Category Archives: Investing

Stock Market Leverage in La-La Land, Rises to Historic WTF High, by Wolf Richter

Leverage is called leverage because borrowed money levers markets up . . . and down. From Wolf Richter at wolfstreet.com:

Archegos shows how leverage is the great accelerator of stock prices on the way up, and on the way down. One of its bets, ViacomCBS, after skyrocketing, collapsed by 60%.

Vast, unreported, and at the time unknown amounts of leverage blew up Archegos Capital Management, dishing out enormous losses to its investors, the banks that brokered the swaps, and holders of the targeted stocks. The amount of leverage became known only after it blew up as banks started picking through the debris. ViacomCBS [VIAC] was one of the handful of stocks on which Archegos placed huge and highly leveraged bets, thereby pushing the shares into the stratosphere until March 22, after which they collapsed by 60%.

Archegos is an example of how leverage operates: It creates enormous buying pressure and drives up prices as leverage builds, and then when prices decline, the leveraged bets blow up as forced selling sets in. Most of the leverage in the markets is unreported until it blows up. The only type of stock-market leverage that is reported is margin debt – the amount that individuals and institutions borrow against their stock holdings as tracked by FINRA at its member brokerage firms. Margin debt is an indicator for overall leverage, and it has reached the zoo-has-gone-nuts level.

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U.S. Financial Markets Have Become A Giant Mirage Built On A Foundation Of Fraud, by Michael Snyder

They’re throwing billions at companies that will never generate a dime of profits. From Michael Snyder at theeconomiccollapseblog.com:

Would you pay more than 100 million dollars for a single deli in rural New Jersey that had less than $36,000 in sales during the last two years combined?  I know that sounds like a completely ridiculous question, but the stock market apparently thinks that deli is worth that much.  On Thursday, the Dow Jones Industrial Average closed above 34,000 for the first time in history, and investors all over the country cheered.  But this financial bubble is not real.  It is a giant mirage that is built on a foundation of fraud.  Investors have lost all touch with reality, and in this sort of euphoric environment a small deli in rural New Jersey can literally be valued at more than 100 million dollars

The Paulsboro, New Jersey-based Your Hometown Deli is the sole location for Hometown International, which has an eye-popping market value despite totaling $35,748 in sales in the last two years combined, according to securities filings.

“Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey … HWIN reached a market cap of $113 million on February 8. The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing,” Einhorn said in a letter to clients published Thursday.

For young people getting ready to graduate from high school and go to college, don’t waste your time.

Just open up a small deli and go public.

Soon you will be a multi-millionaire.

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The “Helicopter Parent” Fed and the Fatal Crash of Risk, by Charles Hugh Smith

Neither people nor markets learn or grow when they’re always bailed out of their mistakes. From Charles Hugh Smith at oftwominds.com:

All the risks generated by gambling with trillions of borrowed and leveraged dollars didn’t actually vanish; they were transferred by the Fed to the entire system.

The Federal Reserve is the nation’s Helicopter Parent, saving everyone from the consequences of their actions. We all know what happens when over-protective Helicopter Parents save their precious offspring from any opportunity to learn from mistakes and failures: they cripple their child’s ability to assess risk and learn from failure, guaranteeing fragility and catastrophically blind-to-risk decisions later in life.

Helicopter Parents generate a perfection of moral hazard, defined as there is no incentive to hedge risk because one is protected from its consequences. Moral hazard perversely increases the incentives to take on more risk because Mommy and Daddy (the Fed) will always save me / bail me out.

For example, when Mommy and Daddy make their reckless teen’s DUI charge go away, the teen’s already potent sense of godlike liberation from real-world consequences floats even higher. So next time the teen gets into his car drunk and takes his friends on a high-speed spin down Mulholland Drive, he loses control and kills everyone in the car–not just himself but those who trusted his warped sense of risk.

The Fed is the ultimate Helicopter Parent, protecting all the power players in our economy and society from the consequences of their risky actions. By crushing interest rates to near-zero, the Fed has perversely incentivized increasingly risky expansion of credit, and given the green light to there’s no limit, spend as much as you want government borrowing.

The Fed’s implicit promise to never let the stock market drop for more than a few days–the Fed Put–has incentivized every punter from billionaires to corporations to unemployed people with stimmy checks to max out their credit (or margin accounts) to increase their bets in the market casino.

The Fed has implicitly informed the bigger players that they can bet as big as they want because the Fed will always bail them out, transferring private losses to the public via Fed bailouts, lines of credit, backstops, etc.

The Fed has also signaled it will change the rules as needed to save its Players from loss. Mark-to-Market reveals the insolvency of the Players? Well, we’ll just get rid of that. All fixed! (heh)

Once the path of moral hazard has been taken, a fatal feedback loop takes hold: as reckless punters take on more risk to boost their gains, the fragility and brittleness of their positions increases geometrically. This soon endangers not just their own bets but the entire financial system, as it’s not just one punter who responds to the Fed’s Helicopter Parenting promise of no consequences for taking on more risk–every punter gets the green light to take on more risk because the Fed has our back.

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Advice for Holders of Government Bonds, by Bill Bonner

Sell. From Bill Bonner at rogueeconomics.com:

YOUGHAL, IRELAND – U.S. Treasury bond prices got a lift on Tuesday, with the 10-year yield falling below 1.7%. (Remember, when yields go down, bond prices go up.)

In August of last year, the yield on the 10-year was only 0.51%. But since then, it has been heading up. Now, even after the recent dip, it’s still more than three times that.

And the quarter just ended was the worst for Treasuries in almost 40 years. Not since the 1980s have yields risen by so much, so fast.

That move – before investors took former Federal Reserve chairman Paul Volcker seriously – proved to be the last gasp of the last bear market in bonds, that had begun three decades earlier.

Not that we know anything you don’t know. But this latest move over the last quarter looks like the first gasp of the next one.

And investors will soon learn that their faith in current Federal Reserve chair Jerome Powell and Treasury Secretary Janet Yellen is a mistake.

A Bird in the Hand

U.S. Treasury bonds trade on the full faith and credit of the issuer – the United States of America.

We’ve been exploring the decline of the U.S. empire this week. If we’re wrong about that, we may be wrong about this, too.

Perhaps faith in the credit of the U.S. will increase. But to make a long story short, our guess is that Treasury bonds have a lot more bad quarters coming.

After all, a U.S. Treasury bond is a promise to pay the lender back with a stream of U.S. dollars. Currently, that stream is enhanced by a yield of the aforementioned 1.7%… more or less.

But it is reduced by the uncertainties of the future… and by consumer price inflation.

“A bird in the hand is worth two in the bush,” is the old expression. The ones in the bush might fly away before you get your hands on them.

And if you get hit by a runaway Amazon delivery van, you might not enjoy a single penny of the money you invested in U.S. Treasury bonds.

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Doug Casey on the Rise of Woke Companies and ESG Investing

The Marxist ideologies that have infested all the other important American institutions have infested corporations as well. From Doug Casey at internationalman.com:

ESG investing

International Man: The trend of investing in so-called environmental, social, and governance (ESG) companies is growing. Companies are rated based on their carbon emissions, diversity on their board, among other factors. Many companies seem to be bending over backwards to show their ESG credentials.

What do you make of all this? Where did this all come from?

Doug Casey: A tsunami of political correctness is washing over the entire world. It’s not just the US. But it didn’t just arise spontaneously in a vacuum.

The first time that I ever heard the term “politically correct” was in a Saturday Night Live skit in the early ’80s. At the time, I just thought it was a funny catchphrase. It sounded like a takeoff on the Soviet term “politically unreliable,” which was used to describe those who weren’t dogmatic communist ideologues. However, it turned out to be an indicator of a much broader trend, one that got underway in the ’60s. It started in the universities.

Three generations of people have gone to college since the ’60s. In those days, attending college was relatively rare, only around 10% of the youth. It was less than 5% in the previous era. Now it’s quite common, with over a third of Americans getting degrees.

In those days, college was actually supposed to be about learning something tangible. Either subjects about the natural world—science, medicine, engineering, and the like—or humanities—literature, history, philosophy, and the like. There was always a divide between the two categories, of course. Sciences were hard and required diligent work with verifiable data, whereas the humanities were soft, largely the province of opinion and interpretation. Both disciplines have degraded, however. Even math is now considered too “white,” while the humanities have morphed into indoctrination.

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Diversity or The Bigotry of Low Expectations, by Jayant Bhandari

It’s not enough for people in business to be committed to and actually do the right things. Now, they must trumpet their eternal love of ESG and EDI. Don’t know what those two acronyms mean? Read on. From Jayant Bhandari at acting-man.com:

Value Traps and Economic Ignorance

A financial analyst is often, or at least should be, more of a psychologist than a financial expert. There are companies that I knew fifteen years ago that had inherent value a multiple of what their stocks were trading at. Today, there continues to be similar upside, except that upside targets and share prices are lower. What went wrong?

A problem reaches the far North faster than climate change can melt all the ice. [PT]

Such companies are often value-traps. A financially astute person might invest in them, hoping that eventually, the market will recognize the value. Unfortunately, some managements do not understand the concept of value-creation or are unfocused, innumerate, or crooked. One must learn early that even in the private sector, top leadership positions do not necessarily end up in the hands of the most competent people.

I mostly analyze mining companies. An example of a value-trap is a Hong Kong-listed entity, G-Resources, which was a mining company in the past. Today, it has most of its value is in treasuries and cash, worth US$1,500 million. Its market capitalization (at a HK$0.05 share price) is, however, a mere US$200 million. I don’t see any hope of it ever going up to match its inherent value.

An analyst must screen out the bad apples as quickly as possible. I want to address some areas in which companies actively destroy value.

Many mining companies, whose focus should be geology and mining engineering, spend too much time worrying about the commodity market. The commodity business is a specialization in its own right, and there is a reason why commodities are called “commodities”: It is hard — perhaps impossible — to project their future prices.

When mining companies project a future of scarcity, they show a lack of understanding of economics: About the elasticity of demand and supply and how futures and options markets take care of shortages through a complex web of hedging by suppliers and users. The extent to which a specific  commodity can rise in price is limited, because at some point substitution kicks in.

A typical, but hugely erroneous graph provided by many companies.

Holier than Thou with ESG

Over the last couple of years, many companies have implemented ESG programs. And EDI, a recent advent, has gone into hyper-drive. Of course, only the acronyms are quoted, for every “woke” person should know what they mean. ESG stands for Environment, Social, and Government.

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Market Manias Galore, But Long-Term Interest Rates Smell a Rat, by Wolf Richter

The rise in long-term interest rates reflects the humongous supply of US treasury debt hitting the market, the inflationary expectations engendered by the Federal Reserve’s monetization of that debt, and the fact that most market participants implicitly believe that rates that have stayed down for so long will stay down forever. From Wolf Richter at wolfstreet.com:

These manias and the rising long-term interest rates are on collision course.

Everyone can see what’s going on: speculative manias everywhere. This includes the most worthless delisted stocks of companies that had no activity for years that suddenly surged several hundred percent in hours, driven by pump-and-dump schemes in the social media, before re-collapsing.

And it goes all the way via real estate, junk bonds, the most-shorted stocks, cryptos, and well, sneakers, to the newest thingy, so-called NFTs, or non-fungible tokens, that are now being hyped to high heaven.

But facing these manias are long-term US Treasury bonds and high-grade corporate bonds that have been getting crushed for months – as their yields have surged.

For example, the bond market ETF that tracks US Treasury bonds with maturities of 20 years or more with the ticker TLT – its shares are now down 20% since early August last year. When prices of bonds drop, by definition, their yields rise.

A 20% drop in share price of what is promoted as a conservative investment in US government bonds is a big step down.

The Fed has bolted down short-term interest rates pretty well. They’re near zero and haven’t budged.

But long-term interest rates have been rising for months. The 10-year Treasury yield on Friday rose to 1.63%, the highest in over a year. Since August, the 10-year yield has more than tripled.

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SPACs Are Lining Up as the Next WTF Chart of the Year , by Wolf Richter

With SPACS (Special Purpose Acquisition Companies) you invest first and find out what you’re investing in later. If this seems strange and perverse, it is because it is, a phenomenon one only sees at the tippy-top of long running bull markets. From Wolf Richter at wolfstreet.com:

Who’s going to be the sucker? Even the SEC, which has been asleep through all this, warns retail investors. But in the current mega-bubble craze, no one gives a hoot about anything anymore.

SPACs – Special Purpose Acquisition Companies, or more descriptively, “blank check companies” that have no operations – have accomplished a huge feat that fits seamlessly into the current mega-bubble craze.

So far this year, as of today, 260 SPACs went public and raised $84 billion with their IPOs, according to data provided by SPACInsider. This is a big moment because it exceeded the total amount raised during the entire year 2020 of $83 billion, which itself had been six times as large as the prior full-year record in 2019. At this pace, SPACs are forming the next WTF chart of the year:

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Former BlackRock ESG Chief: American Public Is Being Duped By “Greenwashing”-Wall-Streeters, by Tyler Durden

Trust Wall Street to turn a buck off of the latest social and political totems without actually doing anything to solve the underlying problems. From Tyler Durden at zerohedge.com:

Over a month ago we first exposed the “Green Scam”. ESG, or Environmental, Social, and Governance, has become the virtue-signaling tour de force for asset mangers to skim even greater margins off retail dupes under pressure from their liberal peers. And since the green movement was here to stay, so was the wave of pro-ESG investing which every single bank has been pitching to its clients because, well you know, it’s the socially, environmentally and financially responsible thing.

There is just one problem. Instead of finding companies that, well, care for the environment, for society or are for a progressive governance movement, it turns out that the most popular holdings of all those virtue signaling ESG funds are companies such as…. Microsoft, Alphabet, Apple and Amazon, which one would be hard pressed to explain how their actions do anything that is of benefit for the environment, or whatever the S and G stand for. It gets better: among the other most popular ESG companies are consulting company Accenture (?), Procter & Gamble (??), and… drumroll, JPMorgan (!!?!!!?!).

Yes, for all those who are speechless by the fact that the latest virtue-signaling investing farce is nothing more than the pure cristalized hypocrisy of Wall Street and America’s most valuable corporations, who have all risen above the $1 trillion market cap bogey because they found a brilliant hook with which to attract the world’s most gullible, bleeding-heart liberals and frankly everybody else into believing they are fixing the world by investing in “ESG” when instead they are just making Jeff Bezos and Jamie Dimon richer beyond their wildest dreams, here is Credit Suisse’s summary of the 108 most popular ESG funds. Please try hard not to laugh when reading what “socially responsible, environmentally safe, aggressively progressive” companies that one buys when one investing into the “Green”, aka ESG scam.

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Rigged to Fail—From Musk to Powell, by Matthew Piepenburg

Living on lies is like living on junk food and TV, sooner or later it will kill you. From Matthew Piepenburg at goldswitzerland.com:

For quite some time we have been warning about the rising shark fin of rising yields and rates.

As of this writing, one can almost hear John Williams’ orchestral theme song to Jaws ringing in the ears.

The Slow Creep

Mortgage rates in the U.S. have hit 3%, dramatically curtailing mortgage re-fi’s.

Meanwhile, oil prices are now at levels not seen since 2018 (as broader commodities in general are on the rise) while the tech stocks of the NASDAQ (most of which thrive on cheap rates) recently, and predictably, saw volatile swings, at one point down past 10% from their February 12th peak.

Rates are up, the dollar is up and as Barron’s reporter, Janet H. Cho, observed: “Things are getting interesting.”

Unfortunately for Barron’s readers, however, these “interesting” developments have little if nothing to do with what she described as “economic growth picking up.”

Economic growth? Huh? Really? C’mon…

Spinning the “economic growth” meme for rising yields is akin to attributing Lance Armstrong’s cycling success to an apple-a-day rather than a steroid per week.

What Barron’s feature articleis conveniently overlooking is the far more obvious fact that investors, here and around the world, are calling the Fed’s bluff, not swooning over “economic growth.”

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