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The Stock Market Is An Accident Waiting To Happen
This interview was recorded on 12/20/2024. In this conversation, Gary Bohm and I delve into the current economic landscape, discussing inflation, market dynamics, and the state of precious metals and mining stocks.
We also analyze the discrepancies between government-released economic data and the reality observed in the private sector, emphasizing the ongoing challenges in the economy. The discussion also covers the implications of recent Fed policies, insider trading behaviors, and predictions for the future of the stock market and gold prices.
Video link: The Stock Market Is Headed For Crash – Buy Gold And Silver
The mining stocks have experienced a big pullback after GDX ran up 71% between February 28th and October 21st. This has created very attractive levels in many mining stocks to either start a position or add to an existing position. My Mining Stock Journal offers insights into the precious metals. While I focus on the junior project developers because they offer serious alpha, I also recommend several mid-cap mining stock that I believe are very undervalued relative to their peers.
Will It Take A Big Market Decline For The Mining Stocks Rally?
Some of the subscribers to my Mining Stock Journal have been asking me if I thought it would take a big sell-off in the general stock market before the mining stocks will resume their bull cycle, noting that “several analysts seem to think that’s the case.”
I’m puzzled by this notion because the mining stocks have been in bull mode since late September 2022:
Between 2/28/24 and today, GDX is up 31% vs 22% for the Nasdaq. I don’t know what more goldbugs could ask for? That GDX ROR was achieved with the stock market in a strong rally. When GDX topped on 10/22/24, it was up 71% from the end of February. The sell-off since the top is part of a much-needed (and welcomed by me even though I don’t like it) corrective pullback.
The sell-off in the sector today (December 390th) was likely driven by hedge funds dumping paper gold and silver contracts plus unloading stocks across the board, including mining stocks, in their leveraged portfolios. I’m certain retail mining stock shareholders with weak hands were dumping today too.
This correction/pullback in the sector will run its course. The miners might get pushed lower if the stock market dumps but I think there will be a New Year’s rally as retirement fund contribution money and cash flowing into investment funds is put to work. But who knows?
Also if the trading pattern is similar to that of 2008, and I think it could be, the mining stocks and SPX/Nasdaq both declined together between mid-March 2008 and the end of October 2008. But then the precious metals sector reversed higher while the rest of the stock market didn’t bottom until March 2009.
But it wasn’t the continued dump in the general stock market that triggered the rally in the mining stocks. It was driven by the sharp reversal in gold and silver after the Fed began to print money. Smart money that understood the effect money printing would have on the value of the U.S. dollar piled into gold, silver and mining stocks. I expect the Fed to begin overtly printing money, likely under a program with a misleading name – like “Bank Term Funding Program” – which was a form of QE.
The best I can say is that I believe the precious metals sector will be much higher 12 months from now but I don’t know the price-path it will take and I don’t think a resumption of the rally is dependent on a crash in the Nasdaq. Hell the equal weight SPX index is down 7.4% from its ATH at the end of November and only 32% of all stocks are above their 50 dma. The point here is that the broad stock market has been declining while the mining stocks have been pulling back.
NOTE: If you liked this commentary, consider a subscription to my Mining Stock Journal. It features market commentary but focuses on looking for mining stocks that will outperform the sector. Here’s an example: Cabral Gold
Restoration Hardware (RH) Is Idiotically Overvalued
NOTE: the following analysis on why RH is overvalued and is a great short is from the latest issue of my short selling newsletter. To learn more about it follow this link: Short Seller’s Journal
The economics that drive RH’s business is the housing market cycle – not the brown, smelly organic cow pasture material that exhales from the CEO’s mouth.
RH (RH – $446) – A way to short both the housing market and the trend of declining consumer spending on discretionary items is RH, formerly known as Restoration Hardware. RH is an upscale home furnishings retailer that sells its products through retail stores, catalog and online. It pretentiously refers to its stores as “galleries.” It operates 70 galleries, 18 full-line design galleries and 3 baby/child galleries. RH designs its furniture and accompanying products and refers to its furniture gallery offerings as “collections.”
I’ve been tracking RH for several weeks and have been looking for an opportune time to present it in SSJ and invest in puts on the stock. The stock soared $64 (17%) on Friday after the Company reported its FY Q3 financials Thursday after the market closed. Although the Company missed consensus revenues and EPS for the quarter, the Company issued unexpectedly robust guidance for its FY 2024 Q4 and full year for revenues and profit margins.
The CEO of RH is known for his long-winded, flamboyant – if not pretentious – quarterly shareholder letters that are full of grandiose assertions about his vision for RH. Of course they are also notable for lacking specifics with respect to execution. Here’s an example from the latest quarter: “We have worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry.” There’s two pages of that crap.
For its FY Q3, revenues rose 8.1% YoY ($811mm vs $751mm), operating income nearly doubled ($101mm vs $51mm) and net income swung from a $2.1mm loss to income of $33.1mm. This compares to FY 2023 Q3 in which revenues declined YoY. Speaking of which, FY Q3 2024 revenues were 6.7% below FY 2022 Q3 revenues and operating income plunged 40.5% from 2022 Q3 to 2024 Q3. This shows the degree to which RH’s revenues and profitability correlate with home sales.
With respect to the YoY quarterly increase in revenues for Q3, this does not surprise me. New home sales in the three month period for August – October in 2024 were moderately higher than for the same period in 2023. In addition, RH rolled out a new Sourcebook in July this year, just in time for its FY Q3, which featured its new, aggrandized “collection” of furniture. In my opinion, there was likely a “new car model” effect that occurs when an auto OEM rolls out a new or updated model. Plus there was a bump in revenues from price inflation. Given those three factors, particularly the fact that new home sales rose YoY during RH’s FY Q3, an 8.1% YoY increase in revenues YoY is not impressive. It also suggests to me that there’s a good chance that RH will miss its Q4 guidance.
This graphic below further illustrate the correlation between RH’s revenues and share price to new home sales:
Though the two graphs are on a different scale, it’s easy to see the directional correlation between RH’s stock price and the volume of new home sales from late 2019 to now. The two charts moved in opposite directions in mid-November, as RH started to melt-up, a week before the new home sales report for October was released showing a 17.3% drop in sales from September. At some point I anticipate that both charts will re-correlate, with RH catching down to new home sales. I also found a chart that showed RH’s quarterly revenues going back to Q3 2019. That chart looks quite similar to the two charts above. RH’s share price trended laterally for the most part from June 2022 September 2024. Similarly, RH’s revenues were largely flat from mid-2022 to the latest quarter. Again, the economics that drive RH’s business is the housing market cycle – not the brown, smelly organic cow pasture material that exhales from the CEO’s mouth.
Finally, RH’s share price is extremely volatile. This is because the total amount of shares outstanding is just 18.6mm, while the share float is 15mm. As of the end of November, the short-interest in the shares was 12.1%. This makes the stock vulnerable to squeezes, which is what I believe occurred Friday.
Per the chart above, RH is prone to huge moves higher in a short period of time only to give back the gains. I expect the same thing to happen again, though it may take a Q4 miss of expectations to trigger a sharp sell-off. In addition, the stock is now registering an extreme overbought reading per the RSI.
As mentioned above, I am confident that RH’s Q3 performance vs a year ago is primarily attributable to a higher level of new home sales during the quarterly period this year vs last year. The stock is trading at 128x trailing 12-month earnings. It trades with a forward P/E of 35.8, which is still quite high. I also expect its FY 2025 earnings to be revised lower as 2025 unfolds and as new homes sales continue to trend lower. In addition, keep in mind that the universe of potential customers is declining along with household disposable income.
I have not yet decided which puts I am going to buy or when I will buy them. That said, it will be a longer term fundamental play for me so I will look to go out at least to the May or June 2025 puts. If you short the shares, which I may do instead, I think now is as good of a time as any but I would recommend a stop-loss 15-20% above the current price.
Are Nvidia’s Financials Infested With Accounting Fraud?
Note: the following commentary is from the latest issue of my Short Seller’s Journal, a weekly newsletter dedicated to dissecting the latest economic reports and looking for ways to express a bearish view of the stock market. It’s notable that Jensen Huang (CEO) unloaded well over $1 billion worth of shares between June 13th and September 13th.
Nvidia update – (NVDA – $132) – Nvidia and Jensen Huang are no strangers to accouting fraud. Huang has settled with SEC by paying big fines multiple times for revenue recognition and disclosure fraud. Currently it is likely that, on top of revenue recognition fraud, Nvidia is invovled in a quasi-revenue generating Ponzi scheme.
NVDA reported its FY 2025 Q3 numbers Wednesday after the close. Of course it beat estimates across the board. However, while guidance of $37.5 billion in revenues for Q4 “beat” the median consensus of $37.1 billion, it was far below the buyside expectations of $38.8 billion and well below Goldman’s expectations of $39 billion. Also, of note, NVDA’s gross margin declined from 75.1% in FY ’25 Q2 to 74.6% in the latest quarter. The stock initially dropped 5.4% in after hours trading but ended up down 2.5% when the after hours trading closed.
The data center unit, which sells the “coveted” AI chips, represents 86% of NVDA’s revenues (gaming/graphics, professional graphics, auto & other is the rest). However, within the data center segment, the networking revenues declined over 14%. Networking revenues are derived from the sale of networking hardware inter-connectivity components that enable data transfer. Although networking revenue is just 10% of the overall data center, it’s interesting that the revenue in that segment declined because, to the extent that there’s growth in the sale of AI chips, I would think that there should commensurate growth the sale of the high-speed hardware components that transmit data processed by NVDA’s chips.
This is a potential red flag because, as detailed in previous issues, it’s suspected by many – including me – that NVDA is using a Ponzi-like scheme to manufacture a material portion of its revenues. It does this by investing in “hyper-scaler” data center start-ups who use the proceeds from NVDA’s investment to buy chips. However, if these start-ups are not ready to open for business, they might not be purchasing the hardware from NVDA that would be used to enable the data centers to operate and sell cloud computing services. This is just speculation on my part but I’m not the only one who noticed this as some financial media reports noted that networking revenues declined.
The other interesting aspect of NVDA’s numbers is the slowdown in the rate of growth in NVDA’s data center segment (sale of AI chips, mostly). Over the last four quarters, the QoQ growth rate in revenues has been, starting from FY Q2 2024 to present: 26.8%, 22.2%, 16.4% and 17.2%. The growth rate from FY 2025 Q2 to Q3 rose, but the decline in the growth rate from FY Q3 2024 to Q3 this year is dramatic. Furthermore, I can almost guarantee that Jensen Huang used NVDA’s funding of start-ups during the quarter in order to guarantee a small bounce in the QoQ revenue growth rate.
Perhaps the most remarkable aspect of NVDA’s financials since the rate of growth in AI chips soared is the fact that NVDA has been reporting $4 billion +/- in revenue growth since The FY 2024 Q2 – five straight quarters of consistent $4B in revenues growth. This consistency is just too “clean” and thus another red flag pointing toward the potential of profound accounting fraud.
Another interesting metric that potentially points to the revenue generation Ponzi-like scheme that many of us suspect is occurring at NVDA is that fact that the percentage growth in accounts receivable is substantially higher than revenue growth. As an example sequentially from the FY Q2 to FY Q3 revenues grew 17.2% but accounts receivable grew 24.8%. My best guess is that either NVDA engaged in channel-stuffing, in which it ships more chips than were ordered, possibly on the assumption that the orders might fill-in during FY Q4 or it sold chips to NVDA-funded start-ups which were not funded int time to pay at quarter-end. There could be some other reason but the large increase in accounts payable relative to revenue growth is a big red flag.
Jensen Huang triggered a rally in NVDA’s stock price starting in September from $102 to as high as $150 when its Q3 numbers were released by claiming that the demand for NVDA’s H100 (the current hot chip) was “insane” at an investment conference. Funny thing about that, several NVDA’s bearish analysts discovered in early November that H100 chips and racks that were built by SMCI to host the GPUs were being offered for sale on EBAY. Now why would this be this case if demand for the chip was insane? I checked for myself and sure enough NVDA chips and SMCI hardware are freely for sale on EBAY. There’s also this: @DarioCpx
Regardless of whether or not NVDA’s financials are infested with accounting fraud – and I believe it’s a certainty, not a possibility – the slowdown in the rate of growth in revenues at some point will cause a contraction in the stock’s Price/sales and price/earnings ratios. Currently the P/S is an eye-watering 28.7 and the P/E is 52.1. Furthermore, META, GOOG and AMZN are developing their own AI chips in order to wean themselves off of overpaying for NVDA’s GPUs. The contractions in the valuation multiples may have begun after it closed at an all-time high on November 7th ($148.88), backed off for two days and then failed a retest on Novmeber 12th):
When I published the last issue of my Short Seller’s Journal on Sunday, I commented that I wanted to see the stock drop below the 21 dma (light blue ma line), and hold below. It did that Monday and Tuesday and is currently below the 50 dma (yellow ma line). If it holds below the 50 dma, it will seek out the 100 dma (dark blue ma line, $125.98 today). I think, barring a continued slow-motion melt-up in the stock market, that NVDA will fall to the 200 dma (red dma, $111.73 today) by Christmas Eve.
Betting Against Super Micro Computer Is A Good Bet
The following commentary is from the latest issue of my short sellers newsletter. To learn about about it, follow this link: Short Seller’s Journal subscription information.
I’m focusing on SMCI as a short because there’s an increasing number of red flags that suggest a high probability that SMCI is the Hotel California of accounting fraud: you can check-in but you’ll never check-out. I think there’s a strong possibility that SMCI will not be operating in its current form 12-18 months from now. While I think there’s value to SMCI’s business, it’s a matter of determining what’s real and what’s accounting fraud. It’s a low margin business on which SMCI’s c-suite has been imposing accounting fraud to make the sales growth and profit margins appear bigger than reality. The incentive to do this, of course, is to boost the share price.
On Wednesday SMCI filed a Notification of Late Filing with the SEC stating that it is unable to file its FY 2025 Q1 10-Q. It also stated that it needs additional time to find an auditor, for the Special Committee of the Board to complete its review of SMCI’s procedures and controls and for the audit firm that is eventually hired to prepare and complete the FY 2024 10-K and FY ’25 10-Q.
The Nasdaq now must decide if it will delist SMCI or give the Company 180 days to fix the issues listed above. I have no idea how this will unfold but, quite frankly, this stock should not be trading given the complete lack of transparency with its financials for the last 5 quarters. In addition, NVDA pulled a big order for servers last week from SMCI.
SMCI’s shares jumped 16.6% from the close in thin after-hours trading Friday after Barron’s reported that “a person familiar with the matter” told Barron’s that SMCI intends to submit a plan on Monday in an effort to avoid delisting. Details were lacking but as of Friday SMCI had not hired an auditor to replace E&Y.
In fact, the Wall Street Journal published an article Friday morning titled “Is Anyone Crazy Enough to Audit Super Micro Computer?” The article referenced the possibility that E&Y found something missed by the previous accounting firm, Deloitte & Touche. D&T was fired by SMCI at the end of its FY 2023 (June 30, 2023). Thus, E&Y resigned as the auditor just 15 months after Deloitte was fired and before E&Y completed its FY 2024 year-end audit.
In other words, despite SMCI’s denials, there has to be some serious problems with SMCI’s accounting. Prior to E&Y’s resignation, in April a former employee (Bob Luong) who was the Head of Global Services filed a whistleblower lawsuit alleging that SMCI continued to falsify revenue recognition shortly after SMCI settled with the SEC and was relisted on the Nasdaq in 2020.
According to the court filing, Luong was terminated in April 2023 after refusing to comply with SMCI’s repeated requests to implement what Luong believed was revenue recognition accounting that violates SEC accounting regulations between late 2020 and 2022. The court filing has two pages of sordid details. This includes improper revenue recognition, recognizing revenue from incomplete sales and shipping products near quarter-end that SMCI knew had problems and would be returned for exchange after the quarter ended. In addition Luong alleges that SMCI would shift revenue services to hardware sales in order to boost the profit margin reported in the financials from hardware sales. Luong also cited circumvention by upper management of internal accounting controls.
In December 2022 Luong was placed on involuntary administrative leave and fired in April 2023. Note that Deloitte was fired two-and-a-half months later. I suspect that Deloitte was putting up resistance for the same reasons listed by Luong in his lawsuit. Deloitte was SMCI’s auditor when the Company delisted in August 2018 for failing to file financial statements for two consecutive years. After regaining compliance in January 2020, the SEC charged the Company with widespread accounting violations in August 2020. SMCI settled with the SEC shortly there-after.
I find it quite interesting that E&Y quit as SMCI’s auditor before it completed what would have been its first FY year-end audit in connection with the preparation of the 10-K to be filed with the SEC. Clearly E&Y discovered huge problems with SMCI’s accounting and controls and was unwilling to put its name on the Auditor’s Report which precedes the presentation of the financials in a 10-K.
In my opinion the writing is on the wall for SMCI. This Company is riddled with accounting fraud based on all of the “footprints in the snow.” I continue to believe that SMCI will be trading under $10 within six to twelve months. The problem with using puts right now to express this view is that if the stock is delisted the options cease trading. That said, I think the after-hours report that SMCI is filing a plan of compliance with the Nasdaq (though I don’t see how the report has substance since an audit firm has not been hired).
I hope the stocks pops this week because I would love to establish a longer-dated, OTM put position in this stock. I’ll be watching the price-action in the stock Monday at the open and I hope the stock runs into the mid-high $20’s.
As an aside, there’s still the potential for this stock to get delisted. If you take a bearish view on SMCI with puts, there’s delisting risk, meaning that the options cease trading if there’s a delisting. However, if you short the stock, that short position can be carried over into the OTC market, likely under the symbol “SMCIQ.” I really believe this stock is a no-brainer short.
NOTE: On Monday SMCI filed an 8-K in which t announced that it hired a new audit firm, BDO, and intended to file a Plan of Compliance. There’s just two problems. The 8-K contained a paragraph which would lead a discerning reader to conclude that the BDO engagement is contingent on BDO getting comfortable with the issues that led to the firing of Deloitte and the resignation of E&Y. Note that E&Y quit before it completed what would have been its first annual audit of SMCI’s numbers. As it turns out, BDO is a shady “mid-tier” audit firm. The Public Accounting Oversight Board issued a report in which is stated that 86% of the audits by BDO that PCAOB insspected were deficient. This means that BDO had failed to collect evidence to support at least part of its audit conclusion.
I don’t know how this saga might play out in the near-term. But longer term, as the market figures out that the value-added of AI does not justify the massive market caps given to the AI-related companies. This is particlularly true with the SMCI, which sports an operating margin that is below 10% – to the extent that operating margin can be trusted – and clearly does not command pricing power for what is basically a commodity product.
The Sell-Off In The Precious Metals Sector May Be Winding Down
The sell-off in the precious metals sector since the election has nothing to do with Trump’s victory. That thesis is based on the price-action in the precious metals sector when Trump was elected in 2016. But the sell-off that year followed a move straight up starting in January 2016 that lasted nearly eight months. The sector began heading south in late August that year. It was going to at least undergo a correction in spite of Trump. There’s some other factors back then that are not present currently.
The current sell-off has more to do with the fact that, after a big move higher since the beginning of August the sector had become extremely overbought technically. The Comex banks were shorting a massive amount of gold and silver contracts to feed the appetite of the momentum-chasing hedge funds and CTAs. The bank short position became extreme as did the managed money long position. It was the perfect set-up for the banks to implement what I call a Commitment of Traders open-interest liquidation operation. Using a technically overbought condition in the sector, along with a torrid rally in the dollar, the banks coerced selling by the hedge funds/CTA. The sell-off was almost exclusively during Comex floor trading hours – almost none of the downside price action occurred during physical market trading in the eastern hemisphere.
Last Friday the COT report showed that the banks covered 15k+ contracts in an amount that was nearly identical to the decline in the managemed money long postion. Unfortunately the big move lower Wednesday won’t show up in the COT numbers until November 22nd (Tuesday is a cut-off day). But I suspect this Friday’s COT report will show that the banks covered more shorts and the managed money puked more longs.
I discuss the market action and dispel the Trump/gold misinformation in a podcast with Arcadia Economics
The mining stocks are extremely oversold now. As well, the dollar is extremely overbought and may be topping. In response to a flood of emails from my subscribers, I included a shopping list of my favorite mining stocks in today’s new issue of my newsletter to buy in order to take advantage of the sell-off and the next move higher. I also updated five stocks that I cover and recommend that I believe could be anywhere from doubles to 5-baggers over the next six to twelve months. To learn more about my newsletter and get these stock picks, follow this link: Mining Stock Journal
Mining Stocks Haven’t Been This Undervalued Since 2001
Tom Bodrovics invited me back onto this Palisades Gold Radio podcast to discuss the election, the economy, the national debt and mining stocks. We also discuss the existence or non-existence of the U.S. Treasury’s gold bars, which are allegedly held in custody by the Fed but for which there has not been an indepedent audit since the mid-1950’s (note: the gold was moved from Fort Knox to “deep storage” in various locations quite some time ago; any gold Fort Knox is for display purposes only). With respect to our discussion about minining stocks follow this link to learn about my Mining Stock Journal
Housing Market Update – DR Horton Is Down 13%
NOTE: DR Horton (DHI) reported its FY Q4 numbers this morning. It missed Street consensus across the board and warned about FY 2025. The stock is currently down 12.5 but it has a long way to fall just to reset to its valuation at the peak of the first big housing bubble this century.
Existing home sales fell 1% in September from August and 3.5% YoY. The 3.84 million seasonally adjusted, annualized rate is the lowest since October 2010. On a not-adjusted, monthly basis, existing sales plunged 12.6% from August and 4.9% YoY. At the current SAAR the months’ supply of listings jumped to 4.3, the highest since the pandemic. First-time buyers represented 26% of the closings, which matched an all-time low.
Existing home sales are based on closings. It’s possible that existing sales in October could undergo a small bounce because the mortgage purchase index rose during September and contracts signed will show up as closings in October and part of November.
The prospects for a sustained turnaround in home sales will not improve anytime soon, however, as the weekly mortgage purchase index plunged 5.8% from the previous week. The purchase index is down 12.1% from September 27th. The purchase index had been rising since mid-August as mortgage rates declined in anticipation of the Fed rate cut. The index started to reverse sharply three weeks ago with the 10yr Treasury yield up 60 basis points and the baseline 30yr fixed mortgage rate jumping to 7.26% from 6.6%.
New home sales were said to have risen 4.1% in September from August and 6.3% YoY. August’s 8.7% decline from July was revised even lower, from a 716k SAAR to a 709k SAAR. And July’s alleged 751k SAAR, or 18.4% jump from June’s originally reported 681k SAAR. June’s number was revised down to a 672k SAAR and the July number was revised down to a 726k SAAR.
See the pattern here? The Census Bureau’s data surveying and statistical calculus is completely unreliable. New home sales are based on contracts signed. So, while the Census Bureau’s estimate is likely inaccurate, it’s entirely possible that there was an increase in new home contracts given that the mortgage purchase index rose 9.5% during September. That said, the CB does not adjust its data for canceled contracts. Given the jump in mortgage rates since mid-September, I would bet there will be a jump in contract cancellations.
I can’t say with certainty that the market will start to reprice tech or small caps anytime soon, though I think it will, I am confident that the homebuilders and related stocks will are starting to feel the gravitational pull of fundamentals-based reality. Higher rates eventually will force a hard downward valuation adjustment in the housing stocks.
Pulte Homes reported its Q3 numbers on Tuesday before the open. Despite what looked like decent headline numbers, the stock plunged 7.2% and dragged the entire sector with it. This is despite the fact that PHM beat the revenue and EPS consensus. I’ll get to my rationale for the sharp sell-off in the stock shortly.
In terms of the prima facie numbers, on a YoY basis closings were up 12%, revenues rose 12% and EPS increased 16%. Gross margin declined and SG&A as a percent of sales increased. Both metrics do not surprise me because the Company no doubt had to offer huge incentives to coerce contract signings and the cost of that would be allocated both to the cost of revenues and SG&A.
Here’s where it gets interesting. To begin with, forward guidance was notably absent from the earnings press release, the earnings presentation and the conference call. Although new orders increased YoY, the dollar value of the backlog declined 5.3% YoY and roughly the same amount from Q2 2024. Despite the Fed rate cut, along with a decline in mortgage rates during July and August in anticipation of the rate cut, PHM’s cancellation rate increased in Q3 vs Q2 (it was about the same – 15% – as Q3 2023).
Here’s PHM’s comment about mortgage rates: “with mortgage rates hovering around 6.5% to begin the third quarter, buyers were generally less inclined to sign a purchase agreement.” Actually, the current baseline (20% down, 740+ FICO) 30-yr fixed mortgage rate is now 7.26%, which means buyers will be even more “less inclined” to sign a purchase agreement now. This means it will become more difficult to move inventory. In addition, the jump in mortgage rates will likely cause an increase in cancellations.
Speaking of which, Pulte management said that 43% of the homes in its inventory are “spec” homes. In all likelihood, I would bet 50% of those spec homes are from canceled contracts. I would love to ask about that on the earnings call, but corporate earnings calls are highly curated and no sycophantic Wall Street analyst would would dare ask a tough question. It’s a great bet that the percentage of spec homes in PHM’s inventory will continue to climb. I suspect the same is true for all of the homebuilders.
Here’s the money-shot. At the peak of the housing bubble in the first decade of this century, PHM peaked at a little over 2.4x the dollar value of its backlog. Currently, the stock is valued at 3.6.x the value of the backlog. On this basis, despite the big drop earlier this week, PHM is at least 50% overvalued based on market cap to backlog value.
As with the entire sector and the stock market in general, PHM has been rising relentlessly, albeit irrationally, since mid-October 2022. It was triggered by the market’s anticipation of the eventual rate cut that occurred in September. Unfortunately for the perma-bulls, the rate cut triggered a sharp increase in the 10-year Treasury rate and mortgage rates. In addition, new home sales home sales have been on a downward trajectory since October 2020. The phony SAAR for September is down 28.3% from October 2020 – and the numbers do not include contract cancellations.
Of the homebuilders I analyze and present in SSJ, only TOL and PHM look like this:
While I think both TOL and PHM are fantastic shorts, the charts of KBH, BZH, DHI and LGIH appear have formed a top and are poised to head lower:
LGIH, along with BLDR, are my two favorite homebuilder shorts. They both report numbers on November 5th. DHI reports Tuesday (Oct 29). In my opinion, all three are shorts (or put plays) ahead of earnings.
Russia proposes to put the Comex and LME out of the market-rigging business (GATA)
Bingo! I’ve been wondering for over 20 years when this would happen. It’s not like Russia and China don’t understand the degree to which western Central Banks, led by the Fed, manipulated the prices of gold and silver using the banks on the Comex and LBMA as their agents.
MOSCOW, Oct 24 (Reuters) – Russia is in talks with other BRICS members about creating an international precious metals exchange to ensure fair pricing and trade growth, the country’s Finance Minister Anton Siluanov said in a statement on Thursday…”The mechanism will include the creation of price indicators for metals, standards for the production and trade of bullion, and instruments for accrediting market participants, clearing, and auditing within BRICS,” Siluanov said.
The BRICS precious metals exchange would rival Western trading platforms, such as the London Metal Exchange, and would protect trade from sanctions imposed by the West on BRICS members Russia and Iran.
Earlier, BRICS leaders expressed support for efforts to increase trade in precious metals among the group’s countries in a joint communique issued on Oct. 23.
Here’s the link for the entire article: REUTERS
And here’s the link for the GATA Dispatch: GATA.org
Silver Looks Explosive To The Upside
That’s the title from the latest issue of my Mining Stock Journal, which I released yesterday. Silver is up nearlly 4% as I write this. Here’s the title from the September 19th issue: “The Mining Stocks Remain Historically Undervalued.” GDX is up 4% as I write this. Several of the micro-cap, project development stocks that I recommend are up over 20% since mid-September. Some of them, like Cabral Gold, have potential 10-20x returns ahead of them. I updated Cabral in yesterday’s issue with a couple of imminent catalysts that could trigger a 25% to 35% move in the stock before Christmas. Follow this link to learn more about my newsletter: MSJ information
The left “rim” of the cup goes back silver’s all-time high in 1980. The right “rim” of the cup formed in 2011, when silver peaked just $1 below the 1980 all-time high. The “handle” has been forming over the last 13 years. Perhaps, most interesting, a 5-year chart shows that part of the handle is an upside-down head and shoulders technical formation.
The point here is that silver looks potentially explosive. Since April, silver has been banging its head on $32.50 (Comex front-month contract price basis). In my opinion, if it breaks over $33 and holds, it will trade towards $40 very quickly.
This view is supported by the fundamental set-up in the silver market. It’s been well circulated that the Silver Institute of America is forecasting a 215 million ounce silver supply/demand deficit for 2024. Several factors will likely increase the size of that deficit in 2025. First, Russia announced in its Draft Federal Budget release that it plans to significantly increase the holdings in precious metals in its State Fund (sovereign wealth fund). This includes plans to acquire gold, platinum, palladium and, for the first time, silver.
In addition, China recently announced that its build-out of a national solar grid will continue through 2030. This endeavor requires a massive amount of silver. Though China does not publish official silver import numbers, I recall that when the program was underway it was consuming more than all of the annual amount of silver produced in China. India also has a similar program in place, which is part of the reason it has been importing large amounts of silver. In fact, earlier this week India announced another $109 billion in grid investments for renewable energy sources. This will also require large quantities of silver.
Finally, at some point – as occurred in the late 1970’s and again leading up to the 2011 top in silver – the “poor man’s gold” attribute of silver will become a large factor in driving a massive amount of investor money into silver as a cheap substitute for gold. This demand would be coming from the greater public beyond the precious metals “bugs” who have been stacking silver for years.
I believe that in the next 12 to 18 months, silver will make a move higher that will shock just about everyone except the most ardent silver bulls. I don’t like to make price forecasts based on a specific point in time, but I think $40 silver within the next year has a high probability. Furthermore, the primary silver producer stocks will soar and the junior silver project development stocks will soar x 5. This is likely why both Coeur Mining announced the acquisition of Silvercrest Metals and First Majestic announced the acquisition of Gatos Silver. Six months to a year from now the cost to acquire these companies might have doubled.