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Recovering Large Cap Growth PM. How I invest my own money is nothing like how I had to play the insane benchmark game.

The Event Horizon Is Nearing!


EVENT HORIZON: “In general relativity, an event horizon is a boundary in spacetime beyond which events cannot affect an outside observer. In layman’s terms, it is defined as “the point of no return”, i.e., the point at which the gravitational pull becomes so great as to make escape impossible. An event horizon is most commonly associated with black holes. Light emitted from inside the event horizon can never reach the outside observer.”

We are slowly approaching the Monetary Event Horizon from which an inevitable global credit collapse is unavoidable.  The recent negative interest rate pronouncements of the BOJ and subsequent reversal of price action seen in the USDJPY and the Nikkei are illustrative of the now zero marginal return on markets from Central Bank actions.  In the old days the jaw boning and/or action would produce weeks and months of short covering and/or speculative buying.  Now such activity lasts hours to days in it’s effectiveness.  Essentially we are at the beginnings of the end game.  There may be one more arrow in the quiver of Central Banks if the Fed unleashes another round of QE.  However, if Fed QE should fail (and it will IMHO) then you will know that we are being sucked into the final credit collapse event horizon.  The bottom line is that the natural business cycle can be delayed but not averted by Central Banks.  Due to their efforts to delay the cycle the CB’s have actually made the coming recession much worse as their solution to the last crisis was to load up corporations and sovereigns with 30% more debt globally.  If they had let things alone after the Dot Com crash and not blown the real estate bubble we would have been much better off.   However, their meddling will ultimately be seen as the cause of what is to come.  The Central Bank omnipotence meme is giving way to the Central Bank Event Horizon meme.  Let’s see how long it takes before this meme (I just created) is spoken from the lips of a CNBC commentator.

The chart below is the round trip of the dollar yen pair (USDJPY) after Kuroda’s January 29th negative interest rate announcement and last nights ineffective jaw boning:


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Monthly Death Cross Alert!

10 ma 20 ma

The 10 Month MA just Crossed over the 20 Month MA last week by 3 S&P points.  The last 2 times that this occurred was on January 2001 and April 2008 where the declines in those bear markets really began to accelerate to the downside.  Will this time be different?  In my humble opinion no it will not.  By the way, when this death cross occurred in 2001 and 2008 the Fed had already reversed course and had started easing.  My guess is that after this current rally ends (days to weeks) we should see a rather nasty sell off that will scare the living daylights out of most of us.  Even if the Fed eases I don’t think they can stop the recession and credit implosion that is coming.  You won’t hear about this death cross on the MSM because it is a longer time frame than the very popular 200 day moving average that has always been a meaningless signal.

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Real World Credit Widening Anecdote

In case you think things are going to revert back to normal and the bull market is going to resume, I want to share with you a real world example of what happens when the credit cycle rolls over and it’s systemic implications for the economy and corporations.  For the last year I have been listening to folks relentlessly telling me that credit is fine ex-energy.  What many fail to understand is that when one sector becomes diseased it eventually spreads to other sectors as well.  Credit in energy does not exist in a vacuum and eventually it’s stress is causing other sector’s spreads to widen.  This happened during the 2000 telecom credit implosion and the 2007 subprime credit implosion.  It is simply the credit cycle and contagion in one sector always starts where the most amount of excess has occurred and eventually spreads to all sectors.

The example I will use to illustrate this point is Cypress Semiconductor which reported earnings last Thursday.  On their call it came out that instead of issuing a bond to buy back stock they will cut production and sell chips from inventory to generate cash for the buy back.  This has the effect of lowering their gross margins.  They did this because in November the cost of the bond was 4% but by January it had risen to 6%.  Essentially a 50% increase for an investment grade company in the span of 2 months.  If you multiply this anecdote across the whole system you can see that the days of credit milk and honey for companies have ended.  The stock buy back math no longer works so we just lost the most important bid in the market.  Stock buybacks will now have to come from cash flow.  The increase in the cost of money for companies is a profound change that has negative feedback implications for the economy and stock prices.

TJ Rodgers on his company’s buyback:

We’ve decided to actually increase the under-loading to 50% under-loading, which will have an impact on our gross margins. That’s the reason we’re forecasting 36% gross margin in Q1 and low numbers for Q2 and Q3 as well in order to burn through that inventory. We will recover gross margin simply by filling the fab back up to the rate at which we’re consuming inventory, even at the low quarter one level.

We decided to do that, even though reporting – forecasting 36% gross margin is painful, because the alternative for getting cash in order to do our buyback, which we’re committed to – these prices are very attractive, and we’re going to take stock out of the market. The alternative for getting cash to do our buyback is to borrow money and the price for that money – and that was our plan we told you about – the price for that money right now is 6%. And it’s up from about 4%, which is what we baked into our plans when we said we were going to do a buyback. So, we’re in effect going to turn wafers into stock and we’re going to bring stock back without borrowing money. And that’s the plan and we’re eating it on gross margin and we apologize for that announcement this morning.


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Tim Cook: Overall Virtual Malaise In Every Country In The World

The inane debate about a Global Slowdown is over.  Tim Cook uttered the above words and drove a stake through the heart of the it’s “only commodities” meme.  Apple whiffed on revenues and guided revenues 14% lower year over year for the next quarter.  Tim cited broad macro weakness and a recent slowdown in China as the cause.

I am not hear to tell you to short Apple’s stock.  If Apple is seeing this kind of slowdown then you will have bigger problems in your portfolio over the next year.  The somber tone of tonight’s earnings call reminded me of Cisco’s quarter in 2001 where they whiffed and guided lower.  John Chambers was the king of tech then and had a good read on macro as he sold his gear into most global geographies.  Chambers called out a sudden and abrupt synchronized global slowdown the likes of which he had never seen before for his company.  His warnings, much like Tim’s tonight, ushered in the official bear market.  Cisco’s stock had peaked months before in March of 2000.  The US equity markets did not bottom until 21 months later.  Anyone still holding onto the growth theme then was considered a stubborn idiot.

If you don’t respect this datapoint for its true implications then I can’t help you because you are blind or lack experience.  Does this mean the market collapses tomorrow?…no but what it does mean is that the slowdown is real and is spreading fast to the broader economy.

As a side note the quarter was worse than it appeared.  The company had a non-recurring IP licensing award that was included in revenues and added 40 bp to Gross Margins.  Additionally they stuffed the channel to the tune of 3.3 million units in the quarter which also artificially boosted the reported revenue number.  The quarter was not good.  IMHO Gross Margins have peaked for Apple and have nowhere to go but down as the smart phone market has reached saturation and growth slows.


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What Will The Fed Do?

The High Priestess of the Money Masters will hand down her committee’s decree at 2:00 PM on Wednesday January 27th.  What will they do?  I have no idea but I have no doubt that in the short term markets will react violently in one direction or the other.  However, I am fairly certain that in the intermediate term that asset markets are headed much lower.

There is a misconception amongst many participants that the Fed has power over the markets.  The Fed has the power to stretch out a cycle but it can not avert a business cycle downturn.  Credit markets are deteriorating because there is not enough cash flow to service existing debt on the margin.  When that happens spreads widen, bond markets seize up and a business downturn commences.  The bond markets always lead the Fed not the other way around.  Why are they raising interest rates then?  Basically because they waited too long and they are at risk of folks realizing they really don’t have the power that many think the have.  If they didn’t raise rates market’s would be collapsing anyways and folks would realize that the emperor has no clothing.  The Kabuki Theater you have witnessed over the last year concerning economic dot plots and a recovering economy are a grand illusion.  The truth of the matter is that the Fed as an institution has has run out of magic tricks to fool folks into believing that the US economy is on solid ground.  Since the 2000 Dot Com bust the velocity of money has been collapsing and the true unemployment rate has been rising.  The credit engine has run out of steam and since the 2008 shadow banking crisis all we have done is plug that hole and put it on the US balance sheet and in the Junk bond markets.  The piper must be paid and I am afraid this collapse will be swift and violent.  There will be bear market rallies but by Summer/Fall markets will be much lower as margin calls and defaults pile up.

Could the Fed do QE4? Sure but what would that accomplish?  QE has been proven to cause mal-investment and ultimately deflation which the Fed has been fighting since 2000.  I am afraid we are in the Central Banking end game.  I will remain flexible but I believe the Fed’s fight against deflation is over.  It is time for the markets to clear.

Below is a video of a scene from the movie Apocalypto which shows Mayan human sacrifices during a solar eclipse.  What I love about this scene is watching the elites knowingly laugh their heads off as they pull off this grand illusion to fool the masses into believing they have the right to rule over them.  The difference between them and the slaves is their occult knowledge of how astronomy works.  Today’s belief system by the investing crowd reminds me of this dynamic.  If one thinks that the Fed can save us from the business cycle you must understand the Fed has the knowledge that they can’t stop it but they don’t mind investors having that belief system as it serves the continuation of the institution.  Additionally savvy speculators like Soros and Drukenmiller have this occult knowledge of cycles and the fallacy of central bank omnipotence.  They have made fortunes better against Central Banks.



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Clearly Someone Has The Energy Derivative Old Maid

Everyone is looking for a bottom.  The problem is that the street is busy trying to figure out who has the energy derivative old maid and is not focused on bidding up the market but instead they are interested in protecting themselves from counter party risk.  This commodity disaster has wiped out trillions behind the curtain and someone big is in tremendous pain.  The TED spread blew out in the month of December tipping us off to the fact that all was not well within our banking system.  If this market can’t get its sea legs here then we are likely headed a lot lower.  When we do find out who has the old maid we hopefully put in a durable trading bottom.  In my humble opinion any rallies should be sold until the dead body of the financial institution (or institutions) floats to the surface.  Could we get rallies here?  Sure…but I trust nothing until the purging.  Usually once the news is out we usually get a relief rally.  We rallied in 98 on the LTCM bailout news, and in 2008 on the bankruptcy news of Bear Sterns.  However, I don’t think it will be The Bottom but a short covering rally for several weeks to a few months before more pain and despair.

Ted Spread

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Bullard Rally: If It Fails Look Out Below!

The Fed has two weapons at its disposal in setting monetary policy and controlling asset markets.  The first is jaw boning and the second is actual action like raising or lowering rates etc.  In one of Ben Bernanke’s blogs he cheerfully admits that 90% of what the Fed wants to get accomplished occurs through jaw boning the markets.  Well I guess the Fed decided to halt the slide of the markets today and they trotted out “The Bullard”, as the traders like to call him.  You may recall that Bullard made an appearance in October 2014, as the market was cratering, and put QE back on the table.  The Market bottomed that day and a V shaped rally ensued for 6 weeks.  Today Bullard came out and walked back the rate hike talk using the low price of oil and lack of inflation as the excuse.

What is extremely important is to realize that if this rally fails in a few days or a week and we roll over then the Fed has lost a very important tool in their tool box and that is jaw boning.  In 2008 Bernanke lost that tool and then he had to resort to rate cuts as the markets imploded and eventually those didn’t even work either.  Basically if we go to a new low this will be the first sign that the Fed has officially lost control and then it will likely become apparent to many market participants that the train has left the station and stopping the train will require extra ordinary measures.  The problem banking on these measures is that they are likely to occur from much lower stock prices and will be tough for the Fed to do in an election year.  This next rally is extremely important and will be a tell for us as to whether or not the Fed still has the confidence and control that so many of you have come to expect.  My bet is no they don’t and that much lower stock prices are already baked into this deflationary cake.  If we don’t V and go to new highs very soon then look out below.

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Obama May Be The Next Irving Fisher

Obama may have inserted his foot into his mouth last night.  He defiantly proclaimed that “Anyone claiming that America’s economy is in decline is peddling fiction.”

The timing of this comment cannot be any worse.  We are at a very critical juncture in the stock market right here right now.   In fact, while many think we will bottom soon for a bounce, there is a chance that this market stays oversold and bottoms at much lower prices.  This is OPEX week and when we had the melt down in August it was during OPEX as well.  In 1929 right before the market took a tremendous cliff dive Irving Fisher, then a renowned economist, said  “Stocks have reached a permanently high plateau.”  In the video below you will see him describe why stocks crashed a few weeks after his famous comments.  The backdrop then was that a great deflation had taken hold.  Commodities had already collapsed in the summer and the economy was rolling over.  His comment was in response to critics that were pointing out how stocks were in a precarious spot due to the weakening economy.  Could this be Obama’s Irving Fisher moment?  Maybe…I am not suggesting we crash here although I am positioned for it.  If you are not short I would not suggest getting short here.  If you are long then God speed and good luck.

On Friday at the close last week I added a crash put and shorted Valeant in addition to my other positions.  Why did I do that?  We are extremely left translated and I had already banked a ton of profits from my Volatility Grinch bet.  Its a 50/50 shot that we bottom tomorrow or just continue to free fall.   And after all,  I am a little bit crazy like Stephen the Mad Irishman from Braveheart.  Any rallies we get IMHO should be sold.



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“No Ammo Left!”-Former Fed Governor Fisher

Former Fed Governor Fisher dropped a bombshell on CNBC Tuesday Morning.  It was such a complete bombshell and surprise that CNBC heavily edited his comments to make them look like they were about China instead and essentially memory holed this video.  I could not find the original on their site anywhere because they buried it so deeply.  In a nutshell he basically said that the Fed has:

1) “Front loaded a tremendous market rally”

2) “The Fed has no Ammo left!”

3) He expects a correction of 10-20% and says folks are nervous and raising cash levels.

4) He basically admitted that the Fed created a manipulated wealth effect and now we should expect a hangover.

I forwarded this video to a friend of mine who mangers $20 billion in Equities.  He has known that this market is bullshit but has had to play.  The frankness of Fisher shocked him.  The bottom line is that as we unravel many investors like him who don’t really buy into this market fully will hit the bid fast if we gather steam to the downside.  This video should raise alarm bells as the this Matrix of manipulation is coming undone rather quickly.  All manipulations eventually fail.  I recommend that you take the time to listen to this Fisher interview I found on youtube which hits the highlights.

Additionally, I have included an interview by Tim Wood a Market Cycle Technician that was recorded on News Years Eve.  He is seeing ominous things in his work.  If you listen to both men they are basically saying the same thing. Both men think this rally has been a giant manipulation and that we are going lower in price.  The only difference between them is the matter of degree in price decline expected.

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Theater Of The Absurd Year Goes Nuclear On Day 5!

It is only day 5 of what I have dubbed officially as Theater Of The Absurd Year.  It just went nuclear as Kim Jong-Un and North Korea have successfully conducted a hydrogen bomb test.  Thats right, the crazy man who fed his uncle to dogs has decided it would be a good idea to test some Nuclear bombs in the new year just to make his neighbors feel warm and cozy.  I wonder what Obama is going to do?  Oh that’s right he is too busy crying over all the folks killed by gun violence.  So instead of dealing with this or ISIS he will take your guns.

Additionally,  China has devalued a second time in 2 days which has caused our futures to careen lower tonight.  Seriously folks what the F-ck is going on?  It is as if the mad scientists at CERN Switzerland have mistakenly unlocked a gate to Hell with the Hadron Collider and have unleashed some Demons into the world.  As I suggested in my Grinch piece from a few days ago I got max short before Xmas and I will be unwinding some options and vol trades into the carnage this week.  I will stay short stocks and SPY as I believe this party is just getting started.  Strap on your hard hats and watch out for falling debris.

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