#ESG

What are banned but addicted vapers going to smoke now?

Image result for smoking many cigarettes

Tobacco companies fall foul of most ESG (environment/social/governance)/CSR (corporate social responsibility) measures. Good. Give that so much money is already loaded into corporations that focus on financial virtue signalling, tobacco companies remain forgotten. They look a great mean reversion trade.

British American Tobacco (BTI) is trading at $36 almost half the level of two years ago. Now at 1.02x book value and a 7.3% yield.

Philip Morris Int’l (PM) is at $72.60, down from $122.90 in 2017. A 6.4% dividend yield.

Imperial Brands (IMBBY) at $26.73 down from $55.55 in 2016. A 9.2% yield.

JT is less than half its 2016 number trading at $21.44. A 6.45% yield.

Philip Morris doesn’t have a vaping business but it appears with all these bans in NY etc that nicotine-addicted vapers will switch back to the old school.

Old habits die hard and cigarette smoking is pretty inelastic. Even in bonkers $40 a packet Australia, the ABS records men continued to be more likely than women to smoke daily (16.5% compared to 11.1%). Rates for both men and women have declined since 1995 when 27.3% of men and 20.3% of women smoked daily. However, these rates have remained similar since 2014-15 (16.9% for men and 12.1% for women). Therefore taxes haven’t killed off the habit.

So start underweighting the rubbish in your portfolio that has a penchant for banning plastic straws in the staff canteen to those corporates that allow yourself the opportunity to kill you!

Let’s not forget that governments aren’t going to terminate the monster taxes from this either, especially that so many national and state budgets around the world are looking seriously sick.

The depression we have to have

Image result for milton friedman quotes

In his 1967 presidential address to the American Economic Association, Nobel laureate economist Milton Friedman said, “… we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and as a result, in danger of preventing it from making the contribution that it is capable of making.

What we are witnessing today is not capitalism. While socialists around the world scream for equality and point to the evils of capitalism, the real truth is that they are shaking pitchforks at the political class who are experimenting with economic and monetary concoctions that absolutely defy the tenets of free markets. As my learned credit analyst and friend, Jonathan Rochford, rightly points out, central banks have applied “their monetary policy hammer to problems that need a screwdriver.

Never has there been so much manipulation to keep this sinking global ship afloat. Manipulation is the complete antithesis to capitalism.  Yet our leaders and central banks think firing more cheap credit tranquillizers will somehow get us out of this mess. IT. WILL. NOT.

BONDS

As of August 15th, 2019, the sum of negative-yielding debt exceeds $16.4 trillion. That is to say, 30% of outstanding government debt sits in this category. Every single government bond issued by Germany, The Netherlands, Finland and Denmark are now negative-yielding. Germany just announced a 30-yr auction with a zero-interest coupon.

Unfortunately, insurance companies and pension funds are large scale buyers of bonds and negative interest rates don’t exactly serve their purposes. Therefore the hunt for positive yield (that ticks the right credit rating boxes) means the pickings continue to get slimmer.

Put simply to buy a bond with a negative yield, means that the cost of the bond held to maturity is more than the sum of all the coupons due and the receipt of face value combined. It also says clearly that controlling the extent of the loss of one’s money is preferable to sticking to strategies in other asset classes (e.g. property, equities) where TINA (there is no alternative) is the rule of thumb.

CM believes that there is a far bigger issue investors should focus on is the return “of” their money, not the return “on” it.

Rochford continues,

Central banks have hoped that extraordinary monetary policy would kick start economic growth, but they have instead only created asset price growth. In applying their monetary policy hammer to problems that need a screwdriver they have created the preconditions for the next and possibly greater financial crisis. The outworkings of many years of malinvestment are now starting to show with increasing regularity.

Argentina’s heavily oversubscribed issuance of 100-year bonds in 2017 was considered insane by many debt market participants at the time. The crash to below 50% of face value this month and request for maturity extensions is no surprise for a country that has a long rap sheet of sovereign defaults. Greece’s ten-year bond yield below 2% is another example of sovereign debt insanity…

…There have been three regional bank failures in China in the last three months, likely an early warning of the bad debt crisis brewing in China’s banks and debt markets. Europe’s banks aren’t in much better shape, there’s still a cohort of weak banks in Germany, Greece, Italy and Spain that haven’t fixed their problems that first surfaced a decade ago. Deutsche Bank is both fundamentally weak and the world’s most systemically important bank, a highly dangerous combination.”

What about equity markets?

EQUITIES

We only need look at the number record number of IPOs in 2018 where over 80% launched with negative earnings, you know, just like what happened in 2000 when the tech bubble collapsed.

Have people paid attention to the fact that aggregate US after-tax corporate earnings have been FLAT since 2012? That is 7 long years of tracking sideways. Where is this economic miracle that is spoken of?

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The only reason the markets have continued to remain excited is the generous share buyback regimes among many corporates which have flattered earnings per share (EPS). The “E” hasn’t grown. It is just that “S” has fallen. Credit spreads between AAA and BBB rated corporate paper has been so narrow that over 50% of US corporates now have a BBB or worse credit rating. Now credit spreads between top and bottom investment-grade bonds remain ridiculously tight. At some stage, investors will demand an appropriate spread to account for market “risk.”

Axios noted that for 2019, IT companies are again on pace to spend the most on stock buybacks this year, as the total looks set to pass 2018’s $1.085 trillion record total. Pretty easy to keep markets in the clouds with cheap credit fuelling expensive buybacks. Harley-Davidson is another household name which suffers from strategy decay yet deploys more cash to share buybacks instead of revitalising its core franchise. Harley delinquencies are at a 9-yr high.

Companies like GE embarked on a $45bn share buyback program despite a balance sheet which still reveals considerable negative equity. GE was the largest company in the world in 2000 and now trades at 20% of that value almost 20 years later.

Should we ignore Harry Markopolos, who discovered the Bernie Madoff Ponzi scheme, when he points to the problems within GE? GE management can protest all they like but ultimately the company is not winning the argument if the share price is a barometer.

Valuations are at extreme levels. Beyond Meat trades at 100x revenues. Don’t get CM started on Tesla. A largely loss-making third rate automaker which is trading at outlandish premiums. The blind faith put in charge of a CEO that has lost over 100 senior management members.

Bank of America looked at 20 metrics to evaluate current market levels of the S&P500. 17 of them pointed to excess valuations relative to history including one metric that revealed S&P500 being 90% overvalued on a market cap to GDP ratio. Never mind.

Then witness the push for diversity nonsense inside corporate boardrooms. CM has always believed if a board is best suited to be run by all women based on background, skills and experience, then so be it. That is the best outcome for shareholders. However, to artificially set targets to morally preen will mean absolutely nothing if a sharp downturn exposes a soft underbelly of a lack of crisis management skills. Shareholders and retirees won’t be impressed.

It was laughable to hear superannuation funds ganging up on Harvey Norman last week for not having a diverse enough board. Even though Harvey Norman is thumping the competition which focuses too much on ESG/CSR, the shortcomings of our retirement managers are only too evident. Retirees want returns and their super managers should focus on that, rather than try to push companies to meet their ridiculous self-imposed investment restrictions. Retirees won’t be happy when their superannuation balances are decimated because fund managers wanted to appear socially acceptable at cocktail parties.

PROPERTY

It was only last month that Jyske Bank in Denmark started to offer negative interest mortgages. That is the bank pays interest to the mortgage holders. Of course, the bank is able to source credit below that rate to make a profit however net interest margins for the banks get squeezed globally. What next? Will people be able to sign up to a perpetual negative interest mortgage? Shall we expect a Japan-style multi-generational loan?

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The RBA’s latest chart pack shows net interest margins at the lowest levels for two decades. With the Hayne Banking Royal Commission likely to further crimp on lending growth, we are storing up huge pain in property markets despite the hope that August clearing rates signal a bottom in the short term. Yet more suckers lured in at the top of a shaky economy and financial sector.

Of course, central banks will dance to the tune that all is OK. Until it isn’t.

Don’t forget former US Treasury Secretary Hank Paulson, said “our financial institutions are strong” right before plugging $700bn worth of TARP money to save many of them from bankruptcy in 2008.

CM has previously investigated the Big 4 Aussie banks who have equity levels that are chronically low levels. Our major banks have such high exposure to mortgages that a severe downturn could potentially lead to part or whole nationalisation. Of course, between signalling the importance of factoring climate change, APRA assures us the stress tests ensure our financial institutions are safe.

Back in 2007, Sydney house prices were 8x income. In 2017 Demographia stated average housing (excluding apartment) prices were in the 13-14x range. The Australian Bureau of Statistics notes that 80% of people live in houses and 20% in apartments. Only Hong Kong at 19x beats Sydney for dizzy property prices. In 2019, expect that price/income rates remain at unsustainable levels.

In 2018, Australia’s GDP was around A$1.75 trillion. Our total lending by the banks was approximately $2.64 trillion which is 150% of GDP. At the height of the Japanese bubble, total bank lending as a whole only reached 106%. Mortgages alone in Australia are near as makes no difference 100% of GDP. Where there is smoke, there is fire.

At the height of the property bubble frenzy, Japanese real estate related lending comprised around 41.2% (A$2.5 trillion) of all loans outstanding. N.B. Australian bank mortgage loan books have swelled to 64% (A$1.8 trillion) of total loans.

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Sensing the bubble was getting out of control, the Bank of Japan went into a tightening rate cycle (from 2.5% to 6%) to contain it. Unfortunately, it led to an implosion in asset markets, most notably housing. From the peak in 1991/2 prices over the next two decades fell 75-80%. Banks were decimated.

In the following two decades, 181 Japanese banks, trust banks and credit unions went bust and the rest were either injected with public funds, forced into mergers or nationalized. The unravelling of asset prices was swift and sudden but the process to deal with it took decades because banks were reluctant to repossess properties for fear of having to mark the other properties (assets) on their balance sheets to current market values. Paying mere fractions of the loan were enough to justify not calling the debt bad. If banks were forced to reflect the truth of their financial health rather than use accounting trickery to keep the loans valued at the inflated levels the loans were made against they would quickly become insolvent. By the end of the crisis, disposal of non-performing loans (NPLs) among all financial institutions exceeded 90 trillion yen (A$1.1 trillion), or 17% of Japanese GDP at the time.

The lessons are no less disturbing for Australia. As a percentage of total loans outstanding in Australia, mortgages make up 65%. The next is daylight, followed by Norway at around 40%. US banks have cut overall property exposures and Japanese banks are now in the early teens. Post GFC, US banks have ratcheted back mortgage exposure. They have diversified their earnings through investment banking and other areas. That doesn’t let them off the hook mind you.

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Japanese banks have 90%+ funding from domestic deposits. Australia is around 60-70%. Our banks need to go shopping in global markets to get access to capital. Conditions for that can change on a dime. External shocks can see funding costs hit nose bleed levels which are passed onto consumers. When you see the press get into a frenzy over banks passing on more than the rate rises doled out by the RBA, they aren’t just being greedy – a large part is absorbing these higher wholesale funding costs.

Central banks need a mea culpa moment. We need to move away from manipulating interest rates to muddle through. It isn’t working. At all.

Rochford rightly points out,

Coming off the addiction to monetary policy is going to be painful, but it is the only sustainable course. It is likely that normalising monetary policy will result in a global recession, but this must be accepted as an unavoidable outcome given the disastrous policies of the past. Excessive monetary and fiscal stimulus has pulled consumption forward, the process of unwinding that obviously requires a level of consumption to be pushed backwards.”

Rochford is being conservative (no doubt due to his polite demeanour) in his assessment of a global recession. It is likely that this downturn will make the GFC of 2008 look like a picnic. CM thinks depression is the more apt term. 1929 not 2008. Central banks are rapidly losing what little confidence remains. If the RBA think QE will be a policy option, there is plenty of beta testing to show that it doesn’t work in the long run.

It is time to have the recession/depression we had to have to get the markets to clear. It will be excruciatingly painful but until we face facts, all the manipulation in the world will fail to keep capitalism from doing its job in the end. The longer we wait the worse it will get.

“It’s not what you don’t know that gets you into trouble…..it is what you know to be sure that just ain’t so! – Mark Twain.

Why Gerry Harvey’s comments on diversity obsessed companies speak more about our superannuation fund managers

Harvey Norman is currently valued at over $5.1bn, which is c.4x the combined value of Myer and David Jones. Good on Gerry Harvey for getting stuck into the stupidity of diversity quota obsessed boards. He is right. Why are certain funds requesting Harvey Norman hit these soft and irrelevant targets adopted by David Jones & Myer so they can invest under their self imposed ESG guidelines? Surely any company’s performance (assuming they aren’t illegally exploiting child labour) should be all that matters to shareholders? If it works without this gender balance nonsense why fight to change a winning formula?

If anyone is ever fortunate enough to meet Gerry Harvey’s wife, Katie Page (the CEO), it isn’t hard to work out that her gender wasn’t a selection criteria. Fistfuls of competence were. She gets it and not for one fleeting second could anyone ever get the idea that she plays up to the gender card. An utterly pleasant, generous and intelligent individual.

If Gerry Harvey & Katie Page thought Harvey Norman shareholders’ best interests were served by an all female board it would done so based on skill and ability to add value. The gender wouldn’t even be a factor.

Have you noticed why Harvey Norman hasn’t followed the group think pervading all the other companies who pulled their adverts off the Alan Jones Breakfast Show? Because Harvey Norman doesn’t pretend to judge the personal political beliefs of its customers. They only wish to provide the best possible goods that meet market demand, not chase imaginary pixies in the quest to morally preen. However it perfectly describes the decision making processes inside less competent boards when they blindly follow the herd rather than independently validate scenarios based on data, relevance and common sense. We now know over 40 companies didn’t.

The only diversity required is that of thought – not gender, race, sexual preference or religion. However don’t be surprised to see locals run Harvey Norman’s overseas businesses – driven by the fact they understand local conditions better than a helicoptered expat.

Maybe it is high time these superannuation funds actually decide to do some homework on the companies they invest in. To drop this focus on nanny-state driven diversity targets and actually look at the companies themselves as “businesses”.

CM guarantees that the companies that focus on this socially constructed diversity balance nonsense will severely underperform when tough times approach. Because decisive leadership in a crisis can be found with leaders like Katie Page, not with those companies that put everything else but ability as the key selection criteria.

The bigger concern down the line will be that these CSR/ESG and equality obsessed fund managers will have parked so much money in the wrong names that the retirements of millions of Aussies will be severely crimped by this muck. Let there be no mistake – super holders will not thank these woke investors for chasing irrelevant internal constructs over viable businesses when reality dawns that they have much less than they anticipated for retirement. Maybe that is what CM should have said to the ATO when he set up his SMSF.

Cate Faehrmann plays investor for a day

Investment managers have difficult jobs. They have to forecast a whole plethora of variables from global economic growth, currencies, commodity prices and micro level corporate industries. If governments can provide ironclad policy certainty, investment choices become relatively easier. Unfortunately, perfect information detracts from performance because things get priced almost instantaneously.

It might be nice that 415 funds all call for a ratification of Paris Climate Accord (which means nothing in practice as the US isn’t a signatory and its emissions have fallen while China is a signatory and emissions continue to rise) but truth be told,  it sounds what is commonly termed in financial circles as “talking one’s book.” NSW Greens MLC Cate Faehrmann pretends to understand finance in her latest piece.

While these 415 firms might represent $32 trillion in assets under management (AUM), the truth is not all of those funds are spoken for in terms of climate-related investments. Investment advisors by their very nature have very diverse client bases. They cover basic low-risk pension (i.e. stable income) funds all the way to riskier return profiles for clients that want more exposure to certain themes or countries. If clients aren’t interested in buying climate funds, the asset managers don’t gather fees. Pretty simple.

Much of the fund industry has focused on ESG (environment, social responsibility & governance) since its inception in 2005. ESG represents around $20 trillion of global AUM, or 25% of total professionally managed funds. Therefore the other 75% of monies are deployed without this in mind. In reality, this is done because investment managers must hunt for the best returns, not those which sacrifice profitability for virtue. If NAB offered you a 10% 1-yr deposit and no solar panels on the HQ roof and Westpac offered a 1% 1-yr deposit because it did, would you invest in the latter based on its ecomentalism?

Let’s take the world’s largest public pension fund (2 million members), California Public Employees’ Retirement System (CalPERS) which is a cosignatory to this demand for climate action. Apart from the fact that this $380bn fund has been so poorly managed (marked to market unfunded liabilities are c.US$1 trillion), its portfolio consists of widespread ownership of met coal, petroleum and other mining assets. It owns bonds in fossil-fuel producing nations such as Abu Dhabi, Qatar and Saudi Arabia as well as highly environmentally unfriendly aluminium smelters in the world’s biggest polluter, China. So there goes the rhetoric of “demanding” Paris is ratified, that we shift to a low carbon economy and we force companies to report their carbon commitments.

It is frightening that some members of our political class believe that investment managers which collaborate in groupthink are worthy of listening to. On the contrary, the performance of many must be sub par. It is a sad reality that 80% of large-cap fund managers fail to outperform the index on a regular basis. So praying for governments to backstop investments they deployed capital into shows more desperation than innovation.

Maybe we should think of Adani as a classic example of investment at work. While Annastacia Palaszczuk’s government is backflipping on the Adani Carmichael coal mine after the electoral drubbing handed out to federal colleagues, the voluntary infrastructure tax is a cynical way to try to make the project less financially viable. After 8 years of ridiculous and onerous environmental approvals, Adani probably think it only needs to wait til October 2020 when an election will wipe out Queensland Labor from government and the infrastructure tax will be repealed soon after.

CM has long held that the non-ESG names are the place to invest. Most of the auto-pilot, brain dead, virtue signalling group think money has been poured into ESG. All non-ESG companies care about is profitability, not focusing on all the soft cuddly things they do displayed on the corporate lobby TV screens on a loop. Sadly when markets inevitably implode, investors always seek safe havens to limit the damage. As so much money is collectively invested together, so the bigger the stampede to the relatively attractive values provided by the stocks that have been cast aside by “woke” investors.

Go woke, go broke

Yet another example of why CM has cancelled his FT subscription. Where is the critical reporting? This article by Pilita Clark doesn’t critique the ridiculous movement by corporates to virtue signal but falls in line with the stupidity.

Maybe the best metaphor for the woke corporation is parsley. It often looks nice as a garnish but 99.9% of us push it to the side of the plate and leave it to be thrown away.

Corporate hypocrisy is everywhere.

Take Josh Bayliss, CEO of Virgin Group. He says,

“It’s definitely true that right now every one of us should think hard about whether or not we need to take a flight.”

Why doesn’t he close down the airlines in the portfolio? Instead of waiting for his customers to grow a conscience and do the right thing why not force their choice? The obvious answer is that it’s hypocritical.

Airlines operate on about 70% capacity load factor break even so if Virgin flights end up being half full he’ll only end up spewing more or less the same CO2 per flight and go out of business. British Airways, EasyJet and Ryanair will welcome Virgin’s virtue signaling. Go woke, go broke.

Qantas has the world’s largest carbon offset program yet only 2% of passengers elect to pay. That’s the extent of the belief in global warming.

Blackrock’s chief Larry Fink said his asset manager needs to do more than just make money yet it only backed 10% of the climate related shareholder proposals. Why? Supposedly because they would crush profits. All talk, little walk.

BP surprisingly helped prevent a carbon tax it openly launched support for. A fossil fuel company trying to undermine a carbon tax? Wow. Who’d a thunk?

UK shadow chancellor John McDonnell has said Labour would seek to delist companies from the London Stock Exchange that didn’t meet their climate change commitments. In order to meet that, will that mean a child daycare company will be burnt at the stake for not brainwashing kindergarten kids? Will there be a minimum pot plant to child ratio?

How would regulations impact the myriad of different businesses that would trigger being dumped from the LSE? What standard would be applied? CM is betting corporates jus need to “file” a governance statement on climate change which no one will read. As long as 100% of companies file, nothing will happen.

Pretty easy to avoid too. Companies could list on Nasdaq or the Singapore exchange to avoid the regulations and still raise capital. Did you think of that Mr McDonnell? No because it is all about being woke and there are plenty of alternatives to dodge stupid policy. Capital is global.

Pilita Clark closes her article by saying,

“Yet the climate debate is shifting and I am willing to bet that companies failing to match their green claims with solid action face far greater risks than they ever have before.”

Like much of the climate religion, few hard facts are ever presented except the date we are all supposed to die. Even then that is an ever-shifting goal post. We can be assured that when 2028 arrives all of a sudden we’ll have another 12 years to do something. A bit like the joke where a patient asks his doctor how long he has to live and is given an extension so he can pay his bill.

The ever-growing tide of the “woke” corporation is going to thwart ingenuity and entrepreneurship. It is corporate suicide to pander to this nonsense. It is not for companies to bang on about their wonderful commitments. Customers and shareholders can decide for themselves. Maybe if companies listened to both groups they would find profits go up. People are growing sick and tired of being told what to do. How to think.

The world is littered with corporate wokeness backfiring. The irony is much of it is self-inflicted. By trying to create false images of virtue, the results have been disastrous.

P&G had to write off billions from its Gillette brand for the toxic masculinity campaign. Before the campaign Gillette was ranked 7th out of 45 health and grooming brands. After, rock bottom.

There is almost a wave of corporate fear twisted by a minority of social activists like Sleeping Giants which create false narratives about public perceptions of evil companies. There is a flip side.

Chick-fil-A was established by Southern Baptists. They don’t ram their Christian beliefs at all in the restaurants. Activists tried to boycott the fast food outlet because one of the directors personally didn’t support same-sex marriage. Guess what, store numbers have doubled and revenues tripled over the last decade.

Chick-fil-A states it’s mission is, “To glorify God by being a faithful steward of all that is entrusted to us. To have a positive influence on all who come in contact with Chick-fil-A.”

Chick-fil-A is notable by its closure on Sundays, Thanksgiving and Christmas. So people are well aware ofthis corporate backing its religious beliefs.

There is a difference between founding a company on certain beliefs and concocting them to ride a wave of hijacking social movements. Customers are aware of the difference.

Virgin Group can wax lyrical about its concerns in trying to save the planet but the only woke thing would be to shut down. Pushing the guilt back on its customers shows how hypocritical the airline is.

To be honest it gets tiring waiting in corporate lobbies watching flat panel TVs advertising all of the wonderful community things they do. 99% of the transaction with any corporate will be driven by the ability to deliver goods and services, not supporting tree planting. It is not to diminish charity or good intentions, rather to cut back on acting as though they’re angels to avoid being put on an imaginary naughty step that doesn’t exist.

Perhaps CM should recommend a portfolio of non-compliant ESG companies. When the market sells off, all the passive money in ESG compliant names should well underperform those that don’t. Perhaps an asset manager should establish an ETF with a basket of companies that just provide product or service rather than garnish it with lashings of corporate virtue. Here is betting it would be a contrarian winner.

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.