Tag Archives: tech bubble

The Stock Market’s Great Fool Theory

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

When The Stock Market Reversal Happens, It Will Be A Whopper

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

Before I saw that quote from Hussman on Twitter, I was contemplating how the trading patterns this year in bond and precious metals markets remind of the way they were trading in 2008 before the financial system de facto collapsed.  Similarly,  the tech stocks right now remind me of the blow-off top that occurred in tech stocks in January/February 2000 just before the Nasdaq collapsed. Whether intentional or not, the Fed has quickly re-inflated the tech bubble that was punctured in September 2018.

Semiconductor stock bubble – The tech bubble in the late 1990’s was led by the semiconductor sector and the dot.coms. 98% of the dot.coms taken public during that time are no longer around. The semiconductor industry is “hyper”-cyclical. It has a beta of 11 vs. the economy. Right now the global economy is in melt-down mode. Just ask the IMF, BIS and World Bank. The Fed and Trump have recklessly reflated the stock bubble that led to the all-time high in the stock market. The semiconductors closed at an all-time high on Friday. It’s sheer insanity given that industry fundamentals are melting down.

The semiconductors seem to be the most responsive to trade war headlines that promote optimism. But the stock prices of these companies have completely disconnected from reality. Every possible consumer-driven end-user product market that uses semiconductors is contracting. As an example, Samsung warned on Thursday that it’s Q1 profit would be down 60% from Q1 2018, citing declines in prices for memory chips and lower demand from OEMs for screens, like the OLED display that Samsung makes for Apple’s iPhone.

Samsung’s inventory is now twice the size of two of its primary competitors. One of those competitors is Micron (MU – $41.72), which admitted that its inventory had soared to 137 days and was on its way to 150+ days in the current quarter. The slashing of capex by chip manufacturers has barely begun.

Semiconductor sales fell 7.3% in February from January and 10.6% from February. Globally semiconductor sales fell across all major categories and across all regional markets (not just China) in February. In North America, chip sales were down 12.9% from January and 22.9% from February 2018 (vs. down 7.8% in February in China sequentially from January and down 8.5% from Feb 2017).

The trade war has nothing do with the sales crash in the chip industry. And the “green shoots” seen in the “blip” in China’s PMI which ignited the stock market last Monday is not confirmed by the PMI data coming from Japan and South Korea, two of China’s largest trading partners. In short, when semiconductor stocks reverse from this insane run higher, they will literally rip in reverse. DRAM average selling prices (ASP) plunged over 20% in Q1 2019. The ASP is projected to drop another 15-20% in Q2 and a further 10% drop in Q3. So much for the 2nd half “recovery” that several chip company CEO’s saw in their crystal ball during the latest quarters’ conference calls (Micron, Lam Research, etc).

Inventories of all categories of semiconductors are extremely high because the demand for the end-user products (smartphones, autos, electronics) is plummeting, which means the inventory of those products is soaring as end-user demand contracts. The best news is for shorts looking for contrarian signals is that Cramer has been on his CNBC show recently pounding the table on chip stocks. This can only mean that his Wall Street sources are trying to move big blocks of stock out of their best institutional clients.

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The commentary above is an excerpt from my latest Short Seller’s Journal.  In that issue I present a detail rationale with data to explain why the U.S. economy is tanking and I provide several stocks to short, along with put option suggestions and capital management advice.  You can learn more about this weekly newsletter here:  Short Seller’s Journal information.

“Man, this is high-value newsletter.  Especially for me.” – Subscriber “Scott” from Michigan

Larry Kudlow Wants A 50 b.p. Cut In Fed Funds – Why?

The stock market has been rising relentlessly since Christmas, riding on a crest of increasingly bearish economic reports. Maybe the hedge fund algos are anticipating that the Fed will soon start cutting rates. Data indicates foreigners and retail investors are pulling cash from U.S. stocks. This for me implies that the market is being pushed higher by hedge fund computer algos reacting to any bullish words that appear in news headlines. For example, this week Trump and Kudlow have opportunistically dropped “optimistic” reports connected to trade war negotiations which trigger an instantaneous spike up in stock futures.

“U.S. economy continues to weaken more sharply and quickly than widely acknowledged” – John Williams, Shadowstats.com, Bulletin Endition #5

The real economy continues to deteriorate, both globally and in the U.S. At some point the stock market is going to “catch down” to this reality.

The graphic above shows Citigroup’s Economic Data Change index. It measures data releases relative to their 1-yr history. A positive reading means data releases have been stronger than their year average. A negative reading means data releases have been worse than their 1-yr average. The index has been negative since the spring of 2018 and is currently well south of -200, its worst level since 2009.

The Treasury yield curve inversion continued to steepen last week. It blows my mind that mainstream media and Wall Street analysts continue to advise that it’s different this time. I would advise heeding the message in this chart:

I’m not sure how any analyst who expects to be taken seriously can look at the graphic above and try to explain that an inverted yield curve this time around is irrelevant. As you can see, the last two times the Treasury curve inverted to an extreme degree, the stock bubbles began to collapse shortly thereafter.

The data in the chart above is two weeks old. The current inversion is now nearly as extreme as the previous two extreme inversions. This is not to suggest that the stock market will go off the cliff next week. There’s typically a time-lag between when the yield curve inverts and when the stock market reacts to the reality reflected in an inverted curve. Prior to the great financial crisis, the yield curve began to invert in the summer of 2006. However, before the tech bubble popped, the yield curve inversion coincided with the crash in the Nasdaq.

Another chart that I believe reflects some of the information conveyed by the inverted yield curve is this graphic from the Fed showing personal interest payments. Just like in 2000 and 2008, households once again have taken on an unmanageable level of debt service expense:

Obviously the chart above is highly correlated with stock market tops…

The Conference Board’s measure of consumer confidence dropped in March, with the Present Situation index plunging to an 11-month low. It was the biggest monthly drop in the Present Situation index since April 2008. What’s interesting about this drop in confidence is that, historically, there’s been an extraordinarily high correlation between the directional movement in the S&P 500 and consumer confidence. The move in the stock market over the last three months would have suggested that consumer confidence should be soaring.

The Cass Freight Index for February declined for the third straight month. Even the perma-bullish publishers of the Cass newsletter expressed that the index “is beginning to give us cause for concern.” The chart of the index has literally fallen off a cliff. Meanwhile, the cost of shipping continues to rise. So much for the “no inflation” narrative. The Cass Index is, in general, considered a useful economic indicator. Perhaps this is why Kudlow wants an immediate cut in the Fed Funds rate?

The U.S. Economy Is In Big Trouble

“You’ve really seen the limits of monetary and fiscal policy in its ability to extend out a long boom period.” – Josh Friedman, Co-Chairman of Canyon Partners (a “deep value,” credit-driven hedge fund)

The Fed’s abrupt policy reversal says it all. No more rate hikes (yes, one is “scheduled” for 2020 but that’s fake news) and the balance sheet run-off is being “tapered” but will stop in September. Do not be surprised if it ends sooner. Listening to Powell explain the decision or reading the statement released is a waste of time. The truth is reflected in the deed. The motive is an attempt to prevent the onset economic and financial chaos. It’s really as simple as that. See Occam’s Razor if you need an explanation.

As the market began to sell-off in March, the Fed’s FOMC foot soldiers began to discuss further easing of monetary policy and hinted at the possibility, if necessary, of introducing “radical” monetary policies. This references Bernanke’s speech ahead of the roll-out QE1. Before QE1 was implemented, Bernanke said that it was meant to be a temporary solution to an extreme crisis. Eight-and-a-half years and $4.5 trillion later, the Fed is going to end its balance sheet reduction program after little more than a 10% reversal of QE and it’s hinting at re-starting QE. Make no mistake, the 60 Minutes propaganda hit-job was a thinly veiled effort to prop up the stock market and instill confidence in the Fed’s policies.

Economic data is showing further negative divergence from the rally in the stock market. The Census Bureau finally released January new home sales, which showed a 6.9% drop from December. Remember, the data behind the report is seasonally adjusted and converted to an annualized rate. This theoretically removes the seasonal effects of lower home sales in December and January. The Census Bureau (questionably) revised December’s sales up to 652k SAAR from 621k SAAR. But January’s SAAR was still 2.3% below the original number reported. New home sales are tanking despite the fact that median sales price was 3.7% below January 2018 and inventory soared 18%.

LGI Homes reported that in January it deliveries declined year-over-year (and sequentially) and Toll Brothers reported a shocking 24% in new orders. None of the homebuilders are willing to give forward guidance.  LGI’s average sale price is well below $200k, so “affordability” and “supply” are not the problem (it’s the economy, stupid).

The upward revision to December’s new home sales report is questionable because it does not fit the mortgage purchase application data as reported in December. New homes sales are recorded when a contract is signed. 90% of all new construction homes are purchased with a mortgage. If purchase applications are dropping, it is 99% certain that new home sales are dropping. With the November number revised down 599k, and mortgage purchase applications falling almost every week in December, it’s 99% likely that new home sales at best were flat from November to December. In other words, the original Census Bureau guesstimate was probably closer to the truth.

The chart to the right shows the year-over-year change in the number of new homes (yr/yr change in the number of units as estimated by the Census Bureau) sold for each month. I added the downward sloping trend channel to help illustrate the general decline in new home sales. As you can see, the trend began declining in early 2015.

Recall that it was in January 2015 that Fannie Mae and Feddie Mac began reducing the qualification requirements for Government-backed “conforming” mortgages, starting with reducing the down payment requirement from 5% to 3%. For the next three years, the Government continued to lower this bar to expand the pool of potential homebuyers and reduce the monthly payment burden. This was on top of the Fed artificially taking interest rates down to all-time lows. In other words, the powers that be connected to the housing market and the policy-makers at the Fed and the Government knew that the housing market was growing weak and have gone to great lengths in an attempt to defer a housing market disaster. Short of making 0% down payments a standard feature of Government-guaranteed mortgage programs, I’m not sure what else can be done help put homebuyers into homes they can’t afford.

I do expect, at the very least, that we might see a “statistical” bounce in the numbers to show up over the couple of existing and new home sale reports (starting with February’s numbers). Both the NAR and the Government will likely “stretch” seasonal adjustments imposed on the data to squeeze out reports which show gains plus it looks like purchase mortgage applications may have bounced a bit in February and March, though the data was “choppy” (i.e. positive one week and negative the next).

E-commerce sales for Q4 reported last week showed a 2% annualized growth rate, down from 2.6% in Q3. Q3 was revised lower from the 3.1% originally reported. This partially explains why South Korea’s exports were down 19.1% last month, German industrial production was down 3.3%, China auto sales tanked 15% and Japan’s tool orders plummeted 29.3%. The global economy is at its weakest since the financial crisis.

It would be a mistake to believe that the U.S. is not contributing to this. The Empire State manufacturing survey index fell to 3.7 in March from 8.8 in February. Wall Street’s finest were looking for an index reading of 10. New orders are their weakest since May 2017. Like the Philly Fed survey index, this index has been in general downtrend since mid-2017. The downward slope of the trendline steepened starting around June 2018. Industrial production for February was said to have nudged up 0.1% from January. But this was attributable to a weather-related boost for utilities. The manufacturing index fell 0.4%. Wall Street was thinking both indices would rise 0.4%. Oops.

The economy is over-leveraged with debt at every level to an extreme and the Fed knows it. Economic activity is beginning  to head off of a cliff. The Fed knows that too. The Fed has access to much more in-depth, thorough and accurate data than is made available to the public. While it’s not obvious from its public posture, the Fed knows the system is in trouble. The Fed’s abrupt policy reversal is an act of admission. I would say the odds that the Fed starts printing money again before the end of 2019 is better than 50/50 now. The “smartest” money is moving quickly into cash. Corporate insiders are unloading shares at a record pace. It’s better to look stupid now than to be one a bagholder later.

Gravity Rules: End Of The Bubble Is In Sight

“Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.

The quote above is from Ben Graham, considered to be the father of value investing. Graham followed the crowd in 1929 and lost a small fortune for himself and his investors. Graham collected his learning experience from that disaster and eventually wrote, “The Intelligent Investor,” which is considered to be the one of the best investment books ever written. Warren Buffet enrolled at Columbia to study under Graham. Graham’s teachings formed the foundation of modern money management theories. To this day it is considered the value investor’s “investment bible.”

Wall Street is incentivized to sell the idea that stocks only go up. When I started on the junk bond desk as a salesmen (before switching to trading), I was told my job was to “reach into the portfolio manager’s pocket and take as much money as you can from his pocket and put it into your pocket.”

Wall Street greed has been around as long as stocks have been trading (the NYSE was founded in 1792). But it’s hard to blame stockbrokers for the damaging effects of greed. Stock-peddlers are like well-paid psychologists. They take advantage of human greed. Without investor greed, the stock brokerage business would be considerably smaller than it is today.

A stock bubble can’t exist without investor greed. It starts with greed. It moves into the “bubble” phase when greed is consumed by hysteria. The U.S. stock market has moved into the “hysteria” stage. This would be the point at which the bubble has almost reached maximum inflation. The upward movement in stocks is dominated by a handful of the stocks that, for whatever reason, are moving higher at the fastest rate of levitation. The graphic on the next page shows visually what “bubble to hysteria” looks like.

I reached the conclusion the stock market has moved into the hysteria stage by spending time studying the “Five Horsemen” (AAPL, AMZN, NFLX, FB, MSFT) + TSLA. Even during periods of the trading day when the Dow and SPX are go red, most or all of those six stocks remain green, sometimes moving higher while the broad indices move lower. It’s incredible to watch real-time.

“It’s not to late to catch a ride on the FANG rally” was a headline seen on CNBC last week. This is the type of hysteria that is reflected in the media at bubble peaks.

In the image above (click to enlarge), the graph on the left is the NASDAQ index since the election (from Jesse’s Cafe Americain). The graph on the right is the price-path that occurred during the Dutch Tulip Bulb mania of the 1630’s. You can see that both graphs go vertical. The vertical stage is driven by hysteria in which investors are terrified of missing the next move higher. It also ends with a decline, the rate of which is typically stunning.

The push higher in stocks like AAPL and AMZN is irrational, but TSLA has been infected with outright hysteria.

The worse the news on Tesla gets, the more quickly the stock seems to move up in price. Early in the week last week, Triple-A (the Auto Club group) announced that it was going to raise the its insurance premiums on Tesla cars by as much as 30%. A highway loss data study revealed that Tesla’s vehicles have higher claim numbers and repair costs vs. other vehicles in Tesla’s category. The Tesla S model claims were said to be 46% greater than the average number of claims for similar vehicles. Servicing those claims cost twice as much. The X model car reported a 41% higher crash-rate than similar vehicles and cost 89% more to repair.

In addition, it was reported on Monday that Toyota had unloaded the last of its remaining stake in Tesla before the end of 2016. It marked the end of a collaboration between Tesla and Toyota that began in 2010. Toyota announced that it plans to release its own fleet of long-range mass produced electric vehicles by 2020. Despite this blow of negative news about Tesla, the stock powered up over 8% last week before a late-day sell-off in the 5 Horsemen + Tesla inflicted a $19 reversal in TSLA’s stock price from its high Friday to the close. My puts, the June 30th $317.50-strikes, traded from Friday from a low of $1.06 to close at $2.40 on the bid side.

The graph below shows the price-path of TSLA’s stock since the election. Note that the graph looks very similar to the graphs of the NASDAQ/Tulip Bulb mania. In the 1800’s, writer Charles Mackay wrote a highly acclaimed book called, “Extraordinary Popular Delusions and the Madness of Crowds,” in which he presented his studies on crowd psychology and how it leads to financial manias, among other destructive events. The chart below reflects “crowd” madness as it applies to TSLA stock (the inset price-box from last Thursday morning) – click to enlarge:

While the NASDAQ has appreciated 22% since the election, TSLA’s stock, on deteriorating fundamentals, has shot up 191%. TSLA’s market cap now stands at nearly $61 billion. It burns over $1 billion per year in cash and its financials are riddled with what would have been considered accounting fraud 20 years ago. It sold 72.6 thousand cars in 2016. Compare this to GM, which has a market cap of $51 billion and sold over 3 million cars in 2016, and Ford, which has a market cap of $44 billion and sold 2.5 million cars in 2016.
To say that the action in TSLA’s stock price and its market cap is “insane” does not do justice to the word in “insane.” TSLA is the “poster child” for the mass hysteria that fuels investment bubbles. The problem with shorting TSLA is that the hedge funds are chasing its momentum higher, as investors as investors embrace the negative news events as a reason to pay more for the stock. As such, it’s hard to see a catalyst that will “correct” the price, like with retailers for instance. TSLA, along with AMZN, is one of the rare stocks which will continue levitating until it doesn’t – like a meteor that eventually burns out falls to earth.

In my opinion, the ride down will be worth the pain and blood-loss of sticking with a short bet on TSLA, which is why I continue to buy small quantities of put options that have been expiring worthless. I know at some point I’m going to catch a $100+ reversal in TSLA stock which will more than make-up for the small losses I’m enduring in the puts while I wait for that occurrence. Using puts protects me from the unknown magnitude of upside risk from shorting the stock. Plus, I don’t have make a “stop-loss” decision because I don’t have the theoretic “infinite upside” loss potential that I would face shorting the stock. With my loss capped, I can hang on to the puts through expiration. With a stock like TSLA, often a stop-loss exit is followed up by reversal to the downside, leaving the short-seller without a short position.

As we saw on Friday, TSLA stock can reverse to the downside quite abruptly and sharply. I can guarantee that some number of shorts covered as TSLA was soaring over $370, leaving them with no position when the stock reversed, closing at $357. I don’t want to recommend specific puts to use but I can recommend giving yourself at least four weeks of time. If I were putting on a new put position today, I would probably buy a very small quantity of the July 7th $340-strikes. If TSLA sells back to the $310 area before expiry, which could easily happen as $310 is where the last 2-week push up in price began, the puts would have an intrinsic value of $30. The current cost is about $10.

TSLA reminds me of Commerce One (CMRC), a B2B internet company that went from $10 to $600 in a very short period of time in late 1999 – 2000. It eventually went to $0. I shorted and covered small quantities of stock starting around $450. I was fortunate to have been short from the high $500’s when it finally topped out a $600. The volatility of this stock was extraordinary but persistence and “thick skin” paid off.

The above analysis and commentary is from the latest <ahref=”https://investmentresearchdynamics.com/short-sellers-journal/”>Short Seller’s Journal, in which I present a “Big Short” mortgage derivative stock that will eventually drop close to zero from it’s current price in the mid-teens.  You can find out more here:  Short Seller Journal info.

Microsoft’s Acquisition Of Linked-In Is Beyond Idiotic

I will say right off the bat that Microsoft’s stock is now one of my favorite short-sell candidates.  This is the 2000 tech bubble on steroids.  MSFT itself is extremely overvalued given that its revenues are down over 7% on a trailing twelve month basis compared to its FY 2015 ended June 30th.   Its net income is down 16% on the same comparison basis.   MSFT itself trades at a 38x trailing p/e with declining revenues and income.  It trades at 4.7x sales and 5.4x book value.

It’s been issuing debt like the U.S. Government in order to buy back shares, with its debt load increasing nearly 50%  since September, from $27 billion to over $40 billion.  Since June 2013, MSFT’s debt load is up 333% (from $12 billion).

MSFT’s valuation is in and of itself is insane given it’s debt-addled balance sheet and deteriorating business model.  Microsoft Windows 8 was a total abortion and Windows 10 is not much better.  Anyone with two brain cells to rub together uses the bare bones Windows 7 and the freeware Linux-based Microsoft surrogate software, which can can be downloaded for  free (or a gratis donation) and is superior to MSFT’s crap (see OpenOffice.org, for instance).

Now Microsoft has decided to layer nuclear waste on top of its own toxicity by acquiring Linked-In for over $26 billion.   This is a tragic, if not catastrophic, use of shareholder cash. Here’s LNKD’s net income history:  It reported GAAP net income going from $11.9 million in 2011 to $26.7 million in 2013.  Then it decided to use the Silicon Valley private equity unicorn stock valuation model and spend as much money on “R&D” as possible in order to generate losses.  And it has generated massive losses:  in 2014 it reported a $15.7 million loss. This ballooned to a $164 million loss in its FY 2015.  On a TTM basis, LNKD’s net income has plunged to nearly a $170 million loss.

And MSFT is paying for what?  This is from MSFT’s press release announcing the tragedy:

  • 19 percent growth year over year (YOY) to more than 433 million members worldwide
  • 9 percent growth YOY to more than 105 million unique visiting members per month
  • 49 percent growth YOY to 60 percent mobile usage
  • 34 percent growth YOY to more than 45 billion quarterly member page views
  • 101 percent growth YOY to more than 7 million active job listings   (LINK)

Anyone see ANY mention of those attributes generating any revenue, cash flow or operating income?   Remember when Maria Bartiromo and Joe Kernan used to crow about “clicks and eyeballs” to justify multi-billion market caps for internet businesses with nary a business model?  That’s what this acquisition is all over again.

MSFT on the surface is paying:  5.4x sales, 4x book value, 4.8x enterprise value (market cap + debt) AND 58x enterprise value to EBITDA.    Wait, anyone notice there’s no implied p/e ratio?  That’s because there’s no “e.”  But of course Wall Street has stuck a hockey stick net income forecast for FY 2017, so the implied “forward” p/e is 45x.

Microsoft’s acquisition of LNKD is about as idiotic as it would be to try and convince someone that the sun rises in the west and sets in east.   If anything, this deal is emblematic of an American systemic Ponzi scheme that has gone “off the rails.”

Linked-In is nothing more than a glorified jobs networking bulletin board.  Sure, as the system continues to unravel and more “business services” people lose their jobs, there might be a big jump in “clicks and eyeballs” on Linked-In.  But this will be out of desperation trying to find anyone on the Linked-In board who might offer a ray of hope for employment.  But no one will spend their unemployment check on LNKD’s idiotic premium services.   That will be money much better spent on whiskey and weed, which is exactly what MSFT’s upper management and board of directors must be ingesting to have come up with this idea.   MSFT is my lowest risk short-sell idea of the year.

The best part is that Jim Cramer is pounding the table hard with bullish commentary about this deal.   This makes the idea of shorting MSFT a slam-dunk.  It reminds me of his bullish call on Bear Stearns before Bear collapsed.

If you like this analysis, you might benefit from my Short Seller’s Journal.  Every week is present what I believe to be somewhat unique market insight, a minimum of two short-sell ideas, recommendations for using options and capital/trade management strategies.   My picks greatly outperformed the S&P 500 when the market dropped from early January to mid-February.  You can access the SSJ using this link:   Short Seller’s Journal.

David Stockman: Amazon And The Fantastic FANGs…

A Bubblicious Breakfast Of Unicorns And Slippery Accounting

Consider the case of Amazon. Its PE multiple on LTM net income of $328 million has dropped from 985X all the way to…….well, 829X! Likewise, it’s now valued at 97X its $2.8 billion of LTM free cash flow compared to 117X at year end.  In the same vein, Facebook’s LTM multiple on net income has dropped from 108X to 96X.

So the reason to revisit the FANGs, and the Amazon bubble in particular, is not because their market caps have come down to earth; it’s because once you get inside, another characteristic of late stage bubbles comes lurking front and center. Namely, the tendency for the accounting income of momo tech stocks at bubble tops to be bloated with non-sustainable revenues and profits from Silicon Valley burn babies…

…I was reminded of this possibility by an excellent post by Dave Kranzler at Investment Research Dynamics. In a piece called “AMAZON dot CON” he took me to task for being too kind to Jeff Bezos’s ponzi accounting.  Among other things, Kranzler went all the way back to the beginning and offered an even more dramatic juxtaposition of the bubble in the stock versus the reality on the ground:

Throughout its 25-year history as a public stock, AMZN has delivered a cumulative total of $1.9 billion in net income to shareholders. Jeff Bezos made $16 billion on AMZN stock in 2014.

You can read the rest of Stockman’s commentary on AMZN here:  Amazon And The Fantastic Fangs

AMAZON dot CON

Any question about the role Amazon stock plays in helping the Fed/US Government prop up the S&P 500?Untitled2

The more time I spend researching and observing AMZN, the more I”m convinced that it’s the biggest Ponzi scheme in the history of the stock market.

Throughout its 25-year history as a public stock, AMZN has delivered a cumulative total of $1.9 billion in net income to shareholders. Jeff Bezos made $16 billion on AMZN stock in 2014. Here’s the details:  Bezos’ Ponzi Scheme

Here’s what’s behind Bezos’ drive to transfer as much money from the stock market to his bank account: Bezos Has Amassed A $59 Billion Fortune – And Wants More. If you read through that article you’ll get a sense of what drives Bezos and how he operates.

Amazon is a Ponzi scheme in the sense that its business model requires sales growth every quarter in order to generate enough cash flowing in to the Company to enable it to pay the cash expenses flowing out of the Company.  This is one of the reasons AMZN is constantly running Prime membership 1st-year fee deals.  It needs the cash it receives upfront in order to help it fund cash payment Untitledexpense obligations.   The graph to the right shows one of AMZN’s basic problems.  AMZN offers free two-day shipping to Prime members.   Its cost of shipping eats up an increasing percentage of its sales revenues.   AMZN hides a lot of its expenses by making liberal use of the increasingly “grey” areas of GAAP accounting rules.  But you would never know this unless you dig deeply into the murky abyss of the footnotes to its financials.

The genius of Bezos is his ability bamboozle big investors and retail chimps into piling into his stock every time he announces another “big” idea.  The current massive bubble embedded in the valuation of AMZN’s stock is the $150 billion of AMZN’s $297 billion attributed to AMZN’s cloud  computing services business, “AWS.”   This is a business that represents about 7% of AMZN’s revenues.    That $150 billion is  21-times AWS’ trailing twelve month revenues and about 150-times  AWS’ trailing twelve month operating income.  Insane valuation multiples.

David Stockman published a piece last week which discusses the degree to which AMZN is an epic stock bubble.  However, even he is bamboozled by AMZN’s numbers. He gives AMZN credit for spending $11.6 billion on R&D.   This is what Bezos wants the market to believe.  Tech companies get a lot of stock market “cred” for showing high R&D “investment.”   But the $11.6 billion AMZN spends is not R&D.   Market professionals like Stockman are getting this “R&D” number from an expense line item in AMZN’s income statement called “Technology and Content.”  They automatically assume that number is R&D’s expense.  But it’s not. I like to dig into the bowels of 10Q and 10K filings and kill the market with truth.   This is from the footnotes to AMZN’s SEC-filed financials:

Costs to operate our AWS segment are primarily classified as “Technology and content.” Technology infrastructure costs consist of servers, networking equipment, and data center related depreciation, rent, utilities, and payroll expenses. These costs are allocated to segments based on usage. During Q3 2015, we expanded our technology infrastructure principally by increasing our capacity for AWS service offerings globally.

What analysts like Stockman assume to be R&D spending are, in truth, mostly the expense of operating AMZN’s website and its AWS business operations.  I detail this in my AMAZON dot CON report. In other words, AMZN is getting $10’s of billions of stock market love based on the idea that it is pouring billions into R&D – R&D that is in reality nothing more than standard operating expenses.

David Stockman and everyone else also use in their analysis the number that AMZN reports as “free cash flow.”  But I show in detail, based on using information that is found by digging through the footnotes in AMZN’s SEC-filed financials and by applying a deep understanding of GAAP accounting, that AMZN’s true cash flow is not even remotely close to the number used and reported by analysts and critics in their reports.  Again, my report is available here:  AMAZON dot CON.

As for the quality of revenues and operating income at AMZN’s cloud business, most of AMZN’s contracts are with Silicon Valley start-ups, most of which will not be around very long.  Moreover, the pricing for cloud computing services has undergone extreme price compression from competitive pressures. Here’s an anecdote from a contact of mine who runs a technology-based healthcare company:

Here’s a funny fact on AWS [Amazon Web Services] that again everyone seems to ignore or miss. I have a company and our AWS bill is coming up for renewal and the prices have dropped 90%+ in 3 years. And yet, a hyper deflationary commodity, that is being sold in mass quantity to profit-less start-ups, is worth perhaps $150B or more of AMZN’s market cap.  Epic.

Cloud computing services is the contemporary version of fiber-optics.  Remember that business, which drove a large portion of the late 1990’s tech bubble?   Level-Three Communications (Warren Buffet), Qwest (Phil Anschutz), Global Crossing (A JP Morgan sponsored Ponzi business).   The cost of accessing fiber optic networks dropped like a rock as fiber-optic overcapacity and technological advances invaded the business model.  The same dynamic has invaded cloud computing.

Global Crossing went bankrupt and reorganized into Level Three; Qwest renamed CenturyLink is a quasi-utility phone/communications company and survived the fallout from the fiber-optic bubble but its then-CEO, Joe Nacchio, was prosecuted for insider trading and financial fraud and spent six years in prison;  Level Three still operates but it’s stock, on a split-adjusted basis, dropped from a peak of $1,769 on Jan 31, 2000 to a current price of $53.

These examples show the type of hype, fraud and malfeasance which belie extreme financial bubbles.  I am highly confident that the same type of activities are occurring behind the “curtain” at Amazon.

Clearly, from the graph above, the Fed uses AMZN as one of its props to hold up the S&P 500 in order to maintain the illusion that the economy is fine.  But at some point, just like with every bubble stock in history, the gravitational pull of fundamentals will engulf AMZN’s stock price and send it plummeting.  Perhaps this has already begun:

AMZN11

Amazon (AMZN): Sheer Insanity

Amazon (AMZN) stock is breaking out to a new all-time high today.  The “catalyst” ostensibly was news reports out yesterday that AMZN added 3 million Prime members during the 3rd week of Decemeber (of course, reported by CNBC) – LINK.   The report suggests that AMZN has lifted “veil” on Prime.

But what is not reported in this article,  of course, is the fact that AMZN was offering a free one-month trial of Prime.  Hmmm,  a week before Christmas and I can get free two-day shipping on anything I order?  I’m surprised AMZN didn’t sign up 10 million Prime “members.”  I wonder if CNBC will do a follow-up report next month which discusses the “churn” rate on the 3 million new “members.”  “Churn rate” would be the number of free-trials which cancel after the free month.

CNBC also reported that AMZN had a “record breaking holiday” based on the fact that 200 million more items received free shipping this year, reaching a record number of shipments.  This may be a record in terms of shipments but “free” shipping costs someone money.  I don’t think UPS, Fed Ex and the USPS are shipping AMZN’s products at a loss.  Someone bears this expense.  In my AMZN dot CON report I show in detail how AMZN bears the cost of fulfillment and also does spectacular job of hiding this cost.

The Robo traders grabbed these headlines and started having a big party pushing the stock higher, which is up 32 points, or 4.8%, in less that two trading sessions.

Lost in all this excitement is notion that AMZN is the poster-child representing the fact that the U.S. financial markets are irrevocably broken.  The entire financial system, especially the stock market, has become one big fraud.  It’s reported that Apple’s shipments of the new iPhone from Taiwan manufacturers were cut 5-10%.  This is not happening because demand is strong.   The market doesn’t care, as AAPL is up over 2% today.

At $694/share, Amazon is trading at 988 times its trailing twelve month earnings per share of  70 cents.  This EPS is calculated using AMZN’s version of GAAP accounting.   Think about it this way:   How many of you would buy a business in which you pay $988 for every dollar that business earns?

The Fed likes to refer to a process in which it seeks to “normalize interest rates” – whatever that means.  Let’s assume we “normalize” AMZN’s p/e ratio based on the theory that AMZN can grow into a market p/e of 21 (roughly).   On a trailing twelve month basis, AMZN’s net income was $328 million.  AMZN’s net income margin over the last several years has been 1% or less.  Let’s assume AMZN’s net income margin can “normalize” to Walmart’s 5%.  In order to justify today’s price of $694/share, AMZN’s sales would have grow from $100 billion to well over $300 billion.   How realistic are these assumptions?

If AMZN were to price its products and services based on standard cost accounting methods, it would have to eliminate free shipping and raise the prices on the products it sells.  Many retailers are now matching any price on AMZN.  In this regard, AMZN’s “competitive” advantage is being eroded.  My stock research report shows in detail that AMZN’s reported “free cash flow” is highly misleading.  AMZN burns cash.

Oh but what about AMZN’s now-famously promoted cloud business?  Here’s an email I received from a reader who’s company uses AMZN’s AWS services:

Here’s a funny fact on AWS that again everyone seems to ignore or miss. I have a technology company and our AWS bill is coming up for renewal and the prices have dropped 90%+ in 3 years. And yet, a hyper deflationary commodity, that is being sold in mass quantity to profit-less start-ups, is worth perhaps $150B or more of AMZN’s market cap. Epic.

The point here is that – despite the heavy application of mascara on the wart-hog’s face – the bulk of AMZN’s cloud business is derived from the small tech start-ups being glorified by private equity firms but that will not be around in a few years.  The pricing of cloud computing services has been plummeting.   Sound familiar?  Anyone remember the “fiber optic” bubble that precipitated the internet/tech bubble?  Anyone remember a company called Global Crossing? GBLX filed bankruptcy in 2002.  i’m not suggesting AMZN will go BK, what I am suggesting is that AMZN’s cloud computing business is all hype and hope.  That $150 billion in market cap ascribed to AMZN’s cloud business will evaporate quickly at some point in time.

But here’s the coup de gras:  A friend/colleague who is a Prime member who brags about the fact that AMZN loses money on him forwarded an email to me he received from AMZN. He titled it “AMZN sinks to a new low.”   It turns out he received a “promotional credit” entitling him to a free digital HD copy of “Kung Fu Panda” on Amazon Video.  He has to use this credit by January 15, 2016.  The question is, who the hell wants to watch “Kung Fu Panda” even if it’s free?   Obviously this is a loss-leader marketing ploy designed to get him on to the website where he might pay for something.

The right to distribute this movie was not free for AMZN.  At some point someone along the food chain will have to pay for it.  AMZN pays for it up upfront and then washes the cost of this by capitalizing the expense on its balance sheet.  Eventually this game will come to an end, causing the stock to plummet.  Don’t ask me on the timing of this event.  No one knows.  Bezos doesn’t care because he unloads 100’s of thousands of shares every quarter.

Ultimately the shareholders will pay for this:  the funds who chased the stock price up to the stratosphere and the people who are invested in those funds.  It will not end well…

 

Amazon.com Is The Corporate Symbol Of Dystopic America

Several readers of my research report sent me an article from the NY Times titled:   Inside Amazon:  Wrestling Big Ideas In A Bruising Workplace.   The article describes a stunning Darwinian corporate culture in which employees must transform themselves into de-humanized Amazonian robots.

The article reads like a chapter from Aldus Huxley’s “Brave New World.  Employees are even encouraged and incentivized to report on each other:

The internal phone directory instructs colleagues on how to send secret feedback to one another’s bosses. Employees say it is frequently used to sabotage others. (The tool offers sample texts, including this: “I felt concerned about his inflexibility and openly complaining about minor tasks.”)

Without a doubt Jeff Bezos has become a cult of personality who has deluded employees to sacrifice and distort their humanity in order to conform to his empire of deceit, propaganda and fraud.

Lost in the NY Times article is that, despite the mania that has engulfed Amazon’s stock, and despite the vision of a highly motivated and productive workforce, Amazon has failed to generate any meaningful degree of profitability in its 21-year history.   In fact, as my research report shows in detail, Amazon’s GAAP operating margins have declined from over 6% in 2004 to near zero now (6% is standard for big retailers).

The article is worth reading if you think about it in the context of “Brave New World” and Orwell’s “Animal Farm.” But I would also suggest thinking about it – in the context of the facts presented in my AMAZON dot CON research report – the way you would think about Enron or Bernard Madoff.

The stock has been driven up to insanely absurd levels given the fact that Amazon burns cash like a trash incinerator. If you doubt this, then you need to read to my report.  I show how and why Amazon has failed – and will fail going forward – to generate real net income and will continue burning cash.  You can access my report here:   AMAZON dot CON.

My report shows in intricate detail from a technical accounting standpoint, which actual examples that are easy to understand, how Amazon hides its inability to make any money. Although the extreme intervention in the stock market by the Fed/Government makes it extremely challenging to short any stock right now, I believe that the market is starting roll over despite the manipulation.  As this happens, the market itself will lift the “emporer’s robe” on companies like Amazon and a brutal downside reality to the stock will commence.

Any professional money manager who owns a big position in AMZN with other people’s money is breaching their fiduciary duty if they don’t read my report and consider the facts presented.

From a reader of my report:

I audited many of the high fliers that crashed and burned, took companies public & was at the printers the day the bubble really burst which ultimately tabled that IPO. Then, was a CFO at a software company for a couple years during the really ugly times. My point is I’ve got a heavy tech background.   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