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Commentary on The Capital Markets- Category [Market Musings]
2016-11-13 05:00 by Karl Denninger
in Market Musings , 441 references
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Why is tech falling apart post-election while the DOW is at all-time highs?

Simple: A Trump Presidency probably means the end of the leech.

Let's look at who this impacts:

1. Forced "net neutrality" that in fact isn't "net neutrality" at all, but was crammed down the throat of the cable industry to help Netflix.  That's probably gone under a Trump Administration.  What does Netflix have left as a business model if it has to pay for its own distribution costs without being able to shift them onto non-customers?  Nothing, as I've pointed out for years, and given Netflix's forward content cost commitments that makes them odds-on to be a zero.

2. Profiting from counterfeit products from China is likely to be curtailed -- or even prosecuted.  Bye-bye Amazon's ridiculous P/E.  No, they're not a zero, but they might be a sub-$100 stock -- easily.

3. Facebook -- think you can steal everyone's location data and use it as you wish?  Uh, maybe not.  More to the point, The Rule of Law may get in the way of a lot of those sorts of plans.  Hmmm.... Not looking so good eh?  Back to $20 you go.

4. Google -- advertising for counterfeit products from China is very profitable.  What happens if that all goes away?  No, this doesn't zero Google by any means but it sure does hurt them.  25% haircut?  Probably.

5. Tesla/Solar City.  Bye-bye.  Tax farms?  They're all zeros for the simple reason that they're all highly-levered on the debt side and have no prayer in hell of survival without said tax farming capacity.  Expect all of that to disappear under a Trump administration, and with it all the firms reliant on it.

6. Any CEO or company that whines about the election or issues what some would consider thinly-veiled threats aimed at "wrong-voting" employees or customers.  We've had two so far that I'm aware of, and both have been taken out back and bent over the woodpile behind the shed.  I suspect CEOs will learn fast that it's a path to immediate ruin to***** off half your customers, but you'd have thought they were smarter than that in the first place, so......  (PS: I ran an Internet company in the 1990s and while I had strong political views even then I certainly was smart enough to keep my damn mouth and corporate wallet shut in that regard since I also knew half the nation didn't agree with me!)

Who's not getting hurt?  Mostly eBAY and ETSY -- so far.  Gee, I wonder why?

Who else gets murdered?  Anyone with a heavy reliance on overseas labor.  Hello a lot of folks -- Apple anyone, for instance?

Start looking at stocks as "who relies on either (1) cheap foreign labor, (2) getting a skim from foreign knock-off products or (3) crammed-through "regulations" without which they do not exist."

Then adjust for who's got either a sky-high P/E (which means a big fall) or worse, on or off-balance sheet debt and forward commitment cash requirements (in which case they're a potential zero.)

That's the easy one, without a single bit of policy yet being announced or enacted.

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2016-11-10 08:54 by Karl Denninger
in Market Musings , 304 references
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Oh look, we're saved, the banks can make more money due to higher rates!

Uh, did you forget something?

What has driven the market over the last six, seven years?

Extremely low rates and therefore greatly increased borrowing, an enormous percentage of which was used to buy back stock and pay dividends.

That's over.  It was over before the election, but now we know that "low and flat" as a trajectory for rates, the benign case, is far less-likely.

Most bubbles end this way.  Financials get the last gasp of buying and price appreciation while those that have been consuming that cheap credit begin to underperform and then roll over.

Then the defaults start, the debt loads cause negative earnings and forced dividend cuts (which are magnified due to lower share counts in EPS terms) and finally, the financials collapse.

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2016-11-09 15:11 by Karl Denninger
in Market Musings , 342 references
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Folks, that was one monster move upward from the overnight lock-limit lows.

I'm reminded of the Bear Stearns days and others like it during the crash.  None of them held.

Here's the problem: The bond market says there's big trouble with earnings coming around the corner and it's across the board.

Fives and 10s were both up huge; the 5Y rate was up 11% to 1.47 and the 10Y rate was up 11.2% to 2.07.  While these look like "small" numbers in "real terms" it's a 50% increase in the five year rate since July!

Now consider this: Pretty-much everyone in the corporate sector has taken on a lot of debt to do uneconomic things, like buy back stock and issue dividends.  The carrying costs of that debt are fixed until it matures, but when it does they won't be able to pay it off and will have to roll it at interest costs that are likely to be 50% or more higher than they are now.

In the "benign" circumstance this murders earnings and thus for a constant P/E if "E" goes down so does P.

In the malignant case you can't refinance at a price you can afford in coupon expense and you wind up instantly bankrupt.

I have long put forward that there are two scenarios for rates going forward -- one is more or less benign (flat rates because the economy is sort of punky) and the other is malignant to an extreme degree with rapid market rate increases -- and collapsing asset prices.

Go back and look at where the S&P and Dow were in the early 1980s; if rates were to spike hard we could easily wind up back there in one big hurry.

Right now we simply do not know which way this will play out and the markets are playing "algorithm."  IMHO you're far safer, unless trading very short-term on these swings, to sit it out and see what sort of market rate environment we're going to end up with.  I had a very nice night last evening but was out well before midnight and since I didn't intend to stay up all night I made no attempt to ride the futures back up.

It'll be a few months before we know how the environment will play out but you're unlikely to miss that much by not committing one way or the other until a month or two after inauguration.

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