Wednesday, March 30, 2016

Berkshire Hathaway 2016 Shareholder Letter

FEBRUARY 27,2016 

So Sad to read this, but it's reality

"There is, however, one clear, present and enduring danger to Berkshire against which Charlie and I are powerless. That threat to Berkshire is also the major threat our citizenry faces: a “successful” (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States. That is a risk Berkshire shares with all of American business.
The probability of such mass destruction in any given year is likely very small. It’s been more than 70 years since I delivered a Washington Post newspaper headlining the fact that the United States had dropped the first atomic bomb. Subsequently, we’ve had a few close calls but avoided catastrophic destruction. We can thank our government – and luck! – for this result.
Nevertheless, what’s a small probability in a short period approaches certainty in the longer run. (If there is only one chance in thirty of an event occurring in a given year, the likelihood of it occurring at least once in a century is 96.6%.) The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime. “Innovation” has its dark side.
There is no way for American corporations or their investors to shed this risk. If an event occurs in the U.S. that leads to mass devastation, the value of all equity investments will almost certainly be decimated.
No one knows what “the day after” will look like. I think, however, that Einstein’s 1949 appraisal remains apt: “I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.” 

Berkshire Hathaway Profited On ENRON BONDS

FEBRUARY 28,2007 Berkshire Hathaway Shareholder Letter

"We continue, however, to need “elephants” in order for us to use Berkshire’s flood of incoming
cash. Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.
Our exemplar is the older man who crashed his grocery cart into that of a much younger fellow while both were shopping. The elderly man explained apologetically that he had lost track of his wife and was preoccupied searching for her. His new acquaintance said that by coincidence his wife had also wandered off and suggested that it might be more efficient if they jointly looked for the two women. Agreeing, the older man asked his new companion what his wife looked like. “She’s a gorgeous blonde,” the fellow answered, “with a body that would cause a bishop to go through a stained glass window, and she’s wearing tight white shorts. How about yours?” The senior citizen wasted no words: “Forget her, we’ll look for yours.” 

"in 2002-2003 we spent about $82 million buying – of all things – Enron bonds, some of which were denominated in Euros. Already we’ve received distributions of $179 million from these bonds, and our remaining stake is worth $173 million. That means our overall gain is $270 million, part of which came from the appreciation of the Euro that took place after our bond purchase. "

"Already the prediction I made last year about one fall-out from our spending binge has come true: The “investment income” account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse compounding” as we pay ever-increasing amounts of interest on interest. "

"I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking."

"Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions." 

FEBRUARY 28,2007 Berkshire Hathaway Shareholder Letter

Warren E. Buffett Chairman of the Board 
Berkshire Hathaway Shareholder letter 

Thursday, March 17, 2016

After Close: Titan Machinery Unexpectedly Pre Announces FY2016 Warning

  •  Expects FY2016 Sales Decline of $500 Million (-28%)
  • Expects Net Income  FY2016 Loss of ($37 Million) down from Fy2015 Loss of ($31 Million) 

Titan Machinery (NASDAQ: $12.50) is trading down significantly after hours after the company pre announced FY2016 Q4 and Year End Financials for the period ending January 31,2016. 
8K here

In March 2015 Titan Machinery Pre Announced FY2015 Financials and the stock was HALTED!

March 2015 FY2015 Pre Announcement:
GAAP net loss attributable to common stockholders for fiscal 2015 is expected to be in the range of $30.9 million to $32.0 million, or $1.48 to $1.53 per diluted share.  vs 
Adjusted net income attributable to common stockholders forfiscal 2014 was $16.5 million, or $0.78 per diluted share"

March 17,2016 FY2016

  • For the fourth quarter of fiscal 2016, revenue is expected to be approximately $335 million compared to revenue of $490.7 million in the fourth quarter last year.
  • Q4 the Company recorded an inventory impairment charge of approximately $27 million, or $0.77 per diluted share, related to the expanded equipment inventory reduction plan

  • Pre-tax loss for the fourth quarter of fiscal 2016 is expected to be approximately $53 million, compared to loss of $37.2 million in the fourth quarter last year.
  •  Pre-tax loss for the fourth quarter of fiscal 2016 included the $27 million impact from the equipment inventory impairment charges as well as a $6.7 million impairment charge related to long-lived assets. 
  • Pre-tax loss for the fourth quarter of fiscal 2015 included non-cash impairment charges of $31.0 million primarily related to goodwill and other intangible assets within the Agriculture segment. 
Total Company: Loss of $45 million, which includes equipment inventory impairment charges of approximately $27 million, compared to loss of $5.0 million for the fourth quarter last year. 

Net loss attributable to common stockholders for the fourth quarter of fiscal 2016 is expected to be approximately $34 million, or $1.62 per diluted share, compared to net loss of $27.0 million or $1.28 per diluted share for the fourth quarter last year. Excluding all non-GAAP adjustments, adjusted net loss attributable to common stockholders for the fourth quarter of fiscal 2016 is expected to be approximately $28 million, or $1.31 per diluted share, compared to adjusted net loss of $4.1 million or $0.20 per diluted share for the fourth quarter last year.

Preliminary Fiscal 2016 Full Year Results

For the full year ended January 31, 2016, revenue is expected to be approximately $1.37 billion compared to $1.90 billion last year. GAAP net loss attributable to common stockholders for fiscal 2016 is expected to be approximately $37 million, or $1.76 per diluted share, compared to net loss of $31.6 million or $1.51 per diluted share last year. Adjusted net loss attributable to common stockholders for fiscal 2016 is expected to be approximately $26.5 million, or $1.25 to per diluted share, compared to adjusted net loss of $1.9 million, or $0.09 per diluted share, last year.

No Mention of the Cash raised from the sale of this Titan property to Sterling Real Estate Trust on January 29,2016. (2 days prior to the ending)
Executive Manager of Sterling is former assistant to Titan's president

Equities Research Warned @ $30 

Sunday, December 13, 2015

Ridding World of Negative Rates May Require Meltdown of Income-Producing Assets

Ridding World of Negative Rates May Require Meltdown of Income-Producing Assets

Michael Markowski | 
Should the yields of U.S. Treasury debt securities become negative a meltdown of the global banking system and a crash of the global markets might be inevitable. Based on my analysis the only solution, other than the central banks taking action, to rid the world of the insidious NIRPs and negative interest rates would be that all of the world’s income-producing assets undergo significant markdowns. See my March 12, 2016 “Negative Rates Pose Grave Risks to Banks” report.
Since the beginning of 2016, I observed a degree of volatility that I had only seen in 2008. Given my many years of experience and track record for developing algorithms, which enabled me to warn investors about pending calamities — including Lehman, Bear Stearns and Merrill Lynch in 2007 — I conducted extensive research on the crash of 2008. I discovered metrics that could have been used to predict the 2008 crash, and the V-shaped reversal. These metrics are components for an algorithm that is now powering my “NIRP Crash Indicator”, which can signal an impending market crash. The NIRP Crash Indicator signals are free and are posted daily at See March 9, 2016 “New Indicator to Predict Market Crashes” article.
The best solution to stop the spreading of NIRPs and negative interest rates is for central banks of the world to immediately enact or redact policies to abolish them. This would be the catalyst for the yields of the sovereign securities of Japan and Germany becoming positive. In the absence of this happening, a possible remedy to fight the NIRP and negative interest rate contagion could be the resetting of valuations of all income-producing assets to a discount in the marketplace as compared to their most recent valuations. The decline in valuations of income-producing assets would result in a significant increase in their yields. The yields increasing to sufficient levels should motivate safe haven and other investors to liquidate their holdings in negative- and low-yielding sovereign debt securities to purchase the less secure and much higher-yielding income-producing assets. The availability of significantly higher yields on income-producing assets would, hopefully, discourage safe haven and other savvy investors from “being fearful”, and encourage them to “become greedy”.
With significant declines in the values of all less secured income-producing assets, and resultant increase in their yields, market forces would take over. The result would be that markets would drive down prices of treasuries and other sovereign debt securities, and their yields upward into substantial positive territory. Upon yields of the world’s sovereign debt securities skyrocketing, the demand for and prices of negative and low interest rate securities will collapse. The need for central banks to utilize NIRPs will have been completely exhausted.

Case Study: American Electric Power versus 10-Year U.S. Treasury Note

To prove my theory and validate my suggested remedy, I conducted research on the share price and dividend yield behavior of the public utility company, American Electric Power (NYSE: AEP), before and after the crash of 2008. I also focused my research on the price action and yields of 10-Year U.S. Treasury bonds over the same period. My focus was on a utility company because shares of a utility have always been considered the safest form of equity investments. If a utility bill is not paid the electricity is turned off. For this reason a utility’s dividend payments are reliable. Thus, the dividends of a utility company are much more secure than are dividends of any non-utility company.  During the Great Depression AEP was able to maintain and increase cash dividends. For these reasons it is assumed that the yield for shares owned of a utility will always be lower than the yield that they might expect to receive from shares they hold of a dividend-paying non-utility company.
The shares of American Electric Power (AEP) is a good example of a safe income-producing asset that could potentially motivate a holder of negative or extremely low interest rate sovereign securities to liquidate them to purchase its shares. With a current annual dividend of $2.24, and a most recent share price of $62.00, AEP has a yield of 3.63%. Based on how AEP’s yield and share price behaved before and after the crash of 2008, an increase of its yield to 10% would likely be sufficient to motivate a holder of a low or negative interest rate sovereign securities to buy its shares. A decline in AEP shares by approximately $40, or by 64% to a share price of $22 would increase its dividend yield to 10%. Should such a scenario unfold it would be very similar to what happened to AEP’s share price and yield before and after the crash of 2008.
On July 31, 2008 AEP’s share price was $27.84, and its annual dividend yield was 5.9%. From the end of July 2008 to March 9, 2009 — the same date that the S&P 500 Index (the Index) bottomed — AEP’s share price declined by almost $10 (or by 36%) to a 5-year low of $17.73 and to an equivalent dividend yield of 9.2%. Over the same period the price of a 10-year U.S. Treasury note increased by 33%, and the yield fell from 4% to 3%. In June of 2009, three months after AEP’s share price had bottomed, the price of AEP shares had increased by 21% and its yield had fallen to 7.6%. Over the same three months the price of the 10-year Treasury bond declined by 25% and its yield had gone back to the 4% from which it started a year earlier. Based on the opposite behavior of yields, the price action of AEP shares, and the 10-year Treasury notes from July of 2008, through June of 2009, it is very likely that holders of the notes were selling them to purchase shares of AEP and other high-yielding utility companies. See CNBC’s historical yields chart for 10-Year U.S. Treasury notes. My research confirms that holders of Treasuries and sovereign debt securities will sell them for less secure income-paying securities upon the yields increasing substantially.
On March 10, 2016 the dividend yield for the S&P 500 — based on its close at a value of 1989 — was 2.2%. Under the assumption that the dividend yield of the Index would have to be at 10% to become attractive to safe-haven and savvy investors, the Index would have to decline to 430, based on the current annual $43.00 dividend. While such a correction of approximately 80% would be severe, it would not likely be the Index’s low. A crash or correction of such magnitude would likely cause the first global depression since the 1930s. After the Index’s dividend hit an all-time high in 1930, the dividend declined by 44% by 1935 and did not eclipse the 1930 high until 1955.
There is voluminous empirical data covering the price and yield action of utility shares and sovereign debt securities, before and after the 2008 crash. For this reason it would be difficult to fathom any argument that theS&P 500 would not have to go to a yield of at least 10% to dislodge safe-haven investors from their holdings of U.S. Treasury notes and other sovereign debt securities. 
Assuming that all of the world’s central banks that have instituted NIRPs do not repeal them, the issue would become how the resets of the world’s income-producing equity and non-sovereign debt markets — required to exterminate the NIRPs and negative interest rates — might take form? Will it be a swift crash, or a gradual correction? My hunch is that the correction could occur with valuations of the markets ratcheting downward in stages. Markets would not likely bottom until late 2017, or early 2018 for two reasons, as follows:
  • A correction of more than 40% from a market’s all-time high to its trough has historically taken time. There have been five such corrections over the last 100 years, as follows: 1919 to 1921, 1929 to 1932, 1973 to 1974, 2000 to 2002, and 2007 to 2009. (The four corrections, prior to the one ending in 2009, lasted at least 24 months.) Had massive fiscal and monetary stimulus not been applied in October of 2008, after Lehman filed for bankruptcy, this most recent correction would likely have lasted at least 24 months. 
  • If the dividend yield of the S&P 500 Index should go from a most recent 2% to 10% to kill the NIRPs and negative interest rates, the peak-to-trough decline of the Index would be 80%. The only other time over the last 100 years in the U.S. that a decline of more than 50% occurred was from 1929 through 1932. After the market had declined by an initial 40% in October of 1929, the market experienced six powerful rallies that generated trough-to-peak rallies providing returns ranging from 20% to 50%. When the market finally bottomed in the middle of 1932 it had declined by 90% from its 1929 all-time high. Since history has been known to repeat itself I would expect no less drama from the secular bear market that was likely birthed after the market hit an all-time high in May of 2015.
The only remaining issue is the timing of when the S&P 500 Index might begin to ratchet downward to new multi-year lows that could eventually take the Index to well below 1000 by late 2017 or early 2018. Extreme controversy surrounding the NIRPs and negative interest rates has continued to escalate since the Bank of Japan (BOJ) instituted a NIRP earlier in 2016. It has also increased the probability of the Index’s descent happening sooner rather than later. For this reason it is likely that the news pertaining to NIRPs will be the catalyst that causes the beginning of the next market downturn. Because NIRPs were created by the world’s central banks the next downturn to lower lows will likely be fueled by public statements that will be made by central bankers about NIRPs, negative rates, stimulus, and the health of economies, etc.
A perfect example of this occurred on March 10, 2016, as I watched the European Central Bank’s (ECB’s) press conference pertaining to changes to its interest policies implemented at the conclusion of the regularly scheduled policy meeting on same date. The four most significant revelations from the ECB press conference and my brief comments follow:
  • Interest rates and inflation projected to remain low in Europe through 2019 
Onset of deflation risk to remain high 
  • ECB to buy investment-grade corporate bonds 
Potential disaster should deflation occur. See my deflation white paper
  • Lower profits resulting from NIRP, offset by capital gains on banks’ bond holdings 
Capital gains are non-recurring 
  • NIRPs do not work for all bank business models 
Confirms NIRPs are now creating dysfunction for banking system 
An in-depth report is underway that will provide explanations regarding the consequences each item the ECB revealed above will have on the world’s markets. One of my conclusions is obvious: the flight into safe-haven sovereign debt securities will accelerate. My March 12, 2016 report entitled, “Negative Rates Pose Grave Risks to Banks” also provides color on the ECB’s recent policy meeting, sovereign debt securities and save havens.
Fireworks could go off when the Fed concludes its scheduled March Policy Meeting on March 16, as there is no doubt that Fed Chair, Janet Yellen, will have to answer questions from Congressional leaders and the media about negative interest rates. Should Yellen give any indication that negative interest rates might be an option it could set off a chain of events that could result in negative- and/or low-interest rates becoming the headline campaign issue for the 2016 elections. I recently watched a video interview of David Stockman, former Budget Director under President Reagan. Based on what Stockman said about Donald Trump, the probability is high that the Presidential candidate will use Yellen’s statements to make negative- and/or low-interest rates his flagship campaign issue. There are millions of retired Democrats and Republicans with whom this issue would resonate. Since the 2008 debacle, passbook savings rates have been miniscule. Negative interest rates and deflation becoming the topic of discussion at dinner tables could, in itself, be the catalyst that produces a market meltdown or a recession. Please see the March 14, 2016 video: “The Fed Is Lost: David Stockman”.
In the event that Fed Chair, Yellen, does not slip up on March 16, there will be plenty of additional central-banker sound bite opportunities throughout 2016. From April through December of 2016 each of the world’s three leading central banks have six scheduled policy meetings. What will most likely occur is that the S&P 500 and the indices for the other global markets will hit new multi-year lows during some or all of the months the meetings are scheduled.  
Schedule of Remaining Policy Meetings of Central Banks for 2016
European Central Bank (ECB)
Bank of Japan (BOJ)
U.S. Federal Reserve (FOMC)
March 10, 2016
March 15, 2016
March 16, 2016
April 21, 2016
April 28, 2016
April 27, 2016
June 2, 2016
June 16, 2016
June 16, 2016
July 21, 2016
July 29, 2016
July 27, 2016
September 8, 2016
September 21, 2016
September 21, 2016
October 20, 2016
November 1, 2016
November 2, 2016
December 8, 2016
December 20, 2016
December 14, 2016
It is unlikely that the ECB and the BOJ will make the policy changes that would be needed to eliminate negative interest rates. The ECB in its March meeting announced that it had increased its NIRP from -0.03 to -0.04 the negative meeting The markets for the sovereign debt securities of Japan and Germany have already priced yields into negative territory. While its questionable that the U.S. Federal Reserve would institute a NIRP, the U.S. Central Bank is severely conflicted and compromised. After raising the discount rate in December of 2015 interest rates of the U.S. Treasury markets promptly declined. With the global economy having deteriorated and Japan having instituted a NIRP, the rational for the Fed to raise rates is fast evaporating. Even if the U.S. economy should weaken, the Federal Reserve would have to give serious consideration before lowering the discount rate. The markets would likely interpret a rate cut vs. a rate hike as a signal that the Fed would be moving in the direction of instituting a NIRP. The Fed’s being “conflicted” is yet another reason the markets are highly susceptible to a significant haircut by the end of 2016.
The writing herein is in further support of my February 26, 2016 foundational report “Japan’s NIRP Increases Global Market-Crash Probability”, which is about NIRPs and deflation, and the potential devastating impact that both can have on corporate profits and on the markets. The report concluded that instituting of a NIRP (Negative Interest Rate Policy) by the Bank of Japan (BOJ) had significantly increased market volatility to a point that has increased the probability of a market crash. (My recommended investment strategy, which protects an investor’s capital against significant market corrections and crashes, is contained in an excerpt from my foundational report as follows: “Pre-Crash ‘Black Swan’ Investing Strategy”.)
My foundational report also provides details on research that I had conducted on the Crash of 2008, which enabled me to discover the metrics that could have been used to predict the 2008 crash, and the V-shaped reversal. These metrics are now powering an indicator, or warning system, which I developed and named the “NIRP Crash Indicator”. It is currently being utilized to monitor the markets for indications of any impending crash and its freely available at
My March 9, 2016 follow up report entitled, “Cash Hoarding Has Thrust Negative Rates into Lead Role for Next Crash” and my March 12, 2016 report entitled, “Negative Rates Pose Grave Risks to Banks” are also highly recommended. The video below is a discussion conducted with SCN’s Jane King that covers half of the subject matter of this report. There will soon be a second SCN video available that will explain the additional content within this report.

Wednesday, March 16, 2016

Negative Rates Pose Grave Risks to U.S. Markets

Negative Rates Pose Grave Risks to Banks
Michael Markowski | 

Unless the Negative Interest Rate Policies (NIRPs) that were brought upon the world by central banks are eliminated, a meltdown of the world’s banking system is unavoidable. Japan’s central bank instituting a negative interest rate policy (NIRP) earlier this year has resulted in all of the country’s money market funds closing and the spreading of negative interest rates globally. The NIRP that was instituted by the European Central Bank (ECB) in 2014 has put Europe’s banking system on the verge of a crisis.  
During the first two months of 2016, I observed a degree of volatility that I had only seen once throughout my 40-year career in the markets, and that was in 2008. Given my experience and track record for developing algorithms that successfully warn investors about potential catastrophes — including Lehman, Bear Stearns and Merrill Lynch documented in my 2007 Equities Magazine column — I conducted extensive research on the crash of 2008. Through this research I discovered metrics that could have been used to predict the 2008 crash, and the V-shaped reversal. These metrics are now powering an indicator or warning system that I developed and named the “NIRP Crash Indicator” which I am utilizing to monitor the markets for indications of any impending crash. The NIRP Crash Indicator is freely available at
The terms “NIRP” and “negative interest rate” should not be confused or intertwined. A NIRP is the inside rate, formerly known as the “discount rate”, that a central bank charges on the reserves that are held in its member banks. A negative interest rate is not established or set by a central bank. The market instead sets it. It is entirely possible that the sovereign debt securities of a country could have a negative yield even though its central bank has not instituted a NIRP. 

Negative Rates Pose Risks to Banks

NIRPs and negative interest rates are much more lethal to the world’s banks than the subprime loans, subprime mortgages, and credit default swaps — the causes of the crash of 2008. Based on my exhaustive research, my conclusion is that it is impossible for a bank in the US, or any country, to remain a bank under a scenario where interest rates on treasuries or sovereign debt securities are negative. The comparative tables below for my Savings & Loan (S&L) example illustrate the marked difference that a negative interest rate has on the profits and losses of a banking institution. Please note that my interest rates and 50% loan-to-deposit ratio are hypothetical.
Any bank or business having to depend on capital gains to subsidize a decline in operating profits or cover operating losses can only end in disaster.Depository financial institutions including S&Ls and banks cannot lend 100% of the funds that they receive from depositors. The S&Ls and banks must have funds available to provide to those depositors who decide to withdraw monies from their accounts. Banks are prohibited by regulators from investing their reserves into anything other than government guaranteed securities. For this reason, depository financial institutions in the US must be able to invest their reserves into secure US Treasury securities that pay a positive yield. The centuries old banking model of banks investing their reserves into treasury securities works the same in all developed and emerging countries. A US bank or a bank domiciled in a country that does not have positive-yielding treasury securities into which the bank could invest its cash reserves cannot remain a bank. 
What is now happening in Europe is a confirmation that negative interest rates pose grave risk to US banks and banking systems. In 2014 the ECB instituted a NIRP for all of its European member countries, including Germany. According to the March 4, 2016, article entitled “It’s a revolution: German banks told to start hoarding cash” published by Sorveign Man, cited in English “German newspaper Der Spiegel reported yesterday that the Bavarian Banking Association has recommended that its member banks start stockpiling PHYSICAL CASH [sic].” Members of the association are in an uproar about having to pay the ECB the 0.03% NIRP rate on unloaned reserves of the banks. To make matters worse, in its March 10, 2016 policy meeting, the ECB increased the negative rate to 0.04%. In the press conference, held by the ECB at the conclusion of the policy meeting, two very disconcerting answers were given by ECB officials to questions from reporters. Both answers confirm that the European banking system is becoming increasingly dysfunctional.. Answers by ECB officials to questions raised by reporters and my comments follow:
  • The ECB Vice President explained that while the banks had lower profits resulting from NIRP, this was not a major concern because the banks had been able to book capital gains on bonds that they hold in their investment portfolios. 
  • A reporter posed a question about retail banks struggling with the NIRP. ECB President Mario Draghi’s reply was that negative rates do not work for all banking business models. 
There are only two types of banks, commercial and commercial/investment. A commercial bank, which is also known as a “retail or a community bank” takes in checking and savings deposits and provides loans to local individuals and businesses. A commercial/investment bank is a hybrid, which can generate fees and commissions by raising “equity” capital for the larger private and public companies. J.P. Morgan and Deutsche Bank are both hybrid examples. For a commercial bank to also be an investment bank requires a license. Less than 1.00% of the more than 6,000 retail banks in Europe and more than 5,000 in the US have licenses. It is now only a matter of time before the ECB’s NIRP and negative interest rates erode Europe’s banking system. 
(The hoarding of cash by banks and also by individuals causes serious dysfunction within the world’s banking system. Currency constitutes merely a small percentage of the world’s money supply. If a fraction of the banks start hoarding currency it would cause significant stress on the banking system. The amount of cash that is in circulation is equivalent to a fraction of all banking transactions. Since hoarding by banks would remove the cash from circulation it would eventually lead to chaos and complete dysfunction for the banking system. To understand the huge risks to the banking system from individuals in Europe that have begun to hoard cash please see my March 9, 2016 article entitled “Cash Hoarding has Thrust Negative Rates Into Lead Role for Next Crash”.) 

Demand for US Treasury Securities Will Drive Interest Rates Below Zero

What the banks in Europe and Japan are now facing, and what I predict that US banks will eventually have to face, is that the quantity and yields of positive-yielding government or sovereign-debt securities that will be available for purchase in the secondary markets or from new issues auctions are declining. Negative yields on German 2-year notes recently fell to a negative 0.57, and the yield of the 10-year German bund is now hovering at just above zero. The yields for all of Japan’s notes and bonds of durations of 10 years or less went negative and have remained negative shortly after their central bank — Bank of Japan (BOJ) — announced that it was instituting a NIRP on January 29, 2016. Additionally, the yield for the US 10-year Treasury notes have fallen significantly since the beginning of 2016, and was recently hovering just above its 30-year low of 1.44%. The chart below of the yields for Bloomberg’s sovereign bond index graphically depicts what U.S. banks will soon have to face. 
With yields for two of the three world’s biggest issuers of government or sovereign debt securities going negative, the US is now the only remaining major country that has government debt-securities with positive yields. This will soon pose a big problem for US banks. Worldwide, investors are now competing against U.S. banks and U.S. investors to purchase the sovereign securities of the U.S. Treasury. This will result in the prices of the securities being driven upward and the yields declining, eventually becoming negative. After this happens, it will only be a matter of time before US banks follow the rest of the world’s banks and become dysfunctional. From the start of 2016, European bank stocks were down 27% as compared to 11% for the US bank stocks. Below are the categories of buyers that compete to purchase US Treasury debt securities:
  • US Banks.
  • US Federal Reserve Bank (“the Fed”).
  • US Speculators. These include the Treasury securities ETFs. 
  • US Institutional Investors. These include the money market funds that have $1.4 Trillion of US Treasury securities. 
  • Foreign Investors. Japanese brokerage firms have already started to create and sell funds that consist of US debt and equity securities. 
  • Safe-Haven Investors. The world’s wealthiest families, largest pension plans, endowments, etc. — with the majority having capital-preservation profiles and 100-year-investment time horizons
The only fail-safe solution available to investors to fully protect themselves from macro-economic risks is sovereign bonds issued by a safe-haven country. A government of a country that has the ability to tax its citizens to repay the debt, is the backing of all safe-haven bonds. The safest safe-haven countries are the U.S., Japan, and Germany. Greece is not a safe haven because Greece has tax-collection difficulties. The US is a good example. After the Great Depression began, the US income tax rate increased to as high as 90%. US investors need to understand that the securities of the safe havens of the US, Japan, and Germany are the “Lloyds of London” for the financial markets. Eventually, the positive-yielding sovereign securities (insurance policies) will no longer be available. For more on safe havens, please see my May 2009 “Safe Haven” white paper
The depleting quantities of positive-yield sovereign or safe-haven bonds in the world are similar to the issue that I brought to light in my September 2007 Equities Magazine article entitled “Have Wall Street’s Brokers been Pigging Out?”. I emphatically told my readers to sell their shares of Lehman, and the other four leading brokers when the shares were trading at close to all-time highs. The basis of my “sell” recommendation was that I had concluded that the brokers had already depleted the pool of large institutional investors who could have potentially bought their subprime loan packages. The excerpt below is from my 2007 Equities Magazine article. 
  • “I believe that there will be a day of reckoning. It will be sooner rather than later and that day will be ugly for the five large brokers. An obvious question is just how many regular humongous buyers are there for the billions of dollars of the mortgage-backed and private-equity related securities that Goldman and the other four are creating, holding and trading? … I believe that these five big brokerage firms are going to hit that same wall. It’s only a matter of time.” 
The pool of safe-haven sovereign debt, including US Treasury securities, will soon be depleted. I am once again emphatic. This time I am advising my readers to sell all of their equity holdings. When I predicted the collapses of Lehman and the other four brokers in September 2007, I should have told my readers to completely sell everything else in their portfolios. After witnessing in 2008 the havoc caused by a US banking system that would likely have failed without the aid of TARP, I will not make that mistake this time. There is not a doubt in my mind that positive-yield US Treasury debt securities will soon no longer be available. When this happens the world’s banking system and financial markets will have hit the wall. It’s only a matter of time.
The writing herein is in further support of my February 26, 2016 foundational report “Japan’s NIRP Increases Global Market-Crash Probability” which concerns NIRPs, deflation, and the potential devastating impact that both can have on corporate profits and on the markets. The report concluded that instituting of a NIRP by the BOJ had significantly increased market volatility to the point that it has increased the probability of a market crash. (My recommended investment strategy, which protects an investor’s capital against significant market corrections and crashes, is contained in an excerpt from my foundational report entitled “Pre-Crash ‘Black Swan’ Investing Strategy”.)
My foundational report also provides details on research that I had conducted on the Crash of 2008, which enabled me to discover the metrics that could have been used to predict the 2008 crash and the V-shaped reversal. These metrics are now powering an indicator (warning system) that I developed and named the “NIRP Crash Indicator”. It is currently being utilized to monitor the markets for indications of any impending crash, and is freely available at
My March 9, 2016 follow-up report “Cash Hoarding Has Thrust Negative Rates into Lead Role for Next Crash” is highly recommended. The video “Negative Rates Pose Risks to U.S. Markets” below is a discussion that I had with SCN’s Jane King about the increasing risks for all worldwide banks and depository institutions that have been caused by the onset and spreading of negative interest rates.


Sunday, March 13, 2016

Under Armour Spin Leads League Schooling Wall Street's Finest

When: Monday to Friday
Time: 9:30 to 4pm
Its A Technology Company
3-D Printing
 CHINA Hyper Growth Story
Exaggerated Earnings Beat
*Note classes on each day may vary depending on the Wall Street flavor of the day.
** filings on Friday Night after the close are intentional and are not recommended reading. 
***ALL Morgan Stanley Research regarding A Downside Risk of $42 (-50%) should be ignored.

Equities Research Warning: SELL Under Armour
Equities Research is speculating that Under Armour (NYSE: UA) will announce in the next 4 weeks an equity or debt underwriting before the company announces results for the first quarter in late April 2016. Under Armour 1st quarter ends March 31,2016.
Equities Research believes Under Armour will raise capital before the Q1 report because of expections the company will miss Wall Street analyst Q1 EPS estimates of $0.05 per share. Equities Research believes Under Armour Will Report a LOSS for FY2016 Q1.  

Under Armour Needs cash and can not afford to take a risk of a poor Q1 earnings report's effect on its stock, a significantly weaker market capitalization would make any underwriting done after a poor report to adversely effect pricing.  Under Armour disclosed on their FY2015 Conference call that they would "look for Opportunities to refinance their debt".  The company's total debt increased to $669 million for the period ending December 31,2015 up from $284 million for the period ending December 31,2014.  The company also noted that FY 2016 interest on debt would increase to $35 million (approximately $0.16 per share). 

To keep the stock higher, Under Armour has put on a "FULL COURT PRESS" , literally. A day doesn't go by without a major news wire reporting Spin after Spin, from Barron's to TheStreet to every message board on the planet, the company has touted their scouting expertise at finding high school athletes in AAU  to Silicon Valley technology ventures with IBM's Watson.

The only Scoreboard that matters to Equities Research is not in the headlines, but in the BOX SCORE, also known as audited financial statements filed with the Securities & Exchange Commission.
  • December 31,2015 Cash & Cash equivalents were $129 Million down from $593 Million from December 31,2014.   (78% Decline)
  • FY2015 Cash Flow from Operations was Negative $44 Million down vs Positive $219 Million in FY2014. A Decline of $263 Million year over year. 
  • $48 million of the $129 total cash is held in foreign subsidiaries, while only $81million is available in the US. Foreign Subsidiary held cash is not expected to be used in US due to tax consequences.

Friday Night Dump
Under Armour (NYSE: 82.45) filed a DEF 14 filing with the Securities & Exchange Commission late Friday after the close, also known as a #FridayNightDump.

  • (SPIN) Kevin Plank CEO Compensation Drops 31.5% 
At first glance it looks like CEO "took less" compensation in the best interest of the Shareholders, but  after digging into the DEF14A we learn otherwise.  It turns out that in addition to the CEO, Maurath the Chief Revenue Officer also earned less compensation  This was not a shareholder friendly decision, but instead as disclosed in the filing, these two officers compensations declined by an aggregate of $1.8 million as a direct result of financial performance (or lack their of).
A small $1.8 million compensation number may sound insignificant, but as I will get to later I will show how this "little" number made a $4 Billion Increase to the Company's market capitalization within a 48 hour period. What really is even more alarming is that this disclosure is only being surfaced 6 weeks after an opaque FY2015 earnings report was hyped.

Down 17% in 3 Weeks
On Wednesday January 27th Under Armour traded at a low of $66.93 and was down $14 Year to date from its $80.61 December 31,2015 close. (-17% in 4 weeks).
Under Armour traded on October 12,2015 at an all time high above $104.74 and the following day the CFO resigned and the shares would eventual fall to a 52 week low of $66.93. (Down $38 in 3 months, a  -37% drop in 90 days)

Up 28% in 2 Days
On Thursday January 28th pre market, Under Armour announced FY2015 earnings and by the close on Friday the shares had Sky rocketed to close the week @ $85.43, UP $19 in two days or 28%.

Friday night March 11th we learned a "little more" about how Under Armour "BLEW AWAY THE WALL STREET ANALYST ESTIMATES" back January 28th.  A $0.02 Beat for a company with 220 million shares outstanding would be a beat of $4.4million. But the company beat the net income estimate by only $3.2 million based on the release. Now after finding out Friday night , 6 weeks later, that the CEO and CRO earned less than an aggregate of $1.8 million vs. FY2014 due to not meeting financial performance targets. We now need to subtract the $1.8 million from the $3.2 million beat and we end up with a beat of only $1.4 million, which is an ACTUAL BEAT of $0.006 (less than a penny and NOT $0.02 that WALL STREET FINEST USED TO PUMP MARKET CAP UP BY $4 BILLION within 2 days!

Using the Actual Math, and not the Spin Number, Under Armour DID NOT Grow Earnings by 20% in FY2015 Q4 vs. FY2014 Q4. Earnings only grew by 18%.

Stephen Curry was mentioned 27 times on the morning Conference Call and the word "CASH" was mentioned once.  

Positive EFFECT OF TAX LOSS Carry Forwards on NET INCOME (NOL)

February 22,2016 the company discloses in SEC 10K filing that Accounting Errors have been discovered in the cash flow statements for FY2015 Q1 and Q2.

Down 18% in 6 Days
Sunday, January 31st Equities Research downgrades Under Armour to a Sell, shares fell $15 over next 6 trading sessions from $85.43 to a low of $70.33, down 18%. (humble note: BOJ announcing NIRP on the 29th brought the entire Global Market to its knees, until (SPIN) Jamie Dimon and Warren Buffet   touted how the USA  market was a great buying opportunity and all is well).

Up 17% in 4 Weeks

Friday, March 11th Under Armour closed @ $82.45 up $1.45 on the day.

  • (SPIN) Under Armour, (the Technology) Company Makes Huge Splash at Consumer Electronics Show.
  • (SPIN) CEO Kevin Plank "spoke with" CEO of IBM about IBM's "HEALTH HUB"
  • (SPIN) IBM WATSON can let you know how you're feeling today on Scale of 1-10).
 •(SPIN) "Lewis: Yeah, I think when you hear IBM Watson you have that, whoa, this is some serious data analytics and serious AI-type work that they're going to be doing."
 •(SPIN) Under Armour deems it necessary to file 8K on March 4th to inform the public that The Sports Authority bankruptcy will not effect Under Armour.
On Wednesday March 2nd, a week after Under Armour filed their 10K , The Sports Authority filed bankruptcy and announced the closing of 140 of its 463 stores. Analysts estimate that The Sports Authority generated revenue of $3 billion in 2015. The bankruptcy filing lists Under Armour as one the largest creditors with $23 million in receivables. 
Under Armour immediately came out with an (8K) announcement DEFENDING its FY2016 guidance and stated The Sports Authority will not have an effect on FY2016 projections. 

Although Under Armour filed an 8K saying otherwise, Dick's CEO says company will see increase selling pressure in months to come due to liquidations at The Sorts Authority.

Thanks to the genuis of Ophir Gottlieb the founder of Capital Market Laboratories, I am able to share his TRADECARD graphs from his CMLVIZ website.

NEGATIVE $44 MILLION Cash Flow from Operations ttm
NET INCOME $232 Million ttm



OLSTEIN: Earnings vs. Cash Flow

New York Times  7/18/1999 

"EARNINGS VS. CASH FLOW -- Mr. Olstein first examines what a company generates in cash flow from its operations. A company with excess cash flow can raise dividends and survive tough times without being forced to borrow or sell assets.
To calculate a company's cash flow, start with net income. Add back what it has taken in depreciation expenses and accounts payable. Then subtract capital expenditures, inventories and accounts receivable.
Watch out, Mr. Olstein said, if net income is much higher than cash flow. The company may be speeding or slowing its booking of income or costs, perhaps to meet analysts' earnings forecasts."

 Fortune Magazine  6/26/2000

  Eight Warnings You Want to See by Herb Greenberg

"Positive free cash flow. Olstein looks at a company's financials, specifically the 10-Qs and 10-K, and makes a beeline for the statement of cash flows. We're not talking about the stated cash flow from operations, investing activities or financings. We're talking about cash flow from operations minus capital expenditures--the amount of usable cash the company actually generates, which can be used to buy back stock, pay dividends, make acquisitions, and grow the business." 6/25/01

Fund Junkie by Ian MacDonald
" Our main defense against risk is only buying companies that either are currently generating excess cash flow, or will in the next three years."

Financial Advisor Magazine August 2001
Staying Alert Pays Off by Maria Brill
"To Olstein, being right means finding companies with excess cash flow that are selling at inexpensive levels because investors are tuning them out. "Cash flow is the oil that lubricates the corporate engine," he observes."

 The Washington Post 2/17/2002
"By concentrating on cash, investors can learn enough about a company to eliminate it as a possible investment. FOr example, if you want to get a quick-and-dirty reading, look not at a firm's "income statement" but at a more obscure tables of numbers called its "statement of cash flows".

New York Times 11/14/2004 
Sometimes It Takes a Sherlock by Gretchen Morgenson
""Everyone looks at conventional price-earnings ratios but that doesn't tell you anything about the deviation between cash flow and reported earnings," Mr. Olstein said."

 Financial Advisor Magazine June 2006
Forensic Accounting by Jeff Schlegel
"Olstein believes that cash--particularly free cash flow--is king because he thinks it's a truer measure of a company's underlying performance. He and his staff analysts look for companies trading at a discount to free cash flow. Lack of free cash flow is one reason why he doesn't like (a sector) ..."

 CFA Institute 12/4/2007
Free Cash Flow & Quality of Earnings by Fred H. Speece, Jr. CFA

BloombergBusinessweek 8/17/2009 
Behind Bob Olstein's Comeback by Karyn McCormack
" quality companies that have "wide moats" (in other words, "hard to compete with out of the box"), have been generating free cash flow throughout the financial crisis, and have a great balance sheet to withstand any issues."

 New York Times 1/9/2010
Fair Game:Why All Earnings Are Not Equal by  Gretchen Morgenson
As the market goes higher, it becomes more important to measure the quality of corporate earnings, he said. You have to look behind the numbers.
Adjustments that investors need to make now, in Mr. Olstein's view, are a result of disparities between a company's reported earnings and its excess cash flow. Earnings are what investors focus on, but because these figures include noncash items, based on management estimates, the bottom line may not tell the whole story.
Cash flow, on the other hand, is actual money that a company generates and that its managers can use to invest in the business or pay out to shareholders.

SOME of the widest gulfs between earnings and cash flows, Mr. Olstein said, are showing up the ways companies account for capital expenditures."

 New York Times 9/11/2010
Cash is king, he says. He spends a lot of time crunching numbers in a search for strong cash flow, and his winnowing process goes something like this:
First, he scrutinizes a company's financial reports in an effort to determine whether they paint an accurate picture. In this work, he has considerable expertise: he was an auditor with the old Arthur Andersen & Company, and then, in the 1970s, was co-author of The Quality of Earnings, a financial newsletter that, in its day, was perhaps the foremost authority on spotting the gray areas of corporate accounting.
If you're analyzing a company, he says, you first have to understand what they're really earning, as opposed to what they say they're earning.  

 American Association of Individual Investors  October 2010
"the forensic analysis we undertake
to analyze a company's results and the quality of its
earnings for valuation purposes.
1. Using the company's cash fl ow statements, we begin by
reconciling the difference between free cash fl ow and
reported earnings under accrual accounting. (Accrual
accounting records revenues, expenses and income
when the transaction occurs, as opposed to when
the cash is actually received or spent.) The smaller
the difference between free cash fl ow and reported
earnings, the higher the quality of earnings."

 Barron's 4/30/2011
Depreciation, An Appreciation by Lawrence C. Strauss
"He grows more concerned when a company's reported earnings significantly exceed its cash flow,..."

 Value Investor  4/30/2012
"Describe where you look first in researching
a company's financials.
RO: We begin by reconciling the difference
between free cash flow and reported
earnings under accrual accounting. The
smaller the difference, the higher the
quality of earnings. The bigger the difference,
the more work we have to do to
understand the makeup and sustainability
of free cash flow."