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2018-02-08 07:00 by Karl Denninger
in Market Musings , 1210 references
[Comments enabled]  

One of the common chestnuts is that stocks are "not that expensive" on a forward P/E basis, especially with the recent drop that took about 1 point off that P/E.

While those forward numbers remain above historical averages, down is down and thus this is a buying opportunity, right?

Not so fast.

One must look first at how the earnings numbers we have today are being made.

Let's look quickly at one example from last night: Disney.

In percentage terms all of their business segments lost operating profits except one: Theme parks, which were up big (21%).  The theme park business has seen utterly-monstrous ticket price increases, both on a gross and "best deal" basis over the last several years.  In fact they're gone up 116% for some people (like Florida Residents) over the last decade.  We used to be able to buy Play Four Days tickets that were good from early January until June 30th, were park hoppers, good for any four days during that period of time, and were $100 each.  That's $25/day, per person, and got you into any or all of the Disney parks in Orlando except the waterparks (which were not included.)

Today the "best deal" for a Florida Resident is $179, which sounds fairly comparable except they're not hoppers!  To be able to go between parks the price is $216.50, which is well more than a clean double.

It's just as bad if you want to attend any of the other Orlando parks.  Universal has gotten downright extortionate since their Harry Potter stuff opened up, in that now to really enjoy it you have to buy the two-park ticket because they cleverly put part of it in each of Universal and Islands of Adventure.  So if you only want to do the amusement park sort of ride thing -- no real Potter deal for you. Never mind one-day ticket prices that are now well north of $100 and that's before you pay the daily parking fee and buy a $10 hotdog that cost them fifty cents.

Now take Disney's other businesses.  Films were down by a couple percent, consumer product sales off 4%, and broadcast TV license fees down an utterly-enormous 25%.  But for people buying overpriced park tickets -- a clearly-discretionary purchase that they've ratcheted up enormously to get higher and higher "ARPU"s Disney would be cooked.

They're not alone in this.

Note that virtually all of the so-called "high flyers" measure, in some form or another, their success by rising ARPU. (Average revenue per user.)  Hotels, for example, measure their "success" based on the increase in price paid per night, which of course means prices are being jacked.  Hilton, which owns Hampton Inn, has become one of the masters of this; I used to stay in their properties almost-exclusively, but their price increases have gotten so extortionate over the last few years, well north of 50% at most properties over the last three to five years and in some cases nearing or even exceeding a double while the quality and amenities offered have not increased materially at all and in some cases, such as their "free" WiFi, quality has been reduced to scrap in an attempt to force you to pay a daily fee for actual working WiFi, that I no longer think they're worth it.  As such my room nights on their properties have gone to an effective zero over the last three years, with the exception being the few properties where (probably) they have found themselves with a near-empty hotel and thus are being more-reasonable.

Obviously I'm not in the majority of opinion on this as Hilton's stock has more than doubled over the last couple of years.

What makes this sort of thing possible?

Big spreads where companies and individuals can borrow nearly-unlimited amounts of money for non-productive purpose, whether that be consumption in the case of individuals on their credit cards and car loans, stock buybacks and dividends and other purposes that do not result in net investments being made in productive capacity.

This is especially telling when it comes to banks and other financial firms that have seen stock prices double or more since they can borrow for 1% but your credit card interest is still 14%, 18% or even 24%!  Gee, that's a nice spread!  But, in the case of Wells Fargo, even that wasn't enough for their "desired" equivalent to "ARPU" as they ripped off even more money via scamming customers repeatedly.

And that goes to the next issue, which is that sort of scam.  Wells just plain robbed people.  But Apple, which also has had a big rise in their stock price, appears to have done the same thing by effectively trying to force people to buy new $700-1,000 phones instead of $25 batteries.  They've gotten away with it too for quite some time; it was only recently they got caught.

And then there's the last part of it: Even when caught ripping people off on a blatant basis, say much less by deception, nobody gets indicted and goes to prison.

Of course Apple denies any wrongdoing.

As I have repeatedly noted this sort of ripoff is literally the business model of everything.  Just take one tiny little example, like the find I recently made with regards to Xylitol and how using it as a toothpaste appears to materially improve oral health.  The selective activity of it on "bad" mouth bacteria is published and has been known for quite some time -- years, in fact in formal, medical literature -- yet there have been no studies by the NIH or dental research groups that I can find on this as a specific modality compared against other (very profitable for the dental industry) options, no studies by private groups either and when informed of the cause of improvement the standard dentist's reply is that they cannot recommend doing that for legal reasons as it hasn't been studied in that way.

Well, yeah -- you won't study it because there's no money to be had from using a commonly-available plant extract as a toothpaste where if someone doesn't do that and ultimately requires surgery or you recommend very expensive implanted antibiotic treatments you make thousands.  Worse, for the dentists, if such a study was ever conducted and found it to be materially effective then all the money currently being made by the dental and periodontal practices pushing temporary "fixes" that wind up being an effective forced subscription model that costs the patient thousands a year would go "poof" like a fart in a church and lots of class-action lawsuits would be likely to immediately follow.

The same is true for Type II diabetes. I've literally lost count of the people who have reported on this very site that they were either Type II diabetic formally (diagnosed) or knew damn well they would be if they went to the doctor, stopped eating carbs and within days their blood sugar normalized.  Not only is there plenty of evidence that the medical system knows this works and has deliberately ignored it for decades (indeed it was the only option for severe diabetes before insulin was isolated and produced - and doctors were well aware of itthere is a formal association, the ADA, that recommends the exact opposite.  Just as with gingivitis progression being sold as an "inevitably progressive disease" the same is said about Type II diabetes.  Allowing medical practitioners to run this crap results in literally $400 billion or more of spending by the government on Medicare and Medicaid for diabetes and related medical issues alone, and likely double that in total when private medical spending is included.

All of the government spending is financed since we run huge deficits that would be nearly erased if we cut that crap out and a huge part of private spending is as well.  How much of the so-called "earnings" in the market today is a direct consequence of not just these two areas but the dozens if not hundreds of similar schemes and the near-zero cost of late in financing all that crap?

The take-away from these facts is that while the desire to scam will not go away the ability to finance it at near-zero cost and the spread "enjoyed" by the financial system are both disappearing by the day.  The Fed cannot evade doing this either, as they've gone way too far with "stimulating" and between the employment situation and commodities they can either continue at an increasing rate or suffer severe consequences in the broader economy.

My point remains today as it has for the last few years: The 30+ year trend, starting in the early 1980s, which has driven the acceleration of asset prices including stocks, bonds, real estate and virtually everything else is all predicated on falling interest rates.  The reason is simple: If $1 million costs you $100,000 to borrow and keep out for a year at 10% interest when rates fall to 1% you can and will borrow $10 million instead for the same $100,000!  This results in a multiplication of leverage by 10 times what it formerly was, and that flows directly into asset prices.

However, for that change (e.g. upward move) to continue rates must continue to fall.  If they stop falling then asset prices stop going up as leverage can no longer be expanded.  If rates rise then asset prices go down, and are at risk of collapse because those who borrowed cannot either roll over their debt at an affordable rate nor can they pay it off since they spent the money.  The result is that those borrowers inevitably go bankrupt!

Absolutely nobody in the media -- nobody -- is talking about this mathematical fact or what it must result in with regard to the price of all assets, whether the asset is stocks, bonds, houses, commercial real estate or anything else.

Now put this into the mix: Congress just voted to add $150 billion/year to the deficit and Trump supports same.

 by tickerguy

Without The Fed monetizing that additional Treasury issuance rates will rise, and may I remind you that $150 billion is more than the $100 billion a year in "tax cuts" which means you didn't get a tax cut -- you in fact got a tax increase.  So take whatever "valuation change" you think the market should have for the "tax cuts", remove it, and then remove another 50% because $150 billion a year is -- quite simply -- 150% of $100 billion.

Finally, for those who think the "broader economy" is fundamentally strong tell me what the "E" would look like without the buybacks and dividends funded with near-zero cost borrowing, just for openers -- because that's essentially disappearing now and the impact will start to show up within the next couple of quarters.  Oh, and without the so-called "tax cuts."

Then recompute that P/E with the much-lower "E" and tell me what you think about valuations.

Let's put this in simple terms: You can have the "budget deal" which will add hundreds of billions to the deficit this year, producing a trillion of new issuance and much higher interest rates, which ultimately will collapse the DOW to under 10,000 and the SPX to under 1,000 (a 50-70%+ selloff) or you can cut the crap with the budget, deficit, and spending coupled with your claimed "tax cuts" that are actually a tax increase.

You cannot have both that budget and "soaring" markets.

In short: We're headed for the crapper.  Maybe not today, but I assure you -- that's where we're going.

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2018-02-06 07:23 by Karl Denninger
in Market Musings , 461 references
[Comments enabled]  

Almost-certainly not.

First, it is extremely unlikely for a market to crash from a spike high.  China is the only place where it has happened with any sort of regularity; what usually comes first is a distribution pattern.  But..... with that said it isn't impossible.

However, as of 2/5 the S&P is now back to the 50DMA, which it has not touched for quite some time -- it bounced, and then collapsed.  Of note the 200DMA is down around 2530, which would be back to about November 2017 levels and extraordinary in terms of the current extension.

More to the point the "high flyers" like Amazon, Apple, Facesucker and Netfux, have hardly been dented at all, if at all, right up until it all went to crap.What had been falling apart is everything else.  GE has been schmammered over the last few months, for example.

But with that said it would be a real good idea to pay attention.

Systemic leverage in the form of financial assets to the real economy, along with margin debt and price:sales or price:free cash flow ratios are at levels either consistent with former bull market peaks and in some cases at all-time highs, higher than in 1929 for example!  Financial assets -- stocks, basically -- are now at levels never before recorded in terms of their size in relationship to the overall economy.

This is what everyone gets for cheering on and allowing The Fed and Congress to run trillion dollar deficits for years, not count inflation in asset prices as "inflation", run effective negative interest rates and pin the short end at zero well beyond the end of 2009, never mind the outrageous fraud that marked the end of the selloff in the spring of '09 when Congress mandated that FASB change accounting standards to make fraud on bank balance sheets not only legal but mandatory.  I reported on it at the time and instead of pitchforks and torches what you did was cheer.

It's also what you get for allowing pindick Trump to play Rocketman with the stock market, cheering the fraud on, including HFT and spoofing, literally from election day forward.

It's what we all get, in short, for arrogance and this nation is going to pay for it.

Not today, probably, but you are going to pay, because what just happened has broken things.  Critical things.  You won't be told what and where either, because you sat on your fat asses and cheered while the frauds continued in the banking system from 2009 forward instead of demanding heads on plates and as a result there is no fear among regulators, banksters or politicians who lie to you.

Just like in 2007, when the underlying breakage happened in the spring, and yet it was a year and change later before it all went to crap, there will be a delay this time too because there will be more lies, more fraud and more coverups.  It will continue until it can't, but trust me on this -- it can't, just like it didn't last time.

Eventually the rot will overwhelm and cascading losses will trigger more losses; leverage is a nightmare when it goes bad on you, and the premise that The Fed will always stand up to stop any sort of selloff with the words out of their mouths or cost-shifting government programs to the people through stealth tax increases by monetizing debt is a very convenient chimera, one that has been "right" for quite some time and has led people to double down on asset price gains as they have occurred, further increasing leverage.

Oh, and if you want another example BitCON is now down around 6,500 which marks nearly a 66% loss over a very short period of time.

Those who think that can't happen with the stock market are full of crap.

It both can and has several times, including in 2008/09 and the leverage ratios now in the market are materially higher than they were then.  Yes, even after yesterday.

Again, 2007 started exactly like this, with the Asian selloff.  We got a reactionary move, but nowhere near as much. Then we got the "subprime is contained" nonsense when some of that forced de-leveraging went through the system.  The media and brokerage mavens all told you that everything was just fine, just like today, and the market did indeed bounce strongly -- for a while.

Does anyone remember what came next?

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2018-02-05 22:00 by Karl Denninger
in Market Musings , 449 references
[Comments enabled]  

There is another Ticker in the queue, but this is what you need to take home with you this evening.

The computers were all shut off today.

All those HFT machine?  Gone.  Liquidity in the /ES futures all day looked like something out of Lord of the Flies.  There were entire brackets in the bid/offer stack that had single or two-digit contracts being bid or offered for hours at a time; for context a normal daytime market has hundreds to low thousands all day long.

This is what you get when you allow "HFT" dudes to take over and basically own the stock market; they're faster, they cheat with their bid-rigging and spoofing schemes, and since they're colocated they can beat any human, anywhere, no matter how much capital you have.

But robodudes have no obligation to be there at all, and today they were not.

So one person sells 100 contracts and clears several handles -- not ticks, handles -- at once.

That's what was going on all day today.  And worse, it's going on right now, with literal single digit contract counts -- again, extremely abnormal even for this time of night.

It's why the /ES is off another 50 handles, plus roughly 40 it was off between the close and lockup, so roughly another 90 points.  It's also why the Dow is off another 1,000 right now as I write this.  This didn't happen during the '07 and '08 downdrafts, but it's happening now.

You could have demanded this crap stop years ago.  But nooooo!  You liked it when it drove the market higher. Trump liked it too.  But there's no law that says these guys have to play and they drove out all the manual traders, who simply couldn't make a decent living anymore.  Either have a computer running some "strategy", pay for ridiculous colocation costs and "super speed" connections or inevitably get chewed up one tick at a time.

So you let the cheating go on for nearly a decade, and some of you made a lot of money.  Today you saw how fast it all can turn into red vapor.

The bad news -- really bad news -- is that there were things that blew up today.  You won't be told what, because lying is a business model, remember -- just like last time.  But I assure you -- they did, and the foundation has been critically damaged.  That which we call "the market" will come down like the Twin Towers.  It is now simply a matter of time.

More on that in the Ticker to come.

Pat yourself on the back America, and especially those of you who support and screech praise for tinypenis Trump.  This party is just getting started, and while there will be a nice pause not one in a thousand of you will saunter out the door in what will be your last opportunity.

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2018-01-30 09:25 by Karl Denninger
in Market Musings , 149 references
[Comments enabled]  

We're in for trouble folks.

I've written much about financialization of all areas in the economy.  Indeed, a number of years ago I gave a talk out in California at a conference that focused on The Financialized Economy.  The "focus" of said conference was on various means to "protect" yourself from that, and featured plenty of people who thought that buying gold, silver, or various mining assets (including for things like uranium) would be protective.

I argued otherwise at the time and still do; the only solution is political, but there's no "uptake" on that and the reason is simple: It's easy to goad people into bidding up financial assets.  It's hard to actually make things.

People are lazy, in short, and thus they get exploited.

Then you have folks like Trump who get off on this crap, trumpeting how much the stock market is "roaring."

But the economy that makes things (goods and services) is not "roaring."  Nor is productivity.  The strongest evidence for this is the plunging "savings rate", which I remind you is defined by the US Government as "income less household operating expenses" which is not savings at all since it counts paying off debts as "saving"!

Where is the "massive inflow" coming from into the market from actual persons when the personal savings rate is plumbing the all-time lows?  There isn't any, in short -- it's simply multiple expansion, or paying more for the same financial asset.  Now couple that with a massive ramp in credit card charges in the last couple of months and you have the stage set for an all-on disaster.

What's even worse -- much worse -- is that this "expansion" in financialization is not just about multiple expansion it is also about "hot money" from various Central Banks (other than The Fed) such as the SNB and JCB along with the blatant and outrageous manipulation that comes out of China.  That would be bad enough but it pales next to the crazy borrow-to-buyback-share game that firms in the United States have engaged in -- in fact, that's much larger than all of the foreign central bank crap combined.

Of course the problem with buying back your own stock at $200/share when the price then drops to $100 should be apparent especially if you borrowed the money to pay the $200.  That interest and principal is now a millstone around your neck that can never be removed and in fact will ultimately sink you as a declining stock price, which I remind you goes down faster with fewer shares as EPS is multiplied both positive and negative places even more pressure on debt-coverage ratios (e.g. debt to equity.)

This is the "coffin corner" that central banks and ultra-easy monetary policy, along with their intentional bubble blowing in both financial assets and stocks has brought.

Good luck getting out of it without having 90% of said "value" vaporized.

You're going to need it. 

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