Virtue signaling fails again at the ballot box


No matter how dreadful the Liberals under Turnbull are at a federal level, South Australians realized that the 16 years of Labor in SA led them to the slowest growth, highest unemployment and most expensive electricity prices in the nation thanks to the loony renewables policy of the Weatherill government.  He ran a platform to double down on the failed policy that led to multiple state wide black outs. Common sense prevailed and he was rightly booted.

No amount of blowing up coal fired power stations or smug smiles while shaking hands with Elon Musk to make out as if wasting $560mn more of taxpayers money was intentional, could sway the hearts of the electorate.

The Libs gained a majority on its own right with 25 seats. Labor set to lose 5 seats to 18. The Greens lost more ground in SA, slipping over 2% to 6.6%. No seats. At the sharp edge of the wedge, a growing number of constituents don’t need the virtue signaling. They want sustainable jobs, sensible stewardship of their tax dollars and reliable, affordable electricity.

Whether the Libs can actually deliver is another question but Premier Weatherill’s flagrant failure came home to roost. However Turnbull mustn’t take these state victories as an endorsement for the coalition at the federal level. He’s still badly burnt toast.

The day Elon Musk gets asked by…


Elon Musk said in the FY2017 conference call today: “Super Bullish…What I find sort of interesting is that our competitors – the car industry thinks they’re really good at manufacturing. And actually they are quite good at manufacturing, but they just don’t realize just how much potential there is for improvement. It’s way more than they think…I went through this math I think on a prior earnings call, but like it sounds like some of the fastest car factories produce a car maybe every 25 seconds. That sounds fast. But if you think of a 5-meter long car, including gap, and a 4.5 meter car with a half meter gap or something, that’s only 0.2 meters per second. Like grandma with a walker can exceed the speed of the fastest production line we’re in, so really no that fast. Walking speed is one meter per second, so five times faster than the fastest production line on earth.”

Listening to commentary like this just shows how cavalier the processes at Tesla are. The day Tesla gets called in by other kings of industry for lessons on production techniques the comment will hold water.

Toyota, which has coined almost every manufacturing effficiency jargon over 50 years, was invited by Porsche to fix its problems in the 90s. Several years ago Toyota was called in to help Lockheed Martin streamline production of the F-35 Joint Strike Fighter because of the massive cost overruns. The day Boeing calls up Elon Musk for tips on how to belt out more 787s two slices of humble pie will be consumed immediately.

Seriously one has to question how this board can believe it has the potential to be worth more than all the other volume and luxury auto majors combined when they make such fictitious claims. Sounds like Sakamoto from Elpida promising endless dreams. Elpida went belly up because it failed to deliver. .

Tale of the gold coin chocolate & a warning for Tesla Disciples


It hadn’t really hit until going back to read the conditions of Musk’s new executive compensation package but the first thing that struck me was the risk of the old adage of paying too much attention to the share price. The collection of all 12 tranches for CEO Elon Musk only kicks in when his company hits $650bn in market cap. The first thing to pop in the head was that of Japanese mobile phone retailer Hikari Tsushin back during the tech bubble. The rather eccentric CEO Yasumitsu Shigeta had gold coin chocolates made embossed with “Hikari Tsushin: Target Market Cap Y100 trillion.” One could only conclude he believed in his own BS.

It was at that moment where the only thing that crossed the mind was ‘this spells trouble’. There were magazines like Forbes touting how Shigeta was one of the richest men in the world and analysts fell hook, line and sinker for this unrealistic dream forecasting he’d be #1 before long. The only rational conclusion for the Contrarian Marketplace was to tell them that “bet he won’t be in the top 100 next year.”  Low and behold the tech bubble collapsed and Hikari Tsushin – that believed it was worth 2x the market cap of then highest valued corporation in the world, General Electric – fell over 95%.

While Musk may not yet have printed target market cap $650bn gold coin chocolates, what the incentives are saying to the market is that his company needs to be worth more than Daimler, BMW, VW, GM, Ford, Toyota, Nissan, Honda, Renault, Fiat-Chrysler Ferrari and Porsche combined. Just read that last sentence again. Do investors honestly believe that Tesla which consistently misses and is going up against companies that have been in the game for decades, seen brutal cycles, invest multiples more in technology and forgotten more than they remembered will somehow all become slaves to a company which has no technological advantages whatsoever?

Once again, this compensation package screams of gold coin chocolates in mentality. Instead of running the business and letting the share price do the talking, the mindset is focused on launching convertibles into space and distracting investors from increasingly dreadful financial results which eventually must come full circle if the results continue to miss. Broader Tesla report here.

Tesla’s FY2017 – cashflow stunts bigger than a roadster in orbit


No beating around the bush. Tesla’s cash-flow situation resembles that of One.Tel in Australia before it became insolvent. Rocketing financing and investing cash-flow with troubled operating cash which in Tesla’s case was flattered by some accounting trickery.  The Q4 2017 earnings release spoke of fairies and magic pixie dust for the most part. Q1 deliveries to date look to undershoot.  Once again a promise to hit production of 2,500 Tesla Model 3s by the end of Q1 and 5,000 a week by end of Q2 2018 (i.e. 6 months away). Note that Tesla had about 860 undelivered Model 3 cars at the end of Q4. That is a high ratio given 1550 were shipped in Q4.

While the company claims a cash balance of $3.4bn which many will pop champagne corks over, Tesla has accrued liabilities, accounts payable and customer deposits totaling $4.975bn at quarter end. This also excludes the $608mn in extra ‘residual value guarantees’ on the books YoY.

The company expects to break even during the year. However with gross automotive margins about to suck up the Model 3 in larger numbers that will take some doing despite claims it can do 25% vs the existing line-up’s 18% range. As at January, Q1 sales in the US are at 2016 levels and European registrations are down around 14% in aggregate across Norway, Holland, Italy, Belgium, Sweden, Austria and Switzerland. Lots can change but it doesn’t read well to kick off 2018’s challenge to break even at an operating level. The Model 3 is on average two-thirds cheaper than the average selling price on existing products so to even hold margins constant will take the mother of all cost cutting all the meanwhile facing new competition over 2018 which will weigh on pricing.

Interesting within the operating cash-flow statement is a term “Changes in operating assets and liabilities,net of effect of business combinations” which shows a quarter on quarter swing of $746.8m pushing net operating cash to +$509mn achieving a new quarterly record. This was achieved mainly by improved collection of receivables (believable), inventory reduction of finished vehicles (were incomplete vehicles that left the factory to parking lots yet to be delivered due to a lack of parts counted?), improved working capital from the ramp of Model 3, and growth in customer deposits (this was only  $168m QoQ vs expectations of $400m) from Semi and Roadsters that were announced with fanfare during Q4. Cash burn appeared lower because the company included customer deposits for the upcoming Semi and Roadster in its operating CF. That is slightly deceiving because deposits aren’t supposed to be drawn from current operations. The Roadster is supposed to be ready by 2020. This seems odd.

Tesla wrote “Despite the delays that we experienced in our production ramp, Model 3 net reservations remained stable in Q4.” Strange there was no mention of progress on Roadster and Semi orders in Q4. Was the $250,000 deposit within 10 days for the Founder series Roadster a bit steep? Truck orders seem around 600-700 at this stage and at $5,000 a deposit, generously speaking $3,500,000 isn’t a swing. As mentioned earlier the +$168m in customer deposits could only reflect how poorly orders for those vehicles are tracking such is the need to avoid talking about them in the statement (surely something to crow about) other than projected performance stats.

Capital expenditures in 2018 are projected to be slightly more than 2017 according to the statement. Tesla also mentioned “quarterly operating income should turn sustainably positive at some point in 2018.” That is a hugely optimistic target for the company which has failed so many times to deliver on promises. As CM always argues, the ‘cult’ following of Tesla is a dangerous vixen which can keep the ‘dream’ floating in orbit when reality is that “Nevada, we have a problem”.

The market can stay irrational longer than you can stay solvent. The 3% bounce in the shares reflects that blind optimism. Our study shows that even if it made margins similar to mainstream makers it is grossly overvalued.

Tesla X review


Catching an Uber to Sai Kung in HK and happened to be picked up in a Tesla X. The driver has had it for 9 months and said he’s had many problems. I asked him whether he’d buy another Tesla and he said no chance. He wants a Mercedes Benz. “Everything is better”.

His comments-

”handling – there is no confidence”

”autopilot – never use and friend has crashed using it.”

”quality is poor”

”noises in wheel hubs”

”centre panel is good”

”big windows good”

From the back seat the ride is thrashy but with so much torque suspension needs to be relatively firmer to stop squatting.

I get the coolness of this car. Indeed Elon Musk deserves praise for innovation and waking the sleeping auto giants to the luxury end of EVs. Sadly waking these giants that have production nailed means they hold all the aces, not Tesla. Tesla’s full year earnings aren’t far away where we’ll get a picture of whether the dream can stay alive.

As for this driver Tesla hasn’t won long term customer loyalty.

Tesla – reports of only 345 deliveries of Model 3 in November


Seems that Tesla has only managed to make 345 Model 3s in November. A far cry from the promises to make 5,000 Model 3s every week by December. At the Q3 results the goal was pushed out til March 2018 at the earliest as “production hell” bites. Note that no single mainstream auto supplier is on Tesla’s deck which tells us how little faith they have in the company. Auto suppliers run on the smell of an oily rag and after so many bad experiences won’t accept dealing with auto makers who may jeopardize their own future. Recall how many auto suppliers almost went to the wall (many were in Chapter 11) after the tech bubble collapse at the turn of the century.

The other news is that Norway is ending Tesla subsidies and Germany has now disqualified Tesla Model S subsidies as the cars breach the €60,000 threshold. Finally a government that thinks it’s not advisable to give the well heeled tax breaks when it’s the battling insurance salesman Manfred from Bremen living paycheck to paycheck whose taxes to register his clapped out 1983 VW Golf diesel pay for it.

The shares have languished and even the hype of the new products and outrageous deposits has not converted into a ramp up. Q4 is likely to be a shocker at this rate. When will the faithful eventually pull the plug? Maybe Tesla should gamble the deposits on Bitcoin to see if they can lever cash flows that way?

Gold Coin vs Bitcoin – just go on a crypto blog and invite a fatwah by criticizing it

The Bitcoin debate rages again. I’ve been asked more times by friends about whether to buy Bitcoin in the last 3 months than I care to remember. This video is about as telling as it gets about understanding raw value. At the moment Bitcoin pricing is as random as a Lotto ball dispenser although only higher numbers are being drawn for now (despite the 20% flash crash yesterday, shows panic is a server outage away). My answer to them is I wouldn’t touch it with a barge pole but everyone’s risk is their own. I answered along the lines below.

As a contrarian investor, this video warms my heart. When everyone seems to love something it tends to be a sign that ‘greater fool theory’ is alive and kicking. The video shows a woman unwilling to trade a stick of gum for a 1oz gold coin. If there was ever a better example of mean reversion, this must be it. Mark Dice did a similar video with people asking if they wanted a Hershey’s chocolate bar or a silver bar. Everyone chose the Hershey’s! While I am sure the response on Wall Street would elicit a different response it shows how few people understand the value of barbarous old relics.

The biggest issue with Bitcoin or any other crypto is that it is mined in cyber space. Do you ever wonder why you need to update your Norton anti-virus software every other day? Yes because some criminals are phishing/hacking your data trying to rob you blind. That’s just the amateur cowboy stuff by the way.

Gold needs to be dug out of the ground with considerable effort. The thing that spooks me about crypto (without trying to sound conspiracy theorist) is that state actors (most top end computer science grads in China end up working in the country’s cyber warfare teams), hackers or criminal minds (did you know 70% of top end computer science grads in Russia end up working for the mob (directly or indirectly) the value of coins in the system could be instantaneously wiped out at the stroke of a key. We’ve had small hiccups ($280m) only last week. So as much as the ‘security’ of these crypto currencies is often sold as bulletproof, none of them are ‘cyberproof’. Just like your home software, crypto at every stage has to constantly update its protection to prevent vulnerabilities and it is naive to think it can keep a 100% safety record.

It only takes one serious hack to bring most if not all the crypto down as vulnerable. In order for Auric Goldfinger to crush prices in Gold he’d need to smelt lead bars and paint them, were any left over from the pail and brush used on Jill Masterson. Gold is one currency that governments often threaten to confiscate (India springs to mind). Imagine if North Korea turns Bitcoin into the state currency?

I have just been on a Bitcoin forum and the insults being hurled at disbelievers has all the hallmarks of Tesla share ownership. It is a religion. Not an investment. I was accused of having no idea on crypto to which I argued 90%+ of those that own it probably don’t either. So having owners in Bitcoin or other cryptos knowing a tiny fraction of the risks means they’ll stampede faster than the servers can process data should ‘bit hit the fan’. One crypto ‘expert’ tried to tell me that artwork has no value as it is not tradable. It is tradable, just illiquid. I argued that the latest sale of DaVinci’s artwork fetched $450mn or 45,000 bitcoin. Storage costs aside over the long run I’ll have a Leonardo thank you!

As Mark Twain said, ”It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

My assessment is that the fascination of those around me about Bitcoin suggests that many of the fan base are punters trading on the greed of others. It has no underlying core value other than those prepared to pay more for it. That indeed is the tenet of all investment but like most manias, the risk/reward ratio can turn on a dime (no pun intended). At some stage the fall out from crypto will be ugly. As financial pundits know

the market can stay irrational longer than you can stay solvent”