Month: October 2017

An eerily potent lesson for today

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In 2011 then Polish Central Bank Head Marek Belka spoke about why Eastern Europe understood austerity better than the West ever will. As our governments bloat budget deficits to avoid taking much needed reform and belt tightening he said of Western Europe….

“Because the people here still aren’t used to prosperity. Let me give you an example from my days at the International Monetary Fund. It was at a time when the Latvians had to implement a drastic austerity program, which caused consumer spending to drop by 25 percent in a year. I asked a Latvia negotiator how his country expected to survive this dramatic crisis. He said: What crisis? We had a crisis when the Soviets were sending us to Siberia. Here in Eastern Europe, many still remember why they were once poor, and they’re not afraid of reasonable reforms that are painful in the short term.”

Experience is a great teacher. It gives the test first and the lesson afterwards. Maybe time we prepare to be Latvians.

 

Tesla – 30 reasons it will likely end up a bug on a windshield

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Contrarian Marketplace ー Tesla – 30 Reasons it will likely be a bug on a windshield

Contrarian Marketplace Research (CMR) provides 30 valid reasons to show Tesla (TSLA) is richly valued. Institutional investors have heard many of the financial arguments of its debt position, subsidies, cash burn and other conventional metrics. What CMR does is give Tesla all the benefits of the doubt. Even when extended every courtesy based on Tesla’s own 2020 production target of 1,000,000 vehicles and ascribing the margins of luxury makers BMW Group (BMW GR) & Daimler (DAI GR) the shares are worth 42% less than they are today. When stacked up against the lower margin volume manufacturers, the shares are worth 83% less. There is no fuzzy math involved. It is merely looking through a different lens. We do not deny Tesla’s projected growth rates are superior to BMW or DAI but the risks appear to be amplifying in a way that exposes the weak flank of the cult that defines the EV maker- ‘production hell’.

Follow social media feeds and Tesla’s fans bathe in the cognitive dissonance of ownership and their charismatic visionary, CEO Elon Musk. No-one can fault Musk’s entrepreneurial sales skills yet his business is at the pointy end of playing in the major leagues of mass production, which he himself admitted 18 months ago was a ‘new’ challenge. Let us not kid ourselves. This is a skill that even Toyota, the undisputed king of manufacturing, a company that has coined pretty much every industrial efficiency jargon (JIT, Kanban, Kaizen) has taken 70 years to hone. It might have escaped most investors’ attention but Lockheed Martin called on Toyota to help refine the manufacturing processes of the over budget F-35 Joint Strike Fighter. If that is not a testament to the Japanese manufacturer’s brilliance Tesla is effectively Conor McGregor taking on Aichi’s version of Floyd Mayweather.

Yet Tesla’s stock has all the hallmarks of the pattern we have seen so many times – the hype and promise of disruptors like Ballard Power, GoPro and Blackberry which sadly ended up in the dustbin of history as reality dawned. Can investors honestly convince themselves that Tesla is worth 25x more than Fiat Chrysler (a company transformed) on a price to sales ratio? 10x Mercedes, which is in the sweet spot of its model cycle?

Conventional wisdom tells us this time is different for Tesla. Investors have been blinded by virtue signalling governments who are making bold claims about hard targets for EVs even though those making the promises are highly unlikely to even be in office by 2040. What has not dawned on many governments is that 4-5% of the tax revenue in most major economies comes from fuel excise. Fiscal budgets around the world make for far from pleasant viewing. Are they about to burn (no pun intended) such a constant tax source? Do investors forget how overly eager governments made such recklessly uncosted subsidies causing the private sector to over invest in renewable energy sending countless companies to the wall?

Let us not forget the subsidies directed at EVs. The irony of Tesla is that it is the EV of the well-heeled. So the taxes of the lawnmower man with a pick-up truck are going to pay for the Tesla owned by the client who pays his wages to cut the lawn. Then we need look no further than the hard evidence of virtue signalling owners who run the other way when the subsidies disappear.

To prove the theory of the recent thought bubbles made by policy makers, they are already getting urgent emails from energy suppliers on how the projections of EV sales will require huge investment in the grid. The UK electricity network is currently connected to systems in France, the Netherlands and Ireland through cables called interconnectors. The UK uses these to import or export electricity when it is most economical. Will this source be curtailed as nations are forced into self-imposed energy security?

So haphazard is the drive for EV legislation there are over 200 cities in Europe with different regulations. In the rush for cities to outdo one another this problem will only get worse. Getting two city councils to compromise is one thing but 200 or more across country lines? Without consistent regulations, it is hard to build EVs that can accommodate all the variance without boosting production costs. On top of that charging infrastructure is an issue. Japan is a good example. Its EV growth will be limited by elevator parking and in some suburban areas, where car lots are little more than a patch of dirt where owners are unlikely to install charging points. Charging and battery technology will keep improving but infrastructure harmonisation and ultimately who pays for the cost is far from decided. With governments making emotional rather than rational decisions, the only conclusion to be drawn is unchecked virtuous bingo which will end up having to be heavily compromised from the initial promises as always.

Then there are the auto makers. While they are all making politically correct statements about their commitments to go full EV, they do recognise that ultimately customers will decide their fate. A universal truth is that car makers do their best to promote their drivetrains as a performance differentiator to rivals. Moving to full EV removes that unique selling property. Volkswagen went out of its way to cheat the system which not only expressed their true feelings about man-made climate change but hidden within the $80bn investment is the 3 million EVs in 2042 would only be c.30% of VW’s total output today. Even Toyota said it would phase out internal combustion in the 2040s. Dec 31st, 2049 perhaps?

Speaking to the engineers of the auto suppliers at the 2017 Tokyo Motor Show, they do not share the fervour of policy makers either. It is not merely the roll out of infrastructure, sourcing battery materials from countries that have appalling human rights records (blood-cobalt?) but they know they must bet on the future. Signs are that the roll out will be way under baked.

While mean reversion is an obvious trade, the reality is that for all the auto makers kneeling at the altar of the EV gods, they are still atheists at heart. The best plays on the long side are those companies that happily play in either pond – EV or ICE. The best positioned makers are those who focus on cost effective weight reduction – the expansion of plastics replacing metal has already started and as autonomous vehicles take hold, the enhanced safety from that should drive its usage further. Daikyo Nishikawa (4246) and Toyoda Gosei (7282) are two plastics makers that should be best positioned to exploit those forking billions to outdo each other on tech widgets by providing low cost, effective solutions for OEMs. Amazing that for all of the high tech hits investors pray to discover, the dumb, analogue solution ends up being the true diamond in the rough!

Tesla – what is fair value? Not $320

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How do you value an auto company that has no earnings? Tesla still bleeds chips badly. Of course the $54bn market cap share price ($320/share) is forecasting a very bright future. High hopes for the Tesla Model 3 (despite the production disaster) remain. In the endeavour to find another way to cut the data, when one divides market capitalization by production rates some glaringly BIG differences emerge. So for each unit of production the weighted average of Mercedes & BMW Group would get an investor $31,000 worth of market cap. Tesla on the same measure is $637,500. If Tesla hits its 2020 target of 1,000,000 units production, even if we generously gave it the same margins as the German luxury makers, the shares would have a fair value of around $185 (or 42% lower than today). If put against the volume makers (Toyota, Honda, Nissan, GM, FCA etc) the fair value at 1,000,000 units ceteris paribus is (you’ll need to wait for that!)

CMR is mid way through a 30 point reason why Tesla is massively overrated after spending a full day yesterday with engineers (a very honest bunch) of the parts suppliers at the Tokyo Motor Show. Like I always thought – all the auto makers are pulling out all the stops with their PR departments to virtue signal. The parts suppliers do not have anywhere near the expectations of the OEMs which tells us all we need to know. How I see all the de ja vu of the time that governments were chucking cash on renewables and created such a disaster of misallocated capital that sent many to the wall.

Barnaby fought the law and the law won

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Well the High Court has ruled against the Deputy PM Barnaby Joyce. As a dual citizen he has lost his right to serve in parliament. Despite all the assurances from PM Turnbull that the High Court would rule in his favour, the government has lost its majority in parliament. Now the Turnbull Coalition is at the mercy of the independents for ‘confidence and supply’. The Libs must sack Turnbull. He is dead man walking. While Joyce and the other ministers and senators impacted by the ruling were not specifically Turnbull’s fault he helped trade the party unto such a precarious balance that it will be wiped out at the next election. No one needs an eggshell government. So much for the liberal media talking of Turnbull serving more terms than Sir Robert Menzies.  There is a certain sense of schadenfreude to see the end of the Turnbull era. One hallmarked by terrible judgement, duplicitous and delivery on next to nothing.

What we must not forget that Australia’s long held and hard earned reputation as the safest democracy in the Asian region continues to diminish. With the likely 6th PM in almost as many years we are a laughing stock. That is actually a travesty.

Trump defunds the UN again

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The media is eerily silent but VP Mike Pence made a speech to the In Defence of Christians (IDC) dinner last night where he said that the US would now provide its aid directly instead of via the UN. He said, “We will no longer rely on the United Nations alone to assist persecuted [Iraqi] Christians and minorities in the wake of genocide and the atrocities of terrorist groups…from now on we will provide aid directly

Now before liberals jump up and down persecuting the move as fueling theological fires, there can be no doubt that the UN is getting the message that it is a bloated, inefficient and biased group that needs to wake up and start being accountable rather than pay themselves fat tax free salaries and a whole host of perks on the tax dollars of member states. You can read more on the UN’s perks here.

Liberal Party of Australia – find a cure

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Margaret Thatcher once said, “such are our achievements that my employees have asked me to stay – twice!

The current crop of the once conservative Liberal Party of Australia (called the Turnbull Coalition) can not attest to that. How Michaelia Cash hasn’t resigned for misleading parliament over the recent AWU scandal is beyond me. Then we have Christopher Pyne saying if the boundaries in his constituency are changed then the other member must make way for him. If a $50bn submarine deal to buy his seat at the last election only just saw Pyne scrape home, what on God’s earth does he think he has done to earn his employees’ faith?

The Turnbull Coalition is a dud in every sense of the word and without question we know that Turnbull will decide to leave the ‘political stage’ in the face of defeat to (in his eyes) an inferior opponent. Such is the fragility of the ego PM’s that he’ll actually view his legacy as paved with countless successes. I am struggling to think of one.  Indeed were his employees happy with him they’d ask him to stay at the next election. Turnbull loves the limelight of being PM. Why would he give that up? Surely if he believes his own BS then he’d be the first to contest again in confidence that he would beat Shorten to The Lodge hands down.

Then we have Foreign Minister Julie Bishop who jets around the world cutting cheques to nearly anyone and pushed hard for the purchase of a seat at the UN on the Human Rights Council. Let us not forget that other parts of the UN thought Mugabe a worthy ambassador.

As a life long Liberal voter, there is no conscionable way for me to help elect these clowns until there has been a proper bleaching of all the stains within. There is hardly any whiff of sensibility within their ministerial ranks. Since Turnbull arrived he has divided a party, destroyed its foundations all the while his ministers have to resort to cheap shots and raids to expose the opposition as fraudsters rather than look within. Are their memories that short? It was only 10 years ago they were trying to smear Kevin Rudd for going to a strip club in New York! Who cares? Try running the country instead of trying to force your set of moral values!

It makes my blood boil to see the incompetence get shown on a daily basis. I will happily vote Liberal Party of Australia again once they come back to me. At present they are so far removed from the principles they once held that ‘Liberal’ is actually more aptly described as the derogatory term we give to the ‘left’ in America.

They need a proper drubbing at the next election to remind them how badly they have stuffed up. So caught in their own echo chamber, so on top of the electorate do they believe they really are they will find out that there is no way the ‘achievements of the government could in any way lead to the employees asking them to stay twice.

Israel & Saudi cooperation a surprise to Bloomberg News

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Bloomberg has written a puff piece wrapped in surprise on how the Saudi’s are likely to seek Israeli approval for a bridge which crosses from a new city Neom to Africa. There is one reason and one alone – Israel has a naval base at the Port of Eilat (in blue) at the southern tip of the country. If the height of the bridge is too low and surface naval ships can’t pass then the navy would be boxed in. Almost like ships in the Black Sea. So of course the Saudis won’t do it single handedly.

As much as people might think the Saudis hate Israel, they acknowledge the security Israel buys them vis-a-vis defending against a mutual enemy in the form of the Iranians who are active on SA’s southern border with Yemen. The Iranian Revolutionary Guard has been active in Yemen, Syria, Gaza, Lebanon and Iraq in recent decades supplying weapons and training. So sometimes mutual benefits (peace between the two countries) outweighs trying to  pull a fast one on them. It is likely the US State Department might send a friendly reminder of what is at stake geopolitically. In actual fact this discussion has been ongoing for a long time.