For February 2018 the fund was up approximately 2.2% net of all fees and expenses. By way of comparison, the S&P 500 was down approximately 3.7% while the Russell 2000 was down approximately 3.9%. Year-to-date the fund is down approximately 8.9% while the S&P 500 is up approximately 1.8% and the Russell 2000 is down approximately 1.4%. Since inception on June 1, 2011 the fund is up approximately 82.1% net while the S&P 500 is up approximately 132.8% and the Russell 2000 is up approximately 95.8%. Since inception the fund has compounded at approximately 9.3% net annually vs 13.3% for the S&P 500 and 10.5% for the Russell 2000. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two; meanwhile I continue to waive the annual management fee until we regain our high-water mark.
As noted last month, through this entire bull market low interest rates were used to justify egregious earnings multiples on stocks, as well as being responsible for creating much of those earnings via cheap mortgages, auto loans, etc., and yet we’re now in a rising rate environment. Even before the arrival of (or perhaps anticipating) a massive amount of deficit-related U.S. debt issuance beginning later this year, the 10-year U.S. treasury bond yield appears to have definitively broken its very long-term downtrend, ending the month with a yield of just under 2.9%. Meanwhile, recent “hot” CPI data combined with mediocre growth may even be indicative of a whiff of 1970s style stagflation. So I think the catalysts are finally here for the high-multiple stock party to end, and we’re positioned for it.
We remain short shares of Tesla, Inc. (TSLA), which I consider to be the biggest single stock bubble in this whole bubble market—a company so landmine-filled that I think it can implode at any moment regardless of what the broad market does. To reiterate the three core points of our Tesla short position:
1) Tesla has no “moat” of any kind; i.e., nothing meaningfully or sustainably proprietary.
2) Tesla loses a huge (and increasing) amount of money despite relatively light competition but will soon be confronted with massive competition in every aspect of its business.
3) Elon Musk is extremely untrustworthy.
In February Tesla released its worst quarterly “earnings” report ever, with a record GAAP loss of $675 million even including a $179 million one-time injection of near-100% net margin ZEV credit sales; the loss would have been around $850 million (!) without those ZEV credits. Also, automotive gross margin ex-ZEV sales dropped to an embarrassingly low 13.8%, and remember that unlike the rest of the auto industry Tesla doesn’t include any engineering or dealership costs on that line; measured the same way as its competitors, Tesla actually had a negative gross margin on its cars. In fact, overall in Q4 (using the total net loss ex those ZEV credits) Tesla lost over $28,000 on each car it sold! Additionally, this “hypergrowth” company guided to flat 2018 sales of Models S&X and I think they’ll actually be down, as much nicer Jaguar and Audi electric cars will be in showrooms this June and November respectively. Then 2019 will be even worse for the S&X as Mercedes and Porsche will begin selling luxury EVs. Yes, Tesla did manage to juice its Q4 negative free cash flow to be not as bad as expected but that was accomplished by the aforementioned ZEV credit sale, a massive one-time inventory liquidation and the inclusion of customer deposits in “cash flow from operations.” Here’s an excellent explanation of those shenanigans. And of course the follow-up conference call was filled with the usual combination of lies, obfuscation and inadvertent hilarity—here’s a great summary of the “highlights.”
What Tesla can’t obfuscate (courtesy of its new 10-K) is the $31.4 billion in combined long-term debt and battery purchase obligations that—accompanied by its negative cash flow and massive encroaching competition—will drive it into bankruptcy. In fact, Tesla interest expense is now at a run-rate of nearly $600 million a year, which in Q4 amounted to $4884 per car sold!
And remember that in December Panasonic announced a partnership with Toyota (and possibly other Japanese automakers) that casts a spotlight on how technologically behind Tesla’s cylindrical battery format (the one with that $17 billion purchase obligation!) now is. I urge you to read this excellent summary of the event from The Daily Kanban.
Would you like to see a few more examples—courtesy of Tesla’s 10-K- of what a horrible business (i.e., one with no ornegative scale) looks like? Here you go:
Then immediately after Tesla’s disastrous February conference call two additional bombshells dropped: first, its Global President of Sales & Service became the latest among scores of C-level execs to leave the company, then its web site quietly announced that the “$35,000 Model 3” (which I’ve been saying since 2014 would never be offered in any quantity because Tesla would lose $10-$15,000 on each one) will be delayed for at least a year and in my opinion will never be offered except in token amounts. The latter may finally be causing many deposit holders/shareholders to realize that Musk is the securities fraudster we’ve always known him to be, and is likely to result in hundreds of thousands of demands for deposit refunds as potential buyers flock to alternative vehicles. In fact, after delivering only around 8000 Model 3s in total, Tesla is now offering quick delivery of the $49,000+ configuration to fill reservations from non-Tesla owners, indicating a massive number of either cancellations or postponements from current owners. And watch those reservations really vanish when the $7500 tax credit goes away later this year (one quarter after Tesla sells its cumulative 200,000th U.S. car) while over 100 competing new EV models entering the market over the next few years will still enjoy it. And finally, remember that almost nothing can be done in the Model 3 without a multi-step process on the touchscreen—not even changing the windshield-wiper speed, adjusting the air vents or opening the glovebox. Thus, operating a Tesla Model 3 may potentially be as dangerous as texting while driving.
As for the heavily promoted “$180,000, 500-mile” Tesla electric truck, I (and many others) estimate that a 500-mile electric truck will require a 1000/kWh battery pack and—with its fancy carbon fiber cab and chassis– will thus cost at least $250,000 to build. Additionally, Tesla is guaranteeing to cap electricity rates at .07/kWh for the first million miles of the truck’s usage; as national rates average around .12/kWh, I estimate this will cost Tesla—on average—an additional $100,000 for each truck it sells, meaning it will supposedly charge $180,000 for a product that will cost around $350,000 to build and subsidize– a typical Musk “business proposition” if I’ve ever seen one! In other words, the Tesla semi-truck will either never be built and sold (hey by the way—where’s the factory and assembly line for that “2019 product”?) or the real price (with the lifetime .07/kWh electricity subsidy) will be over $400,000 (vs. $120,000 for a conventional truck) and all those big-name “reservations” will disappear even faster than the proceeds from a Tesla financing. And oh, by the way, Tesla is actually behind much of the industry in developing an electric truck.
And hey, speaking of Tesla being “behind,” read this Bloomberg article about its China situation, then click on the “China competition links” below.
Meanwhile, Tesla is increasingly besieged by a wide variety of lawsuits, for labor discrimination, union-busting, autopilot fraud, sudden acceleration, lemon law violations (including an interesting new one), investor fraud and, undoubtedly, many others of which I’m not yet aware. And that’s even before it brings in the (inevitable) bankruptcy lawyers!
So here is Tesla’s competition in cars (note: these links are continually updated)…
So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition (and things will only get worse once it does), while its market cap exceeds that of Ford and GM despite a $2.5 billion annualized net loss selling a bit over 100,000 cars while Ford and GM make billions of dollars selling 6.6 million and 9 million cars respectively. Thus this cash-burning Musk vanity project is worth vastly less than its approximately $70 billion fully-diluted enterprise value and—thanks to its roughly $31 billion in debt and purchase obligations—may eventually be worth “zero.”
Thanks and regards,
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