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Super Micro Computer Is A Bag Of Fraud
This analysis is from the August 11th issue of my Short Seller’s Journal. I also did a deep-dive on it in early June and first presented it as a short idea in early February: Short Seller’s Journal information
Super Micro Computer (SMCI – $508) – SMCI’s share price was blasted for $125 (20%) on Wednesday when it reported its FY Q4/full year numbers Tuesday after the close despite beating revenue consensus and announcing a 10:1 stock split. The Company’s gross margin was well below estimates and forward guidance was much lower than estimates. The Company’s gross margin plunged to 11.2% from 15.5% in Q3 and 17% in Q4 2023. The operating margin fell to just 6.4% from 9.8% in Q3 and 10.3% in Q4 2023.
I first presented SMCI as a short in the February 11, 2024 issue of SSJ when the stock was at $740. This is the second time I exposed teh red flags at SMCI: Super Micro Computer Red Flags. In Februrary I remarked that its 10.1% operating margin was quite low, particularly for a company that is supposedly an innovative tech company trading with a 57.6 P/E and 4.5x revenues (at the time). In comparison, AMZN’s AWS operating margin was 26% in 2023 while MSFT’s operating margin was 43.5%. Now SMCI’s operating margin is just 6%.
SMCI’s EPS declined 18.6% in Q4 from Q3 despite the fact that revenues rose 37.8% QoQ. That shows the degree to which SMCI has no ability to control the prices it pays to suppliers or dictate the prices of the products it sells. Let’s face it, the bulk of its business is building racks to hold servers at data networking centers – not exactly a business with room for innovation or creating products with competitive advantages. The consumer equivalent of SMCI’s products is television and stereo racks.
SMCI also has revenue concentration and accounts receivable payment risk. Its top three customers accounted for 61.4% of its revenues and two of these customers accounted for 19.3% of its accounts receivable. Admittedly these are probably big tech companies like Meta and Microsoft. But at some point there’s going to be an oversupply of data center, cloud computing capacity – just like there became a big oversupply of fiber-optic capacity during the dot.com/tech bubble – and there will be a dramatic drop-off in server rack orders from its largest customers.
Another issue is the rate at which the Company is burning cash. For the full-year FY 2024 SMCI’s operations burned $2.47 billion in cash, including $630mm in Q4. Its operations thus are consuming over $600mm in cash per quarter right now. It funded that cash burn by issuing $1.6 billion worth of shares and a $2.3 billion convertible bond deal in its FY Q3. Both of which are highly dilutive to existing shareholders.
SMCI’s P/E has corrected down to 25.5. In my opinion that is still too high, particularly if earnings per share continue to decline. The Street consensus for its FY 2025 is $44.29. Over a four quarter average, that’s $11.07/share, or 84% above the Q4 EPS. It’s hard to believe that the Street still has that kind of earnings growth built into its models.
SMCI’s best case is that EPS stay flat for the next four quarters. But I don’t see that happening. I expect that several big companies who are spending heavily on AI chips and server capex will start to cut back. This will adversely affect SMCI.
I expect earnings to continue to decline. That means a 25 P/E for a business with 6% operating margins and declining earnings is too high. Hell the homebuilders have much better margins right now and they trade at an average of an 8 P/E. If SMCI can replicate its Q4 EPS over the next four quarters, and we apply an 8 forward P/E because it’s a low margin business with no earnings growth, that implies a forward stock valuation of $192/share.
The easiest money shorting SMCI has already been made. But I think this stock will get cut in half over the next year, which would put it at $250 where it was trading before AI mania engulfed the markets.
Fed Stealth QE Is Driving Gold’s All-Time High Price Run
The following commentary is an excerpt from my Mining Stock Journal newsletter. To learn more about it follow this link: Mining Stock Journal subscription information. Note: I will be hiking the price from $20/month to $40/month soon. Existing subscribers will be grandfathered at the current rate.
Given the large increase in the amount of gold that is flowing to the east, I think it’s easy to make the case that this massive demand for physical gold is a major factor in pushing the price of gold higher. A similar argument can be made for silver, particularly with India and China, which require a lot of silver for their implementation of national solar energy grids. The breadth of countries with Central Banks now accumulating gold was not much of a factor until the last couple of years and I believe the proliferation of eastern Central Banks has offset the seasonal weakness that historically has affected the March through June period.
Secondarily, despite the rhetoric about the Fed’s hawkish monetary policy, take a look at the Fed’s actions vs its words. Despite the maintenance of the Fed funds range at 5.25-5.50% and the monthly QT operations, financial system liquidity has been rising. The M2 money supply measure has been rising since October 2023. More significant, the Fed’s reverse repo facility has been drained over the last twelve months. This is money that returns to the financial system, primarily in the form of banking and financial system liquidity. The Fed could keep that money in the facility with just a small increase in the rate it pays. But for some reason it wants that liquidity to flow into the financial system. In addition, the Chicago Fed’s National Financial Conditions Index shows that the Fed has set the easiest systemic financial conditions since the end of January 2022, one month before the Fed began hiking rates.
The Fed is thus masquerading as a monetary hawk when, in fact, key liquidity indicators reflect the reality of an easy monetary policy. I would argue that the Fed has created this systemic liquidity to offset the deteriorating quality of large and small bank balance sheets – primarily CRE and consumer loans but also leveraged corporate loans. Regardless, the rise in financial system liquidity, in addition to the massive demand in the physical market, is the reason gold and silver prices have been rising steadily since November 2022.
M2 has been rising since October 2023. Most market participants are unaware of this fact because the M2 posts on social media show the YoY percentage change in M2, which is deceptive. This chart is through the end of June, the latest date for which the Fed posts M2 data (intentionally):
Similarly, and again through the end of June, the Monetary Base (formerly MZM) has been rising since March 2023:
The increase in the Monetary Base is more impactful in terms of causing inflation (dollar devaluation) because the Monetary Base is coins/currency in circulation plus banks reserves. Both represent instant spending or lending power.
The final, and foremost aspect of the Fed’s “stealth QE” is the $2 trillion drain of the Fed’s reverse repo facility. The facility was at $2.375 trillion at the end of March 2023. Since then more than $2 trillion has disintermediated into funding Treasury debt and the banking system, ultimately finding its way into the wider financial system. The Fed could have kept that liquidity “captive” with just a small hike in the rate it pays for overnight RRPs. But note that the Fed let the facility start draining around the same time as the regional bank CRE crisis. That crisis, by the way, is now detonating bombs on the Too Big To Fail bank balance sheets (among several other areas of balance sheet distress).
This “stealth QE,” which is undeniable, is the reason that gold has been hitting successive all-time highs. It will be interesting to see if the Fed cuts rates at its September FOMC meeting because it’s obvious the economy is flopping around like a near-dead fish on a dock in Montauk. The problem is that a rate cut could trigger another wave of yen carry-trade unwind, which would cause another sharp sell-off in the stock market.
But for those scratching their head at the impressive rally in gold, look no further than stealth QE that has been implemented by the Fed since March 2023. Precious metals investors have interest rate cuts and the official re-start of money printing in the coming months, which I believe will drive the gold price into the $3,000s in the next 12 months. Silver will outperform gold in that scenario.
Big Breakout Ahead For Silver
Gold recently broke out of 12-year cup/handle technical formation. The price objective from this breakout is at least $3,500. I was looking at a long-term chart of silver. I did not realize it looked like this:
For a refresher, here’s the gold breakout:
The silver cup/handle has lasted for 13 years. The duration of the cup/handle will generate a longer duration, bigger move higher than many believe is possible. Of course, that skepticism preceded the move from $7 to $49 between late 2008 and March 2011. A 7x move when the silver cup/handle breaks out would take silver close to $200…
The Housing Market Is Crashing – Rate Cuts Won’t Help
The following commentary is from the August 4th issue of my Short Sellers Journal weekly newsletter. Click on that link to get more informations. The charts below are through August 2nd. In the August 11th issue I’ll be reviewing Builder Firstsource’s Q2 numbers and explaining why I think it will be a highly profitable short (or use of puts) $BLDR.
Housing market update – Redfin posted data this past week that reflects the degree to which home sales activity is tanking. In June, 15% of home purchase contracts were canceled and 20% of listings nationwide had price cuts. Both metrics are the highest on record for June. In addition, and this is pertinent to CRE and multi-family housing (ABR), new apartments are taking longer to rent out because a near-record of them are hitting the market (new con-struction multi-family units).
The pending home sales index for July rose 4.8% in June from May but declined 2.6% YoY. The not seasonally adjusted numbers showed a 7.8% decline YoY. That comp likely is more reflective of the YoY decline because it doesn’t contain statistical errors in the “adjustments” calculus. The July increase over June is likely just a statistical bounce because the pending home sales index had been trolling record low levels going back to 2001, which is when the data series began. It also correlates with the brief bounce in mortgage purchase applications during mid-June. Pendings are based on contracts signed during June.
Speaking of the weekly mortgage purchase index, it slid to 132.8 which is the lowest level since the week ending May 31st when it hit 132.3. The index continues to press its lowest level since 1995. On a not seasonally adjusted basis, the index is down 14% YoY. It’s down 24.1% since January 19th. Again, the housing market is still in its strongest seasonal period of the year. After that brief bounce in June it’s been in a sharp downtrend and reflects the growing weakness in home sales activity despite the rapidly rising inventory of new and used homes.
It looks like the homebuilders may be headed south. The Dow Jones Home Construction index looks to be rolling over from an irrational move higher since July 9th plus the RSI and MACD are heading south from overbought readings:
The caveat with the builders is that the 10yr yield plunged 40 basis points last week from 4.19% to 3.79% on Friday. I don’t know if the hedge fund algos will start to buy homebuilders if the 10-year yield continues to fall. On the other hand the market may continue dumping homebuilders based on the recent plethora of economic news showing a weaker than previously perceived economy. Certainly the market can not ignore the extreme overvaluation in the homebuilders if the new and used home sales numbers continue to head south.
Beazer Homes (BZH – $28.57) reported its FY Q3 numbers on Thursday after the close. Revenue increased 4% YoY due to a 4.4% YoY increase in closings. However, that’s it for the positive aspect to the numbers. The gross margin declined 310 basis points YoY, which means the Company either had trouble controlling building material and labor costs or offered big incentives to induce buyers – or both. Operating income plunged 38.2%. New orders fell 10.8% YoY and the cancellation rate jumped to 18.6% vs 16.1% in FY Q3 2023 and from 16.2% through the first half of its FY this year. The Company did not offer Q4 guidance.
Looking at the balance sheet, cash fell to $73 million from $132mm in FY Q2 2024 and $345 million at the end of its FY 2023. The inventory jumped 23.6% from FY 2023 year-end and it was up 5.5% vs FY Q2. The 10-Q has not been released yet but BZH’s operations burned $239mm in cash thru 1H FY 2024. With the $117mm increase in inventory it must have burned cash in its Q3. Total debt increased by $46mm from Q2 and $91mm from FY 2023 year-end.
The numbers are going the wrong way for Beazer. Based on the drop in new orders, revenues will soon be heading south, profitability has been hammered, cash is evaporating, inventory is rising, the cancellation rate is rising and the operations are burning cash. It won’t be long before BZH will have to start writing down the value of the inventory with which it will be stuck.
BZH’s chart looks far worse than the chart of the DJUSHB above:
I bought BZH puts ahead of earnings starting on the previous Friday (7/26). I added to my position Wednesday and Thursday. I booked profits on those Friday morning because they were in-the-money and I rolled some of the profits into August 16th $28 puts. I’m actually hoping the stock bounces because I’d like also to have a longer-dated, OTM put position. Like December or February $25 puts (February 2025 is the longest put series right now).
Biggest Stock Bubble In History – Mining Stocks Historically Cheap
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Housing Market Crash Is On The Horizon
The commentary below is excerpted from two issues of my short sellers newsletter. Learn more about this subscription newsletter: Short Seller’s Journal
Housing market update – Existing single-family home ( sales for June, released Tuesday, were nothing short of a disaster. Sales fell 5.4% MoM and 4.3% YoY to a 3.5mm SAAR (seasonally adjusted annualized rate). This is the fourth consecutive month of declining used home sales in what should be the strongest seasonal period of the year for home sales. The not seasonally adjusted, monthly number dropped 6.6% from May and plunged 12.6% YoY. This metric is a more reliable indicator of the YoY trend in sales because its cleansed of any errors imposed on the data by the NAR’s seasonal adjustment calculus.
The monthly SAAR has been in decline since January 2021:
Since January 2021, when the existing home sales SAAR was 6.6 million, the metric has plunged 41%. Unsold listings jumped to 4 months’ supply, up 29% YoY to the highest level since May 2020. Including condos and co-ops, inventory is at 4.1 months’ supply and it has soared 57.6% YoY.
As with new home sales in May, which I detailed in the July 14th issue, every price “bucket” declined in all four regions except the $750k-$1mm and over $1mm buckets. In the $750k-$1mm bucket the only region with a YoY increase in sales was the northeast – the bucket declined nationwide. The over $1mm bucket increased 10.9% YoY in the northeast but was up just 3.6% nationwide.
The NAR Chief “Economist” commented that “we’re seeing a slow shift from a seller’s market to a buyer’s market.” He does his best to put lipstick on Miss Piggy. The reality is that it looks like a hastening shift from a slowing market to an eventual sales and price crash.
Earlier this month I did a deep-dive into the May existing home sales report and found a smoking gun. I noticed that the distribution of sales across the six price “buckets” shows a different story than the headline number broken out by sales region:
The table above is from the Supplemental Data link on the National Association of Realtors news release. The data is the not seasonally adjusted, monthly data. On a monthly basis for May, the NAR data shows an estimated 364,000 homes (no change YoY) sold in May at a median price of $380,400 (half sold above that price and half below).
The headline numbers, however, are deceptive. Per the top table, the two highest price buckets showed double-digit increases in the number of homes sold YoY while the two lowest price buckets declined YoY. All of the action in the May sales was in the two highest price buckets while the everything below the top two buckets was flat to down. The data reflects the degree to which buying a home or moving up from a starter home has become unaffordable for the majority of households. In fact, Friday’s U of Michigan Consumer sentiment report (discussed below) showed that homebuying conditions in June hit a record low for the history of the data series.
Given the recent reports based on Zillow data that many of the previously hottest housing markets are experiencing a huge influx of listings and big price cuts in the listings, in most areas the buyers in the top two price buckets will soon be underwater on their home purchase. Moreover, as the amount of listings piling up in the various MSAs becomes more “visual” to prospective buyers in the two top price buckets, many will hold off buying.
With respect to potential rate cuts, the median new mortgage payment now requires 41.4% (pre-tax) of the median household income according to the data parsed by Reventure Consulting (median household income (Fed) divided by median new mortgage payment (Bankrate). In the previous housing bubble, this metric topped at 39.3%. This is why I believe it won’t change reality for housing market if the Fed eventually takes rates back to zero. Moreover, the market has already priced the next six rate-cuts into the homebuilder valuations.
I have to believe that the actual fundamentals of the housing market will invade the highly overvalued homebuilder stock sector within the next three to six months. The primary driver of the record low buying conditions is high home prices. I would argue with high conviction that, given the data on household financials, even if the Fed took rates down to zero percent it would not do much to jump-start the housing market. As such, I think the extraordinarily overvalued homebuilder stocks are among the best shorts on the NYSE.
The Housing Market Hit A Wall In May/June – It’s Headed South Pronto
The commentary below is from my weekly short seller’s newsletter. To learn more follow this link: Short Seller’s Journal
Housing market update – In taking a deeper dive into the existing home sales report for May, I noticed that the distribution of sales across the six price “buckets” shows a different story than the headline number broken out by sales region:
The table above is from the Supplemental Data link on the National Association of Realtors news release. The data is the not seasonally adjusted, monthly data. On a monthly basis for May, the NAR data shows an estimated 364,000 homes (no change YoY) sold in May at a median price of $380,400 (half sold above that price and half below).
The headline numbers, however, are deceptive. Per the top table, the two highest price buckets showed double-digit increases in the number of homes sold YoY while the two lowest price buckets declined YoY. All of the action in the May sales was in the two highest price buckets while the everything below the top two buckets was flat to down. The data reflects the degree to which buying a home or moving up from a starter home has become unaffordable for the majority of households. In fact, Friday’s U of Michigan Consumer sentiment report (discussed below) showed that homebuying conditions in June hit a record low for the history of the data series.
Given the recent reports based on Zillow data that many of the previously hottest housing markets are experiencing a huge influx of listings and big price cuts in the listings, in most areas the buyers in the top two price buckets will soon be underwater on their home purchase. Moreover, as the amount of listings piling up in the various MSAs becomes more “visual” to prospective buyers in the two top price buckets, many will hold off buying.
The homebuilder stocks went straight up the last three days of the week, with most of the move triggered by better than expected, but highly rigged, CPI report.
The ITB ETF was up over 6% and the individual homebuilders stocks were up anywhere from 6-12%. It’s my opinion based on my observations in around the metro-Denver area as well as from reports from around the country that the housing market likely hit a wall in May/June. A colleague and friend who lives in the north-metro part of Denver told me that the DHI salesman who sold him his home not that long ago has quit because he said it’s too slow to make a living.
Per the chart above ITB, as a proxy for the homebuilders, shot straight up after it sold down to its 200 dma (red ma line) and tested it for five days. If the Government had reported inflation honestly, it likely would have done a cliff-dive below the 200 dma. I think the move in ITB in the latter part of the week was a combination of bubble-mania, hedge fund short-covering and technical-based momentum-chasing.
I have to believe that the actual fundamentals of the housing market will invade the highly overvalued homebuilder stock sector within the next three to six months. The primary driver of the record low buying conditions is high home prices. I would argue with high conviction that, given the data on household financials, even if the Fed took rates down to zero percent it would not do much to jump-start the housing market.
Before putting the cart before the horse on interest rate cuts, it should be noted that the CPI report this past week was a total sham. The BLS claims that food prices, which are a significant component of the CPI calculus, declined 0.1% in June from May. I did not experience that in the general basket of food items that I purchase every week. Also gasoline prices have begun to rise again after falling from late April to mid-June. In fact, the average price of gasoline has risen 9% since the beginning of June. Oil futures have jumped 13.2% over the same time period. The price of gas usually lags the directional move in futures.
Furthermore, the PPI report came in hot at 0.2% higher from May vs 0% expected, while May was revised higher. YoY the PPI was 2.6% vs 2.3% expected. The “core” PPI for 0.4%, double the expectation. Worse, prices for intermediate demand goods (partially processed commodities that will be used as inputs to product final demand goods) is accelerating.
The point here is that the market believes that the Fed will cut rates in September and that was one of the catalysts that triggered the melt-up in homebuilder stocks. I also believe that the Fed knows the truth about inflation and will only cut rates, along with restarting official QE, to fund Treasury issuance and save the biggest banks.
With respect to rate cuts, the median new mortgage payment now requires 41.4% (pre-tax) of the median household income according to the data parsed by Reventure Consulting (median household income (Fed) divided by median new mortgage payment (Bankrate). In the previous housing bubble, this metric topped at 39.3%. This is why I believe it won’t change reality for housing market if the Fed eventually takes rates back to zero.
The Big Move In Junior Mining Stocks Is Still Ahead
I research, trade and own the stocks I mention in the podcast below in my mining stock newsletter. I also cover others that I think are compelling investments. You learn more about newsletter here: Mining Stock Journal
By far my largest percentage holdings are the junior [gold and silver] development stocks because I think you are looking at anywhere from five-bagger to twenty-baggers potential in some cases with these stocks. I also expect gold to be north of $2500/oz and silver in the mid-$30’s/oz range by year-end 2024.
Bill Powers invited me back on to his Mining Education podcast to discuss the factors that I see which will drive gold, silver and the mining stocks considerably higher in the coming months and quarters. I also discuss of handful of minings stocks that I think will outperform their peers.
Nvidia And Dutch Tulip Bulb Bubbles
The commentary on NVDA below is from the latest issue of my short seller’s newsletter. You can learn more about it here: Short Sellers Journal
Nvidia update (NVDA – $123.54) – The 2x Long NVDA ETF (NVDL – $69.55) had a record $743 million inflow of investor money during the week that ended Friday, June 21st. Perhaps that was the ultimate contrarian indicator, as the stock price fell from an intraday high of $140 on June 20th (Thursday) to a closing price of $118 on June 24th (Monday). That’s a loss of $542 billion in market cap over a three-day period.
NVDA is another bubble among the various asset bubble charts throughout history starting with the 1600’s Dutch tulip bulb bubble on the upper left (source: @great_martis):
We’re being told that “it’s different this time” with respect to NVDA’s market cap. One portfolio manager was on CNBC saying he expects NVDA to hit a $6 trillion market cap this year “as investors realize how cheap the stock is…” That would be a double from the current stock price. It’s a laughable prediction. That would take the trailing P/E to 144, the forward P/E to 68x and the price/sales to 76x. I just don’t see it happening.
The bulls seem to believe that NVDA will maintain its lead in AI chips and near-monopolistic pricing power in perpetuity. It won’t. At some point competitors will bring competitive chips to market at lower prices. Plus, most are overlooking the fact that semiconductors are a highly cyclical industry. The proliferation of AI will not change that. At some point the market will become saturated with NVDA’s chips and its business will be subjected to the law of supply and demand.
NVDA’s share price has a history of boom/bust cycles. On a split-adjusted basis after the recent 10:1 stock split, NVDA went from 5 cents in October 1999 to as high as 61 cents in January 2002. By September 2002 it had dropped back to 7 cents. Between September 2004 and October 2007, another stock bubble era, NVDA ran from 12 cents to as high as 99 cents. By November 2008 it had dropped to as low as 14 cents. The cliff-dive in “Dutch tulip bulb” charts happens much more quickly than the ascent to the top of the cliff. It won’t be different this time.
After that three-day plunge, NVDA stabilized at its 21 dma (light blue ma line, $123.21 on Friday). Volume has tailed off considerably and the RSI/MACD momentum indicators are heading south. Those three attributes suggest the stock is losing “energy.” Also, the last three days of the week the stock closed well off of its highs of the day.