When a “Last Stock Standing” Falls

Posted On Jan 29, 2016 By Dave Gonigam

  • A sure sign the top is in…
  • When these numbers head south, recession is “just around the corner”
  • David Stockman’s “next major U.S. stock to crash,” revealed
  • Bad news is good news again… Misplaced hopes behind today’s rally
  • A glimpse at the cashless society, through the eyes of a homeless man
  • Reader’s report from the front lines of the war on cash

Even as late as this week, your editor had lingering doubts about whether the U.S. stock market and economy had topped out. Maybe there was still just enough EZ-money juice sloshing around in the system for one more hurrah.

Then we saw this yesterday…

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As you might recall, the “Great Recession” killed off Circuit City. Last fall, two New York retail veterans bought the rights to the name. The first store is scheduled to open in Dallas in June.

PC World tells us “the new stores will feature the usual electronics fare, including smartphones, tablets, wearables, routers, gamer gear and headphones.” Smartphones! In a bricks-and-mortar setting! NO ONE’S EVER DONE THAT BEFORE!

“There will also be drones, 3-D printers and other items such as Circuit City’s own brand of basic accessories like cables and power banks.” Hell, why should Best Buy have a monopoly on overpriced HDMI cables?!

Sorta reminds us of the time Sam Zell, the foul-mouthed motorcycle-riding billionaire, thought he could parlay his commercial real estate smarts into becoming a media mogul. He closed on the purchase of Tribune Co.in December 2007 — the very month the “Great Recession” got rolling. A year later, Mother Tribune was in Chapter 11.

“The fast money and robo-machines keep trying to ignite stock rallies, but they all fizzle because bad karma is beginning to infect the casino,” says David Stockman — who doesn’t need any convincing the top is in.

“That is, apprehension is growing among whatever adults are left on Wall Street that 84 months of zero interest rate policy and $3.5 trillion of Fed balance sheet expansion, aka money printing, didn’t do the trick,” Mr. Stockman wrote yesterday.

This morning, those apprehensions were confirmed by the Commerce Department’s first guess at fourth-quarter GDP — up an annualized 0.7%.

That compares with 2.0% in the third quarter, itself a subpar figure by historical standards.

We’ll concede GDP — aside from all its other faults — is a notoriously “backward looking” figure… not indicative of future activity. As David said here yesterday, “Business sales and investment are the heart of the equation. When they head south, the recession is just around the corner.

“As of the most recent data, total business sales — manufacturing, wholesale and retail — were down by nearly 4% from their mid-2014 peak. And the ratio of inventory to sales has shot up to levels last posted in October 2008.”

All III Omen

Alas, the adults are not in charge on the Street today. The Dow is up 212 points as we write, at 16,282, thanks to more EZ money from Japan and the anticipation of more EZ money from the Fed. (More about both shortly.)

The one outlier in the rally today — Amazon. After the closing bell yesterday, AMZN reported record profits… but at $1 a share, they fell well short of Wall Street’s lofty $1.56 expectations. Sales also missed the mark.

AMZN shares are down more than 7% at last check, below $600.

We can now reveal Amazon was the “next major U.S. stock to crash,” as David Stockman was projecting here over the last week.

Seven percent in a morning isn’t a crash… but it’s a good start. And with more disappointments to come, there’s ample time for the put options he recommended to play out. They don’t expire till January next year.

A bit about David’s thinking behind the play: He rejected the notion that AMZN’s profit margins are razor-thin because the firm keeps investing in future growth. “Sooner or later, valuation has to be about free cash flow,” he said in the recommendation he sent to everyone who signed up for David Stockman’s Bubble Finance Trader.

“Jeff Bezos is surely the greatest empire builder since Genghis Khan and has never wavered in his determination to spend every dime the company generates in sales. Profits be damned.

“But history will surely record that the 48 months since December 2011 comprised the final stages of the most stupendous financial bubble in recorded history. During that period, the casino re-rated Amazon’s meager free cash flow from 40X to 62X to 117X on virtually no improvement in performance.”

In a late-stage bull market, none of that matters — until suddenly it does. Yesterday, it started to matter.

That’s what David called “Last Stocks Standing” syndrome. Amazon defied gravity while much of the rest of the S&P 500 languished. No more.

If you missed out on these Amazon puts, there’s another trade just around the corner. David issues new recommendations every two weeks. He’s closed two of them so far for gains of 54% and 88%. Among the open positions, the average is a 17% gain in less than two months.

Out of fairness to the people who jumped on our free 30-day trial offer in the last week, we can’t extend that offer again. But we can do the next best thing. It’s still a substantial discount from the regular subscription price. Click here right now for access, because this offer is available today only.

The phenomenon of negative interest rates is spreading eastward. After being the hot thing in Sweden and Switzerland for a while, the Bank of Japan adopted them overnight.

Commercial banks that keep money on deposit at the BOJ will pay 0.1% for the privilege. The thinking is that the banks will now have an incentive to lend to businesses and lift Japan out of its 25-year economic funk.

That’s assuming businesses want to borrow, of course… heh.

“The BOJ announced last night that they will implement a three-tiered system for deposits,” explains EverBank Global Markets managing director Chuck Butler in today’s Daily Pfennig. “Existing deposits don’t change, and neither do the reserve requirements for banks, but any newly created deposits will be charged negative 0.1%…

“I’ll tell you right here, right now, that this is a way to slowly introduce negative rates across the board in Japan. And I wouldn’t be surprised if we saw that happen in 2016.”

[Just in: “I think negative rates are something the Fed will and probably should consider if the situation arises,” former Federal Reserve chief Ben Bernanke says in an interview with MarketWatch. You’ve been warned.]

With the BOJ’s announcement, the yen has tumbled against the dollar more than 2%. It now takes 121.55 yen to equal one U.S. dollar.

The U.S. dollar index — of which the yen is a major component — has shot up more than 1%, to 99.8. That’s within sight of the 100 level reached twice within the past year.

Not only is hot money flooding into the dollar, it’s seeking shelter in U.S. Treasuries — which still pay a higher yield than many other nations’ sovereign debt.

The buying has pushed down the yield on a 10-year Treasury to 1.93%, a level last seen nine months ago.

To some degree, today’s stock rally is also fueled by misplaced hopes that the Federal Reserve will hold off on another interest rate increase in March.

It’s the return of the bad-news-is-good-news phenomenon. The lousy GDP print supposedly makes a “pause” in the rate increases a sure thing.

As we say, that hope is misplaced. “Contrary to what you’ll read in the mainstream media,” says Jim Rickards, “the Fed’s statement Wednesday did not back away from their plan to raise rates later this year.

“It’s true that they mentioned unsettled conditions in global markets, but that’s not enough to divert them from their model scenario. They still see inflation coming, tight labor markets, steady growth and only a ‘transitory’ impact from energy prices.

“The Fed is misguided on all four points. Deflation is the greater danger, labor markets have slack, growth is weakening and the impact of lower energy prices is not behind us.

“The Fed is looking at models, and we are looking at the real world. It will take until summer before the reality of a weak economy forces the Fed to take off their rose-colored glasses. Until then, look for at least one, and perhaps two, rate hikes (March and June), continued volatility and declining stock prices.”

“I’m the only homeless guy in America who can take a credit card,” says Abe Hagenston.

“Honest Abe,” as he calls himself, lives under an overpass above Interstate 75 in Detroit. “He accepts cards with a reader attached to his cellphone,” according to the city’s all-news radio station.

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So if you encounter Abe while he’s panhandling, having no cash is no excuse. He has one of those little Square readers attached to his phone. “They cost about $10,” says WWJ radio, “and Square providers charge vendors a fee per transaction. In the case of iTunes, the charge is 2.75% per transaction.”

Hmmm…. Once in a while as we muse about the “war on cash” and a cashless society, we get stuck on what the powers that be would do about the 7.7% of Americans who have no bank account.

Now we know. Give ’em all “Obamaphones” and Square readers. Done.

“Today a friend called to complain about an experience he had just gone through at a large national bank,” writes a reader with a cautionary tale about the war on cash.

“He manages rental properties for different owners, and one of the tenants this week had paid him the rent, $1,000, in cash. He was trying to deposit the cash into the owner’s account at this large bank when the teller asked him for identification. He asked why that was needed when he was making a deposit only.

“After several minutes, it was explained to him that the bank now has a policy that ALL cash deposits require some form of identification from the actual person making the deposit. He ended up giving his driver’s license as identification, which the teller promptly entered into their computer.

“I am sure this policy has a few exceptions, but it is the first time I have heard of this requirement on a sum so low. My friend is now instituting a policy to all tenants that the rent must be paid with a check every month. Cash will no longer be accepted.

“It appears the government is achieving exactly what their goal is, that in the future there will be a paper trail for every transaction, which can come with a fee. Plus, it will become difficult, if not impossible, to protect your cash in the future, as you will have to keep it on deposit in a bank to conduct any transaction. This all comes with an added benefit: All they have to do to confiscate it is have it transferred from the bank to their account when they want it. I fear this is just the beginning, and it scares me to think where it will end.”

The 5: Us too. And as we’ve pointed out before, negative interest rates are part and parcel of the scheme as well.

Jim Rickards has thought about it long and hard. It occurs to us that many of the solutions he’s developed in Jim Rickards’ Strategic Intelligence can protect you from the worst of the impact. Not all hope is lost. Details here.

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

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