Vern Gowdie

Dear Reader,

Did you know that…

‘Apples are high in fructose — a type of sugar. Fructose is used to make high-fructose corn syrup, which is linked with obesity and heart disease.

‘Fructose can only be absorbed in the liver, and when it’s there, it produces harmful fats called triglycerides, which can lead to heart disease. Eating too many apples can lead to excess fructose in the body, which can contribute to diabetes and obesity as well.’

Cookist

Too much of a good thing can lead to serious health side effects.

The same applies to your wealth.

Portfolios overweight (pardon the pun) in Apple shares are getting fatter by the day.

‘The record-setting advance in U.S. stocks is fueling readings of investor bliss not seen since the dot-com era. Gains in Tesla Inc. and Apple Inc. following stock splits helped push the Nasdaq 100 past 12,000.

‘A sentiment gauge, Citigroup’s panic/euphoria model, which tracks metrics from options trading to short sales and newsletter bullishness, is having its longest run of extreme bullishness since the early 2000s. At around 1.1, the current reading is almost three times the level that denotes euphoria.’

That blissful sugar high investors are feeling is from binging on Apple and other sweet-tasting tech stocks.

The fructose overload is evident in the Citigroup panic/euphoria chart:

If this was a medical chart, the patient would be rushed to ER. All efforts to avoid serious damage to internal organs would be made.

But when it comes to the economic quacks (sorry, doctors) overseeing the markets, ‘too much of a good thing’ is never enough. More. More. And some more again.

All logic is abandoned.

And speaking of logic — or more precisely, the lack of it — let’s put this statement to the test ‘Gains in Tesla Inc. and Apple Inc. following stock splits helped push the Nasdaq 100 past 12,000’.

There’s a widely-held belief that stock splits (turning one share into 10) suddenly makes the shares more valuable.

Talking heads parrot the line of ‘retail investors will find the lower stock price more attractive’.

Please tell me how splitting a $10 note for 10 $1 coins changes the value of the transaction…it doesn’t. Logic is one of the first casualties when investors are obsessed with seeking sugar hits.

Wall Street veteran (and if you’ve been on the street for 60 years, you qualify as a veteran) Art Cashin, explains what actually happens with a stock split…

‘The real point I can’t believe all of them [analysts] have missed has to do with shorting the stock, particularly stocks like Tesla, Amazon and Apple where there are large short positions due to skeptics. When someone sells a stock that he doesn’t own (short), he then has to borrow it from someone who owns it so he can make delivery. He promises then to re-deliver an identical type of stock from whom he borrowed.

‘When the stock splits, it complicates life for short sellers and often they have to go into various negotiations that are the equivalent of a short squeeze to buy back the stock, rechanging it for stock that will be due after the split is effective. So, it was perfectly natural to watch Apple split and then have people begin to buy it and Tesla split and people begin to buy it.’

Stock splits DO NOT create extra value. The split simply creates (temporary) extra demand for the stock from short sellers.

Why is Apple so popular?

According to the popular narrative…it’s a growth story. But is it?

Average quarterly revenues (black line) have increased by around 40% over the past five years. A growth rate of around 7% per annum compound.

Good, but hardly a growth story.

Then when you look at Apple’s free cash flow (the cash left over from Apple’s revenue after it pays for its operating expenses and capital expenditures), that’s been anything but a growth story.

Free cash flow (blue line) has been flatlining for the past three years.

And while Apple is not generating any more free cash flow than it was in 2017, the share price (yellow line) has managed to go parabolic.

Word of warning here…parabolic share price growth is never a good sign.

This manic and irrational pricing behaviour is a common feature of markets that are close to major reversal.

If we travel back in time to the US market’s last big sugar-hit high, we see a similar pattern.

The top five and top 10 largest companies in the S&P 500 Index have a disproportionate weighting within the index.

Apple, Amazon, Facebook, Microsoft and Google represent 23% of the index.

The other 495 stocks in the S&P 500 Index, make up the other 77%.

The growing concentration in the very top tier of the S&P 500 is highlighted in the advance-decline line for the Nasdaq Composite Index (CCMP).

The advance–decline line is a technical indicator that’s used to measure the number of individual stocks participating in a market rise or fall. 

Up until 2018, the advance-decline (blue line) was mostly positive. Which means the number of stocks rising was greater than those falling.

This is a good sign. Showing the market advance is broad based and there are multiple pillars holding up the index.

After 2018, the advance-decline trend goes into its own decline.

The base for the advance is getting narrower and the pillars supporting a much higher price are becoming few and far between.

We’ve seen this before. Eventually, the structure becomes completely unstable and collapses.

Yes. It collapses.

And here’s the proof.

This is what happened to the handful of blue chip stocks that dominated the index at the peak of the dotcom boom.

Apple lost 81.1% of its value.

Can it happen again?

Absolutely.

If we go back to when Apple’s free cash flow started flatlining in 2017, the share price was US$147. Today, (adjusted for the 4:1 stock split) the share price is US$536.

Just going back to the 2017 price would result in a share price fall of 72.5%.

A little change in social mood and a slight slump in revenues and hey presto, you could get an 80% collapse in the share price.

I know, that sounds silly, irrational and patently ridiculous in an environment where investors ‘logic’ pushes up a share price almost 300% on flatling earnings.

‘Eating too many apples can lead to excess fructose in the body, which can contribute to diabetes and obesity as well.’

One of the symptoms from diabetes can be blurry and clouded vision.

My guess is those investors who’ve indulged too much on Apple and the other tech darlings are suffering from an acute case of blurred vision.

Market history — going back to the late 1920s — shows the same pattern…a handful of blue chip stocks capturing the imagination of investors right at the peak of a long-running bull market.

Sadly, investors seem destined to learn that an apple today won’t keep the bear away.

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

Russians Won’t Interfere in US Elections
By Bill Bonner

We have two pieces of bad news…both becoming clear over the last two weeks.

First, the Republican Party is dead. We’ll roll the corpse over tomorrow and have a look.

But sadly, the Democrats are alive and well.

Waste of time

Here at the Diary, we try to ignore politics as much as possible. Like TV, Facebook, and dinner parties, they’re a waste of time.

Besides, we have no desire to take something away from anyone else, neither with a pistol or an election. If we can’t earn it — or at least steal it honestly — we don’t want it.

But many of our dear readers take their politics seriously. So, we’ll do our best to offend as many of them as we can.

Besides, politics is getting harder and harder to ignore. It muscles into our private lives like Antifa crashing a kumbaya singalong.

Left and Right are shooting at each other, while knuckleheaded politicians crash the economy…and trash our civil society, too.

Pathetic affair

The Democrats’ big shindig, a week ago, was a pathetic affair. It was little more than a gripe fest aimed at Donald Trump (although Mr Biden didn’t once pronounce his name).

The Democrats are convinced that Mr Trump is a dangerous moron…probably the only thing on the whole agenda that they are right about.

Tulsi Gabbard won more delegates than Kamala Harris. But Ms Gabbard dared to challenge the party’s Clintonesque warmongering…and endangered its support from the armed wing of the deep state.

Ms Gabbard may have some other good ideas, too, but we never got to hear from her; she was not invited.

And with her out of the way, the hacks and has-beens were able to pick up the old bones and gnaw away.

Inequality…racism…LBGT+…free medical care…free this…free that — from eternal life to cheap broadband…they were for it all.

And they had a solution for every problem…even those that don’t exist. Joe Biden:

‘[I won’t] put up with foreign interference in our most sacred democratic exercise: voting.’

‘Sacred’ is the right word. Like the virgin birth…QAnon…and superheroes — you have to believe.

Patriotic duty

For one thing, it takes a remarkable suspension of disbelief to think that foreigners would want to diddle with US elections. ‘Never interrupt your enemy when he’s making a mistake,’ said Napoleon.

In the upcoming election, we have a worn-out husk on one side, ready to go along with everything. On the other is a delusional grifter, who might do anything. Why would any foreign nation bother to meddle?

As for the voters themselves, it must take an amazing lack of self-esteem to want either of these clowns to tell them what to do.

‘Can I buy a Chinese-made phone? Do I have to wear a mask? Can I go out of my house now? Should I save my money…or spend it? Should I hate the Russians? Should I send my boy to the Middle East so someone can shoot at him…or to Portland? Why is it so hard to make ends meet?’

Seriously? Do you want Joe Biden or Donald Trump to answer these questions for you?

Either way, here’s Biden’s answer:

‘We’ll have a national mandate to wear a mask — not as a burden, but to protect each other.

‘It's a patriotic duty.’

Really? A patriotic duty to wear a face mask?

Dumb as ever

By this time in his speech, Joe Biden was rolling up his sleeves and getting down to business. Here’s his plan:

‘With modern roads, bridges, highways, broadband, ports and airports as a new foundation for economic growth. With pipes that transport clean water to every community. With 5 million new manufacturing and technology jobs so the future is made in America.

‘With a health care system that lowers premiums, deductibles, and drug prices by building on the Affordable Care Act he’s trying to rip away.

‘With an education system that trains our people for the best jobs of the 21st century, where cost doesn’t prevent young people from going to college, and student debt doesn’t crush them when they get out.

‘With child care and elder care that make it possible for parents to go to work and for the elderly to stay in their homes with dignity. With an immigration system that powers our economy and reflects our values. With newly empowered labor unions. With equal pay for women. With rising wages you can raise a family on. Yes, we’re going to do more than praise our essential workers. We’re finally going to pay them.

‘We can, and we will, deal with climate change. It’s not only a crisis, it’s an enormous opportunity. An opportunity for the US to lead the world in clean energy and create millions of new good-paying jobs in the process.’

Yes, dear reader, the Democrats are alive and well. And dumb as ever. They have one tired and ineffective solution to everything: more government.

Bad math

But wait…how to pay for all this stuff? At least Biden did suggest a source of funds:

‘And we can pay for these investments by ending loopholes and the president’s $1.3 trillion tax giveaway to the wealthiest 1 percent and the biggest, most profitable corporations, some of which pay no tax at all.’

Really? End loopholes and raise taxes on the rich? Is anyone able to add and subtract?

This year, the feds are closing in on a $4.2 trillion deficit — funded almost entirely by printing ‘fake’ money. A little of that gap might be filled by raising taxes on the rich, but probably not much.

A substantial increase in tax rates — say, capital gains or death duties — would collapse the stock market. Instead of paying capital gains, the rich would be taking capital losses…and paying less tax.

And of course, the rich have lobbyists…with whom Mr Biden is very familiar.

For many years, he was the go-to pol for Delaware’s big banks. And (along with Donald Trump) he’s a major recipient of Big Pharma/Insurance company campaign donations. No doubt, they still have his phone number.

The real problem

But the real problem with the Democrats’ get together was not the usual hollow promises, double dealing, and idea-free speeches. Those are what you’d expect.

But you might also expect that at least one person might have noticed that the US is headed towards a fiscal/economic/social catastrophe.

Its financing scheme — covering huge deficits with printing press money — has ruined every country that has tried it. And yet, not one word was said about it.

Michael Bloomberg attacked Trump’s economic record…and rightly so, but only to discredit The Donald.

Like the other speakers, he stuck to the basic template for the whole program — bemoan the problems of the poor, the unemployed, the downtrodden, the BIPOCs, the economy, the climate…

…but never question the real causes.

No one wondered why GDP growth is running at the lowest levels since the Second World War. Or why debt is growing more than twice as fast. Or why working class wages are lower today than they were 50 years ago.

Or why there are now 30 million people on the unemployment rolls. Or why the economy might never recover from its current slump.

Or why the lives of so many Americans — black and white — are so miserable…or how they might actually be made better.

Instead, like so much of the rest of American public life, the Democrats’ convention was fake…not really facing up to any of the problems and dangers now threatening the country…and not having any sensible idea of what to do about them.

Tomorrow: GOP. R.I.P.

Regards,

Bill Bonner,
For The Rum Rebellion