Category Archives: Investing

Collapse of Cryptocurrencies in Q1: Even the Biggest Crashed 67% to 88%, by Wolf Richter

What goes up a lot can come down a lot. From Wolf Richter at wolfstreet.com:

But nothing goes to heck in a straight line.

I don’t think there has ever been an entire sector that skyrocketed as much and collapsed as quickly as the cryptocurrency space. The skyrocketing phase culminated at the turn of the year. Then the collapse phase set in, with different cryptos choosing different points in time.

It doesn’t help that regulators around the world have caught on to these schemes called initial coin offerings (ICOs), where anyone, even the government of Venezuela, can try to sell homemade digital tokens to the gullible and take their “fiat” money from them and run away with it. There are now 1,596 cryptocurrencies and tokens out there, up from a handful a few years ago. And the gullible are getting cleaned out.

And it doesn’t help that the ways to promote these schemes are being closed off, one after the other.

At the end of January, Facebook announced that, suddenly, “misleading or deceptive ads have no place on Facebook,” and it prohibited ads about ICOs and cryptos.

On March 14, Google announced that it will block ads with “cryptocurrencies and related content,” including ICOs, cryptocurrency exchanges, cryptocurrency wallets, and cryptocurrency trading advice. Its crackdown begins in June.

On March 26, Twitter announced that it would ban ads of ICOs, cryptocurrency exchanges, and cryptocurrency wallet services, unless they are by public companies traded on major stock markets. It will roll out its policy over the next 30 days.

On March 29, MailChimp, a major email mass-distribution service, announced that it will block email promos from businesses that are “involved in any aspect of the sale, transaction, exchange, storage, marketing or production of cryptocurrencies, virtual currencies, and any digital assets related to an Initial Coin Offering.” This broadened and tightened its policy announced in February that promised to shut down any account related to promos of ICOs or blockchain activity.

To continue reading: Collapse of Cryptocurrencies in Q1: Even the Biggest Crashed 67% to 88%

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Bull Market Requiem, by Northman Trader

The Northman Trader has many reasons not to be bullish on the stock market. From the Northman Trader at northmantrader.com:

A bull market requiem:

Following the financial crisis the world needed coordinated structural solutions (and those would be hard requiring tough choices). Instead what the world got was coordinated central bank intervention which shrunk the middle class, made the rich richer and provided the rest with the illusion that things were getting better as pro forma unemployment rates shrunk and housing prices rose again and stock markets jumped from record to record. In the meantime politicians (of both parties) used the easy money illusion to do precisely nothing on the structural front. Instead they added debt and more debt and recent tax cuts just added to the combination of both: Wealth inequality and debt.

The data is very clear. Things are better for the few:

The greatest bull market ever (?) and 90% of income earners have less net worth than before the financial crisis? Given what it took on the intervention and debt fronts this is intellectual bankruptcy. Policy makers have failed the larger population. Full stop.

Income growth? Forget it:

Debt? A disaster zone with no end in sight:

And only getting worse. Much, much worse. Here’s the CBO projecting the coming explosion in debt which doesn’t even presume a coming recession:

This is what policy makers have produced ahead of the next recession:

The construct was ready to fall apart in early 2016. Earnings recession they called it. Bullshit. It was a recession in the making and central bankers knew it and hence we saw the cumulative insanity of over $5 trillion in additional intervention between 2016 and now. People forget: In this short period we witnessed the most aggressive global central bank intervention ever:

To continue reading: Bull Market Requiem

The Donald’s Blind Squirrel Nails An Acorn, by David Stockman

Would Amazon stock trade anywhere near $1000 a share in a world of honest money? David Stockman says no. From Stockman, at davidstockmanscontracorner.com:

It is said that even a blind squirrel occasionally finds an acorn, and so it goes with the Donald. Banging on his Twitter keyboard in the morning darkness, he drilled Jeff Bezos a new one—or at least that’s what most people would call having their net worth lightened by about $2 billion:

I have stated my concerns with Amazon long before the Election. Unlike others, they pay little or no taxes to state & local governments, use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.), and are putting many thousands of retailers out of business!

You can’t get more accurate than that. Amazon (AMZN) is a monstrous predator enabled by the state, but Amazon’s outrageous postal subsidy—-a $1.46 gift card from the USPS stabled on each box—-isn’t the half of it.

The real crime here is that Amazon has been exempted from making a profit, and the culprit is the Federal Reserve’s malignant regime of Bubble Finance. The latter has destroyed financial discipline entirely and turned the stock market into the greatest den of speculation in human history.

That’s why Bezos can kill established businesses with impunity. The casino allows him to run a pernicious business model based on “price to destroy”, rather than price for profit and a return on capital.

Needless to say, under a regime of sound money and honest capital markets Amazon would be a far more benign economic creature. That’s because no real investors would value AMZN’s money-loosing e-Commerce business at $540 billion—-nor even a small fraction of that after 25-years of profitless growth.

As we observed a few weeks ago,

AMZN is allegedly a tech company owing to its cloud business (AWS). But that’s exactly the skunk in the woodpile.

When you set aside AWS’ sales and operating income during 2017, Amazon’s e-Commerce business generated $160 billion of sales, but posted operating income of negative $200 million.

That’s right. The monster of the retail midway posted no profit whatsoever last year!

And it’s getting worse. During 2016 the e-Commerce business posted $1.1 billion of operating income on $124 billion of sales; and the year before that (2015) operating income was $2.6 billion on e-Commerce sales of $99 billion.

Stated differently, incremental annual sales of $61 billion over the past three years resulted in a $2.8 billion reduction in operating profit.

There you have it. As the third great bubble of this century has accelerated towards its blow-off top, the robo-machines and momo traders have turned absolutely rabid, thereby enabling Bezos to go flat-out berserk in pursuit of growth at any cost.

To continue reading: The Donald’s Blind Squirrel Nails An Acorn

Wall Street Stands To Lose Billions As Trump Hangs A “Not-For-Sale Sign” On US Tech, by Tyler Durden

President Trump is walling off the high-tech sector from acquisitions from rival powers. Too bad for those firms; the foreigners almost always overpay. From Tyler Durden at zerohedge.com:

Broadcom executives should’ve seen this coming.

For months now, Singapore-based Broadcom has pursued a merger with US-based Qualcomm, raising its bid for the largest US-based technology firm to $117 billion, which is developing chips that are expected to be integral to 5G network technology in the US. Then, national security issues reared their head.

Earlier this month, the Committee on Foreign Investment in the US inserted itself into the negotiations (following a request from lawmakers) by ordering Qualcomm to delay its March 6 shareholder meeting to give CFIUS more time to investigate the takeover bid.

CFIUS’s involvement presented yet another obstacle to the deal. Qualcomm had actively resisted the Broadcom’s overtures, but the Singapore-based firm’s willingness to repeatedly raise its bid, along with its plans to redomicile in the US, impressed upon investors that the company was committed to closing the merger.

Then last night, President Trump definitively quashed the deal by issuing an executive order blocking the deal on national security grounds.

“There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom) … through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States…”

The move, as many analysts noted, was unusual. But Kyle Bass of Hyman Capital anticipated the intervention, telling CNBC last week that QCOM’s importance to 5G tech meant that “we can’t possible let the Broadcom Qualcom merger to go through.

And on Monday, the Treasury Department sent a letter to lawyers involved in the deal expressing concerns about Chinese competitors in 5G network development, which raises national security concerns over the Broadcom-Qualcomm merger.

Broadcom said in a letter to Congress regarding its offer to acquire Qualcomm that the company would not sell any “critical national security assets” to any foreign companies.

But clearly those assurances weren’t enough. And today, as Bloomberg explains, Trump’s swift rejection of the hostile takeover sent a clear message to overseas investors and companies: Any deal that could give China an edge in critical technology will be blocked on national security grounds.

 

To continue reading: Wall Street Stands To Lose Billions As Trump Hangs A “Not-For-Sale Sign” On US Tech

Bitcoin Is Ridiculous. Blockchain Is Dangerous, by Paul Ford

Paul Ford looks at Bitcoin and blockchain technology through the lenses of prior tech manias. From Ford at bloomberg.com:

The true believers won’t stop until they’ve remade the world. Some of it will be thrilling. Some of it will keep us up at night.

On the days when Bitcoin crashes, a holiday atmosphere takes over in my corners of the internet. People tweet screengrabs of Reddit fights. It’s always good fun to watch strangers grieve as their digital nonsense nickels melt into slag.

It’s not that I want Bitcoin holders to suffer, really. As a technologist and entrepreneur, I’m sympathetic to and admiring of risk takers. But as a writer, I enjoy the sheer human-condition-revealing sport. I’m happy to watch other people play video games without playing myself. I’ll watch poker, but I’ve never bought a deck of cards—and when I watch football, I keep the official NFL rulebook open on my phone. For whatever reason, I tend to like the rules more than the game. Bitcoin is at some level just a set of rules, defined by software, that has become one of the world’s weirdest games. And people who invest in an unmanageable abstraction, then panic when it underperforms, are very entertaining.

Everyone’s so excited and having such a good time, the sort of time you have right before they invade Paris. Watching the world of initial coin offerings over the past few years has been like watching popcorn pop. Everything rattled around in the hot air for what seemed like forever and then pop! Mastercoin! Ethereum! Bancor! Tezos! Then other kernels started popping, and now we’re eating popcorn for breakfast, lunch, and dinner. Blockchain startups visit our software agency and promise to pay in dollars, then add, “There are, however, other ways to get paid.” Everyone is smart and well-funded. And, yes, some blockchain startups (but never, ever the ones that visit us) seem comical—so many graphs! Some are even deliberately so, like Useless Ethereum Token, whose logo is a raised middle finger. “There will be no expectation of gains,” says the UET website. Naturally, buyers have taken on about $300,000 worth.

 The people tossed around by the cryptocurrency tempest—their only sin is belief. (Well, and greed.) But here I can only smile warmly and sigh. I know what it’s like to believe.

The Arithmetic of Risk, by John P. Hussman

Sooner or later Hussman’s warnings about overvalued markets and speculative manias are going to hit home. The market has been overvalued for a long time, but Hussman detects a shift in the its underlying risk dynamics. From Hussman at hussmanfunds.com:

The collapse of major bubbles is often preceded by the collapse of smaller bubbles representing ‘fringe’ speculations. Those early wipeouts are canaries in the coalmine. Once investor preferences shift from speculation toward risk-aversion, extreme valuations should not be ignored, and can suddenly matter to their full extent.

A month ago, I noted that prevailing valuation extremes implied negative total returns for the S&P 500 on 10-12 year horizon, and losses on the order of two-thirds of the market’s value over the completion of the current market cycle. With our measures of market internals constructive, on balance, we had maintained a rather neutral near-term outlook for months, despite the most extreme “overvalued, overbought, overbullish” syndromes in U.S. history. Still, I noted, “I believe that it’s essential to carry a significant safety net at present, and I’m also partial to tail-risk hedges that kick-in automatically as the market declines, rather than requiring the execution of sell orders. My impression is that the first leg down will be extremely steep, and that a subsequent bounce will encourage investors to believe the worst is over.”

On February 2nd, our measures of market internals clearly deteriorated, shifting market conditions to a combination of extreme valuations and unfavorable market internals, coming off of the most extremely overextended conditions we’ve ever observed in the historical data. At present, I view the market as a “broken parabola” – much the same as we observed for the Nikkei in 1990, the Nasdaq in 2000, or for those wishing a more recent example, Bitcoin since January.

To continue reading: The Arithmetic of Risk

Warren Buffett isn’t buying. Why should anyone else? by Simon Black

Perhaps you’re long and strong on the stock market, maybe even leveraged, because deep down inside, you know you’re a better investor than Warren. Good luck with that. From Simon Black at sovereignman.com:

Over the weekend on Saturday morning, amid its usual fanfare and attention, Warren Buffett’s company Berkshire Hathaway released its annual report to the public.

This is a pretty big deal each year. Investors and financial reporters typically wait with baited breath to hear what the Oracle himself has to say in his legendary annual letter.

Buffett’s topics in previous letters have covered a lot of ground– the state of the US economy, value investing education, why Wall Street is so deeply flawed, commentary on financial markets, etc.

This year’s letter was, as usual, quite interesting… but primarily because of what Buffett said about his own business.

Berkshire Hathaway is an enormous enterprise; it’s essentially a $500 billion holding company that owns dozens of smaller businesses, all of which collectively generate tens of billions in free cash flow.

Buffett’s primary mission is to acquire more businesses and expand Berkshire’s portfolio… and then ensure that each of those subsidiaries has top quality management to grow the cashflow.

And that’s what was so interesting about this year’s letter: Buffett couldn’t really do his job.

According to Warren Buffett himself:

In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high.

Now, consider that Berkshire Hathaway’s cash pile rose to an astonishing $116 billion at the end of 2017.

With that much money on hand, very few companies are out of Buffett’s reach.

Specifically, $116 billion would have been enough money to acquire any one of 465 out of the 500 largest companies in the United States– including Nike, Starbucks, UPS, Netflix, and Ford.

To continue reading: Warren Buffett isn’t buying. Why should anyone else?