During the 40 months after Alan Greenspan’s infamous “irrational exuberance” speech in December 1996, the NASDAQ 100 index rose from 830 to 4585 or by 450%. But the perma-bulls said not to worry: This time is different—-it’s a new age of technology miracles that will change the laws of finance. It wasn’t. The market cracked in April 2000 and did not stop plunging until the NASDAQ 100 index hit 815 in early October 2002. During those a heart-stopping 30 months of free-fall, all the gains of the tech boom were wiped out in an 84% collapse of the index. Overall, the market value of household equities sank from $10.0 trillion to $4.8 trillion—-a wipeout from which millions of baby boom households have never recovered. Likewise, the second Greenspan housing and credit boom generated a similar round trip of bubble inflation and collapse. During the 57 months after the October 2002 bottom, the Russell 2000 (RUT) climbed the proverbial wall-of-worry—-rising from 340 to 850 or by 2.5X. And this time was also held to be different because, purportedly, the art of central banking had been perfected in what Bernanke was pleased to call the “Great Moderation”. Taking the cue, Wall Street dubbed it the Goldilocks Economy—-meaning a macroeconomic environment so stable, productive and balanced that it would never again be vulnerable to a recessionary contraction and the resulting plunge in corporate profits and stock prices. Wrong again!
During the 40 months after Alan Greenspan’s infamous “irrational exuberance” speech in December 1996, the NASDAQ 100 index rose from 830 to 4585 or by 450%. But the perma-bulls said not to worry: This time is different—-it’s a new age of technology miracles that will change the laws of finance forever. It wasn’t. The market cracked in April 2000 and did not stop plunging until the NASDAQ 100 index hit 815 in early October 2002. During those heart-stopping 30 months of free-fall, all the gains of the tech boom were wiped out in an 84% collapse of the index. Overall, the market value of household equities sank from $10.0 trillion to $4.8 trillion—-a wipeout from which millions of baby boom households have never recovered. Likewise, the second Greenspan housing and credit boom generated a similar round trip of bubble inflation and collapse. During the 57 months after the October 2002 bottom, the Russell 2000 (RUT) climbed the proverbial wall-of-worry—-rising from 340 to 850 or by 2.5X. And this time was also held to be different because, purportedly, the art of central banking had been perfected in what Bernanke was pleased to call the “Great Moderation”. Taking the cue, Wall Street dubbed it the Goldilocks Economy—-meaning a macroeconomic environment so stable, productive and balanced that it would never again be vulnerable to a recessionary contraction and the resulting plunge in corporate profits and stock prices. Wrong again!
The stock market rejoices the House passage of the tax ‘reform’ Bill as the Dow shot up 187 points and the S&P 500 spiked up 21. The Nasdaq soared 1.3%, retracing its 3-day decline in one day. The tax bill is nothing more than a massive redirect of money flow from the Treasury Department to Corporate America and billionaires. The middle class will not receive any tax relief from the Bill but it will shoulder the burden of the several trillion dollars extra in Treasury debt that will be required to finance the tax cuts for the wealthy. The tax ‘reform’ will have, at best, no effect on GDP. It will likely be detrimental to real economic output. The Big Money Grab is ‘on’ at the highest levels of of Wall St., DC, Corporate America, the Judiciary and State/local Govt. These people are grabbing from a dying carcass as fast and greedily as possible. The elitists are operating free from any fear of the Rule of Law. That particular nuisance does not apply to ‘them’ – only to ‘us.’ They don’t even try to hide their grand scale theft anymore because the protocol in place to prevent them from doing this is now on their side. This is the section in Atlas Shrugged leading up to the big implosion. ‘When you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.’ – Atlas Shrugged
As we keep insisting, monetary central planning systematically falsifies asset prices and corrupts the flow of financial information. That’s why bubbles seemingly inflate endlessly and egregiously, and also why financial crashes and economic corrections appear to come out of the blue without warning. Back in the winter of 1999-2000, for example, we were allegedly in the midst of a “new age economy”. The revolution in technology then underway, it was claimed, meant all historic valuation benchmarks–like PE multiples, cash flow and book values—– were irrelevant to stock prices. Likewise, in the fall of 2007 there was nary a cloud in the economic skies. That’s because the Great Moderation superintended by the geniuses at the Fed had purportedly engendered a “goldilocks” economy destined to expand indefinitely. Within months of the dotcom epiphanies, however, the highflying NASDAQ 100 crashed—eventually hitting bottom 83% below its new age apogee; and 15 months after the S&P 500 reached its goldilocks peak of 1570 in October 2007 it staggered around in smoldering ruins at 670—down 57% from its housing bubble high.
Nasdaq hits record, bounces off, plunges. Wow, did you see that? That was quick. Friday morning between 10:15 AM and 11:15 AM, the Nasdaq gallivanted around blissfully for an entire hour in record territory of around 6,340 with not a worry in sight, and then someone must have looked at the valuations or something, and it became infectious, and the sell-orders started pouring out, and by 2:48 PM, the Nasdaq hit a low for the day of 6,160, down 3.1% from peak to trough. It closed at 6,208, down 114 points, or 1.8%, its biggest daily decline so far this year. Meanwhile, the Dow rose nearly 90 points or 0.4% to 21,272. And the S&P 500 ended down a minuscule 2 points. The market is so dependent on the infamous FAANG stocks: Facebook, Apple, Amazon, Netflix, and Alphabet (the Google in the acronym). And here’s how they did:
President-elect Donald Trump’s corporate tax reform plan is a real possibility in 2017. Fixing flaws in the U. S. corporate tax code would have a huge impact on U. S. companies, many of whom have gotten very good at using current laws to drastically reduce their tax bills. One of the most prominent ploys is for multinational companies to keep their foreign earnings stashed overseas. By not bringing those profits home, these companies avoid paying the 35% U. S. corporate tax. Right now, U. S. companies have about $2.6 trillion in foreign earnings waiting to be repatriated. That amount has doubled just since 2008 and is six times higher than it was in 2002. Apple Inc. (Nasdaq: AAPL) tops the list of these companies, with roughly $200 billion in cash stashed overseas. Other ‘tax haven’ companies include Microsoft Corp. (Nasdaq: MSFT) with about $110 billion, General Electric Co. (NYSE: GE) with about $100 billion, and Pfizer Inc. (NYSE: PFE) with about $80 billion. Other companies have become expert at exploiting tax loopholes. In some cases, these companies pay little or no tax despite making billions in profits. Here’s how they do it…
By now, many of you have probably seen the email that was leaked from Tesla (NASDAQ:TSLA) corporate and reported on by Bloomberg on Friday. We wanted to comment today as to why we believe this email will ultimately have a net negative affect on Tesla as an investment going forward. Somehow, Elon Musk has managed to take the wind out of a good quarter that hasn’t even happened yet. We have been working for the last few months to try and get a good grasp on how the market views Tesla as a company and where, as an investment, the company may wind up going over the next few quarters. It has certainly been a unique set of circumstances, with its newly proposed acquisition and the company’s unique ability to consistently burn through large sums of cash. As an investment, it is a fascinating subject, because ostensibly either the company will be found to be correct and this will be one of the greatest growth stories of our time even from current levels, or the skeptics will be found to be correct, and the stock will likely take a tremendous haircut if the company doesn’t wind up collapsing altogether. Those are two polar opposite scenarios and they are what keeps us fascinated about and trying to figure out the markets perception on the company. For those that have missed the Bloomberg story on Friday, here is what was reported,
The stock market is partying like it’s 1999, and for exactly the opposite reason. Last week the S&P 500, Dow Jones Industrial Average and Nasdaq Composite hit a synchronized high for the first time since the eve of the millennium. America’s most valuable company is a tech stock (Apple today, Microsoft back then). The tech sector is back above a fifth of S&P 500 market capitalization, and just as then bears worry that the market is overvalued, although not by anywhere near as much. In 1999, wild optimism was elevating the market as investors piled into anything with ‘.com’ after its name – leading to a rash of stock-price-boosting name changes. Investors punished dividend payers for not having enough ways to spend money on transformative tech. The number of clicks beat cash flow as an investment tool. The contrary is true this year. Wild pessimism about the global economy has led investors to chase dividend payments, demand buybacks and punish companies that invest. Cash is king. And yet, the market rises. ‘Nobody seems to be particularly optimistic about much of anything and yet the stock market in the U. S. seems to do nothing but go up,’ said Ben Inker, co-head of asset allocation at Boston fund manager GMO.
Yesterday we published our 1,007th article here at Wall Street On Parade on the insidiously corrupt financial system in the United States known as Wall Street. It’s a system that now operates as an institutionalized wealth transfer mechanism that is hallowing out the middle class, leaving one of every five children in our nation living in poverty, while funneling the plunder to the top one-tenth of one percent. Tens of millions of Americans clearly understand that an entrenched system of corruption such as this, perpetuated through a revolving door between Wall Street and Washington, while enshrined by a political campaign finance system that recycles a portion of the plunder to ensure greater plunders, will inevitably leave the nation’s economy in tatters – again. That’s because systemic corruption and legalized bribery within the financial arteries of the nation can only create grossly perverse economic outcomes. The actual role of Wall Street is to fairly and efficiently allocate capital to maximize positive economic outcomes for the nation. Under the current model, Wall Street is focused solely on maximizing profits in any manner possible, including fraud and collusion, to maximize personal enrichment. When Senator Bernie Sanders said during his campaign stops and a presidential debate that ‘the business model of Wall Street is fraud,’ there was a long, substantive archive of facts to back up that assertion. Consider the intensely corrupt Wall Street analyst research practices that led to the Nasdaq crash at the turn of this century. Writing in the New York Times on March 15, 2001, Ron Chernow said it best: ‘Let us be clear about the magnitude of the Nasdaq collapse. The tumble has been so steep and so bloody – close to $4 trillion in market value erased in one year – that it amounts to nearly four times the carnage recorded in the October 1987 crash.’ Chernow compared the Nasdaq stock market, filled with companies boosted by intentionally corrupt Wall Street research, to a ‘lunatic control tower that directed most incoming planes to a bustling, congested airport known as the New Economy while another, depressed airport, the Old Economy, stagnated with empty runways. The market functioned as a vast, erratic mechanism for misallocating capital across America,’ said Chernow.
The stock market went haywire about a year ago. The Dow crashed more than 1,000 points, the S&P 500 was down 120 points, and the Nasdaq was down 393 points shortly after the market open on August 24. And for a time, the blame for the sudden and unexplained move was a group of funds called risk parity fund. Risk parity funds build portfolios around risks: They target a certain exposure to volatility, rather than, say, equities or bonds. That means that when volatility spikes, they sell automatically and indiscriminately. That’s why they were in the spotlight back in August 2015. The complaint was that the sudden rise in the stock-market volatility forced them to sell, increasing volatility further. Well, everyone should be paying close attention to these funds again, according to Bank of America Merrill Lynch. The equity derivatives strategy team at the US bank put out a note on August 9 that is full of technical language, but boils down to this: There are risks building up in the risk parity world. From the note:
In what may be a long overdue victory for the “good guys”, the WSJ reports that the SECs staff has recommended that the agency approve IEX Group Inc.’s “controversial” bid to launch a new stock exchange, signaling likely approval when the agency’s commissioners vote on the order Friday. This decision takes place despite vocal objections of not only Nasdaq, by not only the entire HFT lobby, as IEX’s technology would provide an HFT-free exchange as a result of its 350-microsecond speed bump which would force all traders to be on an equal footing, but most notably despite the repeated complaints by NY Fed darling, HFT powerhouse Citadel (and employer of one Ben Bernanke), which has argued in the past that granting IEX an exchange status would corrupt US equity markets. That would end months of debate and lobbying over the startup’s proposal to launch the first platform that slows down trading, countering the decadelong trend toward ever-greater speed. There is still a chance IEX may be rejected in the last moment: according to the WSJ, “the SEC’s three sitting commissioners aren’t required to support the staff’s views, and one may vote no. But the full commission rarely rejects a formal staff recommendation. If the SEC’s commissioners give the green light to IEX, which stands for Investors’ Exchange, it would be the first major new stock exchange in the U. S. since the SEC approved several venues in 2010 that are now owned by BATS Global Markets Inc.” For regular readers, IEX’ campaign – and symbolism, in a dramatically fragmented market, catering exclusively to well-paying HFT clients who spend millions for the opportunity to frontrun orderflow – is familiar, but here is a brief recap:
This post was published at Zero Hedge by Tyler Durden – Jun 14, 2016.
All eyes will be on the upcoming ‘Brexit’ vote in the United Kingdom next week, now that polls are showing that the Brits are more likely than not to shock conventional wisdom and exit the European Union. Wherever she is, Margaret Thatcher will be beaming at the wisdom of her former constituents seeing the wisdom of exiting the deeply flawed and ultimately unsustainable confederation of European countries. Markets will no doubt react very badly if the vote tracks the current polls, but this type of short-term pain is child’s play compared to what has to happen to return the global economy to some semblance of sanity and growth in the years ahead. Take the U. S. stock market, for instance… Wanted: Strong Corrective Measures Something radical is certainly required to snap investors out of the complacency. While stocks sold off sharply on Friday, they were flat on the week with theDow Jones Industrial Average rising 58 points or 0.3% to 17,865.34 and the S&P 500 losing 3 points or 0.15% to close at 2096.07. The Nasdaq Composite Index fell 1% to 4894.55. The Dow danced above 18,000 a couple of times during the week, giving rise to the predictably idiotic CNBC news flashes despite the fact that this was not news (unless you believe that profound investor stupidity is news, but unfortunately it is all too predictable). Junk bonds also kept rallying despite deteriorating credit quality with the average yield on the Barclays High Yield Index moving closer to 7%, which in case anybody asks you is an oxymoron since 7% is a low yield, not a high yield. Investors have clearly checked their brains and good sense at the door; when they check out, they are going to leave a good deal poorer.
The use of ad blocking browsers in mobile devices almost doubled in 2015. New ad blocking technologies can also intercept in-app advertising. Ad blocking is disrupting the traditional Web advertising model, and investors should be cautious about companies dependent on advertising. A new report on mobile ad blocking by PageFair suggests that the next billion of mobile users in emerging markets will be mostly invisible to advertisers. PageFair has found that use of ad blocking technology has skyrocketed in emerging markets. This calls into question the long-term growth strategies of companies such as Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) that are actively seeking the ‘next billion(s)’ of mobile device users in emerging markets. Where the Action Is Following the development of extensions for Apple’s (NASDAQ:AAPL) iOS browser, Safari, that enable ad blocking, I wrote some articles about the technology with a focus on iOS and the possible impact to Google. What’s interesting about the PageFair report is that iOS devices don’t seem to be where the real growth is in ad blocking. The report indicates that about 20% of the estimated 1.9 billion mobile device users employ some form of ad blocking tech, but the vast majority are concentrated in emerging markets, where iOS has fairly low usage share.
From the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors. But rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016. Over the span of just two wild months, daily turnover on the nation’s futures markets has jumped by the equivalent of $183 billion, outpacing the headiest days of last year’s Chinese stock bubble and making volumes on the Nasdaq exchange in 2000 look tame. What started as a logical bet – that China’s economic stimulus and industrial reforms would lead to shortages of construction materials – quickly morphed into a full-blown commodities frenzy with little bearing on reality. As the nation’s army of individual investors piled in, they traded enough cotton in a single day last month to make one pair of jeans for everyone on Earth and shuffled around enough soybeans for 56 billion servings of tofu. Now, as Chinese authorities introduce trading curbs to prevent surging commodities from fueling inflation and undermining plans to shut down inefficient producers, speculators are retreating as fast as they poured in. It’s the latest in a series of boom-bust market cycles that critics say are becoming more extreme as China’s policy makers flood the financial system with cash to stave off an economic hard landing.
When the dot-com bubble burst in early 2000, the fallout for publicly traded stocks was quick and severe. The Nasdaq Composite Index fell 37% in the 10 weeks following its peak on March 10, 2000. For startups, the immediate impact was less dramatic. In the second quarter of 2000, venture capitalists invested $25 billion in startups, down only 5% from the first-quarter peak. ‘There was a lot of suspended disbelief between March and June,’ says Keith Rabois, then a vice president at PayPal Inc. and now a partner at Khosla Ventures. Mr. Rabois and others think we’re now in a similar period of suspension of disbelief. Startup investment has cooled. Valuations are falling. But Mr. Rabois says many investors and entrepreneurs haven’t yet grasped the new reality. ‘If that suspended disbelief ends, all hell breaks loose,’ he says. The parallels between the two eras aren’t perfect. After a seven-month decline, the Nasdaq index has gained 12% since early February. As of April 18, it was within 5% of its post-2000 high. Initial public offerings have all but disappeared, but venture-capital funds raised a record amount of capital in the first quarter.
History is poised to repeat itself in the stock market, and the result won’t be pretty for the bulls. Last week we noticed a pattern in the PowerShares QQQ Trust(QQQ) that is eerily similar to one that occurred late last year and preceded the stock market’s worst January ever. This pattern is called a ‘gap island reversal,’ and it marks the end of a previous trend and the beginning of a new one. Look at the intraday bar chart below of the PowerShares QQQ Trust, the exchange-traded fund that tracks the Nasdaq 100 index. Notice the large pink box at the top of the graph? It’s not attached to the price bars to its left or to those to its right. This ‘island’ of price behavior began with a gap higher on Oct. 23 and ended with a gap lower on Jan. 4. This formation shows exhaustion, and in this particular case, it revealed exhaustion of the final rise off the August panic spike reversal.
Now look at last week’s activity. Although last week’s high came within a few cents of the Dec. 31 low, it failed to fill the gap to that low. This is an ‘uh oh’ moment, when the crowd realizes it’s been trapped into late-joining buying, mostly because of the gap that began the island formation.
I think it is fairly safe to say that the retail transformation of Sears Holdings (NASDAQ:SHLD) is failing and that it would take a miracle to reverse its trajectory at this point. The comparable store sales decline worsened in 2015, resulting in greater declines than 2008. The cost cutting hasn’t been able to keep up with the sales decline, resulting in adjusted EBITDA that was worse in 2015 than in 2014, which was already worse than in 2013. It is probable that Eddie Lampert would have been fired as CEO of Sears long ago if he wasn’t the main owner. Comparable Store Sales Decline Greater Than 2008 The retail transformation at Sears appears to be going as well as Ron Johnson’s attempt to transform J. C. Penney. Comparable store sales at Sears Domestic and Kmart fell -11.1% and -7.3% respectively in 2015, continuing a near-uninterrupted string of declines (broken only by slightly positive comps at Kmart in 2010). Remarkably, the attempts to transform Sears have resulted in worse comps in 2015 than it did during the 2008 recession.
The new year is beginning with a mauling for many investors, as Chinese stocks fell so sharply Monday that they triggered a trading halt. Following China’s lead, Dow futures have wallowed more than 300 points in the red. ‘Investors are not going to like the start of this year,’ says Naeem Aslam, AvaTrade’s chief market strategist, in a note. Today’s call of the day fits the bearish mood that’s dominating 2016′s first trading session in the early going. The new year brings a ‘possibility that the ‘stealth bear market’ we have been in for 6-9 months is revealed as a true bear market,’ says Jonathan Krinsky at MKM Partners in a note. MKM’s chief market technician warns the median stock in the Russell 3000 RUA, -2.26% , which represents 98% of the U. S. stock market, is ‘now down over 20% from its 52-week high.’ So his shop’s ‘base case for 2016 is that the weakness seen at the stock level finally makes its way to the cap-weighted index level,’ meaning main benchmarks like the S&P 500 SPX, -2.09% and Nasdaq COMP, -2.55% . More from Krinsky below.
The bigger news in the cable industry is that the U. S. Justice Department’s threat to block the purchase/merger of Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC) did result in Comcast withdrawing its stock-swap proposal to acquire TWC in April, 2015. However, TWC soon afterwards entered into an agreement to be acquired by Charter Communications in May. The Charter’s deals totaling $67.1 billion for TWC and Bright House Networks is still under review by Federal Regulators. If approved, that merger would create the country’s second-largest cable operator, with about 24 million customers in 41 states, after Comcast. I personally think it is insane that anyone would even entertain the idea that a merger of any cable companies would be a good thing to consumers. On the surface, the cable industry is not entirely ‘consolidated’. Nonetheless, the fact is that almost all cable companies operate as de facto monopolies in the United States since frequently only one cable company offers cable service in a given community. Things have gotten worse as cable also has become one of the very few choices for residential Internet services. For example, in Houston, the fourth most populous city in the nation, Comcast has a virtual monopoly over residential cable services. Leveraging its cable TV monopoly, Comcast is also the more popular choice for Internet service within the city (cable modem is supposed to have better speed than phone lines). With this kind of dominance, would any business strive to ‘innovate’ or ‘improve the quality of customer service?
Today Jack Ciesielski and I will to try to scare some sense into you. Who is Ciesielski, and why would he want to frighten you? It’ll take some time to answer that. First things first. The stock market has been more or less flat most of this year. But at times – like for the past month or so – stock prices have climbed as if Wall Street didn’t have a concern in the world. Terrorism hasn’t fazed the stock market. Nor has the fact that the Federal Reserve is threatening – yet again – to raise interest rates. Weak corporate profits and revenue declines? Nah, Wall Street doesn’t give a damn about them either. This column will show you why the performance of companies should be of great concern – and not only because they are, on the surface, lousy but also because accounting tricks are hiding the true horror story. That’s where Ciesielski comes in, but he’ll have to wait in the wings for his turn. Everyone who reads this column should already know what price-to-earnings ratios are. But just in case you don’t, here’s the explanation: Price-to-earnings – or P/E – are the price of a share of stock compared with a company’s earnings on a per-share basis. That’s a mouthful. To make it simple, let’s say a company – I’ll call it John’s Co. – earned $1 a share in 2015. Let’s say investors are buying and selling John’s Co. shares on Nasdaq at $14 each. (I picked Nasdaq because it will piss off the New York Stock Exchange that I didn’t list my company on the ‘Big Board.’) So the price of $14 a share compared with the $1-per-share earnings gives my company a P/E of 14 to 1.