Category Archives: Financial Markets

Jay Powell’s Printing Press And The Idiot Stocks

I’d like to thank Jay Powell and his marvelous printing press.  The equity side of my investment fund, which I manage, is 100% mining stocks – mostly juniors – and as of today it’s up 100% QTD.  Thank you Jay.  Almost every stock we hold is from the ideas I present in my Mining Stock Journal.

But I’m here to discuss the “idiot stocks.” I’ve decided to label stocks like SHOP, W, TSLA, BYND, CVNA, etc as “idiot stocks.” Yes, ignorant speculators have managed to get lucky trading these stocks during a period of time when the Fed has printed the greatest amount of money in its history. But only an idiot would consider them to be long term, fundamentals-based investments. Not one of those stocks has ever produced a valid GAAP profit and never will. They are largely cash-burning furnaces that have benefited from a stock market that, for now, will tolerate any negative event short of nuclear war.

The latest idiot stock with which I’ve started toying is Fastly (FSLY, $86). FSLY is an “edge” cloud-based technology services business focused on real-time content delivery network services. FSLY’s market is $8.14 billion which is 38.6x trailing revenues. For 2019 the Company generated $200 million in revenues. It looks like, based on its growth rate and Q1 revenues of $63 million, that it will generate maybe $270-280 million in revenues in 2020. The point of this is that it’s a small company with significant inherent business risks, not the least of which is obsolescence and competition.

Like most of the idiot stocks, FSLY operates at a loss every quarter and its operations burn cash every quarter, even adding back the non-cash expense of stock-based compensation. Of course, stock-based comp imposes silent shareholder dilution. And insiders are ensuring this dilution happens quickly, as almost everyday insiders exercise zero-cost stock options and then turnaround and dump the shares in the market. At the end of Q1/19, there were 25 million shares outstanding. Now the share-count is 95 million.

The stock chart, RSI and MACD pretty much speak for themselves. This is one of the more overvalued stocks I’ve analyzed, ergo an idiot stock. I’ve been playing around with near-money puts for the last 7 trading days. Despite the chart appearance, I’ve managed to eek out a modest profit.

The implied vol is very high, especially for the call options. This means shorting OTM calls is a better proposition than buying puts. The July 17th $120 calls were $2.20 bid on Friday. Shorting these would be the equivalent of picking up nickels in front of a steam-roller. If you feel like stepping up the risk for higher profits, the August $120 calls can be shorted around $7, plus or minus 20 cents. The short interest is not very high (6%) so you won’t have to worry about a short-squeeze. If you short the calls, use a 20% stop-loss.

Because the implied vol is so high (on average it’s 100%), the puts are expensive – even deep OTM puts. This is why I’m sticking with weekly near-money puts for now. But this stock was trading at $45 on June 11th. On this basis it might be worth taking a shot with August $60’s. Another interesting idea is the January 2021 $20’s. The last trade in this put was this past Wednesday at $2.81. If you short the stock, use a 20% stop-loss. You want to give yourself room to weather the high volatility and avoid getting stopped out on a brief 10% intra-day spike.

The commentary above is from my Short Seller’s Journal.  FSLY dropped as much as $10 on Monday. I scored a double on the puts I bought on Friday. Several of my subscribers bought puts in early trading Monday and booked profits that made it worthwhile getting out of bed today. You can learn more about this newsletter here:  Short Seller’s Journal information.

“Major Battle Underway In The Gold Market”

The chart (and blog title) above is from James Turk via King World News. Turk was making the point that the western Central Banks, via the bullion banks, are short $4 billion worth of paper gold on the Comex. With all of the Central Bank money printing, and the Fed is by far printing the most, it would be a disaster for the fiat currency system if the price of gold were to break free and rediscover price discovery. It’s only a matter of time until this occurs. But for now the Central Banks are making a concerted effort to do what they do best: defer reality for as long as possible.

For now the goal is to prevent gold from breaking above $1800, which means the invisible “battle line” is at $1790. I remember when gold was trying to get over $400. It seemed like it took forever. But once $400 fell (shortly after Elliot Wave aficionado, Robert Prechter, proclaimed gold was going back to $50), it didn’t take long for gold to double (about 18 months). I think once gold gets through $1800 and holds, it will challenge the all-time high at $1900 relatively quickly. For as bullish as I am on gold, I’m 3x more bullish on silver.

A subscriber was concerned about the possibility of the miners getting hit hard in the next general stock market crash. I suspect the miners will get hit initially but then stage a rally. But that’s why I advise always leaving yourself plenty of cash to take advantage of big sell-offs that will likely recover quickly and take the market higher.

We’re in an ideal period of time for gold/silver to move higher with all of the money printing and concomitant currency devaluation. As gold/silver move higher the mining stocks will eventually catch a big bid from the mainstream investing public and soar. Look at how quickly the mining stocks recovered from the March massacre. (And from the Thursday/Friday morning price slam as the Comex was opening).

NOTE: The commentary above is from the last issue of my Mining Stock Journal subscription newsletter. In this issue I provide any updates and recommendations on my core portfolio recommendations.  I also provide a brief review of Vizsla Silver ($VIZSF) and Mako Mining ($MAKOF).  You can learn more about my newsletter here:   Mining Stock Journal

The Money Printing Road To Perdition – Got Gold?

Where’s the “V?” – Obviously the Fed has injected monetary cocaine into the stock market to make it appear as if stocks are “discounting a “V” economic recovery.  But a “V” on Main Street is nowhere to be found (graphic is from Crescat Capital -the comment bubble is my edit):

The chart above plots the NY Fed’s weekly index of economic activity (red line) vs. the Bloomberg U.S. financial conditions index, which attempts to measure the relative strength of the bond, equity and money markets (white line). With the amount of money the Fed has injected into the financial system, it’s no surprise that the financial conditions index is soaring. However, as I’ve suggested in recent issues, this money is having little, if any, effect on real economic activity.

Compounding the insanity of the current market valuations is the fact that no one has any idea just how bad the economic damage has been from the shutdown of the economy and the virus crisis. We won’t know for several months the degree to which unemployment and overall economic activity will recover. Certainly this idea that there will be a full recovery by the end of the summer (per several White House officials) is completely foolish.

The economic numbers that appear positive are merely a “statistical” bounce attributable to the “re-opening” during May from the highly depressed state of the economy during the lock-down period. But household debt delinquencies – credit card, auto and mortgage – continue to rise, while there’s little evidence that the majority of those who lost their jobs will be re-employed any time soon, if ever.  What will be the effect on the economy when unemployment benefits expire for a large portion of those receiving them now and who can not find a job?

The Fed asserts that its money printing is necessary to restore economic health.  But this is poorly disguised Orwellian propaganda.  Most of the Fed’s money printing has been used to keep the Too Big To Fail banks from choking to death on subprime and non-performing “assets,” such as leveraged loans to the retail and oil sectors, CLO liabilities and counter-party exposure from OTC derivatives (credit default swaps, primarily).  The resumption of money printing in September 2019 is evidence of that assertion. The rest of the printed money is funding the enormous load of new Treasury issuance.

Gold hit a new eight-year high today. This comes interestingly on the heels of escalating tensions with China. Trump likely does not understand this, but China holds several aces up its sleeve which can be used to undermine the U.S. dollar and detonate the ticking time bombs embedded in the U.S. financial system.  The most notable wild card held by China is its increasing control over the global physical gold market.

In the context of these comments from a Vice Chairman at the China Securities Regulatory Commission (i.e. a CCP member), it’s quite possible that China is starting to flex its muscle slowly to reset the price of gold to more closely align the vast spread between the paper derivative gold price determined in London and NYC and a true “price discovered” price of gold that reflects the underlying supply/demand reality:

Fang Xinghai, a vice-chairman at the China Securities Regulatory Commission, said that as China mainly relies on the US dollar payment system in international deals, it makes it vulnerable to possible US sanctions.

“Such things have already happened to many Russian businesses and financial institutions. We have to make preparations early – real preparations, not just psychological preparations,” Fang said at a forum organised by Chinese media outlet Caixin.

Fang’s comment came at a time when Washington is pondering how far it should go to use the US dollar’s key role in international payment to punish Chinese individuals, companies and financial institutions for alleged involvement in issues such as Xinjiang and Hong Kong.  (Caixin Gloal, via Zerohedge)

I’m just speculating here,  but China may be starting to flex its muscle in the gold market. It’s a widely accepted proposition that China’s Central Bank holds many multiples of the amount of gold officially reported.

China is the world’s largest producer of gold and now its setting its sights on acquiring robust western hemisphere gold mines.  Two State-controlled Chinese mining companies have made three notable western gold mining company acquisitions this year: one with a mine in Canada (TMAC); one with a soon-producing gold mine in Columbia (Continental Gold); and one in Guyana (Toronto-based Guyana Goldfields).  All three mine properties host very high-grade gold resources.  China would not spend hundreds of millions to acquire high margin gold mines to sell the gold produced at a manipulated,  artificially low price of gold.

Beyond China’s “invisible hand,”  I don’t know how else to explain the strength in the gold price during a period of time – late 2019 through present – when China and India have largely been absent from the gold market based on import data, while at the same time the Comex paper gold open interest has declined over 40% since January.

Gold has been surprisingly strong this morning, hitting an eight-year high at $1785 (August gold basis). If August gold can jump over the $1788-1790 area, which has been defended vigorously by the paper gold slinging western bullion banks, the $1800 level may fall like Gaul…

Fact, Fiction And Fraud At The Comex

“I think there will be a full monetary system reset after the world has had enough of Jay Powell and his digital printing press.”

The alleged gold flow into the Comex and amount of gold for which contract longs are taking “delivery” is at a historical extreme. I use “delivery” because “taking delivery” means being assigned an electronic warrant that records ownership transfer of a Comex registered bar presumably (but not guaranteed) to be sitting in a Comex-approved vault.  It  does not mean that the party taking delivery takes possession of  a physical bar.

Chris Marcus and I discuss the unusual activity at the Comex and the LBMA in the podcast below.  But first read this excellent article from Ronan Manly at Bullionstar.com, who dissects fact from fiction about the Comex vault and delivery reports:

However, given the opacity of the wholesale gold market and the unconvincing explanations from its fronting organizations the London Bullion Market Association (LBMA) and COMEX operator CME Group (e.g. closed refineries, grounded flights), those looking for a ‘Theory of Everything’ framework to connect all of the above have had to do so on their own.

While Bloomberg and Reuters are content with repeating spoon-fed handouts about all of the above – eating the breadcrumbs instead of following the trail – and between them have published at least 30 articles on the subject, thankfully there are many on the sidelines who are more inquiring and less gullible, hence the skepticism, speculation and debate.  “The Curious Case of Comex Gold Deliveries…”

**************

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.

The Market Is More Dangerous Now Than Early 2000

This market reminds me of the late 1999/early 2000 tech bubble. But back then it was primarily the Nasdaq that bubbled up. This time around the absurd dislocation between value and reality is more comprehensive. It’s not just tech stocks but also non-tech related stocks like HTZ, AAL, BA etc.

Back in late 1999/early 2000, like now, newly minted retail day-trading geniuses who couldn’t explain what a p/e ratio is were piling into tech stocks with risky OTM call options and heavy use of margin.   Most were wiped out when the Nasdaq crashed just like most will be wiped out when this market has the rug pulled out from under it. The February-mid March decline was just an appetizer for patient short sellers.

Silver Liberties invited me back onto its podcast to discuss the insanity of the current stock market and, of course, to talk about gold, silver and mining stocks:

**************

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.

Retail Sales Headlines Are A Complete Joke

The stock market promoting mainstream media this morning reported “U.S. Retail Sales Rose Record 18% in May” (e.g. the Wall St Journal).  The S&P futures jumped from up 45 points to up 90 points.

But, as usual, the details are in the fine print of the report itself, and it’s apparent that nobody in the financial media bothered to look beyond the headlines.

In fact, the 18% rise is measured from April’s report, which was heavily depressed due to the shelter-in-place restrictions and the closure of many retail businesses. Funny thing about using the percentage change as the metric of measurement. If April had one dollar of retail sales and May had two dollars, the percentage gain would have been 100%.

Measured from May 2019,  the “seasonally adjusted” numbers show that May 2020 retail sales dropped 6.1%.  In retail sales terms, especially given the healthy rate of inflation built into the numbers, that’s a cliff-dive. If the numbers had been adjusted for price inflation, the percentage decline would have been even larger.  Here’s the report if you want to check for  yourself – Retail Sales.

Then there’s the credibility of the data collection, which is done by the notoriously unreliable Census Bureau.  The Census Bureau would have us believe that sales at restaurants (“food services and drinking places” if you bother to look at the report) gained 29% from April to May. I find this impossible to believe given that most of the country, including many restaurants, were still shut down until late May.  The gross negligence in this particular number is likely attributable to the highly opaque “seasonal adjustments.”

Same for auto sales, which the CB would have us believe increased 50% in May from April. Certainly the 23.6% drop in the Cass Freight index belies the numbers from the Census Bureau, especially for autos. I play tennis with someone who owns a trucking business that transports new vehicles from OEMs to dealers. His business completely stopped until late May.  John Williams, of Shadowstats.com, believes the May number for auto sales will be reversed in June’s report.

Keep in mind as the various economic reports for May and June hit the tape, the percentage change from April to May and from May to June will make it appear as if economic activity is bouncing back strongly. In truth, with the economy re-opening, the May and June numbers will be calculated on a percentage basis from the severely depressed level in April and an inordinately depressed level in May, while the nominal numbers will be considerably lower compared to the same month in 2019.

In fact, it’s going to take at least a few months before the real fall-out from the closure of the economy is known. As an example, commercial real estate company Cushman & Wakefield has forecast that as many as 25,000 stores will close in 2020 – mostly in malls. This not only affects directly the employees who work at those stores, but also the surrounding businesses that benefit from store employees who spend money while at work (food establishments, etc.)

Without question the economy is not even remotely close to being in the “V” recovery that is implied by the action in the stock market. The immediate economic impact of high unemployment is deferred somewhat by Government “stimulus” payments and unemployment benefits. Many of those unemployed can still pay some bills and feed their families while stimulus payments continue and unemployment benefits are not exhausted. But once those pools of assistance are tapped out, the economic impact will be severe.

Hertz Symbolizes The Complete Corruption Of The Stock Market

“No one ever loses equity in a bankruptcy case,” U.S. Bankruptcy Judge David Jones said during a status conference in the J.C. Penney case last month. “Equity gets lost long before the case is filed.”

Hertz filed Chapter 11 under the U.S. Bankruptcy Code after the market closed on May 22nd. The filing was well telegraphed. The next day the stock took a cliff dive down to 40 cents from the previous day’s close at $2.84. Below 50 cents is about where the stock of bankrupt company should trade, especially when the senior secured debt outstanding exceeds the value of a company’s assets.

But don’t tell that to the new breed of retail daytrader, who has rediscovered the “art” of chasing insanely overvalued stocks, most of which will eventually go out of business. Most if not all of the current batch of daytrading geniuses were not around during the dot.com boom/bust:

Away from hedge fund computer algorithms set up by market professionals to take advantage of High Frequency Trading technology (HFT), “day trading” and “call options” are the beacons of inexperienced retail traders who have very little understanding of the risks involved in trading the markets. The fact that large numbers of newly minted traders have searched on the term “call options” reflects their relative market ignorance.  It’s been estimated that 90% of all retail daytraders were wiped out in the dot.com bust, which also took down Jim Cramer’s hedge fund.

Hertz has $15 billion of  senior secured debt collateralized by its fleet and $4 billion unsecured subordinated debt. The book value of Hertz’s fleet is $14 billion. With the crash in used car prices, the fleet is likely worth 10-20% less – at least – than the value carried on the books. This means the subordinated debt and shares are worthless. The sub debt was trading at 40 cents on the dollar late last week.  Yet Hertz’s stock traded close to $900 million market cap on June 8th.

In the best case, if Hertz re-organizes the secured debt will get 90% of the new equity and the sub debt will get 10%. The shares will be canceled and the shareholders will be tossed some gratuitous deep out of the money warrants. And yet, the market cap of the equity traded as high as $887 million this past Monday.

The worst case for Hertz is a liquidation, in which case the senior secured debt be paid out while the sub debt and equity are bageled.  Even the lawyer for Hertz at the court hearing admitted that Hertz’s value had “disconnected from the fundamentals.”

The stock deal is an “at-the-market” offering, meaning the underwriter (Jefferies) will dump shares into the market when the Robinhood Einsteins bid the shares higher. The only hurdle preventing Jefferies from unloading as many shares as possible until the stock approaches zero is a provision that prevents shares under this offering from being sold below $1.  Said provision can be changed easily with written consent from parties to the agreement.

Any funds raised will either be used to pay for Hertz’s legal and operating costs or it will be distributed to bondholders. This stock deal epitomizes the degree to which the stock market is completely corrupted.

I was not surprised the bankruptcy court judge and the SEC signed off on the deal. Once upon a time in America bankruptcy judges and the SEC did their job as public servants by looking after the interests of the public – in this case unsophisticated retail investors who didn’t have a brokerage account 6 months ago.  But the three branches of Government in this country have morphed into a portal by which the wealthy and powerful elite are sucking as much wealth from the public as possible before the system collapses, while compensating politicians, judges and lawyers well for their help.

Hertz and its lawyers admit that the Hertz shares will more than likely end up worthless. Jefferies, the broker/agent for the sale of the shares, will receive 3% of the proceeds. Jefferies unsavory and corrupt nature dates back to the Drexel era, when Boyd Jefferies was nailed for colluding with Ivan Boesky for multiple SEC violations.

This entire stock bubble enabled by the Fed’s flood of printed money into the financial system is little more than a money transfer mechanism from the public to the Wall Street banks, corporate CEO’s, private equity funds and other sundry beneficiaries (unicorn founders/employees, law firms, lobbyists, etc).

Hertz reflects the degree to which entire U.S. economic and financial system has deteriorated into a free-for-all for the wolves – foaming at the mouth – who are in a position to take advantage of this environment.  Note to Robinhood traders:  that’s not you.

I said over 15 years ago that the Fed would eventually print enough money to enable the elitists to sweep every last crumb of the public’s money off the table into their own pockets before allowing the system to collapse. We may be on that final stretch – gradually then suddenly – where we are entering the “suddenly” moment…

“…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.” – Francisco’s “Money Speech,” “Atlas Shrugged.”

Gold Manipulation Is Carefully Orchestrated – And China Knows It

The bullion banks – at least on the Comex – have reduced their risk exposure to gold and silver derivatives over the last several months, which means reducing their short exposure. This is likely in response to the rising risk that they will be unable to meet increasing long-side counterparty delivery demands.

Chris Marcus of Arcadia Economics and I discuss the trends developing in the precious metals market as well as China’s awareness of the western Central Banks’ efforts to manage the gold price:

**************

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.

Through The Looking Glass: Employment Report Fraud

“Well, now that we have seen each other,” said the unicorn, “if you’ll believe in me, I’ll believe in you.” – Lewis Carroll, “Through The Looking Glass”

“The greatest trick the devil ever pulled was convincing the world he didn’t exist.” – Keyser Söze, “The Usual Suspects”

The employment report is a complete fraud. But as long as the market and it’s army of mainstream story-tellers focus just on the headline number, unicorns do exist. But the Devil is in the details:

However, there was also a large number of workers who were classified as employed but absent from work. As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified. BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue.

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.

Here’s the source link from the BLS report, scroll to the bottom:   No B.S. Like The BLS

This is before looking at the actual line item data estimates (more like guesstimates) in the Household and Establishment data. Most of the numbers in the line items for each industry are simply not credible. As a colleague points out, “this is the same shit that happened before the November 2012 Presidential election when jobs growth was egregiously overstated and then revised lower over the next several months.”

Beyond that, there’s not much to say about this report. The numbers as presented are astonishingly implausible. It’s an insult to everyone’s intelligence for the Government and the main stream reporters and analysts to think that anyone with two brain cells to rub together would find this report believable. Ultimately, this attempt by Trump to stuff the ballot boxes early in the election cycle will back-fire – badly.

The Bull Move In Gold, Silver And Mining Stocks Is Just Getting Started

The current financial and economic environment supporting a significant and durable move in the precious metals sector is similar to conditions in 2000 through 2008 that fueled the 11 year run from 2000 – 2011.  Only this time those factors – Fed money printing, a collapsing financial system and massive financial asset bubbles – are several multiples more powerful.

Bill Powers invited me onto his Mining Stock Education podcast to discuss risks involved in investing in junior mining stocks, use of stop-losses and attributes which underlie junior exploration projects that become successful, including a couple junior stocks I think could do well in the next few years:

**************

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.