Federal Judge Says California Can’t Force Trump To Release His Tax Returns in Exchange for Ballot Access

California cannot keep President Donald Trump, or any other presidential candidate, off the 2020 ballot for refusing to release his tax returns, a federal judge ruled Tuesday.

The ruling concerns Senate Bill 27 (SB27), the Presidential Tax and Transparency Act, which California’s legislature passed in July and Democratic Gov. Gavin Newsom signed into law. SB27 requires all candidates for president, in order to appear on the state’s primary ballots, make the last five years of their income tax returns publicly available.

Trump’s attorneys, representatives for the Republican National Committee, the state’s Republican Party, and a small group of individual voters all sued, arguing that the act violates the First and 14th Amendments of the Constitution and is pre-empted by federal law regulating financial disclosures by presidential candidates.

On Tuesday, Morrison C. England Jr., U.S. District Judge of the Eastern District of California, agreed with Trump and the other plaintiffs and enjoined California from enforcing the part of the law that requires the disclosure of candidate tax records. England ordered a temporary injunction when he first heard the challenge back in September. Today’s written ruling formally orders California to cease making these demands.

England agreed with every single argument the plaintiffs presented against California. He agreed that the plaintiffs were likely to win on the merits, as the U.S. Supreme Court has determined that the Constitution forbids states from making new eligibility requirements by “dressing eligibility to stand for [public office] in ballot access clothing.” He also agreed that SB27 was preempted by the federal Ethics in Government Act, which outlines what candidates for president must publicly disclose.

He further explains that the Act thwarts the will of California voters, violating their First Amendment rights:

“Here, the Act creates what amounts to a functional bar against the ability to cast an effective vote for a candidate who elects not to disclose his or her tax returns. It further interferes with the ability of both individuals and political parties to select the individual presidential candidate of their choice to act as the ‘standard bearer who best represents [their] ideologies and preferences. … These are severe restrictions, since limitations on ballot access can violate multiple constitutionally-protected interests, including the right to associate for political purposes, the right to vote, and the right to express political preferences.'”

Essentially, England is saying that if the voters support a candidate who does not want to release his or her tax returns, that’s their right and California can’t stop them.

Lawmakers tried to pass the bill under previous Gov. Jerry Brown, who vetoed it as likely unconstitutional and worried that it would result in a slippery slope. England even quotes Brown’s veto message in the ruling:

Today we require tax returns, but what would be next? Five years of health records? A certified birth certificate? High school report cards? And will these requirements vary depending on which political party is in power?

England adds his own concerns:

The list of allegedly “relevant” information required to obtain ballot access could therefore snowball out of control with no practical limitation as legislatures throughout the nation could impose their own qualifications on presidential candidates, perhaps for nakedly political purposes. That result cannot possibly comport with the Framers’ goal for a fixed and nationwide standard for such federal offices.

The short-sighted stupidity of this law should be readily apparent to even the most casual observer, even if we were to set aside the severe constitutional issues with it. For instance, why wouldn’t a state with a Republican legislature retaliate in a way that made it harder for Democratic presidential candidates to qualify for ballot access?

CNN notes that Democratic California Attorney General Xavier Becerra is likely to appeal the ruling. He really should read the whole thing, accept this law is doomed, and not waste any more taxpayer money. England does not give one single inch to any of California’s arguments in the ruling and even points out that it’s actually not true that every presidential candidate has historically released his taxes. Brown himself did not disclose his tax returns when he ran for president in 1992. Nor did Ross Perot. Nor did Ralph Nader in 2000.

It is a dumb, unconstitutional law, and to continue to defend it weakens the argument that Trump is a unique threat to Democratic and constitutional governance. There’s nothing Democratic nor constitutional about trying to gin up reasons to keep a candidate from an opposing political party off the ballot.

Read the ruling for yourself here.

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How To Fix Social Media and Democracy

It’s a rare week when a major politician doesn’t threaten social media with censorship or other legal action. President Donald Trump regularly inveighs against Facebook and Twitter, claiming that such platforms minimize the reach and influence of posting by him and conservatives. Sen. Elizabeth Warren (D–Mass.) has promised to break up tech giants using antitrust law if elected president. Meanwhile, talking heads and experts routinely blame social media for mass shootings, rising suicides, and all sorts of social maladies.

Is any of this true? If it is, what should we do about it? And if it isn’t, why are we so freaked out? On today’s podcast, Nick Gillespie interviews Mike Godwin, whose new book, The Splinters of our Discontent: How to Fix Social Media and Democracy Without Breaking Them, is a richly researched and remarkably panic-free discussion of how Facebook, Twitter, and other social media actually operate and influence public discourse, including elections. Currently a “distinguished senior fellow” at the think tank R Street, Godwin has a long and legendary history when it comes to cyberspace. Back in the 1990s, he was the first staff counsel for the Electronic Frontier Foundation (EFF) and helped craft the legal arguments that ultimately struck down government control of online speech in The Communications Decency Act of 1996. He also codified what’s become known as “Godwin’s law,” which holds that the longer an online discussion continues, the probability of a comparison involving Nazis, Adolph Hitler, or the Holocaust approaches 100 percent. Godwin has served as general counsel for Wikimedia Foundation, is the author of Cyber Rights: Defending Free Speech in the Digital Age, and longtime Reason contributing editor (read his Reason archive here).

Social media, argues Godwin, isn’t broken at all, although both tech companies and users need to clarify their terms of engagement. On the other hand, he says, democracy is in deep disarray, for reasons that go back to the very founding of the United States.

Audio production by Ian Keyser.

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At Least 7 Dead, Embassies Sealed Off As Iraq Protests Rage; Police Open Fire On Crowds

At Least 7 Dead, Embassies Sealed Off As Iraq Protests Rage; Police Open Fire On Crowds

Protests in the Iraqi capital of Baghdad which began relatively peacefully on Tuesday have spiraled out of control Wednesday, and into other cities, after witnessing a heavy handed police response resulting in up to seven reported deaths, according to data from Iraq’s High Commission for Human Rights (IHCHR), cited also by the AFP.

Though the initial protest origins remain obscure, the larger wave on Wednesday has been generally seen as fueled by anger over corruption, unemployment, and the lack of basic services.

Federal police have sought to clamp down on the increasingly violent demonstrations through rubber bullets, tear gas, and even the use of live ammunition. This prompted a statement from the US Embassy in the country, condemning the violence on both sides. At least 200 people were reported injured on Tuesday alone. 

Protests raged in downtown Baghdad on Tuesday, and quickly turned violent, according to The New York Times. Image source: AFP/Getty.

 “US embassy in Baghdad continues to monitor recent protests closely,” the  statement read. “The right to demonstrate peacefully is a fundamental right in all democracies, but there is no place for violence in demonstrations from any side.”

The embassy confirmed that multiple protesters had been killed as it urged all sides to “reject violence while exercising restraint”. The Iraqi government has vowed to investigate the “heavy-handed response” of security forces in a statement. 

Social media image showed throngs of angry protesters in Baghdad on Tuesday. 

The AFP reported Wednesday that “Iraqi security forces fired live rounds on Wednesday to disperse new protests in the capital.”

Protests in Baghdad streets on Wednesday, via the AFP.

Repeat bursts of live fire can be heard in a number of social media videos showing Baghdad’s restive streets on Wednesday. 

As evening fell, large groups of young men were filmed making their way toward the ‘Green Zone’ – the high security zone of the capital that hosts embassies, diplomatic compounds, and the headquarters for various international organizations. 

Expressing solidarity with some of the issues demonstrators have complained about, Iraq’s President Barham Salih issued a public statement late Tuesday, telling security forces that “peaceful protest is a constitutional right”.

The president added: “Our young Iraqi children are looking for reform and jobs, and our duty is to meet these legitimate demands.”


Tyler Durden

Wed, 10/02/2019 – 14:25

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Watch Live: Will Trump Explode During Joint Presser With Finnish President?

Watch Live: Will Trump Explode During Joint Presser With Finnish President?

After a difficult couple of days that has seen President Trump lash out at Congressional Democrats and their impeachment probe, politicos will be watching his press conference with the Prime Minister of Finland Wednesday afternoon to see if Trump loses his cool when the inevitable impeachment-related question is asked.

Watch the presser live below:

 


Tyler Durden

Wed, 10/02/2019 – 14:17

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Why One Trader Is Finally Getting Ready For The Market Crash

Why One Trader Is Finally Getting Ready For The Market Crash

Via AdventuresInCapitalism.com,

It is something of a tradition amongst market commentators to make bold stock market calls because they gain you notoriety if you get it right. Over here at AiC, I don’t particularly care what people think. I’m here to make money—that’s it. Therefore, I’ve refrained from big market calls—particularly as I have no real edge in guessing where an index of a few hundred companies will be trading at a certain date in the future. This doesn’t mean that I don’t recognize economic and share-price cycles and manage my portfolio accordingly.

Over the past few years, I have been increasingly concerned about the massive structural imbalances in the world, along with excess debt and asinine monetary policy leading to an epic equity market bubble. Remember, your investment returns are directly correlated to the price you pay, not your analytical ability and I refuse to play in the greater-fool theory of finance. With that in mind, I have consistently managed my portfolio with a rather reduced overall exposure profile. Despite holding plenty of cash, I have certainly not been a perma-bear—those guys tend to complain a lot but make no money. Rather, I’ve continued to find opportunities to do smart things in esoteric sectors of the market, leading me to consistently trounce the US equity markets over the past few years. Yet, the whole time, I have been quick to sell companies that appreciated to 80% of fair value, I have been un-willing to take on risk and have passed on many perfectly good investments as I preferred to miss something than increase my market exposure. This fear of a collapse at any time has cost me a lot of upside but I accept it as part of the game. It’s always better to avoid losses, than swing for extra gains, particularly as I see something truly nasty coming for global equity markets. There is no way to know when we crash and there is always the possibility that we crash upwards on economic chaos (think of Venezuela and Zimbabwe). However, I feel we’re inching increasingly close to a market collapse.

The world is awash in data and I cannot possibly process it all. As a result, I scan the numbers, remember my two decades of investing and tend to trust my gut when I’m in doubt. My gut says to sell everything as the washout is coming soon. Especially as we’ve seen multiple events that remind me greatly of that period of foreboding right before the crashes of 2000 and 2008.

What are those events?

There’s been a massive VAR unwind where “momentum” gets sold and “value” gets bought—yet there aren’t actual flows into value. Rather, funds are pulling in exposure and reducing “value” shorts. While it looks like a sector rotation—I see it as a massive “risk-off” event.

Vision Fund, a prominent Ponzi Scheme literally detonated overnight and destroyed confidence in all similar VC ventures. Global Crossing, Worldcom and Adelphia destroyed confidence in “new age” telecom, Tyco did it to industrials while Madoff destroyed the last vestiges of structured finance. Capital gets scarce when you cannot trust the data. Is a massive risk-parity fraud about to be exposed and complete the cycle?

Risk assets tied to liquidity have been sold hard lately. Bitcoin dropped in October 2018 right before they pounded the S&P. Is it telling that Bitcoin broke down hard this week?

There are funding stresses in obscure places like the repo market. In both prior crashes, there were odd pockets of funding stress before it all blew apart, including plenty of funds with redemption issues.

Miami real estate has simply gone “no-bid.” You can have a Miami real estate flush without a stock market crash, but it hasn’t happened in my lifetime.

Thousands of unprofitable companies are suddenly caught in an existential vise. If you grow revenues but can’t raise money in 6 months, you die. If you cut spending to reduce losses, you don’t grow and no one funds you. I remember this happening in both crises. WeWork is cutting every cost—including the free peanuts. Does that add or subtract from community adjusted EBITDA?

Look, I can throw a few dozen more reasons why I think now is the time. No one really knows what will happen. However, as an investor, I don’t have to get it precisely right. It’s a simple trade-off; reduce long exposure and potentially miss some further upside or keep exposure and take a beating if it really is the next time down. With that in mind and a gathering storm of data saying something big is coming soon, I’m cutting back dramatically. Back in May of 2019, I said to sell something. This week, I’m getting serious. With a few exceptions, I sold 10-50% of almost every position I have. Remember, the best defense against the coming crash is to not be exposed to it.

I have been writing on this site for nearly a decade now. I have repeatedly warned against the dangers of going short. Your upside is capped at 100% and your risk is unlimited. However, I’ve gone to the dark side and even added some direct short exposure. My shorts are mostly clustered in indices, though I have my fair share of exposure to Ponzi Sector stalwarts, along with a hillbilly bank exposed to Miami real estate (guess which??) and another West Coast bank exposed to Ponzi Sector fraud. I laid into Hong Kong as the country has forever been changed. I already have a lot of put exposure, but I feel like now is the time to get more aggressive and I don’t want to keep burning theta on my options. This is the first time since 2007 that I have shorted anything. In retrospect, I was a year early last time. I may be a year early this time. Hence, I’ve done it on a scale that lets me take some short-term pain if I’m wrong.

Every day in the markets, you can get it wrong. Dramatically reducing my exposure could be the wrong decision, but why take the chance? Cash doesn’t care what happens to the market. Cash is always seeking out the best opportunities. Even if I’m wrong, there will always be another great opportunity to do something smart in the future. Why take the risk of being wrong when all the data says the global economy is collapsing and the stock market is about to detonate? Now is the time to reduce risk.

Disclosure: Funds that I control are short various market indices and public securities


Tyler Durden

Wed, 10/02/2019 – 14:10

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Federal Judge Says California Can’t Force Trump To Release His Tax Returns in Exchange for Ballot Access

California cannot keep President Donald Trump, or any other presidential candidate, off the 2020 ballot for refusing to release his tax returns, a federal judge ruled Tuesday.

The ruling concerns Senate Bill 27 (SB27), the Presidential Tax and Transparency Act, which California’s legislature passed in July and Democratic Gov. Gavin Newsom signed into law. SB27 requires all candidates for president, in order to appear on the state’s primary ballots, make the last five years of their income tax returns publicly available.

Trump’s attorneys, representatives for the Republican National Committee, the state’s Republican Party, and a small group of individual voters all sued, arguing that the act violates the First and 14th Amendments of the Constitution and is pre-empted by federal law regulating financial disclosures by presidential candidates.

On Tuesday, Morrison C. England Jr., U.S. District Judge of the Eastern District of California, agreed with Trump and the other plaintiffs and enjoined California from enforcing the part of the law that requires the disclosure of candidate tax records. England ordered a temporary injunction when he first heard the challenge back in September. Today’s written ruling formally orders California to cease making these demands.

England agreed with every single argument the plaintiffs presented against California. He agreed that the plaintiffs were likely to win on the merits, as the U.S. Supreme Court has determined that the Constitution forbids states from making new eligibility requirements by “dressing eligibility to stand for [public office] in ballot access clothing.” He also agreed that SB27 was preempted by the federal Ethics in Government Act, which outlines what candidates for president must publicly disclose.

He further explains that the Act thwarts the will of California voters, violating their First Amendment rights:

“Here, the Act creates what amounts to a functional bar against the ability to cast an effective vote for a candidate who elects not to disclose his or her tax returns. It further interferes with the ability of both individuals and political parties to select the individual presidential candidate of their choice to act as the ‘standard bearer who best represents [their] ideologies and preferences. … These are severe restrictions, since limitations on ballot access can violate multiple constitutionally-protected interests, including the right to associate for political purposes, the right to vote, and the right to express political preferences.'”

Essentially, England is saying that if the voters support a candidate who does not want to release his or her tax returns, that’s their right and California can’t stop them.

Lawmakers tried to pass the bill under previous Gov. Jerry Brown, who vetoed it as likely unconstitutional and worried that it would result in a slippery slope. England even quotes Brown’s veto message in the ruling:

Today we require tax returns, but what would be next? Five years of health records? A certified birth certificate? High school report cards? And will these requirements vary depending on which political party is in power?

England adds his own concerns:

The list of allegedly “relevant” information required to obtain ballot access could therefore snowball out of control with no practical limitation as legislatures throughout the nation could impose their own qualifications on presidential candidates, perhaps for nakedly political purposes. That result cannot possibly comport with the Framers’ goal for a fixed and nationwide standard for such federal offices.

The short-sighted stupidity of this law should be readily apparent to even the most casual observer, even if we were to set aside the severe constitutional issues with it. For instance, why wouldn’t a state with a Republican legislature retaliate in a way that made it harder for Democratic presidential candidates to qualify for ballot access?

CNN notes that Democratic California Attorney General Xavier Becerra is likely to appeal the ruling. He really should read the whole thing, accept this law is doomed, and not waste any more taxpayer money. England does not give one single inch to any of California’s arguments in the ruling and even points out that it’s actually not true that every presidential candidate has historically released his taxes. Brown himself did not disclose his tax returns when he ran for president in 1992. Nor did Ross Perot. Nor did Ralph Nader in 2000.

It is a dumb, unconstitutional law, and to continue to defend it weakens the argument that Trump is a unique threat to Democratic and constitutional governance. There’s nothing Democratic nor constitutional about trying to gin up reasons to keep a candidate from an opposing political party off the ballot.

Read the ruling for yourself here.

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Protests Rage As Ukraine’s Zelensky Allows Election In Separatist-Controlled East

Protests Rage As Ukraine’s Zelensky Allows Election In Separatist-Controlled East

Comedian turned president of Ukraine Volodymyr Zelensky’s unlikely rise to power was based in large part on convincing voters that he would dramatically ease tensions with Russia and seek a peaceful resolution to the war in Donbass, raging since 2014. 

But now in a potentially explosive Maiden 2.0 scenario, hardcore Ukrainian nationalists have taken to the Kiev square which has come to symbolize resistance to Russia in order to protest the popular president’s dovish and rapprochement-signalling policies. Hours after Zelensky gave an unprecedented go ahead to allow a local election in Donbass which could result in Kiev granting a special status to the region, hundreds of nationalists flooded the square holding signs that read: “No to capitulation!”.

Protests this week outside Zelensky’s office, via AFP.

Zelensky insisted all candidates and political parties should be allowed to run according to Ukrainian law, which has enraged the anti-Russian nationalists, who say Ukraine’s sovereignty is on the line. The new election has the blessing of Russia and European monitors. 

Both government and pro-Russian separatist forces have agreed to withdraw troops from key locations in the Donetsk and Luhansk regions next week to ensure “free and fair” elections, which international monitors will also observe. 

One journalist and political commentator noted the neo-Nazi imagery used in this and other hardline nationalist protests in Kiev’s Maidan, which has for years tainted some of the country’s far right militias and political parties. 

Former president Petro Poroshenko also added fuel to the fire, saying the agreement is “a capitulation to Russia”. 

“Without that, this [Minsk agreement] is capitulation to Russia. I draw your attention to the fact that they [the Ukrainian government] were not offered anything, they were offered only to be there at the meeting. And for this meeting Ukraine risks paying and surrendering,” he said.

President Zelensky’s first working visit to the restive Donbass region in May 2019, via Ukrainian President’s office. 

Poroshenko further echoed other critics who’ve said Ukraine is not gaining anything from the agreement after sacrificing soldiers that died fighting the separatists in a conflict that’s taken 13,000 lives – thousands of them civilians – on both sides

Meanwhile, Russia has welcomed the news, with one senior Russian politician hailing it as “a victory for common sense and an overall success.” Kremlin officials also said they hope this will lead to substantive peace talks on the ground. 


Tyler Durden

Wed, 10/02/2019 – 13:55

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Joe Biden Plans To Ban and Register ‘Assault Weapons’ but Won’t Say What They Are

Former Vice President Joe Biden claims the 1994 federal ban on “assault weapons,” which expired in 2004, “reduced the lethality of mass shootings.” Yet the Democratic presidential contender simultaneously concedes that the 1994 law, which was part of a broader crime bill that he sponsored, had no impact on the lethality of legal firearms, which remained “just as deadly.”

In a gun control plan he unveiled today, Biden promises to fix that problem with new legislation that will “prevent manufacturers from circumventing the law by making minor changes that don’t limit the weapon’s lethality.” Since such laws have always been based on arbitrary distinctions that have little or nothing to do with a gun’s capacity to kill people, it is hard to see how he can possibly keep that promise.

Under the 1994 ban, removing “military-style” features such as folding stocks, flash suppressors, or bayonet mounts transformed forbidden “assault weapons” into legal firearms, even though the compliant models fired the same ammunition at the same rate with the same muzzle velocity as the ones targeted by the law. That is also true of the new, supposedly improved “assault weapon” ban sponsored by Sen. Dianne Feinstein (D–Calif.), who wrote the 1994 law. Feinstein has fiddled with the list of military-style features (omitting bayonet mounts while adding barrel shrouds, for instance), and any one of them would now be sufficient to make a rifle illegal, whereas two were required under the 1994 ban. But the problem identified by Biden remains: Removing these forbidden features results in a gun that is “just as deadly.”

Biden’s plan does not specify how he would improve on Feinstein’s approach. “Federal law prevents hunters from hunting migratory game birds with more than three shells in their shotgun,” he says. “That means our federal law does more to protect ducks than children.”

Does Biden plan to ban all guns that are capable of firing more than three rounds without reloading? If so, his ban would extend far beyond the firearms covered by any existing or proposed “assault weapon” law. Such a ban also would be clearly unconstitutional, applying to all semi-automatic firearms and revolvers, including the handguns that the Supreme Court has said are covered by the Second Amendment.

Presumably that is not what Biden has in mind, and his duck hunting example is just a red herring. But by refusing to say what he means by “assault weapons,” a category that means whatever legislators say it means, he makes it impossible to take his proposal seriously.

In addition to banning “assault weapons” (whatever that means), Biden wants to give current owners of such undefined firearms a choice: They can either sell their guns to the federal government or register them under the National Firearms Act, as is currently required for machine guns, suppressors, and rifles and shotguns with barrels shorter than 18 inches. “Due to these requirements,” Biden says, “such weapons are rarely used in crimes.”

Yet that is also true of “assault weapons,” whether under the 1994 definition or the new one proposed by Feinstein. Last year, according to FBI numbers released this week, rifles in general—only a subset of which would qualify as “assault weapons”—accounted for 4 percent of guns used in firearm homicides where the type of weapon was specified. Handguns, by contrast, accounted for 93 percent of the guns used in those cases.

Unlike his rival Beto O’Rourke, Biden does not plan to confiscate “assault weapons.” But his registration scheme faces the same formidable obstacle: The federal government does not know who owns which guns. State attempts to register “assault weapons” have met with embarrassingly little success, and there is no reason to think a federal requirement would inspire broader compliance, especially now that talk of confiscation is in the air.

Biden, in short, claims the 1994 “assault weapon” ban made mass shootings less lethal even though the weapons that remained legal were “just as deadly”; that the legislation he has in mind will fix that problem, although he cannot say how; and that the federal government can succeed in registering “assault weapons,” however he chooses to define them, even though the track record of such efforts provides little reason to believe that’s true. And he implies that all of this will somehow have a noticeable impact on firearm homicides, which are almost never committed with the guns he wants to target. As a policy proposal, his plan does not pass the laugh test, but it beautifully illustrates the magical thinking of gun controllers.

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Oil Pirates: The Gulf Of Mexico’s Billion Dollar Problem

Oil Pirates: The Gulf Of Mexico’s Billion Dollar Problem

Authored by Irina Slav via OilPrice.com,

Pirate activity in the Gulf of Mexico is on the rise and so is oil theft from platforms operating in the area, Fox News reports, with losses for Pemex as high as $1 billion annually.

Oil theft is not uncommon in Mexico, with most of it linked to local cartels using the services of crooked Pemex employees. Yet most of this theft takes place on land: over just two months in 2018, criminals drilled almost 2,300 illegal taps into Pemex pipelines in Mexico.

Although oil and diesel stealing has been going on for decades, there has been an increase in criminal activity reported in the last four years, said Johan Obdola, the founder of the International Organization for Security and Intelligence, a Canada-based nonprofit.

“It is estimated that the stealing in Mexico is up to 1.18 million barrels a day, bringing millions to criminal organizations, and making it very difficult to control,” Obdola also told Fox News.

According to Pemex’s own estimates, the losses from fuel theft over the past three years have reached $7.5 billion (147 billion Mexican pesos). A lot of the theft is conducted by gangs who are quick to resort to violence as they fight among themselves for greater access to state fuels and also engage in extortion of oil workers.

According to Mexico’s President, Andres Manuel Lopez Obrador, authorities are also involved in widespread fuel theft, which he last year vowed to tackle without compromise.

So far, the tackling has involved deploying military personnel at key oil and fuel infrastructure locations. Offshore, Lopez Obrador has said the Navy would conduct continuous surveillance of Pemex platforms, which are the targets of choice of the pirates.

According to some Mexican officials, the Pena-Nieto energy sector reform is to blame for the rise in oil theft. Opening up the local oil and gas industry to private players has increased the number of targets for pirates offshore and this includes not just the oil itself but also equipment and raw materials.


Tyler Durden

Wed, 10/02/2019 – 13:40

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Morgan Stanley Predicts Q3 Deliveries Miss For Tesla, Capitulates On Company’s Autonomous Timeline

Morgan Stanley Predicts Q3 Deliveries Miss For Tesla, Capitulates On Company’s Autonomous Timeline

Morgan Stanley’s Adam Jonas released a new note on Tesla Wednesday morning, with an “equal weight” rating on the company and a “cautious” outlook on the indsutry.

But the devil was in the details: Jonas believes the company is going to miss Q3 delivery estimates, margins will fall short of expectations and that the demand picture will be hindered by Tesla’s “old” and “overly engineered” vehicles. Jonas says he’s expecting a $600 million cash burn for the quarter. 

He also capitulated that the timeline the company has set for its autonomous goals is wholly unrealistic. 

Regarding the company upcoming report, Jonas writes:  

We expect, as a result of these reports, that investors’ focus may now have mostly shifted to gross margins and cash flow leading into 3Q earnings. We are modeling 17.7% Auto gross margins on an ex-ZEV credit basis (50bps improvement from Q2) vs. Cons of 18.5%. We believe there will likely be some positive contribution to gross margin from software updates. Last quarter, they had a positive working cap impact as they sold more cars than they produced; we expect this to reverse this quarter and we model ~$600mm in cash burn. 

The outlook on demand was also anything but optimistic, as Jonas called the Model S “old”, the Model X “overly engineered” and the Model 3 “trapped in a narrow sedan segment”:

We believe the debate is less a question of price point, but rather the segments which Tesla currently addresses in the US market. We believe that the S is old, the X is overly engineered and needs to be rethought, and the 3 may be trapped in a narrow sedan segment.

Regarding margins, Jonas expounded that he doesn’t see the scope for margin to meaningfully improve over time and he says that ZEV credit revenue will continue to be a “struggle”: 

Tesla management has targeted a long term auto gross margin of 25% in a steady state (incl. reg/non-reg. ZEV credits), but we left 2Q with the feeling that there was an increased dependence on FSD and regulatory credits to bridge the gap between the 18.9% (incl. reg/non-reg. ZEV credits) gross margin they reported. While we have no gauge on what the current take rates are on FSD (we estimate they are in the 30% range); we don’t currently see scope for these to meaningfully improve over time.

We view pooling as a temporary solution to a permanent problem facing OEMs in Europe, and believe that ZEV credit revenue will struggle to remain a recurring source of revenue for Tesla over a multi-year scope.

On China, Jonas is also far less optimistic than the bull estimates: 

We expect China to account for less than 200k units of deliveries to Tesla annually by 2022, which likely puts us in between where we believe bulls and bears stand. While we anticipate significant pent-up demand for Tesla’s locally produced vehicles in the PRC, longer- term we expect the Chinese EV market to remain highly competitive and see Tesla ́s China volume peaking at 254k units sold in 2024, before falling to the 160k to 170k range by 2030.

We continue to have concerns on the long-term viability of a US player in the Chinese EV market. Moreover, we believe investors must consider global trade and geopolitical risks as Tesla’s exposure to China increases. It remains to be seen who will arise as a formidable Tesla competitor in the Chinese market. Anecdotally, our China team believes that Tesla is thought to be the highest quality electric vehicle on the road there by a wide margin.

And finally, with regard to the company’s autonomous timeline, Jonas simply lays down his arms and gives up:

“We think that both bulls and bears alike believe that Tesla’s autonomy timeline is unrealistic,” he says.

We couldn’t agree with you more, Adam. 

 


Tyler Durden

Wed, 10/02/2019 – 13:27

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