Continue to Suspect a Face Ripper

The evidence at hand looks very compelling that the credit cycle has turned in the world, kicked off by the downfall of the oil and natural gas industry. Energy was the spark, but loan impairment is rising around the world and before the cycle is over I’m confident we’ll see at least one major financial institution go belly up. Which in turn would then test the system’s ability to contain SIFI counterparty risks.

Fear of 2008 is back and back with a vengeance, especially fear of the banking industry’s quality of assets on balance sheets across the world. Look at all the articles that have sprung up over the last week. Look at the rise of credit default swaps on financial institutions, specifically European entities.


Investors are acting as if the ECB doesn’t exist and that European leaders somehow won’t acquiesce to the notion of an increase in monetizing commercial bank assets to calm things down. Deustche Bank’s balance sheet has the whole world in a tizzy but the jawboning has already begun by Schäuble and I have no doubts that Draghi will increase Euro-area QE to settle things should fears continue rocketing higher. I know that the public as well as the powers in charge do not have the stomach for another bail-out like we saw in 2008. Bail-ins will occur when a true crash occurs but before then we’ll continue to see back-door bail-outs that are easily sold to the investing public.

The fears are not just consigned to European banks.


As further proof of an excessive level of 2008-style fear, Forbes featured an article by Peter Tchir sharing the above index of credit default swaps pricing for senior financial institutions.

And just look at the performance of bank stocks as depicted by GaveKal.


Relative to the lows of the 2008 and 2011, bank equities are performing at their worse over the last 10 years. This is incredible to me. In 2008, it was as if people thought the whole system was going to implode. Literally. As for 2011, the fears centered on the Mediterranean as people thought Greece and Italy were going to sink into the seas dragging down the world economies with them.

Even the all-seeing eye of Goldman Sachs is being assailed upon. Just look at the gap-ups in the pricing of the squid’s 5-YR CDS, courtesy of ZH via a Bloomberg.


The fears surrounding the world’s financial institutions are not unfounded. There are countless current articles on the deterioration in credit quality in addition to the impairments of balance sheets at financial institutions around the world. It’s just the intensity with which markets have become scared of virtually all banks is truly remarkable.

The ability and the will to continue and increase quantitative easing in Europe and Japan is not being properly discounted. The US does not have to go so far as initiating QE again. Yellen and crew can simply jawbone fears downward by stating they will desist from further rate rises, which we’ve already seen Yellen hint at today. If needed the Fed can simply reverse the rate increase it implemented months ago and that should put a wind in the markets as speculators collectively wipe the sweat from their brows, despite the actual message that would be conveyed.

If we were currently in the midst of a market crash where indices drop by 50% or 60% then it would be the first one I’ve ever read about where people saw it coming months in advance and common market fears totally anticipated it. As I’ve said before, that’s not how these things work. Markets don’t crash while everybody is staring straight at them. That may be attributing too high of a weighting to mass market psychology, but I stand by the contention.

I suspect that animal spirits will be assuaged through various methods by the central banks of the world. Then stock markets can reassert a positive trend on to new highs. Despite the fact that debt markets are far larger and far more important, the stock markets are the thermometer of risk that people seem to spend the most attention on. If 2016 is to be the final hurrah for the stock markets before a rehash of 2008, then I think price action in the S&P 500 could resemble what we saw coming out of the lows of Q3 2011 but on a shorter timeline.


There are many sentiment indicators that are showing an excess of fear. People seem to be expecting a 40 VIX or some sort of blow-off to mark when to get back into stocks to take advantage of the final run in risk-on, but I contend that the markets have shown enough of their hand already. I’ve already allocated capital into trades to take advantage of a bounce in markets. If correct, I think we could see a real face-ripper of a move.

Should the Investing Public Be Worried if Some of the Biggest Banks are Genuinely Scared?

Questions of investing and speculating always require context within time-frame. Players in all asset classes, professional or not, approach the game from their own perspective.

Traders surfing the waves of volatility may be looking only days or weeks out. Investment managers overseeing a growth-oriented portfolio may be looking ahead months or quarters while a value-oriented portfolio manager may be looking years out. The 401k-watching worker bee may be wringing their hands at every market move and every ignorant headline despite the fact that they have 30 more income-earning years left before retirement.

The game is tougher than ever even for the professionals and it’s difficult to decide a course of action with the information overload coming at market players. Determining what’s noise and what is actually valuable information is critical in making the right moves within your portfolio.

I have long been pounding the table on building cash reserves while staying invested in the markets. I’ve also stated that I thought the downturn of late 2015 was the start of the next major bear market. I think that dip and recovery in 2015 was the bear waking up and the poor start in 2016 is investor realization of that bear. However, because everybody now sees it, the markets aren’t going to execute a full-frontal stage-dive. That’s not how these things work, right?

I think we get a recovery into new highs followed by another much smaller correction and consolidation potentially followed by another new high. After that, I suspect all the bull energy will be fully used up and the bear will begin in earnest. Remember, these are simply my suspicions based on behavioral observation of the markets; nothing more than forecasts of potential outcomes.

It’s been a long time since I’ve hit readers with some good old chartporn, but I’m in the mood to throw a bunch of squiggly pics out there to possibly help the reader better assess the market situation in 2016. Observe a 20-year, monthly chart of the S&P 500 along with some relevant indicators.


Observe the long-term breakdowns in the indicators matching the actions of 2008 and 2000. Does that mean crisis is imminent? Nope, but I do think it reinforces my call that a new bear has started. Notice also in 2001 and 2008, we saw strong support and a bounce off of the 50-month moving average. Too many technicians are looking for that and thus too many algorithmic shops will be front running ahead of that signal, blowing out orders to drive the market higher.

I suspect this bounce we are currently in the midst of may be a bit stronger than people realize. Market players have been so used to the V-recoveries and yet they’ve already forgotten what they can be like. It appears that players are numb to the potential of a multi-week to multi-month V-bounce from the January 2016 lows. Despite what I surmise about a stronger than expected bounce, nobody can blame investors for either running for the hills or shoving their heads into the sand.

We’ve already seen the peak in net profit margins for this business cycle in the largest US corporates at the same time that markets continue to be overvalued, despite the corrective moves in December and January. Observe the following chart courtesy of ZH via Thomsen Reuters via Barclays. It depicts how the recession fuse has likely been lit.


And with recession generally comes a bear market correction. Or is it the other way around?

Regarding overvaluation, have a look at this comparison chart from AQR depicting market returns based on various starting points of the Shiller P/E. AQR is the shop that Cliff Assnes, billionaire hedge fund manager, founded and runs.


This coincides with GMO valuation models for future returns based on current valuations. There are plenty of Shiller P/E naysayers who believe that the indicator is bunk. The fact of the matter is that evaluating a normalized 10-year look at P/E ratios is a simple and intelligent way of quickly gauging valuation levels compared to prior periods. Of course every period in history possesses its own specific circumstances as the backstory of the valuation levels, but the raw Shiller P/E paints a clear picture for equity performance going forward.

Besides I don’t see or hear anybody calling Bob Shiller a dumb man. Despite what you may think of his ratio, Shiller is a respected academic even within the professional financial community.

Let’s take a look at a chart from one of every perma-bull’s favorite bear-shaped piñata, Dr. John Hussman. Unfortunately, Hussman catches a lot of flak. Less so after admitting to his analytical mistakes coming out of 2011 but I think he catches a bad rap for simply calling it how he sees it. Hussman’s analysis is based on a quantitative and thorough study of the markets. Can the same be said of a vast majority of the financial blogosphere? No it cannot, including myself. Observe the Hussman Hindenburgs. They nailed the current action coming into Q4 of 2015.


The criterion of the Hussman Hindenburg is detailed in the upper left corner of the chart. Dr. Hussman’s Hindenburg indicators proved to be quite prophetic in 1999 while essentially nailing the top in 2007. For your own long-term holdings, ignore these signals at your own risk. Dr. Hussman, like Dr. Shiller, is respected amongst fellow financial professionals. Have a look at Research Affiliates’ (“RA”) own analysis on current valuation levels.


In a research piece they published in July of 2015, RA evaluates the differences in relative valuation metrics (CAPE, Hussman, Tobin) and absolute valuation metrics. They came to the following conclusion.

Our answer to the question “Are stocks overvalued?” in the U.S. market is a resounding “Yes!” Our forecast for core U.S. equities is a 0.8% annualized real return over the next decade. The 10-year expected real return for emerging markets equity, however, is much higher at 5.9% a year. The return potential of the nondeveloped markets is so high, in fact, that the valuation models, warts and all, paint a very clear picture.

May want to rethink that lack of EM exposure going forward, depending on your time-frame.

Shall we move on to a couple of less orthodox indicators of potential trouble in the markets? Observe the two following charts which pertain to income as opposed to valuation or price action. In the first one, created by McClellan, we get an interesting correlation to total tax receipts for the US government as compared to US GDP.


Notice that in 2000, the US crossed the 18% threshold and stayed there awhile before rising even higher at the beginning of the market selloff. For the GFC of 2007, America almost got to 18% but not quite and we still literally almost vaporized the entire financial system. Currently, we’ve reached 18% but that may or may not mean anything. In each previous occurrence, tax receipts stayed at the level for months or even years so this is an indicator worth watching but only in conjunction with many others.

Interestingly, federal tax receipts as a percentage of GDP currently reached 18% right before the markets began selling off last year. Repeat after me. Correlation is not causation, but the timing is still interesting.

The other chart that doesn’t get a lot of coverage but is very well known is net worth of US households and non-profit organizations as a percentage of disposable personal income. You can find it courtesy of our friendly Federal Reserve Bank of St. Louis and their FRED tool. The grey vertical bars in the FRED charts denote recessions.


It’s been a clear indicator in 5 of the last 6 recessions and we also had that annoying fakeout in 1987. Much like the prior graph, this particular chart should be coincident with additional economic indicators if one is attempting to forecast potential economic as well as investment outcomes.

I want to move on to a particular area that everyone should be concerned about and that is nonperforming loans (“NPL”) at major banks. Not just at US banks but around the world. China’s commercial banks have raised fear levels in even the most seasoned professional investors due to their NPL levels increasing so drastically in 2015. I’ve long stated how debt levels in Italy have the potential to dismantle a good portion of the financial system because the Mediterranean Boot is such a key economic cog in the European Union. Some of the biggest commercial banks in Italy are on the verge of toppling during a period where now the ECB is less amenable to the previously used “bad bank” options. The pressure is beginning to mount for Italy’s leadership to formulate a strategy around potential bank failures.

You might be inclined to observe the following chart and think all is at least well for the US.


But take a look at the following chart in commercial-only loan performance and begin to understand why the total situation looks toppy from the economy to the markets.


For the record, commercial loans comprise approximately $2 trillion of the outstanding debt within the banking system. It is clear to see that a bottoming and an upturn occurred before the last 3 recessions and market dislocations. Now we are currently in the early innings of an upturn in NPL. If commercial loan performance behaviorally adheres to what we saw in the prior two recessions, we will see at least an additional 2% of total commercial loans become impaired assets. That’s potentially between an additional $40 billion to $50 billion at minimum that banks will have to provision for. No easy task in light of current leverage levels and collateral utilization across the repo and derivative space.

This is especially concerning because of the systemic importance of each bank to the entire financial system. Just look at the consolidation that has occurred since 1990.


Couple this concentration with a lack of regulation allowed by Gramm-Leach-Bliley and you can see that debt impairment at the banks is not going to have a happy ending. And if you think Dodd-Frank was the answer to all of our problems, I might stop laughing sometime in March.

What would work to alleviate a lot of the financial pressures around the world in the short term is a weaker dollar. I don’t say that as a proponent of a weaker dollar. Rather, I am stating that currency exchange due to a weaker USD could help sugarcoat revenue reporting across international corporates. It would relieve pressure in the management of reserves for countries with an excess of US treasuries. The oil price could stabilize temporarily but it is well-documented that abundant supply and less-than-expected demand is still the story. Commodities could lift and thus commodity producing countries who are already fighting with their reserves issue could see a double-positive impact. All these effects would be temporary as world debt levels are at unsustainable levels and a bear market for all assets has potentially already arrived. It just has yet to completely sink its claws and fangs entirely into the world’s financial system.

Coming back to the initial question behind this post. Should the investing public be scared? Maybe not scared. Let’s call it aware. They should be aware of all the happenings that are occurring right now. Cash levels should be raised. Certain assets should be paired down depending on losses, gains, and risk exposure. More importantly it’s time to take stock in your own investing psyche. If you are building cash levels, will you have the courage to act at the appropriate time? That’s what raising cash boils down to. Do you have an understanding of the intrinsic valuation levels of specific asset classes that will motivate you to put cash to work?

Aside from brushing up on your ability to properly assess valuations, take a look inside yourself and evaluate your ability to deploy cash when fear is running rampant and the nadir of multiple markets appears to be nowhere in sight.


Lo and Behold

Back on October 8th of last year I shared the following chart in the post, Here’s What’s Going to Happen.


Specifically, I stated:

The reason this scenario works and will again is because of good old fashioned herd mentality. Markets correct. The experienced players advise to stay out and expect a rebound with a retest of lows before jumping back in. The low gets retested and everyone rejoices by betting on red and black, then the rug gets pulled out one more time. The strength of the current bounce is prognosticating another dip before the markets put the climbing gear back on.

And as of yesterday, 1-7-2016, here’s what the action in the S&P 500 looked like.


The herd will steer you wrong virtually 100% of the time. It has literally never been more critical to think independently and see the facts and circumstances as they are within the markets. It is difficult to filter out noise but your retirement portfolios demand that you try. How many fund closures have you read about since December? Even the smartest people in finance are having a very hard time at this game and forecasting is incredibly difficult.

I think this selloff is close to running out of steam and I feel quite confident that the S&P 500 will easily set new highs going into the first half of 2016. I still contend that the Fall of 2015 was the beginning of the larger stock market topping process that will fully avail itself to the investing public in 2016, but not while everyone is staring straight at it. And certainly not while every major bank in existence is publicly sharing all their fears. We need some snapback based on the debt monetization and interest rate levels in other developed markets. When everyone is comfortable again and everyone suspects that 2016 could finish 8% to 12% higher than 2015, then the negative-event-based-fears should muster to create an environment rife with opportunity.

Not that the 4th quarter didn’t present plenty of opportunities. For traders, that whipping volatility was either whipsawing you out of your positions or filling the coffers based on what have recently been traditional patterns of market behaviors. Unfortunately, long-term only investors may have been suckered into new positions having been brainwashed to “fly into the light” and simply buy the dip. For the value types, it was certainly a good quarter to simply sit back and allow the war chest to continue to build.

Lest you think I actually believe that my forecasting skills are somehow less daft than the next bloke’s, allow me to share with you some of my on-the-record prognostications over the past couple of years. I have double the amount of flubs compared to correct calls. It was nice to get the sucker’s rally call right for the current market, but unfortunately, I have been wrong more often than not when attempting to make a bold call.

1. EPC outperforming ENR (Spinoffs)
2. S&P 500 correction from March 26; bottom-ticked the market (Short-term Equity Risks)
3. IBB correcting; went up 3% after call then erased the 3% then went up 9% erasing that gain with a 9% drawdown (Short-term Equity Risks)
4. Canada can beat a S. American squad for the Pan-Am gold (Canada)
5. Europe caving on debt on resolution with Greece; Greece folded and I was so wrong (American Assets)
6. Another leg up in the S&P 500; totally wrong as market chopped exactly sideways until the Sept. corrections (American Assets)
7. QCOM addition to long-term portfolios; price is approximately 25% lower than where I said it was good area to start nibbling; of course it’s a matter of perspective based on time frame (Snapdragon)
8. Bounce and resumption of correction in the S&P 500 (The Correction and a Trade)
9. Going on the record with NCAA football and NFL betting picks; one word…disaster (Handicapping)
10. Shorting Toyota based on gap fills; technically I was right but the action took months when I expected weeks (Revisiting an Old Friend)
11. Bulltrap before a correction in the S&P 500 (Triple-top)
12. S&P 500 could correct all the way to 1650ish (Tea Leaves)

1. TLT and XLU chopping for 3 weeks from March 26 (Short-term Equity Risks)
2. Greece not going back to the Drachma or exiting the Euro in 2015 (American Assets)
3. QCOM filling the gap on a snapback trade up to $71 a share (Snapdragon)
4. JJG ripped higher by 16% after making call to enter trade on October 18th (The Correction and a Trade)
5. DAL falling down to $30 a share for a short trade; thank you kindly ebola (Two Trades)
6. Shorting coffee with JO down to $35 (Whipsaw)

Sorta Right:
1. S&P 500 would correct more than 7% on a closing basis in October 2014; partially right in that it went down another half a percent and then ripped 11% higher; basically wrong but not technically because I’m lame (Some Musings)

As for a final forecast before wrapping up this post, remember to always filter out the noise which so clearly applies to, too. Want to know who gets paid for forecasting? People who earn salaries for that specific role at a financial institution. Want to know who makes real money off of forecasting? Traders and investors with billions in AUM.

I will reiterate that I think this selloff peters out relatively soon and then begins a higher lows walk upwards. There will be a lot of backing and filling as so much fear exists but I feel very strongly that the all-time intraday high in the S&P 500 of 2,134 will be taken out before Q1 is over.

Bet accordingly.

Update:  April 21, 2016
Well doggone it!  I was wrong about new highs during Q1.  The intraday high for Q1 was 2,072 on March 30th.  About 63 points off of my call, and as of this writing, we still haven’t touched new highs.  I’m a little off on my timing.  That’s ok.  I can live with accurately and publicly calling the intensity of the recent snapback rally while also harvesting the trading profits that went with the call.

Indicator Currencies

A couple of weeks ago on ZeroHedge, I happened to read a chart they nicked from BofA Merrill Lynch. Observe:


And just to be Captain Obvious, the chart is inverted as the South African Rand is not exactly a bastion of strength in light of the continued run on commodities. Inverting a chart allows for an alternative perspective, which we know is needed more than ever in these days of literally any trading edge being arbitraged into oblivion within a co-located microsecond. We’ll have to wait and see if Rand correlation to world markets continues to lead up to major market events, but there is no denying the importance of currency analyses in a macro outlook.

Speaking of Captain Obvious, this inverted Rand chart made me want to take another look at an inverted chart of the USD. I keep reading perspective after perspective about how the tightening of the US currency will lead to continued strength in the dollar as the US continues to be the strongest developed economy in the world. Safety, safety, safety will drive the USD trade according to expert analysts. This is in light of the fact that trader commits have already been showing some backing off in the long USD trade.

I am by no means an expert in currency trading, or for that matter, examining international capital flows. However, I pulled up an inverted monthly chart of the USD over the last 15 years and included a couple of indicators that I rarely use. The top indicator is the standard Ultimate Oscillator (ULT) with default periods of 7, 14, and 28. The bottom indicator is simply the 9-month of Rate of Change (ROC). There were some potentially telling relationships.


As denoted by the green circles, trouble was usually on the horizon once the ROC worked its way up to 10 or higher and then back down to crossover the zero-line. The lone exception over the last 5 occurrences was the late 2012 to early 2014 consolidation with heavy chop. Recently, the 9-month ROC just began to crossover below the zero-line again.

The ULT follows a similar path in that once it has breached a reading of 60 or higher and then began to work its way downward, USD price action generally began to deteriorate. Observe the price action in the dollar at each of the downward sloping blue arrows.

Despite what the indicators have proven to communicate on previous occasions, this is an obvious case of data mining and thus cannot be truly relied upon for making large scale investment decisions. None the less, I found the observations interesting as part of a larger overall analysis.

There are many highly-correlated relationships recognized between currencies and asset classes. Some of the obvious ones are the USD and commodities (inverse), CAD and AUD and commodities (direct), Yen and SPX (inverse), but it’s the dollar’s relationship with the Swiss Franc and gold that has me intrigued for a potential move.

The franc and gold have a long documented relationship of synchronous movement. Not perfectly, but with consistently high correlation. While the dollar tends to move opposite the franc and gold. Again, not perfectly but with consistent negative correlation. Observe this time-tested relationship for yourself.


Could the action be telling market players to expect some fireworks in the USD, franc, and gold in the first half of next year? There are a multitude of low-risk ways to go long or short the currencies using futures, ETFs, and options. I leave it up to the reader to decide how to potentially risk any capital.

Another relationship to watch out for due to USD correlation, is the ratio of the S&P 500 index to the CRB commodities index. Kimble Charting Solutions pointed out the “Eiffelesqueness” of this particular ratio. With the world economy continuing to slow down, it does appear as if there is no hope for iron ore, oil, and copper but we are at multi-year extremes and a close eye is warranted. They’re called counter-trend rallies and the adroit can exploit.


I hope you had a wonderful Christmas and I sincerely wish that 2016 truly brings good tidings to all Margin Rich readers…and profits, too!

Believe Your Eyes and Ears, Not the Data

The evidence continues to mount that the US is entering into a recessionary environment. Really, it’s old news however it’s also unsupported by official data. It’s a slow descent into a recession, because we know that the “data” will not be displayed to show the recession in real time. It will be ex post facto revisions from the BEA that finally let the cat out of the bag, so to speak, sometime next year by my estimation.

When it comes to markets and macro-data, people often assume that a forecast of possible events means the event is absolutely imminent. We are moving into a recessionary environment in total and even if this is yet to be supported by official government data sources, the real-world business data is painting a fairly clear picture. Caterpillar has been tanking for how many quarters now? Fastenal, a leading industrial supplier with close to $4B in revenues, recently had the pleasure of having its newly promoted CEO, Daniel Florness, exclaim to the investing world just exactly what kind of economic environment the company is currently operating in.

In a recent Q3 conference call with analysts, Florness unleashed the following gems, “…I would argue that anybody selling into the industrial market is not selling into a non-recessionary environment…The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do.”

Want a larger business as proof? Take Grainger’s guidance then. Grainger is in a similar business however they do almost 3 times as much revenue and own a larger share of the MRO (maintenance, repair, operations) supplier market. Additionally, a full third of Grainger’s business is earned via government, retail, and commercial businesses versus just manufacturing and other industrial segments.

Grainger has lowered earnings guidance after each quarter in 2015. Their margins are being squeezed and they’ve comped down again in Q3 top line sales. The CEO, Jim Ryan, continues to communicate that Grainger’s results “reflect the challenging industrial economy in North America.”

Opposing opinions will point to the 2 very obvious elephants weighing down US economic results, which are the continued rout in petroleum energy and the strength in the US dollar. The fact of the matter is that petroleum-based energy sources are not the only commodities sold and moved through the US. Self-evident? Sure energy companies have taken a major hit, but look what cheap oil and gas has done for everybody that uses the product. Wasn’t the savings from cheap gasoline supposed to drive retail sales? Are airlines not actually producing record profits on the back of cheap jet fuel?

Let’s take a look at the AAR monthly rail traffic report through most of the 3rd quarter.


Observe how carload and intermodal traffic are beginning to tip over. For the sake of unfamiliar readers, carloads are what commodities such as coal, grain, etc. are transported in. Intermodal is utilized for consumer goods like appliances, TV, clothes, and all the other goodies that credit cards get maxed out for. If you visit the AAR site and just drill down on carloads, the data is significantly more alarming. The funny thing about commodities is that they’re the input that the manufacturers consume in order to create an output the end-users consume. Reduced end-user consumption, reduced commodity consumption. Basic economics, right?

The drop-off in traffic for carloads only is vast. Intermodal continues to grow but how much of that traffic can be attributed to excess inventory buildup for a holiday sales party that may never materialize? Come on Black Friday don’t fail us now!

I know how important energy is to total market earnings and how petroleum has skewed the data downward. That data is readily available for all to see the impact.


However, the rail traffic, commodity prices, wholesaler and retail sales are supposed to simply take a backseat to oil and the dollar when it comes to analysis of the US economy?

Wal-Mart rocked the entire stock market single-handedly when it guided that 2016 profits would drop by as much as 12% next year as the behemoth spends heavily to increase wages, improve the store experience, and build out and expand its online presence, all while dropping a cool $20B over the next couple years in share buybacks…which is not to support earnings of course. Managing earnings would be unethical. Putting salt on the wound, management also shared that they expected sales to be flat as opposed to previous estimates of 1% to 2% sales growth.

Let’s find a bright spot somewhere. Do a dance around your sombrero for Mickey D’s reporting positive comps in sales, finally, of less than 1% but I’d still be a whole lot more worried about what Wal-Mart’s performance in Q4 could mean from a macro standpoint.

All the information examined so far is widely reported, but let’s take a closer look at a less orthodox indicator. The hospitality industry, specifically hotels, reports all sorts of proprietary business information. One of the leading aggregators of this data is STR Global. They produce reports that can be drilled down to specific markets and segments.

As these reports are proprietary, STR of course sells this information to whomever would find it useful and are known in the industry as Star reports. Some of the specific knowledge shared is figures on Average Daily Room Rate (“ADR”), Revenue Per Available Room (“RevPAR”), and Rooms Available (“Supply”). ADR is a simple calculation of the average rate paid for rooms which is calculated by dividing room revenue by rooms sold. RevPAR is similar in that it is the total guest room revenue divided by the total number of available rooms, but the sticking point is “available rooms.”

Hotel properties can report to STR that they have decreased their supply of rooms. This will of course positively affect a property’s STR revenue-based metrics. How is this done? Simply. Let’s say a hotel has 500 rooms on the property. Business may be exceptionally slow and cannot support current labor levels. So the GM simply puts 250 rooms out of service indefinitely. Now when data is uploaded to STR, room supply is halved but ADR and RevPAR at the very least maintain but more probably improve due to a lower bar being set for occupancy based room supply.

Where does this begin to affect the greater economy? In the suppliers to the hospitality industry. Less rooms in use means less cleaning supplies needed, less turnover in linens & terry, FF&E investment diminishes and so on. But what’s worse is that suppliers, whether they are manufacturers or wholesale suppliers may create or modify business operations based on STR market data. Revenue goals at suppliers may be maintained at artificial levels despite decreasing occupancy levels in various hospitality markets. There are continued knock-on effects to be rationalized. I leave those effects to readers’ imaginations.

Do you think this is not happening, that rooms are simply identified as “out of service” so that results can be manipulated? I assure you this is happening. Room supply is one of those very important pieces of information that gets completely overlooked as long as ADR and RevPAR are steady or increasing. It’s absurd. You’d think sharp, experienced minds would see through this kind of thing but it is regularly glossed over, much like budget timing cycles in evaluating an underperforming sales person who may simply be having a tough time attaining goals due to the timing cycle after coming off of a monster year, as opposed to an actual lack of effort or skill.

I have multiple, highly reliable sources that have assured me of this practice but it’s not like it’s a secret or some sort of industry cover-up. It will be openly talked about if addressed by the appropriate parties. None the less, this behavior of massaging hospitality data can be misleading in one of the US’s leading service-based industries.

For an idea of how important hospitality is to the US economy, have a read of the following blurb right on the front page of the Select USA travel, tourism, and hospitality site administered by the Department of Commerce,

The travel and tourism industry in the United States generated nearly $1.5 trillion in economic output in 2013. This activity supported 7.8 million U.S. jobs, and accounted for more than 9 percent of all U.S. exports. One out of every 18 Americans is employed, either directly or indirectly, in a travel or tourism-related industry. In 2014, U.S. travel and tourism output represented 2.6 percent of gross domestic product.

Hospitality matters and data integrity across all industries and entities is critical in making accurate business and economic assessments. But let’s come back to the larger markets.

I would venture that there are only a handful of quarters left at best where debt issuance will be seen as “cheap and easy” in order for companies to fund share buybacks. Once that jig is up, then actual sales, profits, and responsible allocation of free cash flow will have to continue to push that game forward. You willing to continue betting your hard earned cash on the responsibility of corporate CEOs in a world already overflowing with debt?

The question, as always, is how is all this actionable? And the answer is that inaction is the action. Continue raising cash. I’ve been sharing that same tired message for a little over 18 months and I’ll continue to reiterate it. I’m still highly allocated to the equity markets. I continue to actively trade albeit much, much more selectively now. The strategy is not go to all-cash, it’s raise cash. There is little doubt in my mind that cash-poise will be rewarded with asset-prosperity.

Coming back to what all this data talk is focused on, the BEA releases the advance estimate for GDP tomorrow morning at 8:30am EDT. Let’s see if a convergence begins with the real world compared to official-statistics world. The 3.9% revision in Q2 from the negative Q1 was eye-opening. I’d say get ready for some volatility tomorrow either way the estimate reads.