

Articles
Will Tesla Ever Generate A Real Profit?
The only part of Tesla’s business model that generates profitability – gross, operating and net – is the sale of greenhouse gas credits to other OEM manufactures and tax subsidies. Neither of those sources of profitability is sustainable.
The GAAP net income of $105mm in Q4 was 17% below the consensus of $126mm. Regarding net income, Tesla generated $133mm of income from selling Zero Emission/Greenhouse Gas credits to the big OEMs who need them – for now – to remain in compliance with environmental regulations. Net of these credits, Tesla lost $28 million in the quarter (before the fraudulent accounting manipulation). Subtracting these credits from the full-year loss, Tesla’s 2019 net loss attributable to shareholders is $1.5 billion.
The problem with this reliance on the sale of these credits to generate income is that, starting this year, the buyers of these credits (GM, Audi, Chrysler, etc) will soon be selling more than enough EVs and hybrids to remain in compliance. This source of income for Tesla will thus eventually be non-recurring.
With subsidies disappearing and an onslaught of competition, 2020 could be a bloodbath for Tesla in terms of deliveries. Not only is the global auto market contracting, but the much larger, better funded and operationally credible OEMs will be flooding the market with competitive EVs that will significantly cannibalize Tesla’s market share.
There’s just no telling when this Electric Tulip will inevitably crash. But, like with any investment bubble, the popping will happen suddenly and unexpectedly, when the bulls are convinced that the upside is limitless and the bears are in a state of terror
Mining Stocks Are Setting Up For Another Run
The Fed is trapped. If it stops adding money to the money supply, the stock market will crash. It’s already extended the repo money printing program twice. The first extension was to February and now it has extended it again to April.
What was billed as a temporary “liquidity problem” in the overnight repo market is instead significant problems developing in the credit and derivative markets to an extent that it appears to be putting Too Big To Fail bank balance sheets in harm’s way. That’s my analysis – the official narrative is that “there’s nothing to see there”.
The delinquency and default rates for below investment grade corporate debt (junk bonds) and for subprime consumer debt are soaring. Privately funded credit, leveraged bank loans, CLO’s and subprime asset-backed trusts (credit cards, ABS, CMBS) are starting to melt down. The repo money printing operations is a direct bail out of leveraged funds, mezzanine funds and banks, which are loaded up on those subprime credit structures. Not only that, but a not insignificant amount of OTC credit default derivatives is “wrapped around” those finance vehicles, which further accelerates the inevitable credit meltdown “Minsky Moment.”
The point here is that I am almost certain, and a growing number of truth-seeking analysts are coming to the same conclusion, that by April the Fed will once again extend and expand the repo operations. As Milton Friedman said, “nothing is so permanent as a temporary government program.”
Gold will sniff this out, just like it sniffed out the September repo implementation at the beginning of June 2019. I think there’s a good chance that gold will be trading above $1600 by this June, if not sooner.
Eventually the market will discover the junior exploration stocks and the share prices will be off to the races. This is part of the reason Eric Sprott continues to invest aggressively in the companies he considers to have the highest probability of getting enough “wood on the ball to knock the ball out of the park” (sorry, baseball is right around the corner).
Precious metals mining stocks are exceptionally cheap relative to the price of gold (and silver). Many of the junior exploration stocks have sold down to historically cheap levels in the latest pullback in the sector. As such, this is a good opportunity to add to existing positions in these names or to start a new position.
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In my latest issue of the Mining Stock Journal, I present a penny stock idea that I believe could be a 5-10 bagger. I’m not alone in this view because a royalty company I know and respect recently took a 9.5% position in the company’s stocks and purchased a royalty stream on several of the company’s mining claims. You can learn more about this mining stock newsletter here: Mining Stock Journal information.
NOTE: I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors. My research and my views are my own and I invest my own money in many of the stocks I present.
Tesla, Gold And Coronavirus – Fraud And Global Depression
To say the current stock market is in a bubble is an insult to the word “bubble.” Tesla experienced an insanely idiotic stock price move after reporting “shock and awe” headline numbers for revenue and EPS which “beat” estimates – estimates that had been lowered by analysts throughout 2019. But as always there’s plenty of dirt in the details which point to a reality that is far different than is represented by headline numbers and Tesla’s highly orchestrated earnings presentation.
There’s just no telling when this Electric Tulip will inevitably crash. But, as with any investment bubble the popping will happen suddenly and unexpectedly, when the bulls are convinced that the upside is limitless and the bears are in a state of terror.
Meanwhile, the physical gold market which underlies the complicated web of paper gold derivatives continues to push the gold price higher despite aggressive efforts by the western Central Bank and bullion bank price management team. In fact, data from the BIS indicates that the BIS had a heavy hand in the effort to cap the price-rise of gold during January using its physical gold swap and leasing transactions.
Paul at Silver Doctors invited me onto its podcast to discuss these issues
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You can learn more about Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required): Short Seller’s Journal subscription information – Mining Stock Journal subscription information
Fake News And The “Healthy Economy” Myth
The “narrative” architects and fairytale spinners are desperately looking for evidence to fit their “consumer is still healthy / economy still fine” propaganda. The hype over strong holiday sales was premature if not fraudulent, as data-manipulators appear to have taken the growth in online holiday sales and projected it across the entire retail sales spectrum. I guess they overlooked the fact that online sales took market share from brick/mortar stores.
Despite the plethora of data showing that U.S. manufacturing was down last year, real retails sales are declining, restaurant traffic – including delivered food – has been contracting almost every month for two years and most households are over-bloated with debt, the Fed continues to insist that the economy is healthy with “sustainable moderate growth.” This is sheer and nonsense and the Fed knows it, which is why the Fed printed over $400 billion and tossed it at the financial system.
Chris Marcus – Arcadia Economics – and I discuss the truths underlying the U.S’ fake news economy:
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You can learn more about Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required): Short Seller’s Journal subscription information – Mining Stock Journal subscription information
Printed Money Blowing The Bubbles Even Bigger
The total US stock market valuation at $33.9 trillion is 157.4% of the last reported GDP. It’s the highest market valuation ever. The more the policy-makers try to pump and jawbone the market higher, the worse the consequences will be on the downside when the rug is pulled out from under stocks. The trigger could be anything. Eventually the market will acknowledge and accept the fact that the economy is getting worse and earnings will continue to decline. But fundamental reality is just one of many possible catalysts that will cause a painful drop in the stock market.
For now the rising stock market is shaping the Wall Street narrative being transmitted through the mainstream media that the economy is in good shape. Funny thing about that – the stock market is not the real economy. But this is:
To be sure, rising stock prices enhance the wealth and spending capacity of the top 1% who own stocks outside of their retirement funds. But that wealth does not “trickle down” to the average middle class household (everyone below the top 1% wealth demographic). Let’s look briefly at some facts.
I’ve been making the case for quite some time that freight shipping volume is a valuable tool by which to gauge the relative level of economic activity:
The Cass freight shipment volume index tanked nearly 8% YoY in December. This number includes the growth in online shopping fulfillment deliveries and would have been worse if online shopping was not taking market share from brick/mortar stores. The index has fallen to its December 2009 level, which is part of the time period that the NBER has declared the economy to be in a recession.
The Cass data is reinforced by the sharp decline in the Baltic Dry Index. The BDI measures global ocean freight shipment activity and is considered a leading indicator for global commodities and raw materials demand. This includes incoming/outgoing vessels to and from the U.S. Not only is the global economy, including the U.S. growing weaker, the IMF has slashed its global economic growth outlook for 2020 and 2021.
The Conference Board’s Leading Economic Index released Thursday showed a 0.3% drop vs the 0.2% decline expected. The index has now declined in five of the last six months of 2019. Without the large run-up in the stock market, the index would have fallen even more. Rising unemployment claims (hmmm…) were the largest contributor to the decline. YoY for December the index gained just 0.1% – the weakest YoY change since November 2009.
One of the false narratives being promoted by talking heads and Wall St. is the idea that the consumer is still strong. Wrong. Consumer spending over and above necessities is being driven by the easiest access to credit in my lifetime. Evidence of this is the rapid growth in auto, credit card and personal loans. And in fact more than a third of all households report using credit cards to make ends meet every month.
But as evidence of the deteriorating condition of the consumer’s financial health, Discover’s (DFS) stock plunged 11.1% on Friday despite “beating” earnings estimates. The dagger in Discover’s quarter was loan charge-offs, which jumped to 4% of the outstanding balance. This is the highest charge-off rate since DFS’ charge-off rate peaked at 5% during the financial crisis. Delinquency rates are also accelerating. On a YoY basis for Q4, 30+ day delinquencies were up 11% while 90+ day delinquencies jumped 13%. For credit card loans, 30+ day delinquencies were up 14% and 90+ day delinquencies soared 15%.
In fact, loan loss reserves are starting to rise at a double-digit rate at many banks and finance companies. The average consumer is stretched, a fact that shows up in the numbers that never get reported in the mainstream media or Wall Street. The last time bank financials evidence rising consumer borrowing distress like this was in late 2007. We know how that played out. This time around the bubbles are bigger, the fraud is better disguised and households and policy-makers are even less prepared for the inevitable.
This is why gold is up 24% since May 2019, outperforming the stock market and most other financialized or commodity investments. No, it has very little to do, if anything, with coronavirus fear. But it’s why the western Central Bank and bullion bank gold price managers are having a difficult time containing the rising price.
The Housing Bubble: They Keep Pushing The System Until It Breaks
The mortgage regulators are stretching the removal of mortgage qualifications to the limit in an effort to keep the housing party going. The Consumer Financial Protection Bureau (CPFB) is recommending the removal of the DTI as a factor in qualified mortgage underwriting. Ironically, tighter mortgage finance regulations were the purpose for the formation of the CPFB in the first place. Wash, rinse, repeat. I have no doubt the mortgage and housing market is headed for another catastrophe.
Note that Blackstone, one of the first companies to dive head first into the buy-to-rent market, recently dumped the rest of its shares in Invitation Homes – one of the large single family rental operators which Blackstone took public in 2017.
Phil Kennedy (Kennedy Financial) hosted Aaron Layman – one of the rare realtors willing to discuss the truth (Aaron Layman Properties), Jimmy Morrison – who produced “The Bubble,” an impressive film housing bubble/collapse – and me to discuss why the housing market will implode again – we also include a brief discussion of gold and silver and why the precious metals sector is going to a lot higher:
Gold, Silver And Mining Stock Charts Look Bullish
“Miss the boat? The move in the precious metals sector is just getting started” – Arcadia Economics
The charts on the mining stocks I follow in my Mining Stock Journal are all starting to look very bullish. Many have pulled back this month after a nice rally during the fourth quarter of 2019. China goes on a week long holiday observance which will close Shanghai until next Friday. That may or may no affect the short term direction of gold and silver.
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I cover several junior exploration stocks with upside that is several multiples of their current price. I also specialize in looking for value plays in larger cap producing miners as well as reviewing stocks to avoid. You can learn more about this mining stock newsletter here: Mining Stock Journal information.
NOTE: I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors. My research and my views are my own and I invest my own money in many of the stocks I present.
MSM Gold Reporting Becomes More Absurd By The Day
I sent this article linked to Chris Powell and Bill Murphy at GATA for a good chuckle. Chris has turned it into worthwhile commentary:
Practially every day prompts those who consider themselves market analysts to contrive explanations for movements in the gold price, no matter how implausible. Zaner Metals in Chicago attributed today’s slight decline in the gold price to concerns about the new virus that has appeared in China:
Investors in gold are undecided about the coronavirus, with early indications that it could hurt bullion demand in China as much as boost safe-haven buying. So the yellow metal dipped again today, while palladium rebounded, making a new record high in futures trade…
“The world is reacting in a deflationary manner to the news of a spread of the pneumonia-like virus in China,” Zaner Metals said in a note. “The trade is justified in factoring in some slowing fears and that in turn has applied pressure to gold, silver, and nearly every physical commodity.
There is no indication in Investing.com’s story that Zaner Metals talked today with anyone buying or selling gold. [I’ll add that, notwithstanding the poor quality of reporting, the idea that the spread of a virus in China is “deflationary” is outright silly.]
More important, there is no indication that before drawing any conclusions about the gold price Zaner Metals inquired with, for example, the Bank for International Settlements about any surreptitious intervention undertaken in the gold market this week by the bank or its member central banks, though such surreptitious intervention can be discerned in the footnotes of the bank’s monthly reports, like the most recent report, November’s, analyzed by GATA consultant Robert Lambourne here:
http://www.gata.org/node/19693
Central banks are the biggest participants in the gold market and yet rare is the gold market analyst who ever puts a critical question to them or reports that they refuse to answer questions about their interventions.
Rarer still is the journalist who poses such questions himself instead of merely repeating the silly contrivances offered by the market analysts. The power to create and dispense infinite money in secret helps central banks rule the world, but most of all they require the negligence of financial journalism.
Tesla’s Warranty Expense “Income”
Note: Tesla is a fascinating case in fraud and of the “wizard” behind the fraud, who has managed to pull the wool over a large population of stock gamblers. Tesla is a saga for the ages and likely the biggest Ponzi scheme in U.S. history. The Company and its CEO are truly emblematic of the fraud and corruption that has engulfed the entire U.S. economic, financial and legal/political system. If this country survives what’s coming, there will be semester long classes in top-10 business schools and psychology masters programs devoted to the case study of Tesla.
A long-time Tesla critic published an article in Seeking Alpha outlining the fraudulent nature of Tesla’s accounting for “warranty expense.” I did not read the article beyond the summary because it was placed behind Seeking Alpha’s subscription firewall. But I’ve detailed this aspect of Tesla’s accounting fraud in previous issues of the Short Seller’s Journal . Tesla has been reducing its provision for warranty expenses relative to the number of vehicles it sells for several quarters. While the warranty provision should rise in correlation with the rising number of vehicles delivered, Tesla and its auditor have decided an inverse relationship between these two variables makes more sense.
In addition, as it turns out Tesla in many instances allocates warranty expenditures incurred to “goodwill” and other non-warranty expense categories, which enables it to move the expense – a cash expense incurred – off its income statement and on to the balance sheet or to the “operating expenses” section of the income statement.
GAAP accounting no longer requires a company to amortize goodwill evenly over time as an expense on the income statement. Those of you who might know GAAP warranty accounting rules might say that the warranty expenses as they incur only affect the income statement to the extent they exceed the “provision for warranty expenses” that accumulates on the balance sheet.
However, in all likelihood Tesla is playing these games with its warranty expenditures because it has already exceeded the amount it has previously reserved for warranty expenses. OR over time if Tesla reports – fraudulently – less on actual warranty expenditures than it has reserved for them, it can “release” the warranty expense reserve into the GAAP income statement as a contra expense to boost gross margin and operating margin. This in turn contributes to the accounting manipulations used in any attempt to generate positive net income.
Furthermore, understating current warranty expenditures enables Tesla to understate future provisions for warranty expense, which should be expensed every quarter as part of the cost of goods sold. In other words, moving warranty expenditures into other expense categories or into goodwill reduces the cost of goods sold thereby artificially and fraudulently boosting the reported GAAP gross margin.
Moreover, the amount of warranty expenditures tossed fraudulently into goodwill never hits the income statement. It sits in the goodwill asset account on the balance sheet which no longer has to be amortized into operating expenses, thereby boosting operating and operating margin OR reducing operating losses. Yes, there is an accounting rule that applies to the revaluation of goodwill but don’t hold your breath waiting for Musk to adhere to any accounting regulations.
This is crucial to understanding the breadth and scale of Tesla’s accounting fraud. Tesla has made it a point of emphasis to boast about its gross margin, which is much larger than the gross margin for the legacy auto OEMs. Also, Wall Street analysts focus on Tesla’s gross margin. When the gross margin reported is higher than expected, the stock price jumps. This accounting scheme also fraudulently boosts Tesla’s operating and net incomes. In fact, if Tesla adhered to strict GAAP accounting, its gross margin would be substantially lower and in all likelihood the Company would have never been able to report positive earnings per share in Q3.
But wait, there’s evidence that backs my assertion above that Tesla fraudulently misclassifies warranty repair expenditures. Tesla owners who have taken their car in for warranty-related repairs have been reporting that on the final invoice the warranty service repair is classified as “Goodwill – service.” You can see a photocopy of one such example in an article published by InsideEvs.com. There are also several lawsuits filed against Tesla with documentation showing that Tesla’s misclassification of warranty service expenditures is standard operating procedure at the service centers.
As it turns out, Tesla labels warranty service expenditures for two more fraudulent reasons. First, under California’s Lemon Law, in many instances Tesla would be required either to buy back for full price the tarnished vehicle from the owner or replace it with a brand new vehicle. Likely this law is similar in most States. Second, repeated warranty repairs for the same problem would require per NHTSA regulations for a recall of the defective parts involved. But labeling these repairs as “goodwill” enables Tesla to fraudulently avoid both of these costs of adhering to the law.
Musk’s business per se is not to be sell cars but sell stock in a company that sells cars. Musk’s accounting schemes are aimed directly at pushing the stock price higher. The primary motive behind this effort is Tesla’s insane CEO compensation plan, which would award Musk with $364 million in stock/options if the market cap hits $100 billion (which is more than Ford and GM combined).
Though I can’t prove it without access to the actual records, I suspect that Goldman Sachs and Morgan Stanley have a lucrative fee-generating business lending money to Musk against the value of his Tesla shares. In other words, Musk – along with Gold man and Morgan Stanley, will do and say anything to try and force the stock higher in order to achieve that compensation milestone level and to protect the value of the collateral used secure loans to Musk.
Bullion Shortages Will Push Junior Mining Stocks Higher in 2020
The chart above shows the ratio of GDXJ/GDX. Although I don’t consider GDXJ to be a junior ETF per se, the GDXJ index does contain smaller cap, later-stage juniors and smaller cap producers. In that sense, it offers slightly higher risk/returns than GDX. That ratio has popped above the downtrend line that was established at the peak of the last bull cycle in the sector. Prospectively, as long as it stays above that trendline and moves higher, it’s a great indicator that the precious metals sector will stage a big move higher for the next couple of years.
Trevor Hall and I discuss the physical bullion shortage developing in London and New York and why the precious metals sector will likely make a big move in 2020 – click on the graphic below or this link to listen:
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I cover several junior exploration stocks with upside that is several multiples of their current price. I also specialize in looking for value plays in larger cap producing miners as well as reviewing stocks to avoid. You can learn more about this mining stock newsletter here: Mining Stock Journal information.
NOTE: I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors. My research and my views are my own and I invest my own money in many of the stocks I present.