Tesla – The Daily Tearsheet

Morning Report: Strong ADP numbers

Vital Statistics:

	Last	Change
S&P futures	2939	10.25
Eurostoxx index	384.7	2.78
Oil (WTI)	75.25	0.07
10 year government bond yield		3.08%
30 year fixed rate mortgage		4.78%

Stocks are higher after the ADP jobs report came in gangbusters. Bonds and MBS are flat as we head into a day with 5 Fed speakers.

The ADP jobs report came in stronger than expected, with 230,000 private sector jobs added in September. This is well higher than the 180,000 estimate the Street has penciled in for Friday’s report. The market will be focusing on the wage data more than the payroll data with the employment situation report, however.

Mortgage applications were flat last week as we head into the seasonally slow Q4 and Q1 time of the year. “Rates were little changed last week, following the most recent [Federal Open Market Committee] meeting where the Fed announced another rate hike based on the health of the economy and job market as expected, “said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Short-term rates have been increasing but long-term rates have held steady, which should not pose too much of a headwind to home purchase activity, especially given the potential demand from demographic factors.”

The ISM Non-Manufacturing Index hit a record high last month (albeit only going back to 2008). We saw a huge jump in the employment index of almost 6 percentage points, and continued strength in new orders. Tariff worries have taken a step back, and prices are rising, but not uncontrollably. Labor shortages were mentioned as an issue.

Mortgage fraud risk is increasing, as higher home prices encourages buyers to pad their financial situation to qualify for a loan. There are online services which will produce fake pay stubs and answer VOE calls, (for “novelty” purposes of course). This is in addition to the other more typical ploys, which include holding out a rental as owner-occupied. Most of the risk in in the wholesale, not retail channel, and we are nowhere near the liar loans of the bubble days. Worst places for fraud risk: NY and NJ, where glacial foreclosure timelines add insult to injury.

They’re still worried about deflation. Charles Evans said that inflation hasn’t gone up as much as the Fed would like. Fiscal policy is very pro-cyclical at the moment, and the expansion is long in the tooth.

The Tesla saga has taken another interesting turn. The SEC thought they had a settlement with Musk over the infamous 420 tweet (where he tweeted that he was planning to take Tesla private at $420 a share price, and that he had financing lined up). The SEC sued him for making false statements that impacted the share price, and he got off relatively light, with a fine to be shared with the company, and a requirement that he step down from the Board for 2 years. Now, Musk is telling the Board that he will quit the company if they don’t fight for him. One thing is for sure: getting into public spats with the SEC is generally not good for your stock price.

I am surprised Amazon stock is holding up given the announcement yesterday. Although the company declined to provide any financial guidance, it is hard to see how the company escapes without a significant bite in its earnings. To make matters worse for the company, cash flow will be impacted as employee bonuses for many workers will now be paid in cash versus stock. AMZN earnings last year: $3 billion. AMZN stock compensation last year $4 billion. I guess bulls on AMZN are betting that this holiday shopping season is going to be so great that the increased costs don’t matter. But a company trading at 78x expected earnings doesn’t have a lot of margin for error, especially if its cost structure is going to more closely mirror that of its bricks-and-mortar competitors. I am sure the politics behind the announcement will be a fascinating tale.

Morning Report: QE portfolio drops below $4 trillion

Vital Statistics:

	Last	Change
S&P futures	2909	-10.5
Eurostoxx index	382	-4.4
Oil (WTI)	72.1	0.02
10 year government bond yield		3.03%
30 year fixed rate mortgage		4.74%

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

Personal incomes rose 0.3% in August, as did personal spending. The inflation numbers came in a little tamer than expected, with the headline number up 2.2% and the core number up 2%, right in line with the Fed’s target.

The Fed’s holding of Treasuries and MBS (relics of the QE and Operation Twist days) have dropped below $4 trillion. Total Assets at the Fed are still around $4.2 trillion, compared to pre-crisis levels below $1 trillion.

Jerome Powell suggested that the Fed is going to return to its more typical opaque posture with respect to the markets. In the aftermath of the crisis, the Fed became very open about its intentions and policies, and often seemed to follow the markets. This is a sensible posture when the economy is fragile, but the financial crisis is probably far enough in the rear view mirror that the Fed can start returning to normalcy. If Janet Yellen’s handholding of the markets was one extreme, Alan Greenspan’s Fed raising the Fed Funds rate 50 basis points at a surprise Saturday meeting was the other.

The SEC has is suing Elon Musk for issuing “false and misleading statements” and failing to notify regulators of material company changes relating to the ill-fated 420 tweet. On August 7, Elon tweeted “Am considering taking Tesla private at $420. Funding secured.” Tesla stock rallied on the announcement and then sold off as investors figured out it wasn’t as solid as it initially appeared. The SEC complaint is fascinating reading – the Board of Directors was blindsided by this, and I think it never dawned on Elon what the implications of that tweet would be. Essentially, he had initial talks with a large Middle Eastern investor who was interested in taking a strategic stake in Tesla. No price, percentage stake or other specifics were mentioned. Elon arrived at the $420 price by applying a 20% takeover premium to Tesla’s existing share price (which came to $419) and then rounded up to $420.

From the complaint: “According to Musk, he calculated the $420 price per share based on a 20% premium over that day’s closing share price because he thought 20% was a “standard premium” in going-private transactions. This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend “would find it funny, which admittedly is not a great reason to pick a price.”

Elon never thought through any of the regulatory conditions, financing conditions, legal issues, how retail investors would have to be treated, etc before making the tweet, which was probably meant to stick it to short sellers. Tesla’s stock is down about 30% from its peak, and is a classic example of what happens when cult stocks stumble. As an aside, when company CEOs get into public wars with short sellers, that is generally not a bullish sign.

One of the remedies will be to ban Musk from ever serving on the Board of Directors of a public company, and he will certainly face civil suits from people who bought TSLA in the aftermath of the tweet, before the relevant information came out. Suffice it to say, this is one of the biggest corporate brain farts I have seen since Martha Stewart went to the big house (and lost about $1 billion in wealth from MSO’s stock decline) in order to prevent $60,000 in losses on IMCL stock.

In the aftermath of the US housing bubble, massive coordinated central bank easing has led to bubble conditions in six large cities: Hong Kong, Munich, Toronto, Vancouver, London and Amsterdam. Extreme overvaluation exists in Stockholm, Paris, San Francisco, Frankfurt and Sydney. Who knows when these bubbles will burst, but when they do, it will tend to pull rates lower, despite what the Fed is doing to short rates.

Morning Report: Turkey situation deteriorates

Vital Statistics:

	Last	Change
S&P futures	2836	-0.55
Eurostoxx index	384.89	-0.96
Oil (WTI)	67.37	-0.26
10 Year Government Bond Yield		2.88%
30 Year fixed rate mortgage		4.58%

Stocks are lower as the Turkey situation snowballs to other emerging markets. Bonds and MBS are up on the flight to quality trade.

Financial markets are being driven by the situation in Turkey, with the Turkish Lira continuing to depreciate. This has spread to other emerging markets currencies like the South African Rand. The Chinese currency has hit the lowest level in a year, which is bound to increase trade tensions with the US. There is the potential for this to affect the balance sheets of some European banks, however the US will be pretty much insulated from it. The most likely effect is that it will cause a flight to quality to the US dollar which will keep a lid on interest rates.

The Turkish crisis hasn’t affected the Sep Fed Funds futures, which are handicapping a 94% of a hike, but they have tempered the probability of a follow-on hike in December. It isn’t a dramatic move, but we have slipped from 66% to 61%.

We won’t have much in the way of market-moving data this week – retail sales on Wednesday will be the only one that matters. We will also get housing starts on Thursday. Other than that, it should be a dull week.

Ben Carson is changing the way HUD encourages multifamily real estate development. The Obama HUD used the stick approach – suing local governments to force them to change their zoning rules, based on demographic analysis. The Carson HUD will use the carrot approach – tying grants to changes in zoning restrictions.

Conventional financing accounted for 69% of all financing last year. Of the non-conventional types of financing, FHA loans led with 12%, followed by cash with 10% and VA with 4%.

Elon Musk clarified his tweet regarding taking Tesla private. He decided to use Twitter in order to notify the public of his intention to take the company private. Most companies file an 8-K with the SEC and do a press release, but Elon decided to use Twitter. Second, his “funding secured” comment was based on a conversation with the Saudi Sovereign Wealth Fund who asked if Tesla was interested in selling to the fund. Musk then looked at the assets of the fund, concluded they had the money, and then tweeted that funding was secured. One thing is for sure, if this deal ever happens, the background section of the proxy statement is going to make for some entertaining reading.

Morning Report: Refinance index falls to an 18 year low

Vital Statistics:

	Last	Change
S&P futures	2857	-2.75
Eurostoxx index	389.8	-0.69
Oil (WTI)	68.41	-0.76
10 Year Government Bond Yield		2.99%
30 Year fixed rate mortgage		4.58%

Stocks are flattish this morning on no real news. Bonds and MBS are down.

Mortgage applications fell 3% last week as purchases fell 2% and refis fell 5%. Activity overall has fallen to a 19 month low. The refi index has is at an 18 year low.

Mortgage credit availability increased in July, although it tightened for government loans. The MBA’s MCAI increased 1.7%, which is a post-crisis high, but nowhere near what it was during the bubble years. “Credit availability continued to expand, driven by an increase in conventional credit supply. More than half of the programs added were for jumbo loans, pushing the jumbo index to its fourth straight increase, and to its highest level since we started collecting these data. There was also continued growth in the conforming non-jumbo space, which reached its highest level since October 2013,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. Note that some observers think the MCAI understates how loose credit is, when you look at things like LTV and credit scores.

Separately, US banks eased lending standards for business loans. The report noted increased demand for business loans, and decreased demand for commercial real estate loans. As mortgage lending dries up, banks are competing more for small business loans, although increased liquidity in the secondary market for these loans also helped.

Elon Musk proposed the largest LolBO ever on Twitter yesterday, saying he was thinking of taking Tesla private at $420 a share. He claims he has funding secured, which is quite the statement. Even in this market, raising $71 billion isn’t the easiest thing in the world, especially for a negative cashflow company trading with an EV / EBITDA in the 150s. Perhaps the price should have tipped people off that this was a joke, but apparently it isn’t.

The NAHB conducted a survey of potential homebuyers, and only 14% are planning to buy a home in the next year. That number was 24% in the fourth quarter of 2017. Of those planning to buy a home, 61% are first time buyers, of which 71% are Millennials. Most are noting that the number of homes for sale with the desired features and price point are smaller than they were 3 months ago.