Category Archives: Market Manipulation

The Irrepressible Taunt Of Totalitarian Creep

The ideal Subject of Totalitarianism is people for whom the distinction between fact and fiction, true and false, no longer exists. – Hannah Arendt, philosopher and political theorist

Hannah Arendt was involved in exposing antisemitic propaganda in Berlin in the early 1930’s. Following  a brief imprisonment by the Gestapo, she fled Germany. After escaping a subsequent German detainment in France in 1940 she ended up on New York’s Upper West Side. I think it’s safe to say the Ms. Arendt understands the breeding ground for Totalitarianism.

The quote above echoes frighteningly the political and social climate of the United States right now. The business, political and community leaders have managed to blur completely the distinction between truth and fiction. The dynamic has been irreparably amplified by the journalists and social media. The imposition of political or social “correctness” is a deviously insidious form of Totalitarianism – “do and behave as I say or be branded a racist or chauvinist or misogynist.”

James Kunstler’s latest commentary explores the political and social tyranny evolving in the U.S. Certainly Trump’s style of imposing his will on foreign Governments and the Fed evokes thoughts of a dictatorial style of leadership. But, as Kunstler points out, the leading Democratic candidates are revising the settled facts of historical events to arouse the support of those who loathe Trump:

“For instance, Resistance team captain Elizabeth Warren referred the other day to the 2014 “murder” of Michael Brown in Ferguson Missouri “by a white policeman.” Of course, Ms. Warren was speaking her “truth.” Now, it happens that the US Department of Justice under Eric Holder (this was the Obama administration) determined that it was not murder, as did an inquiry by the State of Missouri — rather that Mr. Brown was shot after attacking officer Darren Wilson in his police car and attempting to grab his gun.

Did Senator Warren not believe former attorney general Holder? Was there some other authoritative opinion she was referencing? Or was she just making shit up on-the-fly to juice an audience? Could she have had any other purpose than to provoke racial animus? Is that what this country needs? More tension between blacks and whites? More reason for suspicion and hatred? Is that where you want leadership to lead you?”

Here’s the rest of Kunstler’s must-read essay:  The Yin and the Yang of it

The Remarkable Resiliency Of Gold And Silver

The price of gold continues to hold up under the enormous selling in the paper derivatives markets on the Comex and LBMA.  This morning’s price attack is a good example:

The chart above shows December paper gold in 5 minute intervals. Typically the price of gold is taken lower leading up to the a.m. London “fix,” in which the “price fix” process is characterized with heavy offerings.  Lately the price bounces after that. And of course there’s the obligatory price-smack when the Comex floor trading commences (8:20 a.m. EST).  Check that box.  Then the “hey can I tell you the good news” item hit the tape about 4 minutes after the NYSE opened.  The hedge fund algos spiked the S&P 500 futures and dumped paper gold.

For the better part of the last 18 years, when this type of “market” action occurs, gold is down for the count. Not only does the initial “fishing line” sell-off hold, but the gold price moves lower throughout the day.  This snap-back action in the gold price after a price attack since early June is unique to the way gold (and silver) has traded over the last 18+ years.

Gold is at or near an all-time high in most fiat paper currencies except the dollar. This summer, however, it would appear that the dollar-based valuation of gold is starting to break the “shackles” of official intervention and is beginning to reflect the underlying fundamentals.  On the assumption that gold can continue to withstand serious efforts to push the price back below $1500 (the net short position in gold futures held by Comex banks is near a record high, for instance), we could see $1600 or higher before Labor Day weekend.

This price-action in gold is being driven by enormous flows of capital into both physical gold and gold “surrogates” or “derivatives.”  Yes, GLD is a derivative of gold – a device used to index the price movement in gold.  The action over the last two months is more remarkable given that the increased excise tax on bullion imports into India has largely stifled import demand beyond what gets smuggled into the country (in excess of 300 tonnes annually).

I have been told my someone who claims to be in a position to know that there’s a buyer of massive amounts of physical gold and silver on every dip in price and that’s what is driving the resiliency of the precious metals.

Make no mistake, even if by chance of a miracle a “trade agreement” is reached between China and the U.S., the underlying economic fundamentals globally have already deteriorated into a recession. And it’s getting worse. It has nothing to do with tariffs.  For the primary cause, research the amount of debt outstanding now vs.  2008…

Moreover, the randomness of unforeseen news events causing sudden market sell-offs and precious metals rallies is starting to occur with greater frequency. This is driving the flight-to-safety move into the precious metals. The mining stocks have lagged relative to the risk-adjusted percentage move since early June in gold and silver. I do not expect that to last for long…

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Is the Federal Reserve losing control of the gold price?

For the majority of the last 20 years, the western Central Banks, under the direction of the BIS, have been able to use the precious metals derivatives markets to “manage” the price of gold.  As long as counterparties who are “synthetically” long gold and silver are willing to settle the derivatives trade in cash or ETF shares, gold derivatives can be created in infinite quantities and used to keep a lid on the price of gold.

But since late spring, it seems that the attempts to use the paper gold and silver markets on the Comex and LBMA to drive the price lower have been met with aggressive buying.  For now the only explanation is that a large buyer  (or maybe several) may be accumulating physical gold/silver, which is preventing the price managers from indiscriminately printing and flooding the market with paper derivative contracts to drive the price down.  The tail may no longer be wagging the dog.

My friend and colleague, Paul Craig Roberts wrote this commentary about the possibility that the physical gold market is taking away:

After years of being kept in the doldrums by orchestrated short selling described on this website by Roberts and Kranzler, gold has lately moved up sharply reaching $1,510 this morning. The gold price has continued to rise despite the continuing practice of dumping large volumes of naked contracts in the futures market. The gold price is driven down but quickly recovers and moves on up. I haven’t an explanation at this time for the new force that is more powerful than the short-selling that has been used to control the price of gold.

You can read the rest of PCR’s analysis here:  Is The Fed Losing Control Of Gold

Inching Toward The Cliff – Why Gold Is Soaring

The global economy is headed uncontrollably toward the proverbial cliff. Although the Central Banks will once again attempt to defer this reality with more money printing and currency devaluation, systemic collapse is fait accompli.

Gold and silver are behaving in a way I have not observed in over 18 years of active participation in the precious metals sector. It’s quite possible that the is being driven by the physical gold and silver markets, with the banks losing manipulative control over precious metals prices using derivatives.

Silver Doctors invited me to discuss a global economy headed for economic and financial disaster; we also discuss the likely reintroduction of gold into the global monetary system:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

A Global Race To Zero In Fiat Currencies…

…ushers in the restoration of price discovery in the precious metals market. The price of gold is at or near an all-time in most currencies except the dollar. This summer, however, it would appear that the dollar-based valuation of gold is starting to break the “shackles” of official intervention and is beginning reflect the underlying fundamentals. Gold priced in dollars is up over 14% since mid-November 2018 and over 44% since it bottomed at $1050 in December 2015. But those RORs for gold are inconvenient truths you won’t hear in the mainstream financial media.

The movement in gold from 2008-2011 reflected the fundamental problems that caused the great financial crisis. The gold price also anticipated the inherent devaluation of the U.S. dollar from the enormous amount of money and credit that was to be created in order to keep the U.S. financial/economic system from collapsing. But those “remedies” only  treated the symptoms – not the underlying problems.

Once the economic/financial system was stabilized, the price of gold – which had become
technically extremely over-extended – entered a 5-year period of correction/consolidation.
This of course was helped along with official intervention. Gold bottomed out vs. the dollar in late 2015. As you can see, the gold price is significantly undervalued relative to the rising level of Treasury debt:

This is just one measuring stick by which to assess a “fundamental” dollar price for gold. But clearly just using this variable, gold is significantly under-priced in U.S. dollars.

As mentioned above, the underlying problems that led to the systemic de facto collapse in 2008 were allowed to persist. In fact, these problems have become worse despite the  efforts of the policy-makers and insider elitists to cover them up. But gold is starting to sniff the truth.  I’ve been expecting an aggressive effort by the banks to push the price of gold below $1400 – at least temporarily. But every attempt at this endeavor has failed quickly.  This is the ”invisible hand” of the market that ”sees” the ensuing currency devaluation race, which has shifted from a marathon to a track meet.

Though the politicians and Wall Street snake-oil salesmen will blame the fomenting economic contraction on the “trade war,”  the system was heading into a tail-spin anyway – the trade war is simply hastening the process. As such, the only conclusion I can draw is that there’s big big money globally – over and above the well publicized Central Bank buying – that is moving into gold and silver for wealth preservation. In short, bona fide price discovery in U.S. dollar terms is being reintroduced to the precious metals market.

The Mining Stock Journal  covers several mining stocks that I believe are extraordinarily undervalued relative to their upside potential. I also present opportunistic recommendations on select mid-tier and large-cap miners that should outperform their peers.  You can learn more about this newsletter here:   Mining Stock Journal information.

Gold / Silver May Be Breaking Free From Manipulation

The price of gold has rejected numerous attempts by the banks to hammer the gold price below $1400 using paper gold derivatives on the Comex and the LBMA. I have not seen gold behave with such resiliency in the last 19 years when the Comex banks have an extremely large short position in Comex paper.

The action in the price of gold is signalling that large buyers are accumulating a lot of physical gold. This is preventing the banks from using the Comex as a manipulative tool. Based on historical preferences, I highly doubt the buying is coming from the hedge funds, who have been content playing in the paper gold sandbox of the Comex.

Per the World Gold Council numbers, which are notoriously understated, Central Banks have purchased 374 tonnes of gold in the first half of 2019. This is the highest level of CB gold purchases in over 50 years. Note that western Central Banks – specifically the Fed, ECB, BoE and BoJ have been notably absent from the buying frenzy. The buying has been led by China, Poland and Russia.

“With governments everywhere itching to increase spending without raising taxes and as the global economy sinks into a trade and credit-cycle induced recession, budget deficits will fuel monetary inflation at a faster pace than seen before. Re-learning that gold is sound money is now the most urgent priority for all those charged with responsibility for other peoples’ investments.”

The quote above is from Alasdair Macleod’s must-read essay titled, “The Reasoning Behind Gold’s Breakout.”  The article dispels the common “Fake news” myths about gold. It would be a great article to read for Warren Buffet, who believes that gold “just sits there doing nothing.” Of course, students of gold and history know that gold has outperformed the Dow since 1971. Macleod revisits the math behind this fact.

If you are looking for mining stock ideas to take advantage of the emerging bull market move in gold and silver, please consider my Mining Stock Journal.  In the latest issue released last night I review a popular silver stock that I believe is overvalued and I present a high risk/high return junior exploration stock that is relatively unknown but has 10x potential. You can learn more about this newsletter here:  Mining Stock Journal information.

The Economy Is Starting To Implode

Regardless of the Fed Funds rate policy decision by the FOMC today, the economy is spinning down the drain. Lower rates won’t help stimulate much economic activity. Maybe it will arouse a little more financial engineering activity on Wall Street and it might give a temporary boost to mortgage refinancings. But the economic “recovery” of the last 8 years has been an illusion based on massive money printing and credit creation. And credit creation is de facto money printing until the point at which the debt needs to be repaid. Unfortunately, the system is at the point at debt saturation. That’s why the economy is contracting despite the Fed’s best efforts to create what it incorrectly references as “inflation.”

The Chicago PMI released today collapsed to 44.4, the second lowest reading since 2009 and the sharpest monthly decline since the great financial crisis. The index of business conditions in the Chicago area has dropped 5 out of 7 months in 2019. New orders, employment, production and order backlogs all contracted.

The Chicago Fed National Activity index for June remained in contraction at the -0.02 level, up slightly from the reading in May of -0.03. The 3-month average is -0.26. This was the 7th straight monthly decline for the index – the longest streak since 2009. This index is a weighting of 85 indicators of national economic activity. It thus measures a very wide range of economic activities.

The Richmond Fed manufacturing survey index fell off a cliff per last week’s report. The index plunged from 2 in June to -12. The June level was revised down from 3. Wall Street was looking for an index reading of 5. It was the biggest drop in two years and the lowest reading on the index since January 2013. Keep in mind the Fed was still printing money furiously in 2013. The headline index number is a composite of new orders, shipments and employment measures. The biggest contributor to the drop was the new orders component, as order backlogs fell to -26, the lowest reading since April 2009. The survey’s “business conditions” component dropped from 7 to -18, the largest one-month drop in the history of the survey.

Existing home sales for June declined 1.7% from May and 2.2% from June 2018 on a SAAR (seasonally adjusted annualized rate) basis. This is despite the fact that June is one of the best months of the year historically for home sales. Single family home sales dropped 1.5% and condo sales fell 3.3%.

On a not seasonally adjusted basis, existing home sales were down 2.8% from May and down 7.5% from June 2018. The unadjusted monthly number is perhaps the most relevant metric because it removes both seasonality and the “statistical adjustments” imposed on the data by the National Association of Realtors’ number crunchers.

The was the 16th month in a row of year-over-year declines. You can see the trend developing. June 2018 was down 5% from June 2017 (not seasonally adjusted monthly metric) and June 2019 was down 7.5% from June 2018. The drop in home sales is made more remarkable by the fact that mortgage rates are only 40 basis points above the all-time low for a 30-yr fixed rate conforming mortgage. However, this slight increase in interest expense would have been offset by the drop in PMI insurance charged by the Government for sub-20% down payment mortgages.

The point here is that pool of potential home buyers who can afford the monthly cost of home ownership is evaporating despite desperate attempts by the Fed and the Government to make the cost of financing a home as cheap as possible. 

New home sales for June were reported to be up 6.9% – 646k SAAR from 604k SAAR – from May. However, it was well below the print for which Wall St was looking (660k SAAR). There’s a couple problems with the report, however, aside from the fact that John Williams (Shadowstats.com) referenced the number as “worthless headline detail [from] this most-volatile and unstable government housing-statistic.” May’s original number of 626k was revised lower to 604k. Furthermore, the number reported is completely dislocated from mortgage application data which suggests that new home sales were lower in June than May.

The new home sale metric is based on contract signings (vs closings for existing home sales). Keep in mind that 90% of all new home buyers use a mortgage for their purchase.
Mortgage applications released Wednesday showed a 2% drop in purchase applications from the previous week. Recall, the previous week purchase apps were down 4%. Purchase apps have now been down 6 out of the last 9 weeks.

Because 90% of new home buyers use a mortgage, the new home sales report should closely correlate with the Mortgage Bankers Association’s mortgage purchase application data. Clearly the MBA data shows mortgage purchase applications declining during most of June. I’ll let you draw your own conclusion. However, I suspect that when July’s number is reported in 4 weeks, there will a sharp downward revision for June’s number. In fact, the Government’s new home sales numbers were also revised lower for April and May. The median price of a new home is down about 10% from its peak in November 2017.

The shipments component of Cass Freight index was down 3.8% in June. It was the seventh straight monthly decline. The authors of the Cass report can usually put a positive spin or find a silver lining in negative data. The report for June was the gloomiest I’ve ever read from the Cass people. Freight shipping is part of the “central nervous system” of the economy. If freight shipments are dropping, so is overall economic activity. Of note, the price index is still rising. The data shows an economic system with contracting economic activity and infested with price inflation.

The propagandists on Capitol Hill, Wall Street and the financial media will use the trade war with China as the excuse for the ailing economy. Trump is doing his damnedest to use China and the Fed as the scapegoat for the untenable systemic problems he inherited but made worse by the policies he implemented since taking office. Trump has been the most enthusiastic cheerleader of the biggest stock market bubble in history. This, after he fingered his predecessor for fomenting “a big fat ugly bubble” when the Dow was at 17,000. If that was a big fat ugly bubble in 2016, what is now?

Tesla’s Questionable “Free Cash Flow” Claim

In last week’s earnings release, Elon Musk made the claim in the headline release that Tesla generated $614 million of “free cash flow,” which he defined as “operating cash flow less capex.”  Additionally, in the 2nd paragraph of the earnings release Musk states that, “As a result of this growth and operational improvements, we generated $614 million of free cash flow (operating cash flow less capex) in Q2.”

Notwithstanding that fact that Tesla has slashed its capex spending to what appears to be the bare minimum, and setting aside Musk’s claim of “operational improvements,” a careful dissection of the cash flow statement, balance sheet and footnote disclosures calls into question Musk’s assertion that the Company generated $614 million of “free cash flow.”

The graphic above is from the operating cash flow section of Tesla’s cash statement. I use the earnings release version to make comparisons YoY for Q2 and Q1 2019 easier (the 10Q only shows the YTD 6-month numbers in the cash flow statement). You’ll note that Tesla’s capex was $30 million less than Q1 2019 and 59% below the capex spent in Q2 2018. Strange for an automotive OEM that is building a factory in Shanghai, developing a new model (the Model Y), reconfiguring its OEM facility in the U.S. to accommodate the new model and planning an OEM facility in Europe.

However, the big source of Musk’s alledged “free cash flow” comes from the “changes in operating assets and liabilities.” The netted number shows $287 million provided by changes in the various balance sheet accounts. But a detailed analysis of the accounts that provided this “cash flow” would call into question the reliability of Musk’s assertion. In fact, most of the cash was generated from “accumulator” sub-accounts that can be found in the footnote disclosures. These accumulator accounts are liability accounts which account for near-term cash payment obligations which would have used up all of that “free cash flow” had Musk signed the checks to make the payments by June 30th.

The graphic above shows the liability section of Tesla’s balance sheet. I’ve highlighted the liability accounts in question.   The “accrued liabilities and other” account increased from Q1 2019 by $346 million, meaning that it contributed $346 million in cash to the “changes in operating assets/liabilities” number in the cash flow statement.  Most of this is a “current liability” for which Musk is obligated to make payments in the near term. Tesla does not disclose the breakdown of “accrued liabilities” in its 10-Q, but it shows the contents of this account in the 10-K.  In 2018, the two biggest items were payroll and taxes payable, which represented 21.4% and 16.6% of accrued current liabilities.

The second largest contributor to the “free cash flow” calculation was the change in “other  long term liabilities” from Q1.  The details of this account are disclosed in Note 9 of the 10-Q.  This account contains longer term cash payment obligations like “accrued warranty reserve” and “sales return reserve.”  Again, this is an “accumulator” account that accumulates future payment obligations.  This account increased by $180 million from end of March, meaning the accumulation of cash payment obligations contributed $180 million to the “change in operating assets/liabilities” account in the cash flow statement.

Finally, there’s “deferred revenue.” Deferred revenue for Tesla is derived from the portion of the revenue for each vehicle sold which is attributable to access to the supercharger network, internet connectivity, autopilot (LOL), full self-driving (LOL) and software updates.  In other words it represents some portion of the revenue which is paid up-front which is contingent on Tesla delivering performance obligations.  It’s revenue received but not earned.  It also means that Tesla did not recognize the corresponding expense that needs to “amortized” against this revenue source. Thus, it’s a source of cash.  This contributed $121 million in “cash flow” to Tesla’s Q2 “free cash flow.”  But in reality it’s not free cash flow.

The point of this analysis is that Telsa is on the hook to make cash payments on obligations and liabilities incurred well in excess of the amount to which Musk refers as “$614 million  of operating cash flow less capex.”  Most of the money – payroll, taxes, facility lease payments – will be due on or before the end of July.  Some of it will have be paid out of Tesla’s cash balance over the course of the next several months.  But to make the claim that Tesla generated $614 million of “free cash flow” is highly deceptive.

Gold, Silver, Mining Stocks Are A Coiled Spring

Currently gold and silver are behaving in a way that I have not seen since late 2008. The gold open interest on the Comex is near a record high (657,776 on July 11, 2016). The Comex banks continue pile into the short side while the hedge funds pile into the long side. However, every attempt to start a “waterfall” type sell-off is met with buying. Several attempts to take gold below $1400 this week have been thwarted. Silver all of sudden started moving higher manically. Based on the data I see daily, India and China are not participating in the buying. At least overtly. It feels like someone “big” is out “there” accumulating gold.

Phil Kennedy of Kennedy Financial put together a roundtable discussion with Bill Murphy, Dave Collum, Rob Kirby and me to discuss our thoughts on the gold market:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

It’s Just A Matter Of Time (before the market tips over again)

Texas Instruments reported its Q2 yesterday after the close.  Revenues were down 9% YoY for Q2 and management forecast an 11% decline for Q3.  The stock market rewarded this fundamental deterioration in TXN’s business model by adding nearly $8 billion to TXN’s valuation as I write this.

The Dow Jones Transports index is up 1% on the news that the U.S. is sending envoys over to Shangai for a face-to-face love-in with their Chinese counterparts to discuss the two Governments’ differences of opinions on how to conduct bi-lateral trade.  The  stock  market momentum chasers are happy because the headline announced that the meeting would “face to face,” therefore it’s a given that the meeting will save the freight industry from the deep recession into which it’s headed.

The U.S.’ economic woes are not caused by the trade war anymore than China’s issues are caused by the trade war.  The trade war is a symptom of the underlying systemic structural issues.  Trump’s handlers crafted a clever strategy to enable the policy-makers and war-mongers of the Deep State to use China and the trade war as a scapegoat.

Fixing the trade differences – which likely won’t happen in any meaningful manner – and taking interest rates to zero will not stimulate economic activity.   The stock market is melting up because the western Central Banks have made money free to use for those closest to the money spigot.  The banks and companies with access to the free money know that investing it in capital formation is a waste of time because real economic activity is contracting.  Instead they plow this cash into the stock market (cheap loans to hedge funds from banks in  lieu of margin credit and corporate share buy-backs).

The real source of the problem is too much debt.  The global financial system is on the precipice  of a Von Mises’ “crack up boom.”  The melt-up in the chip stocks and unicorns is stunningly similar to the melt-up in the same chip stocks and the dot.coms in late 1999/early 2000.  The “unicorn” stocks are this era’s “dot.com stocks.”  Most of the hedge fund managers and daytraders were in grade school during the first tech bubble.  They will remain clueless until the rug  is pulled out from under them.

The stock and housing markets will eventually collapse because the foundation of debt on which both asset markets are propped will implode.  This process of systemic cleansing started in 2008 but was deferred by the trillions in printed money and credit creation thrown at the problem.  Rather than “fixing” the system, the “solution” did nothing more than add gasoline on the underlying fire.

Someone asked me yesterday what triggered the sell-off in tech stocks in early 2000.  I said, “the market started to shit the bed for no specific reason other than it stopped going higher and decided to go south. The Fed jawboning was not nearly as pervasive although Greenspan was good at ‘talking’ stocks higher. The President then never cheered on the stock market like Trump does. At some point, no one can for sure when, this stock market is going tip-over – it’s just a matter of time…”