Just like the Dutch Tulip Bulb bubble, internet stock bubble, and the
mid-2000’s financial asset bubble, the current stock market is no
longer a price-discovery mechanism. It has deteriorated into a venue
in which Central Bank-manufctured liquidity – in the form of printed
currency and credit creation – has flooded into the system, enabling
investors to chase the few stocks rising in price at the highest
velocity (click to enlarge, graph on the left sourced from
Jesse’s Cafe Americain).
The drivers of this modern day Dutch Tulip phenomenon are the
so-called “Five Horsemen” stocks – AAPL, AMZN, FB, GOOG,MSFT. To that
grouping I toss in TSLA. Among all of those bubble stocks, TSLA has
become, by far, the most disconnected from any remote intrinsic,
fundamental value. AAPL alone is responsible for 25% of the YTD gain in
the Dow and 13% of the YTD gain in the S&P 500. AAPL’s revenues and
operating income have
declined over the last three years (2014
to 2016). More often than not, even on days when the S&P/Dow are
red, most if not all of the Five Horsemen + TSLA seem to close green.
Eventually, the music will stop and this
“no-price-discovery-possible” market will become a “can’t find a seat”
market. The abruptness and rate of decline will be breathtaking.
Perhaps only matched by the outflow of capital from the cryptos by
“investors” who leveraged up their cryptocurrency holdings to throw more
“money” at TSLA.
The good news is that a lot of money can be made shorting stocks.
Since April, stocks like IBM, GS, SHLD, BZH and GE presented in the
Short Seller’s Journal as shorts have outperformed the SPX/Dow. SHLD is
down 47% in 7 weeks – a home run. BZH is down 18% in three weeks. In
the next issue, a “funky” financial stock will be featured that has the
potential to drop at least 50% over the next 12 months if not sooner.
No one knows what event will trigger the stock bubble collapse. One
possibility is the ongoing financial implosion of the State of Illinois.
In stock bubble periods, all news is imbued with “the glass is half
full.” As an example, Illinois’ credit rating was reduced recently to
BB+/Baa3. That is a junk rating. But the media characterizes it as a
“the lowest investment grade” rating – i.e. the “glass is half full.”
Both rating agencies never downgraded Enron to junk until it was
weeks from Chapter 7 bankruptcy. Illinois is on the brink of financial
disaster. See this article as an example:
Illinois Owes Billions.
This problem is absolutely dwarfed by Illinios’ public pension
problem, which Illinois underfunded by a couple hundred billion
(officially about $130 billion but that’s not on a true mark-to-market
basis).
When the music finally stops, the perma-bubble bulls will be looking
for that proverbial “seat” in all the wrong places. But the next
stampede of capital will be out of stocks, bonds, cryptos and
“investment” homes and into physical gold, silver and mining stocks.
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Dave Kranzler spent many years working in various Wall Street jobs. After business school, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and Short Seller Journals. Contact Dave at dkranzler62@gmail.com.
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