Tag: short

Are you exploiting the power of negativity to its fullest?

As if a hundred short sellers screamed in agony* and suddenly fell silent

-“funding secured”

(*actually not, rather they celebrated, knowing the endgame had finally arrived; since knowing the facts rather than a wishful narrative, they understood the action was the last desperate act of a fraudster at the end of his rope)

Topic: why all the negativity?

Discussion: investors are on balance long biased and thus need an opposing view for balance

Conclusion: more pessimism (almost) always leads to a more balanced view

Bonus: a little tip regarding perspective, productivity and happiness (asking past friends for advice)

With a little help from my (previous) friends

You know the 150 people you actually know? They aren’t the same as they were 10 years ago. If you’re serious in your quest for a fresh perspective on things, write an e-mail and ask for your advice from your old network (I got the idea from the book about networking effectively, that Anna Svahn is writing as we speak).

Tip: start by expressing some appreciation and if possible provide something of value. Givers are more successful than matchers and takers. And appreciative people are happier.

The curious case of the lone genius giga fraudster

Let’s forget for a while that Tesla is burning a billion dollars every three months (e.g., cash flow was -1.3 to -1.4bn in Q2), and that it’s effectively running out of money by the turn of the year, unless it manages to raise new capital by then. Nota Bene, this isn’t controversial; it’s a financial fact.

Tesla has over 10 billion dollars in debt. Tesla holds a billion dollars in client deposits. Tesla has a negative net working capital of 3 billion dollars, giver or take. Tesla has 1 billion in convertible debt maturity effectively coming up by the turn of the year. Tesla has at least half a billion of its cash reserves where it can’t be accessed. Anyway, let’s forget about money running out in just a few months, since that’s not really an issue of cash flow turns positive.

Let’s forget that even though sales have increased at an impressive rate, so have losses and executive compensation. These are indisputable financial facts. If anything, the numbers are artificially positive due to creative accounting, not least by under reserving for service costs.

Let’s also forget about the quality issues with hastily manufactured tent “lemons”. Let’s also forget about Tesla’s failed attempt at disrupting the “stealership” model, consequently leaving clients to deal with maintenance, repair and spare parts themselves.

Let’s forget about the super high death rate of Tesla drivers.

Let’s also forget about all the weird and lofty claims Elon Musk spouts every opportunity he gets. I’m thinking about new car models, trucks, pick-ups, solar house roofs, solar car roofs, bricks, 1 USD/trip super-mach intercity hyperloops etc., without the necessary factory investments.

Let’s also forget about the hundreds of former Tesla fans, witnessing about poor to non-existent service, about cars being paid for but not delivered, about deposits not being returned on demand, about suppliers not getting paid or are asked to pay money back (!)

Before: several years of a monopoly-like situation + subsidies = increasingly unprofitable

Now: serious competition (BMW, Porsche, Volvo, Jaguar, Audi…) + no subsidies => profits?

Chart by Tesla Charts

Build it and the profits will come

At this point let’s just think about one single thing, since profits and cash flows are what ultimately decide the fate of a company:

Some of the bullish analysts and bag holders of Tesla stock are counting on Tesla and Musk finally turning profitable now that its subsidies are ending and a tsunami of competition (with subsidies) is entering their market.

Wait, what? Wut? Hqr sez wut?

Yup, that’s right, that’s what’s coming now according to bulls. Elon Musk has never turned a profit in any of his companies. The last fifteen years, Tesla has only increasing losses to show for its efforts to exploit its supposed first mover advantage and massive subsidies. But, now, finally, with a deluge of formidable competitors, with as deep pockets as experience in building and testing cars, Tesla is supposed to somehow reap the benefits of… scale, competitive position, increased margins?

Not only that, just as the available market is about to fall by 90% in the coming years, Tesla’s subsidies are going away. Tell me again how that is supposed to finally push margins into positive territory.

OK, back to the fraudster

The bigger the lie, the easier to get away with it, and Tesla is about as big as they get, just like Theranos, Enron and Madoff before that. Or Nick Leeson and Jérôme Kerviel.

Many fraudsters start out with good intentions, probably Elon Musk too. However, as reality catches up with dreams, losses and mistakes have to be swept under the rug. “It’s just temporarily“, they think, “for the greater good in the long term“, they reason, and go on to make bigger and bolder bets to cover up their little mishaps.

An idea about luxury roadsters and other premium cars making profits, that finance investments in mass-market car manufacturing that’s supposed to make even greater profits, instead turn into ever increasing losses and thus the necessity for side-shows of acquisitions and unrealistic innovations.

At some point the well-intentioned and benevolent disruptor realizes his predicament and steps over the fraud line. The genius has now become a fraudster; and with increasing vitriol and intensity he attacks everyone who expresses the least bit of skepticism, while coming up with ever more fantastic claims about breakthroughs that are on an “order of magnitude” above and beyond anything previously seen. At this point the smart money knows the game is up and starts pointing it out, but it takes years (Enron, CDOs, Allied Capital), sometimes decades (Madoff), for the Ponzi scheme to collapse into the surprised and devastated hands of the bag holders.

This is not about Tesla, but about balance and perspective

Why all the negativity? Because almost everybody else has a positive bias. It takes effort and guts to find and relay negative information to a herd of stampeding bulls. Very few bother, since everybody seems to hold nothing but contempt for short sellers, including SEC officials (who famously like to interrogate whistle-blowers and short sellers rather than investigate the actual perpetrators).

It’s simply humans being humans when bullish investors turn a blind eye to all the obvious negative facts, and instead pat each others’ backs, repeating their faith based narrative, “obviously corroborated by the stock price (bro)”. It’s not really their fault. The problem actually lies with bears being too silent, passively allowing gullible bulls to be had for a ride. Humans are gullible by nature; we like a good story and we tend to positivity. We want to believe in stories bout heroes. We want to believe in seeing ourselves becoming rich, in particular if it’s by supporting a good cause at the same time. Fraudsters (whether by design or mistake) take advantage if that trait.

That’s why bears armed with facts are so important. They perform an almost invaluable service in their quest of fact finding and creating balance in the otherwise one-sided bullish narrative. Humans are lazy and blind to other stories than their own. Nothing wrong with that, it’s just our nature. But that’s exactly why the bears are needed: to create perspective, to catalyze questioning and to provide facts and arguments that can be directly measured against whatever the bull story is.

It’s currently the most important story there is

But why Tesla all the time? You keep ranting about Tesla; why the negativity?

It’s because it’s the biggest and simultaneously most obvious house of cards out there. It’s the most unbalanced narrative there is in public markets right now, in terms of the bull story being the least factful and the bear story being the most tangible. There’s almost a hundred billion dollars at stake, not to mention bag holders car owners that have or have not received their cars but stand to lose any kind of warranty, pre-payments or access to spare parts or super-chargers.

Quite often, bear stories are more qualitative than financial in nature, i.e., less numbers based and more speculative regarding troubles ahead. Not too rarely, very high valuations feature in bears’ short stories, although most smart bears know that’s nowhere near what’s needed for a successful short.

Not this time though. This time the bulls are the dreamers, and the bears don’t even need to start talking about the valuation, since Tesla’s money is actually running out (and with no plan for raising new).

No matter how much bloggers, podcasters and successful investors try to dig out the true foundations of the bull story in Tesla, they come up empty handed. It’s all narrative and hope that the lone genius, who so far has accomplished nothing, will soon magically wave his cave dildo, display his magic beans, and create actual profits.

Occam’s razor would long ago just have labelled Musk a fraudster rather than a genius, and all his actions would be all that much easier to explain.

A genius wouldn’t manufacture lemons and losses. A fraudster could. A genius wouldn’t fantasize about products he could never afford to build. A fraudster might as a cover-up. A genius wouldn’t put himself at the mercy of markets (no cash, negative flow). A fraudster would claim funding is secured (even if the claim might prove to be securities fraud). Would an environmentalist genius have five large Bel Air mansions and the biggest private jet there is (G650)? He could, but a fraudster fits the bill better. A genius maybe should have produced profits some time in his history. A fraudster wouldn’t see why. Finally, a genius wouldn’t pump up numbers in collaboration with his brother in an unrelated company and push his board into accepting a takeover at the very peak of that company’s business. A fraudster? Hell yeah!

This last bit is admittedly speculative, but the perspective is still important. No matter, the bull-genius narrative has only dreams, hopes and fantasies in its corner; while the bear-fraudster story is based on facts about sales, costs, profits, production numbers, quality reports, traffic statistics and not least a much more likely and coherent overall picture.

Market perspective

By the way, how’s this for perspective: imagine a private investor, an amateur with less than a decade under his market belt, doing all his research after his ordinary job hours, without any real insight in the inner workings of either the financial industry or that of the stocks he invest in. Imagine that same person thinking he understands more than, oh I don’t know, e.g., Mark Spiegel, David Einhorn, Jim Chanos…, and me.

I know, I know, I know… why would decades of profitably navigating several bull and bear markets, including investing on both the long and short side in hundreds if not thousands of individual companies, no less with the help of a solid financial education, actually having investing as full-time profession, supported by many, many competent co-workers and with access to dozens of the top financial research firms, ever stand a chance against a lone amateur? Or, er, wait a minute…

 

That’s not how herds operate

 

Maybe, just maybe, the unquestioning bulls need to be shaken out of their confirmation bias bubble and start listening to the fact-finding minority. Sure, we are guilty of CB too, but I’m sure all experienced bears make a true effort of mapping out the bull case in as much detail as humanly possible. The bulls? I’m not so sure, that’s not how herds typically behave.

How about you? Are you long or short Tesla, and have you queried the other side for their best arguments and pitched your own against them yet?

Reality check after the UK’s EU referendum

Summary: I’m reducing my shorts and gold holdings slightly, when the Swedish market opens tomorrow, for the first time since the Brexit

“The UK will remain in the EU and the slow and steady march toward doom can resume”

Oooops! That’s what I wrote, just a few days ago, before heading to Istanbul for some Swedish midsummer celebrations.

So, I was wrong. Now what?

Right now I’m undecided between the negative Catalyst view and the positive Stimulus view (i.e., that the Brexit will trigger immense stimulus efforts and catapult stocks higher)

FYI: I’m 115% short stock indices, 25% long gold (and silver), and 15% gross long single stocks (some deep value, some hope(less) stocks. Considering the gains I’ll probably make when the Swedish stock market opens tomorrow, Monday (it was closed on Friday due to midsummer so we have yet to see the effects of Brexit here), I will cover some of my shorts tomorrow. I think I will sell some gold as well.

My main reason for taking some short term profit on gold and index shorts is to make room for selling again, if there is a bounce on talk of Bregret, and or hints of massive stimulus efforts to counter the effects of an exit.

*********************

What’s more important than the Brexit, is that stocks are ridiculously expensive in relation to corporate revenues and the general economy (GDP). Sooner or later that situation will be corrected – and most likely more than corrected since extreme overshooting tends to be followed by a similarly exaggerated move on the downside.

Still. last week’s referendum result might very well trigger a new euro crisis, where not least Greece, Portugal, Spain and Italy once again question why they should stay in the union and honor their euro debts.

No matter, stocks are expensive and that will be corrected. After an unusually long and strong move upward, stocks are very sensitive to a change in risk tolerance. Just about anything could cause the long overdue correction, and there are many “anythings” hiding in plain sight: debts, valuations, interest rates, jobs, currencies, malinvestment, ponzi schemes, etc.

Hence, I’m convinced we are headed lower. Sigificantly lower. And rather sooner than later.

However, talks of Bregret and/or stimulus efforts could easily cause a temporary bounce of several per cent after the initial downturn. And the inverse of that is likely for gold.

In February I reduced my short positions by around 20% (in units, meaning the remaining exposure was about the same as before). Tomorrow (Monday June 27) I might do 10-20% as well as sell a similar share of my gold holdings.

Thus, I’m not becoming “bullish”, and I haven’t given up my scenario of a severe downturn in 2016-2017. However, I always want to make some room in my portfolio and take profits when I can and not when I have to. If the market keeps falling, I’ll keep covering my shorts but at a slow pace of one per cent a week or so. And when it bounces I will add to my shorts on strong days. In time and if the market falls over time I will slowly work myself toward a net neutral portfolio and then start going long, almost as slowly.

 

What does the Brexit really mean?

What will happen now? I don’t really know, but I expect nothing much will happen fundamentally.

New trade agreements are many years away, large scale layoffs that weren’t already planned anyway too. Actually, the most immediate and tangible result could be stronger exports thanks to a weaker GBP.

 

Conclusions and summary

I still can’t decide between Catalyst or Stimulus, but I think the inevitable downturn and a slow turnaround in sentiment had already begun. Fear of contagion and complete chaos is a relevant possibility, and if the S&P 500 index once again falls below its 200d MAV most of the last remains of optimism and risk appetite will disappear.

Consequently, no amount of stimulus, bar Zimbabwe style money printing, would have more than a brief and passing positive effect on stocks and bonds.

Gold should do well in both scenarios though.

All in all, I think a Brexit is a vote for freedom and a vote against the technocrats in Brussels. I think the UK citizens made a good choice, albeit in large parts for all the wrong reasons (including xenophobia).

For me all it does is change my short term trading pattern slightly due to my anticipation of increased volatility in the aftermath.

Big picture, I’m sticking to 80-90% of my shorts and gold holdings, meaning I will still be around 100% short stock indices and long 20% gold (both in terms of portfolio NAV). Hence, I’m not really turning into a bull (yet).

My four pillars of investing remain: Short stock indices, Long gold, Long cheap or promising/enticing small caps, slowly accumulate dogs, strong balance sheets, high dividend yields.

Hopefully this was my last article on Brexit, so if you are interested in my other favorite themes of personal development, health, wealth and happiness, please subscribe and share this article with your friends.

Are you too ‘smart’ to short the market? Then do this

Unlike most smart investors, financial pundits, TV commentators…

 

…and not least my eloquent friends at Wall Street Playboys,…

 

I do time the stock market, and I don’t shy away from making my recommendations or investments public.

 

Right now every fiber in my body screams to short the stock market:

  • Risk aversion is on the rise (seen in general market dispersion, chaotic and nervous intraday patterns, loss of trend uniformity, increasing High Yield spreads) and any little event could topple that first crucial domino that sets off the rest. The whole market is nothing but an unstable pile of fingers of instability.
  • The rally is extremely long in the tooth and some robot traders could just as well take that as a cue to try the downside (NB: 80% of the trading is automated robot trading)
  • Oh, did I mention the US stock market is the most expensive it has ever been (on some measures, and just 10-20% below the epic peak of year 2000 on others)? Swedes hoping for a safe haven in dear old Stockholm should note that the OMX index usually mirrors the US indices perfectly in downturns, no matter if OMX lagged a little before.

The stock market in a nutshell (pic from Hussman)

Directly from Hussman, just as the picture above: The yellow shaded areas show points where credit spreads might be defined as “rising.” For simplicity, I’ve shaded all points where credit spreads had advanced 90 basis points from their 6-month low, and were greater than their 150-day moving average. Observe that the steepest losses we’ve observed in the S&P 500 in recent decades have been concentrated during those periods of objectively widening credit spreads. I’ll say this again: low and expanding risk premiums are the root of abrupt market losses.

The purple shading identifies only a subset of those points that also match the market return/risk profile that we currently observe (basically identifying recently overvalued, overbought, overbullish conditions that were then joined by deteriorating market internals or widening credit spreads).

 

But, I get it, you just don’t want to short the market. It seems immoral, dangerous, unnatural… You’d rather just wait for a good buying opportunity – and you don’t want your money to sit idly on a zero per cent bank account meanwhile.

You could copy my strategy, which is to slowly accumulate investments that have already become somewhat cheap (but, as always, risk becoming cheaper, much cheaper, further ahead) and trade others opportunistically (I like gold and currencies, since they don’t really have ‘intrinsic values’ like stocks. That makes it easier to disregard the dangers of picking unknown pennies in front of an unknown bulldozer)

 

So, what am I doing exactly? I mean, I have retired, I am officially a retarded hedge fund manager. I could live splendidly off of my capital for the rest of my life. However, as the retard I am, I want to prove that I am right. Just saying I said so afterward simply isn’t enough. I want to make some money too.

 

Except for my big short (which is waaaaay under water) on the Swedish stock market, this is what’s currently in my direct financial portfolio (except apartment, pension funds, private companies like the publishing company and the floating sauna company, russian art etc.)

 

  • Software as a service: A convertible loan and a sell option in a Human Resources software company – if things look okay, I’ll convert to shares and later use the sell option, if they look really good, I’ll convert and keep the shares for a while. If things turn really ugly, I’ll end up with a large mansion in the countryside
  • Cash at the bank (dry powder)
  • Loans to friends (not that dry gun powder, but perhaps I’ll get to call on these when the time comes – at least they stick to regular amortization schedules)
  • Gold (albeit “paper gold”) SPDR Gold shares ETF – gives me some USD exposure as well as some insurance against Yellen’s next move (+21% so far on this trade)
  • Gold mines (senior = actually producing gold) Market Vectors Gold Miners ETF – like above but with more juice (+24% on this trade so far)
  • USD 3x leverage – I halved my position in the USD yesterday (75% profit in a year) but still have a fair amount left. The Swedish Krona, SEK, usually falls in times of trouble. If China falters probably doubly so due to Sweden’s export dependency to Asia. The USD on the contrary, despite all its shortcomings, is the safe haven of first choice for most investors (incl. americans themselves selling foreign assets). The Fed might even consider raising rates this year which I can’t see any other central bank doing.

Smaller investments and speculative short-time bets (oil):

  • Creditsafe – small unlisted credit service company, provides credit quality information on companies and private individuals
  • Oil (Brent) 5x Leverage (entered today )
  • Peptonic medical – oxytocin pioneers (very small investment)
  • Opus – small investment (testing services and testing equipment mainly for the auto industry – hopefully a secular growth story, the share price has recently halved and that’s why I stepped in. However, the shares will likely fall a lot more before this is over)

 

My suggestion to you (except shorting stocks) is:

  • Invest in a business (your business perhaps?) or learning a skill
  • Keep cash ready for opportunistic buying in the case of a (flash) crash
  • Think outside your geographic region (stocks, currencies)
  • Slowly, slowly accumulate stocks that really excite you and have become forgotten by other investors that chase a shrinking pool of rising large caps
  • Consider buying things like gold or oil, but do your homework first, don’t just follow my lead