Monthly Archives: March 2017

Employment Situation, February 2017

March 10, 2017 By in economics, Employment Situation report, government economic policy, Uncategorized Tags: , , , Leave a comment

This morning at 8:30 est, the Bureau of Labor Statistics of the Labor Department issued its Employment Situation report for February 2017.

The Bureau estimates the economy added 235,000 new jobs last month.  This is a very strong result.  However,it is most likely influenced by unseasonable warm temperatures in February, which typically allow outdoor construction work to get started earlier than  usual.  So maybe the “real” figure should be 200,000–which would still signal significant economic strength.

Revisions to the prior two months’ data were +9,000 positions.  Most other data–like the labor participation rate, the number of long-term unemployed…–were relatively unchanged.

The unemployment rate fell to 4.7%, a level that twenty years ago would have set off alarm bells warning of incipient wage inflation.  Nevertheless, wages grew at the same steady yearly rate of +2.8% we have been seeing for a while, and are showing none of the acceleration that labor economists fear.

We know from the BLS’s Job Opening and Labor Turnover (JOLT) survey that the number of current job openings is more than 20% higher than at the pre-recession economic peak in 2007.  This makes the lack of wage acceleration look even more peculiar (more about this on Monday).

Nevertheless, the Fed has made it clear that it thinks there’s nothing further that maintaining emergency-room low interest rates can do to stimulate the economy.  That ball in in the court of fiscal policy, the province of Congress and the administration, where it has resided unmoved for several years.

Especially given Mr. Trump’s promises of corporate income tax reform and renewed infrastructure spending, the biggest economic hazards lie in not continuing to normalize interest rates.

So I think we can pencil in three hikes of 25 basis points each in the Fed Funds rate both this year and next.

 

 

$4.95 trading commissions: a good deal?

March 9, 2017 By in How your broker gets paid, Uncategorized Tags: , , Leave a comment

Yes, both for you and me and for Fidelity, which initiated the move down from $7.95.  Fidelity has quickly been followed by other discount brokers.

The reason for the reduction is the increasing popularity of ETFs with individuals who have been traditional buyers of no-load mutual funds–and who, because of this, aren’t used to paying commissions.  (Yes, the functional equivalent of trade commissions end up being deducted from mutual fund results through administrative expense charges, but people generally don’t notice this.)   Apparently, though, $4.95 is an acceptable number.

Fidelity, as a market maker in ETFs, will also earn a bid-asked spread on transactions.   In addition, the reports I’ve read suggest that the sponsor of an ETF can earn as much as 0.5% of assets annually through stock lending.  So forfeiting $3 on each trade won’t dent Fidelity’s bottom line, especially if this stimulates sales of in-house ETFs.

I think the main results of the move will be to lower our costs modestly and to hasten a bit the demise of traditional brokers.

 

 

 

 

 

what a good analysis of Tesla (TSLA) would contain

March 8, 2017 By in Autos, Industry Analysis, Information for investors, Investment firms, Uncategorized Tags: , , , , Leave a comment

A basic report on TSLA by a competent securities analyst would contain the following:

–an idea of how the market for electric cars will develop and the most important factors that could make progress faster or slower.  My guess is that batteries–costs, power/density increases, driving range, charging speed–would end up being key.  Conclusions would likely not be as firm as one might like.

–TSLA’s position in this market, including competitive strengths/weaknesses.  I suspect one main conclusion will be that combustion engine competitors will be hurt by the internal politics of defending their legacy business vs. advancing their electric car position.  The ways in which things might go wrong for TSLA will be relatively easy to come up with; things that could go right will likely be harder to imagine.

–a detailed income statement projection.  The easy part would be to project (i.e., more or less make up) future unit volume and selling price.  The harder part would be the detail work of breaking down unit costs into variable (meaning costs specific to that unit, like labor and materials, with a breakout of the most important materials (i.e., batteries)) and fixed (meaning each unit’s share of the cost of operating the factory).  An important conclusion will be the extent of operating leverage, that is, the degree to which fixed costs influence that total today + the possibility of very rapid profit growth once the company exceeds breakeven.

There are also the costs of corporate overhead, marketing and interest expense.  But these are relatively straightforward.

The income statement projection is almost always a tedious, trial-and-error endeavor.  Companies almost never reveal enough information, so the analyst has to make initial assumptions about costs and revise them with each quarterly report until the model begins to work.

–a projection of future sources and uses of cash.  Here the two keys will be capital spending requirements and debt service (meaning interest payments + any required repayments of principal).  Of particular interest in the TSLA case will be if/when the company will need to raise new capital.

 

 

Tesla (TSLA), me and momentum investing

March 7, 2017 By in Industry Analysis, Investment firms, securities markets, Technical Analysis, Uncategorized Tags: , , , , 1 Comment

Why should a company fundamentals-driven investor have a problem with momentum investing?

Two reasons:

–momentum investing is a reactive strategy, and

–one that focuses on the past price movement of the little pieces of paper (or electronic impulses) that trade in the secondary market.

In contrast, fundamental investing is a predictive strategy based on the idea that the price of the paper/bits will ultimately be determined by the value of the underlying company.  Among fundamental investors, value investors believe that the key is the worth of the company as presently constituted (but perhaps running more smoothly than it in fact is).  Growth investors think the key is in early recognition of novel and unexpected profit positives that will fully emerge only in the future.

 

What kind of a thing, reactive or predictive, is my formula for TSLA of:   buy at $180 and sell at $250?  In a sense, I’ve got some fundamental underpinning.  My back-of-the-envelope figuring suggests nothing is likely to happen inside the company Tesla over the next couple of years that could possibly justify more than a $250 price.  And I’m willing to sell at that price even though the stock is still exhibiting positive price momentum.

But how did I get the $180?

What I’ve really done is to take a chart of the stock and draw a line that runs through the lows of the past four years or so and to conclude that this line forms the bottom of a channel (with something like $250 as the top) that TSLA has been navigating itself through since late 2013.  Yes, at $180 I have better potential for upside than I do at $250.  But that’s more a fact about arithmetic than a deep insight into corporate operations at Tesla.

In sum, then, the fundamental underpinning of at least the buying are pretty lame.

So I guess I have to say that there’s a healthier dose of momentum in my fooling around with TSLA than I might like to admit.  On another non-fundamental note, though, this ensures that my California son and I stay in regular contact.

my approach to Tesla (TSLA): momentum or not?

March 5, 2017 By in Uncategorized Leave a comment

the general idea

TSLA is what would be called in Asia a “dream” stock    …or, in the US, a “concept” stock.  Personally, I like dream better, because the term underlines the considerable uncertainty surrounding a stock, no matter what one’s view of future prospects is.

On the other hand, TSLA is not nothing.  The company has the premier brand name in electric automobiles.  It is, so far, able to sell at list price and directly to consumer, instead of through an independent sales force.  Thereby, it can not only capture the wholesale markup on its autos, but the wholesale-to-retail markup, as well.  Close to a million potential buyers of the newest TSLA model have put down advance deposits of $1,000 per unit.

In addition, TSLA has a substantial electric battery business, which it is building in partnership with Panasonic.  Its jointly-owned Gigafactory will not only supply batteries for Tesla cars, but also for the nascent enterprise of storing for later use the electricity generated by the solar panels it manufactures through SolarCity.

The company is the brainchild of Elon Musk, a visonary with very high tolerance for risk who is most often compared with Jeff Bezos.  Amazon, however, has long since passed through the desert of red ink and into a greensward of large, and growing, net income.

Although TSLA isn’t profitable today, it would arguably be so if its ambitions weren’t continually growing.

putting numbers on paper…

…more to start a conversation than make any firm conclusions.

the auto business…

Annual sales of cars and light trucks in the US and EU are about 20 million units each.  Let’s add 10 million for the rest of the world.

…extremely simplistically

While we’re making things up, let’s say that TSLA can achieve a 2% global market share–meaning 600,000 cars/trucks a year–at some point.  Let’s be optimistic and figure that the average selling price will be $50,000 and that TSLA’s net profit margin is 10% (doing even the most superficial analysis using margins is a VERY BAD thing, but since this is a “dream,” I’ll take this extremely dangerous shortcut).  [Another note:  we can get to the same profit figure by assuming more cars at lower prices–and lower unit profits.]

This all implies that at some point TSLA will have yearly profits from its auto business of $3  billion.

the battery business

The results could be anything.  Let’s take two cases, though:

Case 1.  batteries break even:  no losses but no gains, either.

Case 2:  batteries somehow make $1 billion a year, a figure I plucked out of the air.

summary

If the above is anywhere near correct, at some point (five years from now ???), TSLA will be making $3 billion – $4 billion per year.

If the future price were $250 a share, TSLA would have a market cap of $40 billion.  That’s the same as today’s.  It would mean a future PE based on my optimistic scenario of 10x -13x.  (For what it’s worth:  If I put a PE of 15x on battery earnings of $1 billion and a PE of 8x on auto results, I’d arrive at about the same $40 billion if batteries are profitable one day, but only $24 billion if batteries break even.)

This means that if I want to hold TSLA at $250 today I’ve got to believe that something better than what I’ve written above will actually come to pass.  That’s because something like what I’ve written seems to me to already be factored into today’s price.

What is the situation at $180 a share?  Well, the market cap of TSLA would be $29 billion.  At that price, a PE of 8x on yearly sales of 600,000 autos + batteries never making any money is what is baked into the cake.

More on Tuesday.