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2023-12-02 09:17 by Karl Denninger
in Market Musings , 547 references
[Comments enabled]  

The last few days have been interesting.

Powell allegedly was expected to make people believe "rate cuts" are coming.  Indeed, some of the callers on the various media channels are now claiming six rate cuts will come next year.

I'll take the under on that: No they won't because the only way that can happen is if Congress balances the budget, which it has shown zero inclination to do.

I don't expect there will be any "rate cuts" next year; if anything short rates are going higher, not lower.  Why?  Because until Congress cuts it out the only other alternative is that the roughly 8% inflation created by Congressional deficit spending, none of which has any source of absorption anymore outside the country (the slacking of trade growth and US/EU sanctions imposition due to the Ukraine mess destroyed that and it isn't coming back) is going to show up in inflation and that means real rates are still negative.

A 5% interest rate in an 8% inflation economy is a real rate of -3%.  Period.  That is, not a thing has changed in terms of the actual tenor of borrowing rates despite the fact that Americans in general are getting screwed and that cannot change until real borrowing rates are positive.  Therefore either Congress has to cut it out or rates have to go higher -- period.

I remind you that simply on the math the only place Congress can cut it out is to fix CMS -- Medicare and Medicaid.  No, that doesn't mean "cutting" either per-se; it means getting rid of the grift, fraud and similar that lace our medical system top-to-bottom.  I've written literal tomes on this over the last 15 years; the "seminal piece" if you just want it in one dose (ok, two, because there's a follow-up implementation article that is linked off the first) you can find it here.  Beware, its not light reading.

Resolving this would be an economic earthquake, but at this point that's not avoidable.  The lobbying interests and political ads it would generate would be wildly misleading or even outright false -- and imply if not state that any politician doing it was intending to literally throw Granny off a cliff.  If you're older than 30 or so you've seen those ads as an adult; they featured prominently until Obama came in and basically underwrote the entire medical and pharma industry at the federal level, but did nothing about the grifting, extortionate pricing and schemes, despite there being 100+ year old felony federal law on the books (not fines, prison terms) available and applicable, as the Supreme Court has previously ruled -- twice (Royal Drug and Maricopa County.)

So here we are with a locked housing market that will almost-certainly disruptively unlock as forced sales eventually do happen, and when they do they wind up nailing appraisals of everything else in the immediate area which then makes HELOCs and refis impossible, even under duress (since you then are "upside down") and that, in turn sets off the cascade.

All the Happy Feet dancing in the world won't do a thing to prevent this, and there isn't realistically a way out of the box other than for prices to come down, dramatically so, in the places where they've gone up the most: Housing, medical care and personal transportation, which in turn will flow through to insurance of various sorts.

That of course means the "E" part of P/E will also go down, which you would expect will lead to "P" (stock prices) coming down too, and since stock prices are a leveraged multiple of earnings that's not going to be a "small" decline either.

I know, I know, its an election year and they will keep the plates in the air -- so it is claimed.

Just ask yourself this: Was 2000 -- or 2008 -- an election year?

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2023-11-29 07:00 by Karl Denninger
in Market Musings , 286 references
[Comments enabled]  

Note that Disney ($DIS) has posted-up multiple box-office flops in a row, with the latest, Wish, being pretty much indistinguishable from having a zero opening weekend.  For Thanksgiving weekend, which is usually a good time to release a movie (especially when nothing else high-ticket is running opposite it) that's a disaster.

Some of this is being blamed on "woke" elements, but the contribution of that is unclear.

What is clear, however, is that American business political leanings, expressed in their merchandising and public views, are wildly out of whack with the American mainstream.


Part of the problem, I believe, can be traced to how we do stock ownership and voting in America.  That is, if you own Disney stock outright (you bought DIS in your portfolio) you vote the shares.  But if you own them in an ETF, say by buying the SPY or one of the many others in the marketplace you don't vote the shares -- the fund manager does.

This is wrong; it is akin to saying that if you rent an apartment the apartment owner gets to cast your vote in an election.  We would never tolerate this.  We used to tolerate the gating factor of voting being the ownership of property early in America's history, and perhaps we should return to that or some other measure that you actually produce net-net from a tax perspective, but transferring someone's vote to another person on an involuntary basis harkens back to the days of three-fifths apportionment even though slaves themselves had no vote at all and thus such was less of an outrage than what we do today in the corporate world.

This is resolvable with a change in Federal Law:

For any corporation or other entity holding a tax ID number in the United States or traded on any United States public exchange said status is conditioned on voting, nominating and proposal rights only being vested in the actual human beneficial owner of the shares.

This would mean you (and not Blackrock, Vanguard or some other fund manager) could vote the Disney shares you held in an ETF.  This would have to be figured out as to the "how" but in today's world of computers this is not difficult at all.  It would mean that fund managers could not propose slates of directors, they could not vote in or out shareholder proposals and similar.  Only the actual humans that hold the shares, through whatever chain of custody as the actual beneficial owners, could do that.

Now think about how and why this is important.

As a shareholder your best and highest interest is in the total return of your holdings, measured by dividends and share price appreciation over time.  That's the entire point of owning shares in a corporation; you expect the company to make a profit and if and when it does you expect to share in the profits.  How the firm allocates research and development, capital expense, employee compensation and similar all goes into whether they succeed or fail.  Common stock is the bottom of the capital stack and has no protections; a bond issued by the company, which you can also buy, does have capital protection in that the equity holders lose their money first.  You choose to be in that "least-favored" position because when good decisions are made you profit at a variable and hopefully higher rate, unlike a bondholder who has a fixed coupon that they will receive over the life of the bond (and thus, other than if the firm goes under, their return does not rise with the company's success.)

The fund manager does not make any more money if the firm succeeds nor do they lose money if the firm fails!  Their entire source of revenue is feeswhich they collect irrespective of the success of the company and thus also, to a large degree, irrespective of the gains or losses in the beneficial owners.  Only through the derivative loss of business if the beneficial owners take their money and go somewhere else does the fund manager potentially lose prospective profits.  They cannot lose capital as their capital is never at risk; they don't put up their capital to buy the shares they put up yours!

There is no way to align these interests.  They are by necessity of the business in question divergent; you care if the firm makes more money or less but the fund manager only cares about how much he has under management.  Therefore he wants to create new vehicles (e.g. new ETFs) which he believes can attract more investors, but the actual company performance in them doesn't change his income either up or down.

This in turn means the fund manager can apply pressure to the company even if it results in the firm making less money without his taking a loss!  If he is allowed to vote shares held in the fund he can thus demand various policies, whether it be "DEI" or whatever and put into place directors on the board that will implement what the fund manager wants.  Since the amount of money said manager gets is not inextricably tied to the performance of the firms in the fund this leaves him free to vote for whatever sort of social and political positions he wants the company to take whether it makes the firm money or not.

You, as the beneficial owner, obviously would see things differently.  Perhaps you would consider such a policy "worth the cost" but I rather doubt it if it resulted in the company making less money, and more to the point many others would likely disagree -- probably enough of them to prevent your desire from becoming an elected winner.

Thus the fix is to change the law: Only the actual beneficial owner of a share may vote that share and only actual beneficial owners may issue proposals -- period.  A holding company, whether its Blackrock in an ETF or Berkshire which is also publicly traded but is not operating a business that it holds stock in, may not issue such proposals, back them or vote any of their shares; they must instead solicit and have their shareholders, who are the true beneficial owners, do so.

If you want to solve this problem -- and the proliferation of money-losing (or less-profitable) actions that fund managers may like but your preference would be for the firm to make more money that's the only way you will resolve it.

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2023-11-21 07:00 by Karl Denninger
in Market Musings , 293 references
[Comments enabled]  

Otherwise known as CHRISTmas.

I had to chuckle at this one from Xthe hubris of thinking that lifting lots of mass off the surface suddenly makes interplanetary life for humans (and other living things) reasonable is beyond crazy.  I've gone through the reasons why this is silliness in the past so long as we're using chemical reaction-mass rockets -- and there's no indication that anyone is about to breach that scientific barrier.

Of course the "consumer orgy" known as Black Friday is imminent as well; the flyers are already showing up and so is the promotion on anything that you might use as an "App" or if you've given some merchant your email address or your cell number.

The next six weeks, more or less, are usually pretty good for equities.  The remaining question mark in this year is whether or not people have room on the plastic for another trip to either their Amazon account or the local merchants.  I found it interesting that the recent MARTS report was quite tepid all things considered; the entire report on a "seasonal adjusted basis" was down 0.1% and, quite-notably, retail sales were only up 1.6% from last year's level, while even by the CPI they don't try to claim inflation was less than that.  Thus, in inflation-adjusted dollars (that is, in units of things sold) retail trade sales were negative 

An interesting point in the MARTS report is that Grocery and other food and beverage store sales were statistically zero (+0.16%) in change from last October.  Given that we know inflation in food hasn't been zero by any means this is a very solid indication that inflation is hitting people's food consumption budgets and they're buying less.  While food and beverages are often thought of as "non-discretionary" that's only true at the edges; most people buy an awful lot of discretionary food and beverage items and yet here we are with a statistical zero which, given inflation data, says that unit sales are down materially.  The same is true for furniture and home stores except there we have a roughly 12% annual spend decrease, so it would certainly appear that people are putting off that new sofa or bed, and clothing was statistically flat so it looks like the ripped jeans are being worn for another month as well.

A 10% increase in health and personal care looks to be materially-comprised of pharmaceuticals.  That's rather involuntary most of the time.

And as for driving people to drink, well, perhaps -- that annualized change is 7.7%, which looks a lot like the real inflation rate, so perhaps that is all, of nearly-all, not in more beers but more-expensive beers.  I can believe that.

October is of course a month that doesn't have much other than Halloween in it, which does make for a pretty-good y/o/y comparison basis when it comes to "baseline" consumer trends and is far enough away from Black Friday to evade any sort of realistic "pull forward" type of effect.  The November release (including Black Friday) will be on the 14th of December, so we have a while for the various media folks to tell us how great (or not) the post-Turkey sales might be.

I've received several circulars with "Black Friday" sale prices and 0700 opening hours for stores starting the Monday of Thanksgiving week.  It would appear that there are merchants with either a bit of  "jump the line-ism" or desperation are out there -- but its hard to know which.

I can tell you this from Monday morning -- I went up to BassPro bright and early, 0700.  There was no congestion in the parking lot. There were three customers I saw in the store including myself, two buying firearms-related items (one ogling a gun, one was ogling a scope.)  I saw one thing I wanted at a price that was reasonably-discounted and purchased it -- total spend under $20.  They spammed every person in the area by postal mail with their circular for "early" Black Friday shopping and got exactly nothing in terms of a crowd this morning out of it; all that ink, paper and postage was worth bupkis.

I have often called this silly season for the markets, and even in really bad times (e.g. 2008) that has proved up to be pretty accurate. 

We shall see if its "Santa Claus", as expected, or Sandy Claws this year.

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2023-11-10 07:00 by Karl Denninger
in Market Musings , 465 references
[Comments enabled]  

Stocks seemed to be having a pretty good day yesterday....... and then the bond refinancing auction went off.

Well, technically I guess it did, but it was extremely weak, with the "Primary Dealers" left holding the bag (but with a nice long tail for compensation) and a horrid bid-to-cover.

The reaction was immediate: Stocks rolled over immediately from what had been a pretty decent day, and bond yields - as expected - spiked.

Congress is almost-certainly ignoring this message as they have for the entire last year, but they better start paying attention because the Bond Market is in fact in charge -- not The Fed -- when it comes to checks and balances on deficit spending.

Clinton is rumored to have mused that "if I'm reincarnated I want to come back as the bond market" when it signaled, 20-odd years ago, that his scheme for redistribution and spending was not going to be tolerated.  Of course we've had a Fed and international environment (epitomized by this sort of exploitation) that has contributed wildly to the continued deficit spending and squeeze on Americans.  Wage and environmental parity tariffs would end this game by removing the economic incentive to screw Americans and offshore labor - which would also flatten the asset/wage curve.

It's somewhat-similar to what I was told by the investment bankers when I was looking into selling my company: They advised me to screw everyone else and they knew how to do it without me being able to be successfully sued.  Oh sure, I would have probably been sued, but they were sure they could structure it in a way that wouldn't stick.  I refused; I'm not wired that way, but a lot of people are.

This, of course, is why consistent application of The Rule of Law matters.  Even if you find a "loophole" that on some technicality you can get away with the externalities come back somewhere.  Sure, you might get away with it from a legal perspective but you shouldn't be able to -- not in medicine or anywhere else.  We've spent decades ladling up the screwing on the common American to the point that family formation is basically impossible for the median income; simply look at the median household income in a place like Chicago and then compare with the median house price and carrying costs, including taxes.  If you want a next generation of productive citizens (and not all gang-bangers with the productive folks declining to reproduce) you can't have a system that is set up this way because over the space of a couple of generations you won't have a productive -- and tax-paying -- workforce.

Nowhere is the problem more-serious than in the medical field but it isn't only there.  Its everywhere.  It is in firms that evade the W2/1099 rules through "multi-layer" contracting setups which have exploded in popularity since Obamacare showed up.  Are these "legal"?  That depends; is the intent to evade wage and hour laws, along with the health insurance mandate?  Yes, quite-clearly, or the offered wages from such places would be higher than an equivalent W2 because the independent person has to pay their own employment taxes (both halves.)  Are they?  No; they're lower -- and not a little either.

The counter-argument often made is that "well, its a free market and people can decline."  Really?  When the alternative is someone making $5/hr with no US employment and related taxes being paid by anyone, at all, including no health insurance costs?

This is claimed to "hold down prices" for Americans but it doesn't.  It instead drives asset bubbles which, contrary to popular belief, does not allow the common person to outrun the inflationary impact.  Why?  Because you can't put enough of your gross income into said investments to remain ahead (perhaps you can sock away 20% pre-tax) without using leverage at fairly extreme levels, which means when such a bubble bursts you are wiped out since leverage multiples the losses exactly as it does gains, so a 20% loss with 5x leverage on means you now have nothing.

The media of course is all-in on trying to excuse this as they were in the 1990s as the market roared.  But then, as now, the problems were apparent and then, as now, the government tried to ignore it.

They failed of course and the crash of 2000 was the result.  Those who thought they could "keep up" by using leverage and investments were literally zeroed.  People went from having millions of "wealth" to being bankrupt in weeks or months.

Its coming again folks, and you don't want to be caught behind the ball on this.

One way or another Congress is going to have to cut it out.  They can do it voluntarily now, and rates will stop going up.  They won't come down materially -- which means prices in Real Estate will decline -- a lot.  Like 50% or more from where they are today.

But if Congress doesn't cut it out then the bond market will take care of the problem.  Congress may authorize spending but that's a "I hope someone will buy these bonds at a reasonable rate" action.  If the bids are unreasonable the auction will be canceled and, if that occurs then there's no money to spend whether Congress authorized it or not!

Better get your arms around this stuff folks, because its reality whether you like it or not, and if Congress tries to "bulldoze" their way through the market the result isn't going to be rates where they are and a 50% decline in Real Estate and, in all likelihood stock prices.

Its going to be a crash in both and a near-complete freeze on borrowing of any sort.  Cars, mortgages, credit cards, all of it.

How screwed are you and those you know if your credit cards are slammed down to their outstanding balances and if you attempt to treat them as anything other than a charge plate that you pay off every month the limit will be immediately decreased to that outstanding balance, prohibiting you from rolling anything over?

If you think that "can't" happen oh yes it can -- and if this is not addressed oh yes it will.

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2019-02-27 08:15 by Karl Denninger
in Market Musings , 289 references
[Comments enabled]  

The lie factory in the media continues with regard to the economy and markets -- and it's you who take it up the chute.

Lawmakers on both sides of the aisle have recently criticized stock buybacks, including Sen. Chuck Schumer, D-N.Y., and Sen. Bernie Sanders, I-Vt., in a New York Times op-ed and Sen. Marco Rubio, R-Fla., in a tweet storm about his plans to release legislation on the subject. As the Tampa Bay Times notes, this is something “you might expect from Bernie Sanders or Elizabeth Warren, but not necessarily the Florida Republican.”

These objections to stock buybacks are, in a word, misguided. Critics’ complaints rest on the premise that they maximize shareholder earnings to the detriment of workers and at the expense of investments in the company. But this reflects a fundamental misunderstanding of how stock buybacks work and what drives business leaders’ decisions about spending profits and deploying capital.


My complaint with them is that they are frauds.

Faux Snooz continues:

When a company turns a profit, one basic way to address the balance is to buy back shares; it’s a common mechanism for companies to distribute earnings to shareholders. The alternatives are to increase investment or pay out more in dividends, the latter of which is functionally identical to buying back shares.

No it's not.  Leaving aside tax differences, which are significant, the financial and market impact of buybacks is not functionally equivalent to a dividend.

When a company pays out dividends the total number of shares does not change.  Therefore the EPS does not change either for a given level of earnings.

If you earn $1 billion dollars and have one billion shares then the EPS is $1.00.  If you pay out half of that billion dollars in dividends then the EPS next quarter, assuming you still make a billion dollars, remains $1.00.

Now let's assume you take that half-billion and buy back shares.  The denominator gets smaller.  This means that for the same billion dollars in earnings next quarter (the size of the company hasn't changed) the EPS goes up.

This is a major functional difference.  It sounds like a free lunch to many people -- EPS goes up and since the "P/E" ratio is a common way to value stocks the instant effect on P/E is for it to fall, and thus price per share will tend to rise to make P/E the same.

This sounds like a buyback is superior to shareholders, and thus ought to be not only permitted but every firm should do it instead of issuing dividends.

If only it was that easy.

If only Unicorns that crapped out Skittles existed.

If only.....

When you reduce the denominator it is true that EPS goes up for a given level of earnings.  But so do the losses per share when there are losses, and by an exactly equal amount.  In other words market violence, which is called "volatility", associated with said firm's results increases exactly at the same ratio.

There is no free lunch in this regard.

Second, however, and the reason that buybacks were generally illegal before the government changed the rules is that this fact is actively hidden by everyone involved -- on Wall Street, in the media, in earnings reports and the statements made by everyone involved.

Why would all these people intentionally mislead the public?

Simple: They use buybacks as a mechanism to rob you as a shareholder.

Let's take a hypothetical company that issues 1,000 shares of stock.  We'll make it nice and small.  The insiders -- that is, the founders, mostly, and other key people at the outset hold 250 of those shares; they sell the rest of them to the public.  (This, by the way, is another scam that is commonly run -- companies sell a minority of shares to the public by one means or another and thus prevent the public shareholders from ever voting out the officers and directors!  That's fraud because such a firm is not publicly-owned and ought to be flatly illegal in the so-called public markets -- if you wish to do this you ought to be limited to selling to accredited investors who understand what's going on and are willing to buy what amounts to a private placement with no voting rights -- because that's what these companies are!)

Ok, so we have our 1,000 share company with 250 of them held by inside executives -- probably half of that 250 is held by the founder who is frequently the CEO.  All good so far; the other 750 shares are enough that you, along with the other public shareholders, can vote out and eject the CEO and board.

Now the company runs and makes a profit.  So what the board does is vote to buyback 100 of the shares in the public market.  What just happened?

The public's interest of 75% of the company just got cut; the insiders held 25% but now they hold 28%!

It doesn't end there.  The 100 shares gets bonused out as "restricted stock units" to the officers and directors!  So the total number of shares doesn't decrease; now there are 350 shares in the hands of insiders and only 650 in the hands of the public.

Do this for two more years and the public no longer has any control over the board or executives since they are now a minority and cannot vote anyone out!

You just had control of the company stolen from you.

The same strategy is sometimes used by closely-held firms where you have outside minority shareholders.  The reason you have to be an "accredited" investor to buy such a position is that it is very easy for the majority holders, who are usually the founders and running the place day-to-day, to steal from you and absent some extremely strong controls you have written into the bylaws of the company if and when it happens there's damn near nothing you can do about it.  Unless you're very savvy and insist on such as part of your deal you are open to a rank ramjob that will diminish your investment by an arbitrary amount as soon as the insiders decide to screw you.

There is nothing in the law, for example, to prevent the majority holder of such a firm who is the CEO from voting to bonus out more shares to himself as part of his compensation.  This dilutes your ownership interest and as a minority shareholder you can't vote a stop to it.  The only hope you have is to sue and you will probably lose so long as the firm can show that it's making money and the executive(s) who got the bonus are substantially why it's making money.  In other words you're almost certain to take it up the pooper with exactly zero recourse, and if you do sue not only will you almost-certainly lose the company defends against your lawsuit with what is ultimately your money since it comes out of company coffers and not the CEOs personal checking account.

Stock buybacks where the executives and other insiders are getting share grants are the exact same scam played out in the public markets.  The claim that it "makes value go up" is a lie.  Until you sell your shares all you have is numbers on a screen; the lower the float in a given firm (that is, the fewer shares outstanding) the less-likely you can sell them without moving the price downward, and thus your so-called "gain" is likely to be illusory.  In addition you permanently give up your voting control piece by piece until you have effectively none; while you may still own the same number of shares the public ownership of the whole is reduced and at the point it reaches less than 50% you have no voting control whatsoever.

Buybacks, in short, are nothing more than a parlor trick.  They look real good so long as the economy is very strong and there are no recessions.  But as soon as the inevitable downturn comes you discover that not only are losses magnified exactly as are "earnings" but you have had your ability to throw management out on their ear either diminished or completely destroyed by an under-the-table trick at the same time.

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