This Week in Barrons: 3-3-2019:
Is Tesla trying to make money Selling Cars?
Major car companies have given up on that task decades ago. The 3 biggest money-makers for car companies are: (a) trade-ins (giving you squat and selling it for a lot), (b) selling you financing and insurance (F&I), and (c) service. Tesla is doing none of those.
The reason I bring this up is that I was sent the above ad – announcing the arrival of Tesla’s $35K Model 3. They proclaimed that such a low price was only available because they are shutting down their retail stores, and moving all sales online. It seems Elon Musk (Tesla’s CEO) sent an email to employees last Thursday explaining the company’s decision to reduce its headcount in its sales and marketing divisions by moving vehicle sales exclusively online. As part of the announcement, Elon also warned that the company would not turn a profit in the first quarter.
But honestly, how do they expect to make a profit – if they’re ignoring ALL of what the major players are doing to make money? That’s until I was in the middle of ordering a Model 3 and arrived at the following screen:
Oh, for an additional $3,000 (+8.5%) – I could buy the software that would engage highway ‘Autopilot’ from on-ramp to off-ramp. And for an additional $5,000 (a total +22.5% premium) – I could buy the software that would allow ‘Full Self-Driving Capability’ to be delivered either at the end of 2019 or 2020 depending upon who you believe. OK, so Tesla is using Apple’s business models: (selling hardware plus maintenance, software upgrades, etc.) – only without the ability to charge a ridiculous premium on the underlying device. Is Tesla hoping that it’s Ai software (akin to Apple’s iTunes & Siri) will learn its customer’s driving patterns so well that the normal methods of making money: trade-ins, financing, and service are completely unnecessary?
Well, I have to be honest: ‘Full Self-Driving Capability’ is pretty enticing. I actually wonder where the fully autonomous vehicle journey will lead us. Samuel Schwartz in his book: No One at the Wheel- uses his experiences driving a NYC Taxi and serving as NYC’s transportation commissioner – to deliver some thoughts:
Q: What will it be like when AVs (autonomous vehicles) are everywhere?
A: Given 90% of our public transportation is pathetic, we could offer a lot more effective public transportation using AVs. But what if we all continue to drive our cars to work – tell the cars to go back home, and then have them pick us up at the end of the day. We would end up using twice the amount of energy. People may live further away - encouraging the urban sprawl to intrude upon what remaining rural areas we have left. AVs promote human inactivity, and that will cause an increase in diabetes, heart disease, and cancer. [FYI: Estimates show AVs will save 1.3m lives/yr. in needless traffic collisions, but will cost 5m live/yr. due to our rising inactivity.] Virtually every driving job as we know it will be gone – causing a revolution not unlike 120 years ago when the car first came on the scene.
Q: How will our roads be impacted?
A: AVs do not veer or sway as much as human drivers do; therefore, we can make our traffic lanes more narrow and create more of them using our existing infrastructure. [i.e. Each of the 3 lanes on the New Jersey Turnpike is currently 12 feet wide = totaling 36 feet. AVs only require 7 feet – narrowing the existing roadway to 21 feet, and potentially allowing for 2 additional lanes.]
Q: What about our parking structures?
A: Currently, 30% of all land inside of a city is dedicated to parking. We’re already seeing a reduction in parking due to: Uber, Lyft, Via, Juno, Gett and other ride-sharing companies. The AV will be the greatest urban release of property that we have ever seen since the Wild, Wild West. One problem is that airports make most of their money from parking – what happens when that revenue stream goes away?
Q: What will happen to our cities?
A: We’re already seeing urban parking lots become mixed-use and/or residential environments. And with more people come additional infrastructure requirements such as: sewage, water, and electricity. But, if people choose (instead) to live further from our cities then we will face a tax issue – because vacant land produces no tax revenue. After all, we could all choose to spend an hour commuting in our cars: working, doing social media, sleeping, or even watching a movie.
Q: What happens to all of the displaced drivers?
A: Urban drivers are already suffering. The value of a taxi medallion in New York City has fallen from over $1m to $250,000. But the real shock to the system will be associated with trucking. One of the early uses for AVs is for long-haul truck driver replacement. Right now trucking requires a driver, and that driver is required to rest. Autonomous trucks can drive without stopping, and will only need a driver at the destination – otherwise the 3,000 mile cross-country drive could be done alone. Delivery prices should plummet.
Q: What happens during the transition?
A: Mixing conventional automobiles with AVs is not a pretty story. It’s akin to 100 years ago, when we had horses and automobiles simultaneously on the roads. It was a chaotic and the most deadly period on America’s highways. Currently our federal government is saying that it will never outlaw human driving. We will see about that. I think in very short order the non-autonomous car is going to be outlawed.
Q: What about the auto industry?
A: The auto industry will morph into one that sells car rides rather than cars. The technologies associated with AVs will need to be updated regularly – and driver-less fleets solely focused on keeping vehicle tech up-to-date will serve that purpose. After all, soon there will be 300m hackable computers on wheels – carrying our most precious cargo around – ourselves.
So as much as I see the light at the end of the tunnel, I’m still not sure Tesla can make any money. Comparing it to Apple, Tesla’s missing: (a) the ridiculously high cost product ($1,000 iPhone) , (b) the insurance side (Apple Care), (c) the educational piece (Genius Bar), and planned obsolescence (iPhone 6 battery). Oh yes, even Apple does trade-ins. And if I ignored all of those elements, there is a problem with stock valuation. Using the same P/E ratio as Apple (a good software / hardware company), Tesla’s stock price should be more like $30 and not its current $300/share. At least Tesla share-holders now know that there is a $270 premium in every share of Tesla stock.
The Market:
It seems like just yesterday when we were in a bear market, and all headed for the exists together and forever. But, the day after Christmas the S&P 500 turned on a dime and has rocketed 18% higher in only 44 days. Michael Batnick put this ‘Killer Vees’ rally in historical perspective via the chart below. This is the ninth time stocks have experienced a ‘killer vee’ bottom since 1970. Everyone dislikes these types of chart patterns. It makes buy and hold investors sweat, and makes mincemeat out of most tactical investors. The chart below shows the predicted ‘Killer Vee’ inflection point circled in red. On average, the S&P 500 was in a 20% drawdown situation when the ‘Killer Vee’ signal emerged. The good news is that 8 out of 9 times – this signaled a major market bottom. The bad news is that 2001 was a big head fake – and there’s no way to know whether this one is like 1982 (and we continue higher) or like 2001 and it becomes: ‘look out below’.
Info Bits:
- Discount War: Uber and Lyft discounts have less to do with supporting you and more to do about market share. Lyft currently has 34% of the rideshare market, and any extra riders are going to help their upcoming IPO roadshow.
- The Customer Knows Best: According to a customer satisfaction survey, consumers love Costco more than Amazon. It seems that there is something more likable about a company that has been offering free samples to America since 1983. As opposed to Amazon, a company that has offered as much greed as convenience but sadly – no free pigs in a blanket.
- Who are you?: Best Buy was up 14% on an awesome earnings report. They had impressive Q4 earnings and forecast strong full-year profits. But, I’m just not sure who still shops at Best Buy – and why?
- Wrong One: Fitbit dropped over 13% after earnings – once everyone realized that they were NOT the Apple Watch company. (Earnings stunk up the joint.)
- This Is How The Matrix Happened: FedEx is getting into the robot delivery game. The company announced that it's using small robots going 10mph to deliver products for firms like AutoZone, Lowe's, Pizza Hut, and others. It has one advantage over other bots – FedEx can climb stairs.
- What’s Big Brother think? Thailand passed a cybersecurity bill that lets the government access digital personal data without a court order. The fine print of the bill clearly states that officials can seize, search, and make copies of computers or other info if the government sees you as a security threat.
- Lyft: Filed their paperwork for their multi-billion dollar IPO. They list as a major risk factor: "We have incurred net losses each year since our inception and may not be able to achieve or maintain profitability in the future."Their revenues hit $2.2B last year, while their losses were $911m. Will you be buying shares?
- Martha Stewart: Isn't the most obvious of weed-advisors, but according to the NY Times and Canopy Growth (CGC), Martha will "have an advisory role and assist with the development and brand positioning of a new line of offerings for humans and animals."Yes, pets are getting CBD. 2019 = endless possibilities.
- The key characteristic of ‘Enhanced Teams’ is: After years of analyzing data, Google found that people’s backgrounds in a team are NOT the #1 predictor for success – SAFETY is. It seems that the ability for everyone to feel safe in taking risks around their team members (free from embarrassment and/or punishment) was the number one element for a team’s success.
- The most anticipated EV is: Harley-Davidson’s electric motorcycle.
- What goes up… Charles Smith of the‘Of Two Minds’ blog says that housing prices are going lower across the country. The latest data agrees. The 20-city index shows home price growth is screeching to a halt, and had the slowest pace of annual growth since 2014. Smith said that: “If the bubble took four years to inflate and rise, the retracement will take the same amount of time and much if not all of the rise.” He’s using the above chart, only this time there are no more saves in the FEDs closet. The decline will start this year and run through 2025. Smith likes Scenario 2 above in which prices plummet below the 2012 lows and keep on going – ultimately retracing the entire housing bubble gains from 2003. Smith’s indicators include: massive student debt, insufficient income to support existing price levels, and the exit of Chinese buyers. “The economy has changed, and the sacrifices required to buy a house in hot markets at today’s prices make no sense. The only question is how low prices will drop by 2025.”
- Out of this world: Microsoft's new augmented reality headset will blow your mind, and also blow a $3,500-hole in your wallet.
- Quoting Goldman: “US equity funds saw another $4.6B outflow in the latest week – the 12th consecutive week of outflows.” So, for TWELVE consecutive weeks – more money has flown out of equity funds than into them. And yet for 9 weeks in a row, we've gone higher. The answer of course is stock buy backs and funny money out of our dear old FED.
Crypto Bytes:
- Wild, Wild West: In crypto-land, it’s hard to tell which coins are better than others, or even legitimate. To guide you through the shootouts and showdowns, check out Flipside Crypto. Their scoring system is called FCAS, and now you’ll know how healthy a coin really is.
- Joseph Lubin (CEO of Consensys) says, “$4,000 is high for Bitcoin”.
- ICOs are back: Fetch.Ai raised $6m in 10 seconds on Binance’s launchpad.
- Warren Buffett says Bitcoin is a “delusion that attracts charlatans”.
- Abra CEO says JPM Coin is an example of enterprise Blockchain nonsense that is bringing more notoriety to Signet than JPM.
- Fake Dudes: BHB, a crypto project based in China, raised $20m through a multi-level marketing arrangement. An investigation uncovered that of the 3 team members – 2 were totally fake – their photos being lifted from real-life professors who publicly deny any involvement with BHB. And then there’s the pyramid scheme that they used to sign people up.
- Seeking Sleuths: The crypto exchange Kraken is offering up to $100,000 to anyone who can help solve this year’s biggest blockchain mystery: What happened to QuadrigaCX’s coins?
- Traders are using: Tron to buy Mountain Dew, Dash to buy French fries, and the Binance Coin to buy the new HTC Exodus 1.
- Let’s Tokenize the World: Inveniam Capital Partners (ICP) is preparing to tokenize shares in 4 private real estate and debt transactions valued @ $260m. They will start with the sale of tokenized shares of a WeWork-occupied building in downtown Miami, FL valued at $65.5m – likely the largest piece of real estate ever to be financed this way. Once the other 3 deals are finalized, ICP will be auctioning off shares in those assets as well. The 4 assets will be sold via a Dutch auction and bids will be accepted in the top 50 cryptocurrencies.
- Bitcoin lights first Green Monthly Candle: in 8 months – so maybe accumulation has begun. A recent poll revealed that a majority of Crypto investors see Bitcoin prices at $100,000 to millions long-term. Y-Combinator’s president thinks crypto could facilitate universal basic income.
Last Week (we learned):
So let's review for a second. The market does NOT belong at this level. Money has been flowing OUT of the market. Earnings have been disappointing at best. But as you know, it’s all about buy-backs, low interest rates, and a FED that’s beholden to the market. A logical mind would suggest that the quadruple top at 2800 will hold as resistance and we'll be heading lower. But that's logic talking, not fraud and manipulation. And if you add fraud and manipulation back into the equation, you’ll see that the most confounding thing the market could do at this point is to break thru the 2800 to 2820 resistance level and continue higher, suck in more people, and THEN roll over. Factually:
- Economic data is ambiguous at best. Auto and home sales are collapsing – while China (FXI) is being flooded with liquidity by their own government,
- Q1 GDP estimates are collapsing with the Atlanta FED saying 0.3%,
- 90% of the corporate tax cuts went into stock buybacks, dividends and M&A – NOT jobs or growth,
- 2018’s final revenue numbers showed an increase of 2.69% - which was barely higher than 2017’s 2.59% - BEFORE tax cuts,
- Nasdaq (QQQ) extended its longest positive daily winning streak since 1999,
- Interest Rates are beginning to climb higher (10-year jumping to 2.75%) – as bonds (TLT) have started to sell off.
- Earnings continue to deteriorate. I wonder if this will cause a slow-down in corporate buybacks?
- There is a compression in volatility (VIX), as the buying of out-of-the-money CALLs in the VIX monthly April options have sky-rocketed. Traders were buying massive amounts of: $20, $25, $30, $35 and $45 options – expecting the upcoming selloff. An inexpensive strategy for an expected selloff would be:
o Sell the April 17, - $13.50 / +$12 Put Credit Spread,
o Buy the April 17, $19 Call – for a net of $0.05 DB
- The following lines of resistance / support in the SPX still hold true:
o 2,911, 2,842, 2,811, 2,731, 2,682, 2,626, and 2,575
- We are at the upper end of the ‘volatility box’ this is from 262 to 282 on the SPY. Therefore, trade with caution.
Weed and BioTech:
Five cannabis stocks got a thumbs-up from Jefferies last week, as the firm started coverage of Canadian marijuana producers. Among their buy ratings were:
- **Aurora Cannabis (ACB) – target $9.11,
- Organic Dutchman (TGOD.Canada),
- **CannTrust Holdings (CTST),
- OrganiGram Holdings (OGI.Canada), and
- Flowr (FLWR.Canada).
They believe the world market for legal weed will reach $30B by 2022, and $50B by 2029. Jefferies argues that "Weed is NOT just another agricultural commoditywhose price will drop from oversupply.” They believe that premium pot won't become commoditized, and doesn't see a cannabis glut occurring until mid-2021 at the earliest. They write: "If you can deliver a top quality experience, you will be able to charge a premium." While they looked only at companies that sell weed in countries where it is nationally legal, they did note that any cannabis company that aspires to large-cap status will need to have a strong position in the U.S. – which is the world's biggest cannabis market. Sales of the recently legalized hemp, a source of the non-psychoactive ingredient cannabidiol (CBD) will help lift the U.S. sales opportunity above $32B in 2022.
Jeffries also believe that Canopy Growth (CGC) is well-placed to dominate the world cannabis market along with their ‘buy-rated’ Aurora. Unfortunately, Canopy’s $15B valuation leads them to a Hold rating. Jeffries’ other Hold is Emerald Health Therapeutics (EMH) - a small vendor of medical cannabis that relies on partnerships for its supply. The Cronos Group (CRON) grabbed headlines when tobacco giant Altria took a $1.8B stake in the Canadian pot producer, but at $20,60/share their stock looks expensive – especially when compared to Aurora. Hexo is also over-priced on the list even with their most recent collaboration with Molson Coors Brewing (TAP). One of the best-known cannabis names absent from their new coverage is Tilray (TLRY). Tilray (to Jefferies) looks expensive, but they are quick to point out that it’s difficult to value these companies when demand is so far out-stripping supply. They believe that valuations will eventually be driven more by financial performance and delivery, and are also looking for less volatility going forward.
I (on the other hand) like 2 of their 5 names (Aurora and CannTrust Holdings), and believe that volatility in a globally under-supplied market is very much here to stay.
Next Week:
2,800 was a sticking point 3 times since October, and is still being something of a thorn in the bull's side. This week we had 3 huge events taking place, and the market looked for a while like it was finally going to just roll over. It didn't. It wasn't just the President’s trip to Vietnam and meeting with Kim Jong. It wasn't just Jerome Powell’s talking to Congress. It was both of those, and the 7-hour questioning of Michael Cohen. The question on everyone's mind is the same: “Will the market power through this 2,800 – 2,820 level and go attack the all-time highs, or is it going to run out of steam right here?” It's a really tough question to answer. I'm on record saying that the market has NO business going higher. P/E's are stretched, and the technical indicators are overbought. Logic dictates that there is no reason to punch through 2,800. But the market doesn't run on logic any more. It runs on Fed money, manipulation, low interest rates and buy backs. I look at the multiple failed attempts this week and start to think: “hey, maybe they can’t or won’t get through this.” But then I see actions where they had every opportunity to sell us off hard – but didn’t and think: “someone isn’t willing to give this market up – yet.”
I’m thinking that they punch us through this resistance level. That will cause all of the shorts to cover, and will light a fire under the algo-bots to buy stocks. We will get that one last big spike higher, and THEN they will pull the rug. The market would make all of that last minute money that will come rushing in on the breakout. It would be a classic market action. They would head fake everyone into thinking that this market will continue for another big leg higher, only to yank the rug out from under. Maybe it coincides with a China deal. That doesn't mean we get through it right now. We’re at 2,804, but we could stall here and retrace a little bit before the next round of hyped up news headlines. On Oct. 17th we ran out of gas at 2,816. After a very deep pullback, we ran back up and hit 2,815 on November 7th. Then another sharp pulldown, and run back up ending at 2,800 on Dec. 3. Then we got the huge plunge down to 2,350.
This coming week, I think they run the SPX up as high as 2,842 before falling backward. This would correspond to the $33 expected move in the SPX by next Friday. In terms of the SPY, we should move into the 285 level before reverting back down to 265. I would not go long anything until we closed over the 2815 level in the SPX for 2 consecutive days. That would probably jump-start the algo-bots into buying. We should know within a couple of days. If I'm right we will grind higher, shorts will cover, and we will have one last major blast higher. If I'm wrong, we’ll fade backward under 2800 for another few days and then finally roll over.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $7.34 / in @ $3.57) – & covered write,
- Canntrust Holdings (CNTTF = $9.22 / in @ $3.12),
- Canopy Growth Corp (CGC = $47.05 / in @ 22.17),
- HEXO (HEXO = $5.67 / in @ $5.12),
- Nova Vax (NVAX = $0.71 / in @ $1.59)
Crypto:
- Bitcoin (BTC = $3,850)
- Ethereum (ETH = 133.00)
- Bitcoin Cash (BCH = 131.00)
Options:
- EWZ (42.35): Buy Mar 8, +44 / -44.5 / +45.5, Call B-Fly for $0.02 DB,
- GDXJ (31.55): Buy Mar 8, +33 / -33.5 / +34, Call B-Fly for $0.05 DB,
- PFE (43.5): Buy Mar 15, +44 / -44.5 / +45, Call B-Fly for $0.05 DB,
- PYPL (98.8): Buy Mar 8, +98 / -99 / +101, Call B-Fly for $0.05 CR,
- SPX (2804): Buy Mar 8, +2825 / -2835 / +2845, Call B-Fly for $0.95 DB,
- SPX (2804): Buy Mar 8, +2760 / -2755 / +2750, Put B-Fly for $0.15 DB,
- SPY (280.7): Buy Mar 8, +283 / -284 / +285, Call B-Fly for $0.07 DB
Thoughts:
- In my search for high implied volatility products, one I’ve never traded popped up on my list. The flavorfully named Parsley Energy (PE) – has 55% implied volatility and 4-star liquidity. What’s not to love about it? It’s a Texas oil and gas exploration company focused on the Permian Basin that missed on earnings last week but rallied despite the numbers. So much for fundamentals. But it sold off in the past couple of days to keep it from breaking out of its range to the upside. On the other hand, if oil prices stabilize – you might want to consider a bullish strategy in PE. If you think that PE might not drop much more, short $17.5 PUT in the April monthly expiration is a bullish strategy that has a 90% probability of making 50% of its max profit before it expires.
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.
R.F. Culbertson
