Upper Management Exodus At Tesla Continues – Why?

Phil Rothenberg, VP of Legal at Tesla, is leaving the company.  He’s been at Tesla for nearly 8 years; previously worked at the SEC.  I assume Phil has a lot of stock and a lot of stock options, having been at the Company for eight years, including a nice chunk of options he’s leaving on the table because they will never vest.  If everything at the Company was as amazing as presented by Musk and his meat-puppet CFO in the 3rd quarter earnings report, why leave now?

Apparently Phil, trained in securities law,  would have been the designee of reviewing and monitoring Musk’s Tweets and other social media venues per the terms of the SEC settlement.   Jonathan Chang, the other VP-level lawyer at TSLA, was not a trained securities lawyer.  I have to believe that the potential legal liabilities connected to being legally responsible for overseeing the manner in which Musk operates as his own PR organization weighed heavily on Phil’s decision to flee Telsa’s corporate Sodom and Gomorrah.

Although the SEC, for whatever reason, let Musk and Tesla off the hook on a slam-dunk securities fraud case with a mere wrist-slap, the provisions of the settlement will likely create a sticky legal spider web that can be utilized to snare Musk and those around him at the Company on several counts down the road.  I am certain a desire to legally disconnect from Tesla/Musk  explains the sudden exodus of high-level executives in the past 12 months.

After Tesla’s post-earnings price spike, the torrid stock market run-up that started October 30th played a major role in keeping Tesla’s stock propped up over the last two weeks. At the beginning of the week after Tesla reported (Monday, October 29th) Tesla’s stock was about to sell-off. But the major stock market indices began to shoot up, keeping Tesla’s stock supported. Today’s action in Tesla stock reinforces this theory, as TSLA plunged 5.5% while the SPX dropped just under 2%. Tesla’s stock is going lower – a lot lower.

Tesla will eventually implode – all Ponzi schemes fail. But Musk has proven to be adept at kicking the can down the road. In the analysis I did of Tesla’s Q3 10-Q that I presented to my Short Seller’s Journal on Sunday evening, I didn’t drill down into the 10Q as thoroughly as I could have because of lack of time. But I’ve never seen this degree of manipulation in the numbers from a company the size and profile of Tesla. Bernie Madoff’s company was private so there were never publicly available numbers to scrutinize. Tesla’s operations will eventually collapse under the weight of liabilities and a collapse in auto sales related to the economy and competition.

Paramount Gold: An Undervalued Advanced-Stage Junior Gold Stock

Paramount Gold (PZG) owns a 100% interest in the Grassy Mountain Gold Project in eastern Oregon and a 100% interest in the Sleeper Gold Project in northern Nevada. PZG acquired Grassy Mountain (GM) in July 2016 via the acquisition of Calico Resources for $15 million in PZG shares. GM has a total resource of 1.65 million ozs of gold (mostly measured) and 4.96 million ozs of silver. Of this, 504k ozs of the gold is underground with a grade of 5.32 g/tonne. The rest is 1.15 million ozs of low grade, open pit resource. PZG now controls all of the mining claims within its 10,000 acre Grassy Mountain land package.

Contrary to what one might think, the State of Oregon is highly supportive of developing the mining industry in eastern Oregon.  At this point, PZG is in the final stages of permitting. The Company has already received preliminary outline proposals for financing mine construction. The existing PEA shows a project with an after-tax NPV of $87 million. The market cap of the stock, fully diluted, is $30 million. Because of the high-grade nature of the underground material, at higher gold prices this project is a literal cash cow.

The Sleeper Gold Project is a former high-grade open pit gold mine operated by AMAX Gold from 1986-1996 (AMAX closed the mine due to the falling price of gold). It produced 1.66 million ozs of gold and 2.3 million ozs of silver. This asset has over 4 million ozs of low-grade measured, indicated and inferred resource. With a gold price a few hundred dollars higher, this project is potentially a home run for a large mining company.

My colleague, Trevor Hall, sat down with PZG’s Executive Chairman, John Seaberg, to take an in-depth look at Paramount’s operations (you can download this podcast from 11 different platforms – MSD apps) :

Mining Stock Daily is collaboration between Clear Creek Digital and The Mining Stock Journal

Housing Market Collapse: Gradually Then Suddenly

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
– “The Sun Also Rises” – Hemingway

Zillow Group stock plunged 24% this morning after reporting Q3 numbers that missed revenue and net income estimates. In addition, the Company revised Q4 lower. ZG is down 52% after hitting hitting an all-time high of $65 in mid-June.

Zillow Group is sort of a “derivative” of the housing market. It “derives” its revenues from all activities related to home sales – realtor commissions, advertising, mortgage fees, internet search traffic, flipping, investing, rentals.  As such, the plight of Zillow foreshadows the plight of the entire housing market.

The Dow Jones Home Construction index is down 35% since January 22nd. The housing stocks have been in a bear market – at least as defined by the financial media – for several months. It’s amusing to note that the financial media conveniently ignores this fact. It’s as if there’s a hidden regulation that forbids financial reporters from reporting anything negative about the economy and markets.

But the data I analyze and present to my Short Seller’s Journal subscribers shows that the housing market has been contracting for several months. And it’s not about the moronic “low inventory” narrative promoted by the snake-oil salesman at the National Association of Realtors and aggressively propagated by the media. Inventory, especially for lower-priced new construction homes, has been rising quickly this year.

More negative data was released just this morning, as the Mortgage Bankers Association reported that its purchase mortgage index dropped 5% from a week ago. This data is “seasonally adjusted” for those of you looking to apply the seasonality spin.

Purchase mortgage applications are a leading indicator of future home sale closings.  The data has been trending highly negative since April this year.

I presented Zillow as a short idea in my Short Seller’s Journal earlier this year when the stock was in the $50’s. While Wall Street analysts were selling housing market bull-spin, I was digging into Zillow’s numbers and concluded that ZG was eventually going to experience a “come to Jesus” moment.  In last week’s issue I presented another housing market “derivative” stock that has at least $100 of downside (and likely more).

Similarly, while most homebuilder stocks are down over 30% from their January highs, there’s a bigger bloodbath coming in the near future.  Data I receive from subscribers around the country show that home sales in some of the previously hottest bubble markets were down 20-30% in October.

I expect that the housing market “re-adjustment” will be more severe this time in comparison to the “Big Short” mid-2000’s market collapse.  Because the housing market and all the economic activity connected to home sale activity is about 25% of GDP, a housing market collapse will translate into general economic collapse that will be worse than the recession associated with “Great Financial Crisis.”

Amazon Is Desperate To Generate Sales Growth – Why?

I’m already fatigued and disgusted with Christmas promotions. They’re everywhere now, including every other ad on television.   I’ve come to loathe the holiday season because of the extreme materialism and consumerism into which it has degenerated.

That said, Wall Street has overlooked or ignored an interesting aspect reflected in Amazon.com’s Q3 earnings circus.  Amazon is now desperate to generate sales growth.  The Company announced that it waived the $25 minimum spending requirement for free shipping during the “holiday season.”  This move devalues the $119 annual fee for a Prime account, other than the fact that non-Prime free shipping will be regular mail rather than 2-day.  As a colleague remarked,  “at least for the holiday season Prime becomes nothing more than low-level streaming service.”  Moreover, the free shipping will annihilate AMZN’s gross and operating profits.  

In 2001, FASB removed the “pooling” method of accounting for mergers which required the financials of the combined entity to be historically restated to reflect the numbers from both companies.  From Q3 2017 to Q3 2018, AMZN optically has generated a huge year-over-year quarterly growth rate because AMZN’s income statement prior to late Q3 2017 did not include WF numbers.  This fact is buried in a disclosure in the SEC filings but, of course, not mentioned by analysts or the dopes on financial television.

But AMZN will be hurt going forward because every quarter, starting with Q4 2017, contains a full quarter of Whole Foods numbers. The consequence of this for AMZN is that, optically, the “growth rate” in AMZN’s revenues will fall significantly in year-over-year quarterly comparisons. Thus, the year-over-year year quarterly comparisons thru Q3 2018 show a much higher growth rate visually even though the comparisons are not “apples to apples” (e.g. Q2 2018 included WF numbers, Q2 2017 did not). Going forward, WF’s numbers will “dilute” the growth rate of AMZN’s revenues. One of the reasons AMZN’s stock was massacred in the previous week’s market sell-off is because AMZN guided the Q4 growth rate lower.

While some of AMZN’s competitors – like Target – are offering free shipping without a spending requirement, the move by Amazon is a act of desperation designed to generate sales growth.  AMZN’s stock price is and always has been tied to revenue growth rate.  Anyone who has bothered to pull apart the financials to the extent I have knows that AMZN burns cash every quarter.  I opined a few years ago that AMZN’s stock would be demolished once the Company reaches a point at which sales growth approaches zero or declines.

AMZN’s stock plunged $252 (14.1%) in the first three trading days after AMZN reported Q3. It would have tanked even more if it wasn’t “saved” by the massive short-squeeze rally last week.  But it’s down another 4.1% today – after hitting its head on its 200 dma.  If the stock market heads south, the decline is AMZN’s stock price is just getting started…

Tesla’s Bag Of Halloween Tricks

I have not had a chance to scour the 10-Q, which was finally filed this morning. GM and Ford are 7-8x larger than Tesla in terms of revenues and 40-50x larger in terms of number of vehicles sold worldwide.  Those two companies file their 10-Q almost immediately after filing the quarterly 8-K financial summary.  There’s no reason for TSLA to delay the filing of its 10-Q by over a week other than it needs the extra time to make its fraudulent numbers conform to SEC-filing standards (which have a low bar as it is).   I will be sharing my observations with my Short Seller’s Journal subscribers on TSLA’s 10-Q either this week or next.

For me the big event last week was Tesla’s earnings report. And Musk did not disappoint. With regard to that, I’m wondering if it’s possible to be astonished and not surprised at the same time.

Tesla originally was going to report earnings this week. But, curiously,  moved up its earnings release by a week to last Thursday. At the same time, the CFO exercised stock options that did not expire until 2022. While this is technically legal, it begs scrutiny. Why exercise options with a $31 exercise price that do not expire until 2022 unless your intent is to unload the shares when the blackout period is lifted?

For me the obvious answer is that the CFO knew the earnings report would cause a big spike-up in the stock price of which he wanted to take advantage. However, if the CFO truly believed that Tesla was undervalued and was going to be worth a lot more in the long run, he would have held onto the $160k in cash he spent exercising the options until the options approached expiration. Anyone who takes a basic finance class knows that you always hold free in-the-money money options for as long as possible, especially if you believe there’s a good probability that they’ll become more valuable over time – unless you have inside information and know that the stock is going to go lower before the options expire.

The Q3 earnings report produced by Telsa did not disappoint in terms of the high level accounting magic performed. It’s important to note that quarterly financials are not audited. The CEO and CFO can essentially do what they want with the numbers. Automotive sales soared from Q2 to Q3, from $3.1 billion to $5.8 billion. Yet, every other major expense and balance sheet item as a percentage of sales is completely out of whack with same items over the previous four quarters. Perhaps this chart captures the essence of the matter (@TeslaCharts has prepared a stunning visual summary of Tesla’s numbers):

In general, there should be some relative degree of continuity in any company’s income statement and balance sheet accounts, barring some major fundamental change, like a merger or large asset restructuring.

The cash from operations in TSLA’s Q3 this year sticks out like a sore thumb. Over 40% of this came from stretching out the accounts payable by $566 million (more on this below).
The other portion of this “cash” generated by operations came from “net income.” Over the last four quarters, TSLA’s average net loss per quarter was around $760 million. Then suddenly net income swings nearly a billion dollars from a $743 net loss in Q2 to net income of $255 million in Q3. This is simply not credible without fraudulent accounting schemes at work. Please note that these are GAAP accounting numbers. In order to verify that real cash was produced by Tesla’s operations, we would have to see an independent audit of Tesla’s bank accounts, something that will never happen.

From Q2 to Q3, TSLA’s automotive gross profit improved by $882 million based on delivering 42,760 more cars. That’s $20,655 of incremental gross profit on a car that sells for as little as $49,000. The weighted average sales price for the Model 3, S and X combined is around $63,000 (based on the number of each sold). This suggests a gross profit margin of nearly 33% per incremental car sold, which is impossible in the automotive business. No other auto manufacturer in the world comes even remotely close to this level of gross margin.

For it’s latest quarter, GM’s gross profit was 10%; in 2017, Daimler Benz’s gross profit was 20%. It’s simply not credible that Tesla generated this level of profitability on its vehicles without accounting fraud. This is especially true given that Tesla claimed that it built and used its own delivery trailers to make deliveries. This should have caused a noticeably large jump in cost of automotive revenues. Yet, miraculously TSLA’s automotive sales gross margin soared from 20.5% in Q2 to over 25% in Q3. Simply not believable and reeks of fraudulent accounting.

One area of Tesla’s income statement that contains probable fraud is SG&A expenses (sales, general and administrative expenditures). Over the previous four quarters, TSLA’s level of SG&A was running around 20% percent of revenues. It was 18.7% of revenues in Q2 2018. But this quarter, Musk somehow parted the Red Sea and was able drive SG&A down to 10.7% of revenues. SG&A outright actually fell from Q2 to Q3. SG&A has averaged $19,000 per vehicle delivered every quarter since 2014.

In Q3 TSLA reports that SG&A plunged to around $9,000 per vehicle delivered. We know Tesla brought in mechanics from its service centers around the country to help push production levels to the limit. This should have caused a large jump in SG&A.  It’s impossible to explain how a drop in SG&A expense like this occurred without access to the inside books. My best guess is that millions of dollars worth of expense invoices were mysteriously misplaced and not recorded for the quarter. This would partially explain by accounts payable soared by over half a billion dollars.

Another area of cost accounting that has red flags waving and warning flares firing is depreciation. Depreciation expense as a percent of revenues plunged from 12.1% in Q2 to 7.3% in Q3. It was 13.4% in Q3 2017.  Generically, part of the depreciation is straight-line useful life of equipment. The “tent” built in Q2 should have added to this part of depreciation.  But there’s also depreciation expense attached to each car produced and sold on a per car basis. This too should have caused an increase in depreciation. From the cash flow statement, TSLA’s depreciation expense in Q3 was $502.8 million, or $6,021 per car delivered. In Q2 the depreciation expense was $485.2 million, or $11,922 per car delivered. Again, this is theoretically and realistically unexplainable, other than fraud.

Tesla shows a cash balance of $2.967 billion at the end of Q3, up from $2.2 billion at the end of Q2. However, Telsa’s accounts payable surged by $566 million vs. Q2. It’s hard to imagine how this occurred when capital expenditures and SG&A declined. The only explanation is that TSLA stretched out its payment of bills to suppliers and vendors in order to conserve cash. This is consistent with the steady flow of smaller vendors who are forced to file legal complaints in order to get court-ordered payment judgments.

Accounting fraud would explain why there’s been a steady exodus of accounting and finance executives over the last year. The number of senior executives leaving the Company accelerated over the summer, including the Chief Accounting Officer, who quit in early September after less than a month on the job.

By the most stringent measure, TSLA is technically insolvent. Current assets less current liabilities is negative $1.855 billion. Cash balance less customer deposits is $2.062 billion. TSLA has a $230 million convertible bond payment due in November. Less this, cash is $1.832 billion. If we were to assume that accounts receivable and payable – theoretically the most liquid assets on a balance after cash – were settled tomorrow, net of cash it would leave a cash deficit of $609 million. That’s insolvency. On top of that, after the November convertible maturity, another $1 billion in debt is due by March 2019.

Keep in mind TSLA’s cash balance was artificially generated by stretching payables, slashing capex to the bone and somehow miraculously cutting back on expenses. This is simply not sustainable, let alone not credible. Note: Tesla’s capex as a percent of revenues was 7.5%. Over the last six quarters TSLA’s capex as percent of revenues has averaged 25% of revenues. In other words, Tesla is plundering its asset base and burning furniture to pay bills and show cash on the balance sheet.

To make things more interesting for the Company, it was reported last week that Tesla slipped several spots in the Consumer Reports reliability ranking. In its analysis of 29 auto brands, Tesla ranks 27th. CR characterized the Model 3 as having “average reliability.” Also of interest is the effect of newly available competition. In Norway month-to-date, Jaguar has delivered 365 newly available Jaguar i-Pace while there were 185 Tesla X+S combined. The EU has not approved the Model 3 for deliveries yet, but the i-Pace competes with the X and S models. When Audi’s e-Tron is available, I doubt there will be any demand for the Model 3 plus it will put a huge dent in European demand for Telsa’s X & S models.

Add on to this the news report that the FBI/Justice Department is probing whether Tesla misstated information about production of the Model 3 for the purpose of misleading investors. The FBI has subpoenaed former employees seeking to interview them. The FBI is looking into Musk’s public forecasts about Model 3 production vs. the actual production numbers, which turned out to be substantially lower that Musk’s continual assertions that deliveries would be significantly higher. It will be hard for Tesla to raise money with this investigation in process.

It’s been suggested that TSLA insiders knew that the FBI report was going to hit on Friday and that’s why the Company moved its earning release up a week with two days’ notice. It would also explain why the CFO exercised deep in-the-money stock options that do not expire until 2022. Musk knew that the news report would have less impact on the stock if it hit the tape a day after the fraudulently inflated earnings report. At some point, many of the large mutual fund companies with big positions in the shares will have to consider the possibility of facing breach of fiduciary duty charges for continuing to hold TSLA shares given latest the Justice Department/FBI development. Keep in mind the Justice Department has several other areas of inquiry and the SEC is examining other issues beyond the issue recently settled with Musk.

TSLA’s stock likely would have sold off this week absent the massive short-squeeze that has caused the Dow and SPX to go vertical. In fact, Tesla stock declined from it’s opening level on Monday through Tuesday’s close. In all probability, TSLA would be below $300 if the Dow and SPX simply flat-lined or drifted lower the past three days.

While not a Ponzi scheme in a strict sense because TSLA does generate revenues, TSLA requires a steady inflow of funding from the capital markets to remain solvent. At some point it will need a few billion to address the money it owes to suppliers and contractors and to service its enormous and growing pile of debt. Like Enron, at some point its cash furnace will run out of printed money to fuel it and the stock will collapse. I provide my Short Seller’s Journal subscribers with both short-term and long-term short-sell and trading ideas on Tesla.

The Homebuilder Stock Train Wreck

One of the proprietors of StockBoardAsset.com tweeted about two weeks ago wondering when the stock market was going to start pricing in a slow-down in the economy. To that I responded by pointing out that the DJ Home Construction index is starting to price in a housing market crash. Residential construction + all economic activity connected to selling and financing existing homes is probably around 25-30% of the GDP when all facets of the housing market are taken into account (realtor activity, mortgage finance, furniture sales, etc). It’s quite surprising to me that almost no one besides the Short Seller’s Journal has been pounding the table on shorting the homebuilders.

In the mid-2000’s financial bubble, the housing market’s demise preceded the start of the collapse of the stock market by roughly 18 months.  This is what we are seeing now. Again, to rebut the tweet mentioned above, the homebuilder stocks and the housing market are strong leading indicators.

The chart above is the DJ Home Construction Index on a weekly basis going back to April 2005. The homebuilder stocks peaked in July 2005, well ahead of the 2008 financial system de facto collapse.  Back then the index plummeted 51% over 12 months before experiencing a dead-cat bounce.  So far it’s dropped 33% from January 22nd.  Regardless of the path down that the index follows this time, it still has along way go before the excesses of the current housing bubble are “cleansed.”

The housing market may be melting way more quickly than I expected. Existing home sales for September showed that sales dropped 3.4% from August on a SAAR basis (seasonally adjusted annualized rate) and 4.1% year-over-year. Sales dropped to a 3-year low. August’s original report was revised lower. It was the 7th straight month of year-over-year monthly declines. The 5.15 million SAAR missed Wall Street’s estimate by a country mile. It’s always amusing to read NAR chief “economist” Larry Yun’s sales-spin on the bad numbers, if you have the time.

New home sales for September cratered, down 5.5% from August. This is a “seasonally adjusted, annualized rate” calculation so seaonality is theoretically “cleansed” from the monthly comparison.  BUT, August’s original print was revised from 629k to 585k, a rather glaringly large 7% overestimate.  The 553k print for September was 12% below the fake August report.  Likely a gross overestimate by the Census Bureau plus an unusually large number of contract cancellations between the original report and the revision.  But here’s the coup de grace:  new homes sales for September plunged 13.2% year over year from September 2017. The median sales price plummeted – so “affordability” was less of a factor. And inventory soared to 7.1 months – the highest since March 2011.  Hey Larry (Yun of the NAR) – care to comment on the inventory report for new homes?

Pending home sales – a leading indicator for existing home sales (pendings are based on contract signings, existing sales are based on closed contracts) were up slightly in September from August. But August’s original pending sales report was revised lower.  These numbers are seasonally adjusted and annualized.  Pendings were down 3.4% year over year, the 10th YOY decline in the last 11 months.

Never mentioned by the media or highlighted by the NAR reports, “investor”/flipper’s have been about 15-20% of the existing home sales volume for quite some time. I would suggest that many of newer “for rent” signs popping up all over large metro areas are coming from flippers who are now underwater on their buy, hoping to earn some rental income to cover the carrying cost of their “investment.”

At some point flippers who are stuck with their flip purchases are going to panic and start unloading homes at lower prices. Or just walk away. This was the catalyst that started the pre-financial crisis housing crash in 2007/2008.

The housing market is on the precipice of a large cyclical downturn.  My view is that this decline will be worse than the previous one.  The Fed injected $2.5 trillion into the housing market to revive it.  That heroin has worn off and the printed money and debt junkie would require twice as much to avoid death from withdrawal.  The bottom line is that, despite a 33% drop in the homebuilder stocks since late January,  these stocks – and related equities – have a long way to fall.  From July 2005 to November 2008, the DJUSHB dropped 87%.  It will likely be worse this time because the homebuilders are bloated up with even more debt and inventory than last time around.

I cover the housing market and homebuilder stocks in-depth in the weekly Short Seller’s Journal.  Myself and my subscribers have made a lot of money shorting this sector, including using put options.  To find out more, click here:  Short Seller’s Journal information.

Short Rallies, Cover Sell-Offs

I think we can all agree, it was an interesting week last week in the stock market, to say the least. For the week, the Dow was down 2.9%, the SPX was down 3.9% and the Nasdaq was down 3.8%. All three indices closed below their 200 dma. It can be argued that, on a short-term basis, the stock market is “oversold” using the MACD as an indicator. However, it appears that hedge fund algos are being re-programmed to start selling the “V” rallies that have characterized this stock market for the last ten years – something I suggested in a previous SSJ would eventually happen.

An argument can easily be made that the stock market could be cut in half from the current level and still be overvalued. I made this argument in 2007 to friends and colleagues. Back then the SPX dropped from 1,576 to 666 – more than cut in half (57%). And if would have fallen farther if the Fed and the Bush/Obama Governments had not intervened. If the SPX drops 57% this time around, it would take the SPX down to 1,274. I believe it could easily fall farther than that.

Despite the abrupt nature of the sell-off over the past month, the stock market potentially still has a long way to fall:

The chart above is a weekly time-frame that encompasses the 2007-2009 decline. The stock bubble this time around is significantly more extreme than the previous bubble. In fact, by many measures, this is the most overvalued stock market in history. I included the MACD to illustrate that, on a weekly basis, the SPX is not even remotely oversold. I sketched in a white line of “support.” While I’m sure every market analyst their favorite “technically-based” area of support, the line I drew is around the 2,550 area on the SPX.  Below that line, there’s about 400 points of “air.”

The above commentary is an excerpt from the latest Short Seller’s Journal. Some of my recent home run shorts include Tilray, Wayfair and Netflix. The issues includes strategies for shorting Tesla, Amazon and several semiconductor stocks. You learn more about this newsletter here:   Short Seller’s Journal information.

“I’m up about $40k because of your short ideas. So thanks for that!” – Subscriber who joined in mid-June, 2018

Overvalued Stocks, Undervalued Gold And Silver, Insolvent Tesla

Craig Hemke, the well-known proprietor of the TF Metals Report  invited me on this his new “Thursday Conversation” podcast to discuss the stock market,  economy, precious metals and Tesla.

“If you adjusted the current S&P 500 earnings stream using the same GAAP accounting standard that were applied in 1999, the current S&P 500 P/E ratio – expressed in 1999 GAAP accounting terms – would be the most overvalued in history.”

“Deutsche Bank is a zombie bank that would have blown up in 2012 if the Bundesbank, ECB and German Government hadn’t bailed it out.”

“Elon Musk used a Halloween bag full of accounting tricks to generate GAAP ‘net income.'” The fact remains that Tesla is closer to insolvency this quarter than it has been at any point in the history of the Company.

“Mining stocks are cheaper now in relation to the S&P 500 and to the price of g old than they were at the bottom of the 20-year gold bear market in 2001”

You can listen to my conversation with Craig “Turd Ferguson” Hemke by clicking on the graphic below:

(NOTE: You can download the MP3 by using this LINK and right clicking on the audio bar)

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:   Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

A Large Decline In Stocks Accompanied By A Huge Move Up In Gold

Elijah Johnson invited me onto the Silver Doctor’s precious metals podcast to discuss why mining stocks are historically cheap and why an expected crash in the stock market will be accompanied by a soaring precious metals sector.   We also discuss why Trump is beating up the Fed over rate hikes:

Note on my Mining Stock Journal. I mentioned a highly undervalued intermediate gold and silver producer in the podcast. I also want to note that occasionally I issue “sell” or “avoid” recommendations. I happened to notice yesterday that Novo Resources was below $2.  A year ago I strongly urged my subscribers who owned Novo  in my October 19, 2017 issue to sell the shares when the stock was above $6. Here’s what I said:

I am following this saga with fascination because it’s a great study in mass crowd psychology and investing. It blows my mind that this stock can have a $1.3 billion market cap with almost no evidence of a mineable resource other than small, pumpkin-size “seeds” of gold samples. I exchanged emails with my junior mining company insider to get some interpretation of the results and affirmation of my view: “These nugget deposits are very difficult to model and drive mining engineers absolutely nutz! This is what happened with Pretium’s first shot at a published resource at the Brucejack project in BC. The gold is coarse and not equally and predictably distributed, so the consultant had a very difficult time modeling the deposit and therefore coming up with an agreeable resource estimate.

You can learn more about the Mining Stock Journal here:  Mining Stock Journal information

Mining Stocks Have Not Been Cheaper In The Last 78 Years

It’s important to keep in mind that the mining stocks have been sold to levels well-below their intrinsic value – in the case of larger-cap producing miners. Or their “optionality” value – in the case of junior mining companies with projects that have a good chance eventually of converting their deposits into mines. “Optionality” value is based on the idea that junior exploration companies with projects that have strong mineralization or a compliant resource have an implied value based on the varying degrees of probability that their projects will eventually be developed into a producing mine.

In relation to the price of gold and silver, the mining stocks generically (i.e. the various mining stock indices like the HUI or GDX) have rarely traded at cheaper levels than where they are trading now:

The chart above, sourced from Incrementum (the October 2018 chartbook update to the “In Gold We Trust” 2018 report), shows the ratio of Barron’s Gold Mining Stock Index (BGMI) to the price of gold (gold line) and the S&P 500 (blue line) going back to 1950. As you can see, gold mining stocks are trading at their lowest level relative to gold and the broad stock market in 78 years. The two dotted lines show the median level for each ratio since 1950.

As you can see, mining stocks do not spend much time below the median ratio. I strongly believe that the chart reflects a high probability of a major move higher in precious metals and mining stocks that is percolating, if not imminent. Certainly the global economic, financial and geo-political risk fundamentals support this assertion.

Unless the precious metals mining business is going away, that chart implies that now is one of the best times since World War Two to buy mining shares. Not surprisingly, industry insiders must agree with that assertion, as mining stock acquisition deal-flow has picked up considerably in the last few months. Most of the deals have been concentrated in the junior mining stocks.  But Barrick’s acquisition of Randgold, announced September 24th, is the largest precious metals merger in history. I strongly believe Barrick bought Randgold out of desperation to replace its rapidly depleting gold reserves.

Fundamentals aside, I believe gold is technically set-up to make a big move:

The chart above shows GLD (used a proxy for the price of gold) from late 2004 to the present on a weekly basis. I’ve sketched a trendline that goes back to 2004. 2004 is when gold finally pushed through $400 for good. It was right before that event that Robert Prechter, of Elliot Wave fame, predicted that gold would fall to $50. While I’m not a big fan of analysis based on lines drawn on charts, this particular tend-line has held intact since gold bottomed in December 2015.

Notwithstanding chart analysis, the COT technicals have never been more bullish. This assertion assumes, of course, that the track record of hedge funds being wrong when positioned long or short at an extreme level remains intact.