Tuesday, July 31, 2018

The Harder They Fall

Compliments of debt-funded stock buybacks, the stock market has morphed into a binary call option on the U.S. economy. Getting into the casino was easy, getting out will be impossible...

Shorts are covering ahead of tonight's Apple earnings and tomorrow's Fed announcement. Two Central banks down, one to go. And just to prove that liquidity is of no concern, the Fed has $28 billion in assets rolling off. Today. The largest amount since the January 31st Fed meeting - the last time the wheels came off the bus. In other words stock buyback blackout, Fed liquidity reduction, Tech implosion, Oil implosion, and China implosion. All in one mid-summer week...

In the first quarter post tax cut (Jan-March), aggregate corporate revenues fell on both a real and nominal basis. Per share profit rose due to massive stock buybacks. As we see, real corporate revenue has gone nowhere for an entire decade, despite a doubling in U.S. Federal debt, due to non-stop corporate outsourcing aka. "Shock Doctrine". The stock market essentially cannibalized the economy. This has been the 100% smoke and mirrors recovery:

Come recession, the shock of a lifetime will be who owns these companies. Because after a decade-long corporate debt binge to buy back stock, it's not clear it will be the shareholders who own the shares. In other words, the stock market is now a call option on the cannibalized economy. At least the insiders were able to sell into the buybacks, in record size. "Trusted advisors" who are relying on traditional valuation measures (P/E ratios) etc. will be surprised to learn that debt covenants don't care about valuation. Only cash flow coverage. 

Corporate debt, % of GDP:

Getting back to the casino, the most overvalued, overbought, and overowned momentum stocks in the history of the planet just lost their bid. But what could go wrong?

"We viewed Friday's moves as a sign of market exhaustion and think shift toward value could be more sustainable," Michael Wilson, equity strategist at Morgan Stanley, said in a note to clients Monday. "With Amazon's strong quarter out of the way and a very strong 2Q GDP number, investors were finally faced with the question of 'what do I look forward to now?'"

This RISK ON lube job was carefully cultivated by Wall Street. One month ago I wrote that June 2018 was the heaviest June for IPOs since Y2k. Now, amid cycle high Tech carnage, we learn that Wall Street dumped 20 IPOs in the past eight trading days:

"July’s 2018 IPO market went out with a bang on Friday. Bankers priced 11 deals in the month’s final week and raised July’s total traffic to 20 IPOs. That was 53.8 percent above the median average of 13 IPOs for the month of July from 2001 through 2017. That was interesting because the month’s first IPOs did not start trading until Wednesday, July 18."

Which is where this all gets interesting...

This is the past year's largest IPO:

Everything internet is now getting monkey hammered

After the close Tuesday Apple is the last mega cap Tech stock to report. Analysts are ignoring imploding iPhone sales in favour of tax-cut funded stock buybacks:

Back in February Apple imploded on weaker than expected iPhone sales, but in May weak sales were conveniently ignored:

iPhone suppliers are warning that sales are weak:

China Tech now poses significant overnight risk:

No need to wonder why:

"BEIJING (Reuters) - Growth in China’s manufacturing sector slowed more than expected in July"

The Defense has left the field. Literally.

The stakes are high...