Month: September 2017

It is no great surprise that Tesla hemorrhages cash.  As we pointed out last month when they reported Q2 earnings, making products that actually generate a return on capital for shareholders isn’t a strong suit of the Silicon Valley powerhouse.  In fact, Elon Musk managed to burn through a record $1.2 billion of cash in Q2 alone, or roughly $13 million dollars every single day.

But, as Bloomberg points out today, the one ‘product’ which Tesla is actually able to sell for a profit is one which was created out of thin air by the state of California and is perhaps the only reason that Elon Musk even has a business to manage.  Of course we’re talking about the ever controversial “Zero Emission Vehicle” credits which are less of “product” and more of a subsidy provided by Tesla’s competitors, or more accurately the consumers of those competitors who are forced to pay higher prices for their Ford Focus all so Elon Musk can practice digging tunnels.

Tesla Inc. has generated nearly $1 billion in revenue the last five years from an unlikely source: Rival automakers. The payments are part of an unpopular system in California that’s poised to proliferate elsewhere.

 

California requires that automakers sell electric and other non-polluting vehicles in proportion to their market share. If the manufacturers don’t sell enough of them, they have to purchase credits from competitors like Tesla to make up the difference.

 

Tesla, which exclusively sells battery-powered models, sold $302.3 million in regulatory credits last year alone. China and the European Union — two of the world’s biggest auto markets — are considering mandates and credit systems similar to California’s. If California is any guide, automakers will resent having to buy from peers, including the electric-car maker led by Elon Musk.

 

“It really makes them mad that Tesla got so much of a boost out of being the only purely electric car manufacturer out there,” Mary Nichols, the chair of the California Air Resources Board, said in an interview Friday at Bloomberg’s headquarters in New York. “In effect, they helped to finance this upstart company which now has all the glamour.”

Going back to early 2013, selling these credits has increasingly padded Tesla’s earnings, taking them above consensus forecasts on more than just a few occasions:

The irony, of course, is that a recent study from Morgan Stanley illustrated how “zero-emission” vehicles like Teslas actually generate more CO2 than they save…perhaps California’s politicians were under the impression that electricity just magically flows from wall sockets instead of being produced by coal and gas-fired power plants?

“Whilst the electric vehicles and lithium batteries manufactured by these two companies do indeed help to reduce direct CO2 emissions from vehicles, electricity is needed to power them,” Morgan Stanley wrote. “And with their primary markets still largely weighted towards fossil-fuel power (72% in the U.S. and 75% in China) the CO2 emissions from this electricity generation are still material.”

 

In other words, “the carbon emissions generated by the electricity required for electric vehicles are greater than those saved by cutting out direct vehicle emissions.”

 

Morgan Stanley calculated that an investment of $1 million in Canadian Solar results in nearly 15,300 metric tons of carbon dioxide being saved every year. For Tesla, such an investment adds nearly one-third of a metric ton of CO2.

Oh well, at least as taxpayers we’re all doing our part to help pollute the earth and simultaneously enrich one eccentric billionaire in Silicon Valley…which presumably makes sense to some politicians in Sacramento.

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A record 2.61 million options on the VIX traded on Monday, surpassing a previous peak reached in August.

Shockingly, Bloomberg reports that the activity appeared to be led by one investor, who rolled over a massive bet on a return in market turbulence to the end of the year.

Shortly after Monday’s market open, an investor rolled over a position of more than 486,000 Oct. 25 calls to December.

 

Monday’s trade was effectively an extension of a bet that volatility will more than double by the end of the year — the wager was initiated in July but that didn’t come to fruition since the VIX gained only 2.5 percent in the period.

 

While the trade was big — it accounted for almost half of Monday’s call volume and 11 percent of the total calls outstanding — wagers that the VIX will rebound have multiplied in recent weeks as shorting volatility has lost some of its appeal.

The VIX, which finished last week at a two-month low, climbed as much as 17 percent on Monday as North Korea’s foreign minister escalated war talk, and as we noted previously, expectations for future VIX uncertainty have never been higher relative to the admittedly low level of VIX itself…

And while uncertainty remains extreme, speculators have never been more short VIX and therefore convinced of the persistence of market calm.

As Dana Lyons details, the proliferation in exchange traded products (ETP’s) has certainly marked a new era of investment accessibility by the masses. Individual investors now have vehicles by which to gain exposure to all sorts of markets that were previously difficult for them to access. One of the byproducts of this boom has been an explosion in futures interest as that market is vital in providing liquidity — directly or indirectly — for many of the new ETP’s.

One class of ETP’s that has seen an explosion in its underlying futures market is stock volatility. Interest in volatility-related instruments, e.g., the “VIX”, has seen a parabolic increase in recent years. For example, just 5 years ago, the largest ever net-short position by Non-Commercial Speculators in VIX futures was around -30,000 contracts. By comparison, this past week, we saw VIX Speculators’ net-short position spike to a record of more than -170,000 contracts.

One imponderable surrounding this data point and others associated with the ETP proliferation is the unintended consequences of such a boom in speculation, both on the futures side and on the ETP side. The ETP era has yet to really experience a significant bout of adversity in the financial markets. In fact, the recent period has been among the calmest ever across asset classes — no doubt contributing to the data point in question. We admit to harboring some concern about the stability of markets overall, not to mention the financial well-being of individuals involved in these new markets, should significant turbulence strike.

The other obvious point of interest regarding the chart and data point is its present context or message. We wrote about it the last time we noted a record VIX Speculator net-short position in late June (just days before the VIX jumped by some 50% on an intra-day basis).

Our thoughts are the same now as they were in that post:

“Once again, futures Speculators are known as “dumb money”, not because they are always wrongly positioned — far from it. However, at positioning extremes, and at key turning points in the underlying markets, they are typically off-sides.

Presently, we cannot say that volatility is at a turning point, i.e., about to surge higher. We won’t know that until after the fact. Additionally (and, importantly), we cannot say that stock prices are about to collapse due to record low volatility levels. Volatility reached record low extremes in the mid-90′s, just prior to a historic boom in stock prices (FYI, a repeat of that occurrence is decidedly NOT our expectation).

What we can say is that Speculators are holding an extreme short position, by historical standards. Now, extremes can always get more extreme. However, history tells us that once these investors all move to one side of the boat, like the “herd” in any market, they reliably end up “in the water”, eventually.

Therefore, while the market calm may persist indefinitely, don’t expect these folks to lead you to safety before the next storm hits.”

*  *  *

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. Considering what we believe will be a very difficult investment climate for awhile, there has never been a better time to reap the benefits of our risk-managed approach.

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Via Soveriegnman.com

[Editor’s note: This letter was co-written with Tim Price, co-founder of the VT Price Value portfolio and editor of Price Value International.]

In the late spring of 1720, Sir Isaac Newton decided to sell his stocks.

Newton had been an investor in the South Sea Company, a famous enterprise which effectively commanded a trading monopoly with South America.

The investment had already made Newton a lot of money, he was up more than 100% in a very short time.

In fact, investors were clamoring to buy up the South Sea Company’s stock, and the share price kept climbing. And climbing.

Newton sensed that the market was getting overheated. It no longer made sense to him. So he sold.

There was only one problem: the share price of the South Sea Company kept climbing.

All of Newton’s friends were getting rich. So, against his better judgement, Newton went back in, repurchasing shares at more than three times the price of his original stake.

The market then collapsed, and he lost virtually all his life savings.

The experience is said to have given rise to his bemused response:

“I can calculate the movement of stars, but not the madness of men.”

It’s now been roughly ten years since the Global Financial Crisis began.

In the time-honoured manner of regulators, they waited until the battle was largely over, then waded onto the battlefield and shot the survivors.

The decade since has seen unprecedented monetary stimulus, i.e. central bankers have expanded their various money supplies by trillions upon trillions of dollars, giving rise to a massive bubble in asset price worldwide.

Stocks are at all-time highs. Bonds are at all-time highs. Property prices are at all-time highs. Many alternative assets like private equity and collectibles are at all-time highs.

Yet asset prices keep climbing.

Perhaps desperate to avoid the mistakes of Isaac Newton, Scotsman Hugh Hendry, founding partner of Eclectica Asset Management, has recently announced that he is closing his hedge fund.

Hendry is a famous critic of this monetary absurdity and consequent asset bubble.

“It wasn’t supposed to be like this.. markets are wrong,” Hendry told investors.

Of course, the market is under no obligation to be right. Ever.

Hendry’s view is accurate– nearly every objective metric shows that the market is incredibly overpriced.

Clint Eastwood’s infamous character Dirty Harry once remarked that a man needs to know his limitations. We think we know at least some of ours: we can’t time markets.

And the only thing we know with any certainty, as sure as night follows day, is that there are always corrections– both booms AND busts.

A decade’s worth of QE and ZIRP has fuelled a runaway train, and at some point there will be a correction.

Does it make sense to stand in front of the train? Or is it better to, as Isaac Newton did, leap aboard for some final thrills?

We prefer neither.

Instead we’re diversifying as pragmatically as we can, working diligently to find undervalued companies run by honest, talented managers.

It requires more hard work and patience than buying some overpriced index fund or whatever the popular investment du jour happens to be.

But nobody ever said this investing business was supposed to be easy.

Earlier this year my publishers invited me to write the foreword to their definitive edition of Reminiscences of a Stock Operator, a thinly disguised biography of the legendary trader Jesse Livermore.

Livermore was extraordinary. Born in 1877, Livermore ran away from home as a child and soon began trading stocks.

By the time he was 20, he had already amassed a fortune of $3 million, more than $75 million in today’s money.

Livermore sold short, i.e. bet that stock prices would fall, just prior to the 1907 crash, as well as the 1929 crash.

His bets were so lucrative that, going into the Great Depression, Livermore had a fortune of more than $100 million, or about $1.4 billion today.

But Livermore wasn’t just great at making money from overheated markets. He was also a master of losing money.

This book is widely and rightly regarded as an investment classic. It is also crammed with valuable observations about the practice of speculation and successful trading.

Among them, the importance of being patient and disciplined:

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made big money for me. It was always my sitting.”

Sitting. As in, doing nothing. As in… neither standing in front of the train, nor jumping on board.

Hedge fund managers like Hugh Hendry don’t have this option. They have to be invested. They have to report to their investors every quarter… and if they’re not making money, investors bail.

But as an individual, you are not accountable to anyone but yourself.

So you are free to sit… and patiently wait for the safe, compelling investments that will arise once market conditions return to sanity.

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Texas Rep. Sheila Jackson Lee kneeled during a speech on the House floor Monday as a show of support for NFL players who demonstrated this weekend against President Trump.

As The Daily Caller reports, Jackson Lee said during remarks on the House floor…

“There is no basis in the First Amendment that says that you cannot kneel before the national anthem or in front of the flag,”

Jackson Lee, a member of the Congressional Black Caucus, took issue with a speech Trump gave on Friday in which he called on NFL owners to fire players who refused to stand for the national anthem.

Jackson Lee claimed that the “son of a bitch” remark was a racist comment by Trump.

“There is no regulation that says that these young men cannot stand against the dishonoring of their mothers by you calling them ‘fire the son of a b.’ You tell me which of those children’s mothers is a son of a b. That is racism. You cannot deny it. You cannot run for it, and I kneel in honor of them,” Jackson Lee said.

And in case you wondered why she specifically decided to 'take a knee' during her House Floor speech, this is what she said…

"…I kneel because I’m going to stand against racism. I kneel because I will stand with those young men, and I’ll stand with our soldiers. And I’ll stand with America, because I kneel…"

Clear enough?

Jackson Lee was not alone in her disdain as The Hill reports a second House Democrat kneeled on the House floor on Tuesday to show support for NFL players protesting police brutality.

Rep. Mark Pocan (D-Wis.) took a knee behind his podium at the end of a floor speech denouncing President Trump’s attacks on athletes who have been kneeling during the national anthem to draw attention to law enforcement’s treatment of African Americans.

“I think today, taking a knee is becoming a broader sign of patriotism and respect for our country,” Pocan said.

.@Repmarkpocan displays word cloud from President Trump's tweets and kneels at end of his remarks. #TakeAKnee http://pic.twitter.com/Dnjq7AnxRV

— CSPAN (@cspan) September 26, 2017

Moments later on the House floor, Rep. Alex Mooney (R-W.Va.) defended Trump for calling on NFL players to stand during the national anthem.

“The president is right to publicly object to this disrespect to our flag and nation,” Mooney said.

 

“While we can disagree on politics and policies, we should not denigrate our flag in our national anthem.”

San Antonio Spurs coach Gregg Popovich went a little further than most, claiming on ESPN2’s “The Paul Finebaum Show” Monday that “people have to be made to feel uncomfortable,” specifically singling out white people.

“If you read some of the recent literature, you’ll realize there really is no such thing as whiteness, but we kind of made that up. That’s not my original thought, but it’s true,” Popovich said.

 

He added, “Because you were born white, you have advantages that are systemically, culturally, psychologically there. And they have been built up and cemented for hundreds of years. But many people can’t look at it. It’s too difficult.”

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Having spooked the bond market earlier with her surprisingly hawkish remarks, and sending the 2Y surging while flattening the curve even more, moments ago the Treasury sold $26 billion in 2 Year paper at a yield of 1.462%, a notable jump from last month’s 1.345%, and the highest since October 2008. It also tailed by 0.2 bps to the 1.460% When Issued, which however was to be expected following the sharp move just minute earlier.

The internals were average, with the cid-to-cover at 2.88 vs last month’s 2.86%, and the six previous auction average of 2.91. Indirect bidders withdrew further, and were awarded 44.2% vs six previous auction average 55.1%, and down from 45.80% in August. This was the lowest Indirect takedown since December. Direct bidder interest jumped, resulting in an award of 19% vs six previous auction average 13.7% and notably higher than the 12.6% in August. Finally, Dealers were left to sop up the mess, and were awarded 36.8% vs six previous auction average 31.2%.

Overall an average auction, and judging by the rising yield, the bond market is increasingly confident that the short end will continue to rise even if it means the yield curve flattens further as the long end refuses to move nearly as much.

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It’s been a week since Hurricane Maria made landfall in eastern Puerto Rico, and hundreds of thousands of Puerto Ricans living in remote villages remain cut off from the world, after the storm trashed power grids, tore up roads, downed cell towers and caused a dam in the northwestern part of the island to fail, endangering tens of thousands of people living in a valley below.

Hospitals, especially in rural areas, have been hopelessly crippled by the storm, which has left them dependent on backup generators for power, threatening the lives of thousands of vulnerable patients. Shipments of diesel fuel to the hospitals are delivered by armed guards to protect against looters – which sounds like something from the plot of one of the “Mad Max” movies.

CNN sent low-flying planes over the island to survey the landscape, and they’ve brought back some stunning footage of the damage. News anchor Jake Tapper tweeted this before-and-after photo, which shows how more than 90% remains mired in blackouts more than a week after the storm made landfall.

Satellite imagery shows how massive the power outages are in Puerto Rico. One is from July 24; the other from yesterday. H/t @NOAA http://pic.twitter.com/hoJF56rRIl

— Jake Tapper (@jaketapper) September 26, 2017

Some meteorologists said Maria hit Puerto Rico with the flooding of Hurricane Harvey in Houston, and the windspeeds of Hurricane Irma in Florida.  

"It is as if Puerto Rico got hit with the strength of Irma's winds, leaving a trail of devastation worse than much of the destruction Irma left in Florida," said CNN meteorologist Judson Jones. "The rainfall in some areas of Puerto Rico rival the amounts of rain left by Harvey in Houston. And now they are contending with a dam disaster that is reminiscent of California's Oroville Dam crisis earlier this year."

After flying over Puerto Rico on Sunday, CNN's Leyla Santiago said residents could be seen along the highways searching for a cellphone signal. With the island’s emergency responders still struggling to evacuate and rescue villagers, the Trump administration has been criticized for not doing enough.

In a tweet Sunday, Clinton said, "President Trump, Sec. Mattis, and DOD should send the Navy, including the USNS Comfort, to Puerto Rico now. These are American citizens."

President Trump, Sec. Mattis, and DOD should send the Navy, including the USNS Comfort, to Puerto Rico now. These are American citizens. https://t.co/J2FVg4II0n

— Hillary Clinton (@HillaryClinton) September 24, 2017

Puerto Rico Governor Ricardo Rosselló appeared on Morning Joe Tuesday morning to plead for more assistance for the island.

“This has been an unprecedented disaster, not only for Puerto Rico, but for all of the region…we need more help. We need more help with resources. We need more help with people being deployed so that we can get logistical support elsewhere."

However, the White House has countered that airplanes and ships loaded with meals, water and generators have been arriving or are headed to Puerto Rico and other affected Caribbean islands. FEMA tweeted that more than 10,000 federal employees are in Puerto Rico and the US Virgin islands helping with search and rescue efforts and moving goods.

.@USCG continues hurricane #Maria response with 13 cutters, 10 aircraft, partners @fema @USNavy @prffa Read more https://t.co/HbIHmFe2f3 http://pic.twitter.com/R6ZBB13iuq

— USCGSoutheast (@USCGSoutheast) September 25, 2017

 

10k+ federal staff are on the ground in PR/USVI assisting with search & rescue, restoring power, & moving commodities. #Maria [????: @USArmy] http://pic.twitter.com/8mbThIzD7T

— FEMA (@fema) September 25, 2017

             CNN              reported that Homeland Security Adviser Tom Bossert and FEMA administrator Brock Long were traveling to Puerto Rico.

"The federal response has been anything but slow," Sanders said. "There's been an unprecedented push through of billions of dollars in federal assistance."

As Bloomberg points out, Puerto Rico’s recovery will depend heavily on federal aid because the island simply has no money to cope with a catastrophe like the storm that passed through last week.

The island has effectively filed for bankruptcy to try and escape $70 billion of debt. The fiscal collapse has effectively shut down Puerto Rico’s access to the US bond market, promising to make it more difficult for the island’s government to borrow money for the rebuilding effort.

As President Trump pointed out in a series of late-night tweets, the island is in “deep trouble,” noting that the country’s “old” electrical grid was devastated.

Texas & Florida are doing great but Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble..

— Donald J. Trump (@realDonaldTrump) September 26, 2017

 

…It's old electrical grid, which was in terrible shape, was devastated. Much of the Island was destroyed, with billions of dollars….

— Donald J. Trump (@realDonaldTrump) September 26, 2017

 

…owed to Wall Street and the banks which, sadly, must be dealt with. Food, water and medical are top priorities – and doing well. #FEMA

— Donald J. Trump (@realDonaldTrump) September 26, 2017

Congress last year enacted emergency rescue legislation that extended Puerto Rico’s authority to seek court protection from creditors, which it previously lacked. But the federal government has provided little financial assistance beyond that.

Puerto Rico’s representative in Congress, Jennifer Gonzalez Colon, said she has talked with House Speaker Paul Ryan about securing more aid from the Federal Emergency Management Agency.

When it’s all said and done, the disaster could cost as much as $30 billion and some residents could be without power for months. As we reported yesterday, in many areas, residents have been forced to transact only in cash, which is quickly becoming a problem for those who didn’t stockpile enough money ahead of the storm.
 

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On the heels of Fed chair Janet Yellen warning of looming inflation and the need for The Fed to perhaps not move as slowly as they have suggested, gold has snapped back below $1300 (erasing North Korean risks) and the dollar is extending gains…

As Citi notes, for those hoping for hawkish comments, Yellen has certainly delivered.

“It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,”

 

The Fed “should also be wary of moving too gradually.”

 

“My colleagues and I must be ready to adjust our assessments of economic conditions and the outlook when new data warrant it”

 

“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation”

And that has sent Dec rate hike odds to 78%…

 

And banged gold lower…

 

Stocks, bonds, and bullion are all sliding…

 

Notably so is the 5s30s yield curve…

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On the heels of Bostic ("we didn't blow any bubbles") Brainard ("some barriers to growth are structural") this morning and Kashkari ("no inflation"), Evans ("need more data"), and Dudley ("inflation's coming soon") yesterday; it is Fed Chair Janet Yellen's turn to speak this afternoon on "Inflation, Uncertainty and Monetary Policy" as the dollar extends its post-FOMC gains (to 1-month highs).

Since The FOMC, Fed Speakers have been active…

Raphael Bostic, Atlanta Fed president: "I actually don’t think that our policies are too easy in the sense of really facilitating some sort of asset bubble."

 

Lael Brainard, Fed governor: Benefits of a lengthy U.S. recovery “can only go so far” and some barriers appear to be structural, sees "widening gulf" between large, small cities.

 

Neel Kashkari, president Minneapolis, FOMC voter in 2017: “I don’t see inflation taking off so I see no need to tap the brakes.”

 

Charles Evans, president Chicago Fed, voting member: “I think we need to see clear signs of building wage and price pressures before taking the next step in removing accommodation.”

 

William Dudley, president New York Fed, permanent voter (and most notably considered to be closely aligned with Yellen's way of thinking): “With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the FOMC’s 2 percent objective over the medium term.”

As a reminder, the Fed Chair said that "we don't fully understand inflation" and added that the "shortfall of inflation this year is more of a mystery," but, while Yellen speaking would normally be must-watch, with only a few days having passed since her post-statement press conference, we wonder just how much flip-flopping is possible. At that appearance, the Fed chief also downplayed the significance of the weak core inflation data as the central bank set the start date for the reduction of its balance sheet and signaled that an additional rate hike this year remained appropriate.

Additionally, though we doubt she will comment on it, Republican Senator Richard Shelby said he doesn’t think President Donald Trump will nominate Yellen for a second term at the helm of the U.S. central bank. Shelby said Tuesday in an interview with Bloomberg Television’s Vonnie Quinnthat he had spoken with the president about the Fed.

“I believe he will appoint somebody else to take her place,” the No. 2 Republican on the Senate Banking Committee said. “But ultimately, that is up to the president.”

Live Feed (from The National Association of Business Economics)

click image for link to Bloomberg's Live Coverage

 

Full Prepared Remarks:

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