#thebigshort

Tesla: Catching a falling knife

Tesla is breaking down. So many discipled pundits are looking at the company stock falling into “good value” territory. Good value is always relative. Sadly buying Tesla now is catching a falling knife.

It reminds CM of a time when Fuji Film dominated flat screen TV TAC films. It held 40% market share. Yet the market was shrinking and new competitor products were able to combine two films in one, dispensing with the need for TAC altogether. Yet analysts would crow at 40%. CM said 40% of soon to be nothing will be nothing.

Tesla’s valuation at $180 is ridiculously high compared to other auto manufacturers. Tesla still misses the two most important ingredients to profitable car companies – production efficiency and distribution. It has neither the first and has chopped back on the last. Digital dealerships are just not feasible especially given the nightmare quality or Tesla cars.

Big money is dumping. T Rowe Price has exited. fidelity following suit. Musk’s musings now carry little weight. Promises of stupendous Q2 volumes and making cars with ridiculously short ranges for Canadians to get the benefit of subsidies smacks of desperation.

This company, if it could, is running on the smell of an oily rag. The inability to rally back up above $200 with any conviction is showing the rattled confidence of existing holders. It’s like finding out you’ve been given the employee of the month award from your boss and you’re the only staff member. It carries no significance.

CM holds to the $28 fair value price from the 2017 report. That is CM’s optimistic scenario. So much for funding secured at $420.

Manhattan property in a gully

Manhattan property seems to be in a gully according to Elliman R/E in Q1 2018. While a slightly better QoQ performance, average prices fell 8.4%YoY, price per square foot fell 18.5%YoY and the number of sales transactions fell 24.6%YoY. This was the lowest quarter total in 5 years and the biggest annual decline in 9 years. Absorption rates hit 8.4 months in Q1, +38%YoY. New federal tax laws, higher interest rates and the end of legacy pipeline contracts were factors. At the luxury end of town average price per sqft fell 20.6%YoY with absorption up 50%YoY to over 20 months. As the real estate agent and stripper said in The Big Short, “it is just a gully we are experiencing right now.

Deja vu?

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Interesting chart from ZeroHedge pointing out the similarities in two equity market corrections that we’ve seen in the past – 1929 and 1987 – vs today. Gluskin Sheff Chief Economist Dave Rosenberg tweeted at the start of March 2018,

Hmmm. Let’s see. Tariffs. Sharp bond selloff. Weak dollar policy. Massive twin deficits. New Fed Chairman. Cyclical inflationary pressures. Overvalued stock markets. Heightened volatility. Sounds eerily familiar (from someone who started his career on October 19th, 1987!).”

Several weeks ago CM wrote,

Perhaps the scariest claim in his report is a survey that showed 75% of asset managers have not experienced the tech bubble collapse in 2000. So their only reference point is one where central banks manipulated the outcome in 2007/8. S&P fell around 56% peak to trough.

“…Hickey cites an interview with Paul Tudor Jones who said that the new Fed Chairman Powell has a situation not unlike “General George Custer before the battle of the Little Bighorn” (aka Custer’s Last Stand). He spoke of $1.5 trillion in US Treasuries requiring refinancing this year. CM wrote that $8.4 trillion required refinancing in 4 years. In any event, with the Fed tapering (i.e. selling their bonds) couple with China and Japan feeling less willing to step up to the plate he conservatively sees 10yr rates hit 3.75% (now 2.8%) and 30 years rise above 4.5%. Now if we tally the $65 trillion public, private and corporate (worst average credit ratings in a decade) debt load in America and overlay that with a rising interest rate market things will get nasty. Not to mention the $9 trillion shortfall in public pensions…

Look at the state of delinquencies in consumer debt among all commercial banks. $36.4 billion or 1% of the $3.854 trillion in outstanding consumer debt, ex mortgages and student debt.

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Last week CM wrote on the blow up in credit card delinquency,

The St Louis Fed shows delinquency rates on credit cards among the smaller banks (above). Presumably the smaller banks have to chase less credit worthy customers because they lack the ultimate battleship marketing cannons of the bigger financial instititutions. We’re back at times worse than the highest levels seen during GFC. Among all banks, we are still away off the $40bn of delinqient credit card debts we’re back at levels higher than those before Lehman’s brought financial markets to a grinding halt.

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It looks as though index options look dirt cheap relative to other asset classes. Out of the money short dated put options are trading at cents in the dollar. CM has invested in these products in recent months. With a market looking sicker by the day, risk on has yet to rattle cages of the option markets. A lot of cheap pick up in buying put options providing an easy way to short the market. Gold is also waking up.

Tesla is trucking kidding itself

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Tesla has bagged 55 orders for the semi so far. Although it is no surprise that no major truck hauling companies have signed up. Funny that. To expect trucking companies who operate under strict cashflow constraints (afterall they’re businesses not wealthy consumers) to give Musk a $200,000 upfront deposit (aka interest free loan) per ‘founder series’ truck is to put in Tesla lexicon – ludicrous. Truck companies, as CM wrote in its 30 reasons why Tesla is likely to be a bug on a windshield, are conservative. They want to see the technology proven in the field before just forking over $150-200,000 and hoping for the best. Were the technology or charging infrastructure to come up short then the whole economic proposition would come unstuck.

The Tesla trucks are roughly 30% to 70% more expensive than diesel trucks which have up to triple the range on full tanks. Many new 2018 diesel models are available now at $120k vs Tesla’s $150k (300mi range) and $180k (500mi range).

If we used the $60,000 more expensive Tesla Semi can to recoup the difference then it will need to be driven 240,000 miles using the $.25/saving per mile vs diesel Tesla number. Some estimates suggest payback in 3-4 years.

One former trucking company planner wrote,

I was surprised when I saw this “two-year” payback period quoted by Musk last week and repeated on the website. Two years? Really? He had just gotten through showing us an operational cost savings of $.25 per mile over diesel.

Well if I am going to pay back the truck I need those savings to equal the purchase price in two years. Well $180,000 divided by $.25 is 720,000 miles or 360,000 miles per year. That is not even physically possible. A truck would have to drive non-stop for 24 hours a day, 365 days a year at an average speed of 41 mph. Subtract out recharging time of 30 minutes every six hours or two hours per day and four hours per day for loading and unloading and the truck must average 54.7 miles per hour for every mile driven. It is impossible to do.

My big trucks ran long trips moving from coast to coast or north to south. I pulled out my records just for the fun of it and my trucks averaged 13,000 miles per month in summer months and under 10,000 in winter months because of weather and tougher loading and unloading conditions. Most trucks ran about 120,000 miles per year maximum even with driver teams. This was due in many cases to operational time limits of over-sized loads (half hour before sunrise until half hour after sunset is mandatory in many states for safety reasons).“

Whether the new Tesla Roadster or Tesla Semi this new deposit scheme is actually more telling than the vehicles themselves. This can be none other than a cash grab interest free loans to keep the thing alive. I salute Musk for his pioneering spirit but playing with the big boys is never easier done than said. Can’t wait to see the cashflow numbers in Q4 reporting early next year. If we get a worsening of this chart beware.

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Perhaps we can also find some amusement in Tesla’s competitor (Nikola) tweets

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Playing with Financial Plutonium

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I am still dumbfounded by the level of complacency in financial markets. How  can there be any confidence in our financial system?  Reality is that confidence continues to wane. I mentioned a while back that the headline stock index in Europe has no financial stocks in it. Never in my history in financial markets have I witnessed this. It isn’t because other stocks have got bigger. Financials in Europe have shrunk to such irrelevant levels that they don’t make the cut. Argue all you want about FinTech revolutionizing banking as we know it however don’t dismiss that the core of financial markets resembles a rotting carcass with so little meat that even vultures are considering vegetarianism so slim are the pickings. If the financial sector is sick and it is what greases the economy beware this signal.

One thing that hasn’t changed is the arrogance of the banks. Deutsche proudly protesting that the DoJ’s $14bn fine is just a “starting point” all the while its shares dwindle at all time lows.  Europe’s most powerful bank 1/3rd the size of Australia’s NAB. I’m working on a report looking at the deterioration of financial profitability and market relevance.

All the while though I keep shouting from the rooftops like the tramp from Blazing Saddles and the bell chimes right as I try to warn of impending  global economic disaster.

“The world economy is dying (clang!)”

“what did he say?”

“I think he said the world economy is flying!”

“No, goddamnit!, I said the world economy is dying (clang!)”

You get the picture. What people still haven’t grasped is the velocity of money continues to slow rapidly. For every dollar pumped into the economy, smaller fractions of GDP are created. In Europe it takes €7 to create €1. In China it takes RMB8 to create RMB1. In the US it takes around $4.5. The more morphine that is pumped into the patient the less efficacy. The debt burden mounts to unsustainable levels. Asset bubbles abound. Central banks keep pushing on sweeping the damage under the carpet. Europe is at stall speed. France and Italy didn’t grow last quarter. The US stumbled into 1% territory while the previous quarter was revised to 0.8% – hardly cracking growth.

The most recent worrying red flag is Greenspan weighing into the central bank policy debate. If there was ever a tail-end Charlie behind the curve he is it. I look at the propaganda pushed by the White House in a self congratulatory tone. This idea that everything is fine. American wealth at all time highs and poverty at 50 year lows. The problem with such fiction is that Main Street is actually living the struggle. They are not theory. They are reality. Whether crushing pensioners with a lack of sensible low risk income products, or celebrating recent inflation through rent rises and healthcare costs is not to pat one’s back over. Real wages are falling, consumption is waning and life is getting tougher. Steeper Obamacare prices and higher rents don’t boost economic growth. This is bad inflation and most other items continue to struggle under the weight of chronic overcapacity. Hanjin Shipping woke us up to that sad fact.

It’s brutal out there but the Democrats talk of prosperity at the same time complaining at the lack of progress on welfare despite having their wise sage Obama at the helm for the past 8 years.

More misguided central bank policy continues in group think like fashion.  It is as if they are enriching financial plutonium to such dangerous levels that imminent detonation could occur. The experiment keeps going but the scale of the collateral damage is growing exponentially. Many central bankers know how bad things have got but pray they can leave their ivory towers and seek shelter before it blows up on their watch so they can evade direct responsibility.

For all of the pump priming, toxic asset buying and NIRP strategies of central bankers, there is one constant in all of this. Pain must eventually be taken to restore equilibrium. The longer we store up the gangrenous irradiated mess that has and is being created for almost two decades the bigger the scale of fall out.

So many are totally unprepared for the coming event. People will still argue that the most experienced and brightest minds work within these banks so we should back their collective wisdom but I’d bet money that most if not all have no idea about how the average Joe and Joanne works. Funny thing is the average Joe and Joanne are feeling the pain everyday as they struggle to get by. They’ve had enough.

I’m surprised the Democrats, the party that is supposed to favour the afflicted, continue to miss the obvious. Trump would never have seen the light of day had the establishment listened to their cries for help.

In closing, I feel the same vibes I did when I called the impending crisis that was GFC1. This time will be much worse.  Financial plutonium is too rich and reaching fissile levels. Discount everything coming from the authorities. Pure common sense tells us the numbers don’t match reality.

There will be no “I told you so!” moment for me. Who would want to bask in misery?

It ain’t what you don’t know that gets you into trouble…

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Better to sit down. We will be covering some pretty bleak conclusions in this report. The world’s central banks have hit stall speed. They have lost control and do not have enough altitude to recover. How bad can things get? There are two things at play here. One is economic (explicitly monetary) policy. The other is social reality (explicitly hardship). Both have become dysfunctional. Reckless central bank monetary expansion sold behind the banner of ‘nothing to see here’ has backfired. Money velocity (or the power of money) across the globe is plummeting to record lows. While the GFC was easily avoidable the post disaster mop up operation consists of printing our way out of the disastrous debt pile by inflating it away. Even negative interest rates leave inflation well below targets. Deflation still prevails. Poverty and post-GFC destitution has reached boiling point. When people feel robbed of their identity and increasingly their democracy we should not be surprised to see the rise of nationalism and non mainstream candidates and sadly violence, especially in Europe. This social disruption should not be ignored because the experimental financial engineering that was supposed to wiggle us from the bondage of moral hazard has had the complete opposite effect.

Here are 7 things to ponder;

  • A recent US Federal Reserve survey found that 47% of Americans couldn’t raise $400 in emergency cash were the need to arise. 5% unemployment rate belies financial difficulties.
  • A bank survey in Australia showed 50% of people wouldn’t be able to meet their financial obligations if unemployed for more than 3 months. Housing price to income ratio almost twice the level pre-GFC. Private debt: GDP ratio at 160%.Credit rating downgrade imminent.
  • 60% of ETF purchases in Japan and c. 100% of sovereign bond purchases are bought by the Bank of Japan which now owns 38% of outstanding government debt. 15 year Japanese government bonds now yield -0.004%. Japan’s move to negative rates has caused a run on sales ofmini-vaults as people look to store their own cash.
  • M2/M3 money velocity has hit all time lows in the US, ECB, Australia, China & Japan.
  • Italian banks non performing loans (NPLs) are approaching 20% and as high as 50% in the south of the country. The ECB is breaching their own covenants to hide the mess. Belgian Optima Bank has just been shut down for not being able to meet obligations. Many more?
  • Over 25% of those in the EU live below the poverty line and youth unemployment is c.25% with long term unemployment now 50%. In Greece those numbers are 36%, 58% and 72%.
  • China’s industrial sector among others shows clear signs of recording sales without much hope of being paid with receivables ballooning in some cases leaping to over 5 years of reported revenue pointing to a sharp uptick in corporate debt insolvency & NPLs to follow.