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Authored by Bill Blain via MorningPorridge.com,

“Rules are made for people who aren’t willing to make up their own”

Why are so many tech stocks defying financial gravity? Tesla, Airbnb, Palantir, Virgin Galactic and others…

(One moment this morning for Chuck Yeager…)

The UK headlines this morning are all about a lovely 90-year old lady in Coventry becoming the first person to be vaccinated against Covid. Ah, bless. Let’s not distract ourselves from the good news, worry about the crisis in the Brexit negotiations, or the fact infections are swelling across California triggering a mass lockdown. According to the stock market momentum, there is – apparently – absolutely nothing to worry about…

There never is… right up to the moment the Iceberg appears on the starboard bow….

Despite my many years in markets I’ve never seen a Christmas bubble pop. Normally, the last three weeks into the end-of-year holidays are very, very quiet from a business perspective. It’s party time. One year I managed a proper lunch every single day in December – putting on multiple kilos. Most nights I was at drinks parties! Ah happy days… my cardiac consultant made a fortune. 

This year is, and feels, very different. We’re all very aware how Central Banks are backstopping Markets through ongoing ultra-low rates and monetary policy like QE Infinity, and that government’s stand ready to provide further stimulus to get us over the pre-vaccine effectiveness darkness before the dawn.

But, I’ve never sensed such a bizarre sense of FOMO driving the market. That’s evident in the headlines about day-trading sites like RobinHood crashing due to volume, and yet more noisy You-Tube proclamations from former taxi-drivers about markets never heading lower, and the extraordinary gains to be made in their favourite stocks. It becomes self-fulfilling. Their momentum is driving the market – and it all makes very little sense with the end of the pandemic support phase in sight next spring.

The moment central banks and governments take their feet off the accelerator is the moment the markets will wobble. That little old lady getting a jab this morning is a sure signal that moment is coming. 

But for now it’s that insane Fear-Of-Missing-Out momentum that is driving belief in certain “story” stocks. Its looking extremely bubblicious. As a said – I’ve never seen a bubble pop over Christmas – and I suspect it won’t as the holiday momentum attracts in the ever greater fools who will be left holding the metaphorical cold turkey come January.

One stock that got me thinking is Airbnb – which IPOs this week. Despite the virus, investors are anticipating a bumper 2021 for Airbnb as repressed travel kicks off again – the deal is now being priced with a valuation of $42bln. Wowser, but? Bear in mind, while many people do go and hire someone else’s house for their vacations, even more still go looking for a cheap 2 weeks in the Sun on a package tour. There was a time when these firms made lots of money – but competition and then the virus means these same mass market holiday firms are going bust at a rate of knots. Remind me why Airbnb is different?

The belief in improbable profits tomorrow (always tomorrow) shows no sign of fading. 

Tesla is up over 15% in the last week – there are rumours of another stock split (on Motley Fool) which would have the effect of persuading yet more greater fools it’s a more affordable buy, which is just more cosmetic lipstick on the pig. Just like its inclusion in the S&P 500 index. Next year, the Telsa punters reckon it will soar higher on inclusion on the Dow. 

Fantastic – except, nothing changes the actual real fundamentals facing Tesla: selling cars in an increasingly competitive market, cutting costs as lithium rises, and actually delivering all its promises on, numbers, self-driving etc. (And btw – we’re currently looking at the installation of Solar Panels and Batteries as part of our house rebuild and not one of the firms responding to our RFP has recommended the Tesla package.) It still hasn’t made a penny profit actually selling cars. 

Writing about Tesla is the market strategist’s equivalent of being sent into a war-zone. You need big shoulders and a flak-jacket to avoid the grenades that will be thrown if you dare to question the sacred beliefs of the Tesla Jihadis. Now that Tesla has become part of the S&P, every index tracker will become a holder. A wider and more conservative holding base may cause more investors to start questioning the assumptions made about the stock, and the frankly absurd beliefs that underly its current valuation. 

I am very familiar with Palantir – Lord of the Rings remains a favourite read, and naming the company after the “seeing stones of Gondor” was a clever allusion to how understanding big data helps perceive the real picture. But, the company has been struggling to turn a meaningful profit after 17-years, meaning it’s not exactly the “innovative, disruptive generator of new future value” that one analyst described.  

A 40x projected revenues valuation is modest compared to the levels the other, younger Software-as-a-service stocks are trading, but yesterday’s 23% gain on news of a rather modest $44mm government contract (where it garners the bulk of its revenues already) is hardly a paradigm shift. Palantir stock has doubled in a month. Following its IPO in September nothing has really happened to change the stock fundamentals – except all the insiders have been able to ditch their holdings. Yet its price has doubled..? What am I missing?

Or, strangest of all, Virgin Galactic, which (unlike its actual spacecraft) soared higher on the news it might actually fly the space plane. The market soared anticipating a successful flight… without any real consideration of what a space tourism business is actually really worth. 

Funnily enough, its Elon Musk who has highlighted the real possibilities of commercial space flights – there are something like 17,000 satellites likely to be launched into Low Earth Orbit in the next 10-years. SpaceX would have been well placed to seize much of that highly lucrative market, but will become a buyer itself to launch its own 12,000 Starlink high-speed internet satellites. (That’s a story for another day.)

While I’m scribbling about Space, I should mention one of the deals I’m leading in our Alternative Investment Business – funding Private Debt and Private Equity deals: 

I have a stand-out VC opportunity in the Satellite launch space: We’re working with a firm with the ability and authorisations to commercialise US Military Tech to become the world’s leading space horizontal launch capability operation, seizing a significant share of the launch market. Not only does it have US and UK support, but will attract investment from the Scottish Government. Based out of Scotland, this new deal will provide the UK with a national space capability the recent defence funding increase called for, plus huge commercial opportunities with upwards of 4x returns! (Email or call for details..)

Or, you could go and buy Galactic Stocks instead, and lob a few tourists into space on an occasional basis… (And yes, I will be happy to contrast what our deal does in terms of what Virgin Orbit does not!)

Why is the market so invested in improbable stories?

• Tech stocks have benefited from Social Media reinforcement – Tesla fans have their faith in the firm constantly validated by the targeted social media posts they receive, reinforcing and building their certainty on the firm. The degree to which social media narratives have overtaken stock market rationality is extraordinary.

• The second factor is success attracts success. At a time of economic pressure and uncertainty the return equations in markets have changed, ultra-low interest rates have forced investors into the equity markets in search of returns – and Tech looks an attractive bet. If every tech firm might just be the next Apple, Amazon or Microsoft, then retail wants in.

• Third – In times of economic hardship, the promise of instant returns and infinite wealth from owning bubblicious Tech stocks are hard to resist – and when every single day-trader is boasting about how much they’ve made from their savvy positions..,, then it sucks in more and more players.. till eventually we get to “Greatest Fool”.. the investor holding the ticking package when it goes pop.  

There are a host of names in the Bubble zone. I suspect a couple will quietly pop, but when a big one goes, or the market redirects itself, then… who knows… No one wants to be the ultimate Greater Fool.

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This is the last week of this year’s charity appeal – raising money for Walking With The Wounded, helping ex-military with mental health issues. My wife and I are Team Morning Porridge. Please read about the charity and make a donation. 

At the close of a blockbuster year for Tesla which saw its shares included in the S&P 500, cementing its reputation as “the only stock that matters” (according to some analysts), the company announced on Tuesday morning yet another $5BN at-the-market share offering. It follows a similarly sized offering back in September (though Tesla’s shares have rallied appreciably since then).

Once again, Musk & Co. are proving that selling Tesla stock is perhaps the most effective and lucrative capital-generating strategy available to the electric-car maker.

TSLA slumped on the news in premarket trading, but if the past is any guide, this dip will soon be bought, despite the fact that Elon Musk himself has repeatedly complained about TSLA’s share price being ‘too high’.

Here’s more from the 8-K announcing the offering:

On December 8, 2020, Tesla, Inc. (“Tesla”) entered into an equity distribution agreement (the “Equity Distribution Agreement”) with Goldman Sachs & Co. LLC, Citigroup Global Markets Inc., Barclays Capital Inc., BNP Paribas Securities Corp., BofA Securities, Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC, SG Americas Securities, LLC and Wells Fargo Securities, LLC, as sales agents (each, a “Sales Agent” and collectively, the “Sales Agents”), to sell shares of common stock, par value $0.001 per share, of Tesla (the “Common Stock”) having aggregate sales proceeds of up to $5.0 billion (the “Shares”), from time to time, through an “at-the-market” offering program (the “Offering”).

Upon delivery of a placement notice and subject to the terms and conditions of the Equity Distribution Agreement, the Sales Agents will use reasonable efforts consistent with their normal trading and sales practices, applicable state and federal laws, rules and regulations, and the rules of the Nasdaq Global Select Market to sell the Shares from time to time based upon Tesla’s instructions for the sales, including any price, time or size limits specified by Tesla. Under the Equity Distribution Agreement, the Sales Agents may sell the Shares by any method permitted by law, including in ordinary brokers’ transactions, in negotiated transactions, in block trades, and in transactions that are deemed to be an “at-the-market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended (the “Securities Act”). The Sales Agents’ obligations to sell the Shares under the Equity Distribution Agreement are subject to satisfaction of certain conditions, including customary closing conditions.

The Equity Distribution Agreement provides that the Sales Agents will be entitled to compensation for their services in the form of a commission of up to 0.25% of the aggregate gross proceeds from each sale of the Shares, and Tesla has agreed to reimburse the Sales Agents for certain specified expenses. Tesla has also agreed to provide the Sales Agents with customary indemnification and contribution rights. Tesla is not obligated to sell any Shares under the Equity Distribution Agreement and may at any time suspend solicitation and offers under the Equity Distribution Agreement. The Equity Distribution Agreement may be terminated by Tesla at any time by giving written notice to the Sales Agents for any reason or by each Sales Agent at any time, with respect to such Sales Agent only, by giving written notice to Tesla for any reason or immediately under certain circumstances, including but not limited to the occurrence of a material adverse change in the company. The Offering of the Shares pursuant to the Equity Distribution Agreement will terminate upon the termination of the Equity Distribution Agreement by Tesla or the Sales Agents.

The sales and issuances of the Shares under the Equity Distribution Agreement will be made pursuant to Tesla’s effective shelf registration statement on Form S-3 (File No. 333-231168) (the “Registration Statement”) declared effective by the Securities and Exchange Commission (the “SEC”) on May 2, 2019. On the date hereof, Tesla intends to file a prospectus supplement with the SEC in connection with the offer and sale of the Shares pursuant to the Equity Distribution Agreement.

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Tesla is working with a syndicate of banks including Goldman Sachs, Citigroup, Barclays Capital, BNP Paribas Securities, BofA Securities, Credit Suisse Securities, Deutsche Bank Securities, Morgan Stanley, SG Americas Securities, LLC and Wells Fargo Securities to sell the new issues.

On an unrelated note, the Internet is still buzzing with reports that Tesla CEO Elon “Take The Red Pill” Musk is finally planning to make good on his stated desire to abandon California for the Lone Star State. There’s no word yet on whether Tesla’s corporate headquarters might be moving with him. It goes without saying that $5BN would go a lot further in most parts of Texas than it will in Fremont, Calif.

The National Restaurant Association (NRA) sent a damning letter to Congress today (Dec. 7) addressing the collapse of more than one hundred thousand restaurants across the country this year because of the virus pandemic. In just the last three months, the letter said more than 10,000 eateries have closed, and thousands of others are in “economic freefall.” 

The letter goes into detail about the association’s most recent nationwide survey, which determines that most restaurants are still experiencing a plunge in sales revenue. Many operators believe more furloughs or layoffs are imminent. As we noted last week, the layoffs have already begun. 

“What these findings make clear is that more than 500,000 restaurants of every business type— franchise, chain, and independent—are in an unprecedented economic decline. And for every month that passes without a solution from Congress, thousands of more restaurants across the country will close their doors for good,” Sean Kennedy, executive vice president of public affairs at the association, said in a letter to Congress.

According to the association’s survey, 

• 87% of full-service restaurants (independent, chain, and franchise) report an average 36% drop in sales revenue. For an industry with an average profit margin of 5%-6%, this is simply unsustainable. 83% of full-service operators expect sales to be even worse over the next three months.

• Although sales are significantly lower for most independent and franchise owners, their costs have not fallen by a proportional level. 59% of operators say their total labor costs (as a percentage of sales) are higher than they were pre-pandemic. 

• The future remains bleak. 58% of chain and independent full-service operators expect continued furloughs and layoffs for at least the next three months.

The tsunami of restaurant closures and bankruptcies will continue to rise through 2021 – leading to deep economic scarring and permanent job loss. The association predicts “as of today, 17% of restaurants—more than 110,000 establishments—are completely closed.”

The findings come as the industry continues to deal with the devastating impact of the virus pandemic. State and local governments are imposing strict indoor limitations on restaurants or even, in some cases, banning indoor dining. 

It’s not just the virus and draconian public health measures from governments that restaurant operators have to deal with – they also have to contend with Mother Nature. As we’ve previously noted, citing a Goldman Sachs report, foot traffic to restaurants will start to plunge when the outside temperature drops below 45°F.

The National Restaurant Association hopes that the letter will pressure Congress to act and provide aid to restaurants once the new stimulus package is approved to help them survive under circumstances that are being forced upon them by policymakers who seem to be ignoring the science, and following the politics.

By Michael Msika, macro commentator at Bloomberg

With the pandemic-induced recession slowly receding, value stocks in Europe are finally outperforming growth peers, and an increasing number of fund managers say that, after plenty of false starts, this time the rotation may only be in its early days.

The region’s heavier weighing in value stocks has been a drag for the past 10 years, causing the continent’s markets to lag behind the U.S. But a shift began in late October, and picked up pace in November with the looming availability of Covid-19 vaccines that promise something resembling normal life in 2021.

“Value has led the market’s recovery coming out of every one of the last 14 global recessions,” said Ian Butler, a portfolio manager at J.P. Morgan Asset Management. Butlers explains Value’s underperformance in recent years by the lack of economic and earnings growth, but as the economies reopen and the outlook improves, investors should turn to valuation as an “alpha signal” once more, he said, adding that value bounced back “with a vengeance” after previous drawdowns of a similar magnitude setting “a strong historical precedent.”

After underperforming for much of 2020, the MSCI Europe Value Index is up 23% since Oct. 29, while its growth counterpart is up only 8.4%. Should that persist, it would argue for investors pouring more money into Europe, where the weighting of value stocks is heavier than into other markets. Over the past 20 years, the outperformance of value often coincided with the outperformance of Europe. “Europe is a value market while the U.S. is a growth market, simply speaking,” said Amundi head of equities Kasper Elmgreen. “A scenario where value does well relative to growth benefits Europe in my view.”

A synchronized economic recovery will make growth stocks less appealing, said Luca Paolini, chief strategist at Pictet Asset Management. As a result the firm is “slowly adding a little bit of value” to its asset allocation, he said. But every single attempt at a value comeback has been short lived, and this one will falter too unless rates head back up, said Pictet’s Paolini. “The precondition for a solid and sustainable (value) rally is not only synchronized growth but also a sustained increase in bond yields, because without that we will still be kind of thinking, is it for real or is it not,” he said.

To find the last long period of value outperformance, investors have to go back to the beginning of the century, after the internet bubble burst. More recently, the last episode was in the aftermath of the global financial crisis, when value outperformed growth for about six months, led by a rebound in bank shares.

The stars are aligned this time for a possible multiyear outperformance by value, according to Amundi’s Elmgreen. Value stocks are at “an attractive starting point” in valuation, both in absolute terms and compared to growth, at a time when the economic rebound “will be very meaningful,” he said.

till, there are several headwinds ahead, according to Kevin Thozet, member of the investment committee at Carmignac Gestion, such as the dependence on government actions and poor earnings visibility until the vaccine is widely available, while tailwinds like financial conditions and bullish sentiment are likely to fade. “Both aspects are casting doubt over the sustainability of value stocks’ recent streak,” Thozet said.

In the short term, Citigroup Inc. strategists recommend value because financial markets should price in higher inflation expectations. After that, though, there are structural headwinds for reflation that don’t bode well for inexpensive stocks over the longer term, they wrote in a report last week, citing risks such as potential collapses in house prices, financial assets or the oil price.

In the short term, Citigroup Inc. strategists recommend value because financial markets should price in higher inflation expectations. After that, though, there are structural headwinds for reflation that don’t bode well for inexpensive stocks over the longer term, they wrote in a report last week, citing risks such as potential collapses in house prices, financial assets or the oil price.

For now, though, the value trade has momentum behind it in part because of fund managers’ fear of missing out. November was the best month in 45 years for European equities, with one of the biggest value outperformances on record, said Barclays Plc strategist Emmanuel Cau. “Yet most investors appear to have missed out on the value bounce, with a large majority of funds trailing their benchmark in November,” he said. “FOMO might prompt them to chase the rally despite short-term risks.”