Category Archives: Recent Market Action

what’s wrong with Tesla (TSLA)?

October 13, 2015 By in Current Market Thoughts, Recent Market Action Tags: , , , , Leave a comment

On September 21st, TSLA traded at $270+ per share early in the day.  Yesterday it closed at $215    …and is sliding again in pre-market trading as I’m writing this post.  That’s a loss of almost 20% during a period when the S&P is up about 2%.  What’s going on?

TSLA is an early-stage car company that is still spending money faster than sales revenue is coming in.  That’s why it is forced periodically to raise new capital on Wall Street.  Officially, TSLA is still projecting that it will sell 50,00 cars this year, a figure that would bring it to breakeven on a cash flow basis–meaning sales revenue would be sufficient to cover all its spending.  Recently, however, the company has been making noises that it will fall short of that figure, mostly because it’s having more trouble than it thought with reprogramming its machine tools to handle producing two models on the same assembly lines.

Let’s say TSLA falls 5,000 cars short of its 50,000 goal.  At first blush, this doesn’t sound too bad. But figure that each car would retail for, say, $120,000.  If so, a shortfall of 500 means $60 million less in the bank than anticipated.  It also means that TSLA won’t reach cash flow breakeven until sometime in 2016.

Something similar happened to TSLA this time last year, when bad weather and sales weakness in China made 4Q14 look ugly, however. TSLA has also been hinting for months that the 50,000 goal may be out of reach, even though “officially” it has not changed its production figure.  So this isn’t exactly new news.

I think two other factors are behind TSLA’s weakness.

–Up until about a month ago, Wall Street brokerage house analysts have been writing super-bullish reports on TSLA.  This amped-up enthusiasm is always what happens in advance of a capital raising (in August, TSLA issued about three-quarters of a billion dollars in new shares).  Now, analysts are, as usual, toning down the rhetoric, and conceding that TSLA might indeed be still cash flow negative at yearend.  Par for the course.  Yet this new analyst narrative is causing the stock to fall, in my view.  This suggests research reports are being processed in larger than normal measure by robots who believe everything they read.

–Investors may also be becoming more cautious about speculative stocks like TSLA because they are finally convinced that the interest rate cycle has turned and that rates are on the cusp of a multi-year upward course.  One enduring market metaphor for stocks is that they are a funny kind of bond.  That is, that they can be evaluated by calculating the present value of future cash flows (this is much, much easier said than done).  A speculative stock is somewhat like a zero-coupon bond, with all the value far in the future.  As discount rates rise, the present value of securities like these erodes the fastest.

This is by no means a fatal flaw in the TSLA story, in my view.  It just suggests to me that trading may mimic the pattern of a year ago for a while.  What’s more interesting is the possibility that the stock market is finally beginning to factor into prices the idea of higher interest rates.

 

Jim Paulsen on the US stock market

September 11, 2015 By in Constructing a Portfolio, Current Market Thoughts, inflation vs deflation, Inventory Cycle, margins, Portfolio management, Recent Market Action, stock market, Strategy Tags: , , , , , , , , 3 Comments

Yesterday’s Financial Times contains a guest column by Jim Paulsen, strategist for Wells Capital, a part of Wells Fargo.  I find Mr. Paulsen’s work to be orignal, thoughtful and, for me, thought-provoking.  On the other hand–a warning–he and I share the same generally optimistic view on markets and have tended to agree on most basics.

Here’s what he has to say:

–the current market swoon may have been triggered by worries about the Chinese economy, but its real cause is to be found in the dynamics of the US economy/stock market

–US stocks were, and still are, trading at an unsustainably high price-earnings multiple.  The final bottom for stocks in this correction will be around 1800 on the S&P 500, or about 3% below the low of a few days ago.  That’s where stocks will be on a more reasonable 15x PE

–full employment in the US, i.e., where we are now, creates a series of problems for the economy and stock market.  Employers wishing to expand are forced to find new workers by bidding them away from other firms.  Since inflation in advanced economies is all about wage increases, poaching creates inflation.  In the short term at least, a higher wage bill means lower margins–and therefore lower profit growth.  The Fed responds to the inflation threat by raising interest rates, which exerts downward pressure on PEs

–investors don’t get this yet.  They’re “more calm and confident than at any other time in this recovery.”

–the combination of high PE, higher interest rates and slowing growth mean that equity investor focus will shift from the US to more fertile fields abroad.  These areas are more prospective because, unlike the US, they don’t face the need, caused by achieving full employment, to rein in the pace of domestic economic growth. I presume, although Mr. Paulson isn’t more specific, that this means the EU (it may also mean US stocks with high exposure to non-US economies).

my thoughts

Mr. Paulsen is in touch with institutional equity investors every day.  So he has a much better sense of the current thought processes of US professionals than I do.  He seems to feel his customers are only beginning to believe that the set of issues that come with full employment are at our doorstep–and are only now starting to discount them into stock prices.  Hence the correction.  While it’s risky to think you know more than the other guy–in this case, that the other guy slept through his elementary economics classes–I’m willing to go along and say it’s true.

Mr. Paulsen has previously made the point that interest rates are going to rise in an economy that doesn’t have much business cycle oomph left in it.  Therefore, he argues, past instances of cyclically rising rates, during which stocks generally were flat to up, may not be good guides to what will happen today.  I look at the situation in a different way.  If we ask where long Treasuries will be at the end of Fed tightening, the answer is that they’ll likely be yielding less than 4%.  If we think that the yield on Treasuries and the earnings yield (1/PE) on stocks should be roughly equivalent, then the implied PE on the S&P is 25x.

One might argue that the idea of the equivalence of earnings yield and interest yield arises from a long period in which Baby Boomers preferred stocks to bonds.  As Boomers have aged, that preference has reversed itself, meaning that yield equivalence between stocks and bonds may be too rosy a view for stocks.  If we assume that stocks trade at a 20% discount to this yield parity, however, the implied PE at the end of rate hikes is still 20.

Both results are a long way from the 15x that Mr. Paulsen proposes for the S&P.

It’s often the case that a significant drop in stocks often signals a leadership change.  I think it makes a lot of sense to reverse portfolio polarity away from an emphasis on earnings coming from the US to profits generated abroad.  How exactly to carry this idea out is the key, though.

 

 

analyzing the past week in stocks

August 28, 2015 By in Current Market Thoughts, Recent Market Action, securities markets, stock market, Strategy Tags: , , , , , , , , Leave a comment

a roller coaster ride

The past five or six days of stock market trading around the globe have been very unusual, to put it mildly.  To recap quickly, the S&P 500 (which will be my main focus here) peaked on July 31st at a value of 2114.  On Thursday August 21st, the index closed at 2026.  Then…

—on Friday the 21st, the S&P fell by 3.2%

–on Monday the 24th, the S&P opened down 5.2%–with major stocks falling by as much as 20%.  The index rallied back to breakeven before fading late in the day to close down 4%.

–on Tuesday the 25th, the index opened up slightly, added 2.5% to the initial print and then turned around to close 1.5% lower.

–on Wednesday, the index gained 4%+.

–on Thursday the S&P opened up slightly, rose steadily to gain a total of 2.5%, reversed course to lose almost all of that  …before reversing course again to end the day at +2.4%.

All this occurred on 2x -3x normal volume each day.

To add to the fun, the computers at Bank of NY-Mellon, which prices a good number of ETFs, failed over last weekend and still aren’t functioning normally.  So for days, traders of ETFs lost the NAV anchor on which to base their actions.  This may be a reason for my impression that bid-asked spreads for ETFs were wider than normal earlier this week.

As I’m writing this early Friday afternoon, the S&P is flattish.  Volume is about half – two-thirds of what it was earlier in the week.

why?

If the question is why a sharp decline now rather than, say, two weeks ago, there’s never a good answer.

If the question is what forces caused the big fall–and equally sharp rebound–that’s almost as difficult.  We might view this week as the panic-filled culmination of an equity slide that began on the first trading day of August and which is based, I think, mostly on extended valuation.  The decline in the oil price below $40 a barrel can’t have helped sentiment.  Nor would spirits have been perked up by the weakness of Chinese stocks as speculative excess continues to be washed out of that market.

Of course, battling computer trading algorithms could have been the driving force.  That would at least explain how quickly everything moved.

For my money, though, a technical correction in a pricey market is a good enough story.

 

A more important question for us as investors is whether the selling, however motivated, is over.  The optimistic part of me (which is virtually my entire body) says that the rebound from the opening lows on Monday is an important positive psychological sign.  However, I think volumes have to return to normal, time has to pass, and the market has to begin to drift upward before I’ll be completely convinced.

Let’s say, just for the sake of argument, that this week has seen the establishment of an important resistance level for the S&P.  Remember, I’m not yet willing to bet that this is the case.  But if it is, three considerations are important:

–the market often rises for a while, but then returns to visit the prior low before bouncing up again off it.  This action forms the so-called “double bottom,”–which technicians take as a very bullish sign

–in a major reversal of direction, market leadership often changes, meaning some star groups become clunkers going forward and some clunkers regain the market limelight.  Although I’d scarcely call this past week a major event, we should still look carefully for hints of leadership change

–we’re fast approaching the yearend selling season for mutual funds (most mutual funds have a fiscal year that ends on Halloween), which typically extends from mid-September to mid-October.  The prospect of such selling could keep a lid on stocks over the next weeks, and would be the vehicle for retesting Monday’s lows.

what to do?

That’s my topic for Monday.

 

 

what’s going on in stock markets?

August 25, 2015 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, stock market Tags: , , , , , , , Leave a comment

technicals

From the intraday high of 2132 on July 20th, the S&P 500 has fallen by almost 12.5% to its intraday low of 1867 yesterday.

For fans of support and resistance, 1867 is within hailing distance of the 1820 intraday low for the index in mid-October 2014.  The closing lows at that October bottom were 1867 on both October 15th and 16th.

That all adds up to a severe correction by the experience of the past few years, but still one that might be called “garden variety.”

opposing signals

What’s unusual about this decline is that virtually the entire fall happened in a panic-filled two-day period–last Friday and yesterday.

So this all gives us two opposing market signals.  On the one hand, in the normal two-steps-forward-one-step-backward rhythm of stock markets, we’ve finally made a significant backward step over a suitably long period of time.  One might conclude that we’re done with that phase and are ready for the next up move.

On the other hand, the past two trading days have been fear-filled.  On Friday, the S&P was down by 3%+ and closed on its lows.  Yes, it was a Friday, so brokerage houses flattened their books going into the weekend (translation:  dumped inventory into the market near the close).  Even so, closing on the lows sends shivers down traders’ spines.  Then the market opened on Monday down by about 6%, another stomach acid inducer.  Pundits rushed in to “explain” the goings on to retail investors as a sign that the Chinese economy (the largest, or second-largest, depending on how you count, economy in the world) was imploding–with dire consequences for the rest of the globe.  That increased the fear quotient.

My point here is that emotions are much more powerful that we usually recognize–and they linger.  Maybe the market had been fearful for close to a month and purged that fear over the past two trading days.  But I don’t have the sense that anyone was afraid before fireworks erupted on Friday.  That’s my main hesitation about saying Monday represents a selling climax that clears the way for upward progress.

China not the cause

I think that China is the trigger for what’s happening in markets now, not the cause.

I’m torn between two viewpoints on China as an economy.  I think the hedge funds proclaiming that the selloff in oil and metals is due to economic weakness in China that Beijing is covering up–and that we are due for a protracted bout of global economic weakness–are completely wrong.  On the other hand, either they or their brethren spouted similar nonsense about hyperinflation being induced by Fed action five years or so ago.  Everyone now knows that was totally wrong–yet this craziness struck a responsive chord and influenced stock trading for an extended period of time.

My conclusion:  this isn’t a time to bet heavily on whether the market is going up or down (it almost never is).

trading up

During periods like this, most investors, even professionals, tend to go on vacation.  They just don’t look at the daily ups and downs of prices.  For anyone who can stand the rocking of the boat, however, there’s useful portfolio work that can be done to upgrade holdings.

–clunkers that have never gone up usually don’t go down a lot in general market declines.   Strong stocks that have gone up a lot typically get pummeled.  So this is a great time to ditch the former and use the money to buy the latter.

–we’re in a time of significant structural economic change.  I think the prophets of doom are mistaking that for cyclical economic weakness.  Losers in a time like this are typically large and well-known; potential winners are typically smaller and more obscure.  For most of us, the appropriate switch is from old-line, status-quo stocks into ETFs that are focused on Millennials.