Wall Street Reacts To The Catastrophic Megatech Earnings… And Why There Is A Silver Lining
It’s been a terrible morning for the tech giants which reported yesterday, GOOGL, MSFT, TXN, all of which either missed or guided much weaker than expected. The results is this:
*ALPHABET FALLS 8% AT THE OPEN AFTER 3Q RESULTS DISAPPOINT
*MICROSOFT SINKS IN BIGGEST INTRADAY DROP SINCE MARCH 2020
*TEXAS INSTRUMENTS SLIDES 6.1% AT THE OPEN, MOST SINCE FEB. 3
Below we compile some of the most notable hot takes following the dismal earnings which started off the tech portion of earnings season on a decidedly wrong foot.
First Microsoft:
Microsoft shares tumbled after the software company reported its weakest quarterly sales growth in five years and gave a lackluster forecast for sales growth in its Azure cloud-computing services business. Analysts noted that Azure growth is expected to moderate, “elevating near-term concerns.” That echoed disappointing results from other industry giants, leading US tech stocks to tumble.
Here’s what analysts are saying
Piper Sandler (overweight, PT cut to $265 from $275)
FX headwinds and deteriorating macro conditions pressure outlook
Azure growth is expected to moderate, “elevating near-term concerns on competitive pricing and workload optimization efforts that could curb consumption patterns heading into a recession”
Jefferies (buy, PT cuts to $270 from $275)
Azure miss was due to a moderation in consumption across customer base and geographies
The personal computer markets deteriorated further in September
RBC Capital Markets (outperform, PT cut to $310 from $380)
Microsoft’s commercial outlook was mixed with Office 365 looking encouragingly resilient and Azure’s disappointing outlook
Morgan Stanley (buy, cuts PT to $307 from $325)
While investors were expecting some cyclical weakness, they might be surprised by the magnitude
Barclays (overweight, cuts PT to $296 from $310)
Results from Microsoft’s More Personal Computing and Productivity businesses “should calm investors,” though “not all was perfect, as Azure growth of 42% YoY in constant currency was slightly below consensus at 42.6% and gross margins came in slightly below”
Bloomberg Intelligence
“Microsoft’s sales growth of 16% in constant currency gives us confidence that tech spending is stable amid economic uncertainty”
* * *
Alphabet
Alphabet shares are also tumbling after the Google parent reported third-quarter revenue that was weaker than expected, reinforcing concerns about a slowdown in the ad market. Analysts also singled out a strong US dollar as a headwind.
Here’s what analysts are saying
Raymond James (outperform, PT to $120 from $143)
The soft results reflect difficult year-over-year comparisons and an “increasingly challenging macro environment”
“We are optimistic that margins can improve by later 2023”
Citi (buy, PT $120)
“The macro environment is likely to continue impacting the broader online advertising environment,” although “Alphabet remains one of the best positioned companies across the Internet sector”
Baird (outperform)
Most of the softness came from YouTube and Network, due to the sluggish performance in app installs, macro impact on video ads and some cannibalization from Shorts
Goldman Sachs (buy)
YouTube results were much weaker and “likely reflective of a mix of brand ad dollar volatility, revenue headwinds created by consumption mix to Shorts and one last quarter of tougher comps from direct response revenue growth last year”
Bloomberg Intelligence
“Alphabet’s weakness, particularly in its high- margin Google Network segment, shows the company isn’t immune to ad pricing”
Jefferies (buy, PT $130)
Ad revenue was weaker than expected, “likely due to FX and macro,” while Google Cloud was strong
Truist Securities (buy, PT $136)
“The top and bottom lines missed Street expectations,” with revenue pressured by a currency headwind
The miss “overshadows sustained momentum” in the US
* * *
Finally, Texas Instruments
Texas Instruments shares are down 6.1% on Wednesday, after the chipmaker’s fourth-quarter outlook signaled that the semiconductor industry’s slump is spreading beyond PCs and smartphones to the once-healthy industrial segment. KeyBanc analysts note that while chip softness broadens, the auto segment continues to hold up
Here’s what analysts are saying
KeyBanc Capital Markets (overweight, PT cut to $210 from $220)
Lowering guidance to be consistent with expectations as “a broader inventory correction” is commencing
Expect headwinds to persist over the next several quarters
Morgan Stanley (underweight, PT cut to $152 from $160)
TI remains more cautious than its analog peers
“The company’s sober outlook will be something of a negative outlier – but a broad-based inventory correction will eventually impact everyone”
Citi (neutral, PT cut to $155 from $165)
“TXN reported increasing cancellations as the downturn takes hold”
Truist Securities (hold, PT $172)
The outlook “represents a 12% sequential decline and is about 7% below both typical seasonality and consensus expectations”
Mizuho Securities
The outlook “is not a total shock” and “looks a bit worse on surface than reality,” writes Jordan Klein, a managing director and tech analyst
Given the stock’s year-to-date outperformance relative to chips, some investors may be looking to sell or short the stock
* * *
After the dismal earnings, all the three stocks were trading sharply lower, and dragging down their peer group, which early this morning was set to shed nearly $300 billion in market cap as the combined weight of just the three companies above amounts to more than 19% of the Nasdaq 100.
Despite the devastation unleashed by these three companies, there was a silver lining.
As Goldman’s Prime Brokerage notes, a possible bright spot is that institutional exposure in FAAMG has been reduced significantly and might soften some of the blow from these prints. Positioning data from the GS Prime book suggest a cautious stance on the mega caps (FAAMG) by hedge funds: indeed, the first chart below shows that the aggregate FAAMG long/short ratio on the Prime book now stands at ~6.3, a multi-year low. For perspective, the same metric was at ~18 in March and at 9.2 in mid-July.
Another note: FAAMG collectively now make up ~11% of the overall US Single Stock Net exposure on the Prime book, also a multi-year low. The same metric was at ~14% in March and at ~12% in mid-July.
Boeing Unexpectedly Reports Surge In Free Cash Flow, Despite Massive Cost Overruns
There was both good and bad news in Boeing’s latest Q3 earnings report. First the good news: after many years and many more quarters of relentless negative cash flow following its countless 737 and Dreamliner fiascoes, Boeing appears to have finally turned the corner, and in Q3 the company reported nearly $3 billion in FCF, almost 3x more than consensus estimates. This was only the second time Boeing has generated positive cash since Chief Executive Officer Dave Calhoun took the top job in early 2020.
The sold cash performance overshadowed more bad news from the Arlington-based company’s defense division, which racked up $2.8 billion in losses due to cost overruns on its KC-46 aerial tanker, Air Force One and other military contracts. This resulted
in Boeing reporting a whopping adjusted loss of $6.18 a share in the period, a huge miss to analyst expectations of slightly positive earnings, marking the company’s fifth consecutive earnings miss.
Revenue of $16 billion also fell short of the $17.7 billion expected by Wall Street.
Global Services revenue $4.43 billion, +5% y/y, estimate $4.53 billion
Boeing Capital revenue $52 million, estimate $62.9 million
Operating cash flow $3.19 billion vs. negative $262 million y/y, estimate $1.38 billion
Commercial airplanes oper loss $643 million, -7.2% y/y, estimate loss $195.6 million
Defense, space & security oper loss $2.80 billion vs. profit $436 million y/y, estimate profit $352.7 million
Global services oper earnings $733 million, +14% y/y, estimate $691.2 million
Boeing Capital operating earnings $23 million, estimate $21.9 million
Backlog $381 billion
The uneven results underscored Boeing’s slow progress in overcoming supplier strains and the financial toll from two 737 Max crashes. Still, with cash unexpectedly surging by rising jet deliveries, stronger receipts and a tax benefit, the company sparked investors’ hope that it’s finally emerging from one of the worst crises in its history.
After several quarters of relentless declines, Boeing’s quarter-end cash finally rose, pushing higher by almost $3 billion from $11.4BN to $14.3BN at Sept 30, while debt was unchanged. The airplan manufacturer said in presentation slides that it has “sufficient liquidity” and expects to generate positive FCF for the rest of 2022.
As Bloomberg reports, in an early-morning message to employees, CEO Calhoun touted the progress toward Boeing’s goal of achieving positive free cash flow this year and blamed the defense unit’s latest losses on “higher estimated manufacturing and supply-chain costs, as well as technical challenges” on a handful of military programs with fixed-price contracts.
“Turnarounds take time — and we have more work to do — but I am confident in our team and the actions we’re taking for the future,” Calhoun said.
Having mostly passed the hurricane from the 737-MAX fiasco, Boeing has been hammered with a series of cost overruns: the company had already recorded $1.5 billion in cost overruns on fixed-price defense contracts during the first half of this year as it dealt with shortages of workers with security clearance and other supplier stresses. Calhoun declared in April that the company would no longer bid near its estimated costs as it did last decade to secure high-profile contracts, from a military trainer to the Air Force One replacements now facing ballooning expenses.
Boeing is working to mitigate risks on the programs, Calhoun said. He touted other work underway to stabilize Boeing’s factories, like hiring 10,000 employees, expanding digital tools to track inventory, creating teams of experts to address industrywide shortages and ramping up its own parts-fabrication capacity to help offset supplier shortfalls.
After first dumping in kneejerk response to the bad news, then spiking on the good news, BA shares were little changed as of 9:00 a.m. before the start of regular trading. Boeing had declined 27% this year through Tuesday’s close.
Tens of millions of US citizens were given a “COVID-19 decree violation” score as a result of a data harvesting program conducted during the first lockdown by voter analytics firm PredictWise.
“These Covid-19 decree violation scores were calculated by analyzing nearly two billion global positioning system (GPS) pings to get “real-time, ultra-granular locations patterns.” People who were “on the go more often than their neighbors” were given a high Covid-19 decree violation score while those who mostly or always stayed at home were given a low Covid-19 decree violation score,” writes Reclaim the Net’s Tom Parker.
The data collected was then used by PredictWise to help Democrats target over 350,000 “COVID concerned” Republicans with campaign ads relating to virus prevention measures.
“PredictWise understood that there were potential pockets of voters to target with Covid-19 messaging and turned high-dimensional data covering over 100 million Americans into measures of adherence to Covid-19 restrictions during deep lockdown,” the company states in its white paper.
This information was used to help identify 40,000 “persuasion targets” for Senate candidate Mark Kelly, who was subsequently elected.
As we highlighted throughout the COVID lockdowns, chilling components of the surveillance grid were weaponized against ordinary people.
At one point, a senior government minister in Australia refused to rule out citizens being forced to wear electronic ankle bracelets, even if they were fully vaccinated, to make sure they were complying with home quarantine orders.
Conservative MP Jeremy Hunt, who was recently promoted to become Chancellor of the Exchequer, called for the government to use GPS tracking technology to ensure Brits were complying with COVID quarantine measures.
“Daily contact with those asked to self-isolate – using GPS tracking to monitor compliance if necessary as happens in Taiwan and Poland,” said Hunt.
Police in the UK also used surveillance drones to monitor and threaten people who dared to go out into remote countryside to walk their dogs.
In Australia, tracking drones were deployed to catch people who didn’t wear masks outside and to keep track of cars that traveled further than 5km from home.
Update(8:48ET): Russia has hailed the ‘success’ of Wednesday scheduled annual nuclear drills, after President Vladimir Putin oversaw the exercises from a command and control room.
RIA news agency quoted the Kremlin as saying, “Under the leadership of the Supreme Commander-in Chief of the Armed Forces Vladimir Putin, a training session was held with ground, sea and air strategic deterrence forces, during which practical launches of ballistic and cruise missiles took place.”
The defense ministry also published brief footage of some of the drills in action…
The Kremlin additionally said that “all missiles hit their targets in the drills,” and that the exercise was undertaken to “prepare for possible enemy nuclear attack against Russia,” according to TASS.
With NATO’s “Steadfast Noon” annual nuclear drills already ongoing in the North Sea region, and led by B-52 bombers from the United States, Russia has formally notified Washington it is kicking off nuclear exercises of its own.
Two US officials cited in a Tuesday CBS report say the notification from Moscow specified that the annual exercises are to include “launches of nuclear capable missiles starting Wednesday.”
The timing of the two sides holding “annual” nuclear exercises couldn’t be worse, with the Ukraine war now hitting the eight-month mark – and tit-for-tat false flag accusationscurrently being hurled between the warring parties.
Russia says Ukraine forces are preparing to unleash a “dirty bomb” which will be blamed on Kremlin forces, while Kiev has alleged the Russians are preparing a “terrorist act” using spent nuclear fuel from the occupied Zaporizhzhia nuclear power plant.
According to more on the announced Russian exercises via the new CBS reporting:
The annual exercise has been described by U.S. officials as “routine” around this time of year but nevertheless will take place against heightened Russian rhetoric about using nuclear weapons in Ukraine.
The Russian “Grom,” or Thunder nuclear exercise, typically involves large-scale maneuvers of strategic nuclear forces, including live missile launches, a senior military official said earlier this month. Officials have expected the annual exercise for several weeks but only recently received notification from Russia.
NATO Secretary General Jens Stoltenberg has meanwhile said the Western military alliance will closely “monitor” the Grom drills, saying it “will remain vigilant not least in light of the veiled nuclear threats and the dangerous nuclear rhetoric we have seen from the Russian side.”
The administration’s position is now:
1. There will be no diplomatic track.
2. Military aid will be virtually unlimited and go on forever.
3. Only Zelensky can decide when and how the war ends.
4. Even though (according to Biden) the war could escalate into Armageddon.
Also deeply alarming is the fact that negotiations seem a distant possibility at this point. The US position is that Ukraine must achieve “victory” – and that ceasefire dialogue with Russia is a decision for President Zelensky alone.
Russia’s military and the Pentagon just within the last days reaffirmed that they are keeping “open lines of communication” – precisely so that inadvertent escalation can be avoided.
After weeks of fixing the onshore yuan far stronger than the offshore yuan (to no effect), having barely adjusted the fix during the Party Congress, last night saw the fix slightly stronger (for the first time this week) and then offshore yuan leg dramatically higher, almost up to the fix…
Desk chatter suggested Chinese state-owned banks were actively selling dollars – no doubt under orders from party HQ – triggering stop-losses and sparking the biggest single-day gain in the offshore yuan in history…
It’s certainly not the first time we have seen the very visible hand of Beijing in the currency markets, but traders are not piling on to the trade for now…
“The PBOC is experienced in managing onshore-offshore spot basis and spot-fixing gap, by always choosing the right timing,” said Ju Wang, head of Greater China FX & Rates Strategy at BNP Paribas.
The offshore yuan had traded below the lower end of the PBOC’s peg band, likely another reason for Beijing’s sudden entrance…
Finally, not to be left out, Yen is rallying on speculation of yet another round of intervention…
Everyone caught by surprise that the infinite road actually has an end will face a bewildering transition.
The End of the “Growth” Road is upon us, though the consensus continues to hold fast to the endearing fantasy of infinite expansion of consumption.
This fantasy has been supported for decades by the financial expansion of debt, which enabled more spending which pushed consumption, earnings, taxes, etc. higher.
All the financial games are fun but “growth” boils down to an expansion of material consumption: more copper mined and turned into wire which is turned into new wind turbines, housing, vehicles, appliances, etc.
There are three problems with the infinite expansion of consumption “growth” paradigm.
1. Everyone in developed economies already has everything. The “solution” is planned obsolescence and the obsessive worship of marketing, which seeks to manipulate “consumers” into buying stuff of marginal utility that they don’t actually need with credit. This is sold as “fashion.”
The reality is many consumer goods are of far lower quality than previous generations of products and services. Some of this can be attributed to lower quality control and the relentless pressure of globalization to lower costs, but it’s also a systemic expansion of planned obsolescence: product cycles, low-quality components, designs intended to be unrepairable, etc. have all been optimized for the LandFill Economy where products that once lasted for decades are now dumped in the landfill after a few years of service. (As for recycling all the broken stuff–that’s another endearing fantasy.)
The purchase of “fashionable” replacements and marketing gimmicks are the only real driver of “growth” in developed economies. Life is not being enhanced with better quality or utility; it’s supposedly being enhanced by “new” stuff, the only benefit of which is that’s it’s “new.” The claimed benefits are marginal.
2. Those who could actually use more stuff don’t have any money. China’s unprecedented development enabled 500 million people who previously didn’t have the earnings or credit to buy vehicles, high-rise flats, etc. gained the income and credit to buy all the middle class goodies. This immense expansion of the global middle class boosted the global economy for 30 years.
But the rest of the developing world has a harder time duplicating the staggering flood of capital into China that funded its transition into “the workshop of the world.” Global corporations might be able to sell snacks and soda and cheap mobile phones to developing economies, but vehicles and high-rise flats–those require expansions of earnings, capital flows and credit that cannot be generated by financial magic.
3. The easy-to-get materials needed to build another billion vehicles, high-rise flats, etc. have been extracted. While the faithful await new technological miracles that will keep the “growth” system expanding forever, those tasked with actually building the new techno-wonders are looking at real-world limits and costs. Read these two twitter threads for a taste of reality:
COPPER redux: I live near one of the largest copper mines on earth (Kennecott Utah Copper – KUC). I helped manage a smaller copper mine for 8 years. Observation: Wind/Solar/Battery Proponents and ESG bean-counters are completely out of touch with copper mining and production.
The logic of “growth” is to consume more materials, not less. Consider the premier consumer product globally, the automobile. We’re constantly told the value of advancements in safety and comfort are the drivers of higher vehicle prices, but the reality is the advances that mattered occurred in the 1970s. Since then, vehicles have become much larger and heavier, consuming more resources for marginal gains.
My 1977 Honda Accord (built 45 years ago) was a considerably different vehicle from the 1962 Dodge Dart my Mom drove. It had far better fuel efficiency, far more power per cubic inch of engine displacement, and was far safer and more comfortable. The same can be said for the modest-sized 4-cylinder Toyota pickups we drove for work.
The modern versions of this car and truck are far larger, heavier and consume far more resources than previous models. If we scrape away the marketing mind-tricks we would conclude the 45-year old vehicles were far more environmentally sound than the bloated modern versions, and the supposed advances (rear cameras, bluetooth sound systems, etc.) are either marginal or annoyances.
I looked through a Toyota Prius manual a few years ago. The majority of the thick book addressed the convoluted, complex sound system. Issues such as why the starter battery went dead if the car wasn’t used constantly were unaddressed.
Electric vehicles and hybrids use far more of the planet’s resources than simple ICE (internal combustion engines) vehicles, and they don’t last as long as their heavy, costly batteries must be replaced long before the basic ICE vehicle reaches the end of its useful life. Only an inconsequential percentage of lithium-ion batteries are recycled, and regardless of rah-rah marketing claims to the contrary, this isn’t going to change.
The environmentally sound approach would be to make vehicles that were radically lighter, less powerful, more efficient and slower, vehicles that would get the equivalent of 200 miles per gallon of fuel (or electrical charge) and last 20 years without major overhauls, battery replacements, etc.
But the logic of marketing and debt expansion demands bigger, heavier, more complex, and more costly everything, and the replacement of everything sooner rather than later. Only if we consume and squander more real-world resources can we continue running the marketing / planned obsolescence / expanding debt machine toward the goal of infinite “growth.”
Marketing and debt are not substitutes for real-world limits. A great many people are enamored of techno-promises of limitless energy, etc., but they don’t look at the vast material consumption needed to build and maintain techno-wonders such as fusion reactors (incomprehensibly complex), nuclear reactors (huge, complex plants that take years to build) or the mining operations needed to dig up and process all the copper, uranium, bauxite, etc. that all these techno-wonders require in the real world.
We’ve reached the end of the “growth” road in which the expansion of marketing and debt magically increase the materials we can consume. Debt and marketing have their own limits, and our reliance on them has generated second-order effects few understand.
The road ends, and the trail beyond is narrow, rough and unmarked. Those who are deaf to marketing and debt and attuned to self-reliance will do just fine. Everyone caught by surprise that the infinite road actually has an end will face a bewildering transition.
SK Hynix Slashes CapEX After “Unprecedented” Plunge In Chip Demand
South Korean chipmaker SK Hynix Inc. provided a worsening outlook for the already slumping semiconductor market in its latest quarterly report, dashing all hopes for a quick rebound.
Hynix said it would slash capital expenditures by more than 50% from the current year due to an oversupply of memory chips. It reported that 2022 spending would be between $7 billion and $14 billion, meaning 2023 investments would be dramatically lower.
The move by Hynix is similar to the memory chip industry’s cuts made during the 2008-09 financial crisis. It may provide the understanding that the global economy is set for a vicious downturn next year.
“SK Hynix diagnosed that the semiconductor memory industry is facing an unprecedented deterioration in market conditions,” the company wrote in an earnings release, adding that “shipments of PCs and smartphone manufacturers, which are major buyers of memory chips, have decreased.”
Hynix warned about the steep decline in DRAM and NAND storage prices, falling by at least 20% last quarter. It will cut production gradually and expects elevated memory supply for the remainder of this year.
The South Korean chipmaker is one of the largest players in the memory space, trailing only Samsung Electronics Co.
Last month, Korea Economic Daily warned Samsung “lowered its semiconductor sales forecast for the second half of the year by more than 30%.” The newspaper attributed declining semiconductors demand “as the economy froze due to central bank rate hikes caused by global inflation.”
The paper warned: “As the semiconductor industry has entered a full-fledged ice age, there are many forecasts in the industry that the recession will continue until the first half of next year when semiconductor inventories are eliminated.”
Hebe Chen, an analyst at IG Markets Ltd., wrote Hynix’s massive capital expenditure cut is a “bold statement demonstrating their determination to confront the escalated uncertainties.”
“This CAPEX cut is a strong action that the market has been waiting for,” Greg Roh, head of technology research at HMC Investment & Securities, said after the earnings report. The move by the company could clear the memory glut by the second half of next year.
Global chip demand has rapidly slowed in recent quarters due to a plunge in shipments of PCs and smartphones as consumers and companies pull back on spending.
“I would say the current downturn is very severe for everyone involved in an unprecedented manner,” Noh Jong-won, the company’s chief marketing officer, said in an earnings call.
Besides Hynix, Texas Instruments Inc. also offered more gloom for the industry. It warned about a chip slowdown for personal devices and in the industrial-equipment market.
Other chip companies such as Taiwan Semiconductor Manufacturing Co., Intel Corp., and Nvidia Corp. have all warned about sliding demand this year.
The Philadelphia Stock Exchange Semiconductor Index has slid more than 40% since peaking in late 2021.
Hynix also warned that the Biden administration’s chip restrictions on China could force closures of at least one major plant — though it said that would be in an “extreme situation.”
We recently pointed out that prices of graphics processing units have also plunged in recent months. Perhaps, this fall could be a great time to build out a gaming trading computer for a fraction of the price compared to where prices were earlier this year.
“The world is in the middle of the first truly global energy crisis,” the executive director of the International Energy Agency, Fatih Birol, said today in Singapore.
IEA projections show global oil consumption growing by 1.7 million barrels a day in 2023. Russian crude will be needed to bridge the gap between demand and supply, Birol said.
As Reuters reports, a U.S. Treasury official told Reuters last week that it is not unreasonable to believe that up to 80% to 90% of Russian oil will continue to flow outside the price cap mechanism if Moscow seeks to flout it.
“I think this is good because the world still needs Russian oil to flow into the market for now. An 80%-90% is good and encouraging level in order to meet the demand,” Birol said.
The official went on to warn that natural gas and LNG markets would tighten further in 2023, with only 20 million tons of new liquefaction capacity scheduled to come online in that year, Reuters reported.
Speaking at the Singapore International Energy Week, the head of the IEA also said that while supply remains tight, demand for gas will continue to be strong, especially in Europe and possibly in China.
Birol’s warning comes amid expectations that this winter will not be the toughest for Europe.
Next winter is believed to be potentially much worse because, during the first half of this year, the EU could stock up on Russian pipeline gas, which is unlikely to come back next year, leaving the EU with a supply gap that other suppliers would be hard-pressed to fill.
Meanwhile, as many as 60 LNG tankers have turned into floating storage off European coasts as there is not enough regasification capacity on the continent to unload the cargo.
This, CNBC reports, is delaying some of the tankers’ return to the Gulf Coast to reload, and pushes gas inventories higher, Andrew Lipow from Lipow Oil Associates told the network.
“The wave of LNG tankers has overwhelmed the ability of the European regasification facilities to unload the cargoes in a timely manner,” Lipow said.
The shortage of LNG import capacity is aggravating Europe’s gas supply crisis but there is no quick solution to this problem except floating regasification units that Germany, for one, is seeking to deploy by the end of the year.
Price is also challenging, with LNG a lot costlier than the pipeline gas Europe was used to. Earlier this month, French president Emmanuel Macron slammed the U.S. for setting double standards in this respect, pointing to how gas cost much less on the U.S. market than on the international LNG market.
Who’s Freezing In Europe This Winter Due To Lack Of Money
Even before the outbreak of war in Ukraine and subsequent energy crisis in Europe, Germany’s Federal Statistics Office estimated that 2.6 million people in the country could not adequately heat their homes in 2021, for financial reasons.
On average, around seven percent of the EU population are too poor to heat their homes properly…
This problem is particularly pronounced in Bulgaria, where almost a quarter of the population is struggling.
At the other end of the spectrum is Finland, where only 1.3 percent have to freeze due to a lack of money.
While significantly fewer people were affected there in 2021 than in the previous year (9 percent), an increase is expected again in 2022 in view of the energy crisis resulting from the Russian attack on Ukraine.
Back in April 2020 during the LBMA-COMEX gold crisis of 2020, when gold prices on COMEX diverged nearly $100 higher than gold prices in London, and the LBMA and CME (COMEX) rushed out multiple combined statements trying to assure the market about “healthy gold stocks in New York and London” (while at the same time scrambling to send shipments of gold bars from London to New York), there appeared some intriguing correspondence between the CME and the Commodity Futures Trading Commission (CFTC).
Specifically, that correspondence (which was a submission by the COMEX to the CFTC certifying a doubling in ‘position limits’ on gold futures trading from 3000 contracts to 6000 contracts) contained the bombshell admission that 50% of the ‘Eligible’ gold in the COMEX-approved vaults in New York should be subtracted from ‘Deliverable Supply’ since that portion of gold in the ‘Eligible’ category is held by long-term investors and has nothing to do with COMEX gold futures trading. For background see the BullionStar article “COMEX Bombshell – Most eligible vaulted gold has nothing to do with COMEX” from 16 April 2020.
So instead of all the gold in the COMEX approved vaults (i.e. total of ‘Registered’ category and ‘Eligible’ category gold) being available to back COMEX gold futures trading, the CME was saying no, the estimated deliverable supply of gold is equal to ‘Registered’ + 0.5 (‘Eligible’).
To put the LBMA silver vault hemorrhage into context, during one month (September), LBMA London vaults lost more silver (45,166,000 troy ounces) than is in the entire COMEX Registered category (40,150,447 troy ounces). If silver buyers turn their attention to COMEX, then boom!💥 pic.twitter.com/iw1Ht06osZ
For anyone confused about the COMEX ‘Eligible’ and ‘Registered’ categories of inventories, join the club. Nearly everyone has been, at one time, confused by these terms. So here is a quick tutorial, straight from the horse’s mouth of the CME:
“Eligible metal is metal that is acceptable for delivery against the Contract (i.e., which meets the specifications and approved brands of the Contract) for which a warranthas notbeen issued.”
“Registered metal is eligible metal for which a warrant has been issued.”
“COMEX warrants are classified as electronic documents of title under the Uniform Commercial Code (UCC) and are issued by Exchange-approved COMEX depositories.
Each warrant is registered at the Exchange and linked to specific bars with identifiable and unique warrant numbers traceable to each COMEX depository.”
You might ask where I’m going with this? Where I’m going with this is Silver.
Because while COMEX operator (the CME) revealed its hand about the COMEX deliverable gold supply in April 2020 during the initial panic phase of the LBMA-COMEX gold crisis, it also turns out that the CME also revealed its hand about the COMEX deliverable silver supply during the initial panic phase of the LBMA-COMEX silver crisis, a.k.a. the beginning of the #SilverSqueeze frenzy in February 2021.
Just attended the annual LBMA (Gold) conference in Lisbon. Polling takeaways from delegates: they are mildly bearish Gold for the year ahead ($1830 by 2023s conference) but super bullish Silver ($28.30!) as the focus was on physical tightness driven by unprecedented demand
Silver Bombshell – Deliverable Supply with 50% Haircut
And what the COMEX operator CME revealed about deliverable silver in February 2021 was as equaling startling as what the CME revealed about deliverable gold in April 2020.
For whatever reason, this February 2021 CME submission (which had great timing by the CFTC and CME in being tee’d up just as #SilverSqueeze threatened to jettison the silver price a lot higher) seems to have gone under the radar until now and has not been mentioned anywhere as far as I can see, but it is critical in highlighting given the massive outflows of physical silver which we are currently seeing from both the LBMA vaults in London, and the COMEX Registered silver category in COMEX New York.
In its February 2021 submission, the CME included “an updated analysis of deliverable supply in connection with the increased position limits for the Silver Futures contract” which it attached as Appendix C to its submission, and which can be seen on the CME website here, and on the CFTC website here.
In this Appendix C, which has a full title of “Commodity Exchange, Inc. (“Comex”) Analysis Of Deliverable Supply Silver Futures”, the CME states that:
“the key component in estimating deliverable supply is the portion of typical depository stocks that could reasonably be considered to be readily available for delivery.”
And then goes on to quote the CFTC’s definition of deliverable supply as:
“the quantity of the commodity meeting the contract’s delivery specifications that can reasonably be expected to be readily available to short traders and saleable by long traders at its market value in normal cash marketing channels at the derivative contract’s delivery points during the specified delivery period, barring abnormal movement in interstate commerce.”
For COMEX silver, the 10 delivery points, or ‘approved silver depositories’, on the date the CME document was written (19 February 2021) were Brinks, CNT, Delaware Depository, HSBC Bank, IDS Delaware, JP Morgan Chase Bank, Malca-Amit, Manfra, Tordella & Brookes (MTB), Loomis, and Bank of Nova Scotia.
Like its Eligible Gold bombshell in the April 2020 document, the Eligible Silver bombshell in the CME’s February 2021 document stated that:
“The Exchange recognizes that silver is used as an investment vehicle and as such some silver stock may be held as a long-term investment.”
Because of this, states the February 2021 CME submission:
“the Exchange, in an effort to represent a conservative deliverable supply that may be readily available for delivery, made a determination to discount from its estimate of deliverable supply 50% of its reported eligible silver at this time.”
Running the Numbers – Applying 50% Haircut to COMEX reports
Taking the CME’s estimate of ‘Deliverable Silver Supply’ (which uses a 50% haircut for Eligible silver), and plugging in the data from the latest COMEX silver inventories report (dated 21 October 2022) we see the following.
COMEX Eligible and Total Silver with a 50% Haircut – Source Data CME.In terms of the overall COMEX total of Eligible silver reported on 21 October 2022, this was 265,956,072 ozs. The Registered silver inventory, which is at a 5 year low, was 38,134,406 ozs. The Eligible silver total (as reported by COMEX) was 265,956,073 ozs.
Raw data from COMEX – 21 October 2022
Registered silver inventory 38,134,406 ozs
Eligible silver inventory 265,956,073 ozs
Total silver inventory 304,090,479 ozs
COMEX Eligible with a 50% Haircut – 21 October 2022
Registered silver inventory 38,134,406 ozs
50% Eligible silver inventory 132,978,036 ozs
Total silver inventory 171,112,442 ozs
This 171.1 million ozs is equivalent to 34,222 COMEX ‘5000 oz’ silver contracts. And so an individual position limit of 3000 contracts (e.g. held by a bullion bank) represents a massive 11.4% of COMEX deliverable silver supply.
So will the CFTC now instruct CME to lower COMEX silver position limits again? So as to prevent single trading entities having too much influence over silver “price discovery”?
Tamping Down ‘amuch worse situation in the SILVER market’.
As an article on the legal website JD Supra, written by K&L Gates LLP and Michael G. Lee explains why it is so important to have realistic position limits. It also raises some questions on why the CFTC raised position limits for gold and silver in April 2020 and February 2021, respectively, and in doing so made it easier for ‘unduly controlling’ those markets:
“The CEA [Commodity Exchange Act] empowers the CFTC to limit the number of derivative contracts that can be owned by any one person or group in order to prevent derivatives from being used to exercise undue control on a market, which can cause sudden or unreasonable fluctuations in price.
Furthermore, through the Dodd-Frank Act, Congress charged the CFTC to update its regulations on position limits to prevent excessive speculation and manipulation while ensuring sufficient market liquidity for bona fide hedgers and protecting the price discovery process.”
Or will the CFTC maintain the 3000 contract position limit, so as to allow the silver price to be tamp down, as the CFTC’s chairman Rostin Behnam said in March 2021. And I quote:
“And in many respects, the resiliency and the market structure of the futures market were really able to TAMP DOWN what could have been a much worse situation in the SILVER market.”
See actual video segment here also:
Technically, the CFTC cannot lower position limits on silver, because the latest limit of 3000 has been hardcoded into the ‘Final Ruling’ on position limits for derivatives. The limit is actually “>3000″. See table on the CFTC website here.
But back to Eligible silver. why does the CME stop at a 50% discount for Eligible Silver? The CME February 2021 letter to the CFTC even concedes that:
“surveys conducted indicated no clear consensus as to how much silver is dedicated to long term investments.”
So, like in the case of COMEX gold, the COMEX operator CME does not know how much of the ‘eligible category’ silver in the COMEX approved vaults is held as ‘long term-investments’. Why does CME even assume that 50% of the eligible silver is part of deliverable supply? Why not say 40%, or 30%, or 25% is available of deliverable supply?
Why even include any eligible silver at all as deliverable supply? At the end of the day, these vaults of MTB (owned by MTS PAMP), Loomis, Brinks, Malca-Amit, HSBC, and JP Morgan – all in New York City – and Delaware Depository and IDS Delaware (both in Delaware), and CNT (in Massachusetts), are in the first instance precious metals vaults for their own clients who store their precious metals in these vaults, and in the second instance these vaults then also just happen to be COMEX-approved vaults.
If an investor purchased a 1000 troy ounce silver bar for investment purposes, and deposited this silver bar in one of the above vaults for long term storage, then it would, due to COMEX-approved vault rules, be then listed as part of COMEX eligible silver, even though the investor may never have even heard of COMEX and had no intention of trading on a futures exchange. That’s just a simple example.
But here is a real world example. Based on 21 October 2022 data, the iShares Silver Trust (SLV) – which is the world’s largest silver-backed ETF – states that it held 486,164,081.6 ozs of silver in the form of 1000 ozs silver bars. Of this total, 103,176,253 ozs of silver is held in the JP Morgan vault in New York, the same vault which is on the COMEX silver inventory report.
iShares Silver Trust (SLV): 103.176 mn ozs is held in the JP Morgan vault in New YorkAccording to the COMEX silver inventory report for 21 October 2022 (see calculations above in previous table), the JP Morgan vault reported 143,694,411 ozs of silver in the Eligible category. With 103,176,253 ozs of this total held by SLV, this only leaves 40,518,158 ozs in the Eligible category of JP Morgan’s vault. In other words, 71.8% of the silver reported by the JP Morgan vault as ‘Eligible’ is already held as a long-term investment by a silver ETF, the SLV, leaving only 28.3% not held by SLV.
Of this total, SLV’s 103.176 million ozs represents 38.8% of all the COMEX claimed Eligible supply. And this is just one example. So straight away we see the magnitude of the danger in assuming that ‘Eligible silver’ is somehow connected to COMEX.
During September, silver inventories held in the vaults of the London Bullion Market Association (LBMA) in London fell by a massive 4.93%, and are now at a new record low. LBMA silver holdings now total only 27,101 tonnes (871.3 mn ozs), and have fallen every month for 10 straight months.
Over on COMEX in New York, the Registered silver total is now only 1186 tonnes (38.13 mn ozs), a five year low. During September, the LBMA vaults in London lost 1404 tonnes (45.166 mn ozs) , which is more silver than in the whole COMEX Registered category.
Nicky Shiels, precious metals analyst for MKSPAMP, echoed that view when reporting back from the LBMA’s annual conference in Lisbon last week, when she said that conference delegates predicted a “super bullish Silver [price] ($28.30!)” in a year’s time “as the focus was on physical tightness driven by unprecedented demand“. See tweet above.
An important contributor to this ‘unprecedented demand’ for physical silver is India where silver imports have been zooming ahead. Silver imports into India totalled 1812 tonnes in July, 1149 tonnes in August and initial estimates for September are about 1700 tonnes. Up until August 2022 (8 months), India’s silver imports totalled 6517 tonnes. Adding September’s ~ 1700 tonnes, gives 8217 tonnes for 9 months of 2022 so far. Which if annualised this nearly 11,000 tonnes, which is one-third of the world’s annual silver supply.
Back on COMEX, the CME’s ‘published’ silver total (where they include 100% of Eligible) is 304.1 million ozs (9458 tonnes). That figure is the lowest level ‘COMEX Eligible + Registered silver’ since 19 June 2019. But that doesn’t even include the CME’s own guidance of applying a 50% haircut on the Eligible total. When this 50% haircut is applied, the total silver in the COMEX vaults is just 171 mn ozs.
People point to the COMEX Registered silver total and say that silver can move from the Eligible category to the Registered category. But that’s not entirely true and only applies to a portion of the Eligible category. More Eligible category silver could of course come into play and move to Registered. But only at a higher silver price. With silver demand firing on all cylinders, and with demand destinations such as India securing an ever higher percentage of annual silver supply, expect the silver market to provide plenty of fireworks in the months ahead.
