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David Stockman says this is “The Next Major U.S. Stock to Crash”

Stockman's Bubble Finance Trader thinks this stock will fall 70%, starting next week

By Travis Johnson, Stock Gumshoe, January 21, 2016

Who can resist that headline, right? If for no other reason than you want to check and see if maybe you own that “next major U.S. stock” that former Reagan budget director David Stockman thinks is going down.

That’s the headline from latest ad from Stockman’s Bubble Finance Trader newsletter service, which was launched fairly recently (I think) by Agora… and it is another small sign that the newsletter teaser market is turning now as the stock market falters, we haven’t seen many of these “next stock to crash” teaser pitches about short bets on individual names in almost five years (though the “all the world is about to collapse” ads are pretty evergreen).

Now that we’re seeing all those stories about short sellers making huge profits as the stock market “corrects”, the greed impulse is starting to emerge on the short side of the market… and greed sells newsletters. Fear does, too, but greed seems to work better.

So what is Stockman talking about? Here’s the intro to his ad:

“The Washington and Wall Street iconoclast who saw Wall Street’s 2008 collapse coming now says…

‘Today, I’m Revealing the Next Major U.S. Stock to Crash’ — David A. Stockman

“With over 50 million square feet of U.S. real estate and 220,000 employees, one company is set to crash. It could drop like an A-bomb on unsuspecting shareholders as soon as January 28th.”

Stockman has made a (new) name for himself over the last couple years as one of the doomsayers — he thinks US capitalism is so corrupted by politics and cronyism that it is largely unfixable, and was very vociferous about “getting out of the market and hiding in cash” three years ago when his book was published (The Great Deformation: The Corruption of Capitalism in America). That wouldn’t have worked as a market call as of now (the market is still 20% higher than it was back then), but who knows, maybe he’ll turn out to be right.

I think he’s right about some general things — the broken and corrupt system of elections and campaign finance, at least — but that doesn’t mean I’m confident he can tell me where the market’s going in the next five years, or whether we’re entering a recession, or whether a particular stock is going to go down. But he has to do something loud like this to get attention in the extremely competitive marketplace of pundits and soothsayers — people who have moderated views or express uncertainty don’t get attention… and authors and newsletter editors who don’t get attention don’t sell books or get subscribers, so they don’t get paid.

But with that caveat, I am at least curious to see what stock he thinks will crash… so what is it? More from the ad:

“I’m going to expose one of the biggest bubbles in corporate America.

“It’s my sincere hope you read this in time and take decisive action.

“Action to get out of the way of what could be a speeding train wreck… while positioning yourself correctly for one of the biggest potential windfalls of your life.

“You don’t have much time…

“On January 28th, 2016, just a few short days from now… I believe one company’s management could drop a bombshell on unsuspecting investors.

“I should be clear from the get-go: This company isn’t Apple… Facebook… Google… Netflix… or anything like that.

“Instead, it’s one of the most well-respected and important businesses in modern American history.”

He thinks that the company’s next announcement, in one week now, will send it “tanking by as much as 70% or more over the next 11 months” … and that investors who heed his advice and “buy one simple type of investment” could generate 300% returns.

So that’s the bigger picture. What other clues and hints do we get? First he moderates that prediction a little bit…

“My conservative estimate is you could make AT LEAST 50-80% by December, 2016 by betting against this stock right now.

“Though I’d be very surprised if it didn’t give you at least have the chance to triple your money.”

And then we get some more details…

“This company has become a symbol of corporate America. No one thinks it will implode.

“It’s one of the few stocks out of the 500 companies that make up the S&P 500 that is keeping the index from completely crashing….

“This company has been spending mountains of money in order to grow.

“The CEO’s promise? That spending more money on facilities, personnel and technology, will mean his company will eventually generate huge profits and dividends for investors.

“There’s one problem: It’s been saying that for 24 years now and the huge profits are nowhere to be seen. And there’s never been a dividend paid. Not once….

“As I write this, this company’s stock trades for nearly $600 per share.”

Ah, well that takes some of the fun out of it — not many stocks are at that price level, so the Thinkolator won’t have to work too hard. Any more clues we should consider?

“…the company’s CEO and accountants have been using hype and accounting wizardry to hide the truth from their shareholders. That:

  • This company is in one of the biggest bubbles in modern financial history.
  • And it’s going to crash — wiping out hundred of billions of investors money….

“In August, the CEO sold more than $500 million of his shares. That tells you all you need to know….

“News is already starting to leak out: One report from Marketwatch suggests that though this company and others like it ‘may look like they’re dominating the world right now,’ the truth is they could be ‘very unstable.’

“It’s ‘likely’ the report continued, that it ‘will crash and burn remarkably quickly.’

“And, famous hedge fund manager David Einhorn of Greenlight Capital, has added this company to his ‘bubble basket’ of highflying stocks set to crash.

“That’s why I’m rushing this presentation out to you today.”

So that’s enough, right? What’s the stock? Stockman is teasing us that Amazon (AMZN) is about to implode.

Oh, geez. Really?

Maybe it will someday, but these criticisms of Amazon — that it keeps investing, that it pours all its cash into growth, that margins are tight and it’s mostly a retailer that shouldn’t trade for a huge premium price — these have all been valid criticisms for at least five or six years, and I’ve shared that sentiment probably since 2006 or 2007. So I’ve missed out on a huge run (AMZN is up over 1,000% over ten years, and more than 200% over the past five years, and I thought it was too expensive five and ten years ago). Is there some reason why Jeff Bezos will lose the faith of the market and cause Amazon stock to crater by 70% by the end of the year?

Don’t read too much into Bezos selling shares, by the way — he did sell about $500 million worth (a million shares) back in August, but he has sold about a million shares a year for several years now as the stock has been rising inexorably (and, of course, he still owns almost $50 billion worth of Amazon shares (roughly 83 million shares).

Stockman is recommending buying put options on Amazon, here’s more from the ad:

“Buy one specific ‘put option’ on this company.

“You may already know that put options are a limited risk, leveraged way for you to make money when stocks drop.

“For example — when a stock falls 5% in a day, put options may go up 50%. When big drops happen, puts can go up hundreds of percent in hours.

“And since they’re limited risk, if I’m wrong – which I don’t believe I am – you’ll never lose more than you put up.

“My point is — there’s no easier, safer, and faster way to grab huge gains from downward stocks than through put options.

“I’ll be disappointed if you don’t at least see the chance to triple your money through my specific put option recommendation.”

As I noted yesterday when we were looking into Jim Rickards and his prediction that Turkey’s market will fall, buying put options does mean you have “limited risk” — but the limit comes from limiting the amount of money you invest in any one options trade. Whatever you put into buying an option, whether put or call, is at much, much greater risk of a 100% loss than any “regular” equity investment. No matter how sound your logic might be, getting the market to agree with your logic by trading a specific security in a specific price pattern by a specific date is a risky bet, and being right about direction but off by a few dollars or a few months could easily mean that your bet expires worthless.

(By the way, there are likely some similarities between Rickards’ Macro currency-based options-buying letter and Stockman’s put-buying “bubble popping” letter — both of these newsletters are co-edited by Dan Amoss, who has been a short-focused and options-focused analyst at Agora for many years and used to helm their Strategic Short Report, he might be the one actually identifying the specific options trades to follow the headline author’s “big picture” thesis).

Selling a stock short is a bet on the direction without a specific time frame requirement, and that can work out even if the stock only falls 10%… but the downside is that your loss is theoretically infinite, if the stock doubles (or more) instead of going down then you have to buy the stock to cover your bet at a potentially catastrophic loss (there are ways to hedge that risk, too, but hedging costs money and reduces returns). Buying put options is limited risk when compared to that, because you can only lose the money you put up to buy the option and there’s no margin call or obligation that could hit your portfolio beyond that — but in exchange for limiting that risk, you have to pay a premium price and be right about both price direction and the extent to which the price will fall and be right about when that happens. It’s really hard to get all of those things right, unless you’re lucky and you short a stock just before the whole market crashes and takes everything down — then you look brilliant even if your analysis is not particularly unique or fantastic.

That Marketwatch “report” that Stockman says indicates Amazon ‘will crash and burn remarkably quickly’ is here, if you’re curious — it’s not a report, it’s an opinion piece by someone poking fun at the silliness of investing in a cute acronym (in this case, FANG — Facebook, Amazon, Netflix, Google). The only “real” assertion there is that tech companies may look dominant, but the nature of technology is that they can be supplanted by the next hot idea. Which is a risk for tech companies, to be sure, and perhaps a risk for some of Amazon’s business, but if you want specific reasons why that would mean that a stock is going to fall 70% in a specific year, well, you might have to drink the Kool-Ade and subscribe to Stockman’s newsletter. I suspect that he’s just making general assertions about Amazon being expensive and risky and reliant on consumer spending and that, since the big tech stocks are, he believes, in a “bubble”, it will naturally pop and make you lots of money.

That’s just my guess, though, does he say anything else about price or timing or reasons for this fall?

This is what he says his new service is all about:

“Every other week, I scan the market the market for stocks that are priced so absurdly high, they have nowhere to go except straight down.

“I call these ‘bubble stocks’ — because their share prices have been inflated 50-80% higher than any sane investor should pay for them….

“Each time I identify an opportunity I blast out an urgent email to my readers that shows them how to play the idea for the chance at impressive gains.”

So he’s starting from an assumption, that expensive stocks are going to get cheap, and he’s looking for the best ones to bet against. If you’re charging people $1,500 to find “bubble” stocks to short twice a month, I have no doubt that you’re going to find them. Doesn’t mean they’ll turn out to be the kind of “bubbles” that “pop” on your schedule… but all it takes is a few big winners and some interesting commentary to keep at least some of your newsletter subscribers happy, and to give you something to boast about to bring new subscribers in to replace the folks who got disenchanted with the picks that didn’t work out.

That’s not to say other newsletters aren’t similar, of course — but newsletters that bet short have a higher hurdle, they have to convince investors to do something that they’re disinclined to do (bet against a stock), and they have to pick specific and timely short candidates that work with some regularity, which is a really, really hard thing to do given the general tendency of the market to rise over long periods of time.

Why now, and why Amazon? A few more tidbits from the ad:

They’re in denial about the ‘big picture’

“Ask any employee of this company and they’re sure to tell you that they’re not worried about the big picture…

“Their motto is: ‘Work Hard. Have Fun. Make History.’

“They think they’re immune to the recession the global economy is entering.

“The trouble is… their business depends on consumer spending.

“In the good years, when consumer spending was high, they weren’t been able to produce the big profits investors have been holding out for…

“A bad bottom line will become even worse as the economy deteriorates and unemployment rises again…

“But instead of cutting expenses… or preparing investors for the possibility that the economic situation might affect their business…

“The CEO is proposing impractical innovations like new drone technology…

“They’re in denial about their future… and the impact the economy will have on them.”

OK, so that’s a “falling consumer spending will hurt Amazon” argument. What else?

They’re using ‘long-term investments’ to hide the truth from investors…

“The company generated $32.6 billion in sales last year….

“$5 billion was ‘reinvested’ in sales and marketing…

“$14 billion was listed as ‘general and administrative expense’…

“And $11.6 billion in ‘research and development.’

“Consider this fact: The company I’ve been telling you about is a retail business. Yet it spent THREE times as much on research and development than did pharmaceutical powerhouse Bristol-Myers Squibb did….

“… if a company is using its cash to make it’s company more profitable in the future, investors should pay more for that company’s stock.

“But if a company is wasting its cash on things that don’t increase profitability, the stock price is supposed to drop.

“And for over a decade this company has wasted its cash. Yet it’s share price shoot to the moon.

“In 2011 investors were paying $36 for every $1 of free cash flow the company generated… even though the company didn’t become hugely profitable.

“In 2014, investors were willing to pay $76 for every $1 of cash the company generated…

“And last year, investors were willing to pay $113 for every $1 of free cash flow.

“But I see right through this.

“I’ve done the math.

“With the big picture looking nastier by the day and the stock market on the verge of crashing, I estimate this company is trading at least three times higher than it should be.”

I sympathize with the analysis to some degree, but Amazon would tell you that they are reinvesting in profitability… it’s just that they have no urgent need to reach that profitability right now, so they’re still reinvesting more and more to further improve the business, seize yet more market share, and, yes, do R&D to make more leaps forward in technology and logistics.

On the flip side, you could also think about the flexibility inherent in this growth investment strategy… if you think Amazon doesn’t need to do that much reinvesting and should instead focus on profit, what might happen? If they slashed the R&D budget in half, Amazon would suddenly be trading at 50X earnings instead of 275X earnings. Would that make it a better company? Is that something they could do if they had to, without hurting their revenue growth or their core business? Given Amazon’s recent history, frankly, I’d be more worried about their failure to continue growing the top line than about the bottom line — investors have proven pretty accepting of Bezos doing whatever he wants with their operating earnings as long as the revenue and the customer count (particularly the number of Prime customers, who order a lot more than anyone else) keep growing at a rapid pace.

So that’s pretty much it, but he is pushing this idea that January 28 will provide a “catalyst” that pops Amazon’s bubble, which he calls “the biggest bubble in 15 years” ….

The Catalyst That Sends Investors Running For the Exits

“This company hasn’t set a date when it would announce earnings.

“But last year, they announced earnings on January 28th.

“If they do the same this year, you only have a few days to read my recommendation… and get into position.

“Already the stock is starting to fall.

“And if they report an earnings miss or bad news on the 28th, I believe my recommendation could rise as high as 300%.

“Despite the media hype… and the mania around this stock, it simply cannot maintain its stratospheric price.”

This is a fairly expensive newsletter ($1,580 “on sale”), which is typical of services that trade options — they have a terrible time getting their investors into trades without dramatically impacting the market, since options contracts are extremely illiquid (compared to stocks, at least) and even a few dozen folks making the same options trade on the same day will likely move the price well out of any “recommended” zone… and the best way to keep your subscriber base relatively small and nimble but also make it worth your time is to put a high price tag on it.

They’re also placing a fairly big bet on people liking what Stockman has to say in his first couple issues this year, because they’re using the old Motley Fool technique of taking your credit card number but giving you a “free trial” and not actually charging you until the first month is up, at which point the quarterly charges start unless you cancel (and are, I assume, nonrefundable — they don’t say anything about refunds in the ad).

What is Amazon likely to report that could change things dramatically in a week? I have no idea. They are expected to announce their fourth quarter earnings after the market close next Thursday, January 28. And the stock often moves pretty sharply after earnings, they beat estimates and said optimistic things in the last two quarters, and the stock popped by more than 10% the following day both times — but I expect big misses or pessimism or a surprisingly bad fourth quarter in the retail business could bring the stock down sharply as easily as optimism and “beating” earnings have spiked it up in the past, particularly given the more pessimistic market we find ourselves in at the moment.

If you haven’t been following Amazon, it’s basically three businesses now — the US retailing giant, which is fueled by hugely valuable Prime members ordering more and more stuff online but which also invests heavily in infrastructure and has razor-thin margins typical of a mass retailer; the International retailer, which loses money as it tries to expand around the world; and Amazon Web Services, the “computing utility” cloud service that’s used by any company that wants computing power, bandwidth or storage on demand, and which is less than a tenth of Amazon revenue but supplies about half of their operating income. They get lots of attention for much smaller things, like their original video projects (TV series and movies that are provided as part of the Prime service) and their “drone” delivery plan, but those are relatively small and considered as R&D or investments in the future. Amazon has recently started posting profits, and that is part of what has investors excited — that maybe the scale of Web Services is finally enough to overcome the no-margin (after reinvestment) retailing business, and maybe they’ve now seized enough market share in the US that they can relax, raise prices a little, cut spending, and reap the whirlwind of profits that should be possible for a retailer that doesn’t have to have cashiers or big box stores.

But no, Amazon continues to reinvest — and Jeff Bezos, their founder and CEO, continues to push the business to grow and get better, not to extract current profit from it. In response to any pressure from FedEx or UPS on pricing (shipping is obviously a huge cost for Amazon), rumors come out that Amazon is planning to start its own huge rapid freight service and airline… and they’re even taking the first steps to become an ocean shipper by getting a license in China. I would be a little exasperated by this if I were a short-term shareholder looking for Amazon to post big profit “beats” in each quarter and make lots of money for dividends or share buybacks, but you have to admit that Bezos has pretty brilliantly built an almost unassailable empire in e-commerce (and maybe even in cloud computing, though that’s probably going to be more competitive)… and investors have loved it and “bought in” almost all the way… at least during this bull market (Amazon did drop by about 50% during the 2008 crash, and had a couple short-lived 25-30% drops more recently).

I can’t justify Amazon’s valuation, but I thought it was expensive at $50 or $100 six or seven years ago and it’s at $600 now so my inability to see the price as reasonable is probably not a strong argument against the stock. I failed to profit from Amazon’s rise… but I at least avoided betting against them and losing money as the juggernaut grew. I’d say that if the economy slows and the market falls then sure, Amazon will probably fall worse than most — after all, it rose faster than most, going up 100% last year, and so far this year (that’s only three weeks, I’ll remind you) it’s down almost twice as much as the market and more than other big 2015 “FANG” winners Facebook (FB), Netflix (NFLX) and Google/Alphabet (GOOG). But that’s a general “probably” expectation if the market continues to fall, it’s not a “this horse beats all comers on wet turf so he’s a shoo-in” kind of opinion.

Oh, and which Amazon “put” option might David Stockman be recommending?

I don’t know, he doesn’t hint at it at all, other than to say that he thinks the stock will fall 70% this year and let you “profit by as much as 300%.” The newsletter is probably still pretty small and may not have a huge impact on open interest yet (that’s the number of outstanding options contracts that exist for a specific strike price and expiration date), or on trading volume today (I assume his recommendation went to his subscribers at some point in the past few weeks, I only have access to current-day volume)… and, as the mention of Einhorn will remind us, there are lots of people (and have been lots of people for five+ years) who think Amazon is “too expensive” and want to bet against the stock, so pretty much all the “round number” put option strike prices ($600, $500, $450, etc.) have a decent amount (over 1,000 contracts) of open interest with or without Stockman’s influence.

If you’re choosing a strike price to make a long-term bearish options bet against Amazon, you essentially have to balance the amount of risk you want to take in terms of the total amount of cash you put up, with the odds of success, which will rise the more you spend (and, therefore, the dollar amount of risk you take per share).

If you’re certain that Stockman will be right, and that AMZN will fall by 70% this year, then you can bet on that with a relatively small outlay by buying the January 2017 $250 puts, which at about $3 would be profitable if Amazon falls by 60% over the next twelve months but will lose 100% of their value at expiration if Amazon stays above $250 for the next year. That’s the conservative way to think about options trades, thinking about value at expiration, though in reality you may well trade these kinds of positions well before expiration — that option could certainly double or more if AMZN drops to, say, $400 by July and people put more value on those January $250 options contracts (today an option bet on AMZN falling by 30% in six months, to $380 in July, would cost you about $6).

Alternatively, if you want to be more conservative and just assert that AMZN will drop this year by, say, at least 20%, you’ll pay a lot more per share for that bet — if you round that down to a $450 price target in twelve months and want to bet that AMZN will fall at least that much but not count on it falling more, it will cost you. A $450 put will cost you about $30 per share ($3,000 per 100-share contract, though AMZN also has some mini contracts available for 10 share increments), so you’d really actually need the stock to fall to $420 to break even if you hold through until expiration… a $500 January 2017 put will cost you about $45 a share, so if the stock falls to just $450 you would eke out a 10% profit before commissions (or be out $4,500 per contract if you’re just plain wrong and Amazon never drops substantially).

Or, of course, you can use a shorter time period instead of a more aggressive price target if you want to minimize your outlay — betting that AMZN will drop 20% next week on the day after earnings are expected, January 29th, would be way cheaper than buying a year’s worth of time, a $500 put for next Friday (AMZN is at $580 as I type this) would only cost you about $3 a share (or you could go out a bit further and buy a $500 put for March for about $11). Of course, the odds are pretty long against you that you’ll be that precise… but the return is more dramatic, if Stockman is right that the news will be bad and the shares fall 20% that day from today’s price, you could earn close to a 1,000% return on your bet with that January 29 $500 put (the stock falls to $465, the $500 put option you paid ~$3 for is worth ~$35). But it is a bet, you don’t know what Amazon will say about the fourth quarter, or how the market will react, any more than I do… and David Stockman does not have inside information about AMZN’s results — he’s just got his opinion and analysis.

So since there’s no indication of precisely what put option Stockman might recommend, I’ll toss it out to the group now for discussion. My guess would be, assuming he wants a dramatic return and a small cost per contract — which might be an inaccurate assumption — that he’s picking the January 2017 $350, $300 or $250 puts, but what do you think? And, more importantly, do you think Amazon is about to collapse — starting with a bad quarterly report next Thursday evening? Let us know with a comment below.

Disclosure: I own shares of Facebook, Alphabet/Google and Apple, all of which are mentioned above. I don’t own any other stock mentioned, and will not trade any covered stock for at least three days per Stock Gumshoe’s trading restrictions.

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6 years ago

Anybody have anymore insight on Stockman? I’m a natural skeptic, and the marketing seems pushy and sensational, but his record seems solid, albeit short (since October).

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6 years ago

These are Bubble Finance current opened holdings and returns as of 5/6/16 IBM + 24%, AME + 80%, POST – 18%, PNRA -20%, BABA-63%, BLK -84%, UA -31%, FB -75%, HYG -4-%, ATHN + 22%. That’s 3 current winners and 7 current losers. He seems to be counting on a soon coming downturn in the overall market to help the positions. His closed positions are MUCH BETTER: WETF 54%, VIAB 88%, TSLA 135%, IBB 69%; 100% WINNERS.

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5 years ago

If anyone is interested, Stockman’s Amazon recommendation is Jan 17 $500 puts

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👍 11
5 years ago

stockman is the best contra-indicator in the market

5 years ago

Do you have any hard evidence to back up that bold statement? I was a Stockman Agora Bubble Finance subscriber. Very poor results with almost all of his option put recommendations expiring worthless. He and his sidekick, Dan Amos are terrible. Now Stockman is claiming everything in the market will crash after tomorrow (Mar 14 2017). Something tells me you and I will still be here, right along with the market. Stockman is worthless.

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Jay T.
Jay T.
5 years ago

Not good results on Stockman’s Bubble Trader service from March 2016 to January 2017, so I called Agora today to ask why Stockman has not informed his newsletter subscribers what he sees as the reasons for Puts performing so badly – IBM, PXD, BABA, VIX, BLK, EWQ, PNRA, and CTAS all lost money (none gained). Honestly, wouldn’t a dart board produce better results? I called for explanations about the investment thesis and what he had learned, and was told they would “pass on the request to the editor”. I opted out of renewal.

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