WAR! US Escalates Financial War With Russia.

Yesterday President Obama announced more sanctions against Russia except this time they had teeth.  Forget the Kaubuki theater going on in Ukraine.  This was really retaliation for the Russian assault against the hegemony of the US dollar as the reserve currency of the world.  Russia was the leader in the recently formed BRICs bank and is actively seeking to de-dollarize the world.

In addition the Obama administration has done a bang up job of fomenting open dissent by our partners against the dollar.  For example, recent actions against French banks for supposed infractions has French officials actually calling for an end to the dollar’s rule.  The powers that be should be very careful when it comes to the dollar.  Should we loose our reserve currency status then the standard of living in this country would plummet.

Make no mistake about it but we are unofficially at war with Russia now.  The prior sanctions were a joke but these actually affect the flow of capital.  I think it is only a matter of time until tanks roll into the Ukraine now that we have upped the ante.

Stock futures are down due to the sanctions and we are still contemplating what the newly hawkish Janet Yellen said as well.  The market is beyond stretched and these two things may be all the excuse that we need to head lower as we are technically set up for a correction.  However, the bull is strong and we will have to wait and see how this unfolds and perhaps earnings will save save us.  It is just starting to get interesting.  I think many stock fund managers are going to have sleepless nights while on vacation this summer.

I read a lot of things.  Perhaps too much.  But it has come to my attention that traders are a superstitious bunch of folks.  Apparently today is a major Bradley turn date.  I have no idea what that is but many seem to be paying attention to it.  The market appears to have a bid to it this morning after Yellen’s stock picking recommendations from yesterday.  If we should fade and close red then Satan surely has taken charge of the situation and indeed strong voodoo magic is at work.  At the time of this writing we are green.  Good luck and lets be careful out there.

Janet is now picking sectors.  This is beyond weird!  She basically called out social media, biotech and small caps.  Apparently the Fed is now in the business of picking sectors.  Clearly they want to now control the structure of the market and they are basically trying to engineer a controlled correction without affecting the rest of the market.  The question is should investors ignore this or do we follow the maxim of “Don’t fight the Fed?”  Let price be your guide on the expensive stocks.  We have really entered new territory.  The hubris of the Fed and its belief that they can micromanage a correction is stunning.  I think it is about to get very interesting.  Watch 1950 on the S&P.  If we take that level out over the next few days then this correction has legs.  Otherwise it is noise.

A little birdie told me that Lloyd is trying to figure out why the bond  market is broken and is researching the subject.  Trading revenues in fixed income at GS are awful.  What is going on?  Well the bottom line is that the Fed has bought much of the supply leaving the yield seeking muppets to fight over what is left in the market place.  The problem is liquidity has dried up and a once robust bond market has become a perverted Frankenstein market.  Repo collateral fails are on the rise and are at the highest level since the Lehman collapse.  Regulation and Fed perversion have forced big players on the buy side into the derivatives market.  Why is that a problem?  Because derivatives are leveraged vehicles and leverage kills when yields rise.

Recently it was rumored that the Fed was looking at Bond Fund exit fees.  My sources tell me it is not a rumor.  Why would the Fed pursue such a strategy?  Conspiracy theorists would say the Fed sees something ugly on the horizon.  Regardless the mere fact that the Fed is looking into this suggests that there is a problem.  When yields rise the potential for a huge bond market dislocation appear to be epic.  Why should stock investors care?  Primarily because when there are margin calls in the bond market there will be zero bids.  This is due to regulation that has reduced the Streets capacity to commit capital for fixed income trades and people will be forced to sell what they can and that will be stocks.  Watch the bond market as it may be a key to unlocking the extended bullish energy in the stock market to the downside.  Bottom Line: When Lloyd and the Fed are looking into the bond market structure we should all proceed with caution.

The high beta stock recovery has been impressive since the May lows.  The broader averages never even flinched.  The fundamentals have been decelerating but the market continues to grind higher.  The only thing that matters is price and price is laughing at the fundamentals and the bears.  I have never seen a market so disconnected from economic reality.  At least during the tech mania in 1999/2000 the economy was actually on fire until it wasn’t.  Now we use snow as an excuse to explain away a -3% GDP print.  Anybody with a brain in their head knows this is a central bank induced bull market and because it is I fear a quick death to this market.  As an example I have a friend that manages $20 billion of Large Cap Growth stocks.  He called me out of the blue on Thursday asking me how to procure physical gold because he is worried about the dollar collapsing and the government taking his money.  He was not joking.  I asked him if he was positioning his portfolio for a correction.  He said no because the market does not pay attention to fundamentals.  That is what I call major cognitive dissonance.  He continues to play this stock market game that he does not believe in because he must.  The market has punished those who do not follow the merry central bankers.  The problem is the central bankers are taking us to a cliff.  I wonder how many large participants in this market don’t believe in what they do anymore.   The end game here is going to be epic.

All the sentiment indicators and all technical measures indicate that we should see a healthy correction soon.  If you are a bull you want to see some of the excesses worked off and some fear come back into the market so you can reload and buy the dip.  If we do not have a correction soon then I think we will have the potential for a terminal “phase transition” blow off top that will surely mark the end of this bull market and result in a crash.  The odds of a melt up of epic proportions were increased last week when Janet Yellen essentially said “have at it boys I don’t care about bubbles.”

I am mostly cash getting ready to shoot this market in the back (especially high beta tech) or meekly play the blow off top.  This is a very dangerous market that is disconnected from reality and is full of Zombies that are following the printing presses.

I have been busy getting my life in order.  Moving to Maui on Thursday.  Well at least my stuff is going on Thursday.  I leave end of July.  My wife and kids are in Japan getting some of that Fukushima good Karma.  Talk about a nation in complete denial.

When I started writing on this wonderful site I was up 9% for the year.  I am now down 3%.  I got run over by the short squeeze and stopped out.  I still own September DIA puts which have been crushed.  I went short AMZN again today with a tight stop.  With todays intraday reversal I think we may have seen a near term top with a nice correction ahead of us.  I am using AMZN to express this opinion because the Chart is very compromised, low short interest, fundamentals are deteriorating and the phone launch looks like a disaster.  People are getting tired of the no profit meme.  The rally out of the lows has been relatively weak compared to other marquee growth names.  Chess has been eyeing this one as a short candidate.  I think it is time to try and short this POS again.  I think the shorts have been slayed and because they are dead there is no one left to cover.  I can hear an air pocket below.

Yelp is a great service for the consumer but this company will never make any money and I suspect the VC’s and management team know that to be the case as well.  The CEO and CFO dump their options the moment that they are vested and have been dumping founder stock.  They have been dumping the whole way up.  One of the original VC’s and Director, Jeremy Levine, still holds some stock but recently dumped 70% of his stake at $60 dollars in December.  I guess he thought it was silly at $60 but little did he know it would race to almost $100 by February.

The main problem is that some of their clients for the most part can’t stand them.  It has been well documented that the FTC is investigating many claims of extortion and there is a class action lawsuit.  We all know that this is old news but that is why they have a 30% annual churn rate and it will never get any better.  What I find interesting is that they have been in business for 10 years and yet they have never made money.  It is my thesis that with such a high churn rate they never will make money.  What is that worth?  Jeremy certainly did not think it was worth $60 bucks.  No one has ever cracked the online local ad market from a viable business model standpoint and I don’t think Yelp ever will.  The valuation is absurd and Google is making a concerted effort to get into their space.

The revenue growth acceleration is purely a function of increased S&M spending which management ramped into this momentum growth stock market on purpose because they knew they would get rewarded for it.  They went public in 2012 when the market was starving for growth stories.  Its like a boiler room.  They hire young hungry sales people who harass small business owners into advertising with them for the bargain basement price of $350 dollars a month.  The more feet on the street the more revenues ramp but because so many clients end up hating them the churn is very high.  They are on a constant tread mill to keep replacing the old suckers with the new suckers.  The capital markets have been funding this nonsense because it believed there would be a payoff down the road.  That game has changed and the insiders knew all along this would end and that is why they have been dumping all the way up.  I wonder if they were pinching themselves looking at each other saying “I can’t believe this is really happening.”

Having said that I wished I had owned it at $15 and shorted it at $100.  I did neither.  I was short for some of the way down but I have since covered.  I am currently not short but I believe that the trend is down over time.  For those who want to short this pick your spots.

One last thing, I have heard that employees are already asking for more cash compensation in lieu of stock. That did not take long and for a company losing money that is not good.

I have just received word that some of my former colleagues were let go from their seats.  Performance was fine but the asset class was out of favor so flows have gone the wrong way.  Such a short term solution, their style would have come back in favor.  The squid coupon clipping management team decided to let them go.  I love the management of large investment firms.  Did you know that a fairly large percentage of them have never managed an ounce of risk in their lives?  But yet they are able to make decisions about the effectiveness of investors.  Its so easy to cast stones at others especially if you have never done this job.  To those who judge us but have never walked in our shoes I offer up this Theodore Roosevelt quote:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes up short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who  at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

Don’t lose sight of the prize!  Going long broken tech stocks for a bounce is a distraction and dangerous (DDD, BLOX). Insider distribution is occurring.  Big Money is feeding the beast.  We are Topping and it is a process.  The Bull Market in Monetary Illusion and Fed Wizardry has been fun but alas it is ending.  I know most of you are traders, but remember it is at big market turns that people get wiped out or extremely rich.  Unfortunately more get wiped out than rich and that is why turns occur.  Too many sailors on one side of the boat and a violent move to bring it back into balance.

Large cash positions are warranted to take advantage of the next short set-up.  Here is my take.  The market looks like it wants to go higher.  Could it melt up?  Yes it could.  However, if you follow cycles we should have a trading cycle top, an intermediate term cycle top and a seasonal cycle top occurring all at once.  Very powerful voodoo indeed for those of you who have no idea about what I am talking about.  These cycles are expected to bottom in the June/July time frame.  If nature takes hold then we should expect a 10-12% decline.  I am using the DOW as my measuring stick because of its long recorded history.  I EXPECT A NEAR TERM TOP SHORTLY!  Could I be wrong? Yes.  I own some Puts on the DIA and I am 90% cash.  When I see the set up I will pile on.  If I am right then the rally out of that low can and should be played on the long side.

Remember people lets KEEP IT SIMPLE! There is a disturbance in the force and I know most of you can feel it.  Number 1 and 2 below will suffice in guiding us but the others just add insult to injury.

1) The Fed and China are tightening. What if the ECB does not start their QE?

2) We are now in month 62 of the longest four year cycle advance in history!

3) Profit margins are at peak.

4) Corporate revenues and earnings appear to be decelerating.

5) Margin debt, corporate net debt and global government debt are above 2007 levels.  We had a debt problem so we solved it by adding more debt.  It is the definition of insanity and it will end very badly.

Why is this stock down 6%?  What we have today is a large long term shareholder saying good bye to a long term friend.  It’s over.  The fact that Marc Benioff sounded forlorn and the fact that they are not going to break out Exact Target anymore spooked this shareholder.  This shareholder likely has been following this company for about a decade, like I have, and they noticed that Marc did not sound his usual peppy self.  It was a huge tone change.  Also without the Exact Target acquisition, which they said they are no longer disclosing, the organic growth most definitely decelerated.  My friends on the buy side tell me that the sell side does not understand the price move today.  They should because they get paid big bucks to figure out this kind of change on the margin.

We now have another Marquee Tech name that is slowing.  The multiple is too high and now they need acquisitions to grow.  The problem with that is their stock currency to buy is weakening.  The growth stock price reflexivity dynamic is now in reverse action here.  This is now a short the rally name.  Their 30% growth rate guidance is a fantasy and the seller today knows that.  No need to stick around and wait for the company to give up the ghost of growth because when they do the stock will be much lower.