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Stock Market Risk-Taking Is Going Parabolic
The “beta” for long/short equity hedge funds has more than tripled vs the average beta since at least December 2018. Beta is the most common measure of stock or portfolio volatility relative to a broad equity index. Technically, beta is the percentage change in a stock (or fund) for every one percent change in the index. A stock/fund with a beta of 1 tends to move in percentage correlation with the index. A beta of 2 means a stock/fund moves 2% for a 1% move – up or down – in the index.
As this applies to long/short hedge funds, it means these funds in aggregate have substantially increased their long exposure to the riskiest stocks. For long/short funds, it also likely signals that the net long position is at its highest in a long time and/or the amount of margin/leverage applied is soaring. Hedge funds have been underperforming passive investment funds and the broad indices. My bet is this huge allocation to riskier stocks is a reckless effort to raise hedge fund performance numbers – using other people’s money – and thereby attempt to maximize performance fees charged.
The bottom line is that hedge funds are taking considerably more risk with investor money (think: pensions) than historically. When the market eventually craps out, this will not end well, especially for pension funds, which themselves have increased their equity allocation, on average across public pensions, to 80% vs 40-50% historically. I would also suggest that this another indicator that a market top draws closer.
The fear of missing out on the “next” market melt-up is huge right now:
The American Association of Individual Investors (AAII) sentiment index hit a three-year high for the for weekly period ending April 7th, with nearly 57% of the respondents expecting the stock market to be higher in the next six months. The last time this index was higher than it is now was January 2018, right before the SPX dropped 10% in nine trading days. Furthermore, the AAII bearish sentiment reading has hit a post-virus crisis low, with just 20.4% of the survey respondents feeling bearish. This is lower than the reading in late 2019, which preceded the market crash that started in February 2020.
The surge in risk-taking and individual investor euphoria drove both the Dow and the SPX to new highs this past week. The Nasdaq launched off its 100 dma and was up 3.1%, though it is still below its ATH on February 12th. The Russell 2000 declined marginally on the week. It’s notable that volume declined every day this past week and, on average, was at its lowest since mid-February. Call option volume also continued to decline.
Data for the latest week shows the insider sell/buy ratio jumped more than 100% from the prior week to 45x from 21x. This means that insiders sold 45x more shares than they purchased. Keep in mind “purchase” often refers to stock received by exercising low-dollar or zero-cost stock options which is then sold.
Bloomberg featured a report on Thursday that a “whale” account made a huge bet on a big move in the VIX, which closed at $16.69 on Friday. The account bought 300,000 July VIX 25 call options and sold 300,000 July VIX 40 calls. This is a bet that the VIX will close between 25 and 40 by mid-July. A sophisticated speculator is speculating on a big sell-off in stocks sometime between now and July.
Despite running up 13 days in a row, the S&P 500 is historically overvalued. The technicals, like the RSI, are flashing “overbought.” While public officials like Jay Powell and Janet Yellen deny the the idea that stocks are in a bubble (see former Fed Head, Ben Bernanke, comment in late 2007 that subprime mortgages were contained for credibility of Fed official assertions), the metrics combined with the fundamentals suggest the stock market is poised for a very painful drawdown.
At some point the Fed’s money printing will diminish the value of the U.S. dollar at to the point at which the law of diminish returns (from money printing) forces impotency on official market intervention. Historical experience in on the side of this viewpoint.
The Early Stage Of Breakouts In Gold, Silver And Mining Stocks
“Management withheld metal [silver] from sale during the price correction over last two weeks of March and plans to sell the withheld metal inventory in anticipation of a precious metal prices rebound in Q2, 2021” – Endeavor Silver ($EXK) management, Q1 earnings report
It’s rare to find a stronger statement of conviction for the price potential of gold and silver than for a company to withhold production from the market in the anticipation of higher prices for the precious metals. I would argue that implicit in that view from EXK is the acknowledgement that the prices of gold and silver are actively manipulated.
But the inflation genie is out of the bottle now and India, China and Russia – along with several other eastern hemisphere countries (Hungary’s Central Bank just tripled its gold reserves) – are furiously importing gold bars.
Craig “Turd Ferguson” Hempke – TF Metals Report and Sprott Money – invited me back onto his TFMR Thursday podcast to discuss mining stocks and the precious metals sector and to have some fun:
TFMR Link: Thursday Conversation
MP3:
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The next big move in financial assets will come from the mining stocks. Mining stocks offer potential wealth enhancement through exposure to the “optionality” upside of price gold and silver prices. If you would like some ideas for investing in mining stocks, take a look at my Mining Stock Journal.
Possible Bottom In Gold And Silver?
The downtrend in the precious metals sector that began in August has been punctuated with one of the most aggressive, blatant price manipulation efforts over the last month that I have witnessed in 20 years. While no one can prove it without access to the inside books at the Comex, I believe the price attack over the last 10-14 days was aimed at “encouraging” longs to either dump their April gold contracts or roll them out to June. Most of the price decline over this period – in fact over the last six months – occurred only after India and China and the rest of the eastern hemisphere physical buyers had closed shop for the day, leaving only the paper gold traders to play in the unsupervised silver and gold paper sandbox.
The motive is to disincentivize Comex paper gold longs from standing for delivery as well as attempt to scare off the growing “army” of retail investors who have been buying an enormous amount of silver products at the retail level. I believe the bank vaults are highly stressed right now to make deliveries to the east. The price smash over the last week took the April gold open interest from over 100k contracts late last week to just 27k by Wednesday’s Comex close (First Notice Day for April gold). In all likelihood, if all 27k were to stand for delivery that amount is far more manageable than 50k or 100k.
I also believe there’s a real problem with physical supply, which is why the various sovereign mints (U.S., Canada, England and Australia) have sharply reduced the amount of gold and silver products they will produce until further notice. I am highly confident this was done to make more metal available for banks to deliver into large eastern buyers. India’s buying based on the import numbers I see daily have shown the largest and most consistent buying on a daily basis that I’ve ever seen in February and March, when India usually takes a break from its winter/festival/wedding buying.
Add Russia to the mix of large eastern buyers that require delivery of the gold it purchases. It was announced on March 27th that Russia’s Finance Ministry has allowed the National Wealth Fund to diversify its assets by investing part of the funds into gold and silver. The ministry also stated that the share of gold has been significantly boosted in Russia’s foreign currency reserves. Per an announcement in January that Russia was continuing to unload its U.S. Treasury holdings, it means Russia is dumping dollars and buying physical gold and silver.
I’m always loathe to call market bottoms and issue upside price targets. But the Hulbert Gold Newsletter Sentiment Index hit negative 45% (newsletters that make buy/hold/sell recommendations on gold and mining stocks are 45% net short}. This is the lowest reading since early July 2013. Mid-2013 was the culmination of the greatest price attack on gold in modern history (post 2000).
The HGNSI is a highly reliable contrarian indicator but it does not offer guidance on the timing of a bottom. This bearish environment could persist for several weeks or it may have begun to turn Wednesday and today (4/1/2021). Also, for what it’s worth, the Wells Fargo gold analyst on Monday put out a report in which he said the supply/demand situation could fuel a strong price rally in gold and he set a target of $2,200. Wells is not a significant player on the Comex. For now I’m not yet re-allocating the cash I raised over the last month but I may start to slowly “wade back into the water” over the next several days.
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The next big move in financial assets will come from the mining stocks. Mining stocks offer potential wealth enhancement through exposure to the “optionality” upside of price gold and silver prices. If you would like some ideas for investing in mining stocks, take a look at my Mining Stock Journal.
The names that I updated and provided an buy/hold/sell opinion on in the past issue (April 1st) include: US Gold, Paramount Gold, GR Silver, Wallbridge Mining, Northern Vertex, Precipitate Gold, Millrock Resources, Cabral Gold, Amex Exploration, Brixton Metals and Great Bear Resources; I also offered some call option ideas on large-cap miners like New Gold and First Majestic; and I provided a brief opinion on Palladium One and Silver Dollar Resources.
Gamestop $GME: It Will Collapse Eventually
GME reported its fiscal year Q4 and full-year numbers this past week. Q4 was a disaster for the Company. Operating earnings were trounced 75%% YoY for the quarter from $75.2 million last year down to $18.8 million. After subtracting interest expense, which rose in 2020, pre-tax net income plunged 84.5%. Across the board, the Company badly missed consensus estimates for revenues, gross margin, operating profit (87% miss) and net income.
Some of you may have seen the headline report that GME earned $1.23 per share in Q4 2020 vs 38 cents in Q4/19. But the net income number in 2020 includes a $69.7 million non-cash GAAP tax “benefit” whereas in 2019 the GAAP non-cash tax expense was $43.8 million. That’s why it’s “cleaner” to analyze operating and pre-tax numbers. While hardware sales (game consoles) increased 20.5% YoY for the quarter, software sales plunged 26%. Game consoles are only marginally profitable. The “juice” in the business is with software sales.
Recall that the founder of Chewy.com (CHWY), Ryan Cohen, took a 13% equity stake in GME in the fall of 2020. He seems to believe that he can successfully transform GME’s business model into an e-commerce “digital” operation from the brick/mortar model. The video game business has largely moved online and competition in the software side of the business is fierce. Microsoft has now jumped into the arena with full force. Perhaps Ryan should focus on trying to make CHWY profitable instead of trying to breathe life into a dead corpse. CHWY’s operations lost over $250 million in FY2020. It has never made money. Over the last 2 years CHWY lost over half a billion dollars. Chewy is literally a cash-burning Weimar furnace.
With respect to the operational “reboot,” the Company’s earnings conference call lasted only 20 minutes and there was not a Q&A session, which is unheard of. At the same time, Jefferies’ stock analyst raised his price target on the stock from $15 to $175, which is absurd. But that sordid upgrade from Jefferies made sense when the 10K was released and it contained a disclosure that Company started evaluating whether or not to increase the size of the ATM stock sales program (ATM = At The Market, which allows the underwriter to sell shares on behalf of the company at any time during market hours).
Jefferies is GME’s main investment banker and is a sleazy firm. It also happens to own a large portion of GME’s shares. Recall the Jefferies was the underwriter of Hertz’s ATM stock sale program that was cut off by the SEC. Outside of Jefferies, every other stock analyst that covers GME has a price target that ranges from $5 to $33.
GME reported its numbers on Tuesday after the close. It’s stock tanked 33.7% on Wednesday from $181 to $120 and closed just below its 50 dma. On Thursday the stock snapped back $63 up to $183. I have not found a reasonable explanation for this beyond the narrative that Reddit traders took the Jefferies stock price target seriously. More likely the already high short interest soared on Wednesday and the stock underwent a “gamma” squeeze. I’m certain Jefferies helped that process along and here’s the evidence of a gamma squeeze:
Note the the 37.2k call option volume at the $200 strike on the March options that expired Friday. It was by far the largest volume for any call or put option for any month. When that amount of calls are sold by market makers, they are forced to buy a certain amount of shares to hedge out their short call exposure, which drives the stock price higher.
GME is trading purely on technicals: short squeezes fueled by intense gamma squeezes and hedge fund algos and retail traders chasing momentum. The stock careened off its 50 dma on Wednesday (yellow line) and flirted with either side of the 21 dma on Thursday and Friday.
I do believe GME is going lower (the RSI and MACD show the potential for the stock to go much lower) though sell-offs could be followed by sharp short-squeezes. The technical action reminds of Tilray (TLRY), on which I eventually hit a home run on my puts after first “investing” with a series of small losses. If you pull up a chart on TLRY that goes back to July 2018, you’ll see a “bungee jump” pattern that is similar to the GME chart above. At the end of the day GME’s stock price will not escape the gravitational pull from failing fundamentals
Carvana’s Cash Burning Ponzi Scheme
CVNA has been largely a highly frustrating short, especially in light of the fact that it burned in excess of $600 million in cash in 2020. I think the high short interest (25% of the float on a float of just 68mm shares) is the catalyst for serial short squeezing. However, the founder and Chairman, former convicted felon Ernest Garcia II, has been unloading shares relentlessly on almost a daily basis this year. In March so far he’s dumped several hundred thousand shares. It’s shamelessly blatant.
The Company recently reported Q4/full year numbers. Sales increased by quite a bit as did the gross margin, which rose nearly 200 basis points. Yet, curiously, the pre-tax operating loss rose 27.5% to $462 million. Part of this was the cost of interest, which rose 63.8% from $80.6 million in 2019 to $131.5 million in 2020. At the end of Q4 the cash balance, which has been “replenished” with stock and debt offerings in the first half of 2020, was down to $300 million. At the current burn rate, it’s likely well under $200 million now, with means the Company will have to issue more debt or equity, or both before June.
This suggests either a poorly managed corporate operation or something unscrupulous is occurring. I’ve detailed in the past how Ernest Garcia II and his son, CEO Ernest Garcia III, are using off-balance-sheet related entities to suck cash out of the business. These are businesses owned by the Garcias that provide “services” like used car reconditioning, financial services etc. I’m not even sure a lot of the stock analysts that recommend the stock are aware of this. I had to spend a considerable amount of time digging through the footnotes to the financial statements in order to understand the extent to which the Garcia’s are fleecing the shareholders.
The Company is forced to issue new shares and debt constantly in order to fund the huge cash deficit generated by the operation. With the Garcia’s “related businesses” siphoning off $10’s of millions every year, this is nothing more than a thinly veiled Ponzi scheme. Morgan Stanley’s corrupted auto analyst, Adam Jonas, put out a strong buy recommendation on February 26th and raised his price target to $420 from $225. MS is CVNA’s primary investment banker so no doubt Jonas knows the Garcia’s are hollowing out CVNA’s cash. It also signaled the likelihood of a stock deal soon.
Ironically, CVNA’s stock price had just dropped below the 50 dma when Jonas issued his buy recommendation. Over the next three days the stock ran from $263 to $314. It then plunged down close to $240 after closing at $314. It’s bounced around with the Nasdaq since then but it’s lower than it was when the Jonas report hit the wires.
Chairman and founder Ernest Garcia II – convicted felon (was tied in with Charles Keating during the Keating-driven collapse of the S&L industry) and Ponzi scheme operator extraordinaire has been selling shares as if they are infected with Covid and malaria, including just before and after earnings were reported on February 25th (graphic from finviz.com, click to enlarge):
Note: CVNA filed for $500 million junk bond deal. This makes no sense because CVNA is unable to take advantage of the tax benefit from interest expense. Issuing debt instead of shares is disadvantageous for shareholders – except Garcia. Filing a $500 million stock deal would have trashed the stock price, which would reduce the net proceeds to Garcia from dumping shares relentlessly.
Full Metal Jacket: Intensive Gold And Silver Price Suppression
“Switzerland in February sent gold to mainland China for the first time since September and shipments to India and Thailand rose to multi-year highs…Swiss customs data showed that in February Switzerland exported 56.5 tonnes of gold to India, 11.2 tonnes to Thailand, 2 tonnes to mainland China and 1 tonne to Hong Kong. That is biggest total to India for any month since April 2019, to Thailand since August 2018 and to Hong Kong since September. It is the first shipment of any gold at all to China since September.” – Reuters, “Asian gold demand rebounding as Swiss exports to India surge”
Physical metal shortages at the retail level on top of manic physical gold buying from Asia as well as intermittent backwardation in the paper gold and silver markets of London and New York underlie one of the most aggressive precious metals price suppression efforts by the western Central Banks that I have experienced in the last 20 years. The purpose is to keep the price of gold suppressed while the Fed and the Treasury – also known as the Powell-Yellen Clown Show – grease the wheels for another massive shot of money printing.
The U.S. monetary system has morphed into near full-blown Modern Monetary Theory. Congress has indefinitely removed the debt limit ceiling and the Fed has indicated a willingness to monetize as much of that debt as needed to keep bond yields in check. This is highly supportive of an eventual huge move much higher in the precious metals sector.
Wall Street Silver invited me on their engaging and entertaining podcast to discuss several topics related to precious metals and the current blatant price manipulation:
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The next big move in financial assets will come from the mining stocks. Mining stocks offer potential wealth enhancement through exposure to the “optionality” upside of price gold and silver prices. If you would like some ideas for investing in mining stocks, take a look at my Mining Stock Journal.
Have Gold And Silver Bottomed Yet?
It makes no sense that shortages of physical have developed while the prices of gold and silver have been declining the past few months. But the aggressive price take-down that occurs in the paper markets is an effort by the banks to discourage buyers from investing in physical gold and silver in an effort to help alleviate the growing shortage of physical metal in NYC and London.
This bullion bank fire drill has occurred intermittently over the 20 years of my involvement in the sector. And yet, gold has been the best performing asset from 2001 to present. Silver I believe has been the 3rd or 4th best performing asset.
The fundamental factors that drive gold and silver keep getting stronger by the day. I don’t know how much lower the sector will go from here – part of that will depend on whether or not a stock market accident occurs, something which I believe has a high probability. But at some point the Fed is going to have to unleash another massive round of money printing to finance the coming flood of Treasury issuance or risk losing control of the long end of the yield curve, which in turn would devastate the financial markets.
Meanwhile the mining stocks are once again historically cheap relative to gold and silver and especially relative to every other financialized asset class.
Bill Powers of MiningStockEducation.com invited me back on to his show to discuss the precious metals and some of the mining stocks I’m buying now:
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The next big move in financial assets will come from the mining stocks. Mining stocks offer potential wealth enhancement through exposure to the “optionality” upside of price gold and silver prices. If you would like some ideas for investing in mining stocks, take a look at my Mining Stock Journal.
Tesla’s Elon Musk: The Master Of Con
Throughout Tesla’s history, Elon Musk has done an incredible job of deflecting the market’s attention away from the Company’s decaying operations. Recently, as Tesla’s global EV market share is rapidly shrinking from a tsunami of higher quality, better produced EVs from long-standing global OEMs, Musk has become quite sloppy with his effort at putting lipstick on his diseased pig.
In an attempt to arrest the sell-off in TSLA since its post-SPX inclusion all-time high of $833 on January 26th, Musk released the 2020 10-K early on Monday, February 8th, in which it was announced that TSLA had bought $1.5 billion worth Bitcoin with shareholder money. The move by Musk was designed to deflect attention away from his unwillingness to “hard code” sales guidance for 2021 – something for which historically he always issued bold, specific numbers. He was hoping to offset the stock’s price decline after the earnings release on January 27th and wanted to get the Roman Candle stock price launch experienced by Microstrategy when its CEO announced a plan to load up on Bitcoin.
The move by Musk failed, badly – instead the stock sold off as much as 34% from February 8th’s closing price. It’s currently down 22.7% from Feb 8th despite Bitcoin recently hitting an all-time high:
Based on the share price behavior since the earnings release and the Bitcoin announcement, it’s fair to say that a wider market audience is starting to acknowledge Musk’s chicanery.
But it gets better. On March 12th, Tesla filed an 8-K with the SEC announcing that “Jerome Guillen, President, Automotive, of Tesla, Inc. transitioned to the role of President, Tesla Heavy Trucking.” The news was “effective” as of March 11th but Tesla did not issue a formal press release and the 8-K has not been posted on Tesla’s website (click to enlarge):
Thus, it was quite curious to me that on Monday, March 15th, that Tesla did post an 8-K on its website announcing that, “Effective as of March 15, 2021, the titles of Elon Musk and Zach Kirkhorn have changed to Technoking of Tesla and Master of Coin, respectively.” This move by Musk, or rather pathetic display of “Theatre of the Absurd,” also was accompanied
by a formal press release, first issued through traditional Tesla propaganda outlets like Teslarati, Electrek and CNBC followed by a release through Dow Jones. Shortly after that, the news of Guillen’s “transition” from overseeing Tesla’s entire automotive operations to being pigeon-holed in the fairytale “Heavy Trucking” division was leaked through Teslarati and Electrek. (source of cartoon: @FairDinkumCap – click to enlarge)
This 8-K/news release maneuvering is clearly a dismal attempt to deflect the market’s attention away from the big demotion of Guillen, who was once labeled “Tesla’s automotive production genius.” Guillen goes from Automotive El Hefe to, as my colleague @BradMunchen describes it, “out to the wilderness…the Semi is still an illusionary project that may or may not ever make it to production.” He adds that “this is a huge red flag.” A view on this matter that I second.
Ironically, the SEC Form-4 filings that were posted on Telsa’s website, on the same day the Guillen 8-K should have been posted, show that Guillen sold a considerable amount of Tesla shares. Not the type of behavior the market would expect from an insider who was put in a charge of a “significant” development project. Guillen clearly expressed his opinion of the job transition by dumping a lot of shares.
It’s not worth commenting on the new titles of “Technoking” and “Master of Coin” for the CEO and CFO. The ridiculousness of it is palpable, childish at best. Perhaps “Master of Con” would be more appropriate for both the CEO and CFO. The bottom line is that Tesla’s dominance of the EV market is – as predicted – rapidly deteriorating from an onslaught of superior quality and competitively priced EVs from a growing cadre of legacy OEMs. As Sanford Bernstein Research published last week:
“Early all-electric products from mainstream manufacturers were underwhelming, but that is now being rectified through a product onslaught across every market segment.”
Tesla is already feeling the deleterious effects from competition in the EU and the U.S. (Ford Mach-E). And by the end of 1H 2021, it will have lost a considerable amount of market share in China.
Buying ARKK Is Like Playing Russian Roulette
I first presented ARKK as a short idea in the January 3, 2021 of my Short Seller’s Journal issue at $124.49. And of course like every other insanely overvalued stock or ETF, it continued to run higher, with a high-close of $156 on February 12th. As air seems to be leaking out the stock bubble, ARKK has taken a 25% beating since the high-close. At one point Friday it was down 32% from the high-close. ARKK is an ETF that has attracted a high degree of speculative interest because it has invested heavily in many of the high-beta,
Silicon Valley “tech” and bio-tech stocks.
These are stocks that have captured the market’s imagination to such an extreme degree that once again, just like in 1999, earnings or even the potential to generate earnings are irrelevant. The ARKK Invest website describes its investment thesis as “disruptive innovation.” It harkens back to 1999 when earnings were dismissed as “old economy” and the value of dot.com’s was derived from “clicks and eyeballs.” At some point as the stock bubble is popping, ARKK will turn out to be “disruptive” to its investors net worth.
The flip-side to a market that will chase any stock to Pluto as long as it keeps moving higher is when the music stops and the next “greater fool” vanishes, leaving the longs looking for a seat. The only buyers are shorts, many of whom have been squeezed into covering on the way up. In ARKK’s case, compounding the liquidity problem just described is the fact that many of its holdings to begin with are not very liquid.
An important facet of successful money management is prudent position management. The riskiest stocks also tend to be the most illiquid, especially on the way down. Cathie Wood has ignored this aspect of running a high-risk, high-return stock portfolio. 18 of her positions representing 19% of ARKK’s NAV would take about 20 days on average to liquid in an orderly fashion based on the 30-day average volume of each holding (this table was put together by @Motorhead – he and I share a lot of trading idea and this analysis showing ARKK’s lack of liquidity is his):
Take MTLS – Materialise – which creates and sells manufacturing and medical software, a highly competitive business dominated by the biggest software companies. ARKK owns 16.4% of equity. Based on its 30-day average volume, it would take ARRK 30 days to sell its position. That’s the best-case scenario and assumes ARKK is the only holder looking looking to sell a lot of shares. In a rapidly falling market, if faced with large redemptions like this past week’s $718mm of outflows, ARKK would not have a prayer of unloading a pro rata amount of shares of MTLS without hammering the share price. As it turns out, MTLS lost 26.7% of its value last week. It’s down 58.8% since February 9th.
But this is just a portion of the problem faced by ARKK in a falling market. As @Motorhead discovered, Nikko Asset Management paid a fee to ARKK to enable Nikko to mimic ARKK’s portfolio and sell it in Japan. Often Sumitomo Mitsui (which owns Nikko) will hold positions of equal size in the ARKK portfolio mirrored by Nikko. As an example, ARKK holds 8.56mm shares of MTLS and Nikko and Sumitomo each hold 2.65 million shares representing a combined 10.1% of MTLS’s shares. Thus ARKK, Nikko and Sumitomo in aggregate own over 26% of MTLS’ outstanding shares, thereby compounding the liquidity problem faced by ARKK.
“She’s cornered. I worked at Amaranth. (No, not on the nat gas team). I know what this looks like.” – @eddiemac3356 – Amaranth was a leveraged hedge that blew itself up in 2006 speculating on natural gas futures. The natural gas market began tanking and the guy running the position continued buying while other parts of the fund were liquidated to fund the margin calls. Eventually the fund could not meet margin calls and Amaranth collapsed – at the time one of the largest hedge fund collapses in history. “What this looks like” references the doomed strategy of selling highly liquid positions in order to double-down on the illiquid ones that are quickly losing value.
I reference this because, based on the daily changes in ARKK’s positions this past week, ARKK was selling liquid holdings like AMZN and AAPL to buy positions which have been battered hard over the last few weeks, like WKHS (Workhorse Group) and VUZI (Vusix Corp). WKHS plunged nearly 50% on February 23rd when it lost its bid on contract with the U.S. Postal Service to help modernize its delivery vehicle fleet. WKHS was a $2 stock in June 2020 and it looks like it will be headed back to that price. VUZI produces consumer “augmented reality” consumer products. It generates about $9mm in revenues (TTM) and multiples of that in operating losses. Vuzi fell 32% this past week.
Here’s ARKK’s top-10 holding as of Friday:
The point here is that ARKK is taking “swing for the fence” positions in stocks that really should still be private companies funded by venture capital funds run by sophisticated investment professionals investing the play-money of the wealthy. But the biggest stock bubble in history has enabled the VC funds to cash out early-stage, high risk ventures and shifted the immense degree of operational and economic risk of these companies onto the unsuspecting public.
And then along comes Cathie Wood, raising billions from the public and throwing the money recklessly into the illiquid stocks of high risk companies, many of which will not be around in the next 5-10 years. But not only is Wood tone deaf to position risk management, she’s selling liquid stocks to double-down on stocks for which price discovery is being rediscovered. Again, many of these positions were inadvisable investments to begin with except maybe in very small quantities.
I have recommended several of these names as shorts well before I started focusing on ARKK a couple months ago. Many of these names ran up to levels I would have never thought possible – chased higher by a flood of momentum-chasing retail idiots and hedge fund algos – but they are now losing altitude quickly. Zillow has plunged 32.1% in the last three weeks; Zoom is down 40.7% since mid-October 2020; Spotify is down 24.7% in the last 2 1/2 weeks; Teledoc is down 35.7% in the last 2 1/2 weeks; and of course TSLA, which is 10% of ARKK, is down 32% since January 26th – at one point on Friday it was down 39%. The top-10 positions represent roughly 47% of the value of the fund.
Ultimately, Cathie Wood is playing with fire. It’s easy to make a lot of money on highly risky illiquid stocks and look like a genius during a stock bubble. It’s even easier to blow up a fund and inflict financial damage on the investors when a bubble pops (just ask Bill Miller who was the “rock star” manager of Legg Mason’s Value Trust until he blew it up in 2008). Wood was regarded as a money management “rock star” recently. At the time, I wondered if that was one of the “white swan” bubble-top indicators.
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The commentary above is an excerpt from the Short Seller’s Journal, a weekly newsletter that dissects the latest economic reports and presents ideas for short seller’s. You can learn about it here: Short Seller’s Journal information.
Gold Price Manipulation, Money Printing and Inflation
“The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion — policemen, customs guards, penal courts, prisons, in some countries even executioners — had to be put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And hosts of servile writers praised what the governments had done and hailed the dawn of the fiat-money millennium.” -Ludwig Von Mises
The sharp sell-off in gold and silver these past two weeks has taken many by surprise, including me, especially given the growing shortage of physical gold and silver. Make no mistake, the majority of the price decline in both metals has taken place in the paper derivative trading in London and NYC. We subscribe to John Brimelow’s Gold Jottings report. It’s expensive but contains valuable data on the Indian, Chinese, Turkish, Vietnamese gold market activity on a daily basis. India has been a voracious buyer since November/ December and China has slowly woken up after being dormant since February 2020. Those are two key eastern markets though Turkey and Viet Nam can be significant buyers as well.
It’s been the same pattern almost every day for the last month: gold and silver rise in evening to early a.m. hours driven by enormous import activity from India and now China. This is what I refer to as the physical markets and the eastern hemisphere buyers require physical delivery. Gold (and silver) then typically start to decline once India and China close down for the day (2a.m. – 3 a.m. EST) and the paper traders take over.
There’s also the issue of the widely reported shortage of gold and silver bullion products at the retail level. Most large coin dealers have very little inventory of minted bullion coins – gold and silver. Many products are unavailable. The shortage has spread to the wholesale 100 oz gold and 1,000 oz silver bar market.
It makes no sense that shortages of physical like this have developed while the prices of gold and silver have been declining the past few months. If mints are having trouble sourcing blanks with which to mint coins and bars, they should be raising the price to a level that enables them to buy the necessary quantities to satisfy demands. This is how price-discovery is supposed to work. I believe the U.S./Canada/Australia etc are not operating their mints like this because bullion banks need to be able to source enough physical bars to deliver to the big buyers in the east. I also believe the aggressive price take-down that occurs in the paper markets is an effort by the banks to discourage buyers from investing in gold and silver.
This bullion bank fire drill has occurred intermittently over the 20 years of my involvement in the sector. And yet, gold has been the best performing asset from 2001 to present. Silver I believe has been the 3rd or 4th best performing asset. Usually an aggressive effort to push the price of gold down precedes more money printing – or in socially correct circles, “Fed balance sheet expansion.” This time around more money printing will be accompanied by price inflation the likes of which has not been in the U.S. since the late 1970’s. Unlike the 1970’s when Paul Volker extinguished inflation by jacking Fed funds up to 20%, the Fed will be helpless to fight inflation without the risk of napalming the stock market.
The fundamental factors that drive gold and silver keep getting stronger by the day. While I don’t know how much lower the sector will go from here – part of that will depend on whether or not a stock market accident occurs, something which I believe has a high probability – at some point the Fed is going to have to unleash another massive round of money printing to finance the coming flood of Treasury issuance or risk losing control of the long end of the yield curve, which in turn will devastate the financial markets.
In this scenario, I see the precious sector getting hit hard in correlation – as in March 2020. But at some point gold and silver will benefit from a big flow of flight-to-quality capital which will push gold and silver much higher, with the mining stocks following. See charts from the fall of 2008 to see how this occurs. This dynamic, should it play out like this, will be “turbo-charged” by the shortage of physical.
But for now, I continue to play “defense” with my positions. I raised cash over the last several weeks and I’m sitting on my hands to prevent myself from adding to positions or engaging in speculative trades. I don’t care to try to time the bottom (or a top). If I can capture the middle 60% of the next move I believe is ahead I’ll be content.