Sound the alarm: two down days... Short-sellers flee... Loans for takeovers are nearing a record... Two worried gurus... Another struggling retailer... An update on the 'disappearing middle class'... Alcoa's blockbuster earnings...
The bears are in the headlines following a harrowing two consecutive down days for the Dow and S&P 500... Their messages deserve your attention.
It's great that the market is hitting all-time highs. It's great that the Federal Reserve, the European Central Bank, and other central banks around the world have pledged to do whatever it takes to goose the markets.
Anyone who has been in stocks for the past five years knows their efforts have worked so far... The S&P 500 has gone up 123% since July 2009.
And their efforts could continue to work... They could continue boosting markets for years. But it could also be months... or weeks... Nobody knows for certain.
We think we still have more upside in stocks. But we know this rally is closer to the end than it is to the beginning. And being blindly long in a rigged market is dangerous.
Of course, investors ignore risk at market tops. The top, by definition, is when the last fool has bought into the rally. Everyone is leveraged and long... Reason goes out the door.
Today, for example, the percentage of stocks being shorted is at its lowest level since before Lehman Brothers' collapse, according to research firm Markit.
Short interest in the S&P 500 is around 2% of total shares, close to its lowest level since the beginning of Markit's data in 2006. Short interest in the Stoxx Europe 600 is just above 2%. And short interest in the UK FTSE All-Share index is less than 1%.
At the peak in 2007, short interest in the S&P 500 was at 5.5%.
As we explained in the February 6 Digest, when you try to profit from the decline in a company's share price, your maximum upside is 100% – a stock can only go to zero. But your downside is unlimited. There's no maximum share price a stock can reach.
And central banks are testing that theory today, as they inflate every asset price. By lowering interest rates to near zero, central banks pose another threat to short-sellers...
When money is cheap and abundant, people get reckless. No company is safe from a takeover bid – from the largest, best-run firms to companies teetering on collapse.
According to Bloomberg, U.S. institutional loans were $47.7 billion for leveraged buyouts (LBOs) in the first half of the year, up 43% from a year ago – and nearing the record $57.5 billion in the first half of 2007.
As we've said many times, we look for three types of short sales... companies that are fraudulent, obsolete, or carrying unsustainable debt loads. Of course, given today's "loose money" environment, the third point is nearly moot.
We never short a stock based on its valuation... An absurdly valued stock can always get more absurd.
On to those rare investors urging caution...
"Certainly asset bubbles [are] developing. Investors should be wary. They should watch out for tail risk," Barry Sternlicht, chairman and CEO of the $36 billion Starwood Capital Group, told CNBC yesterday.
Sternlicht, who focuses on real estate, said investors are buying alternative assets like farmland and timber in lieu of record-low yielding bonds, calling them "yield proxies."
"We represent many sovereign wealth funds that invest with us, and they're anxious to put that cash to work in something, anything," Sternlicht said. "Real estate is a beneficiary of that, as is the stock market."
But he thinks the trade is getting long in the tooth... "I think everyone is levered long to a rising economy. I don't think rates are going anywhere globally. The world's economies are not strong enough."
Gloom, Boom & Doom Report editor Marc Faber also sees a bubble.
"I think it's a colossal bubble in all asset prices, and eventually it will burst, and maybe it has begun to burst already," Faber said yesterday on CNBC.
Like Sternlicht, Faber doesn't see the global economy strengthening...
|
Faber expects the S&P 500 to fall 30% from here. And while we believe Marc is brilliant, remember that he is also often bearish.
Yesterday, we shared Wal-Mart CEO Bill Simon's view on the economy... In short, he said his customer – middle America – is struggling.
Today, Kip Tindell, CEO of The Container Store Group, echoed Simon's observations...
The Container Store Group sells home goods and organizational products... It's on the higher end of retailers for its category. The company announced comparable store sales fell 0.8% in the quarter. Tindell wrote in the company's earnings announcement...
|
Tindell noted even the higher-end shopper is going away...
|
Again, this all plays into our "disappearing middle class" thesis... Stansberry's Investment Advisory research analyst E.B. Tucker offered his thoughts on Tindell's and Simon's announcements...
|
E.B. noted that billionaire investor Carl Icahn's recent position in Dollar General competitor Family Dollar supports the migration to discount retailers...
|
We'll leave you today with one bright spot...
As outlined in the June 12 Digest, DailyWealth Trader editor Amber Lee Mason recommended shares of aluminum company Alcoa up to $8.75. She said global economic growth would improve sentiment toward Alcoa. It was a classic "bad to less bad" trade. As she wrote...
|
DailyWealth Trader subscribers were already up big on the recommendation. But today, things got even "less bad." Alcoa announced great quarterly earnings.
The company earned $216 million, crushing expectations of $138 million. The company lost money in the same quarter last year.
Alcoa forecast that global aluminum demand would rise 7% in 2014. The company sees the global aluminum deficit increasing.
Aluminum producers have struggled for years due to declining aluminum prices, which were caused by a surplus in global capacity and a slowdown in Chinese demand. And recently, Alcoa reduced capacity at various plants to cut costs.
But the company also transformed its portfolio to focus more on value-added products and finished goods (like manufacturing aerospace and auto components), which reduced dependence on metals prices.
Now, Alcoa estimates its North American commercial transportation market will grow 10%-14% a year – a 70% increase from a year earlier. Aluminum reduces the weight of cars, which promotes fuel efficiency. As a result, aluminum is increasingly used as a substitute for steel in the auto industry.
Plus, last month, Alcoa said it would acquire British jet-engine parts manufacturer Firth Rixson for $2.9 billion – another example of Alcoa's focus on value-added components.
Shares of Alcoa jumped nearly 6% on the news... DailyWealth Trader readers are up 74% on the recommendation.
New 52-week highs (as of 7/8/14): Aware (AWRE), Dorchester Minerals (DMLP), Freeport-McMoRan (FCX), and Southern Copper (SCCO).
Do we not spell things out enough in the Digest? Give us your take at feedback@stansberryresearch.com.
"In [yesterday's] Digest, you said: 'And Simon says the middle class is hurting today, despite a drop in U.S. unemployment to 6.1%.' Get you head out of your A _ _ !!!!! QUIT buying into the Obama crap that 6.1% is the 'real Rate', because I T I S N ' T !!! TRY 17 – 20% on for size! Just because the other 11% is so fed up, discouraged, frustrated ... because they cannot find work so they give up, they ARE STILL UNEMPLOYED.
"The Government is nothing but liars, pandering to the uninformed IDIOTS that voted them back in, putting out a LOT of phoney numbers of ALL kinds out there so the brainless hoards will feel good (and vote for the complacency that is destroying our Country... AGAIN ) ! The ONLY way to fight it is to STOP IT in its tracks and expose the 'elected elite' for what they are. DAMNED LIARS. YOU don't HELP MATTERS by re-preaching their CRAP!" – Paid-up subscriber LE
Goldsmith comment: You must not be a longtime reader... Otherwise you would know we don't trust any numbers coming from the government. That was the point of our missive... that the CEO of the world's largest retailer's opinion is more powerful than that of the government.
Regards,
Sean Goldsmith
July 9, 2014
Porter: Why I believe Tesla's accounting is fraudulent...
During his presentation at our natural resources conference in Dallas, Porter explained how electric automaker Tesla is using questionable accounting practices to boost its margins and revenue.
But as he explains in today's Digest Premium, the charade can't last...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Porter: Why I believe Tesla's accounting is fraudulent...
Editor's note: At our natural resources conference event in Dallas, Porter presented as General Motors CEO Mary Barra. In today's Digest Premium, adapted from his speech, Porter (as Barra) explains that while GM is in trouble, electric-car manufacturer Tesla is far worse off...
Tesla's cars catch fire, too.
Now, this is a part of a presentation that was given at an investment conference, the Value Investing Congress. And a sharp analyst there – Zeke Ashton – noticed that Tesla is now valued for half as much as BMW. Think about that for a second. BMW sells 2 million cars a year. It makes a lot of money. Tesla doesn't really make any money and sells a tiny number of cars. That just doesn't make sense. BMW makes almost $100 billion a year in revenue. Tesla makes $2 billion...
They're trying to give a trophy to all the Tesla shareholders too, but it's not going to work.
I see a lot of numbers about car companies, so I have an idea of how this thing works. And I believe Tesla's accounting is fraudulent. And by the way, the mainstream media doesn't know this yet. This is new, so this might be valuable.
Tesla leases a car worth $100,000, but only receives about $25,000 in the first year of the lease. Guess how much money it records in its accounting? $100,000. But Tesla didn't actually get it.
So what I ask my accountants at General Motors to do is to show you what Tesla's pro forma says versus the actual benefit it's getting...
Tesla does something else that's interesting, too. It has been getting these incredible tax credits. And here I thought GM enjoyed all the benefits of "Government Motors," but no, it's Tesla.
The government loves cars that don't work. So Tesla got $180 million in tax credits this year, but instead of applying that as a line item in the revenue basis, the company is using it to subtract from its cost basis. You can't do that. That gets you in trouble.
And that inflates its gross margin substantially. You can see that Tesla goes from being very profitable to being just barely profitable. Now think about that for a second. That's called securities fraud.
There's one more and it's a doozy... So these leases end after three years. How much is a car worth after a three-year lease? The answer is no one really knows, because a gasoline-powered car has a useful life of 10 years. So after a three-year lease, it could still have 60%-70% of its residual value. No problem. But what about an electric car whose battery pack costs $60,000 and only has a three-year lifespan? What do you think a three-year-old used Tesla with no battery is worth?
In its accounting, Tesla says it's worth $50,000. In the pro forma we've prepared, we believe it will be worth $25,000. And our assumption may be very generous. If you look at the three-year-old used prices of other electric cars, they're only worth about 15% of the original sales price. I'm quoting the price of the Nissan LEAF, for those of you who want to do your own work. Anyway, my bet is that all these investors who think that Tesla is worth half as much as BMW are going to be very disappointed.
– Porter Stansberry
Editor's note: We still have a limited number of "early bird" seats for our next live event in Los Angeles on August 23. But we expect to sell out this week... and then we're raising the price. If you'd like to see what Porter has in store for next month – and hear presentations from Steve Sjuggerud, former Morgan Stanley Asia director Peter Churchouse, master speculator Doug Casey, and many more – I hope you'll join us. You can secure your lowest-price "early bird" ticket by clicking here.
Porter: Why I believe Tesla's accounting is fraudulent...
During his presentation at our natural resources conference in Dallas, Porter explained how electric automaker Tesla is using questionable accounting practices to boost its margins and revenue.
But as he explains in today's Digest Premium, the charade can't last...
To continue reading, scroll down or click here.