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A Bank Crisis Is Percolating
I didn’t watch Jay Powell on “60 Minutes” because I knew it would mainstream media sugar-coated drivel wrapped around propaganda as the obsequious 60 Minutes anchor tossed J-Pow meatball questions. But I did learn that Powell asserted that it is unlikely that there will be another real estate led bank crisis, particular with the TBTF banks. I course, there’s no way he can honestly say that he has a clue as to the potential magnitude of CRE exposure via OTC derivatives at the TBTF’s – no one does. And Powell’s statement is certainly reminscient of when Ben Bernanke asserted that the subprime debt problem was “contained” in 2007…
The following is the opending salvo to my weekly bear newsletter. You can learn more about it here: Short Seller’s Journal
Note: The FOMC removed the sentence “The U.S. banking system is sound and resilient” from the FOMC Policy Statement released Wednesday. Read into that what you want but if the Fed was unwilling to make that assertion, it’s likely that the bank crisis from early 2023 is rearing its ugly head again. Note that the Fed “stabilized” the banking system back then by promptly printing money to inject $400 billion in reserves in the banking system. It also set-up the Bank Term Funding Program without a ceiling, which had $167.7 billion drawn from it as of January 25th.
The Fed also announced that it was cutting off the funding from BTFP in March and it is drawing up a plan to encourage banks to use the Fed Discount Window for liquidity needs. The Discount Window is perceived as a “last resort” lending facility and a signal that the borrower is in financial trouble. Banks borrow overnight and pledge high-quality fixed income collateral like Treasuries, agency securities, etc.
Possible trigger for a big stock market sell-off? Ironically, a week after the Fed announced that it would stop making new BTFP loans on March 11th as scheduled, $168 billion in deposits flowed out of the banks. It’s the biggest weekly drop since the SVB crisis. There’s thus a good possibility that the continuation of the 2023 regional bank crisis may be percolating. KRE, the regional bank ETF was down 7.2% for the week.
The stock price of New York Community Bancorp (NYCB) plunged 37.6% on Wednesday (January 31st) after it reported a surprise loss for Q4 and cut its dividend. The stock was down another 13.8% the next day. It’s down 56% since the end of July.
NYCB closed the acquisition of Flagstar Bank in Q1, which “diversified” the bank’s loan business into residential mortgages and the servicing of residential mortgages. It also acquired Signature Bank’s commercial and industrial loan portfolio deposits. Prior to these acquisitions, NYCB was primarily a multi-family CRE lender.
Multi-family housing mortgages represent 44.5% of NYCB’s loan portfolio. Commercial real estate and commercial property acquisition, development, and construction represents 15.9% of NYCB’s loan portfolio. CRE loans in total represent 60% of the bank’s loans. Total interest income declined 4.3% from Q3. The YoY comparison is not relevant because of the two acquisitions mentioned above. The source of the loss in Q4 was a $552 million provision for loan losses. The reason for the provision is the expectation of write-downs in its CRE portfolio, particularly the office sector. In addition, a portion of the credit loss provision is to reflect, as the banks states it, “potential repricing risk in the multi-family portfolio.” That’s a polished way to warn that it expects write-downs in its multi-family loan holdings.
For the full-year, NYCB reported $2.341 billion in GAAP net income – but there’s a catch. In Q1 the bank recognized a “bargain purchase gain” (non-cash) of $2.150 billion, representing the difference between what it paid for Signature Bank’s assets and the guesstimated “fair market value” of the assets. Part of the loan loss provision is a partial reversal of that “gain.” Removing that non-cash bump in income, NYCB’s net income for the full-year was just $191 million, down from $650 million (70%) in 2022. So far the acquisitions have been failures.
The bank charged-off (net of recoveries) $223 million in loans in 2023. Of that, $119 million was multi-family and $117 million of that was in Q4. The bank also reported $442 billion in non-performing loans at the end of 2023, $266 million of which were multi-family/CRE and another $95 million were residential mortgages. The magnitude of the provision tells us that the bank expects to write-off quite a bit more multi-family and office debt as well as residential mortgages. In addition, the bank classified another $250 million in loans as 30 to 89 days past due.
In my opinion, this downward spiral in NYCB’s loan portfolio is just getting started. The quality of NYCB’s total loan portfolio will continue to decline. The $83.6 billion in loan assets is financed with $81.3 billion in checking/money market deposits, savings deposits and CD’s. It also has $20.2 billion in wholesale borrowings, which are the loans from the Federal Home Loan Bank. This source jumped from $13 billion at the end of Q3 to $20.2 billion at the end of Q4. Recall that bank loans from the FHLB spiked higher just prior to the regional bank crisis in March 2023. I can’t say for certain, but it’s possible the jump in FHLB loans from Q3 is an indicator of financial stress.
A good, cheap way to bet on the demise of NYCB is with January 2025 or 2026 $3 puts. But it may take a while for NYCB to grind lower, particularly if the Fed aggressively cuts rates later this year. But I wanted to discuss what happened to NYCB because Japan’s Aozora Bank ADRs plunged 26.1% Thursday after slashing the value of some of its U.S. office tower loans by more than 50%.
Aozora is Japan’s 16th largest bank by market value and said it would post a $191 million loss for the fiscal year vs previous guidance of $164 million in profits. The bank’s biggest US office loan exposure is Chicago and Los Angeles and it disclosed that it has $719 million in non-performing loans in the U.S. It increased its loan-loss reserve ratio on U.S. offices to 18.8% from 9.1%.
While everyone was discussing the potential for a CRE debt crisis to foment this year, the NYCB and Aozora earnings reports confirm that it has already begun. $117 billion in CRE office debt needs to be refinanced this year, led by buildings in NYC ($10 billion), SF (nearly $4 billion), Chicago (over $2 billion) and LA ($2 billion).
The problem is that many buildings in these cities are worth, based on recent market transactions, 50% or less of their book values. Blackstone is marketing a Manhattan tower with a $308 million mortgage for $150 million. That’s the offer price. The building, if it sells, will sell for a lower valuation. The loan-to-value on many buildings is 100% to 200%. The vacancy rate of offices in NY, SF, Chicago and LA is near 20%. An article in the Denver Post last week reported that the vacancy rate in downtown Denver is 37%. If these loans can not be refinanced, they will need to be severely restructured or put in bankruptcy for liquidation. This will blow holes in regional bank balance sheets and REIT NAVs. It could well also blow big holes in the TBTF bank balance sheets via OTC derivatives exposure.
A Rate Cut Will Send Gold / Silver Soaring And The Dollar Much Lower
“The Fed knows it can’t risk cuting rates right now [despite obvious signs of a very weak economy] or he risks the dollar falling off a cliff.”
The FOMC meeting and Policy Statement release is a big event in the financial markets. Every word in that Statement is scrutinized, and CNBC’s Steve Liesman works up a sweat counting the punctuation marks in the Statement. What I neglected to point out is that the statement, “the U.S. banking system is sound and resilient” was removed from the latest FOMC Policy Statement Given the developments related to New York Community Bancorp and Aozora Bank (Japan) announced that they chocked on their heavy exposure to U.S. CRE loans. I provide a more detailed look at NYCB’s financials in the upcoming issue of my Short Seller’s Journal. But don’t forget the Mining Stock Journal. I noticed today that several junior microcap project development stocks started to show signs of life. These stocks are where the biggest payoffs reside in the mining stock sector. I cover several that I believe are 5-10 baggers with gold at $2050 and silver at $23.20. The upside is much greater if we get a big move higher in the metals. You can learn more about my mining stock newsletter here: Mining Stock Journal
Chris Marcus (Arcadia Economics) and I discuss the FOMC Policy Statement and hammer Jay Powell for his brutal dishonesty:
The Mining Stock Journal is going up in price, from $20/month to $40/month. For a limited time you can subscribe for the current price and be grandfathered at that price: Mining Stock Journal information
Fed “Fuel” Will Propel Gold and Silver Higher
The commentary below is from the January 12th issue of the Mining Stock Journal. You can learn more about this mining stock newsletter here: MSJ Information
The stock market bubbled back up in 2023 because the Fed, despite a gradual reduction in its balance sheet, has been injecting liquidity in various forms into the banking system. This occurred explicitly in March 2023 when it printed $400 billion to resuscitate the regional banks. The Bank Term Funding Program, though small relative to the Fed’s balance sheet, is another form of banking system liquidity. There’s some other “nooks and crannies” through which the Fed is injecting liquidity into the banks but I believe the Fed will have to crank up the printing press again aggressively to fight both a banking system crisis and a debt crisis. This will be the fuel that propels the precious metals sector.
With respect to the Fed’s implicit pivot on its interest rate policy at the November FOMC meeting, systemic financial conditions eased in November and December combined by the greatest amount over a two-month period in the history of metric:
This frenetic easing of financial conditions orchestrated by the Fed is the reason the precious metals sector outperformed the stock market in the last two months of 2023. Between October 6th and year-end, gold ran from $1823 to $2071, or 13.6%. Similarly, silver ran from $20.85 to $23.76, or 14%. Over the same timeframe, the S&P 500 rose 10% and the Nasdaq climbed 11.8%. The mining stocks as represented by GDX jumped 15.3% over that time period.
I find it amazing that gold and silver outperformed the stock market while GDX outperformed the S&P 500 by 50% from early October through year-end, yet there was zero commentary to that effect from the mainstream financial media. It is this anonymity factor with respect to the precious metals sector that makes it a textbook value investment play. This performance by gold, silver and the mining stocks should be well set-up by financial and economic tailwinds which will continue, if not intensify, in 2024.
Specifically, an examination of several individual bank quarterly financial statements reveals that the delinquency, default and charge-off rates are increasing at an increasing rate, particularly in commercial real estate and household debt. For banks that emphasize consumer credit, like Synchrony, Discover and Capital One, the delinquency and default rates are much higher than the average across all banks. The rate of delinquency in subprime auto loans is higher than it was at the peak during the great financial crisis era.
This financial stress in the banking system is hidden in plain sight. It simply requires examining bank financial filings. But mainstream media reporters would rather just regurgitate the “banks are in good shape” propaganda fed to them by the Fed and Biden Administration. For now, the financial stress at these banks has been subtly “papered over” by the Fed as described above. But at some point it will require considerably more liquidity creation than has been made available up to this point.
Hence, the probability is high that 2024 will witness the official rebirth of QE, though I’m guessing the Fed will label the program with something other than “QE” (something like current not QE-QE “Bank Term Funding Program”). The only question in my mind is the scale and duration of the precious metals sector bull move that I believe will unfold over the coming months and quarters in response to the next stage of full-blown money printing.
In that regard, the Monetary Base (bank reserves plus currency/ coin in circulation) has been rising since February 2023. This suggests that the Fed started injecting reserves into the banking before the regional bank crisis surfaced which indicates that the Fed knew what was coming. The Monetary Base is up 9.5% since February 2023. Keep in mind that the Fed removed the reserve requirement for banks in 2020, which means that the increase in bank reserves per the Monetary Base creates a “multiplier effect” that is likely the reason behind the reflation of the stock bubble and dramatic drop Treasury yields at the long end of the yield curve.
The point here is that, while it seems obvious that the Fed will need to crank up the printing press this year to keep the banking system solvent and to help fund the coming flood of new Treasury bond issuance, by some measures the Fed has already begun injecting liquidity into the banking system. The rising Monetary Base is just one indicator but it partially explains the unprecedented spike in financial conditions detailed above. Eventually these monetary system developments will translate into much higher prices for gold and silver.
DR Horton Stock Plunges On Earnings – A Bad Omen For Homebuilders
Note: the following analysis and commentary is similar to the content I provide in my weekly short selling newsletter. To learn more follow this link: Short Seller’s Journal info
DR Horton – $DHI – is down 9% after reporting its FY 2024 Q1 earnings. The Company “beat” consensus revenues but “missed” Wall Street’s earnings forecast. While aggressive price cuts and a heavy dose of incentives enabled the Company to generate a 6.4% revenue growth YoY, operating income and net income declined. It’s like Tesla. Stimulate sales (and “pull forward” future sales into the quarter just reported) and the expense of profitability. For DHI it required price cuts, upgrade incentives, and mortgage rate buydowns. With the latter, the homebuilder either gives money to the buyer to “buy down” the mortgage rate for the first year or two or pays the mortgage directly on behalf of the homebuyer to temporarily know the rate down. This expense hammers profit margins.
Despite the fact that DHI raised its guidance for its full-year FY 2024 – which in and of itself is laughable – it has a big problem on its balance sheet. Inventory ballooned in its FY Q1. One thing about that raised guidance. Homebuilder CEOs are like Elon Musk – they’ll say anything and everything to get the stock price higher. Didn’t work this time because the share price is down 9.7% post-earnings as I write this.
Another ugly development is the jump in inventories from its FY Q4 2023. The book value of residential lots under construction is up $ $467 million from last quarter (5.2%). And the Company must have gone on a lot-buying spree because the book value of residential lots and land jumped $1 billion (9.4%) from its FY Q4 2024. At some point, as potential buyers become immune to the current level of price cuts and incentives, DHI, as well as all of the homebuilders will be forced to implement even steeper price cuts in hopes of stimulating sales volume. But, at some point, because of affordability issues (discussed below), it will be like trying to push toothpaste back into the tube. At that juncture, homebuilders will be forced to write-down the value of their bloated inventory which leads to very bloody income statements.
I not only believe that DHI will ultimately fall well short of its deliveries guidance for 2024. I also believe the stock has the potential to get cut in half from the current level. The homebuilder stocks have bubbled up to all-time high valuation levels relative to the value of their order backlogs and relative to the general outlook for the housing industry. Yes, the homebuilder sentiment index bounced quite a bit in January. But recall that I suggested there might be a dead-cat bounce in the first couple months this year in sales and sentiment. The builders are excited because mortgage rates have dropped from 8% to 6.5%. But even with that, homes are at the least affordable in history (chart source @charliebilello):
Existing home sales do not offer any hope for optimism – and new homes are considerably more expensive on average than used homes making them even less affordable. Existing homes sales for December declined 1% from November on a seasonally adjusted annualized rate basis (SAAR), much worse than the +0.3 increase projected by Wall Street. Sales were down 6.2% YoY. On a SAAR basis, the December SAAR was the lowest since 2010. But on an annual basis, it was the worst year going back to at least 1995.
To be sure, part of the problem continues to be supply. But the months’ supply in December was still slightly above the average of 2023 as well as the previous two years. Affordability is the culprit. Again, there may be a small bounce in home sales activity in the first couple of months this year. But I expect the home sales to continue grinding lower, particularly when the stock market resumes its bear market.
QE Has Already Begun – The Next Upleg In Gold Is Coming
I find it quite amusing that the market believes inflation is tied to rates – the propagandists at the Fed did their job there. Distract while creating bank reserves (print money) out of plain sight. The Monetary Base is up over 7% since March. M2 is also a bit higher. This is why the rate of inflation has been slowly rising again since June. It’s also why gold is up 7% and silver is up 2% since the end of June (silver is up 15.9% since early March).
The primary driver of my bull thesis is the shift in the Fed’s monetary policy. It was only a matter of time before this occurred. The Fed informally “pivoted” away from hiking rates at its November FOMC meeting. The markets immediately began to price several rate cuts in 2024 into stock valuations and bond yields.
“Follow the money” – While most observers are watching what the Fed does with interest rates, few have noticed that the Fed stopped shrinking the money supply in response to the regional bank crisis in March 2023. In fact, the M2 measure of the money supply has actually increased slightly since April 2023 (while everyone merely glares at the YoY %-change in M2 that circulates social media) . In addition, the Monetary Base, consisting of bank reserves and coin/currency in circulation, has increased over 7% since March 2023. This is the primary reason why the price of gold ran from $1,825 in March to $2,070 by year-end 2023.
Money printing – much more so than changes in interest rates – is the fuel that drives precious metals prices higher. While the economy is likely headed into a nasty recession this year (many sectors of the economy, like manufacturing, were already contracting during 2023), the primary factors that dictate Fed policy are the health of the banking system and the monetization of new Treasury bond issuance. Both factors will need to be addressed, in my opinion, with more money printing.
Although the Fed’s “dual mandate” is to use its monetary policy to promote stable prices and full employment, its first priority is to prevent the “too big to fail” banks from collapsing. We saw this in 2008, again in 2020 and again in March 2023. In 2023, in response to the collapse of some big regional banks due outflow of checking and savings account funds from banks into money market funds, the Fed swiftly printed $400 billion and injected it into the banking system. In addition, it made available a “QE-like” facility called the “Bank Term Funding Program” which made funds – money created by the Fed – available to all banks.
The $400 billion was removed by late June. But growth in the Monetary Base between March and the end of November (the most recent money supply report) shows that the Fed actually increased bank reserves by $410 billion. Very little of this is explained by the change in the level of currency/coin in circulation. This means that it used various “back door” liquidity facilities to replace the $400 billion it printed and then removed plus it added an additional $410 billion, of which only $147 billion is explained by the Bank Term Funding Program. In other words, the Fed is opaquely creating banks reserves (aka “printing money”) to address a burgeoning liquidity problem in the banking system.
But the Fed will also have to help fund new Treasury bond issuance at some point this year. Over the next twelve months, an unprecedented $8.2 trillion in Treasury bonds will have to be refinanced. In addition, based on the first quarter of the Government’s fiscal year (starting October 1, 2023), the Government’s spending deficit on an annualized basis would be over $2 trillion. This is additional new debt issuance that will have to be funded – a task made more difficult by the fact that our Government’s biggest foreign financiers (China, Japan and OPEC) have been reducing their participation in Treasury auctions.
Unless the Fed can find investors large enough to replace the missing foreign investment capital, it will either have to be the buyer of last resort or risk watching Treasury yields soar to a level that might induce foreign capital back to the table at Treasury bond auctions. Because considerably higher interest rates would throw the U.S. into an economic depression, the second motive for renewed money printing in 2024 will thus be a requirement for the Fed to bridge the gap between the supply and demand for Treasuries.
I strongly believe that the financial and economic fundamentals are set up quite similarly, only much worse, to the conditions in 2008 that led to the Great Financial Crisis. As such, I also believe that the Fed’s response to the next full blown financial system crisis will be much larger than its responses in 2008 and 2020. This should result in a cyclical bull move that I believe will be bigger than the move from late 2008 to mid-2011.
If you are interested in mining stock ideas to take advantage of the next bull move coming, follow this link to learn more about my Mining Stock Journal.
From a long time subscriber after the last issue: “Sometimes the best recommendations are what NOT to buy rather than what to buy. I really appreciate your insights on Dolly, West Red Lake and AbraSilver. Good analysis like that makes it easier for us amateurs to decide whether to buy or not. Definitely helps flesh out the decision-making process.”
Household Financial Distress Is Rising – Short Ally Financial
The following is an excerpt from the Decemer 31, 2023 issue of my short seller’s newsletter. To learn more follow this link: Short Seller’s Journal
As an indicator of rising consumer stress and stretched household finances, a report from Edmunds.com showed that auto loan borrowers with negative equity were underwater by an average of $6,054. This is the most since April 2020 and well above pre-pandemic averages. Auto loan delinquencies and defaults continue to rise as do repossessions. This is a double-whammy for auto loan lenders because used car prices are falling which means the value of collateral backing these loans is declining. This also means that recoveries are declining and write-offs are increasing – and will continue to increase. I discussed this with respect to $CVNA in the December 10th SSJ.
This is bad news for Ally Financial (ALLY – $35.17). While ALLY offers mortgages and credit cards, auto loans represents 78% of its finance receivables and loans. For the latest quarter, ALLY’s pre-tax income from continuing operations plunged 45.3%. In Q3, 33% of its auto loan originations were to subprime borrowers, which is consistent with the historical pattern. I suspect this will bite ALLY in the ass in 2024.
The 30+-day and 60+-day delinquency rates have been rising steadily over the last four quarters. The charge-off rate rose 54% in Q3 YoY. The declaration of a “delinquent” loan is nebulous, however. This is because lenders will grant an extension (temporary forbearance) up to a certain point. Extended loans are not classified as delinquent. Recall from the last issue that CVNA has granted extensions on over 10% of its outstanding loan balance in September, up from 1.97% in September 2022. While it is likely that ALLY has not extended 10% of its loans outstanding, I have no doubt that it has extended a material percentage (over 5%). Ally is likely massaging its GAAP numbers with the granting of extensions, the deferment of charge-offs and the minimizing of its allowance for loan losses (a non-cash GAAP expense). That’s a common source of GAAP earnings management with banks and finance companies.
While the financial distress numbers above may look small in relation to the total size of ALLY’s balance sheet, I believe that they understate the true level of delinquencies and defaults that ALLY may be experiencing. Moreover, when loans start to go bad because the economy is in a recession, the rate of default accelerates. I expect this to happen in 2024.
Recall that ALLY was formerly GMAC (the auto finance arm of General Motors). While Obama bailed out GM, GMAC went into Government receivership. It was eventually “sterilized” with Fed and taxpayer funds and IPO’d as ALLY in 2014. Given the subprime credit quality of over one-third of its auto loans, I think it’s a good bet that ALLY goes “chapter 22” sometime in the next 2 years, barring a Fed and taxpayer-funded bailout.
The stock has run from $22.50 to $34.92 in two months. ALLY in that respect could be considered a meme stock. From the viewpoint of economics, given the latest data on auto loan delinquency rates at several different banks and finance companies that do auto loans, there’s no fundamental reason whatsoever for that big move in ALLY’s stock price. ALLY’s profitability is declining and the riskiness of its balance sheet is rising.
For this play, I think it makes sense to go out at least six months and use OTM puts. I like the June $30 puts and may start a position this week unless it looks like the standard beginning of a new year rally unfolds. Another interesting high ROR/high-risk play that won’t require much capital is the January 2025 $20 puts. Those traded last at 79 cents on Friday. These puts were trading at $2.80 at the beginning of November.
The same analysis holds true for Synchrony Financial and Discover Financial Services. These two companies have a huge percentage of their assets in credit card loans. At least auto loans are secured by the automobiles. Credit card debt is unsecured. The same ridiculous market impulse that caused ALLY’s chart to like it does has caused the same with SYF and DFS.
The U.S. Is A Giant Ponzi Scheme
The California State Teachers’ Retirement System, the country’s second-largest pension fund, may borrow more than $30 billion to help it maintain liquidity without having to sell assets at fire-sale prices, according to a new policy its investment committee will consider this month (link).
The Fed Gave Precious Metals Investors The Green Light
This is the opening commentary in the December 14th issue of my Mining Stock Journal. I also the updates on two my portfolio stocks (I also reviewed Franco Nevada in the issue). To learn more, follow this link: Mining Stock Journal information
Yesterday (Wednesday, December 13th) the Fed signaled the end to interest rate hikes and, in so many words, implied that now the timing of rate cuts is being informally discussed. While stocks and bonds staged a rally, the precious metals sector sprinted higher. Gold and silver rose 2.4% and nearly 5%, respectively, while the mining stocks as represented by GDX soared over 6%. Across the board, the precious metals sector and mining stocks in terms of percentage price gains ran circles around the rest of the stock market. This should be the start of a long, sustained bull cycle in the precious metals sector that could take even seasoned gold bugs like me by surprise with the size of the moving coming.
Based on the FOMC policy statement from the December FOMC meeting, combined with what I believe are the key comments from Powell’s post-FOMC media circus, for all intents and purposes the Fed has pivoted toward easing with respect to its interest rate policy. In addition, I believe there was a subtle signal – intentional or not – that points to the potential for an eventual pivot from QT to more QE. As such, I believe the Fed has triggered the next big move higher in the precious metals sector.
As an aside, I have to believe in order for the Fed to lay itself out like it did Wednesday, it must be seeing highly adverse events unfolding “behind the curtain” in the banking and economic system.
Here are the salient comments from Powell (sometimes my English major comes in handy):
“Policymakers are thinking we have done enough.” Translation: “put a fork in the rate hikes”
“We haven’t worked out if we will follow a threshold-based path for cutting rates.” Translation: “We’re already discussing the implementation of rate cuts.”
“You need to reduce restriction on the economy well before 2%.” This last statement is measured confirmation that the Fed will soon start to cut rates. But the term “restriction” is intentionally nebulous. The meaning can encompass both rate hikes and the expansion of the money supply. Rate cuts in 2024 are a foregone conclusion. However, based on the Fed’s actions this year in response to the banking crisis, I believe “reduce restriction” means that the Fed will take further action in 2024 to increase banking system liquidity though it will likely be forms that are different from overt QE.
Though the Fed reaffirmed that QT program will remain intact (for now), it has used other means to inject liquidity into the banking system. In March the $400 billion it printed to prevent even more regional banks from collapsing is one example. The Bank Term Funding Program, which increases in size almost weekly, hitting an all-time high last week, is another form of QE (the Fed takes long-maturity fixed income assets at par value from the banks in exchange for giving the banks capital – that’s QE).
In addition, the Reverse Repo Facility has declined from $2.55 trillion in December 2022 to $823 billion, or $1.7 trillion as of December 13th. While this does not affect the size of the Fed’s balance sheet, it has enabled the dissemination of that $1.7 trillion into the financial system. The facility served as a “holding tank” for a couple trillion dollars worth the over $4 trillion the Fed printed during the pandemic period.
The facility was a way to withhold that money from the financial system and real economy in order to avert even worse inflation. The Fed could incentivize the retention of funds in that facility by raising the rate it pays. Instead it has let it leak out over the last 12 months because it is needed either to help fund new Treasury debt issuance or shore up banking system liquidity. Though the CPI will be rigged to hide it, this liquidity will stimulate price inflation.
More opaque is a $500 billion bailout facility created in 2021 called the Standing Repo Facility. This facility was the successor to the repo operations that began in September 2019. Establishing it in 2021 was done to make sure that the start of bailout measures are already in place when the next big bank crisis hits. This is different from the BTFP because the BTFP is open to any and all banking institutions. The Standing Repo Facility is limited to the list of primary dealers, which are the big banks, domestic and foreign, that have been approved to help underwrite and fund Treasury debt auctions. The SRF is, in effect, a ready-made QE facility the banks determined to be systemically important.
The Fed thus has in place a couple different avenues available by which it can inject liquidity into the domestic and international banking system as needed and it can direct this liquidity at specific banks. Just recently, a little-known bank outside of Japan was added to the list of banks on the Standing Repo Facility. This is why I maintain the view that the Fed has already been engaged in subtle forms of quantitative easing.
The point I’m making is that, despite the FOMC’s affirmation that it will continue with its balance sheet reduction plan, it’s an optical illusion. The next phase of quantitative easing, also known as “money printing,” has begun and precious metals investors have been given the green light to invest aggressively in the sector.
For point of note, I don’t necessarily expect the junior project development stocks to take off all at once. In fact, I hope they lag the larger cap stocks for a while. I also expect that large moves in micro-cap juniors will occur at any given time to specific individual stocks based on individual company news releases or positive events. Twenty-two years ago I likened this aspect of junior stock investing to watching popcorn pop. You don’t know when a specific kernel will pop but you know most of them will eventually. My point here is don’t be discouraged if some positions lag. At some point any stocks with merit – and many without merit – will make big moves when you least expect it.
In brief: Cabral Gold (CBGZF, CBR.V – US$0.11) released more drill results from the oxide material at the Central Gold deposit. The assays show that drilling continues to hit wide intervals of high-graded gold mineralization. One intercept showed 6.5 gpt over 2 meters within 28 meters of 1.2gpt. The results are important because they demonstrate and confirm continuity and confidence in the oxide blanket mineralization as well as help optimize the resource model for the PFS the eventual mine operation. Cabral continues to be egregiously undervalued. I added shares today. Alan Carter (CEO) told me that his excitement about this project keeps him up at night!
i-80 Gold (IAUX, IAU.TO – US$1.70) released more drill results from Granite Creek. Ordinarily I have not been updating every drill result release because there’s been so many, especially from Ruby Hill and Granite Creek (this is a good thing because it shows the Company is serious about aggressively and expeditiously advancing both projects). But today’s results stand out because of the high grades encountered underground. Just one example is 31.1 gpt over 21.9 meters. The stock jumped 8% on the news.
This degree of high-grade is why big companies like Barrick and Newmont spend a lot of capital developing and processing Carlin Trend underground high-sulphide ore. It’s what makes access to an autoclave so valuable. It’s why I think IAU, currently valued at $500 million, will eventually be worth over $1 billion.
Stock Bubble Mania
The following commentary and analysis is from the December 17th issue of the Short Seller’s Journal. To learn more about this newsletter, follow this link: Short Seller’s Journal information
The stock market, led by the Dow, is going parabolic as it inflates on helium forced into the financial system by the Fed. The bubble has become more manic and all-encompassing than the late 1990’s dot.com/tech bubble, which was led by the Nasdaq. This time around the Dow is leading the pack and has become irrationally exuberant.
While this could become even more insane to the upside, the sentiment and level of speculative activity are back to levels historically indicative of a top. Yesterday’s (December 20th) sudden, sharp reversal in the stock market is likely a warning shot – tremors before a bigger earthquake. Retail trading accounted for 30% of the total trading volume on Friday, compared to the 30-day average of 10%. Volume in sub-$1 stocks is surging, reflecting an extreme degree of risk-taking. But it’s not just the penny stocks. The meme stocks like CVNA and SNAP are going parabolic.
A long-time subscriber asked me how I explain the big move higher in CVNA because it’s pretty clear CVNA will eventually have to file bankruptcy. I asked him to look at this chart to tell me:
The chart plots CVNA (candlesticks) vs the MEME stock ETF (blue line). Note the strong correlation between MEME and CVNA. In fact, what does it say about CVNA that it has been underperforming MEME in the move higher that began in early November. Every retail idiot trading this market is chasing the worst garbage stocks higher. Most of the stocks in MEME have a very high short-interest. Most will be bankrupt within the next three years.
Long positioning by CTAs is at its most extreme level in at least eight years. Extreme long or short positioning by CTAs is a highly reliable contrarian indicator. The VIX is at its lowest level since mid-January 2020. Also, the weekly survey by the Association of American Individual Investors (high net worth, retail) shows that bullish sentiment jumped up to 51.3% through Wednesday, its highest level since July 19th. At 19.3%, the percentage of bears is at its lowest over that same period.
No one can say for certain when this madness will reverse. But we can say for certain that it will and when it does the ensuing sell-off will likely be brutal. Though I took a beating over the last three weeks in my put portfolio and closed out most of the positions. I continue to hold January CVNA $50 puts, AN January $125 and $130 puts, NVDA March $435 puts and TSLA April $220 puts. In addition, on Friday I started a position in IWM (Russell 2000 ETF) late December $195 puts. Earlier in the week I started buying late January SNAP $16.5 puts. Take a look at SNAP’s chart [next page] to understand why. Oh, I also hold January GDDY $100 puts.
C’mon, man. For its Q3, SNAP’s operations lost $380 million. Through 9 months it’s incurred a $1.14 billion operating loss. The only reason this Company is still in business is that the capital markets have enabled it to raise over $4.8 billion via convertible bonds between 2019 and 2022. It did not issue any debt in 2023. But the only thing keeping SNAP from going out of business is the $3.4 billion in cash it had at the end of Q3 2023.
The stock gapped up on November 14th when it was reported that SNAP signed a deal with AMZN that enables AMZN to run ads on SNAP which let SNAP users shop on AMZN and check out without exiting the SNAP app. The economic terms connected to the agreement were not disclosed, which means that the terms do not directly generate revenues from the agreement for SNAP. In terms of the financial benefit of this deal for SNAP, the only thing I could dig up after scouring articles and reports is that the deal might increase average user time on the SNAP app which might enable SNAP to charge higher advertising rates.
In my opinion, SNAP is worth no more than the value per share of the cash on its balance sheet, which will deplete over time. Currently it has $2.42/share in cash. At some point I plan to increase my capital commitment to SNAP puts beyond the January $15.50 puts I have now.
Housing market update – The homebuilder and home construction stocks have gone absolutely parabolic:
The Dow Jones Home Construction Index has soared 17% since the end November. The MACD momentum indicator is by far at its most over-bought reading in the history of the index (2000).
But while the homebuilders have been increasing deliveries via the use of heavy price discounts and other incentives, they are not reporting record levels of revenues and profitability. And the contract value of their order backlogs is plummeting. And here’s the 10-year picture of the monthly seasonal adjusted annualized rate for new home sales:
While new home sales bounced after declining for nearly two years, overall the rate of new home sales has been in a steep downtrend since late 2020. In other words, the differential between the market cap of the homebuilders and their profitability may be at the widest in stock market history. The DJUSHB is 2.4x higher that it was at the peak of the early 2000’s housing bubble while the SAAR peaked at over 700k back them compared to the current SAAR of 679k. I believe that reality will hit the stock market hard in 2024 accompanied by a swift sell-off in the homebuilder stocks.
Lennar (LEN – $149) reported its FY Q4 and full-year numbers on Thursday after the close. Despite “beating” revenue and EPS consensus, as well as the expected FY Q1 2024 forecast, the stock dropped 3.6% Friday. This is because it was apparent to the market that LEN sacrificed margins by cutting prices and offering fat incentives.
While Q4 revenues rose YoY 7.9%, operating income rose just 4.8%. Ordinarily in a healthy operating environment, homebuilders would benefit from economies of scale and operating income would rise percentage-wise more than revenues. But the ASP declined 8.7%. This does not include incentives like rate buy-down loans and architectural upgrades.
LEN’s share price has soared 42% since the end of October. I would be an idiot if I didn’t admit that I wish I had bought calls 7 weeks ago. But the increase in market cap is not in any way remotely justified by fundamentals.
The value of LEN’s backlog, despite a 4.3% increase in new unit orders, plunged 24%. The ratio of LEN’s market cap to the value of the backlog is 6.4. A year ago this ratio was 2.98. This illustrates the degree to which LEN’s market value has become completely unhinged from reality.
While the builders enjoyed a bounce in sales during 2023 thanks to rate buy-down gimmicks as well as other tweaks to mortgage terms that lower the cost for the first two years, with the “savings” added to the back-end cost of the mortgage, plus huge price and upgrade incentives, I have no doubt that homebuilders face a tough 2024.
What’s in store for the economy, the precious metals and the mining shares?
Most sectors of the economy are already in a recession and the Fed has already started to ease monetary policy. But when will the Fed cut rates? I think it will take the onset of a banking system crisis or a steep decline in the stock market, or both, before the Fed cuts rates.
Craig “Turd Ferguson” Hemke invited me back onto his Thursday Conversation podcast to discuss the economy and precious metals sector as well some specific mining stocks. You can access out conversation from his website: TFMR – Thursday Conversation or from the MP3 below:
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