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Gold And Silver May Be Setting Up For A Big Move

Gold and silver are historically undervalued relative to the stock and bond markets. The junior mining stocks overall are at their most undervalued relative to the price of gold since 2001. Gold’s relative performance during the quarter, when the stock market had its best quarterly performance in many decades, is evidence of the underlying strength building in the precious metals sector.

Furthermore, the stock market is an accident waiting to happen. By several traditional financial metrics, the current stock market is at its most extreme valuation level in history. This will not end well for those who have not positioned their portfolio in advance of the economic and financial hurricane that is beginning to “move onshore.”

Bill Powers invited on to his Mining Stock Education podcast to discuss the precious metals sector and the economy:

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

When The Stock Market Reversal Happens, It Will Be A Whopper

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

Before I saw that quote from Hussman on Twitter, I was contemplating how the trading patterns this year in bond and precious metals markets remind of the way they were trading in 2008 before the financial system de facto collapsed.  Similarly,  the tech stocks right now remind me of the blow-off top that occurred in tech stocks in January/February 2000 just before the Nasdaq collapsed. Whether intentional or not, the Fed has quickly re-inflated the tech bubble that was punctured in September 2018.

Semiconductor stock bubble – The tech bubble in the late 1990’s was led by the semiconductor sector and the dot.coms. 98% of the dot.coms taken public during that time are no longer around. The semiconductor industry is “hyper”-cyclical. It has a beta of 11 vs. the economy. Right now the global economy is in melt-down mode. Just ask the IMF, BIS and World Bank. The Fed and Trump have recklessly reflated the stock bubble that led to the all-time high in the stock market. The semiconductors closed at an all-time high on Friday. It’s sheer insanity given that industry fundamentals are melting down.

The semiconductors seem to be the most responsive to trade war headlines that promote optimism. But the stock prices of these companies have completely disconnected from reality. Every possible consumer-driven end-user product market that uses semiconductors is contracting. As an example, Samsung warned on Thursday that it’s Q1 profit would be down 60% from Q1 2018, citing declines in prices for memory chips and lower demand from OEMs for screens, like the OLED display that Samsung makes for Apple’s iPhone.

Samsung’s inventory is now twice the size of two of its primary competitors. One of those competitors is Micron (MU – $41.72), which admitted that its inventory had soared to 137 days and was on its way to 150+ days in the current quarter. The slashing of capex by chip manufacturers has barely begun.

Semiconductor sales fell 7.3% in February from January and 10.6% from February. Globally semiconductor sales fell across all major categories and across all regional markets (not just China) in February. In North America, chip sales were down 12.9% from January and 22.9% from February 2018 (vs. down 7.8% in February in China sequentially from January and down 8.5% from Feb 2017).

The trade war has nothing do with the sales crash in the chip industry. And the “green shoots” seen in the “blip” in China’s PMI which ignited the stock market last Monday is not confirmed by the PMI data coming from Japan and South Korea, two of China’s largest trading partners. In short, when semiconductor stocks reverse from this insane run higher, they will literally rip in reverse. DRAM average selling prices (ASP) plunged over 20% in Q1 2019. The ASP is projected to drop another 15-20% in Q2 and a further 10% drop in Q3. So much for the 2nd half “recovery” that several chip company CEO’s saw in their crystal ball during the latest quarters’ conference calls (Micron, Lam Research, etc).

Inventories of all categories of semiconductors are extremely high because the demand for the end-user products (smartphones, autos, electronics) is plummeting, which means the inventory of those products is soaring as end-user demand contracts. The best news is for shorts looking for contrarian signals is that Cramer has been on his CNBC show recently pounding the table on chip stocks. This can only mean that his Wall Street sources are trying to move big blocks of stock out of their best institutional clients.

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The commentary above is an excerpt from my latest Short Seller’s Journal.  In that issue I present a detail rationale with data to explain why the U.S. economy is tanking and I provide several stocks to short, along with put option suggestions and capital management advice.  You can learn more about this weekly newsletter here:  Short Seller’s Journal information.

“Man, this is high-value newsletter.  Especially for me.” – Subscriber “Scott” from Michigan

The Divergence Between Stocks And Reality Is Insane

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

This is the nastiest bear market rally that I have seen in my over 34 years of experience as a  financial markets professional. It would be a mistake to make the assumption that there has  not been some official intervention to help the stock market recover from the December sell-off.

Rob Kientz of goldsilverpros.com – a relatively new website that focuses on gold and silver market news and research – and I had a conversation about the extreme negative divergence between the economy and the stock market. And, of course, we discussed gold, silver and mining stocks:

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:   Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

“Trump’s Encore”

Someone might argue that it’s Powell’s job to reinflate the stock market, but Trump did everything to humiliate Powell in a very publicly visible fashion to shame Powell into reinflating the biggest bubble of all time:

Will Gold Continue Higher Despite Efforts To Keep It Capped?

“At the exact time that the one asset is supposed to defend against reckless Fed monetary policies should be going higher, it’s going the opposite way…and you’re telling me this isnt’ a  manipulated market?”

The current period reminds of 2008.  The price of gold was overtly manipulated lower ahead of the de facto collapse of the financial system. It’s highly probable the Central Banks are once again setting up the markets for another financial collapse, which is why it’s important for them to remove the dead canary from the coal mine before the worker bees see it.

Craig “Turd Ferguson” Hemke invited me to join him in a discussion about the large drop in the price of gold last week and why it points to official intervention in the gold market for the purpose of removing the warning signal a rising gold price transmits about the growing risk of financial and economic collapse.

You can click on the sound bar below or follow this link:  TF Metals Report to listen to our conversation.

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If you are interested in learning more about the Mining Stock Journal, please click here for more information:  Mining Stock Journal Subscription Information

Larry Kudlow Wants A 50 b.p. Cut In Fed Funds – Why?

The stock market has been rising relentlessly since Christmas, riding on a crest of increasingly bearish economic reports. Maybe the hedge fund algos are anticipating that the Fed will soon start cutting rates. Data indicates foreigners and retail investors are pulling cash from U.S. stocks. This for me implies that the market is being pushed higher by hedge fund computer algos reacting to any bullish words that appear in news headlines. For example, this week Trump and Kudlow have opportunistically dropped “optimistic” reports connected to trade war negotiations which trigger an instantaneous spike up in stock futures.

“U.S. economy continues to weaken more sharply and quickly than widely acknowledged” – John Williams, Shadowstats.com, Bulletin Endition #5

The real economy continues to deteriorate, both globally and in the U.S. At some point the stock market is going to “catch down” to this reality.

The graphic above shows Citigroup’s Economic Data Change index. It measures data releases relative to their 1-yr history. A positive reading means data releases have been stronger than their year average. A negative reading means data releases have been worse than their 1-yr average. The index has been negative since the spring of 2018 and is currently well south of -200, its worst level since 2009.

The Treasury yield curve inversion continued to steepen last week. It blows my mind that mainstream media and Wall Street analysts continue to advise that it’s different this time. I would advise heeding the message in this chart:

I’m not sure how any analyst who expects to be taken seriously can look at the graphic above and try to explain that an inverted yield curve this time around is irrelevant. As you can see, the last two times the Treasury curve inverted to an extreme degree, the stock bubbles began to collapse shortly thereafter.

The data in the chart above is two weeks old. The current inversion is now nearly as extreme as the previous two extreme inversions. This is not to suggest that the stock market will go off the cliff next week. There’s typically a time-lag between when the yield curve inverts and when the stock market reacts to the reality reflected in an inverted curve. Prior to the great financial crisis, the yield curve began to invert in the summer of 2006. However, before the tech bubble popped, the yield curve inversion coincided with the crash in the Nasdaq.

Another chart that I believe reflects some of the information conveyed by the inverted yield curve is this graphic from the Fed showing personal interest payments. Just like in 2000 and 2008, households once again have taken on an unmanageable level of debt service expense:

Obviously the chart above is highly correlated with stock market tops…

The Conference Board’s measure of consumer confidence dropped in March, with the Present Situation index plunging to an 11-month low. It was the biggest monthly drop in the Present Situation index since April 2008. What’s interesting about this drop in confidence is that, historically, there’s been an extraordinarily high correlation between the directional movement in the S&P 500 and consumer confidence. The move in the stock market over the last three months would have suggested that consumer confidence should be soaring.

The Cass Freight Index for February declined for the third straight month. Even the perma-bullish publishers of the Cass newsletter expressed that the index “is beginning to give us cause for concern.” The chart of the index has literally fallen off a cliff. Meanwhile, the cost of shipping continues to rise. So much for the “no inflation” narrative. The Cass Index is, in general, considered a useful economic indicator. Perhaps this is why Kudlow wants an immediate cut in the Fed Funds rate?

John Titus: The Big Lie (As Told By Ben Bernanke And Henry Paulson)

“The reason nobody really knows what caused the financial crisis is that no one asked Ben Bernanke, Chairman of the Federal Reserve at the time, or Hank Paulson, the Treasury Secretary at the time, exactly why they were lying about why those banks supposedly needed a bailout” – John Titus, “The $1 Trillion Devil in the Details

Many people believe what happened in 2008 is settled history. Or, they just don’t care.  The problem with this concession is that it’s about to happen again – only this time it will be much larger in scale…

In his latest installment of “Mafiocracy,” John Titus details the Top Three lies perpetrated by Ben Bernanke and Henry Paulson in order to convince Congress and the The Public that the big banks needed to bailed out using Taxpayer money:

The Paper Raid On The Gold Price

Gold was smacked $22 from top to bottom overnight and this morning.  It was a classic paper derivative raid on the gold price, which was implemented after the large physical gold buyers in the eastern hemisphere had closed shop for the day.  This is what it looks like visually:

As you can see, as each key physical gold trading/delivery market closes, the price of gold is taken lower. The coup de grace occurs when the Comex gold pit opens. The Comex is a pure paper market, as very little physical gold is ever removed from the vaults and the paper derivative open interest far exceeds the amount gold that is reported to be held in the Comex vaults (note: the warehouse reports compiled by the banks that control the Comex are never independently audited).

Today technically is first notice day for April gold contracts despite March 29th as the official designation. Any account with a long position that does not intend to take delivery naturally sells its long position in April contracts. Any account not funded to accommodate a delivery is liquidated by 5 p.m. the day before first notice. This dynamic contributes to the ease with which a paper raid on the gold price can be successfully implemented.

In all probability the price of gold (June gold basis) will likely not stay below $1300 for long. China’s demand has been picking up and India’s importation of gold is running quite heavy for this time of the year. Soon India will be entering a seasonal festival period and gold imports will increase even more. Today’s price hit will likely stimulate more buying from India on Friday.

Recession Fears Fading? ROFLMAO

The news headlines explained the sudden jump in the S&P futures this morning by stating that “recession fears had faded.”  Just like that. Overnight.  I guess the fact that the housing starts report showed a 9% sequential drop in housing starts last month and and a year-over-year 10% plunge means that the housing market is no longer considered part of the economy.

That report was followed by a highly negative March consumer confidence report which included that largest drop in the “present situation” index since 2008.  What’s stunning about this report is that consumer confidence usually is highly correlated with the directional movement of the S&P 500. Obviously this would have suggested that consumer confidence should be soaring.

I explained to my Short Seller Journal subscribers that, once it became obvious the Fed would eventually have to start cutting rates and resuming QE, the stock market might sell-off. I think that’s what we saw on Friday. The “tell-tale” is the inversion in the Treasury yield curve. It’s now inverted out to 7 years when measured between the 1-yr and 7-yr rate. On Friday early the spread between the 3-month T-Bill and the 10-yr Treasury yield inverted. This has occurred on six occasions over the last 50 years. Each time an “officially declared” recession followed lasting an average of 311 days.

The yield curve inversion is a very powerful signal that economy is in far worse shape than any Fed or Government official is willing to admit. the Treasury yield curve “discounts” economic growth expectations. An upward sloping yield curve is the sign that the bond market expects healthy economic growth and potential price inflation. An inverted curve is just the opposite. If you hear or read any analysis that “it’s different this time,” please ignore it. It’s not different.

The inverted yield curve is broadcasting a recession. For many households, this country has been in a recession since 2008. That’s why debt levels have soared as easy access to credit has enabled 80% of American households to maintain their standard of living. The yield curve is telling us that credit availability will tighten considerably and the recession will hit the rest of us. This is what Friday’s stock market was about, notwithstanding the overtly obvious intervention to keep the S&P 500 above the 2800 level on Monday and today.

Without a doubt, through the “magic” of “seasonal adjustments” imposed on monthly data we might get some statistically generated economic reports which will be construed by the propagandists as showing “green shoots.” Run, run as far away as possible from this analysis. The average household has debt bulging from every orifice. In fact, the entire U.S. economic system is bursting at the seams from an 8-year debt binge. It’s not a question of “if” the economy will collapse, it’s more a matter of “when.”

The U.S. Economy Is In Big Trouble

“You’ve really seen the limits of monetary and fiscal policy in its ability to extend out a long boom period.” – Josh Friedman, Co-Chairman of Canyon Partners (a “deep value,” credit-driven hedge fund)

The Fed’s abrupt policy reversal says it all. No more rate hikes (yes, one is “scheduled” for 2020 but that’s fake news) and the balance sheet run-off is being “tapered” but will stop in September. Do not be surprised if it ends sooner. Listening to Powell explain the decision or reading the statement released is a waste of time. The truth is reflected in the deed. The motive is an attempt to prevent the onset economic and financial chaos. It’s really as simple as that. See Occam’s Razor if you need an explanation.

As the market began to sell-off in March, the Fed’s FOMC foot soldiers began to discuss further easing of monetary policy and hinted at the possibility, if necessary, of introducing “radical” monetary policies. This references Bernanke’s speech ahead of the roll-out QE1. Before QE1 was implemented, Bernanke said that it was meant to be a temporary solution to an extreme crisis. Eight-and-a-half years and $4.5 trillion later, the Fed is going to end its balance sheet reduction program after little more than a 10% reversal of QE and it’s hinting at re-starting QE. Make no mistake, the 60 Minutes propaganda hit-job was a thinly veiled effort to prop up the stock market and instill confidence in the Fed’s policies.

Economic data is showing further negative divergence from the rally in the stock market. The Census Bureau finally released January new home sales, which showed a 6.9% drop from December. Remember, the data behind the report is seasonally adjusted and converted to an annualized rate. This theoretically removes the seasonal effects of lower home sales in December and January. The Census Bureau (questionably) revised December’s sales up to 652k SAAR from 621k SAAR. But January’s SAAR was still 2.3% below the original number reported. New home sales are tanking despite the fact that median sales price was 3.7% below January 2018 and inventory soared 18%.

LGI Homes reported that in January it deliveries declined year-over-year (and sequentially) and Toll Brothers reported a shocking 24% in new orders. None of the homebuilders are willing to give forward guidance.  LGI’s average sale price is well below $200k, so “affordability” and “supply” are not the problem (it’s the economy, stupid).

The upward revision to December’s new home sales report is questionable because it does not fit the mortgage purchase application data as reported in December. New homes sales are recorded when a contract is signed. 90% of all new construction homes are purchased with a mortgage. If purchase applications are dropping, it is 99% certain that new home sales are dropping. With the November number revised down 599k, and mortgage purchase applications falling almost every week in December, it’s 99% likely that new home sales at best were flat from November to December. In other words, the original Census Bureau guesstimate was probably closer to the truth.

The chart to the right shows the year-over-year change in the number of new homes (yr/yr change in the number of units as estimated by the Census Bureau) sold for each month. I added the downward sloping trend channel to help illustrate the general decline in new home sales. As you can see, the trend began declining in early 2015.

Recall that it was in January 2015 that Fannie Mae and Feddie Mac began reducing the qualification requirements for Government-backed “conforming” mortgages, starting with reducing the down payment requirement from 5% to 3%. For the next three years, the Government continued to lower this bar to expand the pool of potential homebuyers and reduce the monthly payment burden. This was on top of the Fed artificially taking interest rates down to all-time lows. In other words, the powers that be connected to the housing market and the policy-makers at the Fed and the Government knew that the housing market was growing weak and have gone to great lengths in an attempt to defer a housing market disaster. Short of making 0% down payments a standard feature of Government-guaranteed mortgage programs, I’m not sure what else can be done help put homebuyers into homes they can’t afford.

I do expect, at the very least, that we might see a “statistical” bounce in the numbers to show up over the couple of existing and new home sale reports (starting with February’s numbers). Both the NAR and the Government will likely “stretch” seasonal adjustments imposed on the data to squeeze out reports which show gains plus it looks like purchase mortgage applications may have bounced a bit in February and March, though the data was “choppy” (i.e. positive one week and negative the next).

E-commerce sales for Q4 reported last week showed a 2% annualized growth rate, down from 2.6% in Q3. Q3 was revised lower from the 3.1% originally reported. This partially explains why South Korea’s exports were down 19.1% last month, German industrial production was down 3.3%, China auto sales tanked 15% and Japan’s tool orders plummeted 29.3%. The global economy is at its weakest since the financial crisis.

It would be a mistake to believe that the U.S. is not contributing to this. The Empire State manufacturing survey index fell to 3.7 in March from 8.8 in February. Wall Street’s finest were looking for an index reading of 10. New orders are their weakest since May 2017. Like the Philly Fed survey index, this index has been in general downtrend since mid-2017. The downward slope of the trendline steepened starting around June 2018. Industrial production for February was said to have nudged up 0.1% from January. But this was attributable to a weather-related boost for utilities. The manufacturing index fell 0.4%. Wall Street was thinking both indices would rise 0.4%. Oops.

The economy is over-leveraged with debt at every level to an extreme and the Fed knows it. Economic activity is beginning  to head off of a cliff. The Fed knows that too. The Fed has access to much more in-depth, thorough and accurate data than is made available to the public. While it’s not obvious from its public posture, the Fed knows the system is in trouble. The Fed’s abrupt policy reversal is an act of admission. I would say the odds that the Fed starts printing money again before the end of 2019 is better than 50/50 now. The “smartest” money is moving quickly into cash. Corporate insiders are unloading shares at a record pace. It’s better to look stupid now than to be one a bagholder later.