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Memo from Insiders: Dear Bagholders, Thanks for Buying Our Shares at the Top

August 1, 2020

Memo from Insiders: Dear Bagholders, Thanks for Buying Our Shares at the Top

The self-sustaining recovery is a fantasy that’s evaporated.

What looks like a powerful, can’t-lose rally to newbies is recognized as distribution by old hands. In low-volume markets (as in the past few months), insiders holding large positions can’t dump all their shares at once or the price of the stock would plummet due to the thinness of the bid.

The only way to get top-dollar for one’s overvalued shares is to play distribution games: sell a little each day on the upticks, and buy back shares when they threaten to drop below the key support levels followed by trading algos.

When insiders have finished distributing their shares to naive and trusting bagholders at the top, then the price can flush lower with a velocity that shocks the complacent bagholders who saw only the inevitability of an endless rally rather than the inevitability of a collapse of bubble valuations.

Stocks are priced for a V-shaped recovery and/or $1 trillion in federal giveaways per month. Neither is possible. The V-shaped recovery hopes were based on $6 trillion in federal/Federal Reserve stimulus washing over the nation, boosting household incomes and opening spigots of cash for enterprises and local governments.

The basic idea was to give the economy a needed shot of adrenaline to get to to the point where a recovery would be self-sustaining: companies would hire back laid-off workers, people would start borrowing and over-consuming again, sales and income tax revenues would return to pre-pandemic levels, etc.

The self-sustaining recovery is a fantasy that’s evaporated. The spike in activity was all the giveaways being spent. Now that most of the free-money programs are expiring, there’s no more stimulus to spend.

…click on the above link to read the rest of the article…

Get Real

April 28, 2019

Get Real

The final phase of a bull cycle is the most deceiving. It is the time when things are at their best, optimism runs wild, equities can do no wrong and any warning signs are dismissed as equity price action valiantly defies the reality that is to come.

It is also a time when complacency makes a comeback as big rallies emerge following initial larger corrections. 2018 was a year of big corrections. 10% in February, 20% in Q4. Now a 25% rally. Not signs of a stable bull market. It is precisely the aggressive counter rallies near the end of cycles that can be the most awe-inspiring and reason defying, yet they can also be the most dangerous while being the best opportunities to sell at the same time.

Let’s get real: The liquidity machine can hide reality only for so long and that is: Things keep slowing down. Cycles don’t turn on a dime, they take time and that is what we are seeing unfold and the signs are plentiful. From Japanese industrial production going negative the past 3 months to home sales in the Hamptons slowing to the slowest level in 7 years.  I’m using these couple rather random examples to illustrate a point: The slowdown is as broad as it global:

Oh yes, even Friday’s Q1 GDP report reeked of deceit and the headline is hiding theslowdown in plain sight:

“The economy isn’t doing nearly as well as that 3.2% annual growth rate for gross domestic product reported Friday by the Commerce Department.

The heart of the real economy — private-sector consumption and investment — slowed sharply in the first quarter to a 1.3% annual rate, the slowest growth in nearly six years.

 …click on the above link to read the rest of the article…

Could Stocks Rally Even as Parts of the Economy Are Recessionary?

January 7, 2019

Could Stocks Rally Even as Parts of the Economy Are Recessionary?

It’s not yet clear that the stock market swoon is predictive or merely a panic attack triggered by a loss of meds.

We contrarians can’t help it: when the herd is bullish, we start looking for a reversal. When the herd turns bearish, we also start looking for a reversal.

So now that the herd is skittishly bearish, anticipating a recession, contrarians start wondering if a most hated rally is in the offing, one that would leave most punters off the bus.

The primary theme for 2019 in my view is everything accepted by the mainstream is not as it seems. Everything presented as monolithic and straightforward is fragmented, asymmetric and complex.

Take “recession.” The standard definition of recession is two consecutive quarters of negative GDP. But is this metric useful in such a fragmented, complex economy? What we’re seeing develop is certain sectors are already in recession, others are sliding while others are doing OK.

So the question of stocks rising or falling partly depends on which parts of the economy are most heavily weighted in the stock market. If the sectors most heavily represented by listed stocks are doing OK, then other chunks of the economy can be in freefall and stocks could still rise.

There’s also the psychological state of market participants. Was the 20% decline in the 4th quarter a much-delayed reaction to impending recession or was it a panic attack caused by the Federal Reserve withdrawing some of its largesse, i.e. lowering the Fed Put?

It it turns out to be more panic-attack than rational response, a relief rally might be expected.

…click on the above link to read the rest of the article…

Weekly Commentary: MBS and the Core

November 4, 2018

Weekly Commentary: MBS and the Core

The Dow (DJIA) traded as low as 24,122 in late-Monday afternoon trading. By Friday’s open, the Dow had rallied 1,457 points, or 6.0%, to 25,579. Relatively speaking, the Dow was a tame kitten. From Monday’s intraday lows, the Nasdaq100 rallied as much at 7.8%. The Semiconductors won this week’s Wild Animal competition, rallying 12.7% (week’s lows to highs). At 11.9%, the Biotechs were a close second. The Homebuilders (XHB) rallied as much as 11.3% before ending the week with a gain of 7.3%.
A couple obvious questions come to mind: Bear market rally or just another “buy the dip, don’t be one” opportunity for a market again ready to scale new heights? Is President Trump now ready to strike a trade deal with China – or was he just goosing markets ahead of the midterms?

Let’s start with the markets. They certainly had the likeness of a classic “rip your face off” bear market rally. The Goldman Sachs Most Short index surged 9.0% off Monday lows. For the week, this index rose 6.1%, showing off a 2.5 beta versus the S&P500’s return (6.1%/2.4%). In the semiconductor space, heavily shorted On Semiconductor, NXP Semiconductor, AMD and Micron Technology gained 23.9%, 18.5%, 14.8% and 13.9%, respectively. A long list of heavily shorted retail stocks gained double-digits, as the Retail index (XRT) surged 4.3% for the week.

There were a number of heavily shorted biotech stocks that posted 20% plus gains for the week. A bunch of regional banks rose between five and nine percent. And I’d be remiss for not mentioning (everyone’s favorite short) Tesla. In just 10 sessions, Tesla rallied (38%) from a low of $253 to Friday’s $346 close.

It’s certainly worth noting that short squeeze dynamics were not limited to U.S. equities. Let’s start at the epicenter of global crisis dynamics, the big banks. Hong Kong’s Hang Seng (Chinese) Financials index rallied as much as 8.3% off the week’s lows, to end the week up 6.3%.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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