Author: s4k

The Danger of Owning Bonds

A traditional investment advisor would advise an individual to put 20% to 40% of your money into bonds. The bond market is not a safe place to be at the moment. If you must own bonds, concentrate on shorter durations. The fundamentals for owning any bonds are just not their. The risk/reward ratio is terrible.
Treasury Bond Yields:

Corporate Bond Yields:

Yield and spread on agency mortgage-backed securities:
In the long term, all bonds and any derivatives based on bonds, are going to suffer.
However, I don’t plan to short bonds because I don’t believe the bond bull is dead. I don’t plan to go long bonds because there is no fundamental reason to own them. The only reason to go long bonds, at this point, is because investors around the world think they are a safe investment. They are very wrong. But until the psychology of the market changes, the best action is to stay away. The bond bears have been around for 10 years. From the above charts, you can see they have done nothing but lose money year after year.
The original widow-maker was shorting Japanese Government Bonds (JGB). No matter how much debt Japan racked up, JGB’s continued to rally from 1990 all the way up to present day. It has been almost 30 years since 1990. I have no intention of making the same mistake predecessors made.

Snap Inc.

Snapchat lets users create pictures and send to friends. These pictures only last a limited time. I decided to take a look through their 145 page 10-K to see what is going on with this company.
At a share price of $17.26 it has a market cap of 20 billion dollars.
They have never posted a profit. Ever.

EBITDA:

FCF gets worse and worse.

Than we get to the interesting part.
From the 10-K:
“Research and development expenses for the year ended December 31, 2017 increased $1.4 billion compared to the same period in 2016. The increase was due to a $1.1 billion increase in stock-based compensation expense primarily due to the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of the registration statement for our IPO in March 2017. The increase was also driven by an increase in research and development headcount of approximately 84%. The investment in personnel supported our efforts to continue growing our user base and building and improving products for our
users and advertisers”
From the 10-K:
“General and administrative expenses for the year ended December 31, 2017 increased $1.4 billion compared to the same period in 2016. The increase was primarily due an increase in stock-based compensation expense of $1.2 billion, composed of an award granted to our CEO with an expense of $636.6 million and the remainder primarily related to the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of the registration statement for our IPO in March 2017. The increase for the year ended December 31, 2017 was also driven by increased personnel costs from an increase in general and administrative headcount of approximately 24%. Additionally, there was an increase in professional fees related to increased acquisition activity, legal, and general growth.”

Management at snapchat believe they have done such a fabulous job for their shareholders they decided to reward themselves.

The conclusion of this post is from the 10-K itself:
“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.
We began commercial operations in 2011 and for all of our history we have experienced net losses and negative cash flows from operations. As of December 31, 2017, we had an accumulated deficit of $4.7 billion and for the year ended December 31, 2017, we experienced a net loss of $3.4 billion. We expect our operating expenses to increase in the future as we expand our operations. If our revenue does not grow at a greater rate than our expenses, we will not be able to achieve and maintain profitability. We may incur significant losses in the future for many reasons, including without limitation the other risks and uncertainties described in this report. Additionally, we may encounter unforeseen expenses, operating delays, or other unknown factors that may result in losses in future periods. If our expenses exceed our revenue, our business may be seriously harmed and we may never achieve or maintain profitability.”

Would you buy this company for 20 billion dollars?

School Shootings- A Trip Through Time

Below are the number of deaths due to school shootings since the 1800’s.

Number of school shooting incidents in the USA:

We see the amount of elementary and secondary school enrollment is about the same.

In other words, the added number of school shootings and deaths is not due to the increase in the amount of children.
It is interesting to see the jump in the 1990’s.
We live in a complex world. Trying to explain the increase is not going to be a simple answer. Culture definitely plays an important part in explaining it.
What I do know is this: A bunch of people in D.C. writing words on a piece of paper is not going to solve this issue or any other issue.
The public’s faith and belief in government legitimacy is astounding. If words on a piece of paper could make the world a better place we would all be living in a utopia right now.
Government’s are not going to protect your children. The public school system will not protect your children from school shootings to bullying. Parents still have full faith in the school system though. They send their children to the intellectual meat grinder to get an inferior education.

The 50 Cent Rally

Natural Gas Update.
I think we will get a 50 cent move up. That’s $5,000 profit per contract. Unpredictable weather will help.

The only issue is the cost to roll forward from month to month.


I own some April-18 and some April-19. For April-18, it needs to get to the price target in one month. The market already priced in warmer than usually weather for the rest of the winter. Any cold weather will cause the price to sky rocket.

The Bond Bubble

The 10 year yields for selected countries is depicted below.
The western world bond market is the biggest disaster waiting to happen. The debt structure of some of these countries is mind boggling. Some countries roll over almost half their debt each year. This is analogous to the adjustable mortgage rates that homeowners took out in the early 2000’s. When interest rates went up a few hundred basis points they could no longer afford their mortgage payments.
Far more dangerous is the OTC derivative market. Interest rate contracts have a notional value of 500 trillion dollars. To put this number in perspective, the world GDP is 80 trillion dollars. What will happen when interest rates begin to rise and governments default? How much money is put aside to cover these OTC derivatives? I suspect the answer is close to zero.
Micheal Lewis wrote a book called, “The Big Short: Inside the Doomsday Machine“. They made a movie from the book. Micheal Lewis is an excellent writer. He correctly details how the OTC derivative market played an important role in the 2008 meltdown.
Basically, banks hold an enormous amount of OTC derivatives. 99% of them are fraudulent. That is, if they were ever called upon to perform their duty the banks would go bust. For years, the lie was the following:
“Housing prices don’t go down.”
When housing prices did go down and homeowners defaulted, the OTC derivative imploded.
The new lie is this:
“Governments don’t default.”
They will default though, in one form or another. Average Joe still thinks US government bonds are the safest investment.
The probability of the OTC derivative being this large over the next 30 years is unlikely. How it ends is anyone guess. The range is from World War III to cascading defaults.

Steven Seagal Jumps into the Frenzy

Bitcoiin (B2G), the second generation, is going to launch in little over a month. None other than Steven Seagal is involved. The action star and Zen Master has dived into the cryptocurrency world. They actually have a ‘whitepaper’ on Bitcoiin, which is nothing more than a power point presentation that details almost nothing.
During the ICO, investors can purchase the new cryptocurrency for $5. Developers wrote in their whitepaper that they expect its value to reach $388 by December of this year. They provide no justification for this price target. They don’t need too. Amateur investors love being fed fantasies about getting rich quick. So far they raised almost 27 million dollars.
From their website we read the following:
“…Bitcoiin 2Gen is addressing issues with relation to speed of transactions, security, mining and costs of transactions.”
This was always a major problem with cryptocurrencies in my view. They do not solve any problem. I can transfer dollars around the world at the speed of light for next to nothing.

Haruhiko Kuroda Gets Another Term

Haruhiko Kuroda, the man determined to destroy the Japanese Yen, got appointed to a second term on Friday. Below are central bank balance sheets over the past few years.

The Federal Reserve has not expanded its balance sheet since late 2014. The BOJ is still very active with bond purchases across all durations. The 10 year Japanese bonds are yielding 6 basis points (Basically zero). The BOJ is also buying Japanese stocks. No other major central bank has done this in the post-crisis period. We are currently holding a long position in the Japanese yen, which looks set to rally over the coming weeks. We also have a long position in Japanese stocks, which looks set to fall over the coming weeks. After a few weeks I expect the downtrend in the Japanese yen to continue, which should be constructive for Japanese stocks.
To understand just how crazy the BOJ is watch the video below.

The video is four years old. Since than, things have only gotten crazier.