Monthly Archives: April 2016

what I find most surprising about Tesla (TSLA)

April 8, 2016 By in Autos, Technical Analysis, Uncategorized Tags: , , , , , 3 Comments

a concept stock

My California son got me interested in TSLA a couple of years ago.

It’s a “concept” stock.  That is, the stock trades on the dream or vision of future revenue and profit.

…like Amazon

In many ways, it’s like Amazon (AMZN) was in the late 1990s.

That company seemed to me to be on the verge of financial disaster for most of the first decade of its existence.  It only began to be profitable after it expanded from its original virtual bookstore idea to becoming an online department store.  In my view, had AMZN not aggressively raised a lot of capital during the Internet Bubble, it would not have survived.  After all, it lost money eight (?) years in a row before breaking into the black.

the center of an empire

TSLA is the seat of the Elon Musk empire.  Some say it’s a car company (me included); some would characterize it ultimately as a battery company, with cars as the wrapper that contains the principal TSLA product.

the stock

The stock is now trading at $260 or so a share, giving TSLA a market capitalization of about $39 billion.  Suppose we think, to make up a number, that the stock should trade at 30x earnings.  If so, the current price expresses investor belief that at some point the company will be making $1.3 billion a year and still have, say, 20% growth in annual profit in prospect.

back of the envelope numbers

Let’s say TSLA is a car company and that it will be making on average $7,000 a car, after tax, on its output at some future date.  If so, the current market price already factors into it that TSLA will be selling about 200,000 cars a year–and expanding rapidly.

I think that’s possible.  More important, the market says that’s what investors are willing to believe, and pay for.

risks

There are risks, yes, the most obvious of which is that the company keeps pushing back the date when it will turn cash flow positive.  What cash flow positive means is that the company will be able to generate enough cash from operations to cover costs, and will no longer be eating into its cash reserves to make ends meet.

what I find surprising

What’s stunning, though, is that less than two months ago the stock was trading at just over $141, or just over half today’s price.

New information has come out since then:

–TSLA began taking deposits for its $35,000 base price Model 3.  In less than a week, it has collected $1,000 each for about 300,000 units, with enough add-ons to bring the average selling price to $42,000. Most won’t receive their cars until 2018.  This support seems to me to show there’s potentially huge demand for electric cars, even at today’s lower oil price.

–the company announced that it missed its 1Q16 sales target because of parts shortages.  Presumably this means it did not turn cash flow positive as anticipated during the quarter.  That’s bad, especially since we’ve heard this song before.

the stock price

The stock is up $10-$20 a share on the two items, which were announced at roughly the same time.

What I find interesting is that a relatively large market cap company can move from $140 to $240 in a matter of weeks on a change in sentiment.  That’s about 70%!

So much for efficient markets and investor rationality   …not that anyone outside the ivory tower believes in this stuff.  But this is a huge move.

algorithmic trading?

I think it’s evidence of relatively naive algorithmic trading at work (based ultimately on two other wacky academic ideas–that the most important thing in investing is to control costs, and that there’s no craft skill/specialized knowledge involved in investing).

I also see it as support for my view that trading can be unusually profitable in this environment.   We should look for other instances where this may be happening.

 

 

 

yen strength a minus for Abenomics

April 7, 2016 By in Abenomics, currency effects, currency markets, Uncategorized Tags: , , , 1 Comment

This time a year ago $1 bought about 120 yen.  That figure was 125+ last June.  The rate was 113, however, a week ago–and 108- today.

This amounts about a 10% year-on-year gain in the yen’s purchasing power against the dollar, half of that strength during the past week.

The rise is good for consumers for whom the cost of imported items like food has skyrocketed under the administration of Prime Minister Shinzo Abe.  Not so good, though, for Mr. Abe’s grand plan to resuscitate his country’s still moribund industrial sector through massive currency depreciation.

There’s no particular reason for the yen to strengthen that I can see.  Yes, Mr. Abe did recently observe that aggressive intervention in currency markets is an imprudent strategy.  And, yes, this is the time of year when corporate cash flows back into Japan causes mild currency strength.  But the Bank of Japan recently initiated a negative interest rate policy designed to weaken the yen.  And in my view there’s no sign yet that Mr. Abe’s bet-the-farm gamble on 1980s-era export industries is paying off.

Yet the currency is going up.

This may just be bad luck.

If we assume that the US dollar has peaked, then the question for short-term currency traders is which of the two remaining majors, the yen or the euro, is a better bet.  Given renewed uncertainty about Greece and the upcoming vote in the UK on a referendum to exit the EU, traders may think they have little choice other than to shift their holdings toward yen.

Still, the biggest economic problem for Japan–and the reason Japan is a cautionary tale for the US–is that the political power structure there is totally committed to defending the status quo and retarding structural change.  It’s subsidizing industries whose heyday was in the 1980s, and it’s allowing its workforce to shrink by its anti-immigration stance in the face of an aging domestic population.  A rising currency will only make the circle harder to square.

 

 

investment advisers as fiduciaries: a new Labor Department proposal

April 6, 2016 By in Getting financial advice, How your broker gets paid, Uncategorized Tags: , , , , 1 Comment

The Labor Department proposed new rules today that would require that brokers or financial planners or other professionals giving advice to individuals on their retirement savings act as fiduciaries.

what a fiduciary is

Being a fiduciary means being legally bound to give advice that’s best for the client, without regard for any benefits the adviser might get for recommending one investment over another.

Strangely, in my view, the fiduciary standard is not the rule advisers work under now.  Rather, advisers are only required to recommend products that are “suitable” for customers, meaning they fit the client’s goals, financial circumstances and risk tolerances.

The difference?

Another way of saying the same thing, the fiduciary is required to do what’s best for the client; under the old standard the adviser has simply got to avoid products that damage the customer.

For example:

A broker/planner has two general equity fund offerings:

–Fund A has a long history of strong investment management, consistently beating the S&P 500, and charges low fees

–Fund B has weak managers and an equally long record of sub-par investment performance, consistently losing to the S&P.  It also charges fees that are double the size of Fund A’s.  However, Fund B offers higher commissions to brokers who sell its product, plus trips to weekend informational seminars at resort locations to those who sell the most of it.

Under current rules, a broker/planner is permitted to recommend B over A, even though B is only better for the broker, and will presumably be considerably worse for the client.

costs are the smoking gun

Other than in hindsight, it may be hard to say whether manager X is better than manager Y.  And managers who consistently underperform are eventually culled, even in retail brokerage houses, where the emphasis is typically on strengthening the sales force, not the portfolio management team.

But I think it would be hard for a fiduciary to defend recommending one so-so product over another that costs half as much, and for selling which the fiduciary gets gifts, trips or a corner office and a secretary.

traditional brokers will be hurt the worst by these rules

That’s because they charge the most–partly to compensate highly-paid salesmen, partly to fund an expensive network of retail sales offices.

The traditional retail brokerage business has been dying a slow death since the advent of discount brokerage services in the 1970s.  Imposing a requirement that brokers do the best for their clients is another nail in the coffin.

for now, the rules only affect retirement savings accounts,

…not general savings/investments.  I presume this limitation is the result of fierce lobbying by financial advice providers opposed to the fiduciary standard.  But we may just be seeing the thin edge of the wedge.

employment and retirement

April 5, 2016 By in employment, Employment Situation report, Uncategorized Tags: , , , , 1 Comment

simple math about retirees in the US

Let’s suppose the average American goes to work full-time at age 20 and retires at age 65.  If employees are distributed equally by age, then 2.2% of the workforce reaches retirement each year.  We know the real percentage is higher than that at present because the Baby Boom makes up an unusually large portion of the population.

The workforce is about 155 million people.  Of that, 95%, or about 147 million, are employed.  If 2.2% of this total number retire each year, that’s 3.2 million jobs being opened, or about 270,000 per month.

That’s a far greater figure than the net new hiring being done in the US, as reported by the Labor Department.

This simple calculation already suggests that not every position vacated by a retiree is being filled and/or that people who in other times would be retiring are continuing to work.  Let’s put that aspect of the employment issue aside for today, though.

The point for today is that, however gradual, the retirement of the Baby Boom must be having a powerful effect on labor costs.

But what is that effect?

retirements and pay

A highly oversimplified example:

Let’s say a company has five employees.

#1, the oldest and longest tenured, makes $100,000 a year.

#2 makes $80,000

#3 makes $60,000

#4 makes $40,000

#5 makes $20,000.

The total payroll is $300,000 a year.

Suppose #1 retires and that each of the other employees is promoted one slot and awarded a $15,000 raise.

Assume, too, that a new #5 is hired right out of school for $20,000.  So #5 gets a job and everyone else gets a substantial raise.  A big boost for everyone’s economic health, except for the old #1.

The new company payroll looks like this:

#1 makes $95,000

#2 makes $75,000

#3 makes $55,000

#4 makes $35,000

new #5 makes $20,000.

The total is $280,000.  That’s 7% less than the company was paying out before. Average wages have dropped a lot, despite the fact that every employee is significantly better off.

If 2% of the company is retiring in a given year instead of 20%, and everything else is the same, then the overall drop in wages is 0.7%.  That’s probably much closer to the actual effect on national wages from retiring Boomers.

my thoughts

–During recessions, when people are afraid–and especially in a 401k retirement world–older workers tend to hang onto their jobs rather than retire.  When recovery begins, there tends to be a catch-up period when both “normal” retirees and those who have postponed retirement leave work.  This phenomenon depresses average wages more than usual and disguises the upward economic momentum that’s taking place.

For a plain vanilla recession, this downward wage pressure should begin to abate in year two of recovery.

We’re now deep into year seven after the worst of the last recession.  But the Fed seems to think that the cyclical depression of wages by retirements is still in full swing in the US now.  I’m not sure what to think.

–Our hypothetical retiring Boomer probably goes from earnings $100,000 a year to collecting Social Security of $20,000 + using income from accumulated savings/401k/IRA/pension of, say, $30,000.  No matter what the exact numbers are, this is a sharp downshift in purchasing power and in standard of living.

If the idea that Boomer retirements are currently accelerating is correct, this seems to me to tip the investment scales increasingly sharply away from Boomer spending and toward Millennials’.

 

 

 

 

employment and the March 2016 jobs report

April 4, 2016 By in employment, Employment Situation report, Uncategorized Tags: , , , , , 1 Comment

Last Friday, as usual, the Bureau of Labor Statistics of the Labor Department published its monthly Employment Situation for March 2016.  The report said the economy added 215,00o new positions last month.  Revisions to prior months’ data were insignificant a–a loss of -1,000 jobs.

Despite the continuing strong jobs creation, the unemployment rate ticked up slightly to (a still very favorable) 5% of the workforce.  In the past, that figure would be regarded as full employment. The 5% would be regarded as “frictional” unemployment, meaning it consists either of people who have quit their old job because they have a new one but are not starting right away, or of project workers who routinely have small gaps between jobs.

That would, in fact, be quite worrying, since wage inflation acceleration–and therefore overall inflation acceleration–would be imminent.

The financial markets have not been focused on the very low unemployment percentage, however.  They have been, and continue to be, worried about the lack of wage gains–which, they argue, is evidence of continuing slack in the labor market.

Two recent contrarian thoughts:

–some are saying that the uptick in the unemployment rate is (finally) evidence that disheartened workers who have long since left the workforce (by stopping looking for work) are beginning to think that getting a job is now possible and are re-entering the workforce.  So it’s an early sign of a significantly better tone to the labor market.

I think this is possible.  Good news, if so.  The only question I have is how it could have taken over six years since the economy bottomed for this to occur.

–the Fed is beginning to argue that wage gains are actually greater than corporate reporting would lead us to believe.  The idea is that older, higher-paid workers are retiring and effectively being replaced by younger, lower-paid new hires.  This is something that always happens in the early stages of economic recovery.  Again, the question remains why wage-flattening has been going on for well over half a decade.

More on this topic tomorrow.