Month: July 2020

When it comes to bearish market flow red flags, aggressive selling of stock by corporate insiders is traditionally viewed as the biggest red flag – after all nobody knows the prospects for their companies better than the people who run them – followed closely by companies selling stock. The logic is simple: why sell today if you believe you may get a better price tomorrow.The answer is simple: you don’t, and instead you rush to lock in gains afforded by the market today.

In which case, it’s “red flags galore” because as the following chart from Goldman’s head of European Equity Sales, Mark Wilson, shows companies haven’t sold this much stock in a single quarter in… well, forever.

According to Bloomberg data, secondary offerings in the U.S. raised $113 billion in the second quarter, the most on record. The nearly 400 deals that priced this quarter is also the most ever.

As Goldman adds, “we’re about to close out another record month of global equity issuance, with June set to eclipse the recent record set in May; the numbers (>$230b of supply in 7 weeks), and the market’s ability to absorb this sizeable supply, have been impressive (the quantum of global supply vs prior peak periods shown in the 1st chart; US supply vs recent years trend shown in 2nd chart)”

Following up on this staggering pace of equity sales, Bloomberg writes that “the record-high pace of secondary offerings that took hold in the second quarter is poised to continue into the summer” as share sales by U.S.-listed firms and their top holders raised the most money and happened the most frequently of any other quarter on record.

With coronavirus shutdowns creating a sudden need for cash, issuers found an opportunity in a stock market that came roaring back from depths of the selloff in March. The paradox, of course, is that companies dumped stocks – with buybacks largely dormant – to a market dominated by (mostly young) daytraders who were so eager to lap anything up they almost bought an equity offering of worthless stock by bankrupt Hertz, another unprecedented event.

And in recent weeks activity has continued apace, with Bloomberg predicting that this promises big things for the third quarter as Covid-19 continues to rattle the economy. Convertible bond issuance also surged this quarter. Those deals amounted to more than triple the cash raised in the second quarter of 2019 as some companies needing money looked to minimize the impact of dilution while capitalizing on lower rates.

It’s not just companies that have benefited from the unprecedented demand for equities: for bankers, these deals have been a helpful avenue to recoup business lost to the slowdown in initial public offerings and M&A activity.

And all of this was, of course, started by the Fed which unleashed trillions in liquidity, including buying corporate bonds and ETFs – the Fed is now a Top 5 shareholder in some of the biggest bond ETFs…

The Federal Reserve is now:
#3 holder of LQD
#5 holder of JNK
#2 holder of VCSH
#5 holder of VCIT

The @federalreserve has taken over capital markets under the false pretext of “helping the middle class” pic.twitter.com/PiEocURL16

— zerohedge (@zerohedge) June 30, 2020

… all under the convenient lie that it is laboring on behalf of the US middle class.

Authored by Claudio Grass,

The corona crisis has already taken a very high toll and caused deep damage in our societies and our economies, the extent of which is yet to become apparent. We have seen its impact on productivity, on unemployment, on social cohesion and on political division. However, there is another very worrying trend that has been accelerated under the veil of fear and confusion that the pandemic has spread. The war on cash, that was already underway for almost a decade, has been drastically intensified over the last few months. 

The “problem”

Over the last years, and as the war on cash escalated, we’ve gotten used to hear certain arguments or “reasons” on why we should all abandon paper money and move en masse to an exclusively digital economy. These talking points have been repeated over and over, in most western economies and by countless institutional figures. “Cash is used by terrorists, money launderers and criminals” is arguably the most oft-repeated one, as it’s been widely employed in most debates about the digital transition. Just a couple of years ago, it was also used by Mario Draghi, to support the decision to scrap the 500 euro note. We didn’t get any specific information or data about how many terrorists were actually using this high-denomination note, but we do know a lot of law-abiding citizens were using it to save, as did small business owners for their operational liquidity needs.

Now, however, the corona crisis has introduced a whole new direction of anti-cash rhetoric and fresh arguments in favor of a digital economy. Even in the early stages of the pandemic, when essentially nothing was concretely known about the virus itself or its transmission, the seeds of new fears were already planted by sensational media reports and fear-mongering political and institutional figures. The insidious idea that “you can catch Covid through cash” might have been prematurely spread, but it did stick in most people’s minds. This is, of course, understandable, given the extremely high levels of uncertainty and anxiety in the general public. Wanting to eliminate potential threats was a natural instinct and so was the urge to take back at least some control over our lives, after they’d been suddenly thrown into utter chaos in the wake of the global economic freeze.

Another factor that concretely helped the shift away from physical cash was an entirely practical one. Given the lockdown measures and the new “social distancing” directives that were enforced all over the world, it became difficult to use cash, even if you really wanted to, or had no other means of transaction, as is the case for billions of people. With physical stores being forced to shut down and with more and more online shops offering contactless delivery (either as a choice or as a service requirement), the need for cash very quickly gave way to digital payments.

For most of us, who have access to online banking, cards or other digital payment services, this introduced no real inconvenience and we probably didn’t even give it a second thought. However, for many of our fellow citizens it was a serious impediment, which in some cases blocked their access to basic goods and essential supplies. Contrary to the glowing promises of the digital economy, of financial inclusion and convenience, the fact remains that there are still millions of people who simply do not have access to this brave new world. According to figures by the World Bank, globally there are 2.5 billion people with no bank account, with a high concentration in the developing world. In the West too, however, there is a very large part of the population that is unbanked and/or has no access to digital solutions, while the elderly are also to a very large extent “locked out” of the digital economy. For all these millions of people, cash is the only way to save, to transact and to cover their basic needs.

The “solution”

With cash being presented not just as a danger to society and to national security, but also as a direct health hazard due to the coronavirus, the push towards digital alternatives has been massively reinforced over the last few months. Both international organizations and individual governments have actively participated and encouraged this push, some through public guidance statements and others through the blunt enforcement of direct rules and measures that leave no real room for their citizens to make their own choices.

The CDC in its official guidance to retail workers recommenced that they “encourage customers to use touchless payment options”, while a report by the Word Bank highlighted the need to adopt cashless payments for the sake of “social protection”. The UAE Central Bank encouraged the use of online banking and digital payments “as a measure to protect the health and safety of UAE residents”, and the Bank of England has acknowledged that banknotes can hold “bacteria and viruses” and recommended that people wash their hands after handling money. In March, a report from Reuters revealed that the U.S. Federal Reserve was quarantining dollars that it repatriated from Asia and so did South Korea’s central bank, while banks in China were forced by the government to disinfect bills and keep them in a safe for up to 14 days, before putting them in circulation.

A highlight, however, came in May, when the World Economic Forum published an article in its “Global Agenda” strongly supporting the mass adoption of digital payments, for the sake of public health. In it, the authors argue that “contactless digital payments at the point of sale, such as facial recognition, Quick Response (QR) codes or near-field communications (NFC), can make it less likely for the virus to spread to others through cash exchanges.” They also applauded the efforts of China in digitalizing payments and appeared to hold the country and its measures as a model to be emulated: “China’s path to enabling digital payments should provide some lessons to other countries eager to follow suit.” Since a number of Western governments may indeed be “eager to follow suit”, let us take a closer look at this bright example and examine what it really entails.

Fiat money 2.0

The digitalization drive in all aspects of the Chinese state, society and economy is nothing new and it certainly predated the emergence of Covid-19. The country’s infamous “social rating system” has made headlines years ago and the government’s eagerness to use technology, the internet and all sorts of digital systems to track its citizens’ behaviors and affiliations has long attracted International criticism and widespread condemnation by human rights organizations, privacy advocates and free speech supporters. Now, however, the state has been given a reason to accelerate its efforts in the mass adoption of digital payments and the abandonment of cash. 

To a large extent, this digitalization of payments task was much easier in China, as digital payments there are already very widespread in the population. More than 80% of consumers already used mobile payments in 2019, according to management consultancy Bain, a sharp contrast with the US that had adoption rates of less than 10%. So, as the population has already accepted a new way of payment, the new initiative sought to dominate the means of payment too. Thus, a new “digital yuan” was introduced. This new fiat currency, that has been in development for over 5 years, was rolled out in April in four Chinese cities with a plan for national adoption soon, so that it eventually replaces the physical legal tender.

This so-called Digital Currency Electronic Payment (DCEP) will be put into circulation through China’s big four state banks and citizens will be able to receive and use it by downloading an electronic wallet application authorized by the People’s Bank of China (PBOC), which will be linked to their bank account. On the surface, it appears to work just like the old currency. It is issued and backed by the PBOC, it’s valued the same as the physical banknotes and, thanks to partnerships with Alipay and WeChat Pay, that control 80% of the country’s payment market, it will be used to get paid by anyone and to pay for anything. In fact, some public servant salaries and state subsidies are already being paid out in this new digital yuan, arriving in their intended recipients’ digital wallets.

According to China’s state media People’s Daily, the new currency is meant to simplify domestic transactions and trade, but it will also facilitate and ease cross border transactions. The implication there is clear: It is yet another attempt to challenge the global dominance of the USD, after the Belt and Road initiative failed to really move the needle as the Chinese state had hoped. The strategy of spending of huge amounts of Chinese money abroad did provide some leverage over developing countries, but it didn’t come anywhere near “dethroning” the Dollar and internationalizing the Renminbi. Perhaps, this initiative will fare better, especially as it now has the “first-mover” advantage.

Entering this “digital fiat” arena first is hugely important and the timing of the currency’s launch was no coincidence. The development and the rollout plan were significantly accelerated following Facebook’s announcement of the Libra, as the Chinese state wouldn’t have the private tech giant beat them to the punch. In fact, the digital yuan resembles the Libra in many ways. Most importantly, neither of them is a cryptocurrency, which is decentralized by design and allows for peer to peer transactions without the need of an intermediary or third party. In this case, the issuer is the third party and all transactions go through a very centralized system that controls and has access to all the data. In another non-coincidence just a few years back, China’s government banned initial coin offerings and placed great burdens on cryptocurrencies and crypto-investors making it very hard to operate in the country, thereby dismantling the threat of potential competition from the private sector and clearing the way for its own digital coin. 

*  *  *

In the upcoming second part, we take a closer look at the wider implications of this digital transition and we look ahead at the impact of this shift as it spreads to the West.  

Right around the same time that Tesla was leaking to electrek that the company could break even in Q2 despite the pandemic, analyst Gordon Johnson of GLJ Research was putting his clients on notice about “continued deception” and “accounting impropriety” that is “similar” to Wirecard.

Of course, the stock responded on Tuesday to only one of these two reports, surging higher on the back of Musk’s comments and a continued gamma squeeze helped along by multi-million dollar sweeps of $1500 and $1800 calls on Monday. 

Regardless, Johnson’s note about Tesla’s warranty accounting talks about serious issues that eventually may not be able to be ignored. Johnson estimates on Monday that Tesla has recognized just $1,427 per car in warranty reserves versus the $3,308 per car that it should. This has led to a gross profit overstatement of $148.93 million, according to Johnson:

If you take TSLA’s adjusted warranty reserve in 1Q20 of $78.95mn and divide by its adjusted aggregate cars on the road of 763,755, you arrive at a number of $103.37/car; thus, given TSLA provides an 8-yr battery/motor warranty, and thus every car sold is still under warranty, $103.37/car x 32 = $3,308/car of lifetime expense x 79,200 cars sold and on the road in 1Q20 = the amount TSLA should have taken in 1Q20 pre-adjustment warranty provision (~$275mn) ; yet, taking the adjusted 1Q20 warranty provision of $119mn vs. 79,200 cars on the road, TSLA recognized just $1,427/car in reserves in 1Q20.

So ($3,308/car x 79,200 cars on the road) – ($1,427/car x 79,200 cars on the road) = gross profit overstatement of $148.932mn. This is a pretty big deal, and not only overstates gross margin, but also overstates net income – see below for TSLA classifying warranty cost as “goodwill”.

Johnson then posted several examples of the company accounting for warranty costs as goodwill, thus artificially boosting its gross margin and net income.

Interestingly, Johnson also noted last week that Tesla’s end of quarter push didn’t seem to be going well, which contradicts what has apparently been leaked to electrek. Johnson noted that Florida and Texas were very important markets to monitor since they were the closest to “real-time” of any U.S. Tesla data sets. New York and California, he noted, were 1-2 months behind. 

Johnson noted the following trends last week:

• OVERALL THIS WEEK (i.e., the most important week for TSLA’s 2Q20 numbers): Model 3 slowing in FL; Model Y slowing in FL; Model Y slowing in TX; Model 3 accelerating, slightly, in TX.
• FLORIDA THIS WEEK (i.e., the most important week for TSLA’s 2Q20 numbers): Last week TSLA was averaging 54 3+Y/day; this week, so far, it’s 40.
• TEXAS THIS WEEK (i.e., the most important week for TSLA’s 2Q20 numbers): Last week TSLA was averaging 36 3+Y/day; this week, so far, it’s 39 (the data come in much stronger than expected today – the strength is 100% from the Model 3).

Johnson concluded that “the end-of-quarter push is the weakest it’s been since they ran out of cars in 4Q19 (unlike then, however, this time they have a record level of inventory)”.

And for those note familiar with accounting who still want the gist of Johnson’s note, we’ll refer you to this Tweet, which popped up yesterday:

Tesla Model 3 on fire & still moving. No other details known. $TSLA pic.twitter.com/UHUUfH5cUc

— KillingMyCareer (@MelaynaLokosky) June 29, 2020

 

Authored by General Michael Flynn (ret.), op-ed via WesternJournal.com,

I was once told if we’re not careful, 2 percent of the passionate will control 98 percent of the indifferent 100 percent of the time.

The more I’ve thought about this phrase, the more I believe it. There is now a small group of passionate people working hard to destroy our American way of life. Treason and treachery are rampant and our rule of law and those law enforcement professionals who uphold our laws are under the gun more than at any time in our nation’s history. These passionate 2 percent appear to be winning.

Despite there being countless good people trying to come to grips with everything else on their plates, our silent majority (the indifferent) can no longer be silent.

If the United States wants to survive the onslaught of socialism, if we are to continue to enjoy self-government and the liberty of our hard-fought freedoms, we have to understand there are two opposing forces: One is the “children of light” and the other is the “children of darkness.”

As I recently wrote, the art and exercise of self-governance require active participation by every American. I wasn’t kidding! And voting is only part of that active participation. Time and again, the silent majority have been overwhelmed by the “audacity and resolve” of small, well-organized, passionate groups. It’s now time for us, the silent majority (the indifferent), to demonstrate both.

The trials of our current times, like warfare, are immense and consequences severe and these seem inconquerable.

As a policewoman from Virginia told me, “People don’t feel safe in their homes and our police force is so demoralized we cannot function as we should. In my 23 years with my department, I have never seen morale so low.”

Another woman from Mississippi told me that we need our leaders to “drop a forceful hammer. People are losing patience. It simply must be stopped! Laws MUST be enforced … no one is above the law.”

Don’t fret. Through smart, positive actions of resolute citizen-patriots, we can prevail. Always keep in mind that our enemy (these dark forces) invariably have difficulties of which we are ignorant.

For most Americans, these forces appear to be strong. I sense they are desperate. I also sense that only a slight push on our part is all that is required to defeat these forces. How should that push come?

Prayers help and prayers matter, but action is also a remedy. Our law enforcement professionals, from the dispatcher to the detective and from the cop to the commissioner, are a line of defense against the corrupt and the criminal. It is how we remain (for now) in a state of relatively peaceful existence.

We must support them with all our being. They are not the enemy; they bring light to the darkness of night through their bravery and determination to do their jobs without fanfare and with tremendous sacrifice.

The silent majority (the indifferent) tend to go the way of those leading them. We are not map- or mind-readers; we are humans fraught with all the hopes and fears that flesh is heir to. We must not become lost in this battle. We must resoundingly follow our God-given common sense.

Seek the truth, fight for it in everything that is displayed before you. Don’t trust the fake news or false prophets; trust your instincts and your common sense. Those with a conscience know the difference between right and wrong, and those with courage will always choose the harder right over the easier wrong.

I believe the attacks being presented to us today are part of a well-orchestrated and well-funded effort that uses racism as its sword to aggravate our battlefield dispositions. This weapon is used to leverage and legitimize violence and crime, not to seek or serve the truth.

The dark forces’ weapons formed against us serve one purpose: to promote radical social change through power and control. Socialism and the creation of a socialist society are their ultimate goals.

They are also intent on driving God out of our families, our schools and our courts. They are even seeking the very removal of God from our churches, essentially hoping to remove God from our everyday lives.

Remember, we will only remain united as “one nation under God.”

And yes, there is a “resistance movement” by the forces of darkness. However, we must also resist these onslaughts and instead take an optimistic view of our situation. Like war, optimism can be pervasive and helps to subdue any rising sense of fear.

We must, however, be deliberate about our optimism. Otherwise, we may get lost in discouragement and despair of any failings we encounter. We must be tenacious in the ultimate end we wish to gain. That end is to remain an unwavering constitutional republic based on a set of Judeo-Christian values and principles. We must not fear these and instead embrace each.

Our path requires course corrections. To move our experiment in democracy forward, we should fight and reject the tired and failed political paths and instead pursue a more correct path that shines a bright light on liberty, a path with greater and greater control of our livelihoods instead of being controlled by fewer and fewer of the too-long-in-power politicians. They have discarded us like old trash.

Our will, our individual liberties and freedoms, remain powerful forces and must be understood and applied smartly. We must not be overly stubborn. Following the Constitution as our guide and adapting to change as we have throughout history, we learn more about what freedoms humans desire.

At times, however, we have to fall back on what got us here. We cannot afford to lose our God-given human rights and the strong inner desire for freedom to choose and to breathe the fresh air of liberty. We must stand up and speak out to challenge our so-called “leaders” of government. We put them in charge; we can remove them as well.

It is through our rights and privileges as American citizens that we challenge the political class and leverage our election process so “we the people” can decide who will govern.

We must not allow a small percentage of the powerful to overtake our position on America’s battlefield. We, as free-thinking and acting individuals, must control how we will live and not allow a few passionate others to change our way of life.

To the silent and currently indifferent majority: Wake up. America is at risk of being lost in the dustbin of history to socialism. The very heart and soul of America is at stake.

In war, as in life, most failure comes from inaction. We face a pivotal moment that can change the course of history of our nation.

We the people must challenge every politician at every level.

We also must stand and support our law enforcement professionals: They are the pointy end of the spear defending us against anarchy.

Now is the time to act.

Last week satellite imaging analysts based in the West observed a significant build-up of Chinese PLA forces along the India-Chinese border Line of Actual Control (LAC) in Galwan Valley. This included the expansion of what appeared permanent or semi-permanent bases, as well as tanks and artillery units, after the deadly June 15 Galwan Valley clash which left 20 Indian troops dead and an untold number of PLA casualties.  

The Indian Army responded by sending its quick reaction surface-to-air missile systems known as Akash to the disputed border region, reported widely in Indian media Saturday. New Delhi is also now said to be seeking rapid S-400 acquirement from Russia.

India has further apparently answered China’s tank build-up with its own in a continuing tit-for-tat deployment of additional forces. This despite ongoing deconfliction talks between the opposing military delegations. The Hindustan Times reports Tuesday the army has sent at least six T-90 Bhishma tanks to the LAC, along with additional defensive hardware such as shoulder fired anti-tank missiles for infantry troops.

The Hundustan Times describes the extra force deployment as specifically in answer to the PLA’s own tanks along the border:  

The army’s decision to deploy the T-90 Bishma tanks was taken after the Chinese People’s Liberation Army (PLA) had beefed up its positions on the river bed with armoured personnel carriers and troop tents. The Indian Army is occupying the dominant heights in the sector within its side of the Line of Actual Control (LAC).

Infantry combat vehicles along with 155mm howitzers have been deployed all along 1597 km long LAC in East Ladakh with two tank regiments deployed in Chushul sector to repel any aggressive plans of the adversary through the Spanggur Gap. While Chinese PLA wants to make a deal on the LAC in this sector as part of withdrawal, the Indian Army is no mood to give an inch as the military aggression came from the Western Theatre Command of China with the intention of redefining the LAC.

The report adds further that Indian commanders are prepared for a “long haul” deployment of additional forces and tanks to the border. 

This also as India’s air force and navy are said to be in their “highest state of alertness” according to widely circulating Indian media reports. 

India’s military has been saying the “extraordinary circumstances” warrant both the build-up and altered rules of engagement giving local commanders “freedom of action” ability if provoked or attacked. 

“There is no change in the rules as such. Our side will only react to provocations and in case of extraordinary circumstances,” former Indian director-general of military operations, Lt. Gen. Vinod Bhatia, previously said.