month, more than 250,000 investors visit SilverDoctors.com to gain insights on Precious Metals News as well as to stay up-to-date on World News impacting the metals markets.
Western Central Bank Fear Of Gold Is In The Air
Ballooning open interest, heavy fix selling, aggressive post-settlement selling, flash crashes – this all seems a lot of bother. Perhaps the Other Side is afraid of something. – John Brimelow from his Gold Jottings report
Wednesday evening at 7:06 EST, at one of the least liquid trading periods of the 23 hour trading day for Comex paper gold, a “motivated” seller unloaded 10,777 August gold contracts into the CME’s Globex trading system, knocking the price of gold down $9 in 25 minutes. There were no obvious news or events reported that would have triggered any investor to dump over 1 million ozs of gold with complete disregard to price execution.
Rather, the selling was the act of an entity looking to push the price of gold a lot lower in “shock and awe” fashion. The 10.7k contracts sold were just the August contracts. There was also related selling in several other contract months. To be sure, the total number of contracts unloaded included hedge fund selling from stop-losses triggered in the black boxes of momentum-chasing hedge funds.
In addition to the appearance of frequent, strategically-timed “fat finger” flash crashes, the open interest in paper gold on the Comex has soared by 23,000 contracts since last Friday. This added 2.3 million paper gold ounces to the Comex open interest, which represents nearly 27% of the total amount of alleged physical gold ounces sitting Comex vaults. In fact, the total paper gold open interest on the Comex is 455,605 contracts, or 45.5 million ounces of gold. This is 530% more paper gold than the total amount of gold reported to be sitting in Comex vaults.
The dramatic rise in open interest accompanied gold’s move in price above the 50 dma. It’s typical for the bullion banks on the Comex to start flooding the market with additional paper contracts in order to suppress strong rallies in the price of gold. Imagine what would happen to the price of gold if the regulatory authorities forbid the open interest in Comex gold contracts to never exceed 120% of the total amount of gold in the Comex vaults. This is unwritten “120% rule” is de rigeur with every other commodity contract except, of course, silver.
The “flash crash” and “open interest inflation” are two of the obvious signals that the western Central Banks/bullion banks are worried about the rising price of gold. The recent degree of blatant manipulation reflects outright fear. I suspect the fear is derived from two sources. First is a growing shortage of physical gold that is available to deliver into the eastern hemisphere’s voracious import appetite. Exports from Swiss refineries have been soaring. India’s appetite for gold has not been even slightly derailed by the 3% additional sales tax imposed on gold.
Speaking of India, the World Council has put forth a Herculean effort to down-play to amount of gold India has been and will be buying. After India’s 351 tonnes imported in Q1, the WGC tried to shove a 90 tonne per quarter forecast down our throats for the rest of the year. India’s official tally for Q2 is 167.4 tonnes. Swing and a miss for the WGC. Now the WGC is forecasting at total of 650-750 tonnes for all of 2017.
The WGC forecast is idiotic given that India officially imported 518.6 tonnes in 1H and 2H is traditionally the best seasonal buying period of the year AND a copious monsoon season means that farmers will be flush with cash – or rupees, rather – which will be quickly converted into gold. Two more swings and misses for Q3 and Q4 and the WGC is out of excuses for why India likely will have imported around 1,000 tonnes, not including smuggled gold, in 2017. This aggressive misrepresentation of India’s gold demand reeks of propaganda. But for what purpose?
Back to the second reason for the banks to fear a rising price of gold: the inevitable collapse of the largest financial bubble in history inflated by Central Bank money printing and credit creation. The trading action in the gold and silver markets resembles the trading activity in 2008 leading up to the collapse of Lehman and the de facto collapse of Goldman Sachs.
One significant difference is the relative effort exerted to keep a lid on the price of silver. In early 2008, with the price of silver trading between $17 and $19, the open interest in Comex silver peaked at 189k contracts (Feb 29th COT report). Currently the open interest is 206k contracts and it’s been over 240k. In late 2008, the Comex was reporting over 80 million ozs of “registered” silver in its vaults. “Registered” means “available for delivery.” There were thus roughly 3 ozs of paper gold for every reported ounce of physical gold available for delivery. Currently the Comex is reporting 38.5 million ozs of registered silver. That’s 5.3 ozs of paper silver for every ounce of registered silver.
As you can see, the relative effort to suppress the price of gold and silver is more intense now than in 2008. Given what occurred in 2008, I have to believe that fear emanating from the western banks currently is derived from events unfolding “behind the curtain” that are worse than what hit the system in 2008.
Crashing Auto Sales Reflect Onset Of Debt Armageddon
July auto sales was a blood-bath for U.S auto makers. The SAAR (Seasonally Manipulated Adjusted Annualized Rate) metric – aka “statistical vomit” – presented a slight increase for July over June (16.7 SAAR vs 16.5 SAAR). But the statisticians can’t hide the truth. GM’s total sales plunged 15% YoY vs an 8% decline expected. Ford’s sales were down 7.4% vs an expected 5.5% drop. Chrysler’s sales dropped 10.5% vs. -6.1% expected. In aggregate, including foreign-manufactured vehicles, sales were down 7% YoY.
Note: These numbers are compiled by Automotive News based on actual monthly sales reported by manufactures. Also please note: A “sale” is recorded when the vehicle is shipped to the dealer. It does not reflect an economic transaction between a dealer and an end-user. As Automotive News reports: “[July was] the weakest showing yet in a year that is on tract to generate the industry’s first decline in volume since the 2008-2009 market collapse.”
The domestics blamed the sharp decline in sales on fleet sales. But GM’s retail sales volume plunged 14.4% vs its overall vehicle cliff-dive of 15% And so what? When the Obama Government, after it took over GM, and the rental agencies were loading up on new vehicles, the automakers never specifically identified fleet sales as a driver of sales.
What really drove sales was the obscenely permissive monetary and credit policies implemented by the Fed since 2008. But debt-driven Ponzi schemes require credit usage to expand continuously at an increase rate to sustain itself. And this is what it did from mid-2010 until early 2017:
Auto sales have been updated through June and the loan data through the end of the Q1. You can see the loan data began to flatten out in Q1 2017. I suspect it will be either “flatter” or it will be “curling” downward when the Fed gets around to update the data through Q2. You can also see that, since the “cash for clunkers” Government-subsidized auto sales spike up in late 2009, the increase in auto sales since 2010 has been driven by the issuance of debt.
Since the middle of 2010, the amount of auto debt outstanding has increased nearly 60%. The average household has over $29,000 in auto debt. Though finance companies/banks will not admit it, more than likely close to 40% of the auto loans issued are varying degrees of sub-prime to not rated (sub-sub-prime). Everyone I know who has taken out an auto loan or lease has told me that they were not asked to provide income verification.
Like all orgies, the Fed’s credit orgy has lost energy and stamina. The universe of warm bodies available to pass the “fog a mirror” test required to sign auto loan docs is largely tapped out. The law of diminishing returns has invaded the credit market. Borrower demand is tapering and default rates are rising. The rate of borrowing is rolling over and lenders are tightening credit standards – a little, anyway – in response to rising default rates. The 90-day delinquency rate has been rising since 2014 and is at a post-financial crisis high. The default rates are where they were in 2008, right before the real SHTF.
The graph above shows the 60+ day delinquency rate (left side) and default rate (right side)
for prime (blue line) and subprime (yellow line) auto loans. As you can see, the 60+ day
delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in
2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the
2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%,
which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about
200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day
delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this
year.
We’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is nearly 60% greater. But the real problem will be, once again, the derivatives connected to this debt.
The size of the coming auto loan implosion will not be as large as the mortgage implosion in 2008, but it will likely be accompanies by an implosion in student loan and credit card debt – combined it will likely be just as systemically lethal. It would be a mistake to expect that this problem will not begin to show up in the mortgage market.
Despite the Dow etc hitting new record highs, many stocks are declining, declining precipitously or imploding. For insight, analysis and short-sell ideas on a weekly basis, check out the Short Seller’s Journal. The last two issues presented a uniquely in-depth analysis of Netflix and Amazon and why they are great shorts now.
The Accounting Ponzi Scheme Is Catching Up To Amazon
“‘Faith’ is defined as “belief without evidence.” AMZN is a stock investment that thrives on
investor faith. Investor greed transforms into irrational faith when the faith is rewarded with stock gains. This will ultimately burn out but it’s impossible to predict timing. The stock is trading at 178x TTM net income. This is an insane multiple for a company with a deteriorating business model that is under attack from all angles by large, well-capitalized competitors who specialize in Amazon’s business segments.
Having said that, I continue to believe that money can be made trading AMZN from the short side but it requires discipline and diligent capital management. Amazon is one of those stocks in which you need to maintain some short exposure because, when it finally goes, it will go quickly and you’ll be waiting for a big bounce to short that will never materialize” – excerpt from the latest Short Seller’s Journal
In last week’s issue of the Short Seller’s Journal, I did an in-depth analysis of Netflix’s (NFLX) accounting and demonstrated how NFLX manipulates GAAP accounting to manufacture fake net income. I advised subscribers to short NFLX on Monday at $188. This week I focus on the key areas of Amazon’s quarterly financials and show how Jeff Bezos transforms actual negative free cash flow into the Bezos $9.6 billion LTM “free cash flow.”
I also demonstrate the ways in which Amazon’s business model is beginning to break down – that it’s e-commerce model is under attack from all angles by well-capitalized, more profitable retailers like Walmart and its cloud computing business is being attacked aggressively by traditional software development and applications companies like MSFT, IBM, GOOG and ORCL.
On a year over year LTM basis, the amount of cash burned by AMZN has increased 89.2%, from negative $2.476 billion to negative $4.685 billion. – this seek’s Short Seller’s Journal shows why this statement is fact. Recently subscribers have cleaned up on Chipotle (CMG), Sears (SHLD), Beazer (BZH) and others. This week’s issue shows why AMZN will eventually be a home run short. You can learn more here: Short Seller’s Journal info.
Netflix And Amazon: Case Studies In Accounting Games
Over the time since I started the Short Seller’s Journal, several subscribers have asked about Netflix (NFLX). For some reason I have refrained from presenting it as a short idea, instead choosing AMZN and TSLA as my insanely overvalued “tech poison” short-sell ideas. However, knowing that NFLX was reporting this week, I decided what if – and really more like when – it spiked up on a headline “beat,” I would take a close look at the numbers to see what’s going on with NFLX accounting. Just as you would look through different options for your own accounts, perhaps making a quickbooks freshbooks comparison, so too should you look through the numbers when it comes to investing. Sifting through NFLX’s web of accounting chicanery took a lot longer than I anticipated. I had to not only read through pages upon pages of accounting information but also had to get in touch with a friend of mine who works at an accounting firm similar to BrooksCity to double-check my findings.
As I expected, I found a company that pushes the envelope in an area of GAAP accounting in which there is a substantial “grey” area that enables companies like NFLX to manufacture and manage reported GAAP net income. But NFLX bleeds cash, as I’ll show. The quote at the top summarizes the NFLX business model: it will burn cash “for many years.”
In a sense, NFLX is similar to a Ponzi scheme. As long as cash received in the form of revenues and stock or bond financing exceeds cash expense outflows each year, it can continue operating. But as soon as revenues decline or the capital markets refuse to give NFLX money, it will collapse. As you will see below, while NFLX is generating growth in its net income, the amount of cash burned by its operations has been increasing dramatically. And it has been financing this cash flow deficit with debt.
The above narrative is from last week’s Short Seller’s Journal. I walked through the areas in which NFLX exploits grey areas in GAAP accounting rules to manipulate the cash flows from its business model (cash revenues minus actual cash expenses) in order present GAAP net income. The primary lever it uses is the guidelines (note: “guidelines” – not “rules”) for depreciating media capex. I show step-by-step how NFLX exploited the grey areas in GAAP to manufacture the $0.15 earnings per share it reported.
I also discussed strategies for shorting NFLX, which included shorting the stock outright and using puts. Subscribers who shorted NFLX on Monday morning this past week are green on their short positions. I also suggested capital management strategies.
This week I will be showing how to dissect the numbers AMZN must disclose in the footnotes to its 10-Q filing to see what’s really going on beneath the Jeff Bezos show. For instance Bezos opens his earnings presentation every quarter with a slide and a discussion of the “Free Cash Flow” produced my AMZN on an LTM basis. It’s the very first slide in the earnings call slide show. He’s now claiming LTM FCF of $9.7 billion.
BUT in the footnotes to the 10-Q – a place where no Wall Street analyst ever dares to venture, assuming they even know the footnotes exist – there’s a disclosure that explains that Jeff Bezos FCF is not GAAP FCF. Using GAAP, the Bezos FCF is reduced to $4.1 billion. I’m using ETIDA minus Capex minus Capital Lease Amortization payments. I even give him the benefit of adding back the non-cash share compensation portion of salary, which technically is not allowed in GAAP because share dilution is a form of cash use ultimately from the shareholders perspective. The $4.1 billion is GAAP free cash flow, not the Bezos bullshit FCF.
And not only that, but the AMZN core business model is starting to break down. But that analysis will be saved for this week’s Short Seller’s Journal. Subscribers to the SSJ also get 50% off a subscription to the Mining Stock Journal. Click here to learn more about the SSJ: Short Seller’s Journal info.
Dave, just a moment for some feed back. I just placed and order for 1 oz gold eagles thanks to my profits off Tesla and BBBY. Thanks, as always. – Subscriber email received in early July
Cryptocurrency Devaluation And The Russian-Chinese Golden Bond
Here’s the latest update from the collaborative effort between The Daily Coin and Investment Research Dynamics, AKA the Shadow of Truth:
“Low Inflation” In Not “Good” – It’s Pure Propaganda
Analysts who advocate a monetary policy that targets “low inflation” are the equivalent of chickens in the barnyard rooting for Colonel Sanders to succeed. This idea that a low level of inflation being good for the economy is beyond moronic.
The fiat currency money system era was accompanied by the erroneous notion that a general increase in the price of goods and services is “inflation.” But technically this definition is wrong. “Inflation” is the “decline in the purchasing power of currency.” This decline occurs from actions that devalue a currency. Rising prices are the visible evidence of ongoing currency devaluation.
Currency devaluation occurs when the rate of growth in a country’s money supply exceeds the rate of growth in real wealth output. Simply stated, it’s when the amount of money created exceeds the amount of “widgets” created, where “widgets” is the real wealth output of an economic system.
In ancient Rome, the currency devaluation occurred when the Roman Government began to “shave” gold and silver coins which enabled it to increase the amount of coins produced from mined gold and silver in order to finance Government spending. When spending continued to exceed the amount of currency produced, the Government increased the money supply by diluting gold and silver coins with cheaper and more abundant metallic additives.
In the United States currently, currency devaluation occurs through both money printing, which has been cleverly disguised for propaganda purposes as “quantitative easing,” and by the continuous growth in credit creation. Debt issued behaves exactly the same as printed currency until that time at which the debt is repaid, not by more debt issued, but from money that has been accumulated by the debtor in order to repay and retire the debt.
The U.S. Government has not reduced the amount of debt issued for decades. Apologists will look at the Treasuries outstanding chart on the Fed’s website and argue that the debt level declined ever so slightly in the late 1990’s. But this was achieved through accounting gimmicks, not an outright reduction in Federal debt outstanding.
Notwithstanding this, the total level of debt in the U.S. system has been continuously increasing for many decades. While it’s argued that this is debt and not money supply, it is a fact that debt issued spends just like printed money until the debt is repaid and retired. Thus, currency devaluation has been occurring in the United States on a continuous basis since at least 1913 (founding of the Fed).
Back to the erroneous idea that “low inflation is desirable.” I defy anyone to research this and present a rational explanation that has ever been offered. The best I could come up with is “low inflation is good for the economy.” That is unadulterated ignorance. That phrase means that “it is good for the Government to devalue the currency.” Why is it “good” for a consumer to pay higher prices, i.e. more money for goods and services on an ongoing basis?
Inflation, where “inflation” means the true definition, is a subtle mechanism by which the elitists redistribute wealth. Printing money benefits those who are closest to the money faucet to the detriment of those who are “downstream” from the flow of new money supply (or credit created). The banks are always first in line at the money faucet. The Federal Reserve was erected for that purpose. The creators of the Fed were all owners of the biggest banks in the U.S. at the time plus the political puppets of those owners. Go look up the roster of men who founded the Fed for yourself if you don’t believe me.
After the banks, the Government is next in line. And after that all of the companies that benefit from Government largess. Inflation, even “low inflation” is not beneficial to anyone other than those who are in a position to take advantage of the currency devaluation mechanism. Period. Anyone who tries to argue that “low inflation is good” and that a low inflation target should be a primary goal of the Fed’s monetary policy is either someone who is in position to benefit from that policy (banks, politicians, big corporations etc) or is tragically stupid.
Existing Home Sales Tank This Summer: Fact vs Fiction
Existing home sales declined nearly 2% in June from May on a SAAR basis (Seasonally Adjusted Annualized Rate). (SAAR is the statistically manipulated metric used by industry organizations and the Government to spin bad monthly economic data into an annualized metric that hides the ugly truth).
Here is the NAR-spun fiction: “Closings were down in most of the country last month because interested buyers are being tripped up by supply that remains stuck at a meager level and price growth that’s straining their budget…” – Larry Yun chief “economist” for the National Association of Homebuilders.
This has been Yun’s narrative since home sales volume began to decline last year. His headline mantra of low inventory is mindlessly regurgitated by Wall Street and the financial media. But here’s what the truth looks like (click to enlarge):
Going back to 1999, this data sourced from the Fed, who sourced it from the NAR, shows an inverse correlation between inventory and sales. In other words, low inventory drives sales higher. Conversely, as inventory rises, sales drops. You’ll note that the chart does not go past 2015. This is because, for some reason, the Fed purged its database of existing home inventory prior to June 2016. There’s a gap in inventory between mid-2015 and mid-2016. However, there is this (click to enlarge):
I hate to call Larry Yun a “liar” because it sounds unprofessional. But what else am I supposed to call him when the data completely contradicts the narrative he shovels from his propaganda port-o-let into the public domain? I have no choice.
AS you can see, from 1999 to mid-2015 and from mid-2016 to present, inventory and sales are inversely correlated.
This has been the worst selling season for the housing market’s peak sales months since 2011. In 2011 the Fed was dumping trillions into the housing market and mortgage finance system. To make this morning’s report worse, mortgage rates have been declining at a steep rate since the end of December. Near-record low rates, combined with near-zero percent down payment Government-guaranteed mortgages combined with the lowest credit-approval standards since 2007 combined with the peak selling months should have catapulted home sales much higher this year. This is why more and more people are choosing to sell their homes to companies like Elite Home Solutions, which ‘Sell Your House Fast in Raleigh, NC‘ so that people do not have to worry about putting their house on the market or even renovating because it will be done for them.
Here’s the problem if people don’t do this: the factors listed above have tapped out the available pool of homebuyers who qualify for a near-zero downpayment, low-credit rating Government-backed mortgage:
The graphic above shows the average household mortgage payment as a percentage of disposable personal income (after-tax income). The graphic above is for those households with 20% down payment mortgages. As you can see, that ratio is at an all-time high. It’s far worse for households with 3% down payment mortgages. Either the Government will have to roll-out a program that directly subsidizes the households who still want to over-pay for a home but can’t afford the mortgage payment let alone the cost of home ownership – i.e. helicopter money – or the housing the market is getting ready to head south. This won’t end well either way.
As for the inventory narrative. New homebuilders are bulging with inventory. How do I know? Because I look at the actual balance sheet numbers of most of the publicly traded homebuilders every quarter. Newly built homes sitting in various stages of completion or sitting complete but completely empty often are not listed in the MLS system. There’s a rather large “shadow inventory” of new homes gathering dust. This fact is reflected in the fact that the rate of housing starts has been declining for most of the past 8 months. There’s plenty of new home inventory and homebuilders are open to price negotiation. This is evident from the declining gross margins at almost every homebuilder.
This is the type of analysis that is presented in the Short Seller’s Journal. I research and dig up data and present facts that will never be reported by Wall Street, industry associations and the financial media. This is why my subscribers were short Beazer (BZH) at $14.99 on May 21st. It’s currently at $13.39 but has been as low as $12. It’s headed much lower. Despite the Dow et al hitting new highs, there’s a large universe of stocks that are plumbing 52-week and all-time lows. You can find out details about the SSJ here: Short Seller’s Journal information. In the latest issue I present an in-depth analysis of Netflix’s accounting and show why it’s a Ponzi scheme.
Bonds Are Currencies – A Derivative Of Currencies
I saw a thought-provoking retweet on Mark Yusko’s twitter feed and I wanted to clarify the idea conveyed: “When bonds yields nothing, they aren’t much different than currencies.”
This comment is somewhat misleading because bonds are indeed a derivative of currencies. It’s basic financial economics that Mark Yusko learned in the same Robert Leftwich finance course at U of Chicago that I took.
The tweet references sovereign-issued bonds. Sovereign bonds are simply a sovereign’s currency issued to investors who are willing to bear the “time value” risk connected to the sovereign, where “time value risk” is the sum of “credit risk” – the risk of getting repaid – and “opportunity cost” – the foregone cost of spending that capital now or investing it in an alternative asset that might yield more.
Together, in a free market, those two costs equal the interest rate of a sovereign bond. From there, all bonds that are priced off the sovereign bond curve are 2nd order derivatives of a sovereign currency. In that sense all bonds are a derivative of currencies.
Quantitative easing – when a Central Bank prints money and uses that money to buy sovereign bonds for the purpose of controlling interest rates – removes the market’s ability to price “time value risk.” Western sovereign bonds have been driven down to zero – below zero on a real interest rate basis. Western sovereign bonds arethereby simply interchangeable with a country’s currency. There’s almost no difference between holding cash or holding a 30-day T-bill , or even a 2-yr Note, other than the inconvenience and transaction cost of buying and selling the bond.
The point of this is to reflect on the fact that bonds are indeed currencies – currencies with the added feature of time value risk. An investor buying the bond is willing to exchange current spending/consumption in order to lend money to the sovereign issuer. The interest rate is the amount paid to bear the time value risk. The interest earned is paid in more of the sovereign currency.
QE has destroyed the market’s natural function of pricing time value risk into the capital markets which in turn has reduced most bond investments to the equivalent of holding currency in the pocket sans the benefit of compensation for bearing time value risk. This has in turn forced a flood of money of Biblical proportions into the the non-currency assets that are moving higher at the greatest velocity – primarily stocks. Right now primarily tech stocks.
Eventually the QE intervention will fail – it always fails and history has confirmed this fact ad nauseum. When that failure occurs, and I believe that point of failure is closer than most are willing to accept, there will be an asset crash of Biblical proportions.
Is more difficult to see the truth or accept the truth?…
Chipotle ($CMG): Boom Goes The Dynamite – Redux
And once again Chipotle ($CMG) is in the news for business operations negligence. Where the hell is the local Department of Health? E-coli, customer credit card hacks, novovirus and now rats falling from ceiling – Are You Sure That’s Pork?. As the tried and true adage declares, “where there’s smoke…” – Short Seller Journal subscribers have been short CMG since 5/7 at $475 – it’s now down $110 in 10 weeks and still trading at 113 p/e…
I stopped eating at Chipotle the second I heard about the e-coli thing. Used to grab dinner there at least once a week. Have not been back. Along the way I’ve avoided the credit card hack to their payment system that surface a few months ago. Now it looks like there’s another viral outbreak at Chipotle of some sort: Virginia Chipotle Closed.
I presented the idea of shorting CMG in the Short Seller’s Journal in the May 7th issue:
This was my rationale:
“I personally used to eat at Chipotle once a week before the e-coli problem. I have not been back since then. This is probably not he last we’ll hear of issues like at CMG. After the most recent unjustified bounce in the stock up to $475, CMG still sells at a 147 p/e. This is an insane p/e. With restaurant revenues declining across the industry, extremely overvalued stocks like CMG are vulnerable to big cliff-dives. You can see in the graph above that the stock appears to rolling again for another trip below its moving averages and under $400, at least. This is confirmed by the RSI and MACD indicators.
Wall St. was gushing over CMG’s Q1 2017 performance as it exceeded expectations with revenues up 28% vs. Q1 2016 and net income $46 million vs a loss in 2016. But don’t forget that Chipotle’s Q1 2016 was hammered by the e-coli scare. The more appropriate analysis is to look at Q1 2017 vs. Q1 2015.
It’s an entirely different story if you compare Q1 2017 to Q1 2015, where Q1 2015 was on the books before the e-coli problem. Revenues in Q1 2017 were $1.07 billion vs. $1.09 billion in Q1 2015. Net income in Q1 2017 was $46 million, or $1.60 vs $122 million in Q1 2015, or $3.98/share. If we consider Q1 2017 and Q1 2015 to be more of an “apples to apples” comparison, Q1 2017 was not good. Furthermore, CMG had 2,291 stores open at the end of Q1 2017 vs. 1,831 at the end of Q1 2015. Looked at on a revenues per store basis, Q1 2017 was a total failure vs. Q1 2015. But Wall St and company management will not discuss this type of comparison and the morons buying the stock will not look for it.”
In addition to presenting the idea and the fundamental rationale, I suggested a couple strategies for playing the down-side, including using January 2018 puts. Than January 2018 $350’s have been a home run. By the way, CMG is still insanely overvalued.
Several ideas have been working since last August and have been working really well since January. This is because beneath the marquee indices, many stocks are at 52-week or all-time lows. You can check more about how this service works here: Short Seller’s Journal information. There’s no minimum monthly term requirement but the churn rate to this SSJ is surprisingly low.