Blain’s Morning Porridge: September 9th 2020, Correction or What?

Blain’s Morning Porridge: September 9th 2020, Wobble, Correction or What?

If it smells like, tastes like, and looks like, then it probably is… 

It feels the current correction is going deeper. It might even wobble into a crash. A cataclysm of long-denied bad news is hitting the market; rising pandemic infections (but death rates way down), renewed social distancing rules – no more than 6 people together in the UK, and a string of negative corporate news. Markets are likely to suffer more bad news as October marks rising unemployment and ongoing pandemic misery.

On the other hand – central banks can’t afford a market crash, and Donald Trump can’t either. The American’s look poised to push another stimulus package and the Fed will do what the Fed has to do.. Will it work..? I suspect there is something more fundamental going on the hive mind of the market… but more of that later this week.. Yep… I’ve got an idea..and its not just trying to explain how MMT might work.

Did you know today is World Electric Vehicle Day? Nope? Me neither. But its very Apt.

This morning Boeing and British Airways got lucky – their bad news is buried behind the long-anticipated conflagration of Tesla. As Tesla stages a $100 bln cap rout, the tech rot is spreading fast – pulling down Softbank y’day as the implications of its option-whale investment strategy sank in. It must have hurt the Saudi’s to discover the chaps they thought were new economy tech geniuses are actually just a shower of stock market gamblers.

Its only seven days since I last warned about Tesla in a post called “Irrational is rational”. I was questioning the hype around Tesla’s “Battery Day” later this month, and the irrationality of a company that produces less than 1% of the world’s autos and has never made any real profit selling cars, being worth more than the rest. I also raised the issue of stock sales by long-term holder Bailie Gifford.

My timing was lucky but sublime. The following day the stock’s speculative tumble began. Looks like it was Tesla’s non-inclusion in the S&P, the revelations about Softbank ramping via options, or maybe it was their cheeky little $5 bln capital raise at the very top of the market… but the stock is now down 34% – back to where it was in mid-August. Which is still 8x its price this time last year!

Regular readers will know I’m not of fan of Elon Musk. But let me try and describe what’s going to happen in a non-partisan manner. It’s not going bust, and it won’t default, but there are massive risks swirling around Tesla. My call is Tesla down 34% is not a correction. That pop you heard was the sound of the Tesla bubble bursting. 

I will be bombarded by troll-mails explaining in barely literate terms what an idiot I am. The fanboys will tell me Tesla is going to $5000. Stop. Credit where credit is due: Tesla relaunched/created the EV market and makes good cars. It’s just not worth $300 bln. Its fair value – including a premium for what its achieved – is a fraction of its current market cap.

The fact that Tesla’s massively overhyped bubble has now popped generates enhanced risks and downside momentum of their own making. If Tesla stock doesn’t stabilise quickly, the downside problems could swiftly cascade, accelerating the downward price into, perhaps, a death-spiral.

The realisation the stock was massively inflated will have serious implications for its current market cachet and sales. If the price tumbles – who will want to be seen driving one out the showroom? (Maybe I’ll buy one in the hope it becomes the DeLorean of the future?) The other car makers are launching their EV and Hybrid competitors – they might be inferior and have a lower range, but buyers know they will be there next year. So will Tesla.. but the damage is done.

Troubles for Tesla will not come singly – but in mighty battalions.

When the firm’s market cap is down to a more sober $40 bln (which is where it was last year), maybe it’s leadership in battery tech, the value of the data its acquired and marshalled for autonomous driving, and owning 20% of the growing EV market, might make it interesting as an expensive acquisition or as a partnership backdoor into EVs and meeting CO2 emission targets. Regulatory credits have underlain the bubble. It’s been the sales of credits which have enabled the company to declare a profit despite loss making car sales. They could be Tesla’s most valuable asset.

Yesterday’s $2bln deal GM struck with Nikola (the EV and Hydrogen fuel-cell truck maker that hasn’t yet built a vehicle) is one way forward. $2 bln buys GM 11% of the company and access to its future regulatory credits as it builds the new Badger truck. The deal will pay for itself in the credits alone. GM and Nikola stock surged as Tesla plummeted.  GM gets a seat at the EV table and Nikola’s board.

The $5 bln equity Tesla just raised should ensure its solvency though its coming existential crisis… but for one further major issue…

My big big problem with Tesla is Corporate Governance– the most important of the ESG criteria. Tesla is Elon Musk, and he’s a looper. If I was a risk manager concerned about how my investment committee is going judge me on a possible 90% tumble in Tesla’s stock down to a notional fair value, I might be concerned how Musk ever passed Governance and suitability tests.

Musk’s loose cannon comments and twitterstorms on the SEC, his abuse of markets and individuals who’ve crossed him is well known. On the other hand, his unique-Musk-ness got Tesla to where it is today. Without him, Tesla will be perceived as nothing, but his style certainly won’t fit any future partnership. Any future investment thesis on Tesla should include taking Elon out of his stratospheric option package.

A bigger risk may be more immediate; Musk losing interest, declaring his brief tenure as one of the richest men on the planet means he is done… and will now focus on linking his brain to a laptop, drilling tunnels under cities, or maybe launching himself to Mars. Good luck to him.

The bottom line… what’s the upside for Tesla from here?

I might be wrong, and I’ve been declaring Tesla a bubble for 2 years… but even a stopped clock is right twice a day.. 2 years ago I put WeWork, Telsa and HSBC on my crisis list. I added Boeing to the list last year. 1 Gone, 3 down but not yet out. Let’s see.


Aviation – things get worse for Boeing as B-787 Dreamliners are grounded after dangerous construction defects are discovered.. Even more interesting was a significant number of IAG shareholders staging a revolt over management pay. Outgoing IAG chief Willie Walsh took home a miserable £3.2 mm last year.

A mate of mine, a pilot flying one of BA’s vintage airplanes till the pandemic saw him binned a few months ago, is now a delivery driver for a supermarket chain. He’s not the only one – a West-End theatre director joined alongside him the same day. He says he’s never been happier.

Five Stories Too Read Today

FT – US Companies stretch out debts to lock in low rates for longer

WSJ – JPMorgan Investigating Employees and Clients Over Coronavirus Stimulus Programs

BBerg – Long Treasury Bonds Have Their Own Healthy Correction

BBerg – GM and Nikola Are A Match Made In Tesla Hell

Torygraph – Carmakers must be honest: EV’s aren’t clean!

Out of time and back to the day job!

Bill Blain

Shard Capital