Month: August 2017

A super safe stock fell 19% last Friday… And you should be worried

If you invested $1 in this stock back in 1968 it would be worth around $7,000 today – returning over 20% a year for nearly 50 years.

No, this isn’t another story about buying Warren Buffett’s holding company, Berkshire Hathaway, back in the day and getting rich.

This is about buying cigarettes… In particular, cigarette giant Altria (MO).

The tobacco industry has long been one of the steadiest and most profitable in history.

In 2015, investment bank Credit Suisse published a report showing the performance of every major American industry from 1900 to 2010 – over 100 years of data.

If you invested $1 in the average American industry back in 1900, you would have had $38,255 by 2010. That’s a return of about 10% a year.

You would have done even better if you invested in food companies – turning $1 into $700,000 by 2010.

But tobacco stocks far outperformed every other industry.

One dollar invested in tobacco stocks in 1900 was worth $6.3 million by 2010 – a result 165 times better than the average American industry.

Even during the great financial crisis, people smoked more.

In 2008, Philip Morris International – the international tobacco arm that separated from Altria Group in March 2008 – sold 869.7 billion cigarettes and generated $63.64 billion in revenue (increasing 2.5% and 15.2%, respectively, from the previous year).

Cigarettes are so steady that sales even increased by 6.3% in the first quarter of 2009 during the peak of the financial crisis.

It turns out that selling addictive products is a great business.

Altria is a cash machine, and the company’s ‘free cash flow’ allows it to pay out generous dividends to its shareholders.

In fact Altria has increased its dividend for 47 years in a row.

Yet despite being one of the steadies industries in the world, tobacco stocks got crushed last Friday…

The Food and Drug Administration (FDA) announced it wants to reduce the nicotine in cigarettes to make them less addictive.

The news cratered shares of Altria, which fell nearly 20% intraday.

Yes, the FDA is trying to regulate the tobacco industry. But this isn’t the first time that’s happened.

The government already banned most forms of cigarette advertising. And it’s levied enormous taxes on the product. But the tobacco industry still prevailed.

And it will take years for the FDA to push this through, if it happens at all… Big Tobacco will fight like hell in Washington.

The larger point is that when a company as big and stable as Altria crashes 20% in a day, it’s time to pay attention.

How did this happen?

Simple: Passive Investment Funds.

Consulting firm Macro Risk Advisors estimates passive index funds (including ETFs and mutual funds from behemoths like Vanguard and BlackRock) own 85% of Altria’s shares.

And that’s part of the reason Altria sold off so hard. Before I explain, let’s talk about passive investing…

Passive investors buy stock regardless of valuation (as opposed to “active” managers who try to pick stocks that will outperform).

And they charge rock-bottom fees because no one is making complicated investment decisions.

When you put money into an S&P 500 index fund, your money is spread across those 500 stocks based on their size, i.e. the largest company gets the biggest portion of your money.

And passive funds are growing – with over $5 trillion in assets.

According to a Wall Street Journal analysis, U.S. mutual funds and ETFs that track indexes owned 4.6% of the S&P 500 in 2006.

Today, passive managers own 37% of the S&P 500 (and ETFs account for around a quarter of the daily volume across U.S. exchanges according to Bank of America Merrill Lynch).

Vanguard, which created the first passive mutual fund in 1976, is now receiving $2 billion a day from investors who want to own index funds.

And that $2 billion is immediately invested into the market, irrespective of the quality or value of the stock market.

Vanguard now owns 6.8% of the S&P 500 and is the #1 shareholder of many of the largest companies in the world.

Now, remember that index funds don’t trade stocks. They buy and hold.

Even if the FDA makes a big announcement that could affect the industry, index funds hold their positions.

But since passive funds are the majority owners of many large companies (like Altria), there’s only a small number of shares remaining that can change hands during a normal trading day.

This is why we can see such crazy volatility.

On a day where there’s bad news (like a negative FDA announcement), the passive funds which own 85% of Altria do nothing.

But many of the active investors who owned the other 15% started selling their shares.

When only 15% of the shares of a company ever trade, then the share price can collapse within minutes if even only a handful of the active investors decide to sell.

This is one of the consequences of the passive investing trend.

Small, individual investors are piling in to index funds. And this creates conditions where stocks can easily suffer WILD and violent swings.

More importantly, what happens when small investors decide they want to get out of index funds?

This means the funds will have to sell.

So just imagine what will happen if passive funds, which own 37% of the S&P 500 today, suddenly have to sell…

Altria’s 20% drop is a pretty big warning sign, yet another indication of a broken market.

We could soon see even more major dislocations, with some of the most popular stocks in the world gapping down 10+% in a single day.

As I’ve written before, this is a very good time to consider taking some money off the table.

When the cycle turns south and asset prices start to fall, it’s investors who set aside some capital for a rainy day who will call the shots and enjoy the most lucrative opportunities.

Source

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This One Chart Will Fill You With Despair for Chicago

Residents of Chicago are technically on the hook for more than $250 billion in debt issued by four different government agencies (not including the federal debt, which is a whole ‘nother ball of wax).

There’s the city of Chicago, of course. But then there’s also the Chicago Public Schools and Cook County, which includes Chicago and some surrounding suburbs. And, lastly, there is the state of Illinois. All four of these public entities are deep in debt, thanks largely to the pension promises made to public employees and decades of failing to meet those obligations.

Here’s how it looks in one graphic from the latest Comprehensive Annual Financial Report, or CAFR, issued by the state, as highlighted by Mark Glennon at WirePoints Illinois, a state-based blog covering politics and economics.

If you’re a resident of Illinois, and particularly if you are a resident of Chicago, avert your eyes:

The four colored lines on the chart represent the “net position” of those government agencies. That’s a government accounting term for an annual snapshot of everything on a government’s balance sheet.

It might be hard to believe, but there is actually a little bit of a good news here.

For starters, the chart doesn’t say what it appears to be saying. Looking at this, you’d probably assume that something cataclysmic happened in the year 2015, sending those government balance sheets diving into the abyss. But there was no recession in 2015 or 2016.

Then, you might have glanced to the left-hand side of the chart, in an attempt to compare the precipitous drop-off over the last two years with the relatively modest decline experienced during the actual recession of 2008 and 2009. If the worst economic collapse of the past several decades barely made a dent in these balance sheets, then how could the comparatively good years of the mid-2010s cause such a crisis?

Contrary to what this chart shows, there was no inflection point in 2015. Illinois’ and Chicago’s budgets didn’t get suddenly worse that year, they have been quite bad for a long, long time. What changed is how governments have to report their debt.

Prior to 2015, state and local governments commonly hid the long-term cost of their pension debt by keeping those details off their official balance sheets. Since pension costs are amortized (another fancy government accounting term that means “slowly paid over a long period of time”) over decades, putting their value on a balance sheet requires making a number of assumptions about how quickly those debts will be realized. It’s not impossible to do that, but there’s a fair bit of disagreement about how to best make those assumptions.

Beyond that, there’s a strong political incentive to keep those debts off-the-books so things appear better than they actually are. That happens in other ways too, like when Chicago Mayor Rahm Emanuel announced that the city was facing only a $114 million deficit next year, a figure that the Chicago Tribune says his office reached by ignoring several big ticket spending items like $70 million for hiring and training new police officers.

Starting in 2015, however, changes implemented by the Government Accounting Standards Board required states and localities to include pension debt on their balance sheets. That’s why Illinois’ and Chicago’s finances suddenly look so much worse.

It’s not that they got worse overnight. It’s just that they are no longer allowed to hide those costs and pretend they don’t exist.

That’s the good news, such as it is. Governments are now forced to grapple with the reality of problems that have been growing in the darkness for a long time. As with many things, admitting you have a problem is the first step toward a solution.

Other costs are still off-the-books, though. As Bill Bergman of Truth In Accounting comments at Wire Points, governments “have yet to recognize retiree health care and other retirement benefits on the balance sheet, for example. We have a lot of ditch-digging ahead of us.”

Those proverbial ditches will be filled in with taxpayer cash. Chicago passed a new tax on water and sewer service last year that will generate $240 million for pensions by 2020. Property tax hikes approved the previous year will generate an estimated $543 million in 2019 once they are fully phased-in, the Tribune reports. Meanwhile, Cook County passed a soda tax and Illinois lawmakers approved a 32 percent tax hike last month.

Pension costs cannot be hidden any longer. The bills are coming due. That’s bad news for anyone living or working in Illinois, sure, but it’s better than continuing to pretend that everything is just fine.

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House Judiciary Member Calls For Mueller Resignation Over Conflict, “Clear Violation Of Federal Code”

House Judiciary Committee member, Representative Trent Franks (R-AZ), is calling on Robert Mueller, special counsel for the Department of Justice’s Russia investigation, to resign over an alleged “conflict of interest” resulting from a personal relationship with James Comey who is a person of interest in the investigation.  Per the Washington Examiner:

“Bob Mueller is in clear violation of federal code and must resign to maintain the integrity of the investigation into alleged Russian ties,” Franks said. “Those who worked under them have attested he and Jim Comey possess a close friendship, and they have delivered on-the-record statements effusing praise of one another.”

 

“No one knows Mr. Mueller’s true intentions, but neither can anyone dispute that he now clearly appears to be a partisan arbiter of justice. Accordingly, the law is also explicitly clear: he must step down based on this conflict of interest,” Franks said.

 

“Already, this investigation has become suspect – reports have revealed at least four members of Mueller’s team on the Russia probe donated to support Hillary Clinton for President, as President Trump pointed out. These obviously deliberate partisan hirings do not help convey impartiality,” Franks said. “Until Mueller resigns, he will be in clear violation of the law, a reality that fundamentally undermines his role as Special Counsel and attending ability to execute the law.”

Mueller

 

Comey served as deputy attorney general during Mueller’s FBI tenure, and the two bonded in pushing back in 2004 against then-Attorney General Alberto Gonzalez’s efforts to expand domestic surveillance.

That relationship could come into play as Mueller reportedly investigates whether Trump’s dismissal of the FBI director constituted obstruction of justice amid the bureau’s probe into whether Russian agents coordinated cybercrimes with the Trump campaign.

As we’ve pointed out before, several of Mueller’s early, notable hires have all been contributors to Hillary’s and/or Obama’s previous campaigns and Jeannie Rhee actually represented the Clinton Foundation.

Michael Dreeben, who serves as the Justice Department’s deputy solicitor general, is working on a part-time basis for Mueller, The Washington Post reported Friday.

 

Dreeben donated $1,000 dollars to Hillary Clinton’s Senate political action committee (PAC), Friends of Hillary, while she ran for public office in New York. Dreeben did so while he served as the deputy solicitor general at the Justice Department.

 

Jeannie Rhee, another member of Mueller’s team, donated $5,400 to Hillary Clinton’s presidential campaign PAC Hillary for America.

 

Andrew Weissmann, who serves in a top post within the Justice Department’s fraud practice, is the most senior lawyer on the special counsel team, Bloomberg reported. He served as the FBI’s general counsel and the assistant director to Mueller when the special counsel was FBI director.

 

Before he worked at the FBI or Justice Department, Weissman worked at the law firm Jenner & Block LLP, during which he donated six times to political action committees for Obama in 2008 for a total of $4,700.

 

James Quarles, who served as an assistant special prosecutor on the Watergate Special Prosecution Force, has donated to over a dozen Democratic PACs since the late 1980s. He was also identified by the Washington Post as a member of Mueller’s team.

 

Starting in 1987, Quarles donated to Democratic candidate Michael Dukakis’s presidential PAC, Dukakis for President. Since then, he has also contributed in 1999 to Sen. Al Gore’s run for the presidency, then-Sen. John Kerry’s (D-Mass.) presidential bid in 2005, Obama’s presidential PAC in 2008 and 2012, and Clinton’s presidential pac Hillary for America in 2016.

Of course, any effort to forcibly remove Mueller would undoubtedly result in Maxine Waters once again calling for Trump’s impeachment and somehow we suspect that Mueller would have already stepped down if he thought his relationship with Comey was a real conflict…so don’t expect the status quo to change anytime soon.

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Little Marco’s DREAM Act Flip Flop: New at Reason

Immigration RallySen. Marco Rubio, (R-Florida) has never been known as a man of principle. So it is no surprise that he would sell out his previous pro-immigration stance and come out against the DREAM Act that some senators from his own party have revived to stop the Trump administration from deporting DREAMers.

He has now thrown in his lot with extreme immigration restrictionists who are to the right even of Rush Limbaugh and Pat Robertson, both of whom support legal status for DREAMers.

These are folks who were brought to this country as minors by their parents and have lived here practically all their lives. What is surprising, notes Reason Foundation Senior Analyst Shikha Dalmia, is this level of heartlessness from a son of Cuban immigrants familiar with the plight of people trying to flee deprivation and persecution. .

View this article.

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There Are Two Problems With Trump’s Tweet About Record Corporate Profits

Earlier today, in an attempt to deflect from the relentless scandals that plague his administration, Trump tried to pivot attention to either the stock market, highlighting the record high 22,000 print in the Dow Jones, and also pointing out that “Corporations have NEVER made as much money as they are making now.”

There are two problems with this tweet.

First, it’s not correct. While on a non-GAAP basis, which excludes the impact of “one-time, non-recurring” items, and pretty much anything else management does not want counted, which allows companies to ignore countless above the line expense and cost items, adjusted “profits” may indeed be at an all time high, but those “profits” are a monetary mirage, meant only to justiy the record high level in the S&P ever applying (ever greater) P/E multiples.

Meanwhile, what is going on in the real economy – where companies are taxed on their real profits as disclosed to the IRS – is that real profits – which the BEA defines as “Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj)” – have not only stagnated for the past 5 years, as the latest NIPA GDP number reveal…

 

… but have contracted in recent quarters.

In other words, corporate profits may be all time high for non-GAAP purposes, but in the real world, corporate profits have barely budged in years. For those interested in the difference between NIPA corporate profits and reported earnings, read the following BEA note. This discussion ignores the question whether Trump should be pushing for higher corporate taxes if indeed, as he claims, corporate profits have never been higher.

There is a second problem. With corporate profits rising rapidly in recent years, this has been almost exclusively at the expense of wages and compensation. This is shown in the chart below, which shows that while the profit share of GDP has stabilized over the past quarter, labor Share of GDP is at an all time low, and has fallen further in recent periods. And while labor share of GDP may increase as wages (finally) grow rises, increased capex, especially into productive assets, will limit this growth.

The second chart is especially troubling for Trump because it was the collapse in the labor share of GDP that prompted the populist revulsion against the status quo, and got Trump elected in the first place. Should Trump wish to cheer the record divergence between the corporate and labor share of GDP, his days in the White House may be even more curtailed expected.

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Oil Just Plunged To A $48 Handle After Survey Suggests OPEC Output Jumped In July

Extending losses from Goldman's overnight report noting the minimal impact of Venezuelan sanctions, WTI crude just crashed below $49 on heavy volume after Bloomberg reports that a survey suggests that OPEC's July oil output rose by 210K to 32.87mmb/d, led by growth in Libya who upped production by 180Kb/d to the highest since June 2013.

The recovery of crude production from Libya is undermining OPEC’s efforts to curb its output as the African nation pumps unabated.

 

Total crude production from the Organization of Petroleum Exporting Countries in July rose 210,000 barrels a day from June to reach 32.87 million barrels a day, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

 

Libya — which along with Nigeria is exempt from making cuts as it seeks to restore output lost to internal strife — led those gains, adding 180,000 barrels a day. Production rose to 1.02 million barrels a day, the highest level since June 2013, according to data compiled by Bloomberg.

Not exactly confirming the "market is rebalancing" narrative…

The S&P 500 desperately tried to ignore crude's early weakness but this recent move is dragging stocks lower…

The $50-level is “a psychological level. People are really beginning to realize that the market probably needs a steady beat of bullish information to continue to rally,” Gene McGillian, market research manager at Tradition Energy, says to Bloomberg. “If we don’t get a really positive inventory report this week, the market is vulnerable to a nice little turnaround” after rallying the last couple of weeks

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A Quarter Trillion Dollars In US Savings Was Just “Wiped Away”

As part of its historical revision to GDP, the BEA also had to adjust personal income and spending, with the full results released in today’s July report. What it revealed was striking: over the revised period, disposable personal income for US household was slashed cumulatively by over $120 billion to just under $14.4 trillion, while spending was revised higher by $105 billion, to just above $13.8 trillion. There were two immediate consequences of this result.

First, as the following table shows, while government pay has remained roughly flat over the past 3 years, growing in the mid-2% to mid 3% range, wages and salaries for private workers have been steadily declining as the blue line below shows, and after hitting a 4% Y/Y growth in February, wage growth has slumped to just 2.5% in June, the lowest since January 2014 when excluding the one-time sharp swoon observed at the end of 2016.

 

But a more troubling aspect of today’s revision is what the drop in income and burst in spending means for the average household’s bank account: following the latest annual revision, what until last month was a 5.5% personal saving rate was revised sharply lower as a result of the ongoing downward historical adjustment to personal income and upward adjustment to spending, to only 3.8%.

In dollar terms, this revision means that a quarter trillion dollars, or $226.3 billion, in savings was just “wiped away” from US households – if only in some computer deep in the bowels of the BEA buildings –  who as a result have that much less purchasing power, and following the revision the total personal saving in the US as calculated by the BEA is now down to only $546 billion, down from $791 billion before the revision.

This means that either households will have to incur this much debt to continue on the previous spending “trendline”, or a quarter trillion in potential growth from the future economy (recall 70% of US GDP is the result of consumer spending), has just been chopped off.

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Bitcoin’s “Day Of Reckoning” Has Arrived: Traders Welcome “Bitcoin Cash” As Network Splits

After more than two years of internecine struggles over how to expand bitcoin’s ability to quickly process transactions, the long-feared bitcoin "day of reckoning" has arrived. The bitcoin network has split into two separate blockchains, causing the creation of a new cryptocurrency twin to the original bitcoin.

In the meantime, the collapse that some bitcoin doomsayers envisioned has so far yet to materialize; the original cryptocurrency was off 3% in recent trade, while most of its peers were higher on the day.

After announcing Saturday that they would go ahead with the fork, bitcoin miners running the alternative bitcoin software will soon begin producing the new coin, known as bitcoin cash. Bitcoin cash raises the limit of how much data can be stored in a single “block” on the bitcoin blockchain, which proponents say will help increase transaction speeds while tamping down rising transaction costs.
Though no blocks of bitcoin cash have yet been mined, Kraken, one of the most popular US exchanges, has added it to its interface.

Other exchanges are still figuring out how they will handle cash, according to CNBC.

"Coinbase said it will not support the new bitcoin cash. The firm operates the GDAX exchange, which said in an email alert it has temporarily disabled bitcoin withdrawals and deposits Tuesday "in preparation for the upcoming fork."

 

Bitfinex, which has nearly a third of U.S.-dollar bitcoin trade volume, tweeted Tuesday morning that "We will stop processing $BTC deposits at noon UTC until the situation has settled. Deposits after that time will not be eligible for $BCH."

As of press time, bitcoin cash miners were still waiting for the first new coin to be processed, according to CoinDesk.

According to Btcforkmonitor.info, the bitcoin blockchain has produced 478562 blocks, compared to 478,558 for the alternative Bitcoin Cash blockchain.

 

At press time, miners dedicating computing power to that blockchain were still looking for their first block, an event that would mark the formal creation of its cryptocurrency.

Bitcoin cash is supported by a minority of miners and developers who objected to a feature of the more popular Segwit2x update that would’ve improved the digital currency’s scalability by routing more transaction data over peripheral networks, thereby taking pressure off the main blockchain. Segwit2x will also increase the bitcoin blockchain’s block size to 2 megabytes. According to Shapeshift CEO Erik Vorhees, the only major mining pools that support cash are ViaBTC and Bitcoin.com.

Segwit2x has the support of most of the community’s miners. Data from blockchain.info show that 90% of the network’s mining power is signaling support for Segwit2x, higher than the 80% threshold needed to make the software update official.

If recent moves are any indication, Tuesday will be a wild day in cryptocurrency markets as investors wait to see how the market will react to bitcoin cash. Ethereum endured a similar network split last summer that created Ethereum Classic, a separate token that’s seen its price plunge as investors favored the original Ethereum token over its newly created peer. Now investors are wondering: Will a similar dynamic play out with bitcoin and bitcoin cash?
 

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Crude Oil- Facing heavy resistance test again!

weight lifter for kimble charting solutions post

 

Crude Oil is worth about a third (down 65%) of what it was worth back in 2008. It’s lost about half of it value from just three years ago (2014 highs). The declines in Crude over the past 9-years has created a series of lower highs, reflecting it still remains in a long-term down trend.

Below updates the pattern of Crude over the past decade-

Crude oil weekly, chris kimble chart

CLICK ON CHART TO ENLARGE

As mentioned above, Crude has continued to create a series of lower highs since it hit resistance line (1) back in 2015. It hit falling resistance line (2) earlier this year, only to head lower and create another lower high.

Of late Crude has experienced another counter trend rally, taking it up to test another lower high at (3), which could be a heavy resistance line.

At the same time Crude is testing overhead resistance, Crude traders have created another very crowded trade, almost to the size of the crowed trade that was established at the 2014 highs. At that time, traders believed Crude was going to head higher and boy did they bet big time on this belief. We all know what followed that crowded trade…Big decline in Crude and the bulls were hurt big time!

With traders establishing a similar trade to 2014 currently, what Crude does at falling resistance (3), becomes very important for this sector

 

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Is Rally Leader Amazon Breaking Down?

Via Dana Lyons' Tumblr,

Amazon’s stock is threatening to break below a trendline that has supported it during its epic 2 and a half year run.

When historians look back at the current period in the stock market, one of the stocks that doubtless will define the era is Amazon (AMZN). Not only does the company seem bent on world, or at least U.S., domination but its stock has reflected it as well. From its IPO in 1997 until early 2015, AMZN’s stock price essentially doubled every 2.5 years. In the 2.5 years since, the stock has hit another gear.

By October 2015, AMZN’s stock price had doubled again. And at its high last Thursday of 1083, it had nearly doubled again. Over the last 3 days, however, the stock has not been so hot, losing almost 100 points from its high of last Thursday. The pullback also has the stock testing an important line on AMZN’s chart.

Since its January 2015 low, AMZN had been supported by a well-defined rising trendline (using a log chart). On about a half dozen occasions during the past 2 and a half years, the stock has bounced off nearly precise tags of the trendline.

As of today’s close (988), the stock finds itself testing the line (currently intersecting near the 990 level) once again.

As this trendline has served as near-perfect support during Amazon’s dramatic 2 and a half year run, it is obviously an important technical line to monitor for the sake of the stock. So will it hold? Obviously, we have no way of knowing for sure, although, we are a bit concerned about the now 3 touches of the trendline in the past 2 months alone. The increased frequency of touches may put the trendline in danger of being broken.

Beyond just AMZN’s stock, however, this trendline test could hold implications for the market at large. AMZN has served as one of the steady leaders during this portion of the bull market. If it breaks down, might it be a bad sign for the overall market?

*  *  *

If you want that “all-access” version of these charts and research, Dana invites you to check out his new site, The Lyons Share.

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