The Market Ticker
Commentary on The Capital Markets

I just saw an utterly amusing "interview" on CNBS with Jim Chanos in which he defended continuing to be short Valeant.

The problem is that his argument doesn't pass the third grade arithmetic test.

Let's start with the basics: When you are short your maximum profit, absent leverage, is 100%.

That is, if you short something at $200 a share (as Chanos did in this case) you can at most make $200/share, and for that to happen the stock has to go to zero.

So let's take Valeant.  He started at $200 and now the price is $35, which he's trying to talk down today.

Fine, except for one problem: He's gotten 82.5% of the maximum possible return out of that trade.

The only way he can make more than the original $200 is if he doubles into the position as it falls, which does allow him to make more but a price-recovery now takes that leverage and turns it into an ever-escalating loser!  It is very, very easy when doubling into a falling stock on the short side to lose vastly more than you originally could have profited.

Let's say you short a stock 100 shares of stock @ $100.  It falls to $50, which frees half your margin.  You add to the short and now are short 200 shares, but your blended "cost" is $75, not $100.  It then falls to $25 and you are ecstatic!  What do you do?

If the answer is "short more" you're asking to get your ass reamed; if the price just goes back to $50, which is well under your original short price, you are now underwater and instead of a big profit you have a big loss.  In fact if you went to the wall with that position you're going to get a margin call and not only will you have a big loss on paper you'll have a big crystallized -- that is real and due now cash loss.

You can have all the conviction you want but the fact of the matter is that whenever you have managed to get 82% of the maximum return possible out of a trade you are a damned idiot if you don't take the money.

I don't care how good you are; nobody is always right and when you're using leverage to double into positions, especially on the short side, it only takes one or two mistakes to blow you to bits.

Chanos has a good record, but he's gotten arrogant.  There's no logical or mathematical defense for making a bet on the short side, having it be right, getting 80% of the possible return out of the trade and remaining in it.  There's a clean argument when you're up 20 or 30% on a short to stay with it but not when you've gotten better than 80% of the maximum possible return on your trade.  No matter how convicted you are if you have that sort of gain on a short you take it.

To those who are following him in shorting Valeant here remember that your basis on a short is not $200, it's $34 and change.  If the price doubles he still has a profit, assuming he hasn't levered into the position but your account will be blown up.

CNBS, of course, never mentions this tiny little detail or asks people like Chanos to justify their continued position and table-pounding on that basis.

Gee, I wonder why?

View this entry with comments (registration required to post)
 

You're going to think I'm out of my mind, given my view on the pharmaceutical business (and medical industry in general) -- but it's Valeant.

Certainly, you had an even better entry down under $29, but here's the case for it: Current year earnings estimates of about $8.50 and next year estimates over $10.

That puts the P/E on current-year estimates at about 4.

A month ago this sort of number was justified given the outrageous execution risk, highlighted by a possible debt default due to failure to file scheduled reports.

But that report is now in, and it came without the expected qualified opinion from their auditors.  In other words the auditors signed off on it rather than reserving judgment.

This is a very over-levered firm but it does have a 28% operating margin.  Further, the forward estimates include an expectation of major rollbacks of recent drug price hikes, so that's already in the forward expectations, and free cash flow is sufficient to cover debt obligations.

I expect the firm to sell non-core assets in an attempt to de-lever, which they really need to do.  But given the shake-up in the boardroom, including activist involvement directly (on the board), I believe it will get done.

The largest risk today would be a large spike in market interest rates over the next two years -- not a move higher, but a reactionary spike out of The Fed that would balloon their debt carrying costs before the company can get leverage down to a more-manageable long-term level.  The ratings agencies have already signaled that they're becoming more comfortable with the firm having a path out of the hole, and I tend to agree with them in that regard.

This is not a risk-free play by any means, but over the next 12-18 months I do think it could be a double, assuming the opinion of their auditors is valid.

The longer-term options don't look attractive, unfortunately, with implied vols above 70% -- you're going to pay, and big, to buy calls out far enough for this speculative shot to work, and the price of the stock itself is high enough that this is a true play, not an effective zero-cost option (as is often the case with stocks under $10.)

In general I don't like the market here.  I don't care for the technical picture at all and the fundamentals suck.

But.... if you told me I had to take a play in the market right here, right now, with the overall market trading at nose-bleed multiples and a very high probability of someone tossing the table over the next year resulting in a loss of at least 20 and perhaps 50% -- this is where I'd go with a small enough amount of money to not be too upset if I wind up losing half in the pursuit of a double.

View this entry with comments (registration required to post)
 

Is that the sun I see this morning?

It might be.

Look folks, I don't trust Trump.  Then again I don't trust politicians generally, no matter who they are, simply because they have a proven record of lying and yet while their lies are never punished ours are turned into felonies whenever those they empower are asking the questions -- including themselves!

So here's the challenge before us: As I've pointed out repeatedly in these pages since 2009 when the health care debate came into the forefront of American politics, and turned into Obamacare, we have only two choices fiscally as a nation:

1. Enforce the law against hospitals, doctors, pharmaceutical firms and those running clinics and diagnostic centers.

OR

2. Our nation will be fiscally and, in all probability politically destroyed.

This is not hyperbole.  It is arithmetic.

Anyone denying arithmetic is not only a fool they're both a tyrant and a thief.

To those who claim to be "conservative" yet who have failed to act on this matter for the last three decades: You're liars, thieves, tyrants and unfit to be citizens of this nation -- you most-certainly are not conservative.  Deliberately subverting the rule of law, whether done by action or intentional inaction, disqualifies you on all counts.

To those who claim to be "evangelicals" or "Christians" yet who have failed to act on this matter for the last three decades: You are not Christian; no person who is can permit the sort of ravenous theft and fraud that has driven the expansion of this racket to nearly a full 20% of our economy.  You are Satanists to an individual and that's a fact. Either repent here and now or own and be proud of your serpent behavior.

The laws in question are very clear.  15 USC (collectively), otherwise known as the Sherman, Clayton and Robinson-Patman acts declare that attempting to restrain trade or fix prices is felonious at a federal level.  Further laws at the state level typically declare that it is a criminal act to, through any means, deceive people as to the cost of a good or service or bill them at a rate exceeding that quoted without their affirmative and prior consent.

There are other laws that also bear on this matter, including laws prohibiting extortion (the obtaining of something, particularly money, through threats or force) which facially appear to be violated thousands of times on a daily basis by the medical and insurance industries. Then there are laws that prohibit discriminatory pricing; the usual means of getting around this is to claim that the "chargemaster" price is the actual price but that then turns the so-called "negotiated price" on your EOB from the insurance company into a kickback to the insurance firm which is also prohibited in many cases and in those where it's not that's taxable income to the insurance company as debt forgiveness yet they have never been prosecuted for the outrageous level of tax evasion -- to the tune of over a trillion dollars of undeclared and untaxed income a year -- that such a scheme involves.

Hillary Clinton, should she win the Presidency, will not only refuse to address this problem she'll make it worse.  We know this because she, along with her husband Bill, tried to cram down our throat what is now Obamacare when Bill was in office -- an attempt to take a set of facially unlawful acts by an industry and compel compliance through the use of government force.

Trump has hinted at dismantling this scheme, but he hasn't come out with a full-throated intent to do so.

He needs to, and he needs to do it now, explaining why it has to happen and what will come if we both do and don't take that path.

To be clear, doing it will not be painless.  There will be an industry that is turned on its head and, for a short time, a nasty recession.  We must accept this, because in doing so we will take roughly 15% of the cost structure out of not only your personal life but also that of every business in America.

This will not end drug R&D in the United States or anywhere else.  It will cause prices to go up elsewhere in the world, in some cases by a lot, but it will also cause them to come down here in America by as much as 85%.

It will render paying cash for medical care, even fairly complex care, practical for most Americans.  For those events where it is not it will turn the cost of insurance into a bill similar to that which is paid for homeowners insurance on a modest home -- a reasonable and routine expense, since with the cost of care coming down by 85% so will the cost of insurance similarly fall.

It will permanently resolve not only the Federal Deficit and, over 30 or so years, the entirety of the federal debt, it will also permanently resolve the financial problems our state and local governments face -- threats that if not addressed will cause property and other taxes to rise to unpayable levels for most Americans.

By replacing the federal deficit with a 30-year unbroken records of surpluses it will also take the current ~2% loss of real purchasing power that you have suffered every year for the last 30 and turn it into a 2% compounded annual gain over the same amount of time.  You may not get a raise but you don't need one when you are gaining 2% in real purchasing power each and every year; over 30 years this will almost double your real buying power without a single penny of increase in your wages.

And finally the dramatic reduction in business cost will mean that firms will flock to both manufacture here and run their offices and administrative functions in the United States, freed from what is currently certain fiscal disaster that any reasonably-competent CEO can and has foreseen and thus is trying, in today's business climate, to avoid.

Will Trump do any of the above?

Maybe.  Or maybe not.

But unlike the other candidates he has hinted at it, and he knows where the problem is, because he's lived with it through the 1990s forward, as have I.  As a former CEO myself this was the issue I identified while running MCSNet that was guaranteed to destroy my company financially given sufficient time if it was not addressed.

Competitive pressures are always present in any business; they're a function of the market and part of the job is navigating them.  Arithmetic is not something you can navigate; you must face it and, if you cannot convince the political powers that be to change the underlying facts that lead to these disasters you have no choice but to move as much of your operations as possible away from the jurisdictions where these disasters will take place, lest your company be destroyed.

We have a choice in this country and the time to choose is now.  In 2009 my best estimate was that we had 10 years left before the fiscal pressures reached the point of doing critical and possibly irreversible damage.

It is now 2016, and that means we have less than four years remaining.

We either act now or we fail to act at all, and our decision determines whether the light that I see this morning is in fact the dawn of a new and better day..... or an oncoming train.

View this entry with comments (registration required to post)
 

2016-05-03 18:31 by Karl Denninger
in Politics , 300 references
 

You ran a sleaze-filled campaign from the start, beginning with your outright fraudulent (knowingly so) claims about Ben Carson dropping out.

You followed it up by playing a page from Kim Jung-Un's book, literally, taking delegates you were not entitled to both through games in some states (which made late changes to the rules) and in the post-election delegate selection process itself.  "Legal" under the letter of the law, perhaps, but the mark of a tyrant.

And then you added a woman who has destroyed tens of thousands of American jobs, was heavily involved in bankrupting one iconic US firm (Lucent) and damn near destroyed a second (HP) as your VP "choice."

All the while your own father claimed you were "chosen by God" ("anointed") to be President -- a claim you never refuted, nor did you ever refute the words of multiple preachers with whom you were directly affiliated and appeared with on stage that have repeatedly argued for homosexuality to be rendered a felony and, in at least one case, for said persons to have meted out to them a biblical-style punishment (that is, to be murdered.)

But tonight, Ted, you're done.

You have lost decisively.

Donald Trump, like him, hate him or think he's the antichrist, not only beat you he tattoed you, gathering not just a plurality but a majority of the vote if the early results hold, exactly as he did in every contest on the East Coast just a couple of weeks ago.

It's over Ted. Religious zealotry is not limited to Islam, although it's far more-prevalent there than in Christianity.  You thought you could get away with it Ted, you, your father and your pals.  But it didn't work:  You have been recognized by the people as a vicious snake.

You can either go peacefully or screaming like a petulant child, but you're going.  You can either continue your destructive, puerile and tyrannical screech-fest and in doing so risk destroying the party you ran under with what will be nothing more than an unremitting series of temper tantrums and shenanigans, or you can call for the party to come together and coalesce behind the man who is going to win the nomination, slithering off into the night.

That's the choice before you this evening Ted.

Make a wise decision.

Not for the Party, for after tolerating your crap in this campaign without a word the Republican Party deserves to be destroyed.

No, for your own naked ambition.  For your own Senate seat two years hence, assuming you can produce a CRBA or some other form of documentation that you didn't gain said seat by fraud in the first place.  For a renewed shot at, assuming said documentation exists, the nomination either four or eight years hence -- that is, if you can make a few wiser decisions and the American people forget how much of a vicious snake you are.

The latter I'm sure will happen, because Boobus Americanus is well-understood by you.

The former?

I won't take that bet.

Update: It appears naked ambition wins, and Cruz is leaving the race.  It's about damn time.

View this entry with comments (registration required to post)
 

2016-05-03 11:26 by Karl Denninger
in Politics , 287 references
 

There's a decent chance that today marks the last day Ted Cruz has any claim to being serious in his attempt at the Republican nomination for President.

It would appear that a number of his tactics, which I remind you he telegraphed very early in the race with his campaign's sleaze aimed at Ben Carson, are finally resonating with Republican voters.

The delegate-stealing that has taken place across the country in various states is the sort of optic you never want to present as a politician, despite the fact that nearly all politicians will win by any means they can.  Deliberately ignoring votes is the mark of a King -- or tyrant -- and evokes images of such luminaries as Kim Jung-Un, Mao and similar.  How anyone in their right mind could reasonably conclude that such a tactic would not backfire in the United States is beyond me, but apparently Cruz believed exactly that, because it has been the hallmark of his campaign since the beginning.

Then there's the Fiorina pick for VP, which frankly boggles my mind.  This woman has a record of destroying tens of thousands of American jobs, being largely responsible for the gross abuse of leverage that destroyed Lucent in its entirety as a firm, nearly destroying HP and not holding a single executive-level job since.  The only person who was enriched by her tenure at those two firms was Fiorina herself; putting her on the ticket was tantamount to declaring that you intend to personally loot the Treasury of the United States!  The only argument I can see for her on the ticket is a puerile attempt to play the woman card.

The voters of this nation are often described as ignorant, asleep or even stupid but there comes a point at which being financially raped gets your attention, and it appears Cruz has crossed that threshold.

We shall see when the returns come in this evening from Indiana.

View this entry with comments (registration required to post)
 

Main Navigation
MUST-READ Selection:
Dawn In America?

Full-Text Search & Archives
Archive Access
Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.

NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.

The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.

The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.

Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.