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Gold And Silver: Are We Entering Another Bull Cycle?

Based on the rate of depletion of gold and silver bars from bank custodial vaults in London and NYC, it’s fair to say a “low-grade” physical metals rush is in process – much of it flowing to large eastern hemisphere buyers.  This disintermediation of physical metal has been widely documented. At some point Gresham’s Law will engulf a wider investor audience and morph into a full-blown run on physical gold and silver.

Based on the chart patterns, supported by strong fundamentals, it looks like the precious metals sector may be starting to diverge positively from the stock market, similar to the late fall of 2008.  Andy Maguire and I discuss this topic as wells as several other’s in Kinesis Money’s Live From The Vault:

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If you are looking for mining stock ideas that should outperform the sector, especially junior microcap ideas, I publish the Mining Stock Journal, which now offers Stripe as a payment alternative to Paypal

The Housing Market Crash Is Getting Worse

The following analysis is from my latest issue of the Short Seller’s Journal. You can learn more about this newsletter here:  Short Seller’s Journal information

The November homebuilder sentiment index dropped to 33 from 38 in October. It was the 11th straight month of declining builder sentiment. Including the pandemic period, the future sales sub-index dropped to the lowest index reading since 2012. The traffic of prospective buyers fell off a cliff to 20.

Homebuilder sentiment transmitted to reality in the October housing starts/permits data released this past week. Housing starts declined 4.2% in October from September. Wall Street thought starts might drop 2.7%. The September starts number was revised lower to -1.3% from August. Single-family starts plunged 6.1% to the lowest level since May 2020. In addition, housing permits fell 2.4% from September to the lowest level since August 2020.

This chart shows why I continue to pound the table on homebuilder shorts and why I believe that homebuilder valuations still have a long way to fall:

The chart above shows the homebuilders’ sentiment futures expectations index (red line) vs October housing starts (green line). Both metrics ultimately reflect actual home sales activity, thereby signaling a continued decline in home sales – new and existing. This data likely will continue to head south, as the U of Michigan’s consumer sentiment survey for November showed that consumers regard current home buying conditions as the worst in the history of the data series, which goes back to 1978.

October existing home sales released Friday were crushed, down 5.9% and from September and 28.4% YoY on a SAAR basis. Existing home sales have declined nine months in a row to the lowest SAAR rate since December 2011. On a not seasonally adjusted basis, sales were down 13.3% from September (some seasonality in that number) and 29.5% YoY (no seasonality in that number).

I would argue that the YoY not adjusted number statistically reflects more accurately the degree to which the housing market is contracting. Single family home sales (not including condos/co-ops) fell 6.4% MoM on a SAAR basis and 29.1% on a YoY not adjusted basis. Using the NAR data for median sales price, YoY for October the median price is still 6.2% higher. But the price is down 8.5% since its peak in June 2022.

The last time the existing home sales SAAR was at its current level, the Dow Jones Home Construction Index was trading in the low 500’s (currently its at 1,232). New home sales for October will be released Wednesday. But the October SAAR was 603k. The last time the new home sales SAAR was that low was October 2016. Back then the DJUSHB was trading in the 500’s:

This is why I continue to be baffled by the valuation levels of the homebuilders. The only rationale I can conjure up is that a large segment of perma-bull investors is convinced that not only will the Fed pivot soon but that a pivot with more QE will revive the housing market. But in 2008 it took nearly three years after QE began before the DJUSHB began to begin a bull market run.

The housing market crash is thus starting to accelerate. If I’m wrong, how come insiders have not been buying shares of their companies in the open market after the 30-40% decline from the late 2021 highs? I went through the SEC form 4 filings for DHI, PHM, LGIH, TOL, LEN, KBH and BZW. Not one open market purchase in the last 12 months. The “buys” are zero-cost options exercised and the shares are immediately sold. The amount of insider selling in the sector is breathtaking, if not embarrassing.

Is A Gold (And Silver) Rush About To Occur?

There will be bear markets about twice every 10 years and recessions about twice every 10 or 12 years but nobody has been able to predict them reliably. So the best thing to do is to buy when shares are thoroughly depressed and that means when other people are selling – John Templeton

The following analysis is an excerpt from the October 20th issue of the Mining Stock Journal. It also was published by Kinesis Money

Looking for value in the stock market takes on a few different forms. The most hard core version in my opinion is that of looking for stocks that trade below tangible book value (shareholder equity on the balance sheet), where the value of assets net of intangibles minus liabilities exceeds the market cap of the company. Another flavor of “value” investing is to look for the stocks in companies with good fundamentals that, for whatever reason, the majority of investors are selling or avoiding (contrarian investing). A third version is to look for relative value. This graph is an example of the latter:

The chart above shows the ratio of XAU to the S&P 500 going back to the beginning of 2001, which is when the mining stocks bottomed from the bear market that started in 1980. The chart illustrates the value of the mining stock sector relative to the general stock market only two previous times over the last 21 years. Currently mining stocks are better value relative to the rest of the stock only two times in the last 21 years: at the beginning of 2016, after the vicious 4 1/2-year bear market that began in mid-2011, and in late 2018, when Fed monetary policy caused a big sell-off in financial assets.

Looking at the chart from a technical analysis perspective, the ratio is in an uptrend, which is potentially a bullish indicator for the sector. In 2016 the ratio reflected the fact that the general stock market was rising while the mining stock sector was declining. In 2018 and currently, the drop in the ratio is a function of the fact that mining stocks have been declining on a percentage-basis at a faster rate than the rest of the stock market. However, note that recently the ratio bounced from the trend line, indicating that mining stocks are starting to outperform the S&P 500.

Read the rest of this commentary at Kinesis Money

Physical Gold, Central Bank Secrecy And Gresham’s Law

When I first saw the reports from Reuters and Bloomberg that Central Banks bought 399 tonnes of gold in Q3, I was immediately skeptical of the data. As with all other mainstream media precious metals “news” vomit, I suspected the reports contained regurgitated numbers for the purpose of misdirection. As it turns out, Bullionstar’s Ronan Manly takes the WGC to task and exposes the degree to which the report is highly flawed, if not completely fabricated.

Cui bono? The truth-seeking, gold investing community has been exposing the WGC as a fraud for a couple of decades. In all likelihood Central Banks, particularly the ones in the eastern hemisphere, have been quietly accumulating multiples of that 399 tonne number during 2022. But with the massive drain of physical gold and silver from custodial vaults in London and NYC, the WGC likely was compelled to offer an “official”  cover story for the large quantities of metal being transferred into the possession of private entities.

So that leaves “confidential information regarding unrecorded sales and purchases”.

So basically, as you can see, the World Gold Council’s claim of central banks buying over 310 tonnes of unreported purchases in Q3 is based on a suggestion from Metals Focus, which is based on ‘confidential information’. And since no one knows what this ‘confidential information’ is, nor where it came from, there is no way to verify it.

How’s that for “granular and transparent estimates for gold demand”?

So now you can see the problem. Apart from undermining any sense of confidence in the data that the World Gold Council and Metals Focus have seemingly pulled out of the ether, there is also the problem that the major financial news outlets all ran with the 400 tonnes number for Q3 central bank gold demand, and didn’t point out the obvious issues with the data. And this reporting was everywhere this week, in multiple articles all over the world and across the web.

So instead of questioning the data and using some of it’s 4000 London staff to go out and investigate the identity of the central banks in question, Bloomberg is content to run with the World Gold Council / Metal Focus ‘substantial estimate’ that is based on non-verifiable ‘confidential information’, and to write shallow clickbait articles…referring to a secretive bunch of unidentified sovereign buyers. All Bloomberg can do is speculate that it might be China or Russia or India or some of the middle eastern nations.

Read the full article here: Gold Establishment Supports Central Bank Secrecy instead of Exposing it

Amazon $AMZN: The Path Of Least Resistance Is Down

The forces of economics are catching up with AMZN. First and foremost its businesses, including the cloud services (AWS), face stiff demand headwinds as the global economy sinks further into the abyss of recession. Second, AWS’ gilded veneer is peeling away as its growth rate recedes and its margins contract. Finally, the Company as a whole has been adversely affected by soaring costs, which can be covered over with accounting games while revenues are growing quickly but which rear their ugly when the economy heads south.

I think AMZN’s share price has at least another 50% downside from the current level. The analysis below is from the latest issue of my Short Seller’s Journal:

AMZN’s stock price plunged as much as 19% after hours Thursday (10/27) after reporting horrific Q3 numbers (it finished the after hours session down 12.6%) . Though the GAAP EPS “beat” estimates, revenues missed estimates and AWS sales growth was nearly 500 basis points lower than expected (27% YoY vs 31.9% forecast by the Street). The total revenue growth rate was the slowest in over 20 years. The Company also guided to Q4 revenues that were well below the Street estimate ($140 to $148 billion vs $156 billion expected).

While the revenue growth rate was much slower than expected, costs soared. And though the gross profit rose slightly (probably from GAAP accounting games), the cost of fulfillment jumped from 33.5% to 34.5% of Product sales (e-commerce + Whole Foods, primarily). As a whole, operating expenses soared while the operating profit margin plunged to 1.7% from 4.3% in Q3 2021.

AMZN’s Product Sales generated a $2.87 billion operating loss ($412mm in North America and $2.46 billion in International). AWS’ (cloud computing services) revenue growth rate slowed considerably. AWS’ operating margin dropped to 26% from 30.3% in Q3 2021. AMZN’s P/E multiple will rapidly decline if AWS’ growth rate continues to slow and its margins continue to contract. AWS is 16% fo AMZN’s revenues but it is the reason that AMZN sports a P/E ratio of 92 and a forward P/E of 56. The market will have to reassess the multiple it is willing to pay with AWS’ growth rate slowing and likely to slow more going forward (AMZN announced a hiring freeze at AWS two weeks ago).

I think the easiest money shorting AMZN has been made. However, it hit a low of $80 in March 2020 (down 22% from Friday’s close) and it hit low of $67 in the late 2018 market sell-off (down 35% from Friday’s close). With these levels as potential downside targets when the stock market rolls over again, it’s worth tracking AMZN and shorting it or buying longer-dated OTM puts if it rallies back to the $110-$120 range.

The Housing Market Appears To Be Melting Down Rapidly

When the CEO of a homebuilder admits publicly that “demand clearly slowed” during Q3 and was “even more challenging in October,” you know the market is in trouble. Unfortunately for the CEO of $PHM, the housing market is in worse shape that just “challenging.”  But I’m sure he knows…I’ll be reviewing Pulte Homes in the next issue of the Short Seller’s Journal.  The commentary below is from the October 23rd issue.

The housing market appears to be dissolving quickly. The National Association of Homebuilders sentiment index fell for the 10th straight month to 38 vs expectations of 43.

The chart above (sourced from Tradingeconomics.com) shows the index over the last 25 years. The index is based on a monthly survey of homebuilders regarding the rate of current sales of single-family homes, sales expectations for the next six months and prospective buyer showings. The sales expectations sub-index fell to 35. Except for the pandemic plunge, it’s the lowest reading since August 2012. However, in August 2012 the Fed’s QE was in full-swing and the index was rising.

To put the chart above in the context of homebuilder valuations, The last time the index was at 38 and headed further south was late 2006. The DJUSHB had declined about 37% from its then-ATH in 2005. It eventually bottomed in March 2009 after falling another 78%. The total decline over the nearly four-year period back then was 86%. Currently the DJUSHB has declined 37% from its ATH in December 2021. This is why I have been arguing that homebuilder valuations do not remotely reflect that coming carnage in the housing sector and homebuilder stocks. There’s still a considerable amount of downside that remains

On Friday the base interest rate for a 30-year fixed rate conforming mortgage hit 7.37%, the highest in 22 years. But that’s the base rate for a borrower with a 740 FICO and a 20% down payment. The mortgage rate for a sub-740 FICO and less than 10% down will exceed 8%. These numbers won’t help mortgage purchase applications, which declined again last week. The purchase apps index dropped to 164.2 from 170.5 the previous week. It’s back to where it bottomed and drifted sideways between late 2010 and 2015. The mortgage purchase applications index is down over 53% from its peak in early 2021. The base 30-year fixed mort-gage rate a week ago was 6.94%. The jump to well over 7% should translate into another weekly decline in purchase apps.

Housing starts in September also fell 8.1% from August and were below Street expectations (-7.2%). Permits rose 1.4% but this was attributable to rental unit permitting which rose 8.2%, as single-family permits dropped 3.1%. Most homebuilders build single-family homes and some townhomes. The decline in starts and permits for single-family homes should not surprise, as homebuilders currently are working on a record number of homes in various stages of inventory, many of which have had contract cancellations. This is going to get very ugly both for homebuilders and home prices.

Existing homes for September fell on a SAAR basis (seasonally adjusted annualized rate) for the eighth month in row, falling 1.5% from August. The single-family sales component fell 0.9% on a SAAR basis. But the not seasonally adjusted monthly numbers show a 9.2% decline from August and a 20.8% cliff-dive from September 2021. While the August to September change would have seasonal variances, the YoY comp is likely a decent barometer for the degree to which home sales are contracting. The National Association of Realtors data shows an 8.1% price increase from September 2021 but 7.1% decline from the peak in June.

The chart above puts the current housing bear market in context with the bear market that followed the previous housing bubble. It took trillions in Fed money printing and a near-zero Fed funds rate policy to revive home sales after the last bubble. In addition, it took a series of changes to the parameters for a Fannie/Freddie guaranteed mortgage, starting with reducing the down payment requirements to 3% from 5%, and increasing the size limit of the mortgage, making it easier to qualify. This also lowered by quite a bit the credit quality of the homebuyer pool. It also took trillions and a near-zero interest rate policy after the pandemic crash to juice home sales.

I continue to believe that, barring a sudden sharp reversal in the Fed’s monetary policies, the homebuilders are a no-brainer short. I still own LGIH ($78) puts of various “flavors.” I most recently booked profits on my December 95’s and added March $80s. While I think any of the homebuilder tickers are good shorts, LEN and DHI have not dropped as much as the most of the others, in case you are looking for some names to short. I also continue to really like BLDR and BECN. I think both stocks will be cut in half, at least, before this bear cycle is complete. Note: LGIH reports on 11/1 (before). Keep in mind its Q3 closings were down 23.6% from Q2 and 38% YoY.

Another name that I like as a short that continues to puzzle me is ABNB ($119). I presented the idea a few months ago. It performed well as a short but then shot higher during the June-August market rally. Between August and September, it tested the $125 level and turned lower. It traded down to $100 in September but now appears to be headed for another test of $125.

On an Airbnb Superhosts community chat, several hosts complained about a big drop in bookings: “We went from at least 50% occupancy to literally 0% over the last two months.” Another post said “What’s going on with Airbnb? No bookings at all.” Marketwatch published a report Friday in which it cited several hosts who were experiencing a sudden decline in bookings that began during the summer.

There’s a few factors at play. The number of ABNB hosts soared after the pandemic. A not unmeaningful percentage of home sales since June 2020 were by mom & pop investors who played the housing bubble by chasing investment properties and renting them out through ABNB. The travel boom after the Covid restrictions were lifted fueled this boom. But the most probable cause of the drop in bookings is a widespread and deep cut-back in household discretionary spending. Airlines started reporting a decline in bookings starting in mid-July.

ABNB reports its Q3 numbers on November 1st after the close. I have to believe that the Company either will disappoint vs forecasts or issue a warning. The fate of the stock between now and the earnings release will depend in part on the short term direction of the stock market. For now, I’m going to wait to see if ABNB trades up to test the $125 resistance level again. But I will likely put on some puts ahead of earnings to play a “miss.” I also think there’s a good chance that a material number of ABNB property investors will be forced to sell their homes/apartments, which will put further pressure on the housing market.

Who Actually Dictates The Fed’s Monetary Policy

Hint:  it’s not Jay Powell or the FOMC. The mistake most people make is believing that the public figures elected and appointed by those elected are the ones who devise fiscal and monetary policy. Wrong. They are the front for the real deciders – mere pawns who are well-compensated for their role.  This is a must-read Tweet thread from Occupy the Fed:

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See the rest of this Twitter thread here: Financial corruption/wealth inequality/inflation

Market Indicators That Suggest A Precious Metals Rally May Be Imminent

NOTE:  The following is an article I wrote for Kinesis Money.  In my opinion, the precious metals sector is on the same path that it went down (and then up) in the summer/autumn of 2008. Gold and silver are very undervalued relative to the financial, economic and geopolitical risks that have engulfed the world. And the mining stocks are extraordinarily undervalued relative to all financial assets (stocks, bonds, housing – yes housing is financial because home values are derived mortgage financing).  If you are looking for mining stock ideas that should outperform the sector, I publish the Mining Stock Journal, which now offers Stripe as a payment alternative to Paypal.

It’s always best to approach any investment with a long-term view. While physical gold and silver are first and foremost wealth preservation assets, they can also be used as rate-of-return assets after periods of time when they have become “oversold” relative to other financial assets, such as the stock market.

In addition to the gold/silver ratio, some interesting, lesser-followed market indicators suggest the possibility that the precious metals sector may be forming an investable bottom.

The chart above shows the gold/silver ratio (GSR) from late 2006 to the present on a weekly basis. Periods when the GSR has risen above 80 (as indicated by the green boxes) are followed by a sharp decline in the GSR and a rally in the precious metals sector.

Currently, the GSR has rolled over from reaching its third highest level since 2008 and by far the highest level since August 2020, when the current down-cycle in the precious metals sector began. In addition, the MACD – or the moving average convergence divergence – hits its third most overbought reading in the time period shown in the chart. It has rolled over and is pointing to the possibility of a downturn in the GSR.

Read the rest of this analysis here: Kinesis Money

Consumer Debt Delinquencies And Defaults Set To Soar

The following analysis was featured in the September 25th issue of the Short Seller’s Journal.  You can learn more about this newsletter here:  Short Sellers Journal information.

A survey was done by CreditCards.com in which 60% of the respondents said that they have been in credit card debt for at least a year. That’s up from 50% a year ago. Forty percent said they’ve been in credit card debt for over two years. A quarter of those surveyed said that the reason they carry outstanding credit card debt is to cover daily expenses. The Fed’s July consumer credit report (it has a two-month lag) showed that credit card debt hit a record $4.64 trillion. It’s likely that credit card defaults are going to start shooting higher, causing increased stress on bank balance sheets and credit markets.

A couple weeks ago Goldman Sachs reported that the losses (bad debt write-offs) on its credit card business hit 2.93% in Q2. That’s the largest loss-rate among big credit card issuers (Goldman in recent years has made a big push into retail banking services). As it turns out, more that 25% of Goldman’s credit card loans have gone to people with sub-660 FICO scores.

See a trend here?:

The chart above plots consumer credit card debt balances (blue line, left y-axis) vs the personal savings rate (red line, right y-axis). Credit card debt outstanding is at an all-time high, while the personal savings rate is at its lowest level since the great financial crisis. Keep in mind, though, that a significantly higher percentage of personal savings is with the upper 5% wealth/income demographic relative to the 2008/9 period. Also, the savings rate just after the virus lockdown was a product of the Government handouts in the form stimulus checks and PPP loans. The PPP loans were forgiven. The funds from those programs are now spent. Keep in mind that the savings rate metric is deceptive. The majority of the savings in the U.S. is attributable to the upper 5% income/wealth demographic – and really the upper 1%. How do we know? Because a Lending Club survey a few months ago showed that 23% of those making $250k or more were living paycheck to paycheck; no savings but they live in a fancy house and sport $100k SUVs and sedans in the driveway.

What stands out most to me in the chart above is that credit card debt levels explode relative to the savings rate when the financial markets and economy are entering a period of turmoil. I took the chart back to 2003. The same pattern occurred in 1998/1999 right before the tech bubble collapsed, but it’s not as pronounced because the money supply and outstanding household debt was diminutive relative to the post-tech stock crash period, when Greenspan juiced the money supply and encouraged all flavors of consumer borrowing.

Of course, over the next several months, escalating consumer debt losses will not be unique to Goldman. For point of reference, the overall credit card delinquency rate hit 2.7% in Q1 2020. At the peak in the financial crisis years, the delinquency/charge-off rate, according to Fed statistics, hit a peak of 6.77% outstanding balances in Q2 2009. I believe there’s a good chance it will be much worse this time around.

Moreover, the delinquency and default problem will not be confined to credit cards. Over the last few years, particularly since April 2020, households have stretched beyond rational limits and to assume auto loans and mortgages that many can barely afford and soon will no longer be able to afford. While Carmax’s big earnings miss and subsequent 25% drop in its stock grabbed the headlines on Friday, buried in its Q3 report was an increase in bad debt charge offs and an increase in the provision for credit losses. Carmax is not unique in this regard.

Brace yourself for the impact of a credit crisis that will be be far worse than the one that hit in 2008 – perhaps this is why gold and silver have begun to outperform the stock market.