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Eastern Hemisphere Demand Is Driving The Gold Price

The following commentary is from the opening salvo in the May 30th issue Mining Stock Journal and was also written for Kinesis Money. Note: in that issue I present a review of Freegold Ventures in response to a subscriber request and comment on New Found Gold’s acquisition of Labrador Gold also in response to a subscriber request, along with updates on my “portfolio” companies. I also offer a quick notes on several junior silver mining stocks.

A good friend of mine mentioned that CNBC’s website featured a positive article on gold on its front headlines page on May 27th. He was wondering if he should be worried when one of Wall Street’s public relations outlets turns bullish on the precious metals. It’s a valid question. However, one of the “experts” cited in the article was a strategist from Australia’s ANZ Bank, who attributed the price rise in the metals to “weakness in the U.S. dollar” and “retreating U.S. Treasury yields.”

This was curious because that assertion is easily fact-checked. As it turns out, yes the dollar index is 1.8% below where it was trading at the beginning of May, but it’s 4% above where it was at the beginning of 2024. Furthermore, the 10-year Treasury yield is considerably higher now than at the beginning of 2024 (4.55% now vs 3.87% then). In fact, the entire yield curve from the 2-year Treasury out to the 30-years Treasury has been trending higher since the beginning of the year.

Moreover, the Fed is not expected to lower the Fed funds rate until later this year, if at all. I thus would not be worried about the type of information that CNBC is publishing with respect to the precious metals market given that one of its so-called “expert” sources was predicating his attribution for the move higher in gold on factually incorrect information.

Rather, based on the available data, and recall that China only reports gold import data that flows through Hong Kong but not Beijing or Shanghai, China has been importing a massive amount of gold this year. Thus, eastern hemisphere gold buying, particularly from China, appears to be the force driving gold and silver prices higher currently.

It’s a given that the Chinese Central Bank is buying a lot of gold currently, and likely quite a bit more than it officially reports, in its effort to diversify its reserves out of U.S. dollars and into other forms of money. On top of that, the Chinese public is buying gold at a rate that is twice the amount of domestic gold mine production. According to the China Gold Association, consumers in China bought 308.9 tonnes (10.9 million ounces) of gold in Q1 2024. Chinese gold mines produced 139.1 tonnes of gold in Q1. 53.2 tonnes of that was a product of imported gold ore.

In addition, according to the World Gold Council – and we know it is unable to track all of the gold imported by China – Central Banks globally bought a record 290 tonnes of gold worth $24 billion in Q1 2024. But note that the ten Central Banks reporting an increase in gold reserves are based in the eastern hemisphere (chart and data from Metals Focus, World Gold Council and Refinitiv GFMS by way of the article linked above):

The graphic above is for Q1. In addition, in April India imported $3.11 billion worth of gold vs $1.01 billion in April 2023.

Given that a record amount of physical gold is being accumulated in the east right now, it’s pretty clear, at least to me, that the demand for physical gold is the biggest factor in driving the gold price higher.

The same analysis applies to silver. The Silver Institute is forecasting a 219 million ounce supply deficit in 2024. However, with the sharp rise in the gold price, it appears that the Indians have shifted from buying gold to gorging on silver. In Q1 2024, India imported 3,730 tonnes of silver, which exceeded the amount imported for the full-year 2023. That rate is running about 50% higher than the all-time high of 9,450 in 2022. (source: Manisha Gupta, CNBCTV18 in India, news editor – commodities & currencies).

Silver imports into China do not get reported other than silver concentrate. But it is thought that China buys and uses quite a bit more silver than is produced domestically. The Chinese Government has been working on a massive nationwide solar energy installation program which uses most of the silver produced annually by the mining industry.

Data from the Shanghai Gold Exchange shows that silver withdrawals YTD through the end of April were up 16.6% YoY. The demand is coming from manufacturers and banks. Current premiums for silver on a daily basis have been running about 10% above the world spot price of silver, which reflects continued strong demand for silver in China.

The bottom line is that, while the western mainstream media and market “experts” appear to be clueless with regard to the factors driving gold and silver higher, an examination of the demand for both metals in the eastern hemisphere leads to the conclusion that an enormous amount of physical buying from Central Banks, industrial users and the general public is likely by far the biggest factor in both driving gold to all-time highs and also triggering a technical breakout of silver than are any macroeconomic factors in the U.S.

Super Micro Computer’s 10-Q Is Loaded With Red Flags

The following analysis of SMCI is from the June 2nd issue of bear newsletter. You can learn more about here:  Short Seller’s Journal

Super Micro Computer (SMCI – $750) – Reported its FY 2024 Q3 numbers April 30th. Revenues were up more than three-fold YoY but that’s entirely attributable to AI-mania. However, from Q2 to Q3, revenues rose just 5%. There might be some seasonality in that but that’s a dramatic slow-down from YoY. Also a very dramatic slow-down from the 72% rise in revenues from FY 2024 Q1 to Q2. That said, management raised full-year FY 2024 guidance higher by about $400mm. That may be per-meditated per my analysis below.

The trail of red flags with SMCI starts here. In Q3 ’24, it’s largest customer accounted for 28% of SMCI’s accounts receivable, up from 23% in Q3 ’23. Its top three customers accounted for 61% of SMCI’s accounts receivable in Q3 ’24 vs Q3 ’23 when its top two customers accounted for 42.5% of accounts receivable.

I also happened to notice this “gem” in the 10-Q. SMCI has an agreement with Ablecom, a Taiwanese contract manufacturer, for product development, production and service agreements as well as product manufacturing agreements, manufacturing services agreements and lease agreements for warehouse space. The issue? Ablecom’s CEO, Steve Liang, is the brother of SMCI’s President, CEO and Chairman of the Board (Charles Liang). Steve Liang owns 36% of Ablecom while Charles Liang and his wife own 10.5% of Ablecom.

SMCI also has a distribution agreement with Compuware, including an arrangement for product development and manufacturing services similar to those with Ablecom plus lease agreements for office space. This issue? The CEO of Compuware, Bill Liang, is the brother of Charles and Steve Liang. In addition, a sibling of SMCI’s Senior VP of Business Development, and who is also a director of SMCI, owns 11.7% of Ablecom and 8.7% of Compuware.

This is a cozy and likely not-arms-length relationship among the three brothers and their companies as well as the sibling of the other SMCI executive. It smells really bad. Circling back to the customer accounts receivable risk detailed above, what’s to prevent SMCI from stuffing product into Ablecomm and Compuware, recording that as sales and then booking the sales into accounts receivable in order to boost sales. I’ll note that concentration from the top three customers has ballooned YoY. While there’s no way to prove this without access to the inside books, I would not rule this out.

The reason I say this is there’s some strange changes in SMCI’s statement of cash flows moving from 2023 to 2024, when the surge in revenue growth occurred. Through the first nine months of FY 2024, SMCI generated $855mm of GAAP net income but its operations burned $1.8 billion in cash. The majority of this was from a huge surge in inventory. But there was also a $507mm increase in accounts receivable. That’s a rather large number considering that accounts receivable grew $356mm in thru the first six months of SMCI’s fiscal year (through December). But there’s more. Accounts receivable was a $302mm source of cash in Q1 FY 2024.

I truly believe there’s something fishy going on with the incestuous relationship among SMCI, Ablecom and Compuware and the strange behavior of SMCI’s customer concentration and accounts receivable. Further to this point, SMCI raised $1.75 billion in a convertible bond offering in February. Tech companies with SMCI’s valuation multiple gush cash flow and do not have to raise money like this. At the end of 2023 (SMCI’s FY ’24 Q4) SMCI has $99 million in long term debt and $375mm in total debt. Just one quarter later SMCI has $1.86 billion in total debt.

The increase in capex YoY through the FY first nine months, just $110mm, does not explain the need to raise $1.75 million through debt issuance. If SMCI was borrowing to fund a high-growth rate, capex would be many multiples of that $110mm through FY 2024 nine months. The more I pour over SMCI’s financials in conjunction with the footnotes, the more I believe that its incestuous business relationship with Ablecom and Compuware is a serious issue.

On May 9th, this SEC filing hit:

SMCI was in SEC non-compliance with the rules governing the composition of the Board of Directors’ audit committee. Not that I watch for it, but I can’t recall ever seeing that red flag. The audit committee needs to have three independent directors. Ms. Lin is a chemical engineer and has zero experience in finance and accounting. Her previous jobs were engineering-based. I did run across an article from August 2023 which stated that she owned, at the time, over $4 million worth of SMCI stock. Something does not smell right here either.

The Robert Blair appointment to the audit committee is equally puzzling. Blair is also an engineer. He was CEO of a semiconductor company until 2018 that was acquired by a private equity firm in 2022. Since then he’s been on the board of a technology licensing company where he previously was CEO. His background is in marketing, sales and engineering. What does any of his experience, or Ms. Lin’s experience, have to do with overseeing the accounting and financial statement preparation of SMCI? The SEC delisting notice and the two executives selected to “remedy” the delisting notice, along with the incestuous fraternal relationship detailed above are major red flags at SMCI.

The stock market must agree with my assessment of SMCI. I wrote the above analysis the week leading into Memorial Day weekend on May 23rd, when the stock was trading well over $900 before closing at $847 that day. It closed Friday at $784. It declined every day last week after Monday. This is despite copious amounts of promotional hype from stock-pushing media outlets.

SMCI has knifed below its 21, 50 and 100 dma’s. I expect to head for its 200 dma ($545 on June 3rd) unless the tech sector bubble continues to reflate. That ship may have sailed, however. I’m short SMCI by way of near-money, short-expiry puts and longer-dated, OTM puts (Sept/Nov).

Strong Global Gold Demand Will Propel Gold Higher

The following commentary is the opening salvo to the May 2nd issue of my Mining Stock Journal. You can learn more about this mining stock newsletter here:  Mining Stock Journal information

“The ‘other side’ has a problem.” – John Brimelow, formerly of Brimelow’s Gold Jottings”

For many years John Brimelow published a daily report and commentary on the global gold market, with specific emphasis on the eastern hemisphere demand for physical gold, particularly China, Indian, Turkey and Viet Nam. It was a pricey newsletter targeting primarily institutional investors who focused on precious metals and commodities investing. His newsletter contained gold market data and statistics that rarely makes its way into the western mainstream media. John still emails several of his long-time subscribers, including me, with frequent updates of the latest demand data from the east.

The quote above references an email he sent on April 26th which reported that premiums charged by Indian gold dealers rose to $5 over official domestic prices after having been negative for nearly two months. Indians pay a 15% import duty plus a 3% sales tax, or 18% more than the world gold spot price. Thus, at $2300 gold, Indians minimally pay an added $414 above the spot price, or $2714 per ounce. However, the premium/discount factor reflects the level of demand. The premium or discount measures the relative supply/demand for gold by Indians. When dealers can charge a premium it means that demand is strong relative to the amount of gold flowing into India.

What’s most interesting about this is that, when gold rises sharply over a short period of time as it did from March to mid-April, Indian demand slows considerably. Over short periods of time Indian demand is price sensitive and the premium flips to negative. They tend to curtail buying when the price runs higher and resume buying after it pulls back. However, once they “acclimate” to a higher price level, strong demand resumes. The reversion to a premium this past week means that gold demand has picked up considerably again.

But it’s not just the Indian populace buying gold for investment and as jewelry for seasonal holiday and wedding festivals (the spring and the fall are when Indian demand spikes), but the Indian Central Bank, the Royal Bank of India (RBI) has been has been steadily and consistently accumulating more gold on a monthly basis. As of the end of March, the RBI’s gold reserves hit an all-time high. But not only that, according to the Center for Monitoring Indian Economic Data as well as the World Gold Council, The RBI’s net buying of gold YTD has already surpassed its net buying for all of 2023.

The RBI thus has been one of the primary entities driving the price of gold higher.

But it’s not just India. Per Brimelow’s email referenced above, dealers in China are charging $20 to $25 per ounce above the global spot price. This reflects the steady $25 to $30 premium to world gold that has been reported by the Shanghai Gold Exchange. Moreover, China’s net gold imports via Hong Kong rose 40% over February (Hong Kong Census and Statistics Department). This plus the price premium buyers are willing to pay reflects strong investment demand by Chinese investors as well as the Peoples Bank of China. Keep in mind that the Hong Kong data does not account for all of the gold flowing into China. The Government does not report the amount of gold that enters China via Beijing and Shanghai.

And it’s not just India and China. According to the World Gold Council, total global demand for gold rose 3% YoY in Q1 2024. In fact, Central Banks bought more gold in Q1 2024 than any other first quarterly period on record. This was driven largely by persistent Central Bank buying and high demand from Asian investors. Based on WGC numbers, investment demand (bars and coins) rose 3% YoY in Q1 while demand for gold used in technology jumped 10% YoY. The wild card is the PBoC. While it reports “official” holdings monthly, research done by a few different analysts (most notably Alasdair Macleod) shows that official numbers are just a fraction of the amount the PBoC holds and accumulates. I have detailed previously that China does not report the Beijing and Shanghai import data specifically to “help keep PBoC purchases discreet” (South China Morning Post).

Circling back to Brimelow’s comment that “the other side has a problem,” he is referencing the both the massive bank short interest in gold derivatives, most visibly Comex contracts and LBMA forward contracts, as well as the harder to quantify short-fall of vaulted custodial unallocated physical bars backing the amount of potential claims on those bars. The surge in demand for physical bars with immediate delivery requirements thereby has the potential to trigger a vicious short-squeeze in gold which would drive the price considerably higher.

With or without a short-squeeze, the demand for physical gold has been the catalyst pushing the price of gold higher. I was looking for a pullback/consolidation of the sharp move higher from March to mid-April which created an extreme technically overbought condition in the precious metals sector per the RSI and MACD momentum indicators. That said, given that it appears that world demand for physical gold – particularly in the eastern hemisphere and middle east – will limit the magnitude and duration of the correction that is occurring currently in the sector. Historically gold will often correct down to its 50 dma after a sharp price rise. The 50 dma currently is at $2236 (as of May 1st). I’m not making that price prediction, per se, I’m just stating the lay of the land.

Regardless of the price path, the current pullback will set-up the foundation for another large, sustained move higher in the precious metals sector, especially now that the Fed announced that it is reducing the amount of its Quantitative Tightening program per the latest FOMC policy statement.

Silver Breaks Out – Is There Short-Squeeze Potential

The GSR is currently at 82, after trading as high as 92 earlier this year and up to 97 in 2023. It traded down to 63 in early 2021, which put silver at $30. If gold were to hold at just $2400 while the GSR falls to 63, the conservative price objective for silver would be $38. But it’s silly to assume that silver would move 30% higher from its current price while gold stays constant. So $38 is a very conservative minimum level price objective.

If the current bull move in the precious metals sector resembles the move from late 2008 to mid-2011, the GSR could fall all the way to 31, where it bottomed in 2011. Let’s give gold a more realistic price target of $3000 in this scenario. If the GSR were to drop to 31 eventually, that would imply a price objective of $96 for silver.

Craig Hempke of the TF Metals Report fame invited me onto his podcast to discuss gold and silver, specifically silver, and what happens after silver breaks over $30. We also discuss some mining stocks that I like:

My newsletter twice-a-month precious metals market commentary/outlook as well as mining stock investment ideas, particularly the junior project development micro-cap stocks. I also cover and recommend a handful of producing mining stocks. To learn more, click here:  Mining Stock Journal

Arbor Reality Is Dead-To-Rights

The following commentary and analysis is from the May 5th issue of my Short Sellers Journal newsletter.

Arbor Realty (ABR) – “Rising interest rates have negatively impacted real estate values and have limited certain borrowers abilities to make debt service payments, which may limit new mortgage loan originations (sic) and increase the likelihood of additional delinquencies and losses incurred on defaulted loans if the reduction in collateral value [i.e. the stunning decline in CRE prices] is insufficient to repay their loans in full.” That statement is from the ABR 10-Q.

“It would require great analytical gymnastics and limited financial literacy to promote these results as anything close to “outperform” – Viceroy Research

LOL they “beat” consensus, huh? Revenues dropped 11.5% YoY. Income from mortgage servicing rights was clobbered 45%. This is a result of much lower loan origination activity. Despite lower revenues, expenses were basically flat YoY. Net income before dividends and non-controlling interests was down 28.4%. Net income for common shareholders plunged 32.1%. Great, they “beat,” though.

The earnings call transcript made for some interesting reading. Management did its best to slather mascara all over the earnings report and related statistics which show the rapid deterioration in its loan portfolio. In addition, management made no mention whatsoever of its intent to issue more shares. But after the market closed Friday, ABR filed a prospectus to issue up to 30 million shares as well as preferred stock, debt securities and warrants. And yet, in the liquidity section of the MD&A and on the earnings call management boasted about the amount of liquidity on hand. If that’s true, why further dilute shareholders by issuing more stock?

In March 2023 ABR had declared four loans as non-performing (NPLs) with a carrying value of $7.7million. By the end of Q1 2024, ABR had 21 NPLs with a carrying value of $465 million. It would have been worse but they kicked the can down the road by modifying $1.9 billion worth of loans in Q1. That’s 15.8% of its loan portfolio. The modifications occur because the borrower can’t make payments. The modifications include interest reductions and maturity extensions, with the delinquent interest payments deferred by being added to the principal amount at maturity. Given the third-tier quality of the multi-family and office buildings on which ABR has loaned money, in all likelihood the modifications merely defer default/foreclosure.

The only thing holding the stock up is the shareholder base, which won’t sell because of the 13% dividend. The dividend size is imposed on ABR because in order to maintain its status as a REIT, it has to pay out at 90% of its taxable income to shareholders. Note that net income available to common shareholders plunged 32% YoY and 36.8% from Q4 2023. Though net income was $57.8 million, the Company paid out $98.6 million in dividends to shareholders in order to maintain the 13+% dividend yield. At some point ABR will not have the liquidity to supplement the dividend in order to maintain that 13% yield.

The shareholders are largely high net worth investors looking for high-yielding stocks and registered investment advisors catering to their clients who want high current yielding stocks. They won’t sell until the Company hits the wall.

Per the chart below, ABR jumped 10.5% Tuesday on no news. Apparently management, which has highly questionable ethics, is trying to orchestrate a “meme-style” short-squeeze given the 42% short-interest in the stock. However options market-makers don’t seem concerned. The implied volatility of ARB’s shortest duration, near-money options is 55%. This compares to GME, for which the weekly, near-money implied vol is over 600%.

Arbor is furiously modifying and defering payment requirements on the garbage CRE loans that it has stuffed into CLO’s that is sponsors. In many cases it’s swapping current-pay loans it holds from non-performing loans in the CLO’s. Given the low quality of the multi-family apartment complexes that ABR has financed, these measures merely defer the inevitable default and foreclosure of these loans.

One last point, NYCB reported its numbers last week. The amount of defaulted loans surged 400%, amounting to $800 million in Q1. Multi-family loans, which is a big lending segment for ABR, accounting for 42% of the new defaults. It would be naive to think that the same issues plaguing NYCB are not affecting ABR’s loan portfolio. But entities both finance the dregs of office buildings and multi-family apartment complexes. I think the possibilty that ABR hits the wall before the end of 2025 is very real.

Disclosure: I own a large quantity of long-dated, near-money puts on ABR.

GATA Correctly Shreds Jeffrey Christian’s Gold Commentary

CPM Group’s Jeffrey Christian did a Youtube podcast in which he mocked the view that most if not all of the gold in “Ft Knox” has been used by the Fed and the U.S. Treasury to help control the price of gold since the late 1960’s (London Gold Pool).  The best proof those of us who are convinced that the Treasury’s gold plus an unknown quantity of gold held of behalf of foreign Central Banks has been hypothecated in the Fed’s effort to suppress the gold price is two-fold:  1) Contrary to Christian’s claim, there has not been a bona fide, independent audit of the Fed’s gold holdings since Eisenhower was the President: 2) the U.S. flinched, embarrassingly, when Germany requested the repatriation of half of the gold the Fed has “safekept” for Germany since the end of WW2; the U.S. balked then eventually agree to return 300 tonnes of the custodied gold, or 20% over seven years. Why not in just a couple of months similar to Venezuela’s repatriation of 200 tonnes of gold the prior year?

With the sanctions imposed on Russia by the U.S.,  along with the U.S.’ confiscation of Russia’s assets held at western Central Banks, eastern hemisphere Central Banks have been repatriating gold held in London vaults as well as adding to their existing gold stock.

As a third, and even more damning piece of evidence in support of the view that the Fed’s gold vaults are largely empty (except for the dust that has accumulated on the empty pallets on which gold bars were previously stacked), the Fed has refused to answer official inquiries about both the gold repatriation activity by foreign Central Banks and the questions about its gold market activities. It has even denied FOIA requests for this information. Why the secrecy? The Fed used to report this information. What changed?

GATA’s Chris Powell takes Jeffrey Christian to task over his glib dismissal of those who question whether the Fed has emptied its custodial vaults in its effort to suppress the gold price (Christian actually referred to the truthseekers as “scum”):

But contrary to Christian’s suggestion, the big question about U.S. gold reserve is not the narrow one of whether there’s still metal at Fort Knox but whether the U.S. government has foreign gold obligations and whether these obligations are so large that U.S. gold reserves at Fort Knox and elsewhere are potentially impaired by multiple claims of ownership.

In this respect the curiosity of a more candid and honest analyst might be piqued by the recent refusal of the Federal Reserve to answer even for a member of Congress whether foreign nations have been repatriating their gold that nominally has been vaulted at the Federal Reserve Bank of New York. The amount of foreign gold vaulted at the New York Fed used to be reported publicly by the Fed at various intervals. Why is it apparently a top secret matter now? Christian doesn’t seem to mind.

Chris’ entire commentary can be founder here:  CPM Group’s Jeff Christian battles straw men to distract from the big issues of gold

Possession is 100% of the law with physical gold and silver – if you don’t hold it yourself, you don’t own it

Builders Firstsource (BLDR) Is A Great Short

The analysis and recommendation below is from the March 31st issue of my short sellers newsletter. I present economic, market and individual company analysis from a truth-seeking perfective – no gaslighting allowed. Follow this link to learn more: Short Seller’s Journal information

Builders Firstsource, round two – One stock in particular that continues to baffle me is Builders Firstsource (BLDR – $184.55), which has run from $110 to $208 and back down to $184 since the end of October 2023.  BLDR is essentially a big hardware store and lumber yard chain that also provides pre-fabricated construction components and services to homebuilders and commercial real estate developers. The Company’s revenues and profits benefited from rampant lumber price inflation between early 2020 and early 2022. But that ship has sailed.

Over the past several years management has used aggressive, debt-financed roll-up acquistions along with highly aggressive merger GAAP accounting to project a high-growth business model. It has also used aggressive share buybacks, also funded with debt, to keep the stock propped up. But over the last four quarters its revenues and profitability have deteriorated rapidly. At the same time it has accumulated a massive amount of debt relative to the size of its balance sheet. Shorting BLDR is a great way to express a bearish view on the housing market and commercial construction activity.

I’ve profited from BLDR in the past and its financials continue to deteriorate. The Company released its Q4/full-year numbers on February 22nd. YoY for Q4 sales declined 4.7%. For the full-year sales plunged 25.1% to $17 billion from $22.7 billion in 2022 and $19.8 billion in 2021.

Incredibly, the Company did not provide a full income statement for Q4. But “adjusted” net income declined 6.6% for the quarter. This “as-adjusted” net income was down 38.4% for the full-year. The Company has repurchased a massive amount of shares in 2023, polishing up the EPS vs 2022, which is likely why the stock price is levitating.

But here’s why the terse table with “adjusted” net income is not to be trusted: in the full-year income statement the stated GAAP net income is $1.54 billion vs the $1.88 billion “adjusted” net income in the table with the select quarterly numbers – a $340 million difference. From this it’s not unreasonable to infer the quarterly GAAP net income was materially lower than what was disclosed in the “as adjusted” table. This is a really sleazy move by management.

There’s an even bigger red flag. The Company spent $1.85 billion for share buybacks in 2023, leaving it with just $66 million in cash at the end of 2023. At the end of February it issued $1 billion in unsecured 10-year bonds. The proceeds will be used to pay down indebtedness under an asset-based loan facility (similar to a revolver) and the rest will be used for SG&A. As of the end of 2023 the outstanding amount of debt was $3.2 billion, up from $2.9 billion at the end of 2022. At the end of 2023 the ABL facility had $464mm drawn. This means that, after paying that down with the bond proceeds, BLDR’s debt load will increase by approximately $500 million.

The book value of the Company is $4.7 billion. However, net of goodwill and intangible assets, the book value is zero. $3.7 billion of debt sitting on balance with a $0 tangible book value for a company in a highly cyclical business heading into a brutal economic downturn is an insane amount of debt. To be sure, for now there’s plenty of operating income to cover interest expense. But I anticipate that both residential housing starts and commercial real estate new construction likelywill hit a wall in 2024. For sure office building and multi-family projects, from which BLDR derives a substantial amount of revenue. This will translate into the rapid evaporation of BLDR revenues and cash flow.

Investors/speculators/perma-bulls have a short memory when it comes to chasing highly cyclical momentum stocks higher. With construction-related companies, the revenue and cash flow fountain suddenly turns off. These companies are left sitting on inventory that suddenly plunges in value. I truly believe the construction sector is on that precipice, as the rapid easing of financial conditions by the Fed since March 2023 has temporarily deferred reality for the real estate sector and construction sector.

BLDR has been a tough short, especially if you didn’t set a stop-loss or used puts. But it’s apparent to me that the fundamentals are deteriorating rapidly for its business model. The fact that management issued another $1 billion in debt in order to continue buying back shares (“general corporate purposes” my ass) is a big red flag.

I’m tempted to throw on a long-dated, deep OTM set-and-forget put position. Timing the top in this thing will be tough, if not impossible, but I feel confident that the stock will be below $110, from where it launched at the end of October 2023, within the next nine to twelve months. Right now I’m eyeballing January 2025 $150’s and January 2026 $100’s.

Is China Weaponizing Gold and Silver?

Over the last few weeks, the resiliency of the gold and silver prices to repeated attempts by the price management squad to pull the rug out and send them plunging has been remarkable – if not unprecedented in the 23 years I’ve been studying, researching and trading the precious metals sector.

While the financial media attributes the big move in the metals to a marginal decline in the dollar, in fact it’s the rapid deterioration of underlying economic, financial and fiscal policy fundamentals that are causing the devaluation of the dollar and capital flight globally into gold and silver. This is despite the fact that the sharp move higher has left the metals technically vulnerable to a price ambush on the Comex.

GATA’s Treasurer, Chris Powell, has penned a fiery, must-read commentary which suggests that it is possible that the West may finally be facing the consequences of decades in which the Governments have run big spending deficits, printed trillions of currency units and have devolved into abject corruption – and have operated using paper derivatives to mask these deadly sins by suppressing the price of gold. The fact that the canary has been dead for many years may now be apparent.

Maybe the sun isn’t the only thing being eclipsed tomorrow

Arbor Realty Trust (ABR) Is Going To Zero

The following short-sell analsys is from a recent issue of my short seller’s newsletter. To learn more about this follow this link: Short Seller’s Journal information

ABR loans money to speculators and operators who acquire CRE buildings – primarily multi-family and office buildings – either as “value” plays or rehab plays. It also underwrites GSE single-family and FHA multi-family mortgages but this is a tiny percentage of its operations. The loans that ABR both holds directly and that it stuffs into the CRE CLOs it sponsors are becoming distressed at an alarmingly rapid rate.

Given the increasing distress in CRE CLO’s and other risky debt instruments held by ABR and for which the number of non-performing loans (NPLs) are starting to pile up, I believe that ABR will collapse possibly within the next 18-24 months, depending on how quickly ABR’s borrowers can no longer make debt service payments and the degree to which multi-family and office buildings continue to lose value. It is highly likely that the stated book value of most of the real estate that collateralized the mortgages underwritten by ABR over the last several years, particularly when interest rates were near zero, is worth well less than the outstanding loan amounts. ABR has stuffed about 60% of this paper into CRE CLOs and it holds around 40%.

The bulk of ABR’s loan portfolio consists of risky bridge loan financing and CRE CLO loan obligations. Most if not all of the loans could labeled as “the dregs of the industry.” Per a report by Banco Santander, the percentage of loans in Arbor CLO’s that went delinquent in Q4 doubled from Q3 to 16.5%. According to industry data, this is about 2.5 times the delinquency rate for the CRE CLO market at large. Santander’s analyst expects the delinquency rate on ABR’s loans to continue rising this year. Of ABR’s $12.8 billion loan portfolio, about $7.3 billion is represented by loans used in CLO financing structures.

But it gets worse. According to specialized research firm, Viceroy Research (@viceroy-research/, based on data on ABR’s CLO book provided by CreditIQ, through the end of February 20% of the loans structured into ABR’s CLOs are now delinquent. The delinquency rate thus has risen just two months into 2024 from 16.5% to 20%. Also per Viceroy’s analysis of the data, the number of loans with a greater than 30-day delinquency rate has risen from 7 loans in September 2023 to 50 this month (March 2024).

In addition, the principal loan amount of ABR’s NPLs soared from 2022 to 2023. A loan is designated as non-performing when it is 90+ days past due. Per the table below from ABR’s 2023 10-K, the unpaid balance (UPB) of NPL’s jumped from $7.7 million in 2022 to $274.1 million in 2023:

With respect to the latter, ABR has been swapping some of the bad loans from the CLO trusts with the performing loans that the Company holds. But this is merely a short term fix. In going through the 2023 10-K, I spotted several areas of accounting treatment that raise red flags. The number of accounting red flags I noticed in reading through the footnotes of the 10-K gives me cause to believe that the $274.1 million is fraudulently understated.

Furthermore, in the face of the rapidly rising NPLs, management has been using extend and pretend gimmicks, like loan extensions and shell-game refinancings to defer the eventual default and foreclosure of many of these loans. As Viceroy Research notes, per data available from the trustee of ABR’s six CLOs (U.S. Bancorp), the average net operating income to debt service (debt service coverage ratio) is below 1. This means that the combined cash flow of each borrower with loans held by these CLOs is negative (table produced by

As mentioned above, for now ABR has been able to plug the cash flow holes in its CLOs by drawing down on the reserve in each trust, extending loan maturities and swapping performing loans held by ABR for NPLs in the CLO trusts.

For now, ABR is generating positive GAAP income. The weighted average interest rate on the mortgages it underwrites is 8.42%. But keep in mind that the average yield on the 10yr Treasury between 2021 and present is roughly 3%. The spread between the 10yr and the weighted average interest rate on ABR mortgages is 5.42%. This would imply a triple-C bond rating, which means this paper has a high probability of defaulting. Viceroy Research believes that every mortgage on ABR’s books, including the CLO mortgages, will go bust.

ABR produced $400.5mm in net income in 2023. But in my opinion this is because it is under-reserving for credit losses by a substantial amount. Part of this understatement is attributable to ABR overstating the amount of recovery (the amount of proceeds from selling after foreclosing on defaulted mortgages net of the the loan amount). In my opinion ABR is committing fraud in this regard.

ABR’s stated book value is $3.2 billion. If just 26% of ABR’s loans are wiped out, its book value goes negative. Keep in mind that 20% of ABR’s outstanding loan balance is delinquent and that rate of delinquency is rising rapidly. Furthermore, based on the recent building sale data, the commercial real estate values have started to head south quickly. The influx of multi-family units (detailed a few issues ago) will further exacerbate the rising distress rate of multi-family real estate.

The all-time high in ABR’s stock is $20. It hit $4 during the worst period of the covid ordeal. The state of distress in CRE is similar if not worse to what it was in 2020:

The caveat on shorting the shares outright is that, for now, ABR pays a 13% dividend. But if the loan performance data continues to deteriorate, that dividend won’t last much longer. Also, the short interest is 40%. I think the best way to express the view that ABR will hit the wall within the next 18 months is with October $10 puts. I also think August 2025 $5 puts are interesting. Recall that NYCB plunged from $10 to $3 after it reported bad numbers and cut its dividend. If ABR is forced to cut the dividend, the stock will trade below $5 quickly.

The Collapse Of CRE Debt Is Accelerating

The commentary below is the opening commentary in the latest issue of my short seller’s newsletter. You can learn more about here – also profile Arbor Realty (ABR), which underwrites loans for the worst type of CRE garbage:  Short Seller’s Journal information

The graphic above was sourced from @BankerWeimar. Powell once again earlier this month said that “bad commercial real estate loans will likely cause some bank failures but don’t pose a risk to the overall system.” Either he’s blind to reality or lying. Probably the latter.  All we need now is for Powell to assure us that CRE loan defaults are “contained” a couple more times to confirm that a collapse is around the corner.

The CEO of a big investment fund (Fortress Investment Group) that has been buying CRE loans at prices ranging from 50 cents to 69 cents on the dollar said that about half of the maturing loans in CMBS securities (commercial mortgage back bond trust) are troubled. But it is going to get much worse. The CEO of Cantor Fitzgerald warned recently that there could be as much ast $1 trillion in commercial real estate defaults coming over the next two years. Moody’s estimates that 80% of CMBS office loans are at risk of default or restructuring this year.

Part of the problem is the work from home trend triggered by the covid cluster-you-know-what. But there has been an oversupply of commercial real estate in most metropolitan areas for quite some time (20 years). I’ve seen data thats suggests some of the biggest cities now have an office building vacancy rate of 50% or higher. A local business rag here in Denver said that 38% of the office space in Denver is empty. Two buildings in San Francisco were recently written-down to zero by their owner (which will soon be the bank that is sitting on the mortgages).

Most of the existing CRE debt was underwritten while interest rates were below 2% and asset values were rising. As long as banks were willing to lend the trillions printed by the Fed, there were developers who would put up buildings. With rates much higher now and the value of CRE plummeting, it will be nearly impossible to refinance most of what needs to be refinanced over the next two years. The majority of buildings requiring refinancing are worth far less than the amount of debt outstanding. As an example, earlier this month an office tower in Chicago’s River North area went under contract at a price that was just 33% of the seller’s outstanding loan. An office tower in Baltimore that is 51% vacant is being auctioned at a starting bid of $4 million. And an office tower in Manhattan sold this month for $150mm. It was purchased in 2014 for $500mm.

Another big problem is there has yet to be consistent price discovery for the value of office buildings other than the fact that the value of office buildings continues to decline when there is a distressed sale. The Wall Street Journal published an article last week titled “America’s Office Fire Sale Has Barely Begun:”

Only 3.5% of offices sold last year came from a distressed seller, thanks to optimism and forgiving lenders…forced sales are still surprisingly rare. In 2023, only 3.5% of all office deals in the U.S. involved a distressed seller, based on analysis by MSCI Real Assets. Pressure is building slowly as leases expire: Many companies are reducing their space by 30% to 40% when their contracts end. Lenders are also eager to kick the can down the road. They don’t want to force borrowers to sell buildings into a weak commercial real-estate market, which would lead to punishing losses.

Per the report, as I suspected banks are giving distressed borrower loan extensions to avoid foreclosure and a distressed sale. The benefit of this is that the bank does not have to take a big impairment charge and a large write-off of the loan. But, unless there’s a miraculous U-turn in CRE akin to Moses parting the Red Sea, kicking the can down the road will make the problem even worse, particularly with the economy heading south.

Then there’s the issue of OTC derivatives. Despite the fact that CRE loans represent a small percentage of the loan portfolios at the biggest Wall Street banks, analysts and financial media reporters are overlooking the massive exposure of these banks to CRE via OTC derivatives. Massive. Much of that exposure is accounted for off-balance sheet (opaque data tables buried in the footnotes to the financial statements). This is thanks to accounting “reforms” in 2010 that enabled the big banks to move most of their risk exposure to OTC derivatives off-balance sheet. And the counterparty risk is enormous.

The distressed mortgages were a big problem during the great financial crisis but it was the bank banks’ exposure to the bad loans via OTC derivatives that pushed the banking system to the brink of collapse and triggered trillions in money printing. Goldman Sachs, which was exposed to AIG’s subprime mortgage holdings via credit default swaps, would have collapsed in 2008 if Henry Paulson had not convinced Obama and Congress to bail out the big banks. As well, Citigroup and Morgan Stanley likely would have disappeared.

Bloomberg published a report on March 19th which discussed rapidly rising impairment of CRE CLOs (collateralized loan obligations), which are used to finance risky commercial real estate projects – projects a bank won’t touch. The ongoing and accelerating melt-down in these CRE CLO’s is the basis for shorting Arbor Realty Trust (ABR), which I mentioned in the last issue and which is profiled below.

A CLO is a bond trust backed by a pool of loans. The trust is “sliced” into bond tranches which are ranked by ratings/risk level. The bonds that make up the tranches are sold to investors. The top tranche is considered least risky and receives the highest credit rating. The bottom tranche is a mezzanine trust, often too risky to rate and usually retained by the CLO sponsor. The securities attract “yield hog” investors who typically underestimate the risks but are attracted by yields that are higher than standard mortgage bonds.

The debt service payments (interest plus principal) are used to service each tranche based on seniority level. So the highest rated tranche is the first in line to receive payments. As the loans backing the CLO become distressed and the cash flow from the loans is not adequate to make payments to all of the tranches, there’s a cash reserve structured into the CLO that is used to make up the shortfall. When the reserve dries up, the CLO sponsor must make-up the shortfall up to a certain capped percentage. Once the cap is reached, the tranches go bust, starting with the lowest tranches and moving up as the cash flow shrinks.

The idea behind the CLO (or CMO) is that pooling the risky loans diversifies away enough risk of each individual loan and thereby reduces the risk of investing in the CLO tranches, particularly the higher-rated tranches. In addition, the initial value of the real estate backing the loans is greater than the loan amount (over-collateralization) and a reserve is funded to provide a buffer against some of the loans becoming delinquent. But that model failed in 2008 and it will fail again with CRE CLOs.

During the great financial crisis, even some of the highest rated tranches in these mortgage-backed trusts (primarily CMOs – collateralized mortgage obligations) ended up highly impaired.

For now the Fed is reflating the stock bubble in an effort to reflate the value of office buildings and multi-family apartments. But the supply of both exceeds demand for the foreseeable future (the highest influx of multi-family since Nixon was the President units hits the market) and Powell’s attempt to “push on a string” to stimulate demand will fail.

Powell himself admitted last week that liquidity conditions are loose. The Monetary Base (bank reserves + coin/currency in circluation) has risen nearly 10% since the end of February 2023. WIth this Powell is papering over the holes blowing open in bank balance sheets – both regional and the TBTF – from a rapid escalation in non-performing loans (CRE, credit card, auto). The Fed’s effort will fail, banks will collapse and inflation will be out of control.