I was emailing a friend over the weekend about TSLA and how to play the EV revolution that’s now underway.

My worry about TSLA is that it does basically no advertising now, while it has the EV field in the US more or less to itself. GM spends 2.5% of sales on advertising in the US vs. 0.12% for TSLA. If TSLA had to begin spending on advertising at the same rate as GM, its operating margin would drop from 17% to 14.5%. That’s a contraction of about 15%. 

(I decided to get the relevant figures from ChatGPT instead of gong to the SEC EDGAR site and look at TSLA’s financial filings. I figured AI would go to the authoritative source and save me maybe 15 minutes of looking. It turns out what I got from AI was total garbage. The numbers were mostly wrong–by a lot. They came from sketchy websites, rather than the authoritative source. And ChatGPT didn’t know what an operating margin is. It put TSLA’s at 11%. Anyway…)

It’s hard to know if that 2.5% is the right number or not. If I were forced to guess, I’d say it’s too low. Absolute dollars count and GM’s revenues are 1.8x TSLA’s. It’s not clear whether the traditional auto framework, with lots of different colors and different model years–which would presumably entail further costs to TSLA–will be part of the price of entry to the automotive mainstream. It’s also no longer self-evident, I think, that the association with Elon Musk is the unadulterated plus it might have been a few years ago. There’s the hot mess, financially and content-wise, that X has become under Musk’s stewardship. And, if today’s news reports are correct, Musk is demanding a payment in TSLA stock of $80 billion or so for him to remain with the company. Yes, weird stuff, but the most important issue, I think, is potential damage to the brand name.

Of course, there’s all the news coming out of Chicago about Tesla batteries dying in the cold weather–seemingly a combination of the physical characteristics of the batteries and lines at charging stations. I’m also struck by the number of sleek commercials during the football playoffs by high-end manufacturers of conventional autos debuting their new EV offerings.

I have two reactions to all this: EVs are an important place to have some exposure to, and there’s no need to get that exposure through the EV manufacturers. 

by Brendan Duane

The Bitcoin ETFs are trading.

Depending on where you start counting, this was as long as a ten year process culminating in a court order forcing the SEC to cease arbitrarily blocking these products from listing.

Why care? For one thing, the amount of friction involved in buying Bitcoin has been significantly reduced. Sure, setting up a Coinbase or Robinhood account isn’t actually hard, but it’s got to be over a dozen clicks, plus a new password, a new 2FA, you need to link a bank account… Too many hurdles for many people to bother. But their traditional brokerage accounts are already set up, and already have money in them. Now they can type in “bitcoin” and products that represent direct exposure to Bitcoin show up. Innovation. What’s more, they can put also this stuff into tax advantaged accounts. The impact there shouldn’t be understated, especially considering we’re talking about an asset that historically measures appreciation in multiples, rather than percent.

Benefits to consumers aside, the Wall Street marketing machine is now incentivized: an “exotic” untapped source of commissions and fees just popped up. Ads are already running on CNBC. Seems likely these ETFs will be pushed in front of people until they’re at least a small piece of everyone’s retirement accounts. All the familiar, well trod marketing points bitcoiners have been repeating for years–“digital gold” “artificial scarcity” “monetary debasement hedge”–will be coming from adults in suits with official sounding titles and from well-known financial giants, rather than from guys in buckskin jackets from no-name firms. It’s likely, I think, they’ll find purchase as investors wonder about the implications of AI and global political instability.

A bit of back of the envelope math bitcoiners like uses the mining analogy to compare the amount of BTC in circulation vs. the amount of gold. All told, gold bullion in circulation adds up to a bit above $13 trillion. As of this writing, BTC is not quite $1 trillion. If we consider BTC, at minimum, a comparable substitute for gold, there’s plenty of room for it to grow and market share to eat.

Then there are individual retirement accounts (currently representing $35T+ in assets) as well as the weighting of 401k allocations going forward. Even a small piece migrating to BTC could have outsized impact.

At least as important as the new ease of transacting in BTC, the existence of SEC-approved ETFs signals its institutional legitimation–and implies, I think, the possibility of billions of dollars in inflows to them over the remainder of the decade. From there it’s not hard to imagine some combination of events in AI, geopolitics, or energy markets that might accelerate the trend.

Footnote-ish stuff (by Dan Duane)  a little geeky, maybe a lot geeky, but important nonetheless

ETFs are an evolution of the traditional mutual fund form. Mutual funds are bought and sold, by the management company, once daily, after 4pm New York time, at the US market-closing prices (prices of any non-US securities are set by third-party estimates–which I’ve found in my career to be shockingly accurate). The market for ETFs, in contrast, is made by authorized participants, i.e. big brokerage firms, who trade them just like individual stocks, who also calculate the fund NAV in real time and take a bid-asked spread as their fee for services. The APs also keep the records of ETF holders, saving the fund that expense.

When an AP takes money from you or me and promises delivery of ETF shares, it gets those shares by collecting up a bundle of stocks that replicates the ETF structure and swapping them for shares of the ETF. Conversely, if the AP has bought a bunch of ETF shares from you and me and promised to pay us money, it gets that cash by swapping the shares for a matching bundle of stocks that it then sells in the market.

In the case of bitcoin ETFs, however, the SEC will not permit the exchange of assets. It has stipulated that the AP must give the ETF cash to buy shares from it, and the ETF must give the AP cash (not bitcoin) to redeem shares. Two reasons for this: it’s the same structure as, say, gold ETFs holding physical gold (rather than futures contracts). And allows firms that don’t deal in bitcoin to be APs. But it also means that tax treatment is different for taxable investors.

It seems to me that the transition to electric vehicles is inevitable. The main reason I think so is that in EVs a big battery replaces the internal combustion engine as a source of power. The ICE is a complex, very costly engineering feat that requires frequent aftermarket maintenance, while the battery is a lot cheaper and, well, just lies there. A very big valuation difficulty that arises with traditional auto makers is that internal combustion engine technology and brand names are the heart of the intellectual property they own. 

This huge advantage of EV-makers over ICE auto firms is something I, embarrassingly for me, didn’t really understand when TSLA emerged on the scene. I knew that the gasoline-engine incumbents, particularly those in the US, were bloated bureaucracies periodically flirting with bankruptcy, despite receiving very substantial government protection through tariffs and quotas that discouraged import competition. So that was a big plus for Musk. But it was nowhere as big as having a better, potentially cheaper, product.

TSLA also popularized direct sales to the consumer at a fixed price, as its main distribution channel. This eliminated the need for dealership middlemen, whose opaque pricing of new cars and high-cost maintenance services have been the bane, not only of car owners but manufacturers as well, in the US for generations.

Where are we today? I think we’re still very early in the game and in a sorting out period. We have the basic outlines of what is likely to happen over, say, a decade–that EVs will gradually replace internal combustion engine vehicles in most consumer and some business uses. But there will be bumps in the road and unexpected turns and twists–or at least that’s been my experience over close to half a century (ouch!) of analyzing companies and industries.

Three things stand out to me with EVs right now:

–probably the biggest is what I think of as the “Sony problem.” Back in the heyday of Japanese consumer electronics, Sony would unveil an exciting new product–the Betamax video player, for instance. As volumes built and economies of scale began to kick in, Sony would typically choose to keep its prices high rather than sacrifice margin to pick up volume, that is, “riding the cost curve” down, which would typically end up producing much greater overall profits. Panasonic would inevitably take advantage as a “fast follower,” bringing out an almost-but-not-quite-as-good product, like the VCR, six months later, selling for maybe 30% less than Sony, that would eat Sony’s lunch. In the TSLA case, its offerings are about a third more expensive than a hybrid. My sense is there aren’t any EV Panasonics yet, other than in China, where BYD is now the market leader. 

–today Hertz announced it’s going to be selling about 20,000, or a third, of its remaining fleet of EVs (HTZ bought 100,000 Teslas in 2021, to much fanfare, and talked about turning). How so? As I read the 8-K, HTZ is doing so first of all because there’s not much demand for EV rentals, secondly because repair costs are unusually high. I’d heard rumblings from auto mechanics that Teslas aren’t particularly well-made, but for HTZ the more important issue for its fleet of EVs–which has at least some non-Teslas–seems to be the high cost of repair parts from manufacturers

–my wife and I are going to baseball spring training in Scottsdale next month. In arranging for a rental car, I noticed that EVs were being offered for at least 25% less than comparable ICE cars. Great, I thought, a bargain. But then realized I knew nothing about the availability of charging stations in Arizona, what typical wait times might be or how our needs would match up against the driving range of the EV we’d rent. So I began to understand why demand might be so soft

How to invest? I don’t have a very high level of conviction, but I’m thinking the independent gas station chains in the Midwest are interesting, if risky, ways to play the potential demand for charging. 

The gigantic elephant in the room for investors is, I think, the upcoming presidential election in the US. All my training and experience argues that politics never matters and that anyone who starts off an investment discussion with politics basically has nothing useful to say. This time is different (another alarm-bell phrase), I think, but my guess is that we’re months away from Wall Street beginning to discount the negative consequences of a Trump win.

My first boss as a portfolio manager stressed the the idea that by the time you catch and deal with an underperforming stock, you’ve done enough damage to offset the good that will come from three winners. I’m not sure she’s right about the 3x ratio, but there are certainly times when looking like the index is not a bad thing. I think we’re in one of those times right now, where the overall market will go sideways until we see whether there’s enough oomph in the economy to drive stock prices higher.

I’ve been thinking about the auto industry lately. Of course, this could be another warning sign. Generally speaking, and especially in the US, this has been an area to stay away from for as long as I can remember. GM, a shadow of the dominant domestic firm of a generation or two ago, has been an epic business school case study in dysfunction and financial ineptitude–this despite US automakers enjoying continuous government protection from foreign competition for many decades. The EU isn’t much better, with automakers only beginning to recover from their collusion to falsify emissions data from diesel engines. The worldwide industry has also been plagued by chronic overcapacity for as long as I can remember.

The basic factors I see to consider are:

–combustion engines are on the way out

–engine technology and design/brand names are the major intellectual property of current automakers. Most of the components, ex engines, have long since been farmed out to third-party suppliers–one of the reasons, I think, that most controls are pretty similar from brand to brand

–electric cars are much easier and less expensive to manufacture and maintain because they’re basically giant batteries with software + third-party stuff taped to them

–this calls into question the long-term value of dealer networks, suggesting incumbents must deal with the thorny question of how to disengage.

The obvious manufacturing stock is TSLA, which I owned shares of some time ago …and sold much too soon. Issues I see, though: the stock’s current PE is 75; there’s competition, especially from China; post-purchase dissonance may be an issue (I know of no evidence either way, but I don’t think anyone is talking about this yet, either); repairs may also be a problem; Elon Musk’s political/social views may cause some potential buyers to shy away.

More tomorrow.

In the mid-1980s, the Asian Tiger markets–Hong Kong, Thailand, Malaysia, Singapore–and maybe South Korea and Taiwan) were beginning to become a powerful economic force. This was due to modernization of US industry under Reagan, with the construction of global supply chains; the rising yen, which caused Japan to shift lots of production into China; and the desire of the Tiger countries to replicate the economic success of post-WWII Japan. This was an important world investment theme that lasted over a decade.

Then there were the BRIC countries–Brazil, Russia, India, China–which Goldman Sachs tried to promote about 25 years ago as successors to the Tigers. Nothing much tied this group together, however, other than they were all big countries and–with the exception of China under Deng–all places international stock market investors had tended to avoid. What was so bad? …unstable governments, hostility toward foreigners, difficulty getting money in and out, and untrustworthy financials. And in 2000, Xi replaced Deng and Putin replaced Yeltsin–both moves that had terrible adverse consequences for Russia and China. Anyway, catchy acronym with no substance behind it.

In today’s world, we have the Magnificent Seven. Pundits are writing/talking about them as if they were an important economic and stock market force that will be the key to how this year plays out, rather than a collection of big companies that did well in 2023. 

I think it’s the latter and that a lot of the magnificence of 2023 is a result of their wretchedness in 2022. My rough calculation of 2022 capital change results:

S&P 500    -10%

AAPL    -17%

NVDA    -20%

MSFT    -20%

GOOG    -25%

AMZN    -30%

TSLA    -44%

META    -53%.

So the Seven as a group fell about 3x what the S&P did two years ago. TSLA and META each came close to being cut in half. The consensus view toward the end of 2022 was that more economic damage was in store for 2023. It’s understandable, then, that the biggest losers of 2022 would have strong rebounds when that prediction proved far too bearish. META damping down its Metaverse ambitions didn’t hurt it, either.

Why not the Magnificent Ten? Obviously, you’d lose the movie reference …but you’d also have to include some much less glamorous names, like Berkshire Hathaway and a couple of drug companies. So some, maybe a lot, of the sizzle would be gone.

Also, as it turns out, this morning the Magnificent Seven includes BRK.B and not TSLA. AAPL has slipped out of first place to second, as well, on reports that iPhone sales are cooling off.

Anyway, I think we’ll see the effect of changing economic variables in the performance of the Seven. I don’t think they’re the place to look for the cause, however, as I perceive the financial press is thinking.