Investment Research Products

Powered by Kranzler Research


Gold Breaks Out – Is Silver Next?

Gold recently hit all-time highs in all of the major currencies (euro, yen, British pound, yuan). Last Friday (March 1, 2024), priced in dollars gold achieved its highest weekly close and then proceeded to hit new all-time highs. Wednesday (March 6th) gold hit a new all-time high in yuan. I think the move in gold primarily reflects the fact that inflation is picking back up because the Fed has substantially loosened liquidity which in turn has pushed the money supply higher since February. The Monetary Base, M1 and M2 continue to hover around all-time highs. The rising price of gold also reflects the fact that the U.S. banks have big problems with bad debt and the U.S. economic and financial system is becoming increasingly unstable. When the stock bubble pops it will inflict major damage on the economic and financial system.

Chris Marcus invited on to the Arcadia Economics podcast to discuss the recent breakout in the gold price and what needs to happen before the mining stocks participate in the precious metals rally:

I’ve identified some junior project development micro-cap stocks that I believe have 10-20x upside potential. These stocks trade under 20 cents and are worth multiples of that. To learn more, follow this link: Mining Stock Journal

Questions About Gold The CFTC And Fed Won’t Answer

“The unsustainable will not be sustained, except through ever-increasing force and fraud”

The gold “held” in custody by the Federal Reserve on behalf of the U.S. Treasury Taxpayer has not been formally and independently audited since President Eisenhower was in the White House. Anyone who has studied this issue, particularly GATA, does not take the official published numbers seriously. Many of us question if the gold is still there, having likely been leased to bullion banks in the official effort to keep the price suppressed.

The following is yet another Dispatch by GATA, which has tirelessly and relentlessly uncovered the facts backed by both circumstantial and hard evidence showing that the Federal Reserve operates in conjunction with the BIS, ECB and BoE to suppress the gold price in an effort to prevent gold signalling the onset of economic and financial trouble:

If mainstream financial news organizations ever work up the courage to report honestly about monetary gold, the commanding heights of the issue will have been mapped out for them by U.S. Rep. Alex X. Mooney, R-West Virginia.

After all, where can investigative journalism start better than with questions that already have been shown to be too politically sensitive for the highest government officials to answer, even when a member of Congress is asking?

Thanks to Mooney, in 2020 the U.S. Commodity Futures Trading Commission was shown refusing to answer whether it has jurisdiction over manipulative trading in the commodity futures markets when such trading is undertaken by or at the behest of the U.S. government:

CFTC Letter

And now, also thanks to Mooney, Federal Reserve Chairman Jerome Powell has been shown refusing to answer questions about the repatriation of gold vaulted by other nations at the Federal Reserve Bank of New York, repatriation being something that would signify foreign loss of faith in the Fed, the U.S. government, and the dollar.

In December Mooney wrote to Powell to ask:

“Has the Federal Reserve or the Federal Reserve Bank of New York repatriated any gold to foreign nations this year? If so, to which countries and how much?


“How much gold is the Federal Reserve vaulting for foreign nations now and how does this compare to the amount vaulted at the end of 2022?”

Mooney’s letter to Powell is posted here:

Rep. Mooney letter to Powell

Powell replied to Mooney last week without even acknowledging the congressman’s questions:

“Thank you for your letter of December 14, 2023, regarding the gold market. The Federal Reserve Bank of New York provides gold custody on behalf of certain official-sector account holders, which include the U.S. government, foreign governments, other central banks, and official international organizations. The Federal Reserve Bank of New York does not own any of the gold it holds as custodian, and no other part of the Federal Reserve System owns gold.”

The Fed chairman’s reply to Mooney is here:

Powell’s reply to Mooney

In not even acknowledging Mooney’s questions, Powell was arrogant and insolent, especially insofar as the Federal Reserve in previous years has disclosed the tonnage of custodial gold vaulted at the New York Fed and the number of countries vaulting gold there. Indeed, even now the New York Fed’s internet site claims that it is vaulting 6,331 tonnes of gold for foreign nations:

NY Fed’s gold vault

Is that data no longer accurate? The Fed chairman’s refusal to acknowledge the congressman’s questions suggests as much.

But Powell’s refusal to acknowledge Mooney’s questions also demonstrated absolute confidence that his arrogance and insolence would never be noted and challenged by mainstream financial news organizations, which seem to understand the Fed’s position that gold price suppression is crucial to maintenance of the dollar as the world reserve currency, that it is the foremost weapon of U.S. imperialism and economic exploitation of the rest of the world, and thus is “the elephant in the room” — something that must never be discussed.

In turn the cowardice or collaboration of mainstream financial news organizations, their refusal to press critical questions to central banks, is central banking’s greatest advantage — an advantage greater even than central banking’s power to create and allocate infinite money.

Mooney’s latest exposure of the Federal Reserve’s unaccountability has been added to GATA’s extensive file of documentation of gold price suppression policy —

GATA articles about gold suppression

— whose history is summarized (if at length) here:

Gold market manipulation: why, how and how long

If you know any financial journalists with integrity and courage, please forward this dispatch to them as an invitation to start trying to do their job of speaking truth to power instead of being afraid of power.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

The Stock Market Is Broken, Unstable And Dangerous

The following commentary is the opening salvo to my latest bear newsletter.  In the last issue I updated my work on $NVDA and $TSLA plus two homebuilder stocks and I reviewed $CVNA’s earnings.  You learn more about it here: Short Seller’s Journal

The irrational exuberance that has engulfed the stock market is officially more idiotic than the tech bubble asset that popped in March 2000. The forward P/E ratio for US technology stocks (S&P 500 Information Technology Sector index) is just below 30, its highest level since 2002. But that comparison needs to be “unpacked.” Back then, the P/E ratio for tech was higher than it is now because most of the tech stocks in the S&P 500 tech index were still in the early years of operation and growth. Relative to now, they generated very little in earnings.

On Thursday, the Nasdaq 100 (100 largest market cap stock on the Nasdaq) jumped 3% to a new all-time high. The last time the NDX hit an ATH after spiking up 3% was…drum roll… March 2, 2020 (@SamanthaLaDuc). Ten days later, on March 12th, the Nasdaq hit its then ATH. The following day it plunged 4.5% and the tech bubble officially popped. I responded to Samantha LaDuc’s tweet with this:

“I was trading dot.coms and tech stocks from the short side in the late 90’s through the crash. The current market doesn’t even rhyme – the current market bubble is a much bigger and unstable than the tech bubble market. The current stock market is more like Frankenstein off the chain.”

The breadth of the current stock market rally is a big red flag. Again, on Thursday with the Nasdaq up over 3%, just 55% of the stocks in the Nasdaq Composite were higher than the previous day. According to, the last time this occurred, and it occurred five times, was between 1999 and 2001. In addition, per @unusualwhales, the market cap concentration of the top 10% of stocks hit its highest level since 1929, which is even higher than it was in 2000. This market is headed for a huge accident in my opinion. The only unknown is timing.

In yet another sign of a top in the stock market, the formerly most esteemed U.S. university which hired a now former president who is anti-semitic and a plagiarist (Harvard University), has 98% of the public stock investment portion of its endowment portfolio in tech stocks (Harvard tech allocation). Of this, 70% is in Google and Meta.

The price discovery function of the stock market has been completely disconnected. That canary is dead and, for now, hidden from view. In its place is computer algorithmic momentum-chasing and gamma-squeezes caused by the massive amount of hedge fund and retail money that piles into weekly call options, thereby forcing market makers who short the calls to hedge by going long some percentage of the underlying shares. The “investing” decision has absolutely nothing to do with fundamentals-based investing. As a result, the stock market is very unstable and dangerous.

Calpers Is A Ticking Time Bomb – Leverage Plus Loading Up On Nvidia

Calpers – the California Public Employee Retirement System pension fund has borrowed 8% of its assets in order to load up on risky stocks. From the Financial Times: “Calpers, the largest pension plan in the US with $452bn in assets, had total fund leverage of 8 per cent as of June 2023, which included what the fund described as “active” and “strategic” leverage.” “Strategic leverage?” Leverage is leverage and pension funds, with large, monthly fixed obligations, should not be using leverage to load up on risky equities. It may be borrowing even more money so to avoid have to sell part of its massive private equity holdings, some of which have no bid right now.

Sure, leverage works great as long as the stock bubble continues to inflate. But it’s a double-edged sword that has tendancy to decapitate entities that abuse the leverage. I’ll confidently assert that Calpers’ use of leverage to load up on stocks like $NVDA is abusive, particularly since Calpers has monthly pension beneficiary cash outflows. Its private equity holdings, with a recklessly large allocation as a percentage of assets, is already worth far less than the amount Calpers invested. Calpers added 1.5 million shares of Nvidia in Q4, giving it 7.5 million shares ($5.4 billion). This is an insane 1.2% of Calpers’ assets.  By the way, most public pension fund managers I’ve met are idiots.

Below is the latest update on NVDA excerpted from my latest bear newsletter.  I also updated $SMCI after to doing a deep-dive the previous week. You learn more about this newsletter here:  Short Sellers Journal information.

Nvidia update (NVDA – $726) – CSCO reported its FY 2024 Q2 numbers last week. Revenues declined 6% YoY and EPS were down 3%. The Company also cut full-year and announced that it was cutting 5% of its workforce. I bring this up because, outside of corporate capex that has been spent on upgrading to AI hardware, there’s a general slow down in the tech sector in both corporate capex spending and consumer electronics sales.

It’s also starting to look like AI chips will not be immune to a pullback in corporate spending. UBS published a report in which is said that lead times for NVDA’s H100 GPU for the 2H of 2024 are coming down: “customer discussions confirm Nvidia’s lead times have come in sub-stantially over the past few months, meaning shipment slots are still available in the 2H of 2024. This is interesting because, up until now, there’s been a supposed shortage of NVDA’s H100, which gave the Company some pricing power and fat profit margins. Companies like META and MSFT – plus the Chinese – likely bought what they needed for upgrade programs and are now busy deploying the hardware. Based on the UBS report, it would appear as if the initial rush to load up these chips has subsided.

40% of H100 GPU’s shipped are not yet in service as there is a lag to install the hardware and power up. Based on the number of AI chips already shipped, there is a lot of AI capacity. MSFT, META and AMZN account for 34.2% of NVDA’s revenues. All three are developing their own AI chips. In addition, AMD’s competing chip-set, the Mi300X, is going to start shipping in the 1H 2024. Finally, I would suggest that a material percentage of NVDA’s GPUs are going to the small, private companies that NVDA funds to enable them to buy chips from NVDA. It’s likely that many of these GPUs will never be deployed and show at big discounts on the resale market.

It thus would appear that supply and demand are coming back into balance. This will limit NVDA’s ability to dictate pricing and when competitive chips hit the market and the price wars will begin. A contact of mine who follows this stuff more closely than me explained that there is “an insane amount of [AI] capacity” for many applications that have yet to demonstrate profitability. As an example, I started toying with ChatGPT and Microsoft’s Copilot (which was forced on Windows users). While they make internet-based research faster and easier, I would not spend a dime to use them.

In the context of the chart-path taken by bubble stocks (or tulips), a path that is consistent throughout history, I thought this analog chart comparing CSCO during the tech bubble and NVDA currently is interesting:

I don’t know that we can expect NVDA necessarily to crash the way CSCO did when the tech bubble popped, but I wouldn’t rule it out. For those who were not active in the market during the tech bubble, CSCO was billed as the back-bone of internet build-out similar to the way now that NVDA is promoted as the king of AI chips. The dreamers and snake-oil salesmen conveniently overlook the fact that competition and obsolescence prevents a monopolistic tech product from achieving much more than a brief period of dominance. Between its all-time high March 2000 and October 2002, CSCO lost 82% of its value. The stock price is still 41% below it’s all-time high. I would suggest that there’s a strong probability that NVDA will experience the same fate.

In that regard, the Financial Times published an article last week titled “Nvidia is nuts, when’s the crash?”. The article has a discounted cash flow analysis by an analyst from Chameleon Capital, a UK-based money management and investment banking firm. He noted that “to get to a $740 share price requires that the company maintain monopolist-like operating profit margin of 55% over the next decade, while growing sales ten-fold, from $60 billion/yr to more than $600 billion.” The entire semiconductor industry sold $527 billion worth of chips last year.

A big factor in the stock’s resilience is the $25 billion share buyback program it announced in August 2023. It has been aggressively buying shares in an effort to support the stock price. Instead of investing in future growth, and fending off competition, by deploying free cash flow into R&D, NVDA chooses to buy back shares and fertilize its ponzi-like scheme of “investing” in many unprofitable companies – many are supposedly data-center providers but have no customers – who turnaround and use the NVDA capital to buy H100 GPU’s from NVDA.

It feels like NVDA is finally starting to lose upside momentum. Last week I sat on my hands to prevent me from chasing NVDA higher with puts. But I think I’m going to start testing the waters again, likely with longer-date, deep OTM puts. As an example, I may start to accumulate July $550’s or September $500’s.

A Bank Crisis Is Percolating

I didn’t watch Jay Powell on “60 Minutes” because I knew it would mainstream media sugar-coated drivel wrapped around propaganda as the obsequious 60 Minutes anchor tossed J-Pow meatball questions. But I did learn that Powell asserted that it is unlikely that there will be another real estate led bank crisis, particular with the TBTF banks. I course, there’s no way he can honestly say that he has a clue as to the potential magnitude of CRE exposure via OTC derivatives at the TBTF’s – no one does. And Powell’s statement is certainly reminscient of when Ben Bernanke asserted that the subprime debt problem was “contained” in 2007…

The following is the opending salvo to my weekly bear newsletter. You can learn more about it here:  Short Seller’s Journal

Note: The FOMC removed the sentence “The U.S. banking system is sound and resilient” from the FOMC Policy Statement released Wednesday. Read into that what you want but if the Fed was unwilling to make that assertion, it’s likely that the bank crisis from early 2023 is rearing its ugly head again. Note that the Fed “stabilized” the banking system back then by promptly printing money to inject $400 billion in reserves in the banking system. It also set-up the Bank Term Funding Program without a ceiling, which had $167.7 billion drawn from it as of January 25th.

The Fed also announced that it was cutting off the funding from BTFP in March and it is drawing up a plan to encourage banks to use the Fed Discount Window for liquidity needs. The Discount Window is perceived as a “last resort” lending facility and a signal that the borrower is in financial trouble. Banks borrow overnight and pledge high-quality fixed income collateral like Treasuries, agency securities, etc.

Possible trigger for a big stock market sell-off? Ironically, a week after the Fed announced that it would stop making new BTFP loans on March 11th as scheduled, $168 billion in deposits flowed out of the banks. It’s the biggest weekly drop since the SVB crisis. There’s thus a good possibility that the continuation of the 2023 regional bank crisis may be percolating. KRE, the regional bank ETF was down 7.2% for the week.

The stock price of New York Community Bancorp (NYCB) plunged 37.6% on Wednesday (January 31st) after it reported a surprise loss for Q4 and cut its dividend. The stock was down another 13.8% the next day. It’s down 56% since the end of July.

NYCB closed the acquisition of Flagstar Bank in Q1, which “diversified” the bank’s loan business into residential mortgages and the servicing of residential mortgages. It also acquired Signature Bank’s commercial and industrial loan portfolio deposits. Prior to these acquisitions, NYCB was primarily a multi-family CRE lender.

Multi-family housing mortgages represent 44.5% of NYCB’s loan portfolio. Commercial real estate and commercial property acquisition, development, and construction represents 15.9% of NYCB’s loan portfolio. CRE loans in total represent 60% of the bank’s loans. Total interest income declined 4.3% from Q3. The YoY comparison is not relevant because of the two acquisitions mentioned above. The source of the loss in Q4 was a $552 million provision for loan losses. The reason for the provision is the expectation of write-downs in its CRE portfolio, particularly the office sector. In addition, a portion of the credit loss provision is to reflect, as the banks states it, “potential repricing risk in the multi-family portfolio.” That’s a polished way to warn that it expects write-downs in its multi-family loan holdings.

For the full-year, NYCB reported $2.341 billion in GAAP net income – but there’s a catch. In Q1 the bank recognized a “bargain purchase gain” (non-cash) of $2.150 billion, representing the difference between what it paid for Signature Bank’s assets and the guesstimated “fair market value” of the assets. Part of the loan loss provision is a partial reversal of that “gain.” Removing that non-cash bump in income, NYCB’s net income for the full-year was just $191 million, down from $650 million (70%) in 2022. So far the acquisitions have been failures.

The bank charged-off (net of recoveries) $223 million in loans in 2023. Of that, $119 million was multi-family and $117 million of that was in Q4. The bank also reported $442 billion in non-performing loans at the end of 2023, $266 million of which were multi-family/CRE and another $95 million were residential mortgages. The magnitude of the provision tells us that the bank expects to write-off quite a bit more multi-family and office debt as well as residential mortgages. In addition, the bank classified another $250 million in loans as 30 to 89 days past due.

In my opinion, this downward spiral in NYCB’s loan portfolio is just getting started. The quality of NYCB’s total loan portfolio will continue to decline. The $83.6 billion in loan assets is financed with $81.3 billion in checking/money market deposits, savings deposits and CD’s. It also has $20.2 billion in wholesale borrowings, which are the loans from the Federal Home Loan Bank. This source jumped from $13 billion at the end of Q3 to $20.2 billion at the end of Q4. Recall that bank loans from the FHLB spiked higher just prior to the regional bank crisis in March 2023. I can’t say for certain, but it’s possible the jump in FHLB loans from Q3 is an indicator of financial stress.

A good, cheap way to bet on the demise of NYCB is with January 2025 or 2026 $3 puts. But it may take a while for NYCB to grind lower, particularly if the Fed aggressively cuts rates later this year. But I wanted to discuss what happened to NYCB because Japan’s Aozora Bank ADRs plunged 26.1% Thursday after slashing the value of some of its U.S. office tower loans by more than 50%.

Aozora is Japan’s 16th largest bank by market value and said it would post a $191 million loss for the fiscal year vs previous guidance of $164 million in profits. The bank’s biggest US office loan exposure is Chicago and Los Angeles and it disclosed that it has $719 million in non-performing loans in the U.S. It increased its loan-loss reserve ratio on U.S. offices to 18.8% from 9.1%.

While everyone was discussing the potential for a CRE debt crisis to foment this year, the NYCB and Aozora earnings reports confirm that it has already begun. $117 billion in CRE office debt needs to be refinanced this year, led by buildings in NYC ($10 billion), SF (nearly $4 billion), Chicago (over $2 billion) and LA ($2 billion).

The problem is that many buildings in these cities are worth, based on recent market transactions, 50% or less of their book values. Blackstone is marketing a Manhattan tower with a $308 million mortgage for $150 million. That’s the offer price. The building, if it sells, will sell for a lower valuation. The loan-to-value on many buildings is 100% to 200%. The vacancy rate of offices in NY, SF, Chicago and LA is near 20%. An article in the Denver Post last week reported that the vacancy rate in downtown Denver is 37%. If these loans can not be refinanced, they will need to be severely restructured or put in bankruptcy for liquidation. This will blow holes in regional bank balance sheets and REIT NAVs. It could well also blow big holes in the TBTF bank balance sheets via OTC derivatives exposure.

A Rate Cut Will Send Gold / Silver Soaring And The Dollar Much Lower

“The Fed knows it can’t risk cuting rates right now [despite obvious signs of a very weak economy] or he risks the dollar falling off a cliff.”

The FOMC meeting and Policy Statement release is a big event in the financial markets. Every word in that Statement is scrutinized, and CNBC’s Steve Liesman works up a sweat counting the punctuation marks in the Statement. What I neglected to point out is that the statement, “the U.S. banking system is sound and resilient” was removed from the latest FOMC Policy Statement Given the developments related to New York Community Bancorp and Aozora Bank (Japan) announced that they chocked on their heavy exposure to U.S. CRE loans. I provide a more detailed look at NYCB’s financials in the upcoming issue of my Short Seller’s Journal. But don’t forget the Mining Stock Journal. I noticed today that several junior microcap project development stocks started to show signs of life. These stocks are where the biggest payoffs reside in the mining stock sector. I cover several that I  believe are 5-10 baggers with gold at $2050 and silver at $23.20. The upside is much greater if we get a big move higher in the metals. You can learn more about my mining stock newsletter here:  Mining Stock Journal

Chris Marcus (Arcadia Economics) and I discuss the FOMC Policy Statement and hammer Jay Powell for his brutal dishonesty:

The Mining Stock Journal is going up in price, from $20/month to $40/month. For a limited time you can subscribe for the current price and be grandfathered at that price: Mining Stock Journal information

Fed “Fuel” Will Propel Gold and Silver Higher

The commentary below is from the January 12th issue of the Mining Stock Journal. You can learn more about this mining stock newsletter here: MSJ Information

The stock market bubbled back up in 2023 because the Fed, despite a gradual reduction in its balance sheet, has been injecting liquidity in various forms into the banking system. This occurred explicitly in March 2023 when it printed $400 billion to resuscitate the regional banks. The Bank Term Funding Program, though small relative to the Fed’s balance sheet, is another form of banking system liquidity. There’s some other “nooks and crannies” through which the Fed is injecting liquidity into the banks but I believe the Fed will have to crank up the printing press again aggressively to fight both a banking system crisis and a debt crisis. This will be the fuel that propels the precious metals sector.

With respect to the Fed’s implicit pivot on its interest rate policy at the November FOMC meeting, systemic financial conditions eased in November and December combined by the greatest amount over a two-month period in the history of metric:

This frenetic easing of financial conditions orchestrated by the Fed is the reason the precious metals sector outperformed the stock market in the last two months of 2023. Between October 6th and year-end, gold ran from $1823 to $2071, or 13.6%. Similarly, silver ran from $20.85 to $23.76, or 14%. Over the same timeframe, the S&P 500 rose 10% and the Nasdaq climbed 11.8%. The mining stocks as represented by GDX jumped 15.3% over that time period.

I find it amazing that gold and silver outperformed the stock market while GDX outperformed the S&P 500 by 50% from early October through year-end, yet there was zero commentary to that effect from the mainstream financial media. It is this anonymity factor with respect to the precious metals sector that makes it a textbook value investment play. This performance by gold, silver and the mining stocks should be well set-up by financial and economic tailwinds which will continue, if not intensify, in 2024.

Specifically, an examination of several individual bank quarterly financial statements reveals that the delinquency, default and charge-off rates are increasing at an increasing rate, particularly in commercial real estate and household debt. For banks that emphasize consumer credit, like Synchrony, Discover and Capital One, the delinquency and default rates are much higher than the average across all banks. The rate of delinquency in subprime auto loans is higher than it was at the peak during the great financial crisis era.

This financial stress in the banking system is hidden in plain sight. It simply requires examining bank financial filings. But mainstream media reporters would rather just regurgitate the “banks are in good shape” propaganda fed to them by the Fed and Biden Administration. For now, the financial stress at these banks has been subtly “papered over” by the Fed as described above. But at some point it will require considerably more liquidity creation than has been made available up to this point.

Hence, the probability is high that 2024 will witness the official rebirth of QE, though I’m guessing the Fed will label the program with something other than “QE” (something like current not QE-QE “Bank Term Funding Program”). The only question in my mind is the scale and duration of the precious metals sector bull move that I believe will unfold over the coming months and quarters in response to the next stage of full-blown money printing.

In that regard, the Monetary Base (bank reserves plus currency/ coin in circulation) has been rising since February 2023. This suggests that the Fed started injecting reserves into the banking before the regional bank crisis surfaced which indicates that the Fed knew what was coming. The Monetary Base is up 9.5% since February 2023. Keep in mind that the Fed removed the reserve requirement for banks in 2020, which means that the increase in bank reserves per the Monetary Base creates a “multiplier effect” that is likely the reason behind the reflation of the stock bubble and dramatic drop Treasury yields at the long end of the yield curve.

The point here is that, while it seems obvious that the Fed will need to crank up the printing press this year to keep the banking system solvent and to help fund the coming flood of new Treasury bond issuance, by some measures the Fed has already begun injecting liquidity into the banking system. The rising Monetary Base is just one indicator but it partially explains the unprecedented spike in financial conditions detailed above. Eventually these monetary system developments will translate into much higher prices for gold and silver.

DR Horton Stock Plunges On Earnings – A Bad Omen For Homebuilders

Note: the following analysis and commentary is similar to the content I provide in my weekly short selling newsletter. To learn more follow this link:  Short Seller’s Journal info

DR Horton – $DHI – is down 9% after reporting its FY 2024 Q1 earnings. The Company “beat” consensus revenues but “missed” Wall Street’s earnings forecast.  While aggressive price cuts and a heavy dose of incentives enabled the Company to generate a 6.4% revenue growth YoY, operating income and net income declined. It’s like Tesla. Stimulate sales (and “pull forward” future sales into the quarter just reported) and the expense of profitability. For DHI it required price cuts, upgrade incentives, and mortgage rate buydowns. With the latter, the homebuilder either gives money to the buyer to “buy down” the mortgage rate for the first year or two or pays the mortgage directly on behalf of the homebuyer to temporarily know the rate down. This expense hammers profit margins.

Despite the fact that DHI raised its guidance for its full-year FY 2024 – which in and of itself is laughable – it has a big problem on its balance sheet. Inventory ballooned in its FY Q1. One thing about that raised guidance. Homebuilder CEOs are like Elon Musk – they’ll say anything and everything to get the stock price higher. Didn’t work this time because the share price is down 9.7% post-earnings as I write this.

Another ugly development is the jump in inventories from its FY Q4 2023. The book value of residential lots under construction is up $ $467 million from last quarter (5.2%). And the Company must have gone on a lot-buying spree because the book value of residential lots and land jumped $1 billion (9.4%) from its FY Q4 2024. At some point, as potential buyers become immune to the current level of price cuts and incentives, DHI, as well as all of the homebuilders will be forced to implement even steeper price cuts in hopes of stimulating sales volume. But, at some point, because of affordability issues (discussed below), it will be like trying to push toothpaste back into the tube. At that juncture, homebuilders will be forced to write-down the value of their bloated inventory which leads to very bloody income statements.

I not only believe that DHI will ultimately fall well short of its deliveries guidance for 2024. I also believe the stock has the potential to get cut in half from the current level. The homebuilder stocks have bubbled up to all-time high valuation levels relative to the value of their order backlogs and relative to the general outlook for the housing industry. Yes, the homebuilder sentiment index bounced quite a bit in January. But recall that I suggested there might be a dead-cat bounce in the first couple months this year in sales and sentiment. The builders are excited because mortgage rates have dropped from 8% to 6.5%. But even with that, homes are at the least affordable in history (chart source @charliebilello):

Existing home sales do not offer any hope for optimism – and new homes are considerably more expensive on average than used homes making them even less affordable. Existing homes sales for December declined 1% from November on a seasonally adjusted annualized rate basis (SAAR), much worse than the +0.3 increase projected by Wall Street. Sales were down 6.2% YoY. On a SAAR basis, the December SAAR was the lowest since 2010. But on an annual basis, it was the worst year going back to at least 1995.

To be sure, part of the problem continues to be supply. But the months’ supply in December was still slightly above the average of 2023 as well as the previous two years. Affordability is the culprit. Again, there may be a small bounce in home sales activity in the first couple of months this year. But I expect the home sales to continue grinding lower, particularly when the stock market resumes its bear market.