Tag Archives: market crash

Utter Insanity…

Financial Markets, Market Manipulation, U.S. Economy, , ,

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

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

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

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

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

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

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

Semiconductor Chips Are The Modern Dutch Tulip Bulbs

Financial Markets, Market Manipulation, U.S. Economy, , , ,

The semiconductor stocks continued melting up last week until Intel threw some cold water on the Dutch tulip bulb price-chasing party. TXN reported Tuesday after the close. Revenues declined 5% from the year-earlier quarter. The management stated that “demand continued to slow across most markets. TXN then said Q2 revenues would drop 10% from Q2 2018. It said earnings would be down 13%. Management also explained that historically down-cycles last 4-5 quarters. With the Company 2 quarters into a down-cycle, it would seem that the “green shoots” sighted by some companies in Q1 are nowhere in sight. TXN insiders have been very heavy sellers of the stock.

The chart below is a good example of how the hedge fund algo and retail daytrader momentum chasers operate:

TXN closed around $116.50 before it reported. On the headline “beat,” TXN stock spiked up $6 almost immediately. Price-discovery then set in, as the after-hours traders dumped shares in response to the fundamental reality of TXN’s earnings report. The stock closed after-hours at $113.70, down nearly $9 from the initial reaction to the headlines.

But then on Wednesday Dutch tulip-mania gripped TXN’s stock price. TXN opened green from Tuesday’s regular close and traded as high as $118.99. This is despite the Company’s lowered guidance for the next few quarters. The last time TXN experienced a two-quarter sequential decline in revenues was in 2001 during a recession.

The only news that might have affected TXN’s stock price on Wednesday was a warning about possible further deterioration in its business that accompanied Amphenol’s Q1 earnings report. But Amphenol’s report should have affected TXN’s stock negatively. This market action is exactly like the price-chasing action in late 1999/early 2000.

Semiconductor stocks are the 2019 version of Dutch tulip bulbs. Recall the price of Dutch tulip bulbs rose to insanely high levels during the mid-1630’s, as people chased the price of Tulip bulbs higher, hoping to re-sell them for a profit. With no warning, the price crashed in February 1637.

That’s how the dot.com bubble behaved, including the sudden sell-off that began in March 2000 without any prior warnings other than common sense. I expect that is the same path that the chip stocks will follow. The chip stocks are melting-up in price in complete divergence from the underlying fundamentals. Whereas previously several companies expressed hope for green shoots in the second-half of the year, the last few companies to report (Siltronics, Nanya, TXN and Amphenol) have not mentioned the possibility of a recovery in the sector for the second half of the year.

Xilinx (XLNX) reported a “miss” on Wednesday after the close. Its stock plunged 17% on Thursday. Prior to that, the stock was trading at an insane 12x sales. XLNX’s data center business was down 12% sequentially and 7% yr/yr (the cloud growth is slowing).

Intel reported an obligatory revenue and EPS “beat.” But the market finally payed attention to guidance. INTC cut full-year and Q2 guidance. Management said customers were becoming more cautious, especially in China. Data center inventories are larger than was commonly thought. INTC also said it expected a much more difficult flash memory market. These are chips used in consumer electronics, scientific instrumentation, robotics and medical electronics. INTC stock dropped 9% on Friday.

The chip stocks are setting up for an epic sell-off. Trump can slap the Fed around like a race-horse’s ass while making juvenile demands for lower rates and more money printing all he wants. At some point the collapsing underlying economic fundamentals will remove the termite-eaten legs from beneath the market’s barstool.

The commentary above is an excerpt from the latest Short Seller’s Journal. To learn about the semiconductor stocks I’m shorting and recommending to my subscribers, please visit this link: Short Seller’s Journal information.

The Stock Market’s Great Fool Theory

Financial Markets, Market Manipulation, U.S. Economy, , ,

The current stock market is the most dangerous stock market I have seen in my 34+ year career as a financial markets professional. This includes 1987, 1999-2000 and 2007-2008. The run-up in stocks has been largely a product of momentum-chasing hedge fund algos on behalf of the large universe of sophisticated hedge funds which are desperate for performance. In the context of the obviously deteriorating economic fundamentals, the performance-chasing game has become a combination of FOMO – “fear of missing out” – and the Greater Fool Theory – praying someone else will pay more for the stock than you just paid. There’s also likely some official intervention going on as well per the chart below.

Most, if not all, of you are aware of the degree to which the Trump Administration – primarily The Donald and Larry Kudlow – are using the ongoing the trade negotiations to issue opportunistic headline statements about the progress of a potential deal at times when the market appears ready to drop off a cliff and for which Trump’s advisors know the hedge fund fund algos will respond positively. This chart shows this “positive trade war news” effect (from Northman Trader w/my edits):

The problem with relying on this device is that eventually the market will fatigue of “false-positive” news releases and revert to bona-fide price-discovery.

To see an example of the algos’ response to a headline report and the subsequent “price-discovery” action, let’s examine the release of Bed Bath and Beyond’s (BBBY – $17.99) earnings. BBBY announced its Q4 2018 earnings on Wednesday this past week after the close:

The initial headlines reported an earnings “beat.” The algos drove the stock from its $19.40 closing price to as high as $21.27 on those headlines. But in the real world, the details of BBBY’s financial statements showed that sales declined both in Q4 vs Q4 2018 and for the full-year 2018 vs 2017. Even adding back the large impairment charge which BBBY took in Q4 this year, operating income was still down 37% vs Q4 2017. The stock closed Wednesday’s extended hours trading session 18% below the headline-driven high-tick. This is what happens when reality gets its claws into the market.

The best example of the Greater Fool Theory right now is the semiconductor sector. Semiconductors are “hyper” cyclical. The companies mint money in a strong economy and come close to hemorrhaging to death in recessions. The SMH ETF has gone up 55% since the Fed/Trump began re-inflating the stock bubble. Some individual stocks have nearly doubled.

I’m sorry I missed the opportunity to get long this sector on December 26th. But, given that the move up has been in complete defiance of the actual industry fundamentals, would I have held onto a long position until today? Probably not. The momentum-junkies have been chasing the sector higher with fury based on the faith in the “second-half of 2019” recovery narrative currently preached by CEO’s who have to deliver bad results in Q1 and take a chain-saw to guidance for 2Q. But the message is: “trust me, there’s a huge recovery coming in Q3”

Semiconductor CEO’s are notorious for rose-colored forecasts for the market out in the future. Interestingly, a German wafer manufacturer issued stern, if not refreshingly honest, guidance for 2019 when it said that previous guidance was “under the condition that order intake would need to revive meaningfully in the second half of 2019.” The Company went on to explain that “because of the general economic slowdown and geopolitical uncertainties as well as ongoing inventory corrections in the whole value chain, the timing of a market rebound is not visible.”

Wafers are the building block for semiconductors and integrate circuits. Siltronic is a leading global wafer manufacturer. If Siltronic is seeing a meaningful decline in wafer orders, it means the companies that make the semiconductors and integrated circuits are flush with inventory that reflects lack of demand from companies that use chips to manufacture the end-user products.

The higher probability trade right now is to short the semiconductor sector (along with the overall stock market). Trading volume across the board is declining, standard market internals are fading and sentiment is back to extreme bullishness (Barron’s cover two weeks ago wondered, “is the bull unstoppable?”).

I can hear a bell in the distance signalling the top. I suspect a large herd of price-chasers will realize collectively all at once that there’s going to be a rush to find the next Greater Fool but the Greater Fool will be those stuck at the top.

The above commentary is an excerpt from my weekly subscription newsletter. I bought puts on a semiconductor stock today that has gone parabolic despite horrendous numbers for Q4.  I’ll be discussing that stock and a couple others this Sunday. To learn more, click on this link:  Short Seller’s Journal information

Gold And Silver May Be Setting Up For A Big Move

Financial Markets, Gold, Housing Market, Market Manipulation, Precious Metals, U.S. Economy, , ,

Gold and silver are historically undervalued relative to the stock and bond markets. The junior mining stocks overall are at their most undervalued relative to the price of gold since 2001. Gold’s relative performance during the quarter, when the stock market had its best quarterly performance in many decades, is evidence of the underlying strength building in the precious metals sector.

Furthermore, the stock market is an accident waiting to happen. By several traditional financial metrics, the current stock market is at its most extreme valuation level in history. This will not end well for those who have not positioned their portfolio in advance of the economic and financial hurricane that is beginning to “move onshore.”

Bill Powers invited on to his Mining Stock Education podcast to discuss the precious metals sector and the economy:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

The Powell Helium Pump

Financial Markets, Gold, Housing Market, Market Manipulation, U.S. Economy, , , ,

The stock market has gone “Roman Candle” since Fed Chairman, Jerome Powell, gave a speech that was interpreted as a precursor to the Fed softening its stance on monetary policy.  Not that intermittent quarter-point Fed Funds rate nudges higher or a barely negligible decline in the Fed’s balance sheet should be considered “tight” money policy.

Credible measures of price inflation, like the John Williams Shadowstats.com Alternative measure, which shows the rate of inflation using the methodology in place in 1990, show inflation at 6%.  The Chapwood Index measures inflation using the cost of  500 items on which most Americans spend their after-tax income.  The index is calculated for major metro areas and has inflation averaging 10% (The John Williams measure which uses 1980 Government methodology also shows the current inflation at 10%).

Using the most lenient measure above – 6% current inflation – real interest rates are negative 3.5% (real rate of interest = Fed Funds – real inflation).  The “neutral” interest rate would reset the Fed Funds rate to 6%.  In other words, the Fed should be targeting a much higher Fed Funds rate.

So, if the economy is booming, as Trump exclaims daily while beating his chest  – and as echoed by the hand-puppets in the mainstream media – why is the Fed relaxing its stance on monetary policy?  The huge jump in employment, per the December jobs report, should have triggered an inter- FOMC meeting rate hike to prevent the economy from “over-heating.”

In truth, the economy is not “booming” and the employment report was outright fraudulent. The BLS revised lower several prior periods’ employment gains and shifted the gains into December. The revisions are not published until the annual benchmark revision, on which no one reports (other than John Williams). Not only will you never hear or read this fact from the mainstream financial media and Wall Street analysts, most if not all of them are likely unaware of the BLS recalculations.

The housing market is deteriorating quickly. Housing and all the related economic activity connected to homebuilding and home resales represents at least 20% of GDP. And the housing market is not going to improve anytime soon.  According to a survey by Fannie Mae, most Americans think it’s a bad time to buy a home even with the large decline in interest rates recently.

Several other mainstream measures of economic activity are showing rapid deterioration:  factor orders, industrial production, manufacturing, real retail sales, freight rates etc. Moreover, the average household is loaded up its eyeballs with debt of all flavors and is sitting on a near-record  low savings rate.  Corporate debt levels are at all-time highs.  In truth the economy is on the precipice of going into a tailspin.

The stock market is the only “evidence” to which Trump and the Fed can point as evidence that the economy is “strong.”  Unfortunately, over the last decade, the stock market has become an insidious propaganda tool, used and manipulated for political expediency.  The stock market can be loosely controlled by the Fed using monetary policy.

The stock market can be directly controlled by the Working Group on Financial Markets – a subsidiary of the Treasury mandated by a Reagan Executive Order in 1988 – using the Exchange Stabilization Fund. Note:  anyone who believes the Exchange Stabilization fund and the Working Group are conspiracy theories lacks knowledge of history and is ignorant of easily verifiable facts.

Trump referred to the stock market as a “big fat ugly bubble” in 2016 when he was running for President with the Dow at 17,000.  If it was a visually unaesthetic sight back then, what should it labelled now when it almost hit 27,000 in 2018?  Trump blamed the recent decline in stock prices on the Fed.  Worse, Trump has put inexorable political pressure on the Fed to loosen monetary policy and stop nudging rates higher.  Note that this debate never covers the topic of “relative valuation…”

The weekend before Christmas, after a gut-wrenching sell-off in the stock market, the Secretary of Treasury graciously interrupted his vacation in Mexico to place a call to a group of Wall Street bank CEOs to lobby for help with the stock market.  The Treasury Secretary is part of the Working Group on Financial Markets.  The call to the bank CEOs was choreographically followed-up by the stock market-friendly speech from Powell, who is also a member of the Working Group.

The PPT combo-punch jolted the hedge fund algos like a sonic boom.  The S&P 500 has shot up 10.8% in the ten trading days since Christmas.  It has clawed back 56% of the amount its decline between early September and Christmas Eve.

In reality, the speech was not a “put” because a “put” implies the installation of a safety net beneath the stock market to stop the descent. Rather, the speech should be called, “Powell’s Helium Pump.”  This is because the actions by Mnuchin and Powell were specifically crafted with the intent to drive the stock market higher.  It’s worked for a week, but will it work long term?  History resoundingly says, “no.”

Make no mistake, this nothing more than a temporary respite from what is going to be a brutal bear market.  The vertical move in stocks was triggered by official intervention. It has stimulated manic short-covering by the hedge fund computer algorithms and panic buying by obtuse retail investors.

Investors are not used to two-way price discovery in the stock market, which was removed by the Federal Reserve and the Government in late 2008.  Many money managers and retail investors were not around for the 2007-2009 bear market. Most were not around for the 2000 tech crash and very few were part of the 1987 stock crash.

The market’s Pied Pipers have already declared the resumption of the bull market, Dennis Gartman being among the most prominent.  More likely, at some point when it’s least expected, the bottom will once again fall away from the stock market and the various indices will head toward lower lows.

In the context of well-heeled Wall Street veterans, like Leon Cooperman, crying like babies about the hedge fund algos when the stock market was spiraling lower, I’m having difficulty finding anyone whining about the behavior of the computerized buy-programs with the stock market reaching for the moon.

The Fed’s Frankenstein

Financial Markets, Gold, Housing Market, Market Manipulation, U.S. Economy, , , ,

“Commentators keep asking why the Fed can’t raise rates if the economy is so strong? They still don’t realize that the economy was never strong. They confuse a bubble for strength. Without 0% rates and QE the bubble can’t survive. But a return to those policies kills the dollar” – Peter Schiff on Twitter

I made that same argument about the Fed funds rate, the dollar and why the Fed has to keep “nudging” the Fed funds rate higher in a podcast conversation with James Anderson at Silver Doctors last week.

Yesterday’s 1000-point spike up in the Dow may have been the largest one-day point gain in Dow, but it was far from the largest percentage point gain. The two largest percentage point gains occurred in October 2008: a 11.08% gain on October 13, 2008 and a 10.88% gain on October 28, 2008. Those two days took the Dow just above 9,000. A little more than four months later, the Dow closed at 6,626. Yesterday’s market action was nothing more than evidence that the Fed’s Frankenstein has gone off the chain…

Despite official prevention efforts, two-way price discovery has been introduced to the stock market. The Establishment, lazy, entitled and fattened-up on the 10-year stock bubble, has gone into convulsions over the possibility that the stock market will do anything but move higher. The Wall Street Journal published an article blaming the Christmas Eve stock market massacre on the algos. Even well-seasoned market veterans like Leon Cooperman were whining about the two-way price action and the role of HFT-driven hedge fund algorithm trading. Where were these cries of distress when the market was driven relentlessly higher by QE-armed algos over the last 10-years?

Some chart “experts” have labeled the market “extremely oversold.” But the stock market has been extremely overbought for the better part of the last 8 years. By what measure is the market “extremely oversold” in this context? Looking at a monthly chart of the SPX going back to 1999, the MACD was at it’s most extreme overbought by far at the beginning of 2018.

But the current sell-off has barely moved the needle on the monthly MACD. It’s nice to draw symmetrical geometric shapes and lines which are fit to charts ex post facto (i.e. Monday morning armchair QB). But the fundamentals beneath historically overvalued financial assets are cratering very rapidly.

The drop in stocks since early October has done little to correct the extreme condition of overvaluation – aka “the bubble.” Using real numbers to calculate preferred valuation ratios used by “analysts,” rather than manipulated Government GDP/inflation and phony GAAP numbers used by these “analysts,” the overvalued condition of the stock market the most extreme in history.

A coordinated Central Bank-engineered bounce is to be expected and certainly there’s extreme political pressure in the U.S. for this. But more intervention preventing true price discovery merely defers the inevitable rather than fixing the underlying systemic problems. Furthermore, as evidence of the market’s reaction on Monday after reports hit the tape that the Treasury Secretary (head of the Working Group Group on Financial Markets) was convening the CEO’s of the six biggest banks to discuss the market sell-off, official intervention serves only to signal to the markets that something is profoundly wrong with the system, contrary to official propaganda.

Wednesday’s 1000-point price-spike reflects a completely dysfunctional stock market. Just like the big moves in October 2008, it also foreshadows a much steeper sell-off coming. The story did not end well for Shelley’s Frankenstein. Neither will it end well for the Fed’s creature. It’s going to get a lot more painful for those who have been conditioned to believe that stocks only rise in price.

Short Rallies, Cover Sell-Offs

Financial Markets, Housing Market, Market Manipulation, U.S. Economy, , , ,

I think we can all agree, it was an interesting week last week in the stock market, to say the least. For the week, the Dow was down 2.9%, the SPX was down 3.9% and the Nasdaq was down 3.8%. All three indices closed below their 200 dma. It can be argued that, on a short-term basis, the stock market is “oversold” using the MACD as an indicator. However, it appears that hedge fund algos are being re-programmed to start selling the “V” rallies that have characterized this stock market for the last ten years – something I suggested in a previous SSJ would eventually happen.

An argument can easily be made that the stock market could be cut in half from the current level and still be overvalued. I made this argument in 2007 to friends and colleagues. Back then the SPX dropped from 1,576 to 666 – more than cut in half (57%). And if would have fallen farther if the Fed and the Bush/Obama Governments had not intervened. If the SPX drops 57% this time around, it would take the SPX down to 1,274. I believe it could easily fall farther than that.

Despite the abrupt nature of the sell-off over the past month, the stock market potentially still has a long way to fall:

The chart above is a weekly time-frame that encompasses the 2007-2009 decline. The stock bubble this time around is significantly more extreme than the previous bubble. In fact, by many measures, this is the most overvalued stock market in history. I included the MACD to illustrate that, on a weekly basis, the SPX is not even remotely oversold. I sketched in a white line of “support.” While I’m sure every market analyst their favorite “technically-based” area of support, the line I drew is around the 2,550 area on the SPX.  Below that line, there’s about 400 points of “air.”

The above commentary is an excerpt from the latest Short Seller’s Journal. Some of my recent home run shorts include Tilray, Wayfair and Netflix. The issues includes strategies for shorting Tesla, Amazon and several semiconductor stocks. You learn more about this newsletter here:   Short Seller’s Journal information.

“I’m up about $40k because of your short ideas. So thanks for that!” – Subscriber who joined in mid-June, 2018

A Large Decline In Stocks Accompanied By A Huge Move Up In Gold

Financial Markets, Gold, Market Manipulation, Precious Metals, U.S. Economy, , , ,

Elijah Johnson invited me onto the Silver Doctor’s precious metals podcast to discuss why mining stocks are historically cheap and why an expected crash in the stock market will be accompanied by a soaring precious metals sector.   We also discuss why Trump is beating up the Fed over rate hikes:

Note on my Mining Stock Journal. I mentioned a highly undervalued intermediate gold and silver producer in the podcast. I also want to note that occasionally I issue “sell” or “avoid” recommendations. I happened to notice yesterday that Novo Resources was below $2.  A year ago I strongly urged my subscribers who owned Novo  in my October 19, 2017 issue to sell the shares when the stock was above $6. Here’s what I said:

I am following this saga with fascination because it’s a great study in mass crowd psychology and investing. It blows my mind that this stock can have a $1.3 billion market cap with almost no evidence of a mineable resource other than small, pumpkin-size “seeds” of gold samples. I exchanged emails with my junior mining company insider to get some interpretation of the results and affirmation of my view: “These nugget deposits are very difficult to model and drive mining engineers absolutely nutz! This is what happened with Pretium’s first shot at a published resource at the Brucejack project in BC. The gold is coarse and not equally and predictably distributed, so the consultant had a very difficult time modeling the deposit and therefore coming up with an agreeable resource estimate.

You can learn more about the Mining Stock Journal here:  Mining Stock Journal information

Netflix’s Giant Ponzi Scheme

Financial Markets, Market Manipulation, U.S. Economy, , , ,

A colleague/friend asked today how I thought the “FANG saga” would end.  I replied that I don’t know about GOOG and FB, but AMZN is maybe worth $50/share as it burns cash every quarter despite manufacturing GAAP “net income” so it’s hard to tell for sure – it could be worth less.  NFLX is eventually going to have to restructure its debt, which means the equity is worth zero.

NFLX soared $50 after-hours today after it reported an earnings “beat” for its Q3.  But, per its statement of cash flows, NFLX’s operations burned $690 million for the quarter, 33% more than Q2 and nearly triple the operations cash burn in Q1.  For the first nine months of 2018, NFLX’s operations have incinerated $1.45 billion.   You can see the numbers here:  NFLX Q3 financial statements.  Note:  NFLX uses an unconventional method of reporting its financials, posting them to its website in a read-only spreadsheet format that makes it a pain in the ass to read and analyze the numbers.

How does NFLX manage to show positive net income yet burn hundreds of millions of dollars each quarter?  It’s the magic of GAAP accounting.  I did a detailed analysis for my Short Seller’s Journal subscribers last year.  Each quarter NFLX has to spend $100’s of millions on content.  Most companies like NFLX capitalize this cost and amortize 90% of the cost of this content over the first two years.   Amortizing the cost of content purchased is then expensed each quarter as part of cost of revenues.  Companies can play with the rate of amortization to lower the cost of revenues and thereby increase GAAP operating and net income.

Of course, the accounting “devil” is always in the details of the cash flow statement, which Wall Street, financial media and bubble-chasing stock jockeys never bother to read.  While NFLX shows increasing operating and net income each quarter on the income statement, it also shows a big increase in cash burn from operations each quarter.  The cash burn is from money spent on content.  The net income is generated by reducing the amount of content expense amortization each quarter relative to the amount spent on content each quarter.  Despite the stock market-charming earnings “beat” each quarter, NFLX’s cash outflow exceeds cash inflow each quarter.  In simple terms, NFLX is a giant Ponzi scheme.

In the analysis I did for my subscribers in July 2017, I demonstrated this accounting Ponzi mechanism:

The ratio of cash spent on content in relation to the amount recognized as a depreciation expense can be used to determine if NFLX is “stretching out” the amount depreciation recognized on its GAAP income statements in relation to the amount that it is spending on content. In general, this ratio should remain relatively constant over time.

For 2014, 2015 and 2016, this ratio was 1.42, 1.69 and 1.80 respectively. When this ratio increases, it means that NFLX is spending cash on content at a rate that is greater than the rate at which NFLX is amortizing this cash cost into its GAAP expenses. If NFLX were using a uniform method of calculating media content depreciation, this number should remain fairly constant across time. However, as content spending increases and GAAP depreciation declines relative to the amount spent, this ratio increases dramatically – as it has over the last three years. A rising ratio reflects the fact that NFLX has lowered the rate of depreciation taken in the first year relative to previous years. It does this to “manage” expenses lower in order to “manage” income higher.

In the first nine months of 2018, this ratio was 1.70, which explains largely why NFLX’s rate of GAAP “earnings” growth is declining.

To pay for its massive cash flow burn rate, NFLX has to continually issue more debt and stock.  Earlier this year NFLX issued nearly $2 billion in junk bonds.   For the full year 2014, NFLX had $5.5 billion in revenues, its operations generated positive $16.5 million in cash. The Company had $900 million in debt and $3 billion in non-current content liabilities.  Fast forward to Q3 2018.  The Company has $14.7 billion in LTM revenues and the operations incinerated $1.93 billion LTM.  NFLX has $8.3 billion in long term debt, and $8.1 billion in content liabilities.   Debt and content liabilities tripled.

Liabilities and debt obligations are growing faster than revenues and cash flow burn, the latter of which grows at a double-digit rate every quarter – sequentially.  Cash out is growing at a faster rate than cash in.  The difference is made up by borrowing from investors. This is the definition of a Ponzi scheme.

The problem with NFLX’s business model is that it keeps its subscription rate low enough to attract new subscribers every quarter at a rate that gives Wall Street and stock-jockeys a Viagra-induced erection.  But NFLX does not charge enough for its product to cover expenses.  If NFLX were to raise the cost of what it sells to a level that would cover its expenses, its subscriber-count would plunge.

NFLX exists thanks to the massive amount of money printed by Central Banks globally, which has injected more cash into the financial system than investors know what to do with.  That’s enabled NFLX to continue floating debt.  But this game is  coming to an end and it’s only a matter of time before NFLX stock  crashes and burns.

This is why insiders have been dumping stock indiscriminately.   They were unloading shares up until October 11 – three business days ago – presumably the last day before the earnings blackout.  I don’t care if the sales are “automatic.” If insiders thought the stock deserved to go higher, or was not going lower, they would turn off of the “automatic” sell switch. In the last three months alone, insiders have dumped over 400,000 shares and bought zero.  Follow the money…

The Fed: Lies, Propaganda And Motive

Financial Markets, Gold, Housing Market, Market Manipulation, Precious Metals, U.S. Economy, , , , ,

The agenda of the Fed is to hold up the system for as long as possible. The biggest stock bubble in U.S. history has been fueled by 10 years of negative real interest rates. The only way to justify that policy is to create phony inflation statistics. Based on historical interest rates and based on the alleged unemployment rate, a “normalized” Fed funds rate should be set at 9%, which reflects a more accurate inflation rate plus a 3% premium. The last time the unemployment rate was measured at 3.7% was October 1969. Guess what? The Fed funds rate was 9%. I guess if you live an a cave and only buy TV’s and laptops, then the inflation rate is probably 2%…

Silver Doctor’s Elijah Johnson invited me to discuss the FOMC policy decision released on Wednesday afternoon:

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:  Short Seller’s Journal information and more about the Mining Stock Journal here:  Mining Stock Journal information.