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“Why Fed Bugs Really Hate Gold”

The media campaign against gold continues. With Congress ordering magical fiscal bailouts from the Treasury, Trump conjuring up continued $600 weekly unemployment payments by executive order, and the Fed adding assets of every dubious stripe to its swollen $7 trillion balance sheet, gold prices predictably spiked to over $2,000 per ounce last week. Right on schedule, Fed bug journalists respond with a litany of “Gold is foolish, don’t buy it!” articles. In fact they sound like real estate agents in reverse: there is never a good time to buy. Gold goes up relative to the dollar; it’s overpriced and poised for a big fall. Gold falls below $1,100, as it did in 2015? See, we told you this worthless shiny metal was headed down! (article link below)

Gold is the kryptonite of the fiat currency, fractional banking monetary system.  It is sunshine to the vampires who control the money supply and conjure up fairytales which purport an ability to be able to control  the natural laws of economics through the use of modern monetary policy tools.

When gold starts moving higher in price enough to get noticed by the general population who otherwise have been told ad infinitum that gold is nothing more than a useless barbarous relic, the mainstream anti-gold media swarms into the action:  Gold Is A Foolish Place To Put Your Money

The Mises Institute posted a must-read commentary on the mainstream media and financial world’s irrational hatred of gold:  Why Fed Bugs Really, Really Hate Gold.

 

Carvana: A Convicted Felon’s Personal Piggy Bank

CVNA’s valuation vs competitors like CarMax (KMX), Autonation (AN) etc is completely irrational. I was a CEO of a subprime company in this space. CVNA’s valuation is a crime of capitalism.” – @beaconstagezero

Ernest Garcia II was convicted on felony charges in connection with his involvement in the Charles Keating S&L Ponzi scheme which stole billions from innocent bystanders.  Garcia is the founder and Chairman of Carvana (CVNA).   His son, a chip off the old block, is the CEO.

Carvana’s Q2 2020 showed 15.3% YoY revenue growth vs Q2 2019. But the gross margin dropped 100 basis points from 16% last year to 15% in this year’s Q2. No wonder CVNA is generating revenue growth – just like every other overvalued “unicorn” company hatched in Silicon Valley, CVNA charges a price for its product that does not cover the cost of its business model.

How do we know this? Its operating loss soared 66.4% to $106 million of red ink from $64 million in Q2/19. The cash burned (used) in operations fell to just $7 million from $168 million in Q1/20. But this was attributable to a $215 million run-off of inventory from Q1. As I’ve discussed previously, CVNA does not price the cars it sells at a price high enough to cover the full cost of the business model. This is why it issues debt and stock quite frequently.

A big red flag for me is the fact that has had to issue stock three times raising $1.3 billion subsequent to going public in 2017 plus another $700 million in two separate junk bond deals in 2018 and 2019. Two of the three stock financings occurred in Q2 2020, yet the cash balance between Q1 and Q2 increased by just $76 million dollars, part of which is restricted cash. The Company used $781 million to pay down a short-term revolver used to finance inventory. This also explains the run-off inventory. Including the inventory run-off in Q2, the Company has raised $2.2 billion in funding since going public. This is essentially the amount of cash burned by CVNA’s operations since its April 2017 IPO.

This Company does not make money and it never will unless it charges a much higher price for the vehicles it sells, in which case its sales volume will plummet. CVNA is 60% owned by Chairman/founder, Ernest Garcia (a convicted felon), and 40% owned by the public. Garcia sucks money out of Carvana via a series of “related party” arrangements which include the leasing of office space and other facilities, paying a Garcia-owned business for used car reconditioning services and selling usage time on a corporate aircraft indirectly owned by Garcia. A Garcia-owned company also gets paid for servicing CVNA’s finance receivables. The conflict of interest and self-dealing between CVNA and Ernest Garcia II (Chairman) plus Ernest Garcia III (CEO) is mind-boggling.

The bottom line is that CVNA is functions as a vehicle (so to speak) that Ernest Garcia and his son use to raise money in the public capital markets and suck that money out of CVNA for personal gain. It’s the epitome of fraud and corruption.

The short interest represents 47% of the share float, which explains the ridiculous run-up in the share price after the Company reported. Clearly I’m not the only one who has dissected the footnotes to the financials and determined that CVNA is to a large degree Ponzi scheme with an absurd market valuation.

Quite frankly I would bet that the asset value of the Company is not a lot greater than the amount of debt outstanding. The tangible assets – finance receivables (i.e. subprime loans extended to customers), inventory and unrestricted cash – are carried at $1.2 billion. The finance receivables ballooned in Q2 to $358 million from $199 million in Q1. This tells us that the Company lends aggressively to subprime borrowers.

There’s no way the market value of that crap is worth $358 million. PP&E is carried at $704 million. Thus, CVNA’s “hard” assets total $1.9 billion giving full value to receivables. Total debt plus payables was $1.4 billion at the end of Q2. Subtracting the debt from the tangible assets leaves $500 million of asset value. Beyond that, what is the value of a business that burns several hundred million in cash on an annual basis?

CVNA’s market cap at Friday’s close was $32.9 billion. If you laid out the numbers in the paragraph above and told me that the business described was valued at $32.9 billion, I would have thought you were hallucinating.

CVNA’s stock began plunging Friday about 15 minutes after the NYSE opened. It closed down $31 on the day despite a positive closing for the Dow and SPX. I don’t know if this will be the start of capital flight out of CVNA but eventually this stock is going back to $30 (or lower), where it closed at the market bottom in March.

Is Fed Head, Jay Powell, Serious?

“Investors are being infantilized by the relentless Federal Reserve activity…It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene.” – Seth Klarman, Baupost Group

This is indeed the Golden Age of Fraud, with those appointed to manage the system ethically and responsibly leading the charge. The actions at the Fed are conspicuously irresponsible, if not beyond appalling.

Wall Street on Parade posted a report on Friday detailing Jay Powell’s blatant conflict of interests in his dealings as the Fed Chairman in hiring BlackRock to prop up the financial markets. But I almost fell on chair from laughter when I read Powell’s response to a question from the NY Times about the nature of Powell’s four phone calls lasting a total of 90 minutes since March with BlackRock’s CEO, Larry Fink:

“I can’t recall exactly what those conversations were, but they would have been about what he is seeing in the markets and things like that to generally exchanging information. And he’s typically trying to make sure that we are getting good service from the company that he founded and leads.  I’d say that’s his main objective when we talk.”

Powell must think that those who know enough to pay attention to what’s really going on are complete morons – or at least tragically gullible.   A courtesy call to make sure the Fed is happy with BlackRock’s service?   Is BlackRock the Maytag repairman?  Of course Powell is happy.  The value of his investment with BlackRock has more than doubled since BlackRock was hired to push the financial markets higher using the Fed’s printed money.

The system is openly corrupt now – these guys don’t even attempt to cover the obvious with cheap mascara anymore. Who’s going to stop these crony capitalists from completely looting the system? The SEC? The Justice Department?  Sure, they’ll get right on that but first they too have to feed at the trough.

The wheels are flying off the system and those in a position to do so operate with brazen disregard for the law. The least Powell can do is apologize to his audience for assuming those paying attention are stupid enough to believe the pig vomit he regurgitates to the media and 60 Minutes…

Tesla Is The Poster Child For The Golden Age Of Fraud

“Elon Musk has personified the hopes and dreams of this bull market; Tesla burnishes its results through aggressive accounting; it’s a culture of deception because it is selling self-driving, which doesn’t yet exist.” – Jim Chanos from “We Are In The Golden Age Of Fraud” (Financial Times)

Jim Chanos is perhaps the most well-known remaining short-seller in this market. Don’t be fooled by his demure characterization of Elon Musk and Tesla. It’s calculated diplomacy. The numbers are far more than just polished up to look good and the accounting is not just “aggressive,” it’s fraudulent, and Chanos knows that as well as anyone. Large, successful hedge funds that have lasted as long as Chanos’ Kynikos Capital Partners spend a considerable amount of money hiring private investigators and financial forensic sleuths before putting on and sticking with large short positions. I don’t know if Chanos hires P.I.’s but he knows all well as anyone that the accounting is fraudulent rather than just “aggressive.”

Tesla’s stock ran up to $1650 in the two days before reporting Q2 numbers. After that, it closed lower every day, including losing $175 on Thursday and Friday combined after the earnings report. Tesla is promoted as a “growth story.” But its revenues unequivocally do not exhibit any growth (graphic courtesy of @TESLAcharts):

Anyone see any growth in those numbers? Tesla’s Q2 revenues declined 5% vs Q2/19, despite the continued ramp up the Shanghai factory and the addition of the Model Y to the revenue stream. The virus crisis was not a factor in the lower revenues because unit deliveries increased 3% from Q1 2020. Tesla cut prices on all of its models in every market multiple times during Q2. Outside of China, Tesla’s deliveries declined in every market, especially the Models S/X, which are rapidly trending toward zero deliveries. YoY total Model S/X deliveries including China plummeted 40%.

Tesla played the typical games it plays in order make the gross margin appear larger and to squeeze out an operating profit. The Company managed to show a $327 million operating profit. But $428 million of that is attributable to TSLA’s sale of emissions credits to OEMs. Most of this is from a deal with Fiat/Chrysler. Recall that emissions credits are a regulatory mandate in every country. The large OEMs do not produce enough EVs and thus need to buy some of the excess credits generated by TSLA. But as OEMs ramp up their production of EVs, they’ll no longer need to purchase these credits. Even the CFO admitted on the earnings call that the revenue/profits from this source will eventually disappear. Without this revenue source TSLA’s operations would have lost money again. In other words, without the Government mandated emissions regulations, TSLA’s business model does not generate income.

Tesla also once again slashed R&D expenditures, which were $279 million in Q2 vs $324 million in Q2/19. In fact, TSLA’s R&D expenditures averaged $331 million over the previous four quarters. And yet, despite supposedly developing an EV truck, semi and roadster plus working to develop full automatic driving, TSLA spent 16% ($52 million) less on R&D in Q2. Every dollar reduction in R&D translates into $1 of operating income. Additionally, TSLA’s capex expenditures every quarter continue to be less than its depreciation expense. TSLA is cannibalizing its existing manufacturing assets. This is apparent from the rising complaints about the quality control, especially with regard to the Model 3 and the Model Y. To some extent, reduced capex reduces the cost of revenues and helps pad the gross margin.

And of course I would be remiss if I didn’t touch on the Accounts Receivable (A/R). I detailed the A/R scam in last week’s issue. Refer to that if you want an in-depth review. Once again TSLA’s A/R hit an all-time high, soaring 29.4% higher Q2/19 to $1.48 billion. This is despite the 5% drop in revenues. The A/R was 24.6% of revenues in Q2 vs 18% of revenues in Q2/19. Recall that GM’s A/R is just 10% of revenues and GM is a sprawling global auto OEM and defense contractor. Furthermore, in the auto business, customers are required to pay for a vehicle (either with cash or bank financing) before they can drive away with their vehicle. There is just no conceivable explanation that can justify this red flag and the one given by the CFO on the earnings call was an exercise in blowing smoke.

Chanos referred to the regulators, like the bank puppets at the SEC, as “finanical archeologists” who tell us what happened after a Ponzi company implodes. As an example, Harry Markopolos laid out an air-tight case about Bernard Madoff’s Ponzi scheme and put the report in the lap of the SEC. The SEC ignored him. Madoff blew up in late 2008 and was arrested shortly thereafter.

The reason this occurs is because the SEC exists as big bank puppets. JP Morgan made a fortune on Madoff’s “business.”  Same applies to Tesla and Elon Musk. Goldman and Morgan Stanley will skim $100’s of millions in various fees between now and the time when Tesla blows up.  But don’t complain you weren’t warned if you get burned holding the shares or stuck with a dysfunctional EV that will no longer be serviced.

Owning Gold And Silver Is Critical For The End Game

“…unprecedented monetary stimulus is fueling asset bubbles and corporate debt addiction — rendering interest-rate hikes impossible without an economic crash…gold could rise to $3,000 to $5,000 an ounce in the next three to five years” – Diego Parrilla, head of the $450 million Quadriga Igneo fund, which is up 47% YTD

My personal view is that Diego is low by several  multiples on his estimate for the eventual price of gold before the entire system is reset. And, based on the current gold/silver ratio, the price of silver is 4x undervalued in relation to gold.

Kenneth Ameduri invited me back on to his Crush The Street podcast to discuss the factors behind the precious metals raging bull market and what the end game might look like:

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Several of my junior and larger cap stock ideas have had huge moves higher. I will be discussing what to do with these stocks in the next few issues of my Mining Stock Journal plus presenting any new ideas I uncover that have yet to be widely discovered. You can learn more about Investment Research Dynamic’s newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Note:  I do not receive any promotion or sponsor payments in any form from the mining stock companies I present in my newsletter. Furthermore, I invest in many of the ideas personally or in my fund.

AMZN’s Free Cash Flow And Profitability Myth

Jeff Bezos was a master at GAAP accounting manipulation back when Elon Musk thought that “GAAP” was a clothing store chain. AMZN’s numbers are just as manipulated as Tesla’s. But the difference between Jeff Bezos and Elon Musk is that, whereas Musk is a pure caveman with his fraud, Bezos is clever about disguising and hiding the accounting manipulation. About six years ago I spent a considerable amount of time deep-diving into AMZN’s financials going back to 2004, which is when AMZN’s business really began to takeoff. After about two weeks of tedious but intensive study of the footnotes in 10Q’s and K’s, I pieced together a lot of the GAAP manipulation tools embedded in AMZN’s financials.

I will note that in 2018 Amazon denied a request from the SEC for more information about the Prime business, including disclosing in its financials the amount of sales attributable to Prime members. I’m certain Bezos rejected this request because Prime is a money-losing proposition and does not want to provide the evidence of that by breaking out the numbers. I recall sometime around 2013 or 2014 Bezos admitted in an interview with Bloomberg that Prime lost a couple billion per year.

AMZN pulled a lot of of the usual GAAP tricks to generate this quarter’s net income “beat.” Bezos slashed marketing expenses by a considerable amount as a percentage of revenue, as the marketing expense was essentially flat vs Q2 2019. Historically the marketing expense has grown YoY at a healthy rate. He may have just figured out a way to justify capitalizing some that expense – i.e. throwing some amount of the marketing expense into an asset account and amortizing it over time. This would reduce the amount of marketing expense shown in the income statement, thereby increasing operating and net income. Too be sure during Q2 a lot of companies cut back on web-based advertising, but if this was the case with AMZN, the cost-improvement is one-time, non-recurring.

Though AMZN reported EPS of $10.50 vs. $5.32 in Q2/19, several red flags for me point to the improbability of net income nearly doubling YoY. The operating income margin in the North America product segment (e-commerce + whole foods + sundry other small businesses) declined again to 3.7% from 4.1% in Q2/19. For the first time he showed a tiny operating profit in the International e-commerce business. I’m certain there were accounting games to accomplish this but I can’t prove it with just the publicly available numbers.

AWS (the cloud business) continues to experience slowing sales growth and declining margins. AWS contributed to 59% of the Q2 operating income but just 12.1% of the total revenues. And the percentage of revenues represented by AWS sales declined.

AMZN’s overall operating margin was 6.5% but the Products (online + WF) operating margin was just 3.1% vs 4.9% in Q2/19. This decline is attributable I believe to declining margins in the Whole Foods business. Again, AMZN offers fat discount specials to Prime members on many products at WF, which drives sales growth at the expense of profitability. Unfortunately, AMZN does not break out the sales and income attributable to the WF business – yet another layer of opacity on AMZN’s financials. I predicted when AMZN acquired WF in mid-2017 (at the time WF was 5% operating margin business being folded into a 3% operating margin business) that Bezos would drive margins lower at WF in an effort to generate revenue growth.

The cost of fulfillment rose – again – to 26% of product sales vs 25.6% last year. The Company generates sales by subsidizing the selling price of online products with 2-day free
delivery for Prime members. This is a money losing proposition and it enables predatory
pricing to drive out competition. Bezos is being grilled by Congress about the possible use of predatory pricing strategies to drive out competition, along other anti-trust issues. Rest soundly that this is nothing more than political theatre and nothing will be done to curtail AMZN’s effort to put the competition out of business.

AMZN’s debt increased again to $33 billion (41%) in Q2 but the Company is not using the funds to buyback shares. If the business really is generating free cash flow, why issue more debt? AMZN has to issue debt from time to time to fund cash needs. Without going into the complicated calculus here, AMZN’s free cash flow claim is an accounting mirage. At the end of Q2 2012, AMZN had zero debt. It had $24 billion in debt after closing the WF’s deal. Now it has $33 billion in long term debt. To my knowledge, unlike most other big companies that issue debt for the sole purpose of buying back shares, AMZN has rarely if ever repurchased shares. This is because it needs the debt funding to cover expenses.

Finally, AMZN used to disclose the amount of cash it spends every quarter for operating and finance leases plus that amount cash used to acquire PP&E under operating and finance leases at the bottom of the State of Cash Flows. No more. Now it discloses this information in the footnotes in a section titled “Supplemental Cash Flow Information.” This may sound trivial but the cash used for the PP&E purchases is not included in Bezos’ definition of free cash flow. In addition, very few analysts and investors ever bother to look at the footnotes.

Bottom line: If I gross up the the first 6 months of 2020 operating income and add a couple billion for growth, I get full-year estimated operating income of $20 billion. This stock is trading at 80x estimated operating income for a business that generates a 6.5% operating margin and said margin declines almost every quarter. 88% of the business model generates just a 3% margin and that margin is declining. Right now it doesn’t matter. The stock algos, Chinese retail gunslingers and Robinhood idiots will chase anything that moves. You make a dead skunk carcass move and the Robinhood morons will chase it.

“We Are In The Golden Age Of Fraud”

“Elon Musk has personified the hopes and dreams of this bull market; Tesla burnishes its results through aggressive accounting; it’s a culture of deception because it is selling self-driving, which doesn’t yet exist.” – Jim Chanos from “We Are In The Golden Age Of Fraud” (Financial Times)

Jim Chanos is perhaps the most well-known remaining short-seller in this market.  Don’t be fooled by his demure characterization of Elon Musk and Tesla.  It’s calculated diplomacy. The numbers are far more than just polished up to look good  – the accounting is not just “aggressive,” it’s fraudulent, and Chanos knows that as well as anyone.

Chanos describes the current environment as “a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time”. He reels off why: a 10-year bull market driven by central bank intervention; a level of retail participation in the markets reminiscent of the end of the dotcom boom; Trumpian “post-truth in politics, where my facts are your fake news”; and Silicon Valley’s “fake it until you make it” culture, which is compounded by Fomo — the fear of missing out. All of this is exacerbated by lax oversight. Financial regulators and law enforcement, he says, “are the financial archaeologists — they will tell you after the company has collapsed what the problem was.” (Financial Times)

I have said many times that Tesla and Elon Musk embody and reflect the extreme degree to which the U.S. system has defined deviance downward into what is now a complete Banana Republic controlled by crony-capitalist elitists who are putting the screws to the middle class. The money printed by the Fed is nothing more than the thinly veiled bailout of the biggest banks – nothing more – effecting the greatest wealth transfer in history.

The fraud and corruption is blatant. And there’s nothing the masses can do about it at this point. The U.S. economic, financial, political and legal system is now amalgam of “1984” and “Atlas Shrugged.”  Eventual collapse is fait accompli.

Chanos himself burnishes the adjectives he uses to convey the degree to which the U.S. system has been engulfed in fraud, corruption and open theft.  In my opinion, Francisco D’Anconia in “Atlas Shrugged” describes the U.S. perfectly in this excerpt from the famous “Money Speech:”

Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.

The Precious Metals Bull Market Is Beginning To Rage

The precious metals and mining stocks have a long way to go before this secular bull market is over. My view is that it will culminate with a global monetary reset that will re-incorporate gold/silver into the monetary system. The dollar-based price of gold and silver will end up at multiples of their current prices.

Silver Doctor’s Paul Eberhart invited me back on to his podcast to discuss the big move in the precious metals market, including whether or not the current investor sentiment is overly euphoric, the degree to which the mainstream media spits out anti-gold propaganda, the U.S. dollar and the general economy/stock market/Tesla (Silver Doctors):

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Several of my junior and larger cap stock ideas have had huge moves higher. I will be discussing what to do with these stocks in the next few issues of my Mining Stock Journal plus presenting any new ideas I uncover that have yet to be widely discovered. You can learn more about Investment Research Dynamic’s newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Note:  I do not receive any promotion or sponsor payments in any form from the mining stock companies I present in my newsletter. Furthermore, I invest in many of the ideas personally or in my fund.

What’s Going On With Silver?

Chris Marcus wanted my opinion about whether or not a silver “smash” was coming:  “I would never want to be as dogmatic as saying ‘never’ because anything can happen with a banking [and financial markets] system as corrupt as the one in the U.S.”

But silver is historically cheap as an asset in relation to the universe of dollar-based financial assets and relative to the dollar-value of gold.  Until the global monetary system is reset, gold and silver are going much higher price in ALL fiat currencies. As silver moves higher, there will be even more aggressive attempts to control its rise and this will entail higher volatility – both up and down but mostly up.

Chris (Arcadia Economics) and I examine this topic in our latest podcast and I draw from 20 years of experience in the precious metals sector including a 4-year span in the early 2000’s when I traded silver futures almost around the clock:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Note:  I do not receive any promotion or sponsor payments in any form from the mining stock companies I present in my newsletter. Furthermore, I invest in many of the ideas personally or in my fund.

Gold / Silver: Brief Pullback Then Higher

The market will always from time-to-time remind us that nothing goes straight up in the stock market. The mining stocks, especially the riskiest juniors, have had huge run since mid-March. The HGNSI (Hulbert Gold Newsletter Sentiment Index) has been a remarkably reliable contrarian signal for mining stocks over the years. Sell/take profits when it moves above 60 and buy with both hands when it goes below 20.

The HGNSI has pushed up to 86% last week (86% of gold newsletters have buy recommendations). Mark Hulbert commented that “the HGNSI jumped today in concert with gold, and now stands at the 99.8th percentile of the distribution since 2000; the HGNSI’s current level represents extreme bullishness.” The latest reading (July 15th) is 76 – still too high to be aggressive with positioning.

A red flag for me is when a bullion bank like Goldman Sachs sticks a $2,000 price target on gold. Why $2,000? Why not $2,500? For me, the HGNSI and bullish price targets for gold from Wall Street banks after a big move has occurred already is a signal to take some profits or hedge my mining stock portfolio.

With the massive scale of fiat currency devaluation – aka money printing or “QE” – there’s an “invisible hand” of economics that seems to have, for now anyway, put a floor under the gold price. Add to that the enormous appetite for physical gold imports from India, which was the equivalent of waking up a starving elephant when quarantine restrictions were lifted, and any pullback for which I’m looking could be shallow and short-lived.

Chris Marcus (Arcadia Economics) and I discuss the gold market technicals. And I’ll go one up on Goldman and call for $2,000 gold before Labor Day:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Note:  I do not receive any promotion or sponsor payments in any form from the mining stock companies I present in my newsletter. Furthermore, I invest in many of the ideas personally or in my fund.