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Goldman: Does Valuation Still Matter?

Goldman: Does Valuation Still Matter?

One week ago, when traders were still enthralled by the ongoing marketwide short squeeze, which started off as an isolate reddit attempt to (successfully) punish GME shorts such as Melvin Capital, and…

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Goldman: Does Valuation Still Matter?

One week ago, when traders were still enthralled by the ongoing marketwide short squeeze, which started off as an isolate reddit attempt to (successfully) punish GME shorts such as Melvin Capital, and which cascaded into a widespread liquidation of most popular names as a wave of VaR shocks hit countless hedge funds which had no choice but to rapidly degross and puke their most profitable positions as their shorts spiked, leading to the biggest alpha drawdown in history...

... we summarized recent events in a simple and succicnt fashion: "What it all boils down to: the market has been broken since 2009, but broken in moderation and everyone is happy, the rich get richer, etc. But if someone (WSB, whoever) take this breakage to its absurd extreme (where stock prices no longer reflect anything), everything breaks"

And for a few seconds... everything did break, and only the rapid intervention of regulators/DTCC forcing Robinhood to effectively shutdown trading is what gave the system on full tilt the critical time it needed to take a breath force a reset and reverse the momentum.

Now, in a post-mortem to recent events, Goldman - which last week warned that if the squeeze isn't halted, the consequences for market could be dire - wrote a somewhat lengthier take on what happened but its conclusion is similar: the price formation mechanism - and the fundamental investing process itself - broke when millions of retail investors (and a handful of very wily hedge fund investors) plowed into a the most shorted stocks, leading to an unprecedented disconnect between price and value.

It certainly explains why Goldman's David Kostin starts off with what may well be the best quote to describe recent events:

More than a century ago and written in a completely different context, Oscar Wilde, the Irish playwright, penned a perfect description of the social psychology underpinning a short squeeze. In Lady Windermere’s Fan, one character asks, “What is a cynic?” The friend responds, “A man who knows the price of everything, and the value of nothing.” The dialogue continues, and the original inquirer states, “And a sentimentalist is a man who sees an absurd value in everything, and doesn’t know the market price of a single thing.”

Needless to say, a lot of cynics and sentimentalists were unleashed in the past two weeks.

As Kostin recaps recent events, "every financial market participant knows the recent sequence of events. An extraordinarily high short interest position in a few small cap stocks, most prominently GameStop (GME), was stampeded by a group of social media inspired retail investors. A flurry of odd-lot cash orders and out-of-the-money call options supercharged the stock price and forced short-covering at higher and higher share prices. The situation was compounded because the retail buy orders were placed with broker-dealers which suspended processing trade orders in order to meet the minimum capital requirements of the Depository Trust & Clearing Corp (DTCC). This sequence of events happened within just a few days and caused an epic short squeeze. Billions of dollars were made and lost as share prices rocketed higher and then collapsed within the span of a week."

But so what: it's not like this was the first time something like this happened: after all back in Sept 2008 when the world was crashing, a similar short squeeze made Volkswagen the world's most valuable company... if only for a few hours.

Well, it appears this time was different because unlike back then, the current squeeze happened in a context where virtually everyone was forced to reasses the core principle and tenets of capital markets, or as Kostin poetically puts it:

The market implications of the stock price swings are both very significant and completely inconsequential.

Expounding on this claim, the Goldman chief market strategist says that "those two assessments are not in conflict." Laying out the case first for why the marketwide short squeeze was a tempest in a teapot, to use the parlance of Jamie Dimon, Kostin says that while what happened was although certainly dramatic, "the wild price action of a few small-cap stocks was dwarfed by the rest of the companies in the market both in terms of scale of business activity and equity capitalization. Corporate fundamentals have been much stronger than expected. During the past month, upward estimate revisions for full-year 2021 EPS have occurred across all 11 sectors. Last week, S&P 500 fell by 3.6% from a then-record high. This week, it rebounded to establish a new high and is up 3% YTD."

Ok fine, but good luck telling Melvin Capital (or Ken Griffin, or Steve Cohen for that matter) that what happened was "completely inconsequential." They are more likely to focus on the "yes but" part of Kostin's assessment, namely that... 

The disorderly sequence of events has implications for market structure and oversight. The House Financial Services Committee has scheduled hearings on February 18th to explore recent market volatility in a session titled: “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.” Topics likely to be addressed include payment for order flow, capitalization of broker-dealers, rejection of customer trade orders, trade settlement, mechanics of price-vs. liquidity-driven short-covering, and the gamification of retail investing.

Going back to the actual squeeze, Goldman writes that several aspects of the trading in GME shares are worth noting.

First, from a positioning perspective, for more than a year the short interest in GME exceeded 100% of the float of the company, and it reached 140% in January, a "situation which is highly unusual" because during the last 10 years, Goldman has found only 15 instances when the short interest outstanding exceeded 100% of a company’s float, and as the bank explains, perhaps for the cheap seats, "extremely elevated short interest is a pre-condition if a major short squeeze is going to occur" (we wonder if Goldman, or WSB for that matter, has ever looked at the short interest in the XRT ETF)

Second, and going back to the quote above, Kostin notes that "the acerbic lines from Wilde’s 1892 play perfectly capture the situation: The entire episode was all about price, and nothing about valuation" as "social media commentary typically referenced price action with lofty targets sometimes illustrated with rocket ship emojis. We almost never read a comment about valuation because the rally implied an astronomical P/E multiple." Great point David - now maybe you can extrapolate a little beyond what you just said, and tell your clients some more about how the trillions in liquidity sloshing around market have made price and valuations so disonnected even you are forced to only showing the hilariously wrong Fed model as the only justification to keep buying stonks so they can hit your year-end price target of 4,300. Yeah, didn't think so...

Still, that didn't stop the Goldman strategist from decomposing Oscar Wilde's quote into its components as they applied to GME:

  • The price of everything. GME shares traded at an average price of $13.50 during 2018. The stock then fell sharply and between mid-2019 and mid-2020 (a period stretching from well before through the bottom of the Covidcrisis) the stock traded sideways at $5 per share. A 4Q rally pushed the shares to $19 at year-end. The explosion in stock price since the start of 2021 has been breathtaking. On Jan 13th the stock hit $30, rose to $40 the next day, and had jumped to $65 by Jan 22. The progression during the five days from Jan 25 to Jan 29 was epic: $77, $148, $348, $193, and the stock ended the month at $325, up 1,600% since the start of the year. However, this week the shares have plunged by 80% to $64.

  • The value of nothing. Long before the pandemic, revenues for GME fell by 22% from 2018 to 2019 followed by an additional 20% drop last year. The plunge in earnings has been even more dramatic. In 2019 –pre-pandemic –EPS fell by 92%. In 2020, GME posted a loss (-$2.18) and analysts expect a loss in 2021 (-$0.17). Consensus projects GME will return to profitability in 2022. However, the forecast EPS in 2022 (+$1.35) is only half the realized EPS in 2018 (+$2.70) back when the shares traded at an average price of $13.50 (low of $11; high of $17) (see Exhibit 3).

Next, the Goldman chief strategist stubbornly keeps trying to make the point that what happened was an aberration of efficient markets and a "completely inconsequential" impossibility from a fundamental standpoint, as if anyone would even dream of arguing that GME would ever trade above $500 on its own merits...

The absurdity of the January spike in GME share price becomes readily apparent when viewed through the lens of implied valuation. The implied P/E on projected 2022 EPS two years into the future soared from 14x at year-end 2020 to more than 250x at the peak on Jan 27, before retreating to the current P/E of 42x. For context, the shares of Tesla (TSLA), a stock that has both skeptics and cheerleaders around its valuation, but is widely viewed to have strong growth prospects –consensus forecasts a doubling in sales and a quadrupling of EPS between 2020 and 2022 –trades at 140x expected 2022 EPS following its stunning 780% rise last year (just half the percentage gain in GME shares in January 2021). The more mundane S&P 500 index trades at 20x our 2022E EPS of $196.

... without even for a second stopping to consider that it was the Federal Reserve that made this peak absurdity possible. Why? Because in a market where virtually all valuations are in their 100% percentile...

... and where the thread between price and value is barely present across most "serious" companies which are trading at 100x or even 1000x of future earnings and revenues, all the GME daytrading public did was to sever any pretense of linkages between fundamentals and prices and as a result, quickly took prices to their absurd extreme which in the case of GME meant $513.12 per share early in the morning of Thursday, January 28...

Tyler Durden Sat, 02/06/2021 - 18:30

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Government

Are Voters Recoiling Against Disorder?

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super…

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Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super Tuesday primaries have got it right. Barring cataclysmic changes, Donald Trump and Joe Biden will be the Republican and Democratic nominees for president in 2024.

(Left) President Joe Biden delivers remarks on canceling student debt at Culver City Julian Dixon Library in Culver City, Calif., on Feb. 21, 2024. (Right) Republican presidential candidate and former U.S. President Donald Trump stands on stage during a campaign event at Big League Dreams Las Vegas in Las Vegas, Nev., on Jan. 27, 2024. (Mario Tama/Getty Images; David Becker/Getty Images)

With Nikki Haley’s withdrawal, there will be no more significantly contested primaries or caucuses—the earliest both parties’ races have been over since something like the current primary-dominated system was put in place in 1972.

The primary results have spotlighted some of both nominees’ weaknesses.

Donald Trump lost high-income, high-educated constituencies, including the entire metro area—aka the Swamp. Many but by no means all Haley votes there were cast by Biden Democrats. Mr. Trump can’t afford to lose too many of the others in target states like Pennsylvania and Michigan.

Majorities and large minorities of voters in overwhelmingly Latino counties in Texas’s Rio Grande Valley and some in Houston voted against Joe Biden, and even more against Senate nominee Rep. Colin Allred (D-Texas).

Returns from Hispanic precincts in New Hampshire and Massachusetts show the same thing. Mr. Biden can’t afford to lose too many Latino votes in target states like Arizona and Georgia.

When Mr. Trump rode down that escalator in 2015, commentators assumed he’d repel Latinos. Instead, Latino voters nationally, and especially the closest eyewitnesses of Biden’s open-border policy, have been trending heavily Republican.

High-income liberal Democrats may sport lawn signs proclaiming, “In this house, we believe ... no human is illegal.” The logical consequence of that belief is an open border. But modest-income folks in border counties know that flows of illegal immigrants result in disorder, disease, and crime.

There is plenty of impatience with increased disorder in election returns below the presidential level. Consider Los Angeles County, America’s largest county, with nearly 10 million people, more people than 40 of the 50 states. It voted 71 percent for Mr. Biden in 2020.

Current returns show county District Attorney George Gascon winning only 21 percent of the vote in the nonpartisan primary. He’ll apparently face Republican Nathan Hochman, a critic of his liberal policies, in November.

Gascon, elected after the May 2020 death of counterfeit-passing suspect George Floyd in Minneapolis, is one of many county prosecutors supported by billionaire George Soros. His policies include not charging juveniles as adults, not seeking higher penalties for gang membership or use of firearms, and bringing fewer misdemeanor cases.

The predictable result has been increased car thefts, burglaries, and personal robberies. Some 120 assistant district attorneys have left the office, and there’s a backlog of 10,000 unprosecuted cases.

More than a dozen other Soros-backed and similarly liberal prosecutors have faced strong opposition or have left office.

St. Louis prosecutor Kim Gardner resigned last May amid lawsuits seeking her removal, Milwaukee’s John Chisholm retired in January, and Baltimore’s Marilyn Mosby was defeated in July 2022 and convicted of perjury in September 2023. Last November, Loudoun County, Virginia, voters (62 percent Biden) ousted liberal Buta Biberaj, who declined to prosecute a transgender student for assault, and in June 2022 voters in San Francisco (85 percent Biden) recalled famed radical Chesa Boudin.

Similarly, this Tuesday, voters in San Francisco passed ballot measures strengthening police powers and requiring treatment of drug-addicted welfare recipients.

In retrospect, it appears the Floyd video, appearing after three months of COVID-19 confinement, sparked a frenzied, even crazed reaction, especially among the highly educated and articulate. One fatal incident was seen as proof that America’s “systemic racism” was worse than ever and that police forces should be defunded and perhaps abolished.

2020 was “the year America went crazy,” I wrote in January 2021, a year in which police funding was actually cut by Democrats in New York, Los Angeles, San Francisco, Seattle, and Denver. A year in which young New York Times (NYT) staffers claimed they were endangered by the publication of Sen. Tom Cotton’s (R-Ark.) opinion article advocating calling in military forces if necessary to stop rioting, as had been done in Detroit in 1967 and Los Angeles in 1992. A craven NYT publisher even fired the editorial page editor for running the article.

Evidence of visible and tangible discontent with increasing violence and its consequences—barren and locked shelves in Manhattan chain drugstores, skyrocketing carjackings in Washington, D.C.—is as unmistakable in polls and election results as it is in daily life in large metropolitan areas. Maybe 2024 will turn out to be the year even liberal America stopped acting crazy.

Chaos and disorder work against incumbents, as they did in 1968 when Democrats saw their party’s popular vote fall from 61 percent to 43 percent.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Sat, 03/09/2024 - 23:20

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Government

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The…

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Department of Veterans Affairs (VA) reviewed no data when deciding in 2023 to keep its COVID-19 vaccine mandate in place.

Doses of a COVID-19 vaccine in Washington in a file image. (Jacquelyn Martin/Pool/AFP via Getty Images)

VA Secretary Denis McDonough said on May 1, 2023, that the end of many other federal mandates “will not impact current policies at the Department of Veterans Affairs.”

He said the mandate was remaining for VA health care personnel “to ensure the safety of veterans and our colleagues.”

Mr. McDonough did not cite any studies or other data. A VA spokesperson declined to provide any data that was reviewed when deciding not to rescind the mandate. The Epoch Times submitted a Freedom of Information Act for “all documents outlining which data was relied upon when establishing the mandate when deciding to keep the mandate in place.”

The agency searched for such data and did not find any.

The VA does not even attempt to justify its policies with science, because it can’t,” Leslie Manookian, president and founder of the Health Freedom Defense Fund, told The Epoch Times.

“The VA just trusts that the process and cost of challenging its unfounded policies is so onerous, most people are dissuaded from even trying,” she added.

The VA’s mandate remains in place to this day.

The VA’s website claims that vaccines “help protect you from getting severe illness” and “offer good protection against most COVID-19 variants,” pointing in part to observational data from the U.S. Centers for Disease Control and Prevention (CDC) that estimate the vaccines provide poor protection against symptomatic infection and transient shielding against hospitalization.

There have also been increasing concerns among outside scientists about confirmed side effects like heart inflammation—the VA hid a safety signal it detected for the inflammation—and possible side effects such as tinnitus, which shift the benefit-risk calculus.

President Joe Biden imposed a slate of COVID-19 vaccine mandates in 2021. The VA was the first federal agency to implement a mandate.

President Biden rescinded the mandates in May 2023, citing a drop in COVID-19 cases and hospitalizations. His administration maintains the choice to require vaccines was the right one and saved lives.

“Our administration’s vaccination requirements helped ensure the safety of workers in critical workforces including those in the healthcare and education sectors, protecting themselves and the populations they serve, and strengthening their ability to provide services without disruptions to operations,” the White House said.

Some experts said requiring vaccination meant many younger people were forced to get a vaccine despite the risks potentially outweighing the benefits, leaving fewer doses for older adults.

By mandating the vaccines to younger people and those with natural immunity from having had COVID, older people in the U.S. and other countries did not have access to them, and many people might have died because of that,” Martin Kulldorff, a professor of medicine on leave from Harvard Medical School, told The Epoch Times previously.

The VA was one of just a handful of agencies to keep its mandate in place following the removal of many federal mandates.

“At this time, the vaccine requirement will remain in effect for VA health care personnel, including VA psychologists, pharmacists, social workers, nursing assistants, physical therapists, respiratory therapists, peer specialists, medical support assistants, engineers, housekeepers, and other clinical, administrative, and infrastructure support employees,” Mr. McDonough wrote to VA employees at the time.

This also includes VA volunteers and contractors. Effectively, this means that any Veterans Health Administration (VHA) employee, volunteer, or contractor who works in VHA facilities, visits VHA facilities, or provides direct care to those we serve will still be subject to the vaccine requirement at this time,” he said. “We continue to monitor and discuss this requirement, and we will provide more information about the vaccination requirements for VA health care employees soon. As always, we will process requests for vaccination exceptions in accordance with applicable laws, regulations, and policies.”

The version of the shots cleared in the fall of 2022, and available through the fall of 2023, did not have any clinical trial data supporting them.

A new version was approved in the fall of 2023 because there were indications that the shots not only offered temporary protection but also that the level of protection was lower than what was observed during earlier stages of the pandemic.

Ms. Manookian, whose group has challenged several of the federal mandates, said that the mandate “illustrates the dangers of the administrative state and how these federal agencies have become a law unto themselves.”

Tyler Durden Sat, 03/09/2024 - 22:10

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Spread & Containment

The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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