(F) Archives - Page 7 of 8 - Mad Hedge Fund Trader

The Bull Case for Tesla

Talk about a bad news factory.

A short interest of 26% in Tesla (TSLA) stock has the tendency to manufacture bad news on a daily basis, whether it is true or not. It really has been a black swan a day.

This really is the most despised stock in the market. But you have to expect that when you are simultaneously disputing the auto, oil, dealer, and advertising industries, and doing it all union-free.

It also doesn’t help that Tesla is on the Department of Justice speed dial, undergoing no less than three investigations since the advent of the new administration. I can’t imagine why this is happening, given that the White House is now packed with oil industry executives.

That’s why I have been advising investors to buy the car and not the stock.

That is until now.

The truth is that all of this negativity is generating the best entry point for Tesla shares in two years.

In the meantime, the San Francisco Bay Area has become flooded with new Tesla 3’s. These are suddenly everywhere and soon will outnumber the ubiquitous Toyota Prius, until now the favorite of technology employees.

Q3 production of Tesla 3’s reached an eye-popping 55,840, up from 18,440 the previous quarter, taking Tesla’s total output to 80,000 including the model X.

That puts the company on target to reach 250,000 units in 2019. Tesla may be about to see something it has not witnessed in the company’s 15-year history: a real profit.

When I picked up my first Tesla 1 in 2010, chassis no. 125, I was all alone and treated like I was visiting royalty. The sales staff fawned all over me, offering me free hats, coffee mugs, and other tchotchke. Today, a staggering 200 people a day are gleefully driving their new wheels away from the Fremont factory, and another 200 getting them home-delivered by semis. Take a number and wait in line.

I have pinned down several of these drivers in parking lots, shopping malls, and trailheads to quiz them about their new ride and the answer is always the same. It’s a car from 20 years in the future, the best they have ever driven, and they will never buy another marque again.

Sounds pretty good, doesn’t it?

So I perked up the other day when I heard my old pal, legendary value investor Ron Baron, make the bull case for Tesla.

Ron has never done things by halves. He expects Tesla’s market capitalization to soar from $43 billion today to $1 trillion by 2030, a mere 12 years away. By then, Tesla should be generating $150 billion a year in profits. That implies that a 23-fold increase in the share price to $5,570 is ahead of us.

Half of this will be generated by the auto sales, while the other half will be produced by a burgeoning battery business. Tesla will easily become the largest auto manufacturer in the world within a few years.

Tesla will sell 10-15 million cars a year by 2030, compared to the current 300,000 annual rate.

It already is the one American auto maker with the highest US parts content, nearly 100%. It has also been one of the largest creators of new jobs over the past decade, right behind Amazon (AMZN), at some 46,000.

It’s really all about the math. Today, Tesla is building its Tesla 3’s at a cost of $28,000 apiece and selling them for $62,000. That’s the high price they have been realizing with extra options like four-wheel drive, 300-mile extended range batteries, painted wheels, and all the other bells and whistles. That gives you a $34,000 profit per vehicle.

Tesla’s “cheap” cars, the stripped-down rear wheel drive Tesla 3’s that will sell for a modest but world-beating $35,000 won’t be available until early 2019.

At this rate, the entire company will become profitable when it hits a production rate of 10,000 units a week compared to the current 6,000 units. They should achieve that sometime in early 2019.

Much has been made of drone video footage showing vast parking lots in Fremont, CA chock-a-block with shiny new Tesla 3’s. This creates a false sense of poor sales.

The actual fact is that Tesla has no dealer network. All of those parked cars have been sold and are awaiting owners to pick them up. The months it takes from payment to actual delivery gives Tesla a free float on billions of dollars. That’s worth a lot in a world of steadily rising interest rates.

Oh, and those notorious tents? They could withstand a category 5 hurricane. However, like everything else the company does, they’re revolutionary. They enable bypassed permitting procedures and can be built very quickly and cheaply.

How are things going with the competition? Not so good. The traditional internal combustion car industry has hundreds of billions of dollars tied up in engine factories that will eventually become worthless. They really are the 21^st century equivalent of buggy whip makers.

General Motors (GM), Ford (F), and Chrysler are executing slow motion roll out of electric cars in order to squeeze a few more years of use out of these legacy plants. Electric cars don’t use engines. That is putting them ever further behind.

This is what the poor share performance of auto shares has been screaming at you all year despite one of the strongest economies and stock markets in history. Yes, “peak Auto” is at hand.

The high-end brands like Mercedes, BMW, Audi, and Porsche that just entered the all-electric market are a decade behind Tesla in autonomous software and manufacturing processes. They all have huge, expensive dealer networks.

Let’s see how sales go after they suffer their first fatal crash. In the meantime, Tesla has run up 200 million miles worth of driving data.

Factory insiders say a speed-up of new Tesla orders is in the works. Orders placed before December 31, 2018 are entitled to a $7,500 federal tax credit. That drops to $3,750 in the first half of 2019, only $1,750 in the second half, and zero in 2020.

In the meantime, the oil industry is still collecting $55 billion a year of federal oil depletion allowances. Go figure.

At the same time, many states like California, far and away Tesla’s largest market (Texas is no. 2), are either maintaining or expanding their own electric car subsidies or gas guzzler penalties. It is $2,500 per car in California.

Ron Baron is not alone in his admiration of Tesla. Macquarie Research has just initiated coverage with a strong “BUY” and a target of $430 a share, up 70% from today’s close.

Next in the works will be a Tesla Model Y, a small four-wheel drive based on the Tesla 3 chassis. A Roadster relaunch comes next in 2022, a $250,000 super car that will be doubtless aimed at Arab sheiks and billionaire car collectors.

By then the entire product line will spell SEXY. See! Elon Musk does have a sense of humor after all!

My First S-1

RIP

My New Wheels

October 8, 2018

Diary, Newsletter, Summary

Global Market Comments
October 8, 2018
Fiat Lux

Featured Trade:

(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or GET ME OFF THIS ROLLER COASTER),
(THE INCREDIBLE FUTURE OF THE AUTOMOBILE),
(TSLA), (GM), (F), (TM)

The Unbelievable Future of the Automobile

Diary, Newsletter

It was the kind of dinner invitation I couldn’t turn down. What I learned was amazing.

I usually prefer to spend my evenings at home catching up on my research, calling customers, and plotting my next great Trade Alert.

So, it takes a lot to get me out of my cozy digs, especially given the recent incredible sunsets we have been getting.

Attending would be senior executives from Tesla (TSLA), General Motors (GM), and engineering professor from the University of California at Berkeley, and the California Air Resources Board.

With US car stocks going ballistic lately, I thought the event would be timely.

The dinner was hosted by a retired billionaire from Microsoft at the top of the Mark Hopkins Hotel in San Francisco.

The topic for discussion would be the very long-term future of the car industry.

I get invited to these things because the guests want to know how their views would fit in within a long-term global geopolitical/economic context, my own particular specialty.

I didn’t want to cramp anyone’s style so I kept my notebook under the table and scribbled away blindly, and illegibly. There’s no particular story line here.

I’ll just give you my random thoughts.

(GM) launched its second-generation Chevy Volt in 2015, and the customer response has been fantastic. The company is building a new $400 million battery plant on the east coast to help meet demand.

Some 60% of the buyers are coming from other automakers. It is fast becoming the new face of Chevy, like the Corvette Stingray and Camaro of years past.

The future is in a 200-mile range $30,000 car, and the Volt is that car, followed by the recently launched all electric Bolt.

Customers want to get away from oil and will only buy the products that accomplish that, be they hybrids or all electric.

He also mentioned that GM is launching an electric bike, which is already widespread in Europe. Not a big needle mover there.

The Tesla guy then proceeded to jump all over him, saying the Volt was “green washing” as usual, since it represents only a tiny fraction of the company’s sales.

GM had a vested interest in promoting the internal combustion engine, in which it had made a century long investment.

Its real focus can be seen in the giant new Suburban factory it was now building in Texas.

Mr. Tesla had driven from the south Bay with his S-1 entirely on autopilot.

The hardware has already been pre-installed in every S-1 produced since 2014, and all that is needed to make them self-driving is to execute a wireless overnight software upgrade.

What is truly amazing is that each car will have a learning program unique to the vehicle. If it misses a hard turn the first time, it will remember that turn and then make it perfectly every time from then on.

The Tesla person said that with the new Gigafactory the company will be on schedule for a tenfold ramp up in car production by 2020.

The $35,000 Tesla 3 that will make this possible will be offered in two wheel and four wheel drive variations. That will take them from 92,000 units a year to 500,000. Q3 2018 Production has already reached 53,000.

I asked him if this means that if your wife suspects you of cheating, will your Tesla rat you out. He answered, “Only if she is a coder.”

Then I wondered what would stop Tesla from selling your driving habits to marketers who would then make special offers from stores you prefer.

A previous Tesla experiment landed me a pair of Seven for All Mankind designer jeans for half off.

Tesla outsells every other luxury car of its class, including the Mercedes S class, the BMW Series 7, and the Audi 8.

Among the US car industry, only Ford and Tesla have never filed for bankruptcy. Tesla is the first new car manufacturer to succeed since Chrysler made its debut in 1928.

I asked about the S-1 maximum single charge range achieved by a driver.

An enthusiast in Norway managed to take one 800 miles on a flat track with no wind and perfect conditions. Wow! My drive from Lake Tahoe record of 400 miles doesn’t come close, and that involved a 7,000 foot decline from the High Sierra crest.

I also enquired about the Cambridge University battery breakthrough (click here for “Battery Breakthrough Promises Big Dividends.”

He said he was aware of it, but that it takes a long time to get a technology from the bench to the marketplace.

Just with their own in-house tinkering, Tesla is boosting battery ranges by 3-5% a year. The current S-1 gets a 305-mile range, compared to my four-year-old 255-mile range.

The Berkeley professor made some interesting observations about Millennials.

He said that while 75% of baby boomers got drivers licenses at 16, and 70% of Generation Xer’s did so by then, only 55% of Millennials took to the road at that age.

The rule of thumb for anything regarding Millennials is that they do everything late.

The gentleman from the Air Resources Board brought out some interesting facts.

More than 80% of all cancer-causing chemicals entering the atmosphere come from diesel engines, so a major effort will be made to cut back emissions from commercial trucks.

Look for the electric fleet coming to a neighborhood near you. Goodbye Volkswagen!

Workplace charging of employee cars will be the next big growth area for charging stations.

Half of all greenhouse gases derive from the burning of oil. The biggest savings in greenhouse gas emissions will come from a clampdown on the refining industry.

Think Koch Brothers.

I was amazed at his commitment to meet California’s goal of obtaining 50% of its energy from alternative sources by 2030.

The oil industry managed to exempt gasoline from the legislation, SB 350. But Governor Jerry Brown put it back in through an executive order.

The state is paying for the initial build-out of hydrogen refueling stations for the new $57,500 Toyota Mirai. A single tank will take the fuel cell vehicle 312 miles.

The state is making major investments in biofuel, planning to obtain 10% of the 50% target from this source.

During a slow moment, I asked a bleach blond trophy girlfriend sitting next to me of her interest in electric cars, expecting the worst.

To my surprise, she said that last summer, she drove an electric bike from New York to Los Angeles, towing a trailer with a solar panel cut in half to provide power.

The southern route avoided the high mountain ranges. I noticed she seemed unusually tanned, and it wasn’t from a can.

I was humbled. For once, I knew less about electric cars than anyone else in the room.

After the dinner, I went up to the Tesla executive and told him “Job well done.” I used to own one of the oldest S-1’s, number 125 off the assembly line, until it was totaled by a drunk driver on Christmas Eve.

I even tested to their safety claims.

Thank you, Tesla! You saved my life!

September 27, 2018

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Global Market Comments
September 27, 2018
Fiat Lux

Featured Trade:
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F), (TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (RSX), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL),
(TUESDAY, OCTOBER 16, 2018, MIAMI, FL,
GLOBAL STRATEGY LUNCHEON)

September 26, 2018

Diary, Newsletter, Summary

Global Market Comments
September 26, 2018
Fiat Lux

SPECIAL CAR ISSUE

Featured Trade:
(SAY GOODBYE TO THAT GAS GUZZLER),
(GM), (F), (TSLA), (GOOGL), (AAPL)

Say Goodbye to That Gas Guzzler

Diary, Newsletter, Research

Do you want to get in on the ground floor of another major new trend?

Well, here’s another new trend. Get this one right and your retirement funds should multiple like rabbits.

There have been some pretty amazing announcements by governments lately.

The United Kingdom has banned the use of gasoline-powered engines by 2040.

China is considering doing the same by 2035.

And now the State of California is targeting 100% alternative energy use by 2040. That’s only 22 years away.

The only unknown is what such a planned obsolescence program will look like, and how soon it will be implemented.

With 20% of the U.S. car market, don’t take the Golden State’s ruminations lightly.

California was the first state to require safety glass, seat belts, and catalytic converters, and the other 49 eventually had to follow. Some 20% of the market is just too big to ignore.

The death of the car is now upon us, and it is still early, very early.

This is a very big deal.

Earlier in my lifetime, car production directly and indirectly accounted for about one-third of the U.S. economy.

Much of the growth during our earlier Golden Ages, in the 1920s and the 1950s, were driven by a never-ending cycle of upgrades of our favorite form of transportation, and the countless ancillary products and services needed to support them. Tail fins, radios, and tons of chrome assured you always had to have the next new model.

Today, 253 million automobiles and trucks prowl America’s roads, about half the world’s total, with an average age of 11.4 years.

The demise of this crucial industry started during the 2008 crash, when (GM) and Chrysler (owned by Fiat) went bankrupt. Only more conservatively run, family owned Ford (F) survived on its own.

The government stepped in with massive bailouts. That was the cheaper option for the Feds, as the cost of benefits for an entire unemployed industry was far greater than the cost of the companies absorbed.

If it hadn’t done so, the auto industry would have decamped for a new base near the technology hubs in California, and today would be a decade closer to their futures than they are now.

And remember, the government made billions of dollars of profits from its brief foray into the auto industry as an investor. It was one of the best returns on investment in history in major size.

I’ll breakout the major directions the industry is now taking. Hint: It doesn’t have much to do with traditional metal bashing.

The Car as a Peripheral

The important thing about a car today is not the car, but the various doodads, doohickeys, gizmos, and gadgets they stick in them.

In this category you can include 24/7 4G wireless, full Internet access, mapping software, artificial intelligence, and learning programs.

(GM) is now installing more than 100 microprocessors in its vehicles to control and monitor various functions.

Good luck doing your own tune-ups.

The Car as a Service

When you think about it, automobile ownership is a wildly inefficient use of capital. It is usually a family’s second largest expense, after their home, running $30,000 to $80,000.

It then sits unused in garages or public parking for 96% to 98% of the day. Insurance, maintenance, and liability costs can be off the charts.

What if your car was used 24/7, as is machinery in well-run industrial plants? Your cost drops by 96% to 98% to the point where it is almost free.

The sharing economy is the way to accomplish this.

We are already seeing several start-ups attempting to achieve this in major U.S. cities, such as Zipcar, Car2Go, Getaround, RelayRides, and City CarShare.

What happens to conventional car companies when consumers shift from ownership to sharing? Demand plunges by 96% to 98%.

Perhaps that is why auto shares (GM), (F) have performed so abysmally this year relative to technology and the main market.

Self-Driving Technology

This is the hottest development area in the industry, with Apple (AAPL), Alphabet (GOOG), and the big European carmakers committing thousands of engineers.

Let’s say your car is now comfortably driving you to work, allowing you to read the morning papers and catch up on your email. Or maybe you’re lazy and would rather watch the season finale of Game of Thrones.

What else is possible?

How about if, instead of parking, your car drops you off, saving that exorbitant fee.

Then it joins Uber, picking up local riders and paying for its own way. It then dutifully returns to pick you up at your office when it’s time to go home.

Since the crash rate for computers is vastly lower than for humans, car insurance rates will collapse, gutting that industry.

Ditto for life insurance, as 35,000 people a year will no longer die in car crashes.

Half of all emergency room visits are the result of car accidents, so that business disappears too, dramatically shrinking health care costs in the process.

I have been letting my new Tesla S-1 drive me since last year, and I can assure you that the car can drive better than I can, especially at night.

What better way to get home after I have downed a bottle of Caymus cabernet at a city restaurant?

Driverless electric cars are totally silent, increasing the value of land near freeways.

Nor do they require much maintenance, as they have so few moving parts. Exit the car repair industry.

I could go on and on, but you get the general idea.

For more on the topic, please read “Test Driving Tesla's Self Driving Technology” by clicking here.

Virtual Reality

After 30 years of inadequate infrastructure budgets, trying to get into any America city center is a complete nightmare.

Only last week, a cattle truck turned over on the Golden Gate Bridge, bringing traffic to a halt. Fortunately, a cowboy traveling to a nearby rodeo was able to unload his horse and lasso the errant critters (no, it wasn’t me!).

Even if you get into the city, you will be greeted by a $40 tab for a parking space. Hopefully, no one will smash your windows and steal your laptop (happened to me last year).

Why bother?

Thirty years ago, teleconferencing services pitched themselves as replacing the airplane.

Today, we are taking the next step, using Skype and GoToMeeting to conduct even local meetings, as we do at the Mad Hedge Fund Trader.

Virtual reality is clearly the next step, providing a 3D, 360 degree experience that makes you feel like you and your products are actually there.

Better to leave that car in the garage where it can get a top up on its charge. BART is cheaper anyway, when it runs.

New Materials

We are probably five years away from adopting the carbon fiber technology now used in the aircraft industry for mass-market cars. Carbon has one-tenth the weight of steel, with five times the strength.

The next great leap forward for electric cars won’t be through better batteries. It will come through a 70% reduction of the mass of a car, tripling ranges with existing technology.

San Francisco Becomes the Car Capital of the World

This will definitely NOT happen, as sky-high rents assure that the city by the bay will never attract large, labor-intensive industries.

Instead, the industry will develop much as the one for smartphones. The high value-added aspects, design and programming, will stay in California.

The assembly of the chassis, the body, and the rest of the vehicle will be best done in low-cost, tax-free states with a lot of land, such as Texas and Nevada.

What will happen to Detroit? It has already become a favored destination of new venture capital financial start-ups - the cost of offices and housing is virtually free.

Seems Alive to Me

September 4, 2018

Diary, Newsletter, Summary

Global Market Comments
September 4, 2018
Fiat Lux

Featured Trade:
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON GLOBAL STRATEGY LUNCHEON),
(DON’T MISS THE SEPTEMBER 5 GLOBAL STRATEGY WEBINAR),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
THE WAR WITH CANADA STARTS ON TUESDAY),
(MSFT), (VXX), (TLT), (AAPL), (KO), (GM), (F)

The Market Outlook for the Week Ahead, or The War with Canada Starts on Tuesday

Diary, Newsletter, Research

I have spent all weekend sitting by the phone, waiting for the call from Washington D.C. to re-activate my status as a Marine combat pilot.

Failure of the administration to reach a new NAFTA trade agreement by the Friday deadline makes such a conflict with Canada inevitable.

And while you may laugh at the prospect of an invasion from the North, the last time this happened Washington burned. You can still see the black scorch marks inside the White House today.

This is all a replay for me, when in 1991, I enjoyed an all-expenses paid vacation courtesy of Uncle Sam. That’s when I spent a year shuttling American fighter pilots from RAF Lakenheath to forward bases at Ramstein, Aviano, Cyprus, and Dharan, Saudi Arabia.

It may seem unlikely that our nation’s military would require the services of a decrepit 66-year-old. However, in my last conflict I ran into another draftee who was then 66. It seems that the Air Force then had a lot of F-111 fighter bombers left over from Vietnam that no one knew how to fly.

That’s the great thing about the military. It never throws anything away. Not even me. The life of our remaining B-52 Stratofortress bombers at their final retirement in 2050 will be 100 years.

Perhaps Canada will decide that discretion is the better part of valor, and simply wait for the World Trade Organization to declare the Trump tariffs illegal, which they obviously all are.

That would then force the administration to withdraw from the organization the U.S. created at the end of WWII to regulate fair trade and go rogue. But then what else is new?

And while there was immense media time devoted to the NAFTA talks, which only oversees trade with partners with around $2 trillion each, China, the 800-pound gorilla, is still lurking out there. It has a $12.2 trillion GDP and Trump is imposing tariffs on another $200 billion of their imports there today.

The corner that Trump has painted himself into is that he has made himself SO unpopular abroad, insulting virtually everyone but Russia, that no leader is willing to risk doing a deal with him lest they get kicked out of office.

I certainly felt this in Europe this summer where the discussion was all about Trump all of the time. When you insult a nation’s leader you insult everyone in that country. I haven’t received that kind of treatment since the Vietnam War was running hot and heavy in 1968.

I’ll tell you, I’d much rather be flying combat missions over enemy territory without a parachute than trading a market like we had last week. For months now, it has been utterly devoid of low risk/high return entry points for all asset classes.

It’s been a slow-motion melt-up virtually every day against the most horrific news backdrop imaginable. Such is the wonder of massive global excess liquidity. It Trumps everything.

NASDAQ topped 8,000, proving that if you aren’t loaded to the gills with technology stocks, as I have been pleading all year, you are out of your freaking mind. If you don’t own Apple, you are doubly screwed.

I doubt that such data is available, but I bet the illiterate and the uneducated have been beating more literate types in performance by a huge margin.

The unresponsiveness to news isn’t the only thing afflicting this market. As the summer coughs and sputters its way to a close, we enter September, notorious as the most horrific trading month of the year. And we are launching into it with the Mad Hedge Market Timing Index stuck in the 70s, overbought territory, for weeks now.

Blockbuster earnings, the principal impetus for rising share prices in 2018, are now firmly in the rearview mirror, and won’t make a reappearance for another month. Then they die completely in 2019.

Perhaps this is why my long volatility position in the (VXX) is doing moderately well, even though the indexes have been hitting new all-time highs, with the S&P 500 briefing kissing $292. I rather practice my golf swing rather than try to outtrade this market, even though I don’t play golf.

Other than NAFTA, there was little to trade off of last week. Apple (AAPL) shares continue to break new records, hitting an incredible $228, in front of their big iPhone launch this month. Trump announced he was freezing wages on 1 million-plus federal employees next year. That will solve their tax problems for sure.

Coca-Cola (KO) bought British owned Costa for $5 billion, where I regularly breakfast while traveling abroad, in the hopes that perhaps its 501st new drink launch this year will be successful.

Amazon (AMZN) is within sofa change of becoming the next $1 trillion market cap company, making the parents of founder Jeff Bezos the most successful angel investors in history, worth $30 billion.

U.S. auto sales are in free fall. Car company shares (GM), (F) continued their slide as they are pummeled on every side by administration economic policies. One has to ask the question of how long the American economy can survive after losing a major leg like this one. Home sales, another vital component, are also suddenly awful.

Trump attacked big tech. The market yawned.

With the Mad Hedge Market Timing Index at 71 and bounces around in the 70s all week, I am not inclined to reach for trades here. All three of my current positions are making money, my longs in Microsoft (MSFT) and volatility (VXX) and my short in the U.S. Treasury bond market (TLT).

August finally brought in a performance burst in the final days, leaving us with a respectable return of 2.13%. My 2018 year-to-date performance has clawed its way back up to 25.30% and my nine-year return appreciated to 303.48%. The Averaged Annualized Return stands at 34.35%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 28.59%.

This coming week housing statistics will give the most important insights on the state of the economy.

On Monday, September 3, there was a national holiday, Labor Day.

On Tuesday, September 4, at 9:45 AM the PMI Manufacturers Index is out. August Construction Spending is out at 10:00 AM.

On Wednesday, September 5 at 7:00 AM, we learn MBA Mortgage Applications for the previous week.

Thursday, September 6 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 3,000 last week to 213,000. Also announced at 9:45 AM are the August PMI Services Index.

On Friday, September 7 the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, the high point of my weekend was the funeral services for Senator John McCain. Boy, the Squids really know how to put on a ceremony. I suspect it may market a turning point for our broken American politics.

In the meantime, King Canute sits in his throne at the seashore ordering the tide not to rise.

Good luck and good trading.

August 10, 2018

Diary, Newsletter, Summary

Global Market Comments
August 10, 2018
Fiat Lux

Featured Trade:
(AUGUST 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TBT), (PIN), (ISRG), (EDIT), (MU), (LRCX), (NVDA),
(FXE), (FXA), (FXY), (BOTZ), (VALE), (TSLA), (AMZN),
(THE DEATH OF THE CAR),
(GM), (F), (TSLA), (GOOG), (AAPL)

The Death of the Car

Diary, Newsletter

One of the goals of the Diary of a Mad Hedge Fund Trader is to identify major changes in the global economy early enough to get investors into the impacted shares early.

The death of the car is one of those trends, and it is still early, very early.

This is a very big deal.

Earlier in my lifetime, car production directly and indirectly accounted for about one-third of the U.S. economy.

Much of the growth during our earlier Golden Ages, in the 1920s and the 1950s, were driven by a never-ending cycle of upgrades of our favorite form of transportation and the countless ancillary products and services needed to support them.

Today, 253 million automobiles and trucks prowl America's roads, about half the world's total, with an average age of 11.4 years.

The demise of this crucial industry started during the 2008 crash, when (GM) and Chrysler (owned by Fiat) went bankrupt. Only more conservatively run, family owned Ford (F) survived on its own.

The government stepped in with massive bailouts. That was the cheaper options for the Feds, as the cost of benefits for an entire unemployed industry was far greater than the cost of the companies absorbed.

If it hadn't done so, the auto industry would have decamped for a new base near the technology hub in California, and today would be a decade closer to their futures than they are now.

And remember, the government made billions of dollars of profits from its brief foray into the auto industry. It was one of the best returns on investment in history.

I'll breakout the major directions the industry is now taking. Hint: It doesn't have much to do with traditional metal bashing.

The Car as a Peripheral

The important thing about a car today is not the car, but the various doodads, doohickeys, gizmos, and gadgets they stick in them.

In this category you can include 24/7 4G wireless, full Internet access, mapping software, artificial intelligence, and learning programs. 5G will accelerate this functionality tenfold.

(GM) is now installing more than 100 microprocessors in its vehicles to control and monitor various functions.

Good luck doing your own tune-ups.

The Car as a Service

When you think about it, automobile ownership is a wildly inefficient use of capital. It is usually a family's second-largest expense, after their home, running $30,000-$80,000.

It then sits unused in garages or public parking for 96%-98% of the day. Insurance, maintenance, and liability costs can be off the charts.

What if your car was used 24/7, as is machinery in well-run industrial plants? Your cost drops by 96%-98% to the point where it is almost free.

The sharing economy is the way to accomplish this.

We are already seeing several start-ups in major U.S. cities attempting to achieve this such as Zipcar, Car2Go, Getaround, Turo (formerly RelayRides), and City CarShare.

What happens to conventional car companies when consumers shift from ownership to sharing? Demand plunges by 96%-98%.

Perhaps that is why auto shares (GM), (F) have performed so abysmally this year relative to technology and the main market.

Self-Driving Technology

This is the hottest development area in the industry, with Apple (AAPL), Alphabet (GOOG), and the big European car makers committing thousands of engineers.

Let's say your car is now comfortably driving you to work, allowing you to read the morning papers and catch up on your email. Or maybe you're lazy and would rather watch the season finale for Game of Thrones.

What else is possible?

How about if, instead of parking, your car drops you off, saving that exorbitant fee.

Then it joins Uber, picking up local riders and paying for its own way. It then dutifully returns to pick you up at your office when it's time to go home.

Since the crash rate for computers is vastly lower than for humans, car insurance rates will collapse, gutting that industry.

Ditto for life insurance, as 35,000 people a year will no longer die in car crashes.

Half of all emergency room visits are the result of car accidents, so that business disappears too, dramatically shrinking health care costs in the process.

I have been letting my new Tesla S-1 drive me since last year, and I can assure you that the car can drive better than I can, especially at night.

What better way to get home after I have downed a bottle of Caymus cabernet at a city restaurant?

Driverless electric cars are totally silent, increasing the value of land near freeways.

Nor do they require much maintenance, as they have so few moving parts. Exit the car repair industry.

I could go on and on, but you get the general idea.

For more on the topic, please read "Test Driving Tesla's Self Driving Technology" by clicking here.

Virtual Reality

After 30 years of inadequate infrastructure budgets, trying to get into any American city center is a complete nightmare.

Only last week, a cattle truck turned over on the Golden Gate Bridge, bringing traffic to a halt. Fortunately, a cowboy traveling to a nearby rodeo was able to unload his horse and lasso the errant critters (no, it wasn't me!).

Even if you get into the city, you will be greeted by a $40 tab for a parking space. Hopefully, no one will smash your windows and steal your laptop (happened to me last year).

Why bother?

Thirty years ago, teleconferencing services pitched themselves as replacing the airplane.

Today, we are taking the next step, using Skype and GoToMeeting to conduct even local meetings, as we do at the Mad Hedge Fund Trader.

Virtual reality is clearly the next step, providing a 3-D, 360-degree experience that makes you feel like you and your products are actually there.

Better to leave that car in the garage where it can get a top up on its charge. BART is cheaper anyway, when it runs.

New Materials

We are probably five years away from adopting the carbon fiber technology now used in the aircraft industry for mass-market cars. Carbon has one-tenth the weight of steel, with five times the strength.

The next great leap forward for electric cars won't be through better batteries. It will come through a 70% reduction of the mass of a car, tripling ranges with existing technology.

San Francisco Becomes the Car Capital of the World

This will definitely NOT happen, as sky-high rents assure that the city by the bay will never attract large, labor-intensive industries.

Instead, the industry will develop much as the one for smartphones. The high value-added aspects, design and programming, will stay in California.

The assembly of the chassis, the body, and the rest of the vehicle will be best done in low-cost, tax-free states with a lot of land, such as Texas and Nevada.

What will happen to Detroit? It has already become a favored destination of new venture capital financial start-ups. The cost of offices and housing is virtually free.