UPDATE: Recession, Goldman Sachs, and Tesla

By Staff Reporters

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The director of the nonpartisan Congressional Budget Office [CBO] added his voice Thursday to those economists who say it’s unclear if the economy has hit a downturn, despite posting two straight quarterly drops in growth. “The U.S. economy shows signs of slowing, but whether the economy is currently in a recession is difficult to say,” wrote CBO Director Phillip Swagel in a letter to Sen. Lindsey Graham (R-S.C.). “It is possible that, in retrospect, it will become apparent that the economy moved into recession sometime this year. However, that is not clear from data that were available at the beginning of August,” Swagel added.

Goldman Sachs said its credit card unit is under investigation by the Consumer Financial Protection Bureau, a federal agency tasked with protecting Americans from financial abuse. In a securities filing, Goldman said the CFPB is examining a number of the company’s credit card account management practices, including refunds, resolving billing errors, advertisements and reporting to credit bureaus. And, in a statement to CBS MoneyWatch, Goldman said the bank “is cooperating with the CFPB on this matter.”

Finally, shares of electric vehicle maker Tesla rallied in after-hours trading as the company won shareholder approval for a 3:1 stock split, the second such move in two years, as the world’s most valuable automaker looks to make its stock more affordable.

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UPDATE: The Domestic Stock Markets and [Un]Social Media

By Staff Reporters

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The stock markets fell after new data showing U.S. manufacturing activity stalled and the service sector’s pandemic recovery has gone into reverse as a result of high inflation and mounting interest rate hikes, feeding concerns that the Federal Reserve’s efforts to cool decades-high price increases may force the economy into a recession. The Dow Jones Industrial Average fell 138 points, or 0.4%, to close at 31,899, while the S&P 500 fell 0.9% and the tech-heavy NASDAQ 1.9%; for the week, the indexes ended up 2%, 2.5% and 3%, respectively.

CITE: https://www.r2library.com/Resource/Title/082610254

US social-media companies also saw more than $130 billion wiped off their stock-market values after disappointing revenue from Snap Inc. and a lackluster report from Twitter Inc. raised new concerns about the outlook for online advertising. The Snapchat parent plummeted 39%, sinking to its lowest level since March 2020. Meanwhile, Facebook parent Meta Platforms Inc. fell 7.6%, Pinterest Inc dropped more than 13%, and Google owner Alphabet Inc. declined 5.6% in its biggest one-day drop since March 2020. Twitter also reported quarterly results on Friday, though Wall Street remains focused on the company’s legal battle with Tesla CEO Elon Musk, who is attempting to withdraw from a deal to buy the company. The stock rose 0.8% on the day.

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UPDATE: The EEOC, Yen, Wells Fargo & Tesla

By Staff Reporters

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The Equal Employment Opportunity Commission (EEOC) and the Department of Justice (DOJ) Civil Rights Division each put employers on notice: When using AI in employment processes, employers are responsible for inspecting tools for disability bias, and they better have a plan to provide reasonable accommodations, because federal agencies say they have their eyes on how using artificial intelligence could lead to discrimination under the Americans with Disabilities Act (ADA).

The Yen has the potential to drop to levels last seen in 1990 on Japan’s deepening monetary policy divergence with the US. And, selling the yen has become a favorite macro trade this year as rising Treasury yields spur investors to ditch Japan’s currency for the higher-yielding greenback. The Bank Of Japan has vowed to maintain its easing bias even in the face of the currency’s losses, making it unlikely that the declines will reverse anytime soon.

Berkshire Hathaway Inc (NYSE: BRK-B) bought $3 billion worth of shares in Citigroup Inc (NYSE: C) in Q1, giving the group a stake of about 2.8%, according to filings with regulators. The investment came as Berkshire sold the remainder of its position in Wells Fargo & Co (NYSE: WFC), a rival bank that had been a staple in Buffett’s portfolio for more than three decades, Financial Times reported.

Finally, Tesla shares continued their fall, dropping ~35% since the announcement that Elon Musk was buying Twitter. That may imperil Musk’s ability to complete the deal, given that he’s taken out meaty loans tied to the value of Tesla’s stock.

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ALPHABET GOOGLE: Stock Splitting!

By Staff Reporters

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DEFINITION: A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of market price of individual shares, but does not change the total market capitalization of the company: stock dilution does not occur.

CITE: https://www.r2library.com/Resource/Title/082610254

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EXAMPLE:

Google parent company Alphabet said it would split its stock 20–1. That means in July 2022, Alphabet shareholders will receive 19 more shares for every one that they own. It doesn’t mean they’ll be 20x richer—the price of the stock they hold will drop a proportional amount. If the stock split were to happen now, Alphabet’s share price would fall from $2,865 to $143.

Image result for stock split

Why does it matter?

In many ways, it doesn’t. A stock split does not change the value of the company. It’s simply a way to increase the number of shares outstanding.

Think of it like slicing a pizza. At a share price of almost $3,000, Alphabet’s slices were a wide a monstrosity. With the stock split, it’s cutting company ownership into smaller portions. But, in the end, the pizza isn’t growing—there are just more slices to be shared.

So why do it? By making the slices of its company smaller, it hopes that more people will look at them and say, “Well I guess one couldn’t hurt.” Alphabet said the goal of the stock split is to attract more small-time investors who might have been intimidated by buying in at such a steep share price.

  • Only 27 other stocks in the S&P 500 have share prices above $500 besides Alphabet.

And, there’s evidence this bit of corporate inception can be effective. To see why, let’s look at what happened when two other tech giants, Tesla and Apple, split their stock recently.

  • When Apple split its stock 4–1 in July 2020, retail investors upped their purchases from $150 million per week to nearly $1 billion, according to Vanda Research.
  • When Tesla split its stock 5–1 in August 2020, retail investing jumped from $30–$40 million/week to $700 million.

There may be another play for Alphabet here—and that is to pad its resume for inclusion in the iconic Dow Jones Industrial Average. Because the Dow is weighted by share price (an antiquated system, to be sure), Alphabet at its current price would overwhelm all of the companies. It would become the Alphabet Industrial Average. At $247, it becomes a much more attractive candidate for the Dow.

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UPDATE: Stock Markets and the Economy

By staff reporters

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UPDATE: Stock Markets and Politics

By Staff Reporters

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  • Markets: With Omicron concerns swirling and President Biden’s big spending plan KO’d by Senator Joe Manchin, the S&P posted its biggest three-day drop since September. Tesla shares have now fallen back to their price before their big Hertz deal was announced in October.
  • Build Back Better: Goldman Sachs cut its economic growth forecast for next year after Joe Manchin said he wouldn’t vote for Democrats’ $2 trillion social spending bill. But yesterday the senator detailed some changes to the bill he’d support, reviving hopes that negotiations could resume in January.
  • CITE: https://www.r2library.com/Resource/Title/082610254

UPDATE: https://www.msn.com/en-us/money/markets/us-futures-rebound-after-stock-market-sell-off-but-omicron-risks-remain/ar-AAS1fv3?li=BBnb7Kz

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Stock MARKET Update

ALL TIME HIGHS?

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  • Markets: The S&P begins the week after closing at an all-time high last Friday. The index has closed at a record more times this year (67) than in any other year since 1995. It needs 10 more to tie the mark.
  • More S&P fun facts: Microsoft, Alphabet, Apple, Nvidia, and Tesla alone account for over a third of the S&P’s gains this year.
  • CITE: https://www.r2library.com/Resource/Title/082610254

NOTE: 35,630.18market open‎-340.81 (‎-0.95%)as of 12/13/2021, 11:31 AM EST

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Questions I’d be Asking If I Owned Tesla Stock

Questions I’d be Asking If I Owned Tesla Stock

By Vitaliy Katsenelson CFA

 What happened to 345,000 reservations?

When Tesla’s Model 3 was released, it was supposed to be a $35,000 car. Four hundred thousand people, including yours truly, put down a $1,000 deposit to reserve their spots in line so they could get their hands on that marvel as soon as it became available. It was a brilliant move by Tesla, as it provided the company $400 million of interest-free financing — the biggest crowdfunding project ever.

Today, after some delays, the Model 3 is being produced. However, $35,000 seems to have been a fiction of CEO Elon Musk’s imagination. Though the car is getting great reviews from auto critics, the price for a bare-bones Model 3 starts at $49,000, and the tax incentives are fading away.

But something interesting happened recently. I received an email from Tesla that said: Model 3 is available to order, and no reservation is required in the U.S. We’re now offering all our best options — including our Long Range and Performance configurations with dual motor all-wheel drive. You can design and order yours today for delivery in approximately 2–4 months.

On the surface this sounds like great news, except that it begs a question: What happened to 345,000 orders? Let me explain. According to Bloomberg, which has been tracking Tesla’s production, to date (as of July 28, 2018) Tesla has produced 55,000 Model 3 cars. Since a $1,000 deposit was supposed to secure buyers a place in line, any car ordered today will only be delivered after orders that were placed years ago are fulfilled — after all, 400,000 people paid Tesla $1,000 to hold their places.

Thus there are only three possible explanations for the email I received. One is that Model 3 production is expected to accelerate at an exponential rate to 40,000 cars a week, starting now. However, Bloomberg estimates that Tesla’s normal production cadence of the Model 3 is closer to 2,825 cars a week, so this is a highly unlikely scenario.

Or two, maybe Tesla has been extremely liberal with its statement of a two-to-four month delivery schedule because it still has 345,000 cars to produce before it can start fulfilling new orders, and the company is using that email to raise additional funds from new customers making deposits. (The required deposit is now $2,500.)

There is a third explanation: The bulk of the original 400,000 orders were for a $35,000 car. When it came time to actually buy the car, consumers may have realized that the out-of-pocket expense was much more than expected and simply canceled their orders, draining Tesla’s balance sheet of $345 million.

How sound is Tesla’s balance sheet?

What Musk has achieved with Tesla and SpaceX is truly astounding. I have incredible respect for him, but he is also a magician playing a confidence game. If Musk can continue to convince the market that Tesla has a bright future, then the market will continue to finance Tesla’s losses, and maybe Musk will figure out how to produce the Model 3 more cheaply and then Tesla will sell hundreds of thousands of Model 3s and the future will be as bright as Musk paints it.

For that to happen, Tesla needs to maintain its high stock price, and investors have to believe that Musk is the Iron Man. Investors have to suspend belief, ignore current problems, and focus on the future. However, if the market loses confidence in Tesla and Musk, Tesla is done. This company is losing billions of dollars a year; it has an over-levered balance sheet. This is where Musk’s confidence game comes in.

If you believe in magic stop reading right now. Okay, you’ve been warned.

There is no magic. Magic is just the art of misdirection. The magician gets you to focus on the shiny object he holds in his left hand and you don’t see what he is doing with his right hand.

Musk has been showing us a lot of shiny objects. Some are real, like the success of SpaceX; some are superfluous, like sending a Tesla Roadster into space, and some are future promises on which Musk may or may not be able to deliver, like his futuristic underground railroad for cars (the hyperloop) and the Tesla truck, which is unlikely to be produced on time and at the promised price. The list is long in this category and never-ending; Musk’s futuristic thinking knows no bounds.

But importantly, these promises are the shiny objects that keep Tesla’s stock price high.

If I was a Tesla investor I’d be seriously worried about the company’s balance sheet. There are some ominous signs that Tesla’s financial situation is deteriorating rapidly. Tesla reportedly recently sent an email to its suppliers asking them to give some money back to help the company with its profitability.

Such requests are made by companies looking for Hail Mary solutions to significant financial problems. If suppliers start questioning Tesla’s financial viability, they’ll start shortening their accounts receivables periods and start requesting letters of credit. This would escalate the company’s problems. Hail Marys are acts of desperation. Putting this in the context of the likely Model 3 cancellations, — Tesla’s cash burn has likely gotten a lot worse.

 How effective is Musk at running Tesla?

Tesla is Elon Musk. He has achieved more than many of us will achieve in a thousand lifetimes. But today Musk is running half a dozen companies (Tesla, SpaceX, Solar City, Boring, OpenAI, Hyperloop). To make matters worse, he is also an incredible micromanager. I read that he interviews (or at least used to) every new employee who joins Tesla and SpaceX.

It is clear that Musk is quite exhausted, and his behavior is becoming more erratic. In a conference call snafu in April, he called the British diver who saved the Thai cave kids a “pedo” on Twitter. This sort of thing undermines Musk’s Iron Man image — if he loses that, the confidence game is lost and Tesla is done.

Another red flag went up recently: Musk started to attack short sellers. A short seller who went under the name of Montana Sceptic posted negative research on Tesla on Twitter and SeekingAlpha. Elon Musk personally called the man’s employer and threatened a lawsuit if the employer didn’t silence Montana Sceptic. Historically, companies that have gone after short sellers have had something to hide or were playing a confidence game. (The short sellers were interfering with the misdirection to shiny objects.)

Assessment

Tesla investors are still fascinated by the shiny objects, but I note that CDS insurance on Tesla’s bonds prices in a 24% risk of default by 2025. I am not long or short the stock. But if I were long Tesla’s shares I’d be asking myself these questions. After all, you’re paying $50 billion for a company that trades completely on the spoils of future dreams.

 Conclusion

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