Tag Archives: stock crash

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.

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.

Financial Market Collapse: Not an “IF” But A “When?”

“’DON’T PANIC!!!!’ Just 6.9% off of the most offensive valuation extreme in history.” – Tweet from John Hussman, Hussman Funds

The above quote from John Hussman was a shot at the financial media, which was freaking out over the sell-off in the stock market on Wednesday and Thursday last week. As stock bubbles become more irrational, the rationalizations concocted to explain why stocks are still cheap and can go higher become more outrageous. The financial media was devised to function as a “credible” conduit for Wall Street’s deceitful, if not often fraudulent, sales-pitch.

Perhaps the biggest fraud in the last 10 years perpetrated on investors was the Dodd-Frank financial “reform” legislation. The Dodd-Frank Act was promoted by the Obama Government as legislation that would protect the public from the risky and often fraudulent business practices of the big financial institutions – primarily the Too Big To Fail Banks. It was supposed to prevent another 2008 financial crisis (de facto financial collapse).

However, in effect, the Act made it easier for big banks to disguise or hide their predatory business operations. Ten years later it is glaringly apparent to anyone who bothers to study the facts, that Dodd-frank has been nothing of short of a catastrophic failure. Debt, and especially risky debt, is at record levels at every level of the economic system (Government, corporate, individual). OTC derivatives are at higher levels than 2008. This is without adjusting for accounting changes that enabled banks to understate their derivatives risk exposure. The stock market bubble is the most extreme in history by most measures and housing prices as a ratio to household income are at an all-time record level.

A lot of skeletons in the closet suddenly pop out of “hiding” when the stock market has a week like this past week. An article published by Bloomberg titled, “A $1 trillion Powder Keg Threatens the Corporate Bond Market” highlights the fact that corporate America took advantage of the Fed’s money printing to issue a record amount of debt. Over the last couple of years, the credit quality of this debt has deteriorated. More than 50% of the “investment grade” debt is rated at the lowest level of investment grade (Moody’s Baa3/S&P BBB-).

However, the ratings tell only half the story. Just like the last time around, the credit rating agencies have been over-rating much of this debt. In other words, a growing portion of the debt that is judged investment grade by the ratings agencies likely would have been given junk bond ratings 20 years ago. In fact, FTI Consulting (a global business advisory firm) concluded based on its research that corporate credit quality as measured by ratings distribution is far weaker than at the previous cycle peaks in 2000 and 2007. FTI goes as far as to assert, “it isn’t even close.”

I’ll note that FTI’s work is based using corporate credit ratings as given. However, because credit ratings agencies once again have become scandalously lenient in assigning ratings, there are consequences from relying on the judgment of those who are getting paid by the same companies they rate. In reality, the overall credit quality of corporate debt is likely even worse than FTI has determined.

The debt “skeleton” is a scary one. But even worse is the derivatives “skeleton.” This one not only hides in the closet but, thanks to regulatory “reform,” it’s been stashed in the attic above the closet. An article appeared in the Asia Times a few days ago titled, “Has The Derivatives Volcano Already Begun To Erupt?” I doubt this one will be reprinted by the Wall Street Journal or Barron’s. This article goes into the details about the imminent risk of foreign exchange derivatives to the global financial system. There’s a notional amount of $90 trillion in FX derivatives outstanding, which is up from $60 trillion in 2010.

Many of you have heard about the growing dollar “shortage” in Europe and Japan. Foreign entities issue dollar-denominated debt but transact in local currency. FX derivatives enable these entities to swap local currency for dollars with banks. However, these banks have to borrow the dollars. European banks are now running out of capacity to borrow dollars, a natural economic consequence of the reckless financial risks that these banks have taken, as enabled by the Central Bank money printing.

As it becomes more difficult for European and Japanese banks to borrow dollars, it drives up the cost to hedge local currency/dollar swaps. Compounding this, U.S. banks with exposure to the European banks are required to put up more reserves against their exposure, which in turn acts to tighten credit availability.  It’s a vicious self-perpetuating circle that is more than partially responsible for driving 10yr and 30yr Treasury bond yields higher recently.  Perhaps this explains why the direction of the Dow/SPX and the 10-yr Treasury have been moving in correlation for the past few weeks rather than inversely.

But it’s not just FX derivatives. There’s been $10’s of trillions on credit default swaps underwritten in the last 8 years. The swaps are based on the value of debt securities. For instance, Tesla bonds or home mortgage securities. As the economy deteriorates, the ability of debtors to service their debt becomes compromised and the market value of the debt declines. As delinquencies turn into defaults, credit default swaps are exercised. If the counter-party is unable to pay (AIG/Goldman in 2008), the credit default swap blows up.

And thus the fuse on the global derivatives bomb is lit. The global web of derivatives is extremely fragile and highly dependent on the value of the assets and securities used as collateral. As the asset values decline, more collateral is required (a “collateral call”). As defaults by those required to post more collateral occur, the fuses that have been lit begin to hit gunpowder. This is how the 2008 financial crisis was ignited.

In fact, given the financial turmoil in Italy, India and several other important emerging market countries, I find it hard to believe that we have not seen evidence yet of FX derivative accidents connected to those situations. My best guess is that the Central Banks have been able to diffuse derivative problems thus-far. However, the drop in the stock market on Wednesday surely must have triggered some equity-related derivatives mishaps. At some point, the derivative fires will become too large s they  ignite from unforeseen sources – i.e.the derivatives skeletons come down from hiding in the attic – and that’s when the real fun begins, at least if you are short the market.

I would suggest that the anticipation of an unavoidable derivatives-driven crisis is the reason high-profile market realists like Jim Rogers and Peter Schiff have recently issued warnings that the coming economic and financial crisis will be much worse than what hit in 2008.

The Cracks In The Market’s Floor Grow Wider

“The only time we’ve ever seen a confluence of risk factors anywhere close to those of today was the week of March 24, 2000, which marked the peak of the technology bubble.” – John Hussman, Hussman Funds, in his October Market Commentary

The yield on the 10-yr Treasury has broken out, hitting its highest level since July 2011:

By the end of June 2011, the Fed had only reached its half-way mark in money printing. It was shortly thereafter that the Fed had implemented its “operation twist.” Operation twist consisted of selling the Fed’s short term holdings and using the proceeds plus extra printed money to buy Treasuries at the long-end of the curve – primarily 10-yr bonds. That program is what drove the 10-yr bond yield from 3.40% in July 2011 to as low as 1.33% by mid-2016. At one point the Fed owned more than 50% of all outstanding 10-yr Treasuries. The Fed’s massive money hyper-stimulated the housing and auto markets.

What should frighten market participants and policy-makers – and really, everyone – is that the 10-yr yield has soared the last Thursday and Friday despite the big sell-off in the Dow/SPX. I say “despite” because typically when stocks tank like that, the money flows into Treasuries as a “flight-to-safety” thereby driving yields lower. When stocks drop like last Thursday and Friday in conjunction with the sharp rise in the 10-yr yield (also the 30-yr yield), it reflects the development of financial market problems that are not superficially apparent.

The media narrative attributed Friday’s jump in Treasury yields to the “strong” jobs report. But this is nonsense. The number reported missed expectations. Moreover, the number of working age people “not in the labor force” rose to an all-time high,which is indicative of substantial slack in the labor market.

More likely, yields are soaring on the long end of the curve (10yrs to 30yrs) because it was quietly reported that the amount of outstanding Treasuries jumped by $1.25 trillion in the Government’s 2018 Fiscal Year (October thru September). This means that the Government’s spending deficit soared by that same amount during FY 2018. To make matters worse, the Trump tax cut will likely cause the spending deficit – and therefore the amount of Treasury issuance required to cover that deficit – to well to north of $1.5 trillion in FY 2019.

Who is going to buy all that new Treasury issuance? Based on the Treasury’s TIC report, which shows major foreign holders of Treasury securities, over the last 12 months through July (the report lags by 2 months), foreign holdings of Treasuries increased by only $2.1 billion. The point here is that, in all likelihood, the biggest factor causing Treasuries to spike up in yield is the market’s anticipation of a massive amount of new issuance. Secondarily, the rising yields likely reflect the market’s expectation of accelerating inflation attributable to the deleterious consequences of the trade war and the lascivious monetary policies of the Fed. The market is assuming control of interest rate policy.

On Tuesday last week (October 3rd), the Dow closed at a record high (26,828). Yet, on that day three times as many stocks in NYSE closed at 52-week lows as those that closed at 52-week highs. Since 1965, this happened on just one other day: December 28, 1999. The Dow peaked shortly thereafter (11,722 on January 10, 2000) and began a 21 month sell-off that took the Dow down 32%.

I don’t necessarily expect to see the stock market tank in the next few weeks though, based on watching the intra-day trading action the past couple of weeks leads me to believe that the market is vulnerable at any time to a huge sell-off. The abrupt spike in Treasury yields plus market technicals – like the statistic cited above – lead me to believe that the cracks in the stock market’s “floor” are widening.

The above commentary is an excerpt from the latest Short Seller’s Journal. In that issue I presented LULU as short at $153. It’s already dropped $8 and several subscribers and I have more than doubled our money on put ideas.  You can learn more about this newsletter here:  Short Seller’s Journal information.

The Tragically Flawed Fed Policies And The Eventual Reset Of The Gold Price

With gold showing good resiliency as it has tested the $1200 level successfully after enduring aggressive paper gold attacks during Comex floor trading hours, it’s only a matter of time before gold breaks out above $1220 and heads toward $1300. Gold has been under attack in the futures market this week as the world’s largest physical gold importer, China, has been closed all week for holiday observance. In addition, with financial market conditions stabilizing in India, the world second largest physical gold importer’s peak gold buying season resumed this week. When gold spikes over $1220, it will unleash an avalanche of short-covering by the hedge funds.

What will cause gold to spike up? There’s any number of potential “black swans” that could appear out of nowhere, but the at the root of it is the tragically flawed monetary policies of the Federal Reserve, along with the rest of the Central Banks globally…of course, the eastern hemisphere banks are buying gold hand-over-fist…

Chris Marcus invited me onto this StockPulse podcast to discuss the precious metals market and the factors that will trigger an eventual price-reset:

Tilray: Little More Than A Stock Bubble Scam

Tilray could well become the poster-child stock of the biggest stock bubble in U.S. History.

This past summer Tilray (TLRY) went public (July) at $17 per share. TLRY is a Canada-based medical marijuana company. While its operations are targeting the international medical marijuana market, the Company generated just $9.7 million in revenues in its Q2 2018. It produced a net loss of $12.8 million. The stock had run from $30 on August 20th to
a close of $120 on September 17th. The stock jumped again the next day to $154 on newsthat the DEA granted the approval for Tilray to provide THC capsules to UC San Diego for a clinical trial on the medicinal use of THC/CBD.

At the close of trading last Tuesday, TLRY’s market cap reached $14.1 billion, despite the fact the the UC San Diego deal would provide little in the way of revenues. Wednesday the stock soared to as high as $300 – a $27.6 billion market cap. TLRY did $17 million in revenues for the first-half of 2018. Let’s double that for the next 6 months and give them credit for a forward 12-month revenue stream of $68 million, which is more than generous. That means at Wednesday’s peak, TRLY was trading at 405x forward revenues. But from Q2 2017 to Q2 2018, its operating loss nearly quintupled, from $2.3 million to $11 million. We don’t know to what extent, if ever, this business model will be profitable.

Tilray closed just below $100 on Monday. On Tuesday the stock jumped $17, adding $1.5 billion to its market cap on the “news” that the Company “successfully” delivered CBD capsules to 29 “critically ill children” at a hospital in Victoria, Australia. There was no mention of revenue or profit impact of this “event,” which means this “feat” will be an expense item. Funny thing about CBD products, they are egally available in high concentration capsules and tinctures to anyone. See Ambary Gardens, for instance.

Marijuana was approved for medical use in Colorado in 2008. It was approved for recreational use in 2012. From 2008 to present, the retail price for “top shelf” weed has gone from $350 per ounce to as low as $150 per ounce. Once marijuana is legalized in a jurisdiction, the barrier to entry for producers and distributors is low. This means that, over
time, the selling price of marijuana will begin to approach the cost of production plus the cost of distribution plus a small profit incentive for growers and distributors. I have to believe the big tobacco companies are waiting impatiently for the Federal Government to legalize marijuana out of desperation to generate tax revenues. Then it’s game-over for existing growers.

TLRY’s operating loss including non-cash stock compensation was $14.7 million in the first half of 2018. Net of the huge jump in accounts payable, TLRY’s operations burned $11 million in cash in the first 6 months of 2018. TLRY insiders are sitting on 83 million of the 92 million shares outstanding. I’ll be curious to see how quickly insiders begin to register their shares and unload them. It’s only a matter of time before ground-floor investors try to quietly unload shares. They are idiots if they don’t.

The point here is that, while the run-up in stocks like Tesla and Netflix has been absurd, the trading action is Tilray has been absolutely insane. As it turns out, with only 17.8 million shares in the public float, TLRY has been engulfed by a vicious short-squeeze made even worse by momentum-chasing hedge fund algos and day-traders. Buyers blindly chasing the price higher, driven by fearless greed and the expectation that they will be able to unload their stock purchase on the next buyer willing to pay even more for the stock in complete disregard to valuation considerations.

This is very similar to the early 2000 dot.com/tech stock bubble. Tilray’s price rise to $300 is similar to rise in Commerce One. I was short CMRC at $200/share, which at the time was a completely irrational valuation. CMRC then ran quickly up to $600. But $600 was the top and it fell off a cliff from there.

Why Are The Banks Long Gold And Silver Futures?

“The banks are very net long gold and silver futures. To the extent that banks can peer at what’s going on behind the proverbial ‘curtain,’ they must see something that has inspired them to take long position in the precious metals.”

Gold is behaving the same way it was behaving in the months leading up to the 2008 financial crisis.  Emerging markets are melting down and transmitting a financial and economic virus that infect the entire world.  The coming financial collapse will be magnified by the enormous amount of visible and hidden debt, the worst perpetrator of which is the United States.

Elijah Johnson invited me onto his Silver Doctors podcast to discuss the bullish set-up for gold and silver, along with the underlying factors that will lead to problems which have motivated the banks to go long gold and silver:

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You can learn more about this newsletter here:  Short Seller’s Journal information and more about the Mining Stock Journal here: Mining Stock Journal information.

The Economy Is Collapsing Under The Unbearable Weight Of Debt

“Those who see no Lehman-like episode on the horizon did not see the last one.” – highly regarded writer, George Will, in a National Review article titled, “America Is Overdue For Another Economic Disaster”

Lost in the largely meaningless political Kabuki theatre being staged on Capitol Hill is the fact that the economy is deteriorating. Real average weekly earnings in July declined for production and non-supervisory workers. It was down 0.01% from June to July and down 0.22% from July 2017. For all employees, real average hourly earnings declined 0.20% from June to July but was flat year over year.

Real earnings is not a statistic discussed in the mainstream financial media, but it reflects the ability of the average household to consume non-discretionary goods and services. It also reflects the ability and willingness of the average household to borrow.

The U.S. economy’s appearance of wealth creation and economic growth has been fully dependent on debt creation since 2009. As the graphic from John Williams’ Shadowstats.com shows, the rate of growth in real consumer credit outstanding is approach zero (no growth):

The chart above shows the year-over-year growth rate of real consumer credit outstanding with and without student loans. As you can see, ex-student loans (blue line) the rate of growth in outstanding consumer debt (not including mortgage debt) is close to zero. The increase in consumer credit reported for June (the latest month for which data is available) was $10.2 billion vs $16 billion expected. It was down from May’s increase of $24.6 billion. The perceived growth in GDP is inextricably tied to the growth rate in the use of debt. The near-zero growth rate in consumer credit is thus consistent with the view that the U.S. economy is weaker than the promotional propaganda flowing from Wall Street and DC.

“Student Loans Are Starting To Bite The Economy” – That was title of a Bloomberg article last week. With $1.4 trillion outstanding, student loans are the second largest category of household debt after mortgages. 22.4% of all households carry student debt. 44.8% of households in the 18-34 age demographic carry student debt – that’s up from 18.6% in 2001.

Not discussed by the article is the estimated that 40% of borrowers will default on their loans by 2023. The current 90-day “official” delinquency rate is 11.2%. But this number is highly deceptive because 30% of all student loans are in deferment or forbearance. These loans are put into “remission” for many reasons but the most common is that it enables the borrower who can’t make payments to defer the stopwatch on delinquency/default.

While it’s possible that the student loan problem is affecting potential demand from potential homebuyers, most people who have student debt also have credit card and auto debt. So it’s not clear that student loan debt alone has affected the ability of first-time buers (18-34 age cohort) to buy a home.

Rather, I would argue that it’s the accumulation of debt since 2012 that is affecting all areas of the economy:

As you can see in the chart above, total household debt through the end of March 2018 – which means the debt level is even higher now – is considerably higher than the previous peak at the end of Q3 2008. Not shown is a graph I constructed on the FRED site that added nominal GDP. The rate of growth in household debt has sharply surpassed the rate of growth in GDP since Q3 2015.

This is why the economy is stalling. This is why the housing and auto markets are now in definitive contraction. It has nothing to do with the trade war or low housing inventory. It has everything to do with an economic system that is losing its ability to support the massive amount of debt that has been issued since the last financial crisis (de facto collapse).

The weekly economic reports – both Government and private sector – continue to reflect a downturn in economic activity. Moreover, the reports almost always are below the hyped-up expectations of Wall Street’s brain trust. The chart below reflects the irrational optimism of anyone chasing stocks higher (primarily hedge fund algos):

As you can see, since the middle of August, the 30-yr Treasury yield has negatively diverged from the S&P 500 after being tightly correlated for the first two weeks of August. The spread between the 2yr and 10yr treasury is at its lowest since August 2007.

The Treasury curve “flattens” when the short end of the curve rises relative to the long end. The curve flattens when the market has decided that the Fed is wrong on its policy of raising the Fed Funds rates because the economy is slowing down. Large Treasury buyers pile into 10yr and 30yr Treasuries on the expectation that a deteriorating economy will force the Fed to reverse course and lower rates again. The chart above reflects the market reacting to the steady flow of negative economic reports.

If the Fed is right, we should see the 30yr yield “catch up” to the SPX. Conversely, if the market is right, the chart above is yet another warning sign of an eventual stock market “accident.” I have no doubt that the Fed is wrong. That said, the Fed has painted itself into a corner on rates. Contrary to the Fed’s public propaganda of “low inflation,” the Fed is well aware of the true rate of inflation – inflation created by the Fed’s monetary policy since 2008. If the Fed does not act to tighten monetary conditions, price inflation will continue to accelerate and inflict serious damage to the U.S. economy.

The commentary above is from the latest issue of the Short Seller’s Journal. I explain why the housing market is heading south quickly, update my homebuilder short ideas and discuss Tesla. You can learn more about this newsletter here:  Short Seller’s Journal information

Gold And Silver: Similar To 2008

In 2008, gold was taken from $1020 to $700 and silver was pounded from $21 to  $7 during the period of time that Bear Stearns, Lehman and the U.S. financial system was collapsing.  The precious metals were behaving inversely to what would have been expected as the global financial system melted down.   Massive Central Bank intervention was at play.

Currently the prices of gold and silver are being dismantled by what appears to be massive hedge fund shorting of Comex paper gold.  As of last Tuesday, the “managed money” trader category as detailed in the Commitment of Traders report showed that the hedge funds were short a record amount of paper gold.

As of yesterday the open interest in Comex paper gold was about 17,000 contracts higher than the open interest shown in last week’s COT report.  This represents another 1.7 million ozs – or 48 tonnes – of paper gold that has been dumped on the market.  It is highly probable, if not a certainty, that most of the increase in short interest is attributable to hedge fund algos chasing the paper price of gold lower.

Meanwhile, behind the scenes, the Bank of International Settlements (BIS) has been actively intervening in the physical gold market during July, as detailed by Robert Lambourne, a consultant to GATA:

Use of gold swaps and gold derivatives by the Bank for International Settlements, the gold broker for most central banks, increased by about 17 percent in July, according to the bank’s monthly report…The BIS’ July Statement of Account gives summary information on its use of gold swaps and gold-related derivatives in the month. The information is not sufficient to calculate a precise amount of gold-related derivatives, including swaps, but the bank’s total estimated exposure as of July 31 was about 485 tonnes of gold versus about 413 tonnes as of June 30.

That is an increase of about 72 tonnes or 17 percent. The increase came as there increasingly appeared to be a correlation between the gold price and the valuation of the Chinese yuan, both of which fell substantially during the month.

The BIS refuses to explain what it is doing in the gold market and for whom, engendering suspicion that it is helping one or more of its members to manipulate the currency markets through deception.  To place the bank’s use of gold swaps in context, its current exposure of 485 tonnes is higher than the gold reserves of all but 10 countries. (documentation and links: BIS gold market intervention increased by 17% in July)

While visible evidence of a declining gold price can be seen with Comex futures prices and the daily London gold price “fix,” the BIS is operating in the physical market to increase the supply of physical gold available for bullion banks on the hook to deliver physical gold to the countries buying large quantities of physical gold on a daily basis.  As long as the BIS can ensure the flow of physical gold remains uninterrupted, the demand for physical gold will not offset the effort to take-down the price of gold in the paper derivatives markets.

The effort to push down  the price of gold is to silence the alarm gold provides to signal global systemic distress. It’s not just the emerging market economies  and China. The U.S. economy, based on all the private sector data I dig up an analyze on a daily basis, hit a wall sometime between March and May.

This is most evident in the housing market nationwide, which  has been rapidly deteriorating (notwithstanding a few areas that may still have some flaming embers of activity).  Just one supporting data-point is  mortgage purchase applications, which have declined each week over the past 5 weeks. This is not a good omen for the housing market during the seasonally peak selling months. We know it’s not an inventory issue because inventory across the country in all price segments has been rising in most areas and soaring in some of the hottest areas.

While today’s headline retail sales number shows a 0.5% increase in July over June, the “increase” was manufactured for headline purposes by a large downward revision of June’s retail sales numbers. Furthermore, the headline number is a nominal number. Net of true price inflation, retail sales declined. There are other problematic inconsistencies between the Census Bureau-generated numbers and the actual numbers as reported by private-sector companies.

The bottom line is that the prices of gold and silver are being systematically taken down as a mechanism to help cover up the fact that a large-scale financial crisis is going to hit the global financial system. I don’t know the timing, but I would suggest that the EM currency melt-down that began in South America and has spread to the eastern hemisphere represents a series of earthquakes that  are generating a “tsunami.”

While I’m loathe to forecast a price-bottom for gold and the timing of the forthcoming systemic crisis, I would suggest that anyone who is shaken out of their gold, silver and mining stocks right now will regret selling when looking back a year from now.

My Short Seller’s Journal subscribers and I continue to rake in easy money shorting the homebuilder sector. Two of my short-sell picks, Zillow Group and Redfin, have been annihilated in price over the last week. In the last issue I also laid out why Tesla is technically insolvent and likely will be irrelevant as a company within 12-18 months. You can learn more about this weekly newsletter here: Short Seller’s Journal information.

Home Sales Data Show The Bubble Is Bursting

There’s no question in my mind now that the housing “snowball” has started downhill and it won’t take long to develop into an avalanche. In addition to all of the “for sale” and “for rent” signs I’m seeing with my own eyes popping up around Denver, I’ve been receiving emails from subscribers describing the same thing in their area.Short Seller’s Journal, July 22nd issue

The existing and new home sales reports this week were worse than even I expected.  Given the statistical manipulation tools used by the National Association of Realtors (existing home sales) and the Census Bureau (new home sales) – both entities use the same regression software – one can only wonder about the true rate of home sales decline.

Yesterday, CNBC.com featured a report titled, Southern California home sales crash, a warning sign to the nation.  I was surprised to see CNBC issue a bearish report on anything.  This report is similar to what’s occurring in New York City – rising inventory and falling sales.  Apartment rents in NYC are also dropping.  It’s similar in nearly all “bellwether” markets.

The Housing Bubble Blog (thehousingbubble.com), which was around during the mid-2000’s housing bubble, posted an article on Friday titled, “Discount sales can create a snowball effect.” The article featured articles from different cities, Portland, Dallas, Ft Collins (Colorado) and Minnapolis/St Paul which described rising inventory and falling prices.

This explains why the homebuilder stocks are in an official “bear market,” with some homebuilder stocks down over 30% since late January. I have yet to hear or read about this fact from the mainstream financial media or Wall Street.

Today’s new home sales report, along with the serial decline in the housing starts  data, disproves the “low inventory” narrative.  Affordability, rising rates and a shrinking pool of potential homebuyers who can qualify for a conforming mortgage has torpedoed demand.  The latest U of Michigan Consumer Sentiment report featured this chart on homebuying sentiment:


As you can see, the consumer “sentiment” toward buying a home is at its lowest reading since 2008. This is not a fact that would ever show up in the mainstream financial reporting on the housing market.

As for the low inventory narrative. The California Association of Realtors reported that June existing home sales plunged 7.3% from June 2017 and inventory is up 8.1%. A subscriber of the Short Seller’s Journal showed me an email in which Pulte Homes (PHM) was offering up to an unprecedented $20,000 bonus to realtors who sold Pulte homes in new developments in northern Florida.

Housing starts for June reported last Wednesday came in at 1.17 million (SAAR). The Wall Street brain trust was looking for 1.32 million. This was a 12.3% plunge from May.  May’s original report was revised lower. Starts for both single-family and multi-family homes were down sharply across the entire country. If inventory were “low,” housing starts would be soaring, not falling.

I’m sure northern Florida is not the only market in which Pulte is offering large selling bonuses and I’m sure Pulte is not the only homebuilder offering large broker incentives. I look at the inventory numbers across homebuilders every quarter. A lot of the inventory is “work-in-process.” But finished a new home does not necessarily show up in the MLS system unless the builder lists it. This is why, on the surface, new home inventory might look relatively low but the builders are showing huge inventory levels in their SEC-filed financials.

Because of the nature of the asset, and the relative illiquidity of the market relative to actively traded financial assets, change in the direction of the momentum in the housing market is like turning a large ocean-freighter around. The manic phase of the housing bubble is over. The momentum has been turning in the opposite direction since late 2017. Flippers who bought homes in the last 3-6 months will soon become desperate to sell. Some will look to rent and “wait for the market move through this valley and head up again” only find that rental prices in many areas are now below the cost of carry.  They forget to tell you that part in flipper seminars advertised on local radio stations.

Soon the “discount effect” of falling prices will snowball into an avalanche.  If you think this is wrong, take another look at homebuilder stock charts.  The commentary above is partially excerpted from the latest issue of the Short Seller’s Journal.  In this issue I discuss various strategies for building and managing short  positions in the homebuilder stocks in the context of the homebuilder earnings reports due out tomorrow (Thursday, July 26th).  New subscribers get a handful of back-issues, an option trading primer and a copy of my Amazon Dot Con report.