Month: April 2020

Authored by Jeff Deist via The Mises Institute,

Americans are uniquely privileged, to the point of simply imagining they can stay home for months and months without suffering severe economic hardship as a result. Our unique privilege is delusion, the mentality that America is rich and will remain rich without particular effort on our part. Abundance simply materializes around us, regardless of incentives, and the job of politicians is to rearrange this abundance more equitably.

Polls such as this one showing widespread American support for quarantines and business shutdowns are evidence of this American privilege. Eighty percent of respondents think shutdowns by various state governors are justified as a response to the COVID-19 virus, and one-third support extending closure for another six months! 

This reflexive and unthinking complicity from the American public is partially explained by media hype, of course, over an illness which at this writing has killed fewer than sixty thousand Americans. Fear and hysteria always sell. The press clearly wants the coronavirus to be a major event, one that unseats Trump in the fall. (For its part, the administration is doing a terrible job, starting with the awful Dr. Fauci, whom the president should have sacked months ago.) And clearly the various governors’ responses are wildly out of proportion to the actual public health threat, even if initially well intentioned due to sheer uncertainty of the virus’s lethality. 

But something far more fundamental is at work here.

American simply fail to understand, or even much think about, the fragility of distribution chains and the goods and services we rely on. Earlier this week the chairman of conglomerate Tyson Foods warned that disruptions at processing plants could create very serious shortages of beef, chicken, and pork in US grocery stores, and decimate livestock farmers. And of course this was bound to happen as the dominos fell: the shutdowns would not only impact “nonessential” goods, but everything. 

Who didn’t see this? Will it take outright food shortages to make Americans change their minds about whether the shutdown is “worth it”?

We only need look at India for an example of what business and work shutdowns create in a country without  as much existing wealth to consume, where far more people live close to the bone. The national work moratorium ordered by Prime Minister Modi has sent millions of migrant workers and unskilled laborers into very real danger of starvation. Already living hand to mouth and penniless, their jobs essentially banned, many have taken to walking hundreds of miles in 100-degree heat to their home villages—in hopes of being fed by their families. In a country with widespread poverty and depressingly little per capita capital investment, the shutdown is a death sentence for many. Without much capital accumulation, Indians have little savings and few investments to consume when income grinds to a halt. And India is hardly the only poor country at risk and needing food relief; one NGO official warns of “biblical” famines across thirty underdeveloped nations if supply chains continue to be disrupted and charitable economic aid dries up:

“We are not talking about people going to bed hungry,” he [David Beasley of the World Food Programme] told the Guardian in an interview. “We are talking about extreme conditions, emergency status—people literally marching to the brink of starvation. If we don’t get food to people, people will die.” 

This is what poverty really means: having little or no cushion of wealth for an emergency. Poverty is best defined as a lack of savings and resulting capital, leaving people totally dependent on new and consistent income to survive. It is a condition only capital accumulation can improve. And yet “capitalism” is blamed for the unfolding tragedy before us:

Will stories like this finally make Americans understand the severity of the situation? BBC images from India show the heartbreaking human toll of the unprecedented decision simply to stop human work activity due to an infectious disease. Americans should take note, and soon. 

At more than 3.1 million COVID-19 cases globally, one million of those in the United States, and the rest scattered in various concentrations across 213 countries, there’s been few places in the world left untouched by the virus. With most countries on lockdown or a society-wide economic “pause,” it might be hard to conceive that there are still entire national populations in distant corners of the globe enjoying ‘life as usual’.

In a new report Reuters has broken down the remote, far-flung, and in most instances little populated countries which thus far haven’t seen a single coronavirus case. 

“As of April 20, 2020, 213 countries and territories of the 247 recognized by the United Nations have seen at least one case of the COVID-19. Of these, 186 have also experienced local transmission — where the virus is spread amongst the local community,” Reuters says.

This leaves 34 total countries and territories yet to report a single case; however, considering North Korea – which shares borders with hard-hit China, Russia and South Korea – is among these, some instances may be the result of both under-reporting and lack of testing. “From the 213 countries that have cases, at least 162 have also confirmed at least one fatality,” Reuters adds.

Despite infecting more than 3 million people around the world, there are still 34 countries and territories that are yet to report a single case of coronavirus https://t.co/4HNxIim91v pic.twitter.com/0es9PNwSzG

— Reuters (@Reuters) April 29, 2020

* * *

Here is the list of countries & territories without any cases of COVID-19:

Latin America

• Bouvet Island
• South Georgia and the South Sandwich Islands

Asia

• North Korea
• Tajikistan
• Turkmenistan

Europe

• Aland Islands
• Channel Islands
• Svalbard and Jan Mayen Islands

Africa

• British Indian Ocean Territory
• Comoros
• French Southern Territories
• Lesotho
• Saint Helena

Oceania

• American Samoa
• Christmas Island
• Cocos (Keeling) Islands
• Cook Islands
• Heard Island and McDonald Islands
• Kiribati
• Marshall Islands
• Micronesia (Federated States of)
• Nauru
• Niue
• Norfolk Island
• Palau
• Pitcairn
• Samoa
• Solomon Islands
• Tokelau
• Tonga
• Tuvalu
• United States Minor Outlying Islands
• Vanuatu
• Wallis and Futuna Islands

Authored by Robert Aro via The Mises Institute,

The stimulus packages being handed out across this world provide us with an opportunity to document the anticapitalist process as it unfolds in real time, keeping in mind that when these inflation schemes fail, it will likely be blamed on capitalism.

My previous article discussed the $600 billion Main Street Lending Program (MSLP), which is very different from and not to be confused with the $670 billion Paycheck Protection Program (PPP). Whereas the MSLP grants between $1 million and $150 million in the form of a secured loan, the PPP only provides the lesser of $10 million and 250 percent of a borrower’s average monthly payroll costs. However, what is more concerning than the amount of the loans are the terms of the “loans.” Per the US Small Business Administration (SBA):

The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll).

In what may go down in history as one of the most aptly named loan programs ever, the “Paycheck Protection Program,” appears to be living up to its moniker; but is it a “real loan” or a loan in name only? Even worse, nowhere does it say that employees must work in order to receive the money. Rather, the SBA goes on to mention that “forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.” Thus, not only does it make sense for the entrepreneur to maintain all staff, but the entrepreneur is also incentivized to maintain existing salary amounts as well, regardless of whether the employee works or not.

A recent Washington Post article said it best, citing a legal opinion to explain that

“the company can still choose to use PPP funds to pay that employee, even if the employee is not actually performing real work.”

But that doesn’t mean the loan is designed to pay people “not to work.”

The question to consider is: should society be paying people not to work? If yes, then where should this money come from? For this program, the money will be created via deposit institutions that will provide the loans to businesses. Those deposit institutions will then be able to borrow from the Fed’s newly created Paycheck Protection Program Lending Facility (PPPLF) and exchange the PPP loan as collateral, guaranteed by the SBA.

It may seem strange that the Fed would take on a loan when that loan may be forgiven upon the debtor spending the money on payroll, but in the 31-page “Federal Register Notice: Capital Rule: Paycheck Protection Program Lending Facility and Paycheck Protection Program” it is noted that:

As a general matter, SBA guarantees are backed by the full faith and credit of the U.S. Government.

A government guarantee makes good economic sense to the Fed, which concludes in a report to Congres that:

PPP loans under the PPP are fully guaranteed as to principal and interest by the SBA, and these guaranteed loans will fully collateralize extensions of credit under the PPPLF. As a result, the Board does not expect that the PPPLF will result in losses to the Federal Reserve.

On April 16, 2020 at 9 a.m. the Fed’s loan facility opened, and at noon on the same day the SBA had already made 1,661,367 approvals. Only time will tell how much of this money will be paid back, but there seems to be little reason for anyone to offer to pay it back.

The combination of increasing the money supply in order to pay people not to produce goods or services has consequences that not a lot of people are talking about.

It flies in the face of the free market and is as nonsensical as a negative interest rate. A loan that is forgivable is unconventional to say the least, because a loan is normally defined as an amount borrowed that is expected to be paid back with interest. When a loan is given on a first-come-first-served basis for the purpose of paying people not to work and is forgivable because it’s guaranteed by the United States government, we shouldn’t call it a loan.

It may be called socialism, maybe interventionism, and some may still prefer the term statism; but one thing is certain when it comes to the Paycheck Protection Program: it’s not capitalism!

With total debt (in public bonds & loans outstanding) of $34.2 billion, net debt soaring…

…and having burned through $4.7 billion in cash in the first quarter, it is perhaps no surprise S&P took the ax to Boeing’s credit rating.

As a reminder, Moody’s downgraded Boeing to Baa2 (BBB equivalent) with a negative outlook on April 10th, and now S&P goes one step further with a cut to BBB- (one notch above junk).

Credit markets are actually a little more positive than stocks here (thanks Mr.Powell)…

Boeing Co. Downgraded To ‘BBB-/A-3’ From ‘BBB/A-2’ On Coronavirus Impact, Outlook Stable

• Boeing Co.’s earnings and cash flow over the next few years are likely to be lower than we had previously expected due to the impact of the coronavirus on aircraft demand, with the pace of recovery in air travel still highly uncertain.

• Therefore, we are lowering our issuer credit ratings on the company to ‘BBB-/A-3’ from ‘BBB/A-2’ and are removing the ratings from CreditWatch, where we placed them with negative implications on Jan. 23, 2020.

• The stable outlook reflects credit ratios that should improve in 2021 due to higher 737 MAX deliveries, with funds from operations to debt of 25%-30% and free operating cash flow to debt of 20%-25%.

S&P Global Ratings today took the rating actions listed above.

Earnings and cash flow are now likely to be much weaker than we expected for at least the next two years.  We now expect free cash flow to be an outflow of $19 billion-$20 billion in 2020 and an inflow of $9 billion-$10 billion in 2021. This compares to our previous forecast for free cash flow to be an outflow of $11 billion-$12 billion in 2020 and an inflow of $13 billion-$14 billion in 2021. The significant decline is due to lower aircraft deliveries and aftermarket sales resulting from the impact of the coronavirus on air travel, lower deposits from airlines as they try to conserve cash, and the costs of operational disruptions. This is only partially offset by the company’s efforts to reduce costs to match lower demand.

The total cash outflow (after dividends and acquisitions, but before changes in debt) in 2020 will be similar to our previous expectations at around $20 billion due to the company suspending its $4.6 billion annual dividend and terminating its planned joint venture (JV) with Embraer S.A., which required a $4.2 billion investment.

Total balance sheet debt is still expected to peak at more than $46 billion, up from about $39 billion on March 31, 2020. However, earnings are likely to be much lower due to the lower deliveries and about $2.1 billion in charges related to the KC-46A tanker, further delays on the 737 MAX, costs to fix a problem with earlier generation 737s, and the costs of temporary halting production. We now expect funds from operations (FFO) to debt of 0% to negative 5% in 2020 (previous expectation was 5%) and 25%-30% in 2021 (previous expectation was 30%). However, this forecast is highly uncertain and does not include a possible material increase in pension liabilities due to lower discount rates and poor asset returns in 2020.

Environmental, social, and governance (ESG) factors relevant to the rating action: 

Health and Safety

The stable outlook reflects credit ratios that should improve in 2021 as MAX deliveries increase, with FFO to debt of 25%-30% and free operating cash flow (FOCF) to debt of 20%-25%, if the impact of the coronavirus on aircraft demand is not materially greater than we expect.

We could lower the rating if we do not expect FFO to debt to improve above 20% or FOCF to debt above 10% in the next 12-24 months and we believe the company’s competitive position has deteriorated significantly. Additionally, we could lower the rating if the cash outflow in 2020 is significantly greater then we expect and the company is not able to raise funds in the bank or capital markets or through the various government coronavirus support programs, leading to a deterioration in liquidity.

This could occur if:

• MAX certification is delayed further resulting in fewer deliveries, higher compensation to airlines, and lower margins on the program.

• Aircraft deliveries or aftermarket sales are below our expectations or there are significant order cancelations due to lower demand. This could result from the impact of the coronavirus on air travel being greater or lasting longer than we forecast.

• Operations are significantly disrupted due to government restrictions to slow the pandemic, employee illness, or supplier issues.

• The company is not able to successfully reduce costs to match lower demand.

• We believe the MAX grounding has materially impaired the company’s competitiveness in the narrowbody market, resulting in lower profitability and cash generation.

• Management resumes dividends and share repurchases before significantly reducing debt taken on to deal with the MAX grounding and coronavirus impact.

• The pension liability increases materially, resulting in significantly higher required contributions.

Although unlikely, we could raise the rating if we believe FFO to debt will increase above 25% and FOCF to debt above 15% for a sustained period.

This could occur if:

• Air travel recovers faster than we expect, limiting the impact on aircraft demand and resulting in higher than expected aircraft deliveries.

• The company successfully reduces costs to match expected demand and there are no material disruptions to operations.

• MAX certification is not further delayed.

• Management maintains a conservative financial policy, dedicating all cash flow to reducing debt.

Of course, even if it were cut to junk, The Fed would just scoop it all up and save another zombie.

The downgrade comes after Boeing sent out a separate letter to employees just as it reported earnings. CEO Dave Calhoun said the company is targeting a 10% cut through voluntary layoffs, natural turnover and “involuntary layoffs as necessary.” The reduction will be even deeper – with a 15% employment drop – at the company’s jetliner and services units, as well as in its corporate functions operation.

In his message to employees, Calhoun calls the news on job cuts “a blow during an already challenging time.”

Russian state media reports a grim milestone for a country which though early on reported cases months ago, appears to be peaking late, following officials initially downplaying the pervasiveness of the disease.

From Tuesday into Wednesday over the course of a mere 24 hours new coronavirus cases rose by 5,841 to 99,399 – TASS reports. The prior day, Tuesday, the country reported 6,411 new infections, now the single-day record increase thus far.

This puts the country on track to hit 100,000 by Thursday or at least by end of the week, meaning Russia has this week surpassed Iran and China, and now has the eighth highest count of infections globally.

“A total of 99,399 coronavirus cases have so far been recorded in 85 Russian regions (up by 6.2%). As many as 1,830 people were discharged from hospitals in the past 24 hours, bringing the total number of recoveries to 10,286. As many as 972 people have died,” a statement from Russia’s anti-coronavirus crisis center reads.

Very alarmingly, the center further detailed that 44.9% of the new cases recorded (2,624) have no symptoms.

“Another 2,220 patients have been confirmed in Moscow, bringing the number of cases in the city to 50,646,” TASS says further of the nation’s epicenter. The situation in Moscow strongly suggests the entirely state-run national health system (which is “free” to all citizents) is fast becoming overwhelmed, as the independent Moscow Times notes: 

At least 170 doctors and patients at a hospital in central Russia have tested positive for coronavirus in preliminary tests, the state-run RIA Novosti news agency reported.

Meanwhile, the mayor of Moscow Sergei Sobyanin has indicated that construction is underway of temporary hospitals with the combined capacity for 10,000 beds. 

Chart & data via The Moscow Times

And in another sign that hospitals, woefully short on personal protective equipment (PPE) like many Western nations, are collapsing under the strain, there’s at least one instance of an entire medical building being placed under quarantine: 

City hospital No. 1 was placed under quarantine after 78 of its doctors and patients tested positive for the virus, Kuyvashev said on social media. Most of them are asymptomatic, he added, while one patient is in critical condition.

More and more doctors are said to be self-reporting their own coronavirus infections. Amid the sharp daily rises President Putin extended the “non-working” month at least through May 11.

Chief doc at Hospital 15 in Moscow recorded this video warning: ‘We’re being brought an increasing no of young patients in a really bad way who need ventilating. Our ER is under pressure. There’s lots of patients, more & more each day. Esp aged c. 40, brought in in a bad way.’ pic.twitter.com/ukzUdxAOZV

— Sarah Rainsford (@sarahrainsford) April 23, 2020

Further, the Kommersant business daily has reported authorities are set to take drastic measures to track foreigners’ movements in the country utilizing smartphone geolocation technology.

This after earlier this month the Kremlin controversially locked down the borders to all non-commerce related transit. 

Authored by Michael Snyder via TheMostImpoirtantNews.com,

The fact that a number of states are preparing to “reopen” their economies has created a wave of optimism in recent days, and most Americans are assuming that things could start “getting back to normal” in just a matter of weeks.  But that is not true at all.  As you will see below, some of our biggest states are planning multi-stage “reopenings” that will unfold over many months.  And if a new wave of infections starts to erupt, they will just lock everything down again.  So even in a best case scenario, life is not going to return to “normal” for the foreseeable future, and it is entirely possible that some restrictions could remain in place well into 2021.

Let’s break this down one step at a time.  In California, Governor Newsom just announced that there will be a four stage “reopening” process in his state, and he is openly admitting that stage 3 is months away…

The next phase, Stage 3, is “months, not weeks, away,” Newsom said.

That stage will encompass personal care businesses like gyms, spas and salons, sports without live audiences, in-person religious services and other businesses where workers come in close contact with customers.

And the final phase, Stage 4, will see the end of the stay-at-home order with the reopening of the “highest risk parts of our economy” being reopened, Newsom said on Twitter. That includes concerts, convention centers and sports with live crowds.

If stage 3 is not going to arrive until “months” from now, when will we finally see stage 4?

And considering the fact that California is home to so many professional sports teams, what is all of this going to mean for the NFL, the NBA and Major League Baseball?

If the NFL season ends up getting delayed or canceled, I will be very upset about that.

Unfortunately, Newsom seems quite determined to stay the course, and he is promising that life will never fully return to normal for residents of his state “until we get to immunity or a vaccine”…

“We are not going back to the way things were until we get to immunity or a vaccine,” Newsom said. “We will base reopening plans on facts and data, not on ideology. Not what we want. Not what we hope.”

As I have discussed previously, it is extremely unlikely that “herd immunity” will be achieved in this country until 2021 at the earliest.

And there has never been a successful vaccine for any coronavirus in all of human history.

So if Newsom is serious, it appears that economic activity will be greatly depressed in the state of California for a long time to come.

Meanwhile, New York Governor Andrew Cuomo is also telling residents of his state to expect a multi-stage “reopening”…

“We’re going to reopen in phases,” Cuomo said. “Look at the regional analysis, make a determination, and then monitor whatever you do. Phase one of reopening will involve construction and manufacturing activities, and within construction and manufacturing, those businesses that have a low risk.”

Phase two would involved a business-by-business analysis, asking how essential — and how risky — that business is to reopen.

And if cases in his state start spiking again, Cuomo has made it abundantly clear that he is more than ready to shut everything back down again…

As New York prepares to let businesses reopen with the easing of the coronavirus pandemic, the state will have measures in place that will signal another outbreak of the disease and the need to curb activity once again, Gov. Andrew Cuomo said Tuesday.

In particular, Mr. Cuomo said that if either the hospital system in an area of the state hits 70% of capacity or if the rate of transmission reaches 1.1—meaning for every person who has the virus, another 1.1 are infected—that would constitute what he called a “circuit breaker.”

Needless to say, all of this is completely nuts, and it certainly feels like the inmates are running the asylum at this point.

No matter what we do, this virus is going to keep spreading, and most Americans are eventually going to get it.  These lockdowns can delay the inevitable, but they can’t stop it.

Unfortunately, decision makers all over America are completely paralyzed by fear of this virus, and that is resulting in some very strange outcomes.  For example, Harvard is already warning that the upcoming fall semester may be conducted “without students on campus”…

Harvard University announced Monday that, given the uncertainty caused by the coronavirus pandemic, it is leaving the door open for a fall semester without students on campus.

“We cannot be certain that it will be safe to resume all usual activities” by autumn, university provost Alan Garber wrote in a note to the school Monday. “Consequently, we will need to prepare for a scenario in which much or all learning will be conducted remotely.”

We truly have become a nation of “snowflakes”, and fear of this virus is going to paralyze some portions of the nation for a long time to come.

But the truth is that we can’t keep Americans confined to their homes indefinitely.  As I pointed out yesterday, people are already starting to venture out of their homes more frequently, and one new survey indicates that a lot of Americans are going to reach their “breaking points” if restrictions are not lifted soon…

In all, 1,895 U.S. citizens over the age of 18 were surveyed earlier this month, and 72% said they expect to reach a “breaking point” by mid-June if stay-at-home orders aren’t lifted. In fact, 100% of respondents said they would snap if this all lasts for longer than six months. The survey was conducted between April 3rd and 6th, and at that time, 16% said they had already hit their breaking point, with that number rising to 25% within the next two weeks. That would indicate that one in four Americans have likely reached wits’ end by now.

Broken down by gender, 20% of surveyed women had already reached their breaking point at the time of the survey, and 12% of surveyed men said the same. Half of women felt they’ll hit rock bottom within four weeks of the survey, and 76% in two months.

If you are elderly, have a compromised immune system or are in some other high risk group, it is going to be important for you to continue to quarantine yourself.

But the rest of the country needs to get back to work.  More than 26 million Americans have filed for unemployment benefits during this crisis so far, and a new Gallup survey discovered that about a third of all Americans have lost income due to the coronavirus…

Nearly one in three Americans have experienced a temporary layoff, permanent job loss, reduction in hours, or reduction of income as a result of the coronavirus situation. Eighteen percent have experienced more than one of these disruptions.

We are seeing so much suffering out there right now, and people deserve a chance to make a living.  According to a report that was just released, 31 percent of all Americans have already “cut spending on food” during this crisis, and that is a very alarming number.

Yes, a lot more Americans are going to get sick, and a lot more Americans are going to die.  Sadly, this is going to happen no matter if we have lockdowns or not.

In fact, we won’t ever get to the point of “herd immunity” until most of the population catches this virus, and that is going to take some time to happen.

But meanwhile, these lockdowns are causing our economy to come apart at the seams and the stage is being set for great civil unrest.

I understand that it would not be easy, but we need to try to move forward as a nation.

Unfortunately, the “multi-stage reopenings” that some of these governors have dreamed up will hold us back for many months to come and will greatly extend our economic suffering.

Elections have consequences, and the truth is that a lot of these governors should not even be trusted with mopping the floors at a local Dairy Queen.  But now they are the ones running the show, and the decisions that they are making are going to be very painful for all of us.

With Tesla stock staging a remarkable comeback from its March crash lows, and after doubling in the past month now trading at $800/share…

… a market cap just shy of $150BN which makes Tesla bigger than every other car company in the world except Toyota (which is where it is because the BOJ is buying its stock)…

… has prompted two questions: i) are Tesla retail investors simply unfazed by the coronavirus panic, and ii) what continues to cause Tesla’s stock price to soar over the last couple of weeks while the company has been completely idled.

One thing is certain: unlike all of its automaker peers, the coronavirus pandemic has for some inexplicable reason not had an any effect on Tesla’s stock price. While analysts and institutional investors remain focused on Tesla’s 2020 cash flow and potential ideas for boosting demand, but it appears retail investors simply don’t seem to fear the virus’s impact on the company.

So with Tesla reporting earnings today, there is some hope to get some answers whether Tesla is indeed priced to perfection, and whether Tesla is indeed somehow immune to the pandemic, here are the results:

• Q1 Rev. $5.985BN, beating the estimate of $5.81BN, and up 32% Y/Y largely thanks to the Model Y and Shanghai deliveries.
• Q1 GAAP operating income of $283MM; 4.7% operating margin
• Q1 GAAP net income of $16M; $227M Non-GAAP net income (ex-SBC)
• Non-GAAP Q1 EPS $1.24, beating the estimate Loss of ($2.90), even though basic EPS was just $0.09

Here are the results summarized:

And visually:

Commenting on its revenue, in Q1 Tesla reached its “highest ever revenue for a seasonally slower first quarter as our total revenue grew 32% YoY.” Sequentially, revenue was mainly impacted by lower deliveries, with Tesla explaining that this was driven primarily by limitations on our ability to deliver vehicles towards the end of the quarter. Tesla’s ASP declined further as the mix continues to shift from Model S and Model X to the cheaper Model 3 and Model Y.

Tesla also announced that this was the quarter in which for “the first time in our history that we achieved a positive GAAP net income in the seasonally weak first quarter. Despite global operational challenges, we were able to achieve our best first quarter for both production and deliveries.”

The reason for the profit:  Gigafactory Shanghai, with the company saying that “further volume growth resulted in a material improvement in margins of locally made Model 3 vehicles. In addition, Model Y contributed profits, which is the first time in our history that a new product has been profitable in its first quarter.”

As a reminder, the company said back in 4Q 2019 it was expecting to be positive GAAP net income going forward. However, the impact of COVID-19 seems to have changed that. From the earnings release:

It is difficult to predict how quickly vehicle manufacturing and its global supply chain will return to prior levels. Due to the wide range of potential outcomes, near-term guidance of net income and free cash flow would likely be inaccurate. We will again revisit our 2020 guidance in our Q2 update.

That said, of the company’s $16MM in GAAP net income $354MM was from regulatory credits (a big jump from $133MM in Q4), so excluding those, the company actually had a $338MM loss.

Looking ahead, Tesla didn’t reaffirm its previous guidance but did not give a new number either, blaming suppliers for any potential shortfalls:

“We have the capacity installed to exceed 500,000 vehicle deliveries this year, despite announced production interruptions. For our U.S. factories, it remains uncertain how quickly we and our suppliers will be able to ramp production after resuming operations.”

On to more important things, such as the company’s historic cash burn, unlike last quarter when in its earnings presentation Tesla for the first time added a chart proudly showing vehicle deliveries juxtaposed against Free Cash Flow, this time there was no such chart for one reason: the company’s cash burn made a triumphant return, with the company reporting $895 in negative cash flow in Q1.

Commenting on the cash burn, the company said that “sequential inventory growth impacted our operating cash flow  negatively by $981M, which was primarily attributed to the interruption of our operations at the end of the quarter.“

Despite the cash burn, Tesla said that thanks to the $2.3BN capita raise, the company set another record high cash balance at $8.1 billion.

And speaking of cash flow, the company said that its “near-term cash flow guidance is currently on hold” even as it continues to “significantly invest in our product roadmap and long-term capacity expansion plans as we have sufficient liquidity. Model Y production lines in Shanghai and Berlin remain our most important near-term projects.”

A quick note on something bizarre: there was not a single mention in Tesla’s investor letter of either coronavirus or covid. Perhaps the company really is immune to both the virus and any mentions thereof. There was however a passing reference to the pandemic:

“It is difficult to predict how quickly vehicle manufacturing and its global supply chain will return to prior levels.”

“For our US factories, it remains uncertain how quickly we and our suppliers will be able to ramp production after resuming operations. We are coordinating closely with each supplier and associated government.”

Commenting on its product suite, the company said that it expects that production of both Model Y in Fremont and Model 3 in Shanghai will continue to ramp gradually through Q2, and is “continuing to build capacity for Model Y at Gigafactory Berlin and Gigafactory Shanghai and remain on track to start deliveries from both locations in 2021.” Lastly, Tesla said it is shifting its first Tesla Semi deliveries to 2021 which is odd since the company hasn’t even selected a factory for Semi production.

Tesla also provided an update on Gigafactory Berlin: the company says it’s about to break ground on the construction phase of the site. The company says it’s on track to start delivering Berlin-built Model Y SUVs in 2021.

Oh, and as for that Cybertruck, well there was just one mention: in the company’s installed annual capacity table.

Commenting on the company’s earnings, Wedbush analyst Dan Ives said it’s all about profit. Ives concedes uncertainty remains around COVID-19, but says Tesla investors are looking beyond the near term and through to the June quarter. Courtesy of Bloomberg:

“Musk and his red cape did it again. The profitability picture is much stronger than feared. The missing piece in the puzzle was around profitability and around the fundamental profile, given the COVID headwinds. The bulls could take this and run. You could likely see a four digit stock. It’s true. No one knows what the next ten minutes will be let alone the next few months. Tesla investors are looking past the June quarter. That’s how Tesla investors are playing this stock.”

Gene Munster chimed in too, tweeting that “Tesla surprises on gross margin. GM improvement is a sign that Tesla is building a sustainable business. Auto gm ex credits of 18.6% beat expectations 16.8%. Reason is Shanghai made in China Model 3 improved since Dec-19, and now are “approaching level of US made in Model 3.”

Tesla surprises on gross margin. GM improvement is a sign that Tesla is building a sustainable business. Auto gm ex credits of 18.6% beat expectations 16.8%. Reason is Shanghai made in China Model 3 improved since Dec-19, and now are “approaching level of US made in Model 3.”

— Gene Munster (@munster_gene) April 29, 2020

Following the earnings results, which at least superficially beat all expectations, the stock initially tumbled then surged,c and was up more than $60/share at last check, rising to $862.