The Market Ticker
Commentary on The Capital Markets
2017-02-20 06:00 by Karl Denninger
in Health Reform , 664 references
[Comments enabled]  

It seems some of the state AGs might be reading my postings.......

But now generic drug executives can expect to face tougher legal repercussions, as evidenced by two federal court lawsuits filed late last year—one in November brought by Eatontown, N.J.-based Heritage Pharmaceuticals Inc. against two of its former executives, Jeffrey Glazer and Jason Malek, using the Racketeer Influenced and Corrupt Organizations Act (RICO), and one in December that 20 states have filed against six companies, including Heritage, after a major antitrust investigation by the state of Connecticut.

Racketeering and Anti-Trust eh?  Gee, that's a good start.

Now go after the hospitals and diagnostic centers and you'll really make progress.

Let me give you a hint: It takes 30 seconds to find a bill from a hospital that has a 90% discount for a certain "insurance."

There's extortion ("buy this insurance or be bankrupted if you need our services") and incidentally an illegally-tied sale (anti-trust again) -- and probably Racketeering there too, since the hospitals are all doing basically the same thing and if you can find a couple of people who are "in on it", well....

This crap has been illegal for over 100 years and yet nobody has been willing to bring charges and suits.

Until now, and at the state level. 


Do it and you get your face on Mt. Rushmore.
Don't do it and you have a failed presidency.

(Yes, I'm aware of the short term economic impact from doing it -- and it won't be pretty.  However, that won't last long, and the intermediate impact will be growth rates we haven't seen since right after WWII.)

View this entry with comments (registration required to post)

2017-02-18 06:00 by Karl Denninger
in Editorial , 2024 references
[Comments enabled]  


I'm roaming right now, and what I see is, well, disturbing.

Man came from ape, right?  Sort of, anyway -- whether you think God did it or Darwin was responsible, the path is mostly the same.  We argue agency, not outcome.

But what the hell has happened to people in the last 50ish years?

People of WalMart is supposed to be a spoof.  It's not.

People I knew who I haven't seen in 20, 30 years -- my God what happened to you?

I find old pictures, and gaze at them.  We all get older, we get some lines to our faces, our hair is more-gray, and similar.  But gee, is that it?  No.  And both you and I know it.  And that's just the physical side of things.

We have a divided nation.  Half wants to kill the other half.  More than a few actually mean it; it's not a metaphor, it's a desire.

"Let it go"?  You can't be serious.

If the change comes slowly among those you hang out with you don't really recognize it.  If you walk into a scene you haven't been in for the last 20 years and see the change "all at once".... well....

"I need a drink -- or six -- now" was my initial thought.

The next thought?  Sell everything, buy some land away from all this crap, put up a block house, get some chickens and goats and **** it all.


What the hell has this nation turned into?  It may have happened more or less slowly, but it's happened.  Yes, there are normal people left.  But how many?  In big cities, where the population is centered?  Good luck.

You may know that there's a "dystopian" video floating around out there that basically says that the big cities turning into literal hell is not fiction, but inevitable.  It's a government video.  I would poo-poo it except.... I'm seeing it right now.

Oh my.

Prayer is not only inadequate, it's idiotic at this stage.

View this entry with comments (registration required to post)

2017-02-16 05:00 by Karl Denninger
in Technology , 343 references
[Comments enabled]  

There is a common - and wrong - premise that "first mover" is an advantage.

Of course it is at the outset.

But it only continues to be if you continue to be the first mover -- that is, you always have "the outset."

As soon as anything you do becomes a commodity then "first mover" = first loser.

The reason is simple: You are the first one to buy the hardware and service necessary to do X and you get stuck with it on a depreciation schedule where the new entrants a year or two -- or five -- later get to buy the next few generations down the road which are more-efficient and far cheaper.

Thus on your "COGS" line -- cost of goods (services) sold -- you get murdered.

Witness Verizon.  Verizon was first mover to deploy LTE.  Unfortunately that means they got stuck with a bunch of older LTE gear that could not cleanly integrate with newer advanced services and was more expensive than the next versions that followed.

Verizon had a major market advantage -- for a while -- as a result.  AT&T went second trying to catch them.  T-Mobile came along after the first-generation gear was obsolete, put in second and third generation gear and is now murdering them with a lower cost structure and thus the ability to offer lower prices.

Who's winning?  T-Mobile.

That's not because Legere is a genius.  He's a brazen *******.  But by not being first he got the cost advantage as the market moved toward a commodity offering and now he's tattooing Verizon and, to a lesser extent, AT&T.

Sure, Verizon has coverage in more places than T-Mobile but that advantage is dwindling fast. They're now getting close to AT&T's coverage, and more-importantly in most cases they're both faster and cheaper.

A couple of years ago T-Mobile's coverage was vastly inferior and they had a lot of EDGE or even GPRS service -- woefully slow.  Now most of their network is LTE capable and it typically outperforms -- frequently by 2x and sometimes by 10x -- the speed of either AT&T or Verizon.

How can they do that and offer "unlimited" service for $70/month when nobody else can and does?

Simple: They weren't first and aren't stuck with depreciation on older-generation gear.

Now here's Amazon's problem: Their AWS service is largely comprised of older, "first mover" equipment.

Yes, they are deploying newer.  But that older stuff will be on their balance sheet and in their data centers for years under IRS depreciation schedules and they have to recover the cost of it.  The newer entrants do not have to do this since they were not first.  They installed hardware that is faster, costs less and consumes far less power (which you pay for twice in a data center -- first for the power, then again to remove the heat via your A/C bill.)

Don't underestimate the power and efficiency issue.  It's very, very real, as is the cost issue. A number of years ago a previous-generation Xeon processor in the primary server here cost many hundreds of dollars each -- just for the chip.  Now?  I can get pulls of a chip a generation further down that is both faster and has the built-in AES instruction set for $15.  Yes, I did, of course - around two years ago.

Today I could buy a replacement system board for a few hundred dollars that would consume less than half the power of the one that's in the case now and is much faster!  But that new board needs new RAM, which makes the cost even higher.

And this is where the problem lies for the existing installed base: It's prohibitively expensive to toss all that older stuff in the trash -- it still works and the capital cost of tossing and replacing it is large.  While MACRS rules have helped (reducing what was a 7 year depreciation schedule to 5) five years is a damned eternity in the computer world and the power and performance structure of newer units is likely to leave you disadvantaged to the tune of 400% by the time five years runs!

In point of fact I had quite a go-around with the accountants in the time of MCSNet that for a lot of gear that we owned we should be able to basically expense it since it had a useful operational lifetime that typically failed to span even two tax years. They told me I'd go to jail attempting that with the IRS......

This means that AWS has a natural disadvantage in cost structure that they cannot evade.  Witness places like Digital Ocean that offers virtual servers for $5/month.  Yes, really.  My secondary DNS has been over there for more than a year.  The storage is all SSD.  The prices are, well, insanely cheap.  Instances are easily spun up and torn down and can be as standard as you'd like.

Why is that service there instead of on AWS?  Because I couldn't approach Digital Ocean's pricing on AWS.

Folks, this isn't magic, and Bezos isn't immune to it.  Neither is Microsoft or IBM.  It's fact and it's a huge problem with any service that gets turned into a commodity.

Does it make any sense for firms that are "riding the cloud wave" to be getting the sort of valuations they are under this fact?  Hell no.  That reality inexorably turns into margin compression and when it does the alleged "value" in these offerings that the market is "pricing in" turn into a big pile of flaming dog****.

Don't be there when it happens.

View this entry with comments (registration required to post)

2017-02-14 09:10 by Karl Denninger
in Corruption , 755 references
[Comments enabled]  

There's a lot of crazy in DC.

Most of the time crazy is the order of the day in that town.

But the Flynn fiasco is not in the crazy train mold.  It's real, and it's trouble.

As a private citizen, and not in possession of classified information, Flynn is entitled to discuss whatever he wants with whoever he wants -- up to a point.  That's this thing called the First Amendment, and it applies to people who advise the President but are not formally part (yet) of a Cabinet or otherwise "in" government.  I remind you that Trump, as President-elect, was not yet President.

The bad news is that there is an actual law on this -- the Logan Act.  It was passed in 1799, believe it or not, and it provides that nobody other than "authorized persons" may discuss policy with foreign governments.  Since the Executive is exclusively charged with conducting foreign policy and Trump was not yet President, nor was Flynn yet a Cabinet member, it certainly applied to him.

There are several problems, however, with the act -- the biggest being this pesky thing called The First Amendment.  I will note that nobody has ever been actually prosecuted for violating this act since it was passed -- and that may be why.  I will note that during Obama's term a bunch of Senators published an open letter to the Iranian government regarding an active and real controversy (Iran's nuclear program) and specifically stating that Obama, of course, had a limited time remaining in office -- never mind the fact that what he negotiated never passed the Senate as a formal treaty.  They were not indicted.

So what's the correct read on this?  Probably not that Flynn broke an actual enforceable law, because I suspect the Logan Act is unconstitutional and the government knows it.  They have never actually tried to lock someone up using it because they're pretty sure it will be challenged and spiked if and when they do.

However, this leads to two more problems.  First is the bludgeoning of people with threats to enforce a known unconstitutional statute.  That sort of thing is itself a crime, under 18 USC 242 (violations of civil liberties under color of law or authority) and also a civil cause of actual (42 USC 1983.)  Yet nobody is ever indicted and prosecuted under that law and the only people who can violate that law are those who are government employees of some sort -- by definition!

The second problem, however, is the lying itself.  That's always a problem.  This incident almost-certainly doesn't rise to any sort of criminal standard, because Flynn was never questioned under oath -- and his post is not subject to Senate confirmation.

There are those who are involved in a screamfest about the fact that "someone" (probably the CIA) monitored the phone call and that this information got out.  Well, the "got out" part may or may not be a problem (in other words, the motivation for that is to be determined, and it sure smells bad) but the monitoring part is both expected and routine in this sort of circumstance.

Conversations across a national boundary in which one or both parties are not US citizens enjoy exactly zero protection against "diplomatic" interception -- and that's a fact.  Not only is it a fact with regard to the United States but it's a fact in regard to virtually every other nation and its spying apparatus as well and this fact is as old as nations are themselves.

So give me a break on the screaming about that which has no reality behind it.

Does this mark "the beginning of the end" for Trump?  I doubt it.

But don't think for a second this doesn't indicate a serious problem -- it does, on two counts.

First, what sort of mental midget has a sensitive conversation on an open, unencrypted channel into a foreign nation with someone in their government -- and especially when that nation is Russia?  You have to be an utter imbecile to not fully expect that conversation to be intercepted and recorded.  The stunning lack of concern for OPSEC is beyond outrageous and reaches right up into Trump and his choice of Flynn.  To top that off you have him lying about it, which means he really thought he got away with it!  Flynn's actions brand him as a ****ing idiot who has no business anywhere near anything sensitive, say much less classified -- period

Second, it does call into question whether there was, or was going to be, a blackmail potential within his advisory chain.  That is a problem, and a very real one, if it exists.

Don't think for a minute that DC doesn't run on that sort of crap.  May I remind you of Dennis Hastert, who was Speaker of the House while concealing the fact that he apparently diddled some boys before entering Congress and then paid off one of the alleged victims later on.  I don't care that he paid off the victim, and I find it amusing that he got busted for structuring financial transactions to try to avoid detection of the payoff.

But there is utterly nothing amusing at all about what appears to be factual, and that is that Hastert was in the position to and did choose what bills came to the House Floor and were passed, and those that were killed, during the time in which material information on his alleged diddling of little boys was hidden from the public but known to certain others who were thus able to use that information to shape American policy and law.

We have no way to know if that did or didn't happen, and I will note for the record that exactly nobody has investigated that series of events to find out exactly what laws were passed, or not passed, as a result of Hastert being blackmailed.  It's possible the answer is "none" -- but the fact there was a very real opportunity and that Hastert later paid off the kid means that the question remains open.

Why hasn't that been looked into?

I'll tell you why not: For the same reason that zero felony indictments have been leveled against the medical industry over what appear to be blatant 15 USC Chapter 1 violations -- a law that carries not only ruinous civil penalties but felony criminal penalties as well.

If you think this lack of indictment activity across nearly 40 years since the US Supreme Court killed the hope of "immunity" from same (in 1979) is some sort of "coincidence" you have an IQ smaller than my shoe size.  The overwhelming evidence is that said lack of indictment is in fact because too many people have ordered a very-illegal pizza, or something similar and equally bad yet it is concealed from public knowledge and thus they can be blackmailed with same and have been.

That, folks, is where you ought to focus your concern and attention when it comes to Flynn, and whether we dodged a bullet by getting rid of him or whether attempts, successful or not, had already been made to use that leverage.

View this entry with comments (registration required to post)

2017-02-12 06:00 by Karl Denninger
in Editorial , 1123 references
[Comments enabled]  

Looks awfully similar to 2008.

Rotation back and forth, with most of the gains coming in a handful of big names with big stories -- but no earnings to back them up.  Claims from the media, including most-notably CNBS, citing 2018 earnings projections that have built in 50% or more increases in earnings -- that have not happened yet -- to "justify" P/E ratios that today stand in the area of 40, 50, 100 or more on current earnings.  These same firms are themselves showing slower growth rates and increases in both spending on "new things" and decreasing margins, along with near-zero growth of customers in the United States.

In 2008 this was happening in banks and...... big tech.

Today it's happening (mostly) in big tech.  But those firms today are even further down the road (if they existed at all) than they were in 2008, and yet..... suddenly, we seem to have magically grown a few new continents for them to expand into (never mind that the revenue available from people in those places, thus far, appears to be near-zero on a per-person basis.)

The market always balances fear and greed; along with this nebulous thing called "liquidity" -- the availability of cheap credit to leverage forward results. What everyone intentionally refuses to consider is that leverage works both ways; it both amplifies profits and losses.  Every turn of the crank irretrievably impacts both in exactly the same amount.  If you buy back shares and reduce the float of your stock by 50% then your earnings are doubled on an EPS basis -- but when the worm turns and you take losses, the losses on an EPS basis are doubled as well.

Nobody believes there will be losses, you see, therefore there is no cost, no penalty, and no risk to turning the crank.

Uh huh.  Sure.

If you think firms like Netflix, Amazon, Facebook and similar are going to grow trees to the sky you're deluded.  Amazon managed to somehow nearly double SG&A expense this last quarter over the same quarter last year.  How did that actually happen and where was that expense from?  By the way, their sales did not double -- not even close. 

You can argue, if you'd like, that there's something special -- "water walking" of some sort -- by these firms.  There's not.  There is plenty of accounting gaming going on, but it's legal to do that within broad limits.  The onus is on you as an investor or trader to actually read said releases and figure out, if you can, what they're doing.  Like, for instance, exactly why Amazon's SG&A doubled -- from what section of their business are they hiding broken-out expenses to prevent you from evaluating, on a fair basis, what the forward profitability of that segment of the business is.....

I have considered banks uninvestable since before the crash.  The reason is simple: I cannot get my arms around their contingent liabilities because the law allows them to hide those liabilities to a degree that putting a number on them with any sort of accuracy is impossible.

You could forgive most of the people in the so-called "analyst" community in this regard up to a point.  You see, the world of ever-lower interest rates has been firmly in place since the 1980s.  That's driven better than half the gains in the markets since 1980 as a purely mathematical matter.  Without that the DOW would stand at 10,000 and the S&P at about 1200 today.

But how do you continue that pattern today when it's not possible to continue the ever-lower interest rate paradigm?  It's entirely possible that we could stall out here and never reverse -- that is, the 10 year Treasury could trade in a range of around 2.2-2.5% for decades.  It has before, and it might again.  But if it does that still doesn't help you expand leverage because you've already borrowed the money at the low rates of the last 10 years!

Note that firms like Netflix, with negative operating cash flow that has persisted through a period spanning yearsonly exist because of their ability to continue to turn that crank!

If that ability to disappears the firm is literally out of business because they have contracted to spend money over the next several years that they do not have, do not generate from operations and cannot raise -- this means their stock suddenly becomes worth zero.

It is not the absolute rate that determines which direction leverage goes it is the change in rate and direction of that change.  If there is no change then there is no change in the bias for leverage.  If rates rise then you wind up with a forced de-leveraging because any money borrowed not to be paid back but simply to be paid coupon upon cannot be held out -- either you pay back those loans or you default, and in a corporate environment that means the firm goes bankrupt and the stock value of said firm is zeroed.

When you look through the economy of today in the United States from 20,000' you find two things that stand out:

  • Forced extraction of money, often apparently in violation of black-letter felony law (e.g. 15 USC Ch 1), supported by either intentional refusal to prosecute or even government involvement in same.  Health care is the standout example, but not the only one. Forced "net neutrality" was one of them from the Obama era, and is the reason Netflix exists at the scale and pricing that it does in the US.  Anything that upsets that apple cart will detonate all the businesses dependent on it.

  • Ridiculous borrowing for uneconomic purposes such as stock buybacks and similar.  Borrowing funds is always dangerous.  It also, however, is sometimes a risk worth taking.  There is no such thing as life without risk.  The question is what's the risk, what's the reward, what's the timeline on that risk and what forward assumptions and their probabilities are you using to measure all three?  That last question, in the last 30 years and especially in the last six or seven has never been asked and expanded upon in public by any firm's public filings I've seen.

Finally, we appear to have a President that cares not for the boundaries of the Constitution when it comes to said extraction, nor will he enforce existing law.  The fact that Trump supports "civil forfeiture" is enough to disqualify him as a President standing alone.  That he has demonstrated no intention to act on medical monopolies is far worse, however, as while civil forfeiture is unlikely to impact you medical monopolies will, with near-certainty, impact either you or someone you love and care about at some point in your life.

You need only get into a car accident that you cannot foresee nor are at fault for to be victimized by this system even if only to a mild or moderate degree.  Your mother or father, or child need only get injured in a pure accident, such as by a snake bite to get rat****ed beyond words and face a quarter-million dollar charge they never consented to.  Unlike many of the injustices this one hoses nearly everyone at some point in their life and yet there is exactly zero outrage in the streets, state-houses or directed at the cops and other law enforcement agencies over any of it.

It was obvious to me in 1997 that the stock market was going to crash and the wonderkind would be zeros.  What people cite as "different" today is that firms like Facebook and Amazon have "actual earnings."  Well, perhaps, but that just changes whether the bottom number for their price is zero, or some small number over zero.  That you have a functional business that actually does generate something beyond what you spend doesn't make your 2% operating margin delivering goods, and what is rapidly trending toward a commodity-style 10% operating margin delivering services, worth the near-200 times earnings your stock sells for today on the premise that you can manage to hold 50% service margins along with the necessary companion expectation that sales volume will expand by a factor of 10.

Last time around the stupidity centered on the premise that the S-1 filings claimed somewhere north of 10x Global GDP for "expected outcomes" -- a radically stupid proposition that should have met with exactly zero willing buyers in the market.

This time around it centers on equally-stupid premises -- such as the idea that AWS is a $200 billion a year business operating at a 50% margin -- a pair of assumptions that together mean (1) there will be no competitors and (2) there will be no corporate data centers.  Either one of those presumptions standing alone is laughable.  Together they are hucksterism far worse than anything P.T. Barnum ever cooked up.

This sort of "analysis" by Wall Street and their willing mouthpieces in the media ought to be good for felony indictments because they are claims that have a statistical probability of occurrence less-likely than an asteroid hit on the White House in the next 72 hours.

Yet just as was the case in 2000, and in 2008, exactly nobody will face any sort of sanction for any of it -- just as nobody has for nearly 40 years in the medical industry for violating 100+ year old law.

You, on the other hand, will pay the price -- just as you will for the medical monopolies -- because we, the people refuse to demand that it change now and that this crap be put to a stop.

As for exactly when the roof will fall on your head, that's unknowable.  Every time it happens someone calls it right, but hundreds, even thousands of people call it wrong, and usually the person who called it right got it wrong previously for the same event.  The underlying cause of 2008 was clearly visible early in 2007, yet the insanity went on (and the market continued to rise) for more than 18 months.  In 2000 the insanity was clearly visible in 1997, I exited in 1998, and yet from the point that "this is stupid" was obvious until it blew was close to three years -- and well more than a double in the Nasdaq later.

I have utterly no remorse, however, over sitting out the "last burst" of run-up in either case -- because the odds are nearly 100% that you won't get the call on the exact time right to exit, and you risk far more than you can make by trying to do so -- or even worse you wind up second guessing on what you think is a "dip to be bought" and finding out that what you just walked into with your money is an elevator shaft on the 100th floor -- with no car. 

The math is never wrong.

View this entry with comments (registration required to post)

Main Navigation
MUST-READ Selection:
2016: What Was And a Preview of 2017

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.


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 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, to republish full articles, or for any commercial use (which includes any site where advertising is displayed.)

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.