Royal Bank of Scotland to investors: 'Sell everything'

I dunno. I am not counting other people's money, especially some strangers on a message board.

FYI, Netflix is what happens when $14 trillion of newly-created fiat money over less than a decade sloshes around and turns various markets into leveraged casinos.

Netflix stock took off last night on their subscriber growth -- it smashed the subscriber guidance it had even given for the quarter, which was impressive, adding 8.34 million subscribers worldwide during the quarter.

But Netflix is losing money on each of those new subscribers -- which is the ludicrous part of this. Their cash burn rate for the quarter was another $523 million. They burned through $2 billion for the year. And their guidance is that they expect to burn through another $3 to $4 billion in cash this year. This is a business model that only works in an environment in which central banks have credit conditions so artificially loose that zombie companies can thrive (survival of the unfittest in broad swaths of the global economy). ... they need to keep more and more credit flowing (until there is a financial panic and it ends). ... which is the same story that has created their last 2 bubbles that popped in 2000 and 2008. Except this time, the amount of debt and leverage fueling it is much greater, and it is more of an "everything bubble." Because the debt levels this time around are so much greater, the eventual payback is going to be even more stark.

As fir Netflix itself, it is trading at more than 225 times earnings. Those are the P/E's you get during market euphorias -- 1929, 1999, etc. It would be like buying a gallon of milk for $750 because it has a pretty label and you see everyone else buying bottles in a frenzy. Throw reason out the window. That Netflix valuation is for a company with huge net negative cash flow -- which not coincidentally has exploded for this company as financial conditions worldwide loosened up in particular over the last 5 years thanks to the ECB and BOJ stepping in to expand their balance sheets by trillions of dollars to take over for where the Fed left off over the 4, 5 years before. In this environment, Netflix can borrow cheaply and endlessly. And they have dove in with both feet to load up on debt. It would be laughable in an actual free market. In the casino that they have temporarily turned worldwide debt and equity markets into. ... the momentum monkeys will take it to levels I never thought possible, but I also didn't think we'd see negative interest rates and monetary price administrators taking over various bond markets to buy up everything without any care about price and value, so that central banks are now hedge funds.

Good luck to anyone who wants to be a long-term owner (not a trader) of something like Netflix, especially with what is making it possible. In my opinion, only someone who has no idea what they actually own would have been messing around with something this irrational the last few years as a buy and hold investment. It doesn't matter if the stock heads to a place where it trades at 500 times earnings over the next X years, and someone tries to turn it into a market-timing discussion as the price runs up, rather than actually responding to a post like this. You're still playing fire, and you're probably clueless about what you're playing with.

 

There is a difference between trading and investing.

I own a small business not related to any of this, but I mostly trade (not invest) for a living. ... derivatives ,mostly currencies, some commodities, very occasionally equity futures even (which is the irony), although it isn't my bread and butter. I post very little about trading on here, honestly. So that is an unfair comment. I sometimes do marvel at (maybe not you per se, although your post kind of annoyed me), how people who have no clue what I do, or how well or not well I do it, love to make comments about me personally.

I consider these investment discussions. About investment fundamentals. About valuations. For example, a company that is burning through cash and trading at 225+ times earnings, and how that is nuts, in my opinion (and has always ended up predictably in the past). It doesn't matter if the stock price runs up further and it is trading at 1,000 times earnings over the next X years. Look at it this way. From it's IPO in 1990 to its peak in 2000, Cisco Systems was up something like 110000 percent. It coincided with Alan Greenspan blowing the dot com bubble by keeping financial conditions loose in a way we had never seen before. At it's peak in 2000 (when things collapsed), Cisco had a P/E ratio of more than 200. It took about 17 years for people who were investing in Cisco then to make back their money (if they held on, which most people don't), and that has only happened in the throes of what I know is ANOTHER monetary-induced equity bubble which is going to end with stock prices much lower again.

Valuations (not just in global equity markets) are very distorted and have been for several years now, because of what central banks around the world have done to the debt markets and the amount of leverage that has created. They have created more than $14 trillion out of thin air in less than a decade, and that monetary inflation has blown bubbles all around us -- not just in global equity markets. Whether you get that or not, that is still the stock market in a nutshell. Anyone who disagrees. ... can feel free to tell me why this time is different. "Ha ha. Look the Dow is at 30,000. You're full of shit," doesn't do it.

In some respects, it is what led to 1929 all over again. 2000 all over again. 2008 all over again. 1929 wasn't just the story of the stock market crashing. It was the interest rate suppression over the decade before that sent debt and leverage levels to crazy levels, and ended up creating euphoria in stocks, as people thought they could borrow for nothing and make money on this that would go up in price forever. The guy in 1926 who was pointing out what was actually creating that distortion was not full of shit. And he wasn't costing anyone money by telling them that you were probably clueless about what you were messing with if you were margined up and betting on stocks -- even suggesting that they take money off the table and wait for a buying opportunity if they were playing a LONG game. That is true, even if the Dow Jones more than doubled between 1927 and 1929 -- after it had already run up a lot in the years before.

What they have done over the last 9 years goes way beyond, though, because they have price fixed the debt markets outright by conjuring money out of thin air and buying up almost every sovereign bond and large swaths of the corporate and agency debt market bonds. It's like injecting yourself with heroin. You get yourself addicted, need more and more of it. ... and when you can no longer get your fix, you end up strung out.

We are in unchartered territory because central banks have become bad hedge funds (that buy things without regard for actual value). That has suppressed yields for sure, and it has allowed borrowing beyond rational limits. To the tune of trillions of dollars globally. And it is going to end very badly. When it does, the fact that there will be people who lose a lot of money because they jumped into a Netflix or Tesla frenzy (and it is going to happen) is going to be a small part of the fallout, unfortunately. It's going to be people who have have record credit card debt, student loans at record levels, auto loans at record levels, and can't afford their interest payments who suffer the most. It will be businesses that borrowed trillions of dollars to buyback stock, because they could borrow for near nothing and the buybacks juiced their stock price (even as their earnings stagnated), that pay a heavy price -- many going belly up. And countries that are at debt percentages of GDP that have run up to record unsustainable levels having to deal with new realities that the borrowing game is up for them.

That isn't me telling you to make a trade or how to make money. Figure out for yourself how to make money. Just as I worry about myself. But how's this? You have my permission to put your life savings into any equity you want and not consider valuation. Whether you make money or not? That has zero to do with me. I'll worry about myself, you worry about you. As an investor, maybe you kick the shit out of me. I have the bulk of my retirement money sitting in cash, for example, and am happy to do it, while maybe you are loaded up on Netflix stock. We'll see how it works out for each of us by the time I am ready to retire, I guess. I am confident I am going to have a great buying opportunity over the next couple of years, and I'll be one of the people with the cash to take advantage of it with.

As a trader, where I have a lot more money in play ? As humbling as it can sometimes be, I am pretty comfortable with my abilities to pull money out of markets. Good luck to you too, if that is something you do. Like me, I'll assume you aren't relying on others to tell you how to make money, if that is something you do.

 

The Netflix story in a nutshell (and it is the same for a number of other high flyers right now), for what it is worth:

1) Look at how many subscribers we're adding!
2) We're losing money for every one of those subscribers we're adding.
3) But it doesn't matter, we'll make it up on volume.

It's a great business model. ... when business ownership isn't about actually making money. Which is exactly the environment we are in. You can fuel a business endlessly on debt because it is artificially cheap to borrow and the distortions make it so that lending standards don't exist.

The misallocations of capital that has created over the last decade are going to end with yet another credit crisis -- this one bigger than the last ones. Then, Netflix can figure out how to actually grow by generating (not burning through) cash.

Net neutrality hyperbole has nothing to do with Netflix's valuation, as you know. It's all about how much money Netflix can raise, to burn through more and more cash, to show subscriber growth.