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The Housing Bubble Has Popped

I’m starting to believe that the housing market may have hit a wall in April. The graphic below is my reconstitution of the two charts sourced from Reventure Consulting (RC). It’s self-explanatory:

Amusingly, I’ve noticed articles in the mainstream media which acknowledge that the market is slowing down but assert that “a crash is not likely.” For me, that sentiment puts me on “crash alert.” The housing market at peaks is like a runaway freight train without brakes. But when it runs out power, it tends to derail quickly. All off a sudden multiple-offer listings become “for sale” signs that sit followed by price cuts. Then, rather than chasing prices higher, prospective buyers wait to see how low price will go.d

Silver Liberties invited to have a conversation about the housing market. At the end we also chat about the precious metals sector:

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A portion of the above commentary is an excerpt from my latest Short Seller’s Journal . I’ve managed to hit several home runs in stocks like $HOOD, $DKNG, $ARKK, $Z, $CVNA, $MSTR etc. In my latest issue I lay out the case why I believe the homebuilders and related equities are no-brainer shorts. $RLGY is down 36.4% since I recommended it as short about two months ago. There’s several stocks that not homebuilders but directly related to the housing market that I have recently presented. I’m working another one for the next issue. You can learn more about my newsletter here: Short Seller’s Journal Information

“1984 Was Meant To Be A Warning – Not An Instruction Manual”

Back in 2004, I was chatting with the person who dragged me kicking and screaming into the precious metals sector in 2001. The problem with diving into the world of precious metals is that it’s the equivalent of involuntarily taking the “red pill.”  The truth-seeking news and analysis that accompanies researching the monetary and financial system opens your eyes to realities and truths that would never be encountered by limiting one’s source of information and news only to the mainstream media plus the Wall Street and Capitol Hill spin machines.

My biggest problem and source of anxiety is that once you “see” the red pill realities, you can not “unsee” them.

I recall that, after processing the tech bubble crash, Enron, 9/11 and the illegitimate attack on Iraq, my friend and I decided that eventually we would see events and occurrences that really blow our minds.  I can say with 100% conviction that the attack on free speech and the effort to eradicate it truly blows my mind.

“Every record has been destroyed or falsified, every book rewritten, every picture has been repainted, every statue and street building has been renamed, every date has been altered. And the process is continuing day by day and minute by minute. History has stopped. Nothing exists except an endless present in which the Party is always right.” (Orwell, “1984”)

A “Time” magazine columnist is the latest mainstream media writer to fire missiles at free speech. Incredulously, she argues that men care more about free speech than women – not sure how she comes to that conclusion other than simply regurgitating the vomit from a Stanford University Communications Department professor.

“War is peace, freedom is slavery, ignorance is strength.” (ibid)

George Washington University law professor and noted truth-seeking commentator and legal analyst, Jonathan Turley, eviscerates Time’s Charlotte Alter’s arguments for eradicating free speech. Alter argues that “free speech” meant something different when the Framers created the Constitution – that it means something entirely different now. No, Charlotte, “free speech” is an absolute. It either exists or it does not exist.

As Turley states, “free speech is a basic human right” not limited to the First Amendment. Those who seek to limit or eradicate free speech look to exert full political and Governmental control over the populace. Dismantling the right to unfettered self-expression is the lynchpin of the transition from a democratic political system to totalitarianism. Anti-free speech advocates thereby are endorsing Rule of Man over Rule of Law.

I highly recommend reading Turley’s essay carefully: Time Columnist Denounces Free Speech as a White Man’s “Obsession”

Unfortunately the voices like Turley’s will be drowned and cremated. Life is short and it goes quickly. Cherish what little freedoms that remain – they’re not going to last much longer. It’s too late for me to un-take the red pill and in its place swallow the blue pill. And I suspect that eventually blogs like mine will be blocked from the internet.

Is The Gold, Silver And Mining Stocks Bull Run Over?

Short answer – no – next leg higher could be spectacular:

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Love the Weakness When It Comes—and Buy More – Sprott Money Monthly Wrap-Up:


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Many of the junior exploration/development companies I cover, recommend and invest in have the potential to 5-10 baggers from their current down-trodden level. You can learn more about my newsletter here:  Mining Stock Journal information.  I do not take compensation of any type from mining companies and I have been doing my own research in the sector for over 20 years.

The Reintegration Of Gold And Silver Into The Global Monetary System

“Paper money eventually returns to its intrinsic value — zero.” – Voltaire.

The public is going to get a painful lesson about the difference between fiat currency and real money, where “real money” is defined as physical gold and silver. The western world is focused on Putin’s invasion of Ukraine. Little understood, but more profound in its consequences for the west, is the move by Putin to reintegrate gold (and silver) and other hard asset commodities into the global monetary system.

Andrew Maguire and Shane Morand (Kinesis Money) invited me back onto their podcast to discuss the ramifications of Russia’s pegging the Ruble to gold, and the possible emergence of a new monetary system:

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Many of the junior exploration/development companies I cover, recommend and invest in have the potential to 5-10 baggers from their current down-trodden level. You can learn more about my newsletter here:  Mining Stock Journal information.  I do not take compensation of any type from mining companies and I have been doing my own research in the sector for over 20 years.

Gamestop $GME: The Return Of Meme Stock Idiocy

Meme stock mania is back in full idiocy. And it’s time again to revisit $GME as a short. On March 14th, GME closed at $$78, its lowest level in February 23, 2021. The stock had been down nearly 75% since June 9, 2021. But after the market closed on March 21st, GME Chairman Ryan Cohen, announced that he bought 100,000 shares in the open market, taking his ownership stake to 11.9%. This drove the stock price from $94 to as high as $189 by March 28th.

Then after the market closed on March 31st, GME announced its intent to do a stock-split. The stock jumped after hours from its closing price that day of $165 to as high as $203. It opened at $189 Friday and sold off steadily during the day to as low as $155, before closing at $163. Note: GME is doing a “stock dividend” rather than a stock split. While there’s GAAP accounting differences with respect to the shareholders equity accounting, for practical purposes there’s no difference.

There’s a lot to unpack there, not the least of which is the fact that the entire two-event sequence reeks of intentional stock price manipulation. Cohen clearly understands that the announcement of both his share purchase and the stock split would cause the Wall St Bets Reddit meme-chasing “apes” to stampede into the stock and OTM call options. This is an explosive combination given that the share float of GME is just 62.48mm shares and short-interest is close 20%. Cohen announced his share purchase just nine days ahead of the stock-split announcement. Of course he knew ahead of his stock purchase that his next move would be to announce the stock-split.

This is “stock manipulation” 101. Unfortunately, we live in an era in which the regulators look the other way. Many of them indirectly benefit in that they previously worked at Wall Street firms and maintain equity in their former banks. As an example, SEC Chairman, Gary Gensler, was at one time in the running to become CEO of Goldman Sachs.

In early March, Cohen announced that he had a 9.8% stake in Bed Bath and Beyond, another Reddit meme stock that loses $100’s of millions on an operating basis. That announcement drove the stock from $16 to has high as $30. BBBY closed at $22.84 on Friday. As with GME, BBBY has a small share float, with a 21% short interest plus a rabid meme stock following that boasts about its ability to create short-squeezes in stocks with high short-interest and a small float. It would be naive to believe that Cohen is not exploiting this dynamic.

Does investing in GME make sense from a fundamental standpoint? Zerohedge referenced the stock purchase/stock split combo maneuver as “a brilliant ruse by the management team which is far more focused on financial engineering and how to create stock squeezes than actually running the mostly worthless company.”

Cohen made his fortune as the co-founder of the online pet store, Chewy Inc. $CHWY has never been profitable. He took his stake in GME in November 2020, seeking to transform GME from a brick/mortar-store based retail business into an e-commerce operation. Here’s the operating performance of the business over the last three years (GME released its FY 2021 Q4/full-year on March 17th:

Revenue fell in 2020 because of the virus crisis and related lock-down, which affected all brick/ mortar businesses. But 2021 revenues were still 7% below 2019. For Q4 (not shown), revenues increased slightly over Q4/2020, but the gross profit plunged 15.6% and an $18.8 million operating profit in 2020 swung to $166 million operating loss in Q4/2021.

From the pattern in the Company’s operating losses, it would appear that operating losses vary with revenues – i.e. this business does not have economies of scale. The gross margin in 2019 was 29.1%. It fell over the next two years down to 22.4%. In 2021, the operations (from the statement of cash flows) burned $434 million in cash. As for the plan to shutter the brick/mortar stores, the Company closed down just 5% of its store base in 2021.

The sizzle in the gaming business is with the software. 53% of GME’s revenues in 2021 came from selling gaming hardware and accessories. This is a low-margin business. In 2020 hardware was 49% of sales and it was 42% of sales in 2019. It would appear that software sales as a percentage of revenues is going the wrong way. This explains why the gross margin is declining precipitously.

In 2021 the Company took advantage of the meme-stock driven short-squeeze operation and raised $1.6 billion selling shares. It used some of the cash to pay off debt that was due in 2021 and 2023. The Company has $1.27 billion in cash, which is the only valuable asset on its balance sheet. But against this, there’s $1.35 billion in current liabilities (accounts payable, accrued liabilities, operating lease payables). This Company is technically insolvent. I would be surprised if the Company does not take advantage of the share price run-up and unload even more shares on the market.

Bottom line: This is a business that is slowly withering away. Ryan Cohen, whose Chewy online pet store has never made money, apparently believes he can transition GME’s business into a more software-focused e-commerce business model. Good luck. The gaming software business is extremely competitive. Regardless, I strongly believe that Cohen’s primary motive with GME is financial engineering and stock price manipulation. There’s ways for Cohen to monetize some of his shareholdings without directly selling shares in the open market.

GME’s market cap as of Friday’s close is $12.5 billion. It’s a non-nonsensical market cap for a business with serial operating losses, declining gross margins and stagnating to declining sales. Plus the fact that it is technically insolvent. The stock split/dividend will increase the number of authorized shares from 300 million to a billion. The annual shareholder meeting will likely occur in June (June 9th last year), which means the stock split will likely occur in mid-June. The additional shares outstanding should alleviate the susceptibility of the stock to short-squeezes.

A year ago the Street forecast for GME was to earn $1.30/share this year (2022). Now the Street is forecasting a loss of $4.17/share for this year and $3.00/share loss for 2023.

I believe over the next few months, especially if/when the bear market decline resumes, GME will minimally retrace back to the $80 level, where it was trading before Cohen restarted his stock manipulation schemes. The stock is hard to borrow right now but that status will change after the stock split. The good news is that, while implied volatility in the options is north of 100%, it’s half of what it was when I was presenting GME as a short in late 2020.

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The above commentary on $GME is an excerpt from my latest Short Seller’s Journal – I’ve hit several home runs over the last year, including $DKNG, $HOOD, $Z and $NAIL. There’s still a lot of money to be had on the short side before the stock bubble fully deflates…

Did Russia Intentionally Trigger A Monetary System Reset?

“We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.” – Zoltan Pozsar, Bretton Woods III

Fiat currency is a “promise” to repay a debt obligation and nothing more. A hard asset-backed currency is a guarantee that repayment will occur.

On March 7th Zoltan Pozsar, who formerly worked at the NY Fed, was an advisor at the U.S. Treasury and currently is a strategist as Credit Suisse, published a research report titled “Bretton Woods III.” Anyone familiar with the Bretton Woods agreement understands the reference. Nixon’s snipping of the final thread connecting currency to gold is considered to be Bretton Woods II. Pozsar makes the case that Bretton Woods III is a reversion back to a monetary system in which currency is backed by commodities as opposed to being backed by a sovereign issuer’s “full faith and credit.”

A crisis is unfolding.  A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money. Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s FX reserves. – ibid

The post-1971 fiat currency reserve banking system enabled by the removal of gold from the monetary system is nothing more than a Ponzi scheme. “Inside money” refers to the interbank repo/lending mechanism from which the fractional bank reserve monetary system blossoms. Pozsar distinguishes “inside money” from “outside money.” “Inside money” is created by the Central Bank/inter-bank lending mechanism that can magically turn one dollar of reserve capital in to nine dollars of “credit” capital. And the one dollar of reserve capital is backed by nothing tangible – just the “full faith and credit” of the issuing entity.

Think of this monetary system as an inverted pyramid – eg something like Exter’s Pyramid.  In bankruptcy law, “full faith and credit” would be considered, at best, an unsecured loan.  Get in line and pray that there’s value left over to be distributed to the unsecureds.

In contrast, Pozsar references Bretton Woods III as the “rising allure of outside money over inside money,” where “outside money” is “commodities collateral,” meaning tangible assets for which definitive value can be determined, as opposed to the sovereign promise of “full faith and credit.”  In periods of banking crises, banks are reluctant to participate in the “inside game” (see 2008 and September 2019, for instance) because, at that point in time, they don’t trust the fiat currency collateral on which the fractional reserve banking system is predicated and thus are reluctant to lend money to their banking peers. Every time this occurs, the Central Banks have to print more money to “lubricate” the system enough so that it functions. This in turn further devalues the “inside money” on which the system is predicated.

But if currency issued by Governments and printed by Central Banks is backed by hard assets, this problem is avoided. In this system, the counterparty to trade or financing transactions would have the option of demanding payment in the hard asset or assets backing the currency – most likely gold or possibly a pre-agreed upon commodity asset. Remember, fiat currency is nothing more than an unsecured debt instrument of the issuing entity.

It’s likely that Putin knew ahead of time that the west’s response to Russia’s invasion of Ukraine would be to freeze Russian currency reserves held at western Central Banks. Of course, this response by the U.S./west brought to light the inherent Achilles’ Heel of the modern Central Bank fiat currency reserve system. Any country that keeps currency reserves for trade settlement purposes at foreign Central Banks, specifically the Federal Reserve and the ECB, is at risk of having those reserves confiscated, thereby rendering them worthless.

In response, Russia is now demanding payment for energy in either rubles or gold from what it deems to be “unfriendly” countries. Whereas in the “inside money” banking system, settlement of trade is merely a matter of accounting ledger adjustments at the respective Central Banks, in this trade settlement arrangement, a country purchasing oil or gas from Russia in exchange for gold would need to 1) demonstrate that the gold being used for trade payment actually exists and 2) transfer the ownership rights to Russia. Russia ultimately would likely demand repatriation of the gold. The U.S./G7 made it crystal clear that possession of assets is 100% of the law.

The response by the west – led by the U.S. and its control of the global reserve currency – in all likelihood has triggered a reset of the global monetary system. I actually do not like the term “Bretton Woods III” because it references an agreement which, in its essence, destroyed the gold-backed global monetary system. Regardless, it appears for now that Russia – likely with China’s tacit support – has set in motion a global monetary system reset. In the new system countries which supply the world with goods that have price inelasticity of demand – oil, natural gas and food commodities, for instance – will have the power to enforce trade settlement in hard currencies – e.g. gold or other hard assets – rather than fiat currency Central Bank accounting ledger adjustments. This is the nature of the monetary system reset that has been triggered. Welcome to Galt’s Gulch…

“Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half property, half-loot…

…Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.'” – Francisco’s Money Speech, Atlas Shrugged

Fortuna Silver’s Golden Opportunity

2021 was a rough year for FSM, taking into consideration the royalty payment settlement it made to the Mexican Government, the environmental permit issue with the SEMARNAT, and the disruptions to the ramp-up of Lindero from the virus crisis, among other likely non-recurring issues. In addition, FSM incurred the costs of merging with Roxgold. All of these issues took its toll on the stock price, compounded by the fact that the entire sector was in a downtrend for most of 2021. Going forward FSM management will be able to focus on managing its operating mines, advancing Seguela to production and resource exploration and replacement.

The challenges confronted by Fortuna were compounded Thursday when Stockwatch erroneously (or was it?) released a headline in pre-market reporting that Fortuna lost $59.4 million in 2021. Fortuna generated $59.4 of net income in 2021. It was an inexcusable mistake but the damage to the stock was done by the time Stockwatch ungraciously corrected the error, as hedge fund algos relentlessly sold (and likely shorted) shares based on Stockwatch’s fictional headline, driving the stock down as much as 7.2%  At the very least Stockwatch should issue an apology.

The biggest factor that will benefit FSM’s stock price going forward, and which the market fails to “see” is the upside potential of FSM’s existing mine properties and, even more so, the enormous upside potential of FSM’s exploration properties. Arcadia Economics (Chris Marcus) and I discussed with Fortuna’s CEO, Jorge Gonoza, the Company’s Q4 performance as well the many factors in play that make Fortuna in incredible investment opportunity:

The Petrodollar And Gold (And Silver)

The precious metals market commentary below is an excerpt from the latest issue of the Mining Stock Journal, released on March 17th. The issue also offered an opinion on the $MAG Silver acquisition of Gatling Exploration ($GATGF, $GTR.V), $AEM and Paramount Gold ($PZG), among other companies I cover. You can learn more here: Mining Stock Journal.

By now I’m sure most of you have read the various analyses – not found in the mainstream financial propaganda – explaining why the U.S. sanctions levied against Russia will back-fire and trigger a reset of the monetary system. In brief, the U.S. has “weaponized” the dollar’s status as the reserve currency by imploring western Central Banks to freeze Russia’s foreign currency reserves and banking assets held at western Central Banks (China has not put a freeze on Russia’s currency reserves). This has in turn triggered a move by many of Russia’s trade partners to work around this by settling trade with Russia either in respective domestic currencies or in gold.

While this is going on, Xi Jinping eschewed a meeting with Biden and instead met with the Saudis to discuss settling oil trades in yuan. I don’t know if this will spawn the “petroyuan” but it will certainly advance the removal of the dollar as the reserve currency. Xi also met with Turkey’s President Erdogan, who said that Turkey was more than happy to settle trades with China in yuan, ruble or gold.

Regardless of which side of the Russia/Ukraine/U.S./NATO conflict you might associate, it has without question shined a bright light on the dollar’s diminishing status as the reserve currency. More important, it has pulled gold into the conversation as an alternative trade settlement currency. Gold is, after all, designated as a Tier 1 bank asset per the BIS.

The implication of these events unfolding is that, not only is a monetary system reset in motion, but I believe that, along with this, the price of gold will “reset” to a much higher price in order to reflect a more appropriate valuation relative to the degree to which fiat paper currencies have been devalued from Central Bank money printing.

Though the precious metals sector is technically overbought, it can remain “overbought” for quite some time as an offset to the amount of time it has been technically “under-bought” or “oversold.” Both the HUI and GDX have pulled back to their respective 21 dma’s. This may be all it takes to “reset” the momentum indicators (RSI, MACD, etc) in preparation for another move higher. Similarly, gold and silver are also flirting with their respective 21 dma’s.

Barring any unforeseen exogenous circumstances (primarily a redoubling of the price-capping efforts by the western gold/silver price management team), right now I am confident that the precious metals sector will be considerably higher by the end of the summer.

The Precious Metals Sector Is Potentially Explosive

Though most investors expect some type of pullback in the precious sector to “reset” the various technical indicators that have become “overbought,” the geopolitical situation with Ukraine has given the sector a flight to safety bid. Interestingly, the response by the west to the Russian invasion of Ukraine to freeze Russia’s foreign currency reserves held by western Central Banks has started to shine light on the risk for Governments to hold fiat currency reserves in foreign Central Banks. The Wall Street Journal featured an article on “what is money?” earlier this month:

“The entire artifice of “money“ as a universal store of value risks being eroded by the banning of key exports to Russia…if currency balances were to become worthless computer entries and didn’t guarantee buying essential stuff, Moscow would be rational to stop accumulating them and stockpile physical wealth in oil barrels, rather than sell them to the West. At the very least, more of Russia’s money will likely shift into gold and Chinese assets.”

The point is that, while periods of crises trigger a rush into physical gold (and silver), the measures taken by the west in an attempt to punish Russia financially and economically could backfire by causing central banks globally to reassess their exposure/reliance on the dollar and other fiat currencies as “monetary reserve” assets and to look at further building physical gold and other hard asset reserves that are not kept in foreign central bank custodial accounts. On top of this, price inflation that is getting worse. Factoring in the fact that the allocation of gold, silver and mining stocks to investment portfolios – particularly institutional portfolios – is at an extreme low as a percentage of assets, and the set-up is in place for an explosive move in the precious metals sector.

Wall Street Silver invited me back onto its podcast to discuss the various factors that could ignite a historic move in gold, silver and the mining stocks:

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Many of the junior exploration/development companies I cover, recommend and invest in have the potential to be 10-20 baggers from their current down-trodden level. I look for ideas that have few “eyeballs” looking at them – I strive to identify junior explorers before the crowd discovers them. I also look for relative value trades in the larger cap miners. You can learn more about my newsletter here:  Mining Stock Journal information.  I do not take compensation of any type from mining companies and I have been doing my own research in the sector for over 20 years.

Carvana ($CVNA): The Drexel Burnham Lambert Of Car Finance

Carvana reported Q4/full-year 2021 numbers on February 24th after the close. The Q4 net loss was wider than forecast at $1.02/share vs 41 cents/share a year ago. Revenues “beat” estimates, as unit sales were 113k vehicles vs 72k in Q4/2020. The operating loss for Q4 and the full-year was $104 million.

Where the numbers really get interesting is in the Statement of Cash Flows. CVNA’s operations burned $2.5 billion in cash during 2021 vs $608 million in 2020 and $757 million 2019. The Company also spent $557 million on capex. Total cash burn in 2021 was $3.15 billion. This was funded by a $3.5 billion increase in debt. Carvana uses debt to fund its massive cash flow burn and to fund Ernest Garcia II’s colossal extraction of cash from CVNA. This by definition is Ponzi Scheme on a scale that would make Bernie Madoff blush.

More shocking than CVNA’s financial performance, the Company announced the acquisition of ADESA’s wholesale physical car auction business. ADESA is subsidiary of KAR Global (KAR – $18.94). CVNA is paying $2.2 billion, all of which is funded with debt. CVNA is also taking down another $1 billion in debt to fund $1 billion in “improvements” across ADESA’s 56 auction sites.

I pulled up ADESA’s numbers as broken out in KAR’s 10-K. First, over the last three years, ADESA’s revenues have plunged from $2.1 billion in 2019 to $1.5 billion in 2021. In 2021 ADESA squeaked out a $21.4 million operating profit. This compares to a small operating loss in 2020, but was down from an operating profit of $264 million in 2019 and $307 million in 2018. On this basis, CVNA is paying 102x the 2021 operating profit.

But CVNA is taking down a total of $3.2 billion in debt for this deal, including an additional $1 billion to fund capex improvements. The total amount of debt being used for this transaction is a whopping 149.5x operating profit. Regarding the $1 billion borrowed to fund improvements, KAR had planned just $115 million in capex for 2022 for ADESA.

While I believe using the operating income multiple is the “cleanest” number on a GAAP accounting basis, using ADESA’s 2021 EBITDA of $194 million, CVNA is paying 16.8x EBITDA. This is a “nose-bleed” multiple for a business with thin profit margins and a shrinking revenue based.

Using an EBITDA multiple to justify the amount of debt used in a buyout is a problematic gimmick popularized by Drexel Burnham Lambert. Based on ADESA’s historical numbers, the amount of D&A and capex is similar each year, which means that in order to avoid cannibalizing the asset base, the cash flow represented by D&A needs to be reinvested. The amount of cash represented by D&A therefore is not available to service debt or pay out dividends to shareholders.

CVNA is thus paying an absurd price for a car auction business with a shrinking revenue base and tiny operating income. What’s worse, it’s funding the entire purchase with $3.2 billion additional debt. This is on top of the $3.5 billion in debt needed to fund its cash flow burn in 2021.

When this deal settles, CVNA will have $6.4 billion in long term debt. It also has $2 billion outstanding under its short-term revolving facilities, which I believe is secured by vehicle inventory (floor financing primarily). Nevertheless total debt outstanding will be $8.4 billion. In 2021, CVNA’s interest expense was $176 million. A good estimate for 2022 interest expense is that it will be close to double to $352 million. Unless Moses appears and parts the Red Sea for CVNA in 2022, CVNA will be borrowing more money in 2022 to fund interest payments.

This leads to the question of what bank would possibly allow CVNA to borrow $3.2 billion to fund the ADESA acquisition, given the numbers as laid out above. JP Morgan and Citi are funding the debt. I don’t know if they will be syndicating part of the loan to other banks or to hedge funds until this deal closes and the 8-K is filed. As part of the acquisition, CVNA will assume KAR’s $2.5 billion in finance receivables plus $579 million in PP&E. The debt will be fully secured by these tangible assets and likely anything else unencumbered on CVNA’s balance sheet (Ally’s warehouse loan facility is secured by vehicle inventory).

The motive to fund this cesspool entirely with debt is profits. Until the docs are filed, we won’t know the rate of interest on the JPM/Citi loan. But in all likelihood the rate of interest will be higher than the rate paid by a company like Carmax on its secured debt facilities. My best guess is that JPM/Citi are going into this with an asset package that, at least on paper, over-collateralizes the amount of debt.

JPM/Citi will earn a huge fee on the transaction plus they will earn a big spread on the rate charged to CVNA vs the near-zero cost of capital for these banks. I’m also guessing that the two banks will lay off part of the credit risk via credit default swap transactions with hedge funds. From this standpoint, the loan package at least cosmetically entails low risk relative the amount of fees and interest the two banks will skim.

Why would CVNA want to do this deal and why would CVNA’s Board of Directors approve it? As for the Board approval, I don’t know. Maybe someone can write Dan Quayle (he’s a director) and ask him. Recall that CVNA outsources several operational functions to DriveTime (Carvana’s Cash Burning Ponzi Scheme). This is a corrupt, related-party arrangement used by Earnest Garcia to suck $100’s of millions in cash out of CVNA.

It looks like this deal was put together in order to give Garcia’s DriveTime business the ability to mine huge fees securitizing and servicing the ADESA finance receivables. In addition all of ADESA’s used car reconditioning needs, similar to Carvana, will presumably be outsourced to DriveTime.

CVNA is a house of cards riddled with conflict of interest, securities fraud (the finance receivables business) and financial fraud (the DriveTime relationship). Its operations went from burning $35 million in 2015 to burning $2.5 billion in 2021. CVNA requires outside investor money from the issuance of equity and debt – mostly debt – to fund the cash burn. It has been doing this for seven consecutive years.

Eventually this company will collapse and the shares will be worthless, but not before Ernest Garcia has extracted many billions from this scheme – sale of his stock plus the cash sucked out by DriveTime. In a different era (30 years ago), CVNA would have been shut down by the regulators similar to Drexel Burnham Lambert. If the bear market takes the SPX down another 30-40% in the next 12-24 months, CVNA will hit the wall.

This analysis is from the February 27th issue of my Short Seller’s Journal. At the time CVNA was trading at $152. My subscribers and I cleaned up shorting and buying puts on CVNA. In every issue I provide put option ideas to accompany my short ideas. I am still long puts on CVNA because I think it will go below $10 within the next 24 months. You can learn more about my newsletter here: Short Seller’s Journal