Tag Archives: Cramer

Valeant (VRX): The Short Seller’s ATM Machine

Valeant stock bounced today on the news that it had completed an internal review of its accounting issues with respect to revenue recognition and did not find any additional problems (Wall St Journal).   Famous last words there…VRX announced that it intends to file its restated financials in its 10-K by the April 29 “drop dead” date to avoid triggering a default under its bank covenants.

This Company smells more like an “Enron-esque” situation every day.  The revenue recognition issues connected to Philidor RX Services is just one of many issues.   VRX is a literal “roach motel” of bad business decisions, unethical business practices and, most likely, embedded fraud.

The stock popped up  21% in pre-market when the news report hit the tape.  As you can Untitledsee from the graph to the right (click to enlarge), it’s been selling off since the initial spike.  It’s likely that a few panic’d short sellers rushed to cover.  However, I would bet most of the move up in the stock was triggered by a bevy of retail daytrader stock jockeys who thought it would be a good idea to chase momentum.

While the Company may avoid a technical default under its bank covenants, this does nothing to fix VRX’s deep-seated problems.  It has $30 billion debt that was amassed from overpaying for its several acquisitions over the past few years.  It has a self-assessed book value of $6.4 billion, or $18/share.  BUT, after stripping away goodwill/intangibles, its book value is negative $32.6 billion.  Too be sure, most of that goodwill is attributable the amount by which VRX overpaid for acquisitions, some of which it is already looking to unload.  

One last point about the news that juiced the stock today.  The Company’s declaration that its financials are now valid is based on a review of the matter conducted by a committee that was composed of VRX’s board of directors.  In no way can the case be made that this review was in any respect independent or “arm’s length.”  This is another trait of a Company that is on the ropes:  self-declared exoneration.

Without a doubt, the path of VRX’s stock to much lower stock prices will be littered with news-driven price-spikes like today.   This is why VRX stock is a short-seller’s ATM.  Every spike can be shorted for short-term profits.  Make sure to hold on to some amount of a “core” position in order to profit from the next eventual new-driven waterfall.  This is how similar stocks before VRX – like Enron, Bear Stearns, Countrywide FInancial,  etc – traded until they finally dropped below $10.

I have no doubt that beneath the mess, VRX has a core business that is profitable.  But it is highly likely that core value of VRX’s enterprise is significantly lower that is implied by the current market cap.  Currently VRX’s June $17.50-strike put options trade at $2 and have an implied volatility of 1.477. This is a staggeringly high implied volatility and it reflects an imputed 35% probability that the stock price will be below $17.50 by the June expiration of the put contract.

The only problem I have with the idea of shorting VRX beyond price-spike daytrades is that the idea has not received the full “Cramer endorsement,” meaning Cramer has not issued a table-pounding “buy, the market is stupid” recommendation.   Other than that VRX is a daytrader’s dream ATM.


The Financial Markets Are One Big Cartoon Network

It seems to never end.  The markets do the opposite of what would be expected based on common sense and on undeniable evidence about the fundamentals.   Just this morning, for instance, the S&P 500 pops up overnight and then promptly goes red after the NYSE opens. Then one of the Fed sock-puppets makes a comment about oil bottoming and the S&P 500 takes off like Roman candle.  Overnight gold was also up about $4.  A report hit the tape that some of the ECB members wanted more money printing.  Money printing is a fundamental event that should send gold inexorably higher.  Instead, gold was slammed $10 as soon as the news item hit the tape.

This drool that is served up from the policy makers and political leaders in the U.S. is nothing short of a laughable insult to our collective intelligence.  But, then again, it would seem that this country has slid down that slippery slope into idiocy.   I received this email from a colleague who is an investment advisor.  He’s one of the few that understand what is happening in this country.  Clearly his clients have been mesmerized by the clown show:

I can’t tell you how many times I have been in meeting with investors and explained common sense truths, only to have their eyes completely glass over.  Usually, they immediately proceed to ask me about Amazon, Netflix, Apple and Google.  People really are that clueless.  One of my clients, that owns PHYS, told me he really didn’t want any more than 10% gold and wanted me to look at cloud computing stocks.

I had another client leave me recently because we had an allocation to gold, cash and stocks.  They went to Fidelity and purchased 4 growth funds and long term bonds.  They told me that Fidelity was a bigger company and they were bullish stocks.  I laughed myself to sleep that night and watched their account fall 8% the first week of 2016.

It is totally insane how clueless your average person with investable assets is.  I can’t even imagine how insanely ignorant the people that are that live paycheck to paycheck.  It’s truly scary because those people really and truly believe it’s the rich that keep them poor and they believe the government is their only ally.

When the day finally comes that gold is recognized as real money your average person is going to be totally shocked.  I have a feeling they will blame everyone and everything other than themselves and the good old government.

The hardest part about being a retail advisor is when you first understand that people, even smart people, can’t accept that their beliefs are misguided.  People will take it hard when it happens.

I leave you with a final quote I heard years ago:  “If what you knew to be true turned out not to be true; when would you like to know about it.”  Unfortunately, for most people, they only want to know when it is too late!

Jim Quinn, of The Burning Platform, with whom I often share email chuckles over what’s unfolding in this country, has written a concise commentary titled, “Maybe Valuations Do Matter,”  which encapsulates the essence of the madness into which our system has lapsed:

I wonder if the brainless twits and shills on CNBC will be telling their audience that the S&P 500 is now lower than it was in May 2014. That’s right. Anyone in the stock market over the last 20 months hasn’t gained a penny. The S&P 500 is now down 11% from its all-time high in May 2015. Only 40% or 50% more to go to reach fair value.

He concludes that that the stock market needs to drop at least 50% to be fairly valued.  I have not had a chance to probe him on this, but I suspect his non-public number is closer to my number:   80%.   We were on that path in 2009 until the Fed and Obama bailed out the banks in order to enable them to continue sucking wealth out of the system.

The latest contrarian editorial “vogue” is to refer to the recent .25% nudge in the Fed funds rate as “a policy mistake.”  Sorry, that’s not even remotely close to the truth.  The policy error committed in this country was preventing the markets in 2008/2009 from doing what they will eventually do anyway.   And EVERYONE will end up paying for that mistake.

Out, out, brief candle!
Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing. (Macbeth, Act 5 scene 5)

“Thanks For Your Advice To Short Amazon”

I was active on twitter Friday trading Amazon.  I had two round-trips between $445 and $450.  I’m under water on my core short position but I effectively reduced my cost-basis from the profits I made trading on Friday.  I also shorted some slightly out of the money calls on AMZN, which look like they’ll expire worthless, which means I get to keep the cash from shorting them.

Reader “JB” had this to say:   

Hey Dave, thanks for your advice to short Amazon! This is fun! After the freak spike last Friday I shorted lots of AMZN, and now I’m having fun watching the robots keep trying and failing to bring the Amazon Spike back to life!

This comment is from a reader who was an accountant in Silicon Valley during the tech bubble years:

So, when I say Amazon’s financials are the most misleading and misunderstood I’ve ever seen and their stock will crash mightily, we sound like we’re on the same page.

In it’s latest quarter AMZN reported that its Q1 net income swung from a $108 million in Q1 2014 to a loss of $57 million in Q1 2015.  Naturally Cramer was gushing over Amazon’s results.  I’d bet my dog’s life he doesn’t even understand the numbers that were reported. A Cramer recommendation is nearly 100% guaranteed to lose money for  the idiots who follow him.

There’s a funny scene in the 3rd episode of the new season of “Silicon Valley” in which one of the characters remarks that it’s the kiss of death for a tech company to generate profits and that the market will place more value on a company as it loses more money.  How true this rings with AMZN.

I bet most people reading this were not even aware that Amazon has piled on $9 billion in debt over the last two years.   AMZN burned 2/3’s of the cash last quarter from the $6 billion bond financing it did late in 2014.

Amazon is a Ponzi scheme that has been enabled by nearly twenty years of continuous Fed money printing and financial market bailouts. Although shorting AMZN requires the ability and willingness to actively manage your risk exposure, it will ultimately be a grand-slam home run trade.  Click on the pic below to learn more:


New Home Sales: Lumber And Houston Are Crashing

As we well know, the media and Wall Street have been pumping this idea, fraudulently, that the housing market is in recovery.   As part of this bubble-blowing, the homebuilder stocks have run up to valuation levels that are higher now than at the peak of the housing bubble in 2005/2006.

All of them now have as much debt and inventory as they did back at the bubble peak on a current unit sales level that is 1/3 the level of peak bubble unit sales.  It is beyond stunning.  I know the hedge funds that are playing to the long side are all-in.   In other words, the money that is available to move into the homebuilder stocks is already deployed.   Now the hedge fund community needs to generate demand from retail investors in order to complete the “next greater fool” cycle.  Perhaps this is why Jim Cramer was pumping three homebuilders on Mad Money last week:  Cramer LOVES Homebuilder Stocks (link).

Anyone with a brain cell in their skull knows that Cramer has been mathematically proved to be THE best contrarian indicator in the stock market.

Since Cramer ignores all fundamentals in favor of pumping the stocks the hedge funds pay him to pump, let’s look at two perfect fundamental indicators.

First is the price of lumber, which is in virtual freefall – it’s down amost 3% today:


I got news for the housing market bulls, the price of lumber falls because demand for lumber relative to supply falls. If the price of lumber is falling like this – especially given that we’re being told that the economy is doing well – it means homebuilders are not buying lumber to build new homes. Note: a “housing start” does not necessarily mean a home is physically being built to be called a “start.”

Second:  “Houston, look out below.”   Aaron Layman is a real estate professional in Houston, focusing on Katy/West Houston.  He has a blog in which he reports reality about the housing market down there.   As it turns out, new construction sales in Katy/West Houston plunged 40% year over year.  This is not because of bad weather.   You can read Aaron’s work here:  Aaron Layman 

What is occurring in Houston is a signal for what is developing in the rest of the country.   It’s not the “bad weather, dog ate my homework” theory floated by Wall Street.   If bad weather was causing the price of lumber to drop, we should be seeing a bounce now.  In fact, according NOAA, the month of March was warmer than normal over most of the country.

The economy is beginning to deteriorate at an accelerating rate.  Every day the stock market is pushed higher by the Fed, it becomes more dislocated from reality.   The homebuilder stocks are more dislocated from fundamental reality now than they were at the peak of the bubble.   When downside reality grips the stock market, it will be particularly brutal on the homebuilder stocks.

Can We Believe Anything Coming From The U.S. Government?

It’s gotten to the point at which, if Obama got on t.v. and stated that the sun came up in the east today, I would have to search the internet to make sure there was not any evidence that it didn’t.   But of course, the majority of the U.S. population is now nothing more than what I’ll call “television zombies.”  The Government is well aware that if they plant anything on CNN and Fox News or in the NY Times and Washington Post that most Americans will believe it.

On Monday this week, reports started surfacing that Russia was selling gold.  First Soc Gen and then JP Morgan.  The reports cited “sources in Russia.”   When I read these reports I almost fell of my chair with laughter.  This is one of those examples in which American t.v. zombies will believe anything.  This is a “tell ’em 2 plus 2 equals 1 and I bet they swallow it hook, line and sinker” report.

To begin with, Russia has no need to sell gold.  In fact, Russia added 150 tonnes of gold to its Central Bank holdings in August, September and October.   It didn’t make any sense that Russia would then turn around and sell gold.  Why?   Russia runs a current account surplus – LINK.  It has cash on its balance sheet.  Something the U.S. can only dream about, as the U.S. Government has to issue debt every hour to fund itself.  The last time the U.S. sniffed a positive balance of payments was in the 1980’s.

Second, Russia just got through paying down a big chunk of sovereign debt during Q3.   It’s current Debt/GDP ratio is 10%.  The U.S. Treasury Debt to GDP is over 100%.  Note:  this does not include direct obligations like the debt of Fannie Mae and Freddie Mac now guaranteed by the U.S. Government.  The last time the U.S. had Debt/GDP of 10?   I don’t know, the Fed records only go back 1966 and the lowest that ratio got between then and now was about 30% – LINK.

The story planted in the media by the U.S. elitists just did not add up.  And then Russia released its November Central Bank balance sheet which revealed that it had bought another 600,000 ozs/17 tonnes of gold in November (source:  goldchartsrus.com):


Well, so much for the lie that Russia was selling gold to raise capital.  In fact, if Russia had sourced the gold it bought in November from the Comex – assuming the Comex reports, which are sourced from banks which lie, are valid – the purchase would have wiped out 78% of the gold which is listed as being available for delivery.  Russia did dump $10 billion in Treasuries in October.  Yes, Russia is selling U.S. Government bonds, not gold.

As the U.S. Government and Wall Street become increasingly desperate to hold onto their power – power which enables them to suck all the wealth out of our system – their lies and propaganda become increasingly blatant and absurd.   Of course, they can get away with it because they know that American zombies will believe it as long as  CNN, Fox, Bloomberg or CNBC reported it.