Tag: news

Last week, when WeWork filed its highly anticipated prospectus for the upcoming IPO that seeks to value the company as much as $50 billion, we shared the one chart that summarized – we thought – all that was wrong with the company: the fact that even as revenue has risen, and it has to rise much, much more for the company to ever grow into its massive valuation – it has burned ever more cash.

As it turns out there was much more that was wrong with said offering, as Triton Research CEO Rett Wallace, an analyst who specializes in IPOs with a record of prescient IPO predictions including warnings about Uber and Lyft, found.

“The prospectus is a masterpiece of obfuscation,” he said in a Bloomberg interview, saying that “if the underlying facts were positive, why would a company go to so much trouble to prevent you from understanding them?”

He was referring to the prospectus of a company whose stated goal is “elevating the world’s consciousness”, and which envisions a total addressable market of roughly one million members per city, across 280 cities worldwide, with a total addressable market of $1.6 trillion.

According to WeWork, its potential market size is 15% of US GDP. Thanks @federalreserve this is all your doing pic.twitter.com/s5YyX7iS5x

— zerohedge (@zerohedge) August 14, 2019

According to Wallace, the brave new world outlined in WeWork’s filing sounds more like an episode of Black Mirror than a clear picture of what the company is actually becoming.

“We don’t have to extrapolate much from the baseline of the big-vision, low-clarity disclosure to arrive at this new place WeWork has taken us, where a company that rents out small offices with community beer and ping-pong can claim, without irony, that its mission is to ‘elevate the world’s consciousness’.”

Besides merely focusing on the addressable market size – a preferred gimmick for most recent Silicon Valley darlings who are burning through billions in cash to capture market sure – and semantic hyperbole, Triton also saw other instances of “high levels of obfuscation” in the WeWork’s filing. For example, the company stops counting sales and marketing expenses at a given location once it’s been open for two years – but the spending doesn’t actually stop after that. Instead, it counts as an operating expense, Triton said.

Additionally, WeWork’s filing doesn’t disclose the dates of when its locations opened or when the spending at a given location will switch into the operating expense bucket. Worse, like government agencies, WeWork labels some compensation as investments.

“When you make it impossible for people to have data-driven conviction, then everything is just sentiment,” Wallace said. “sentiment can come and go, especially in a volatile tape like this” as investors in last year’s marijuana darlings found out the hard way.

Needless to say, a company with a spaghetti org chart and three classes of common stock does not exactly scream transparency.

And, as he further told Bloomberg, the lack of disclosure becomes even more apparent when contrasted with other IPO filings that are more direct: “When companies fight you on understanding the basic proposition of the mouse trap, it’s always bad. People who have good mouse traps say, ‘This is the thing: You put the cheese in, the trap is designed to never break your thumb, and it catches mice nine times out of ten’.”

Of course, there is a simple reason to shift investor focus to just what the new and improved mouse trap is – it is to deflect attention from the chart at the very top.

Having correctly warned that both the Lyft and Uber IPOs would slump, now the IPO-focused research firm says WeWork’s business model looks even worse than those of its ride-sharing comparables. For example, if nobody uses a ride-sharing app all day, Uber and Lyft don’t have to pay their drivers. But if all of WeWork’s monthly tenants leave, the company is on the hook for an average lease duration of 15 years.

“They make lip service in the document to how they believe – a notion held without evidence – their business will be just
as good in a down cycle because of the flexibility that’s offered,” Wallace said. “It’s just not a lot to go on when you’re looking at tens of billions of dollars of lease commitments. We don’t know if they can keep the current footprint full, or if they will be able to fill the future footprint at all.”

In that regard, as Bloomberg sarcastically noted, the only thing scarier than WeWork achieving its global goals is the prospect of holding equity as it fails.

via ZeroHedge News https://ift.tt/33KRQBM Tyler Durden

Authored by Mike Shedlock via MishTalk,

Four Chicago Teachers Union representatives went to Venezuela, a failed nation, singing praises of its corrupt leader.

Mayor Rahm Emanuel closed some decaying half-empty Chicago schools.

Those closures prompted a CTU visit to Venezuela in praise of its socialist leader Nicolás Maduro whose corrupt and dictatorial regime has sparked rebuke from some 50 nations around the world.

Surprised?

The Chicago Tribune comments Surprised by CTU’s Venezuela Visit? Then You Haven’t Been Paying Attention.

Four representatives of the Chicago Teachers Union, including a member of its executive board, visited Venezuela in July and returned with high praise for the socialist polices of President Nicolás Maduro.

This should not surprise anyone paying attention to the increasingly left-leaning political views of the leadership at the union, which represents some 25,000 teachers across Chicago.

Reading their social media accounts of the trip, you’d think they visited Mayberry.

In Praise of Maduro

CTU executive board member Sarah Chambers

• “Through major economic hardships, Venezuelan President Nicolas Maduro never closed a single public school or a single health clinic. This stands in stark contrast to our experience in Chicago, where Mayor Rahm Emanuel closed 50 public schools and several mental health clinics in a single year.”

• Chambers also posted on social media her astonishment that, during her trip, she “didn’t see a single homeless person.” She and others praised literacy rates in the country and the commune-style culture.

Venezuela Poverty Facts

Please consider the Top Ten Facts About Venezuela Poverty

• Poverty in Venezuela is an epidemic. Nearly 90 percent of Venezuelans live in poverty. According to estimates by the United Nations Economic Commission for Latin America and the Caribbean, this is a dramatic increase from 2014 when 48 percent of Venezuelans lived in poverty. Maria Ponce is an investigator with the local universities researching the food shortage, and she stated that “this disparity between the rise in prices and the population’s salaries is so generalized that there is practically not a single Venezuelan who is not poor.”

• Venezuela is experiencing ‘hyperinflation.’ Venezuela is experiencing one of the worst inflation rates in history. According to Robert Renhack, deputy director of the IMF’s Western Hemisphere Department, Venezuela “is one of the most severe hyperinflation situations that we’ve known about since the beginning of the 20th century.” And the nation shows no sign of stopping. Currently, Venezuela’s inflation rate sits at 27,364 percent, dooming those without savings or foreign aid to poverty.

• Food crisis leads to “Maduro diet.” Malnutrition is spreading. According to a recent survey, over two-thirds of Venezuelans report losing an average of 25 pounds in the last year and 61.2 percent of Venezuelans report going to bed hungry. Doctor Marianella Herrera states that “people are developing strategies to survive but not to feed themselves.” Iron-rich foods, such as maize and vegetables, have been nearly eliminated from the Venezuelan diet while government food programs fail to end the hunger.

• Medicine is running out. Due to the poor economy, Venezuela is experiencing a severe medicine shortage and hospitals are struggling to stay open. The Pharmaceutical Federation of Venezuela estimates the country is experiencing an 85 percent shortage of medicine

• Venezuelans are fleeing the country. In the past two years, nearly one million Venezuelans have fled the struggling nation, one of the biggest migration crises in Latin American history after the mass exodus following Fidel Castro’s 1959 revolution. Many Venezuelans report they no longer feel safe in their home country and have lost hope in government officials.

I picked out what I thought were the top five points.

Parents, Please Pay Attention

Chicago parents, please pay attention to what your teachers are doing.

And in case it did not occur to you, what they are doing is brainwashing your kids.

It’s one thing to be against Trump’s sanctions on Venezuela (I am too), but it is beyond idiotic to travel to Venezuela singing the praises of Maduro.

via ZeroHedge News https://ift.tt/31OhvYq Tyler Durden

Amid a collapse in global bond yields (to record lows) and soaring aggregate volumes of central-bank-created negative-yielding debt, at least one big bond shop is dumping sovereigns.

Source: Bloomberg

“We’re a lot more defensive,” warned PIMCO’s Daniel Ivascyn, group CIO at the massive bond manager, noting that after the best year-to-date performance since 2003, the fund is paring its positions in government debt on fears that a breakthrough in US-China trade talks could trigger a violent sell-off.

“Even if we get a narrow trade agreement [between the US and China] we could see a pretty powerful snapback in yields.”

However, as The FT reports, while PIMCO is lightening up on their positions in the UK and European bond markets, it is reducing exposure to the US government bond markets less. 

“We like the US market more – it still has more room to rally in a global flight to safety,” Mr Ivascyn said.

“But it wouldn’t take much of an uptick in inflation to cause a meaningful repricing.”

Ivascyn may appear more constructive on growth and inflation but, as FT notes, he tempers his enthusiasm by noting that,

“We think we’ll at best get a partial agreement on trade, and this friction will be with us for a long time.”

And one could argue bonds are more in line with the depressionary signals than stocks currently…

Source: Bloomberg

It appears investors are buying any dip (in price) in USTs for now…

Source: Bloomberg

His greatest fear, which is likely driving the decision to dump European debt faster than US debt, is simple – unorthodox policy mania…

“We think it’s premature to declare inflation to be dead…”

“We could still see more unorthodox policies, like ‘helicopter money’.”

PIMCO’s words (and actions, we presume), echo a report from BlackRock, co-authored by Philipp Hildebrand, Stanley Fischer and Jean Boivin, pointing out that central banks have limited firepower left in their monetary armory, and that fiscal policy is constrained by still-high debt levels. The trio concluded that “unprecedented policies will be needed to respond to the next economic downturn”. The report added:

“Without a clear framework in place, policymakers will inevitably find themselves blurring the boundaries between fiscal and monetary policies… This threatens the hard-won credibility of policy institutions and could open the door to uncontrolled fiscal spending.”

Will it be different this time?

via ZeroHedge News https://ift.tt/2Hg2o29 Tyler Durden

Submitted by Monday Morning Macro

“Impossible” Events Are On The Rise…

A 4-sigma event would be expected to happen once or twice in a trading lifetime – according to the most popular VaR-based risk models. We’ve seen 10 of those this month in Treasuries. What we should have learned from the GFC has been all but forgotten. What the market had considered to be impossibilities (or at least highly unlikely…) is quickly becoming the norm.

Indeed, the number of explosive moves that we’ve seen to start the month of August in “safe havens” is on par with what we saw during the worst months of the crisis. We still have 2 weeks to go.

What’s incredible is how little the broad investor universe seems to care, leaving the weakest parts of the capital structure the most exposed. 

THE PROBLEM:

Having worked as a portfolio manager at several large hedge funds after a stint on the sell-side, I’d like to think that I’ve seen my fair share of methods for assessing risk. People who act as financial actuaries for a living (i.e. “risk managers”) like to think that too. There’s an immutable tug of war that takes place at nearly every hedge fund between the people who are trying, recently without much success, to generate returns better than a passive index fund (the investment team), and the people entrusted with making sure they’ve got the tail events under control (the risk team). This generally means that the risk team runs a backwards-looking analysis to reassure investors that the likelihood of a fund-closing event is inconceivable. More and more, the response when such events transpire should be best summed up by Inigo Montoya.

Several “quantitative” metrics are frequently employed. They range from those that track trailing realized volatility (VaR-based) to those that use absolute numbers from prior historical periods (stress-based). Typically, there’s a VaR limit as well as a historical drawdown limit which ends up being imposed. The first one is almost always easier for a portfolio manager to meet than the second, especially if the historical drawdown period includes 2008. It’s this first type of risk modelling that is important for the discussion below.

The most common VaR-based risk metric employed on the street is what’s referred to as “5-year 95%”. What this means is that a portfolio manager’s risk is measured by what would fit within a 2-standard deviation range using a 5-year lookback. A 2-standard deviation range (or two sigma – 2σ) is defined, under a normally distributed series of returns, as having an approximate daily frequency of once every 22 days (using business days, this means about once a month).

A 4-standard deviation, or 4σ, move would have an approximate daily frequency of once every 63 years (using 252 trading days a year).

We’ve seen 10 of those this month alone in Treasuries. And August is barely halfway done.  

THE DIAGNOSIS:

Now, of course, normally distributed returns don’t always reflect the real world (see Taleb et al) – something that was pointed out repeatedly in the aftermath of the GFC. But that doesn’t mean the market evolved. Sure, options markets began to assign slightly fatter tails to unlikely outcomes – but the shape of the distributions being drawn were still roughly the same. Moreover, the cohort of investors looking to exploit the extra cost of insurance rose as “systematic vol selling” came to represent the peak of high Sharpe strategy deployment.

What’s fascinating is that these same measures are again being tested and – far from terrifying investors – they are being accompanied by record low levels of implied volatility.

Take the rates market, for instance. US treasury yields have experienced 10 moves that would qualify as 4σ or greater since the start of August. In fact, this month already qualifies in the top 10 on record by this measure, and we’re only halfway done – with the largest annual convocation of global central bankers due up this weekend.

Now, the common argument, at least the one that a trader will happily provide – is that there is a fantastically large number of assets from which to select an investment, and the correct methodology should be to assess the risks across all these assets & weight according to a covariance matrix. Simply said: yes, we’ve seen a large number of “tails”, but the number of dogs & breeds have also grown exponentially over the past century.

This, of course, is fine as long as you assume that the volatile asset classes in question are not ones that essentially drive performance & price action across a far greater number of investments. That’s why it’s easier to disregard the monster moves in Emerging Markets (unless you happen to be an EM trader, in which case you probably stopped reading as soon as I used the term “normal distribution”).

It’s not fine when the asset class in question is the largest in the world, however, and is driving the price action and policymaking in virtually every geographic region on the globe.  

One could also argue that, hey, we just cut rates – and perhaps these huge moves are just what we should expect whenever the Fed cuts rates? To those, I’d just point out that the Fed’s latest rate cut was essentially “priced in” by the front-end of the market for the better part of 2 months – and that we actually sold off the day the rate cut was in fact delivered.

There’s something bigger going on here & the market’s refusal to acknowledge it can only be chalked up to the fact that we’ve become conditioned to seeing larger & larger bazookas unveiled by policymakers whenever risk assets endure a temporary swoon. This only engenders the possibility of greater disappointment when the Fed, for example, fails to cut by 50bps in September. The response will be even more demand for stimulus and, in all likelihood, another round of QE in Q1 2020.

How else to explain the fact that the relationship between these massive moves in the rates market & the average level of the VIX during the same month have gotten so dislocated from reality?

Frankly, the most concerning aspect of these moves is not what’s already happened – but is what lies ahead. We can show how ex-ante Sharpe can be affected by a surge in the denominator & that’s a big deal when there’s a limited threshold for rates to go lower. It’s an even bigger deal when this involves a supposedly “safe haven” asset. “Safe havens” cease to fulfil their primary function when they’ve seen a double-digit number of events in the past month that are only supposed to happen every 60+ years.  

THE PROGNOSIS:

The VIX is far from the only complacent asset class in the face of these moves in Treasury yields. The problem is much more pervasive – extending to those areas that, let’s be honest, really should know better. For example, the biggest outlier on the complacency metric among the major asset classes appears to be High Yield credit.

Having established that equity vol already looks low relative to past periods of interest rate volatility, consider where High Yield spreads are vs the VIX. 

On a rolling 6-month basis, the z-score for HY at-the-money volatility lags significantly behind the average across rates, equities, investment grade credit & commodities (3-month expiries shown below). In other words, relative to other asset classes – and also relative to itself (!) – High Yield isn’t pricing in any kind of particularly noteworthy move. The reason why this is so problematic can be easily seen – during times when volatility rises meaningfully, the weakest parts of the capital structure move the most.

BOTTOM LINE: Complacency has become commonplace alongside a “buy-the-dip” mentality across risk assets. Record levels of realized volatility across the largest “safe haven” asset class cannot be discounted as mere noise. The weakest & most sensitive assets will be the next to go as VaR is recalibrated on a global basis.

via ZeroHedge News https://ift.tt/2Ze8lTi Tyler Durden

Until today, Italy has had 61 governments since World War II. We can now make that 62.

Moments ago, during a scathing speech that slammed his his deputy premier, Matteo Salvini of the League who is also Italy’s most popular politicians and defacto leader, said Salvini’s decision to spark a political crisis was “irresponsible,” motivated by personal ambition, and will bring down the curtain on the coalition that led the country for just over a year.

In a much anticipated speech to the Senate in Rome, Conte lashed out at Salvini, saying it wasn’t in Italy’s interests to hold elections every year, clearly unaware that that’s pretty much what Italy has been doing for the past 6 decades. The premier also accused Salvini of not properly responding to allegations in the so-called Russiagate case and said he had overstepped his role as minister.

The government’s actions “terminate here,” Conte said, laying the blame for the collapse of the coalition squarely with Salvini and his personal agenda.

Moments later he said he would go to president Mattarella to resign.

The end of the government was largely expected after Salvini pulled his support from the governing alliance with the anti-establishment Five Star Movement earlier in August, saying the coalition no longer has a working majority and setting the stage for a government headed unilaterally by Salvini. The 46-year-old anti-immigration hardliner has been seeking to cash in on his soaring poll ratings and as Bloomberg notes, upended the political establishment with a mid-summer power grab while parliament was in recess.

What happens next will have major implications on Italy’s mountain of public debt which has become the weakest link for Europe’s financial system. One year ago, the ECB effectively threatened to boycott Italian debt as part of its QE sending it plunging. Now that Salvini is set to be Italy’s leader, and the ECB set to restart QE, the question whether Rome will be isolated will once again become front and center, especially with even more debt on tap: on Tuesday, Salvini promised Italians €50 billion of tax cuts and public spending if he can take control of the government.

Italy’s 10-year bonds rallied during the speech, with yields dropping three basis points to 1.41%, however they dipped once Conte announced his resignation. Stocks moved in parallel.

 

via ZeroHedge News https://ift.tt/2ZeRtjh Tyler Durden

Authored by Lance Roberts via RealInvestmentAdvice.com,

In last Tuesday’s “Technical Update,” I wrote that on a very short-term basis the market had reversed the previously overbought condition, to oversold.

“This could very well provide a short-term ‘sellable bounce’ in the market back to the 50-dma. As shown in the chart below, any rally should be used to reduce portfolio risk in the short-term as the test of the 200-dma is highly probable. (We are not ruling out the possibility the market could decline directly to the 200-dma. However, the spike in volatility and surge in negative sentiment suggests a bounce is likely first.)”

Chart updated through Monday’s close

This oversold condition is why we took on a leveraged long position on the S&P 500, which we discussed with our RIAPRO subscribers last Thursday morning (30-Day Free Trial).:

“I added a 2x S&P 500 position to the Long-Short portfolio for an ‘oversold trade’ and a bounce into the end of the week.”

I followed that statement up, saying we would hold the position over the weekend as:

“Given the President is fearful of a market decline, we expect there will be some announcement over the weekend on ‘trade relief’ to support the markets.”

That indeed came to pass as the President announced he extended the ability of U.S. companies to sell product to Huawei for another 90-days. (China gave up nothing in return.) Furthermore, the President re-engaged against the Fed on Twitter:

Neither point is positive over the longer-term. As noted on Monday, investors are continuing to pay near-record prices for deteriorating corporate profits.

“Despite a near 300% increase in the financial markets over the last decade, corporate profits haven’t grown since 2011.”

This Is Still A “Sellable Rally.” 

On Monday, we closed out 25% of our long trading position. We will also continue to sell into any further rally as the market challenges overhead resistance. The rest of our portfolios remain defensive, hedged, and are carrying an overweight position in cash.

The reason we suggest selling any rally is because, until the pattern changes, the market is exhibiting all traits of a “topping process.” 

My colleague Charles Hugh Smith summed this up nicely on Monday:

“As the saying goes, a market-topping is not an event, it’s a process. There are a handful of historically useful characteristics of topping markets:

1. Declining volume / liquidity
2. Increasing volatility–major swings up and down that increase in amplitude and frequency
3. Inability to break decisively above previous resistance (i.e. make sustainable new highs in a stairstep that moves higher).

We see all these elements in the S&P 500 over the past few years. A healthy, stable advance in 2017, led to a manic blow-off top that crashed in February of 2018, setting off a period of high volatility.

This set up another stable advance that was shorter than the previous advance, and also steeper. This led to the multi-month period of instability that concluded in a panic crash in December 2018.

Since then, advances have been shorter and steeper, suggesting a more volatile era. Three advances to new highs have all dropped back to (or below) the highs of January 2018. In effect, the market has wobbled around for 18 months, becoming more volatile after every rally.”

Adding to his comments, you can also see that bullishness by investors still remains aggressive even as the market trades below its accelerated trendline.

Here is a closer look.

There repeated failures along the previous uptrend line suggests a change of trend is potentially underway. As Charles notes, “topping processes” are a function of time, and previous violations of the bullish trend were clear warnings for investors to become more cautious.

1998

2006

You will notice that in each previous case, the “bullish story” was the same.

• Earnings are still strong
• Economic data suggests there is “no recession” in sight
• It’s a “Goldilocks Economy” (Fed hiking rates is bullish, Fed cutting rates is bullish.) 
• The Fed is cutting rates

However, the primary warning signs to investors were also the same:

• A break of the longer-term bullish trend line
• A marked rise in volatility
• A yield curve declining, and ultimately, inverting as the Fed cuts rates.

The last point we discussed in more detail in this past weekend’s missive:

“While everybody is “freaking out” over the “inversion,” it is when the yield-curve “un-inverts” that is the most important.

The chart below, shows that when the Fed is aggressively cutting rates, the yield curve un-inverts as the short-end of the curve falls faster than the long-end. (This is because money is leaving “risk” to seek the absolute “safety” of money markets, i.e. “market crash.”)”

In other words, while a bulk of the mainstream media keeps pointing to 1995 as “the” example of when the Fed cut rates and the market kept rising afterward, it is important to note the yield curve was NOT inverted then. However, when the Fed did begin to aggressively cut rates, which collided with the inverted yield curve, the “bear market” was not too far behind.

Lastly, Helene Meisler wrote yesterday: 

“Over the course of the last week, we saw the TRIN reach 2.10 a week ago on Aug. 12, followed by an extraordinary reading of 3.72 a few days later on last Wednesday. At the time, I explained that we don’t often get over 2.0, so a reading at almost 4.0 was literally “off the charts.”

This brings us back to the 10-day moving average, which as you can see, has skyrocketed to over 1.50. The first thing to note is that this is higher than it got even in the fourth-quarter decline. It’s more than the January and February 2018 decline as well. In fact, we have to go all the way back to 2015 and 2016 to see the kind of selling we saw last week, using this indicator. I have boxed those off in red on the left side of the chart.

Notice that these types or readings don’t occur often and they tend to occur in violent markets. All the way on the left, in July 2015, you can see this indicator reached over 1.50. The S&P 500 enjoyed a rally– a small one, but still a rally. But then you can see we came back down.

The second spike up that took the indicator to just over 1.70 arrived in August of 2015, which was accompanied by the plunge you see in the S&P of nearly 10%. Now squint even further, and you can see the rally in September – off that August low — and how we came back down in late September and early October to form a “W” in the S&P.

All of those instances are examples of a rally and back down again. I’m sure if I went back in time I could find a few examples when this indicator got this high and did not rally and come back down, but this is more typical as you can see.

All of this data supports the idea of a “sellable” rally for now.

Could that change? 

Certainly, and if it does, and our “onboarding” model turns back onto a “buy signal,” we will act accordingly and increase equity risk in portfolios. However, for now, the risk still appears to be to the downside for now.

“But the Central Banks won’t let the markets fall.” 

Maybe.

But that is an awful lot of faith to put into a few human beings who spent the majority of their lives within the hallowed halls of academia. 

There is a rising probability that Central Banks are no longer as effective is supporting asset markets as they once were. As noted by Zerohedge yesterday:

“The Fed meeting on July 31st was a sell the news event because it had been so telegraphed, and priced. The fact that the Fed arguably disappointed with only a 25bps cut means they are now behind the curve; until they get in front of it, multiples are unlikely to expand again. The Fed put expired on July 31st.”

If you disagree, that is okay.

However, given we are now more than 10-years into the current bull market cycle, here are three questions you should ask yourself:

1. What is my expected return from current valuation levels?  (___%)
2. If I am wrong, given my current risk exposure, what is my potential downside?  (___%)
3. If #2 is greater than #1, then what actions should I be taking now?  (#2 – #1 = ___%)

How you answer those questions is entirely up to you.

What you do with the answers is also up to you.

Ignoring the result, and “hoping this time will be different,” has never been a profitable portfolio strategy. This is particularly the case when you are 10-years into a bull market cycle.

via ZeroHedge News https://ift.tt/2Zdafnj Tyler Durden