Mad Hedge Technology Letter
June 15, 2022
Fiat Lux
Featured Trade:
(HIGH STAKES)
(LCID), (RIVN), (TSLA)
Tag Archive for: (TSLA)
CEO of Tesla (TSLA) Elon Musk commented in an interview that he thought EV makers Rivian (RIVN) and Lucid (LCID) would go bankrupt.
Musk can’t seem to avoid media scrutiny.
Yet while there are indeed elements of truth in his words, we should take it with a grain of salt.
Tesla was once in the same position as RIVN and LCID.
Out of everyone in the world, Musk knows how it feels to be in their position now, and it most likely feels like the world caving in on you.
The pressure from shareholders can be intense, and defying gravity by creating new industries can be incredibly tedious.
What are my thoughts?
Give it some time, even though there isn’t much of it.
Musk’s timing for a sucker punch couldn’t be more cruel as we head into the Fed meeting where there is a 95% chance of a 75-basis point.
In an industry where to become profitable takes many years of losses, it hurts to hear that borrowing money will be at least .75% higher tomorrow.
This matters for Rivian and Lucid because they most likely will need to tap the debt market to keep existing.
The debt markets can either be your friend or foe as a startup.
Musk quipped that raising prices will reduce customers.
Talk about stating the obvious and yes, he is technically accurate, but I think that the comments need some color that wasn’t offered during the interview.
Rivian bled $1.5 billion last quarter, and it has significant negative gross margins and so do many unproven tech firms.
If it keeps hemorrhaging on electric vehicles it sells and delivers, it will go bankrupt unless it can raise more money, which is getting more expensive literally by the day.
Lucid is in a similar situation.
They can also sell a stake and release control over the operation which isn’t great either.
However, this is where you’d expect Rivian and Lucid to be at this stage in their evolution and Tesla was in a very similar situation around the same time.
Tesla was losing money and relied on raising more capital for a long time before it got its costs under control.
Costs are out of control because the global supply chain is in chaos, and Musk shouldn’t make it seem like he’s not dealing with the same external forces as Rivian and Lucid.
Tesla has also been raising the prices of their vehicles too so it’s not only Rivian.
Musk also can’t afford to piss off the Chinese communist party so I would say that each company has rather outsized idiosyncratic risk but in different shapes and forms.
Rivian has $16 billion in cash and even if that pile dwindles, it most likely will be enough gunpowder to get them where they need in the short run.
It’s easy for Musk to lash out from his ivory tower and he has every incentive for RIVN and Lucid to fail because every one of their customers potentially converts to Tesla.
Perhaps, he would also buy these bankrupt car companies for a discount if they did happen to topple.
Both Lucid and Rivian have good products that are sleek and what you would imagine from a new EV car.
Getting through the short-term to enjoy economies of scale is where they are trying to go and just like Tesla, it’s a hard slog with many infrastructure problems building new gigafactories along the way.
Oh, and don’t forget that not everybody is still in love with Tesla either.
There are still haters like vaccine entrepreneur Bill Gates who wagered $1 billion in put options against Tesla.
Many aren’t sold on Tesla the business yet even though the car is great.
In the short-term, I believe it’s a rate story and rising rates induced by Central Bank negligence doesn’t invite higher stock prices, nor if a recession hits next year.
On the other side, high oil prices are driving customers to EV purchases and once rate hikes are priced in later this year, EV stocks have a chance to rebound.
Global Market Comments
June 14, 2022
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON FOR JUNE 14-16)
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or WHAT HAPPENS WHEN YOUR BEST FRIEND BECOMES YOUR WORST ENEMY?)
(SPY), (TLT), (TSLA), (CCJ), (TGT), NVDA), (JPM), (BAC), (C)
Of course, I am talking about the Federal Reserve.
The Fed was the best friend of share owners, pressing interest rates lower from March 2009. That remained the case for 12 years until November 2021 when its notorious pivot took place, flipping overnight from an easing to a tightening posture.
It's actually worst than that. In fact, our nation’s central bank morphed overnight from the easiest monetary policy in history to the most aggressive tightening.
Stock markets have noticed, the Dow average giving up 20% in six months, and the final lows are probably not in yet.
I would bet money that you are expecting the worst-case scenario to happen. After all, the last serious selloff in 2008-2009 took the index down a heart-palpitating 52%.
What’s more, every oil shock of the last 50 years was followed by a recession, and we are clearly in one now. So, you are right to fear for your net worth and retirement security.
However, my work suggests that the best-case scenario will happen. Who is right, you or me?
You already know the answer.
Let me tell you what is already priced in the stock market: a Russian invasion of Ukraine, inflation at a 40-year high and climbing, a doubling of mortgage interest rates in a half year, peaking of the housing bubble, popping of technology and Bitcoin bubbles, and 200 basis points of Fed interest rate hikes.
With all this negativity already in the market, I would say that it is impossible for stocks NOT to go up. All that is left is to suck in one last round of non-believers on the short side before the indexes start a move to new all-time highs. That could take months at the most.
The only question now is whether a further 5% decline to an S&P 500 of 3,600, or a final puke out low of 3,500, down 7.5%. That means you should start scaling into your favorite longs now, the Cadillacs at Volkswagen prices.
So, let’s do some thinking outside the box here.
Tech stocks are cheaper now than after the low point of the Great 2000 Dotcom Bust. But they are still expensive compared to the main market. The S&P without technology stocks is now valued at earnings multiple of 13X versus 17x main market.
That is well into decade-low territory. That’s why I have included financials like (JPM), (BAC), and (C) in my list of “must own sectors'.
It's clear that inflation will bedevil the market for months to come given the dramatic acceleration we saw in May, from 0.3% to 1%. Let me tell you that there are only two ways to end inflation, and they could be done overnight.
*End all US support for Ukraine and throw in with Vladimir Putin. That would shave $50 off the price of oil immediately and get gas prices below $3.00 a gallon. You might have a hard time selling this to the thousands of Americans going over to Ukraine to volunteer.
*Cause a sharp recession immediately. The Fed is already well on their way to doing this with three guaranteed 50 basis point rate hikes by September. The first thing to collapse in a recession is oil demand. In the last recession, it went to negative $37 in the futures market (I got stopped out at -$5). This is why the oil industry isn’t interested in investing a dime at these oil prices. They are responsible to their shareholders, not Biden’s reelection prospects.
If there is a recession, it’s an invisible one. It’s a recession where you can’t hire anyone, can’t buy anything, subcontractors give you a six-month timeline with a straight face, and it takes a year to get delivery of a damn sofa. This recession miserably fails my “look out the window test.”
But at my advanced age, I don’t get surprised anymore.
Boba tea anyone? Who knew?
Consumer Price Index slaughters stocks, taking the Dow Average down 1,600 points, or 5% in two days, the worst move in two years. It’s typical bear market action. May inflation hit 8.6%, a new 40-year high. But you have to more than double to hit the old 1980s peak. New stock lows are in easy reach.
Lumber crashes, down 50% from the highs in months, with the near-complete cessation of new orders from builders. They see a recession just around the corner with higher interest rates and no new home buyers. It’s proof that the current inflation is spiking and setting up for a big fall.
Luxury Home Sales are plunging in New York, in numbers, but not in prices. Anyone who needed debt to trade up is out of the picture.
US drop Covid Testing Requirement for international travelers. Too many Americans trying to get home were getting stranded overseas for weeks because they failed a Covid test. Wheww!! That was a close call!
Americans will spend an extra $730 Billion on energy this year. That’s a heck of a lot to take out of consumer spending. So far, there has been no decline in demand. Much of this money ended up in Russian coffers.
Amazon (AMZN) splits 20:1, triggering an avalanche of new retail buyers. The company is also at the low end of its valuation range anger a gut-punching 41% decline in the share price this year. It may be early, but (AMZN) is definitely a BUY.
Target (TGT) warns of more margin squeeze, with too much inventory and flagging demand. (TGT) has become a bellwether for all of retail, which points to inflation, labor, and supply chain problems.
Uranium Stocks soar on Biden’s plan to buy $4.3 billion worth of enriched uranium, or yellow cake. The move is aimed to replace Russian imports where Russia is one of the world’s largest suppliers. It is the most unexploited form of non-carbon energy out there. Mad Hedge recommended Cameco (CCJ), the world’s second-largest supplier, a month ago. It was up 15% yesterday at the high.
New Home Mortgages hit a 22-year low. With 30-year fixed-rate loans soaring from 2.8% to 5.58% in six months, how can they not? Refis have crashed 75% YOY. Now that the Fed has quit buying, investors won’t touch mortgage-backed securities with a ten-foot pole.
Weekly Jobless Claims pop 29,000 to a five-month high in another hint toward a recession. Continuing Claims are at 1.306 million. The preemptive layoffs by ultra-cautious companies have begun, especially in technology.
Tesla (TSLA) gets an upgrade by UBS, which sees 51% of upside from here to $1,200. Total sales should top 1.4 million vehicles in 2022, up 40% YOY, and that includes lost production of 60,000 in Shanghai. A new Gigafactory in Indonesia is planned with a locked-up supply of Nickel, where the world’s largest supply of the metal resides. Cheap labor helps a lot where 5,000 need to be hired. The company will need six gigafactories to reach 20 million annual production.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my June month-to-date performance recovered to +2.57%.
My 2022 year-to-date performance ratcheted up to 44.44%, a new all-time high. The Dow Average is down -13.52% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 66.63%.
That brings my 14-year total return to 557%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.56%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 85.6 million, up 200,000 in a week, and deaths topping 1,011,200 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, June 13 at 8:00 AM EDT, US Consumer Inflation Expectations are out.
On Tuesday, June 14 at 8:30 AM, the Producer Price Index for May is published.
On Wednesday, June 15 at 10:30 AM, Retails Sales for May are announced. The Fed interest rates decision is out at 11:00 AM. The press conference follows at 11:30.
On Thursday, June 16 at 8:30 AM, Weekly Jobless Claims are out. We also get Housing Starts and Building Permits for May.
On Friday, June 10 at 8:15 AM, Industrial Production for May is published. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I have benefited from many mentors and role models over the years, but Al Pinder, last of the New York-based Shipping and Trade News, is one of my favorites. Short with blown hair, glasses, and an always impish smile, he was a regular at lunch where we always played an old dice game called “ballout.”
I sat next to Al for ten years at the Foreign Correspondents Club of Japan high up in Tokyo’s Yukakucho Denki Building, we were pounding away on our antiquated Royal typewriters. At the end of the day, our necks would be stiff as boards. Al’s idea of work was to type for five minutes, then tell me stories for ten.
Saying that Al lived a colorful life would be the understatement of the century.
Al covered the Japanese invasion of China during the 1930s, interviewing several key generals like Hideki Tojo and Masaharu Homma, later executed for war crimes. He told me of child laborers in Shanghai silk processors who picked cocoons out of boiling water with their bare hands.
Al could see war with Japan on the horizon, so he took an extended tour of every west-facing beach in Japan during the summer of 1941, taking thousands of black and white pictures. The trick was how to get them out of the country without being arrested as a spy.
So he bought an immense steamer trunk and visited a sex shop in Tokyo’s red-light district where he bought a life-sized, blow-up doll of a Japanese female. His immensely valuable photos were hidden below a false bottom in the trunk and the blow-up doll placed on top.
When he passed through Japanese customs on the ship home from Yokohama, the inspectors opened the trunk, had a good laugh, and then closed it. These photos later became the basis of Operation Coronet, the American invasion of Japan in 1945.
Al was working for the Honolulu Star Bulletin when the Japanese attacked Pearl Harbor on December 7, 1941. Many antiaircraft shells fired at the attacking zeros landed in Honolulu causing dozens of casualties. Al told me every woman on the island wanted to get laid that night because they feared getting raped by the Japanese Army the next day.
Since Al knew China well, he was parachuted into western Yunan province to act as a liaison with Mao Zedong, then fighting a guerrilla war against the Japanese with his Eighth Route Army. Capture by the Japanese then meant certain torture and certain death.
In 1944, Al received a coded message in Morse code to pick up an urgent communication from Washington. So, he hiked a day to the drop zone and when the Army Air Corps DC-3 approached, he lit three signal fires.
A package parachuted to the ground, which he grabbed and then he fled for the mountains. Dodging enemy patrols all the way, he returned to his hideout in a mountain cave and opened the package. It was a letter from the Internal Revenue Service asking why he had not filed a tax return in three years.
When the second atomic bomb fell on Nagasaki, the war ended on August 15. Since Al was the closest man on the spot, he flew to Korea where he accepted the Japanese surrender there.
Al was one of the first to move into the Press Club, which housed war correspondents in one of the only buildings still standing in a city that had been bombed flat.
Al never left Japan because, as with many other war correspondents who arrived with the US military, it was the best thing that ever happened to him. After some initial hesitation, they were treated like conquering heroes, it was incredibly cheap at 800 yen to the dollar, and the women were beautiful.
During the Japanese occupation when the people were starving, Al bought an acre of land in Tokyo’s burned-out prime Akasaka district for a ten-pound can of ham. He spent the rest of his life living off this investment, selling one piece at a time, until it eventually became worth $10 million.
Al went to work for the Shipping and Trade News, an obscure industry trade publication which no one had ever heard of. I sat next to him when he artfully lifted every story out of an ancient book, Ships of the World. But Al always had plenty of money to spend.
When Al passed away in the early 2000s, an official from the American embassy in Tokyo showed up at the Press Club asking if anyone knew all Pinder. We eventually traced a bank branch which held a safe deposit box in his name. In it was proof that the CIA had been bribing every Japanese prime minister of the 1950s. He kept the evidence as an insurance policy against the day when his lucrative deal with the Shipping and Trade News was ever put at risk.
I flew in for Al’s wake and his Japanese wife was there along with most of the foreign press. Everyone was crying until I told the IRS story, then they had a good laugh.
A few years ago, I was invited to give the graduation speech at Defense Language Institute in Monterey, California. The latest bunch of graduates, including my nephew, were freshly versed in Arabic and headed for the Middle East.
The school was founded in 1941 to train Americans in Japanese to gain an intelligence advantage in the Pacific war.
General 'Vinegar Joe' Stillwell said their contribution shortened the war by two years. General Douglas MacArthur believed that an army had never before gone to war with so much advance knowledge about its enemy.
To this day, the school's motto is 'Yankee Samurai'. There on the wall with the school’s first graduates was a very young Al Pinder, still with that impish grin.
Al lived a full life and I still miss him to this day. I hope I can do as well.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Al Pinder
Press Club 1976
Global Market Comments
June 9, 2022
Fiat Lux
Featured Trade:
(WHAT THE HECK IS ESG INVESTING?),
(TSLA), (FSLR), (TAN), (MO)
It’s truly astonishing how much money is pouring into ESG investing. Maybe it was another year of blistering heat worldwide that did it. It now accounts for one-third of all US equity investments.
In 2020, BlackRock, one of the largest fund managers in the country, made a major new commitment to ESG investment by rolling out several new ETFs. I thought I’d better take him seriously, as his firm is one of the largest money managers in the world with $10 trillion in assets.
So what the heck is ESG investing?
Environmental, Social, and Governance Investing (ESG) seeks to address climate change in any way shape or form possible. Its goal is to move the economy and capital away from carbon-based energy forms, like oil (USO), natural gas (UNG), and coal, to any kind of alternative.
I am always suspicious of investment themes are politically correct and ideologically directed, as they usually end in tears. I can’t tell you how many people I know who invested their life savings in solar companies to save the world, like Solyndra, Sungevity, American Solar Direct, and Suniva, only to get wiped out when they went under.
As laudable as the goals of these companies may have been, they were unable to deal with collapsing prices, Chinese dumping, and the harsh realities of doing business in a cutthroat competitive world.
As a venture capital friend of mine once told me, “Technology is a bakery business”. If you can’t sell your products immediately, you go broke. Technology always drops prices dramatically and if you can’t stay ahead of the curve you don’t stand a chance.
Still, what I believe is not important. The fastest-growing group of new investors in the market today are Millennials, and they happen to take ESG investing very seriously.
There does seem to be a method to BlackRock’s madness. Over the past year, ESG-influenced funds have grown from 1% to 3.6% of total investment. Other major fund families like Vanguard have already jumped on the bandwagon.
ESG can include a panoply of activities, including, recycling, climate change mitigation, carbon footprint reduction, water purification, green infrastructure, environmental benefits for employees, and greenhouse gas reduction. There are many more.
There is even an ESG rating system for funds and companies produced by firms like Refinitiv, which scores 7,000 companies around the world based on their environmental sensitivity. Companies like United Utilities Group PLC, the UK’s largest water company, get an A+, while China’s Guangdong Investment Ltd, which supplies water and energy to Hong Kong, gets a D-.
It goes without saying that companies from emerging nations tend to score very poorly. So do manufacturing companies relative to service ones, and energy companies versus non-energy ones.
The ESG concept began in 2005 when UN Secretary-General Kofi Annan wrote to 50 global CEOs urging them to take climate change seriously. A major report by Ivor Knoepfel followed a year later entitled “Who Cares Wins.”
The report made the case that embedding environmental, social and governance factors in capital markets makes good business sense and leads to more sustainable markets and better outcomes for societies. The snowball has been rolling ever since.
Themed investing is not new. “Sin” stocks have long been investment pariahs, including alcohol and tobacco companies. As a result, these companies trade at permanently low multiples. The newest investment ban is on firearms-related companies.
ESG investment received a major tailwind in 2021 when the price of oil took off like a rocket. When oil prices rise, it also makes all forms of alternative energy more competitive. But over production by US fracking companies will eventually cause supply gluts that will lead to chronically lower prices. The US happens to have a new 200-year supply of oil and gas, thanks to the fracking revolution.
Saudi Arabia floated their oil monopoly, Saudi ARAMCO, raising a record $26 billion. When Saudi Arabia wants to get out of the oil and gas business, so should you. It’s not because they can’t think of new ways to spend money that they’re unloading it.
That’s why I have been advising followers to avoid energy investments like the plague for the past decade. It’s just a matter of time before alternatives rule the world. Even the oil industry won’t expand production now because they don’t want to buy at the top only to see prices collapse, as they have done many times in the past.
Who is the greenest company in America? That would be electric car and autonomous driving firm Tesla (TSLA). Perhaps ESG investing helps explain why the shares have risen 400 times since I started buying.
What is the top-performing listed stock of the last 30 years? Tobacco company Altria Group (MO), the old Philip Morris.
It’s proof that investment shaming doesn’t always work.
Mad Hedge Technology Letter
June 8, 2022
Fiat Lux
Featured Trade:
(THE ULTIMATUM)
(TSLA), (TWTR)
Founder and CEO of Tesla (TSLA) Elon Musk is clearly either angling for a cheaper purchase price for Twitter (TWTR) or is ready to walk away from the deal.
Even if he does walk away from the deal, he was able to sell Tesla shares at elevated prices, then rolling the capital into Twitter shares, and that in itself is worth more than $1 billion.
If you haven’t kept up with what’s happening, Tesla shares have fallen quite substantially, about 35% to be precise, since Musk unloaded those shares.
Around 35% of the $8.5 billion in Tesla shares by Musk would amount to around $3 billion and if he is forced to pay that $1 billion walkaway fee then he would still gain $2 billion net from his antics.
He is literally playing with house money at this point.
Aside from the actual deal, the global exposure of this deal to his own brand is worth over $15 billion in itself as everyone has been zoned in on this drama because of simple palace intrigue.
The $1 billion he would pay to walk away would also drum up another tsunami of media exposure for Tesla, Space X, Starlink, and Musk.
Musk treating this as his own Johnny Depp versus Amber Heard case is stimulating the media algorithms to push his name into every corner of the global media world so who cares about the $1 billion.
In short, Musk is already a winner, and if he can parlay this bot angle into a 30% discount on Twitter then that would be some epic showmanship while living on the edge.
He would be really making his cake and eating it too.
Musk has also become highly sensitive to how the social media world operates in which usually the loudest and most frequent poster usually is heard first and clearest.
He’s taken that strategy by posting on Twitter relentlessly and often about highly controversial content just so the media talk about him.
He’s not far away from every 24-hour news cycle at this point.
The Twitter sale agreement does allow Musk to get out of the deal if Twitter causes a “material adverse effect,” defined as a change that negatively affects Twitter’s business or financial conditions.
That's one reason Musk may be focusing on the spam bot problem — though he waived many of his rights to peek under Twitter's hood when he signed the deal.
Bots are basically programs that post automated tweets but have been systematically weaponized in the era of the internet.
Musk says it’s also a problem for advertisers who take out ads on the platform based on how many real people they expect to reach.
Musk wants to be compensated by the Twitter “bot” problem with either a lower Twitter price or the opportunity to walk away for free.
If the deal doesn’t go through, there is a high chance that Twitter shareholders sue the Twitter board for going against their fiduciary duty.
While I can easily see the Twitter board suing Musk while he countersues if he decides to walk away and doesn’t pay the $1 billion termination fee.
It would be a lawyer’s dream and a businessman can afford this if you’re the richest one in the world.
The market sensing Musk might not go through with the deal means that Tesla shares are free to rock higher and Twitter shares could sink.
Musk’s Twitter circus doesn’t affect Tesla’s real business itself.
Twitter has many internal problems along with terrible management and Musk has done everything he can to expose its hypocrisy.
If this deal completely turns sour, expect Twitter shares to tank big time, meaning like a halving.
Personally, I wouldn’t touch Twitter shares with a 10-foot pole.
Global Market Comments
June 7, 2022
Fiat Lux
Featured Trade:
(THE SECOND AMERICAN INDUSTRIAL REVOLUTION),
(INDU), (SPY), (QQQ), (GLD), (DBA),
(TSLA), (GOOGL), (XLK), (IBB), (XLE)
Global Market Comments
June 6, 2022
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON FOR JUNE 14-16)
(MARKET OUTLOOK FOR THE WEEK AHEAD, or PUTIN’S DEAD END),
(VIX), (HYG), (JNK), (PTON), (W), (MSTR), (RDFN), (BYND), (F), (TSLA), (NVDA)