Traffic Accident

Hats off to the Jorges

The performances of Spaniards Jorge Martin (Moto3) and Jorge Lorenzo (MotoGP) at the Austrian Grand Prix yesterday were nothing short of master classes.

Martin may have finished 3rd on the day but he rode with a broken left arm, operated on some 8 days ago. Talk about grit. The acceleration forces may not be huge on a Moto3 bike but the braking and cornering forces are. It must have pushed mind and body to the limit. Such is the will to win that pain took a pillion seat.

His main championship rival in the Moto3 class, Marco Bezzecchi doffed his cap to Martin after qualifying such is the respect he holds for such heroics. How demoralizing for the rest of the field to be trailing a guy with metal plates, stitches, swelling and muscular pain in this left arm?

As for Jorge Lorenzo, he rode as aggressively as CM has ever seen him. Lorenzo has generally been one of the riders everyone loves to hate. Cold with the media, never smiling at the camera, making an excuse for everything and detailing a littany of complaints when he was dusted up on track by the other riders. His 2015 world championship was one full of scandals including trying to weigh in on getting the race stewards to penalize his team mate and main rival Valentino Rossi so he could win it. So bad was the reaction that on winning the 2015 crown in Valencia, Spain an all Spanish crowd booed the Spanish rider as he received his trophy from the Spanish King. Instead of soaking up the accolades Lorenzo ran off the podium as quickly as possible. It was an ugly affair.

His first year at Ducati in 2017 showed he had lost none of those bad habits. His face was full of being shown up for a rider whose talents were not worth the €25 million shelled out for his services. It was eating him up. Then it all came together. His first victory on the Ducati GP18 in Mugello was the sweetest of his career no doubt. Not only did he prove his detractors wrong, he proved to himself that he could overcome all of the odds. All of a sudden he was smiling. Someone who had lost the weight of the world off his shoulders.

He has since lost the chip on his shoulder, often smiles at the camera and CM truly respects the 180 degree change. Three slices of humble pie and deepest apologies for writing Lorenzo off in joining the Bologna factory. He deserves everything he gets.

When the going gets tough, the tough get going.

Musk to be investigated by SEC over tweets

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CM has always thought that Elon Musk is the ultimate salesman. CM has also wrote that the biggest risk to being a short seller was then”cult” status of the company. On any rational investment grounds the stock is ridiculously priced but as the old adage goes, “the market can stay irrational longer than you can remain solvent!

Tesla is a car company that is worth more than GM, Ford & FiatChrysler combined. One that trades at 5x Daimler in valuation terms, a luxury competitor that is in the sweet spot of its product line up and rudely profitable.

Back in June, Musk bought $35mn worth of shares in Tesla. The whole idea that someone is willing to fork out $75bn on a whim seems somewhat implausible. Is it safe to assume that all of 100s of lawyers, bankers and brokers would need a little bit of time to prepare the necessary documentation to cement such a ridiculous sum? Or is money now just so free and easy that a billionaire deploys a vault full of cash loaded full of Zero Halliburtons into a private jet after a few phone calls?

SEC enforcement attorneys had already been gathering general information about Tesla’s public statements on manufacturing goals and sales targets. Now SEC attorneys are investigating whether his tweets about securing funding were factual.

CM is not accusing Musk of insider trading albeit as a matter of course the SEC should investigate when he knew about his mega financier. One wonders how it is that we know so little about the buyer, the term sheet, the question of shareholder approval and how “secure” it is? Taking it private will remove the lens of quarterly reporting but it doesn’t remove the fact of how dreadfully the company is run or how amateur production is. Even if public scrutiny is removed, the problems of profitability don’t disappear and the need for funds, credit ratings etc if he taps public markets for debt capital remain.

If Musk pulls it all off and the company becomes a roaring success then CM will gladly eat a whole humble pie and openly admit it was wrong.

As to the SEC investigation let’s hope it has learnt the lessons of its bumbling incompetency over Bernie Madoff and doesn’t miss anything that might be bleeding obvious.

Tesla Q2 – Simple Minds

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When Simple Minds wrote the lyrics to Promised you a miracle, never could they have imagined Elon Musk could have used them to present his earnings release:
The original lyrics:
Promised you a miracle
Belief is a beauty thing
Promises promises
As golden days break wondering
Chance as love takes a train
Summer breeze and brilliant light
Only love she sees
He controls on love
Love sails to a new life
Promised you a miracle
Belief is a beauty thing
Promises promises
As golden days break wondering
Only love she sees
He controls on love
Life throws a curve
Everything is possible
With promises
Everything is possible
Oh
 
I promised you a miracle
Belief is a beauty thing
Promises promises
As golden days break wondering
Chance reflects on them a while
Love screams so quietly
Slipping back on golden times
Breathing with sweet memories
I promised you a miracle
Belief is a beauty thing
Promises promises
As golden days break wondering
Only love she sees

Perhaps Tesla’s Q2 lyrics may have gone:

 

Promised you a miracle
Belief is a beauty thing
Promises promises
Model 3 customers left wondering
Ever more cashflow down the drain
Suppliers freeze as they’re $3bn light
Only delayed payables do they see
Yet he controls the bluff
Profitabilty sails to a distant life
Promised you a miracle
Credibility is a beauty thing
Promises promises
As the golden payday keeps wandering
Only trust he pleas
He loses controls on Twitter
Life throws a curve
Sledging Thai rescuers is possible
With promises
Everything is possible
Oh
I promised you a miracle
Belief is a beauty thing
Promises promises
As warranty provisions must take a hike
Investors reflect profits may take a while
Short sellers scream so quietly
Slipping back on golden times
Breathing with sweet memories
Banks were promised a profit miracle
Belief is a beauty thing
Promises promises
As targets keep fumbling
Only wait another quarter he says.
CM has said time again that Musk is a brilliant salesman. How he has managed to build a debt edifice worth more than GM, Ford & Fiat-Chrysler combined is a testament. Musk has continually missed delivery on so many promises that there is little stock in backing anything he says.
He championed $2bn in cash & equivalents but leaves out $5bn in accounts payble and accrued liabilities. The cash isn’t “net”
The company still reported $739mn negative free cash. While the rate may have slowed from Q1 it is shockingly high. Is it any wonder letters were sent to suppliers in an attempt to massage the figures to make the numbers look optically pretty.
Tesla wrote, “We aim to increase production to 10,000 Model 3s per week as fast as we can. We believe that the majority of Tesla’s production lines will be ready to produce at this rate by end of this year, but we will still have to increase capacity in certain places and we will need our suppliers to meet this as well. As a result, we expect to hit this rate sometime next year.
The problem with this statement shows the naivety of Musk’s lack of knowledge on mars production. Profitability isn’t sustained by cranking to 10k/week if demand won’t be there when it hits that milestone. There are already flip-a-Model 3 websites littered with early adopters hoping to cash in on the initial euphoria. Yet if new stock is coming out that fast, many are likely to cancel orders because there is no arbitrage opportunity.
Customer deposits fell $42mn on the quarter. Tesla noted non-reservation orders are outstripping reservation orders. If reservation orders are stagnating because or cancellations or deliveries that is not a bold claim worth much. The company suggests it is no longer taking reservations in US or Canada because current supply can meet it but deposits would still be required to hold a car at a showroom before final payment so the customer deposit line should reflect that.
Even when CM ran the most optimistic of scenarios for Tesla, valuations would be mere fractions of what the stock trades today. Yet investors overlook the tsunami of new product from competitors made by brands who have spent decades perfecting production and have access to far superior distribution networks.
More smoke and mirrors. Simple Minds are all that is needed to read through the lines. Nothing remotely impressive with these numbers.
In closing, when the company talks of the ability to power slide the Model 3 when it has faced so much criticism over deaths related to false beliefs in its autopilot system you wonder whether Musk ever listens to legal advice? Well If he can blame the families of crash death victims it is clear he thinks of customers and investors as nothing more than beta testers. Then again if he can promise them miracles he is ultimately the winner if they buy into golden days.

Harley-Davidson Shinjuku declares bankruptcy after revenues fall 85%. Changes ownership.

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Yahoo Japan reports Harley-Davidson Shinjuku, a central Tokyo dealer for the motorcycle brand has gone out of business after almost 70 years in the trade.  Established in August 1953 before Harley Davidson Japan became the domestic agency, it ran a parallel imports business of the iconic brand. In the fiscal year ended July 1992, the annual turnover was estimated to be about 2,426 million yen. However, as the motorcycle market contracted, annual sales in the fiscal year ended July 2017 fell 85% to about 376 million yen. Even after closing the Yokohama, Hachioji stores, losses continued every year.

Debt is approximately 146 million yen as of the end of July 2017. “Harley Davidson Shinjuku” was closed on July 11.

It has since reopened under new ownership. Customers of the dealership have been informed of the ownership change according to HD Japan. Harley had peak sales of 16,000 units in Japan and is likely to do around 9,500 units in 2018.

Pension blackhole widens

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CM has been saying for quite some time that the US public pension system is a runaway train running out of track. It seems Zerohedge today confirms many of those same trends. The ratcheting down of return targets by ridiculously small amounts because to actuarially mark-to-market to reality is too scary to contemplate.

To quote the article,

CalSTRS is making the bold move to drop its future goal to… 7%…And CalPERS is ratcheting down its return goals in steps to… wait for it, 7% by 2021.

with interest rates near their lowest levels in human history, it’s been difficult for these pensions to generate a suitable return without taking on more and more risk.

And that’s another big problem with pensions – their investment returns are totally unrealistic.

Most pension funds require a minimum annual return of about 8% a year to cover their future liabilities.

But that 8% is really difficult to generate today, especially if you’re buying bonds (which is the largest asset for most pensions). So pensions are allocating more capital to riskier assets like stocks and private equity.”

Tesla – Augmented Earnings Vehicle?

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Tesla is no longer a joke. It is a farce. CM has not been a fan for the following 30 reasons. The 31st has arrived although it ties in with point 4. Tesla is technically asking for suppliers to refund a portion of the monies they were paid since 2016 to the EV maker so it can post a profit which is borderline accounting manipulation in an attempt to give the impression of an ongoing concern. If suppliers willingly extend this “interest free loan/refund” back to Tesla then it is legit of course but it smells rancid and any investors worth their salt should be able to see through this disgraceful stunt. Is the idea that Tesla shares roof on the announcement of a profit? Then the company could raise capital on the basis of fictitious “earnings” which lowers the effective cost of capital if people are dumb enough to fund it? Will these auto makers get to claim a rebate when (if) it finds profitablity?

Elon Musk is the consummate salesman. He can’t be faulted for his brilliance in being able to sell the vision of a car business that is deeply indebted, unprofitable and still worth more than Ford, GM and Fiat Chrysler combined.

Yet we questioned his state of mind – joking about bankruptcy, lambasting the families over deaths caused by the failure of his autopilot which he sold as virtually foolproof. Then his brazen publicity stunt to rescue kids in Thailand with a device the rescue squad believed was useless caused him to call one of the brave team a “pedo”.

These are recurring signs of stress with the charismatic CEO. That the game of pretending to be a real bonafide car company is fast unraveling. Sure, he has done amazing things to open the eyes of incumbent car makers of a luxury EV market.  They are coming through in short order with countless  competitor variants with distribution chains to die for. Moreover with quality that Tesla can only dream of. Not building car shells half finished and counting them as completed like Micheal Keaton’s “Working Class Man”.

The WSJ claims, “The auto maker’s memo, sent by a global supply manager, described the request as essential to Tesla’s continued operation and characterized it as an investment in the car company to continue the long-term growth between both players….Tesla declined to comment on the specific memo. But it confirmed it is seeking price reductions from suppliers for projects, some of which date back to 2016, and some of which haven’t been completed. The company called such requests a standard part of procurement negotiations to improve its competitive advantage, especially as it ramps up Model 3 production.

It is not the suppliers’ responsibility to pony up to help Tesla. They signed up on the basis of Musk’s vision at the time on being able to fulfill  his quest. His constant pushbacks, failures and delays have cost them a fortune already. Incumbent auto suppliers have long learnt lessons of teaming up with car makers that fail to deliver. That is why next to no recognized parts suppliers have signed up to the dreams of Musk.

He is without a doubt a visionary. A maverick and full credit for him to date in keeping the ideals of what will undoubtedly be a future trend. Unfortunately there are no short cuts in the auto industry. He is now painfully facing that reality. Experience is a hard teacher. You get the test first and the lesson afterwards.

Kindergarten level agenda behind Kinder Morgan buyout

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The Canadian Liberal government is paying $4.5bn for a 60yr old pipeline that was sold a decade ago to Kinder Morgan for $377m for an asset RBC values at $2.5bn. Another $7.5bn will be spent to “create jobs”. Apart from Canadian tax dollars going to fund a US company’s ability to expand and compete against Canadian suppliers, the real truth of Trudeau’s intentions probably don’t become any clearer when examining the sponsored summer jobs programme (where businesses could only get greenlighted if they shared “his” values). Yes, taxpayer dollars were approved by Trudeau to help activists protest a pipeline he’s just bought. This was an ad posted by Dogwood:

“As an organizing assistant through the Canada Summer Jobs program you will work directly with a Dogwood Provincial Organizer and the field organizing team to help our organizing network stop the Kinder Morgan pipeline and tanker project, as well as help us strengthen the public call for stronger, more accountable and transparent democracy.”

He has already been crashing in the polls. This will help to no end. So much for transparency.