• The Fed acknowledged economic improvements and higher inflation but sees price gains as “reflecting transitory factors.”
  • Fed Chair Powell said that “it is not the time to start talking about tapering.” The US central bank remains extraordinarily dovish and entirely focused on the labor market recovery, especially in some vulnerable sectors.
  • The market reaction was muted. The dollar weakened while longer-dated Treasuries and gold gained.
  • Inflation expectations continue to grind higher.
  • The 12-month T-bill yield hit a record low of almost 0% as money markets are flooded with liquidity.
  • The futures-based probability of a rate hike next year remains near 80%.

The Fed should have started lifting rates as the spike in economic growth occurred in 2010-2011 as both the Fed and Government flooded the economy with liquidity. While hiking rates would have slowed the advance in the financial markets, the excess liquidity sloshing around the system would have offset tighter monetary policy.

The majority of market participants are expecting an undramatic event including an upgraded economic outlook, a reiteration of uncertainties and signaling of no policy changes. Unfortunately, it’s an outcome that kicks the policy can down the road when the central bank should be thinking now about scaling back extraordinary measures.

The longer it takes to do so, the harder it will be to pull off eventual normalization without risking both significant market volatility and damaging what should and must be a durable and inclusive economic recovery.

By not hiking rates now, they run the risk of being late once again. However, there have been ZERO times in history when the Fed started a rate hiking campaign that did not lead to a negative outcome.

The bottom line is the Fed is trapped. If they hike rates, they bust the bubble and destroy economic growth. If they do nothing, the bubble inflates to a point it breaks under its weight.

 

US Economy

 

  • The March durable goods orders report was weaker than expected.
  • The transportation sector was a drag on orders. An early Easter holiday also had a negative impact.
  • Let’s look at the absolute dollar amount of orders without seasonal adjustments. The trend remains strong.
  • The Dallas Fed’s manufacturing report confirmed the exceptionally robust manufacturing activity we see across the country.
  • Companies increasingly mention inflation on earnings calls.
  • Hotel rates are rising and rent inflation has bottomed. These trends could boost service inflation.
  • According to Goldman, the GDP growth will peak this quarter.

 

 

  • Over the next few quarters, US growth will outpace that of China.
  • US financial conditions are extraordinarily accommodative.

 

 

  • Uranium miners have been rallying. Nuclear energy may be the only viable way of meeting the aggressive emission reduction targets that are now in place.
  • When will the Fed begin tapering?

 

 

  • Used vehicle prices in the US:

 

 

  • Consumer confidence surged in April, topping forecasts.
  • In-store credit card spending continues to recover.
  • Credit card delinquencies have been trending lower.
  • Restaurants are struggling to find workers as visits rebound.
  • Restaurant wages are going up.
  • Job openings continue to recover.
  • The Richmond Fed’s regional manufacturing index was softer than expected.
  • Supply-chain problems have become a drag on growth.
  • Manufacturers around the country are passing on higher prices to their customers.
  • Based on recent communications, the Fed wants to “assess” and “give some time” before adjusting monetary policy.
  • Households are sitting on substantial savings.
  • Global trade has recovered.
  • Real yield differentials suggest further downside in the dollar.
  • Wholesale inventories jumped last month.
  • But retail inventories tumbled. Car inventories shrunk further due to chip shortages
  • The trade deficit in goods hit a new record, exceeding forecasts. Trade has been a drag on the Q1 GDP growth.

 

 

  • House purchase loan applications remain robust, but there has been some loss of momentum.
  • Housing inventories are shrinking across all price tiers.
  • Most metro areas see rapid price gains.
  • The first-quarter GDP report was roughly in line with expectations.
  • The economy has almost recovered.
  • Higher consumer spending (mostly on goods) drove much of the gains last quarter
  • Shrinking inventories were a drag on growth, which bodes well for the Q2 GDP (restocking).
  • The nominal GDP grew 10.7% in Q1 and is now well above the pre-pandemic highs.

 

 

  • March pending home sales came in well below forecasts amid tight inventories and soaring prices.
  • Consumer confidence continues to recover.
  • Business confidence is surging, as US companies enjoy more pricing power than global peers.
  • Initial jobless claims continue to drift lower as the labor market heals.
  • Applications for extended benefits are down sharply.

 

 

Sell in May and Go Away?

 

The seasonality pattern of the markets is stark.  If you had invested $1K in the S&P500 each year from May 1st to November 1st from 1950 until now, your $1K is worth about $2,500.  If you had invested $1K in the S&P500 each year from November 1st to May 1st from 1950 until now, your $1K is worth about $13K.  Why the stark contrast?  Most businesses “take summer off” and earnings show it.

 

 

Tesla Thoughts….by Stansberry

 

When is a car company NOT a car company?

That’s easy…when it makes all of its profits as a corporate welfare recipient or cryptocurrency speculator that spends billions of dollars covering up its founder’s mistakes.

In other words… when it’s Tesla (TSLA).

The electric-car, battery, and solar-panel maker’s latest quarterly earnings call has me scratching my head.

Tesla earnings were announced last week.  The company earned nearly $10.4 billion in revenue and $533 million in pretax income for the quarter, which ended on March 31. Its sales grew 74% year over year from the first quarter of 2020.

Meanwhile, Tesla reported that its total vehicle deliveries doubled over the past year. And management expects 50% average annual growth in vehicle deliveries “over a multiyear horizon.”

Based on those data points, you might say, “It sounds like business is booming! Someone should give Elon Musk a raise! What’s all this guff about Tesla not being profitable?”

For one thing, as Wall Street Journal columnist Charley Grant pointed out on Wednesday, Tesla earned more profit from selling bitcoin last quarter than it did selling cars.

In fact, all of Tesla’s pretax profits came from two sources – neither of which was car sales.

It’s well known by now that Tesla earns tradeable credits for selling electric cars. The credits come from government regulations “related to zero-emission vehicles (‘ZEVs’), greenhouse gas, fuel economy, renewable energy, and clean fuel.”

The company then turns around and sells the credits to other regulated companies who can use them to comply with emission standards and other regulatory requirements. Basically, Tesla is using its business to help others skirt around the “green” energy regulations.

In a nutshell, Tesla earns government subsidies because it makes electric cars, which are politically favored today over internal combustion engine vehicles.

Regulatory credits are reported as 100% profit. That’s because the company doesn’t need to invest or spend any extra capital to earn them. In its most recent quarter, Tesla earned $518 million from selling these credits – or about 97% of its reported pretax profits.

In its latest annual report, filed on February 8, Tesla reported purchasing $1.5 billion worth of bitcoin in January. It explained the move as providing “more flexibility” and “to further diversify and maximize returns on [its] cash that is not required to maintain adequate operating liquidity.”

Last quarter, it reported a $101 million profit on the sale of $272 million worth of bitcoin from its investment portfolio (10% of its Bitcoin position), while reporting net losses from selling cars.

Tesla reported $594 million in operating profits for the first quarter. Since its regulatory and bitcoin profits totaled $619 million, that means selling cars generated a pretax loss of at least $25 million ($619 million – $594 million = $25 million).

Recall that Tesla bought SolarCity – another Musk venture – in November 2016 for $2.6 billion in stock.

When the deal was announced earlier that year, Musk called it a “no brainer”, meaning the combination of a solar-panel maker with a company that makes batteries (as Tesla does) is logical. He reasoned that the combined company could sell customers a car, a home battery, and solar panels all in one trip instead of making several house calls.

But SolarCity was struggling. Its stock was down 60% when the deal was announced. And at the time, Tesla wasn’t doing great, either. Tesla’s fortunes have improved since then (though it still can’t make money selling cars).

Musk and two of his cousins started SolarCity in 2006. A decade later, SolarCity was firing staff and hemorrhaging cash when Tesla acquired it. In October 2019, publicly disclosed e-mails between Musk and SolarCity CFO Brad Buss showed that Musk knew SolarCity was going broke and that he knew the company’s roof tiles weren’t functional as of June 2019.

Shareholders sued five Tesla directors (including Musk’s brother, Kimbal), accusing them of breaching their fiduciary duty by allowing the deal to happen. Plaintiffs said the transaction “improperly benefited” Musk. And last August, a Delaware judge approved a $60 million settlement.

Plus, last year, Walmart (WMT) sued Tesla after seven of more than 240 SolarCity rooftop installations on the retail giant’s stores caught fire.

Now armed with all of this hindsight, it sure looks like SolarCity was failing back in 2016 – with bankruptcy as a likely outcome. And it certainly appears that Tesla’s “no brainer” deal was little more than a bailout of SolarCity’s shareholders – of whom Musk was the largest.

Under a single roof, you can find…

  1. A car company
  2. A lithium-ion battery factory
  3. A recipient of billions in corporate welfare
  4. The acquirer of the founder’s down-and-out solar company
  5. A massive bitcoin holder
  6. A mediocre earnings manipulator

It’s one of the most overhyped stocks in the market.

Right now, as we go to press, Tesla trades at about $710 per share. That’s 21% below its January intraday all-time high of $900 per share, but it’s still an astronomical valuation.

With a market cap of $680 billion, it’s valued at roughly 3.2 times higher than carmaker Toyota Motor (TM) – which made $17.9 billion in profits last year and makes more than 10 times as many cars in a year as Tesla. And as Grant pointed out in the Wall Street Journal…

“If Tesla extended its first-quarter results for the next three quarters, the stock would trade at about 200 times this year’s adjusted earnings.”

No matter how you feel about Tesla’s business… No matter how much you adore Musk… No matter how fast Tesla really winds up growing its production…You must admit that an electric-car, battery, and solar-panel maker that moonlights as a corporate welfare recipient and bitcoin trading company with an intrinsic value of 200 times its adjusted earnings is probably overvalued.

Tesla is a quintessential bubble stock engaged in blatant earnings manipulation. So, with that in mind, this should make its shareholders very uncomfortable.

 

Jonathan Ward on China

 

Dr. Jonathan Ward is an internationally recognized expert on Chinese global strategy and US-China competition.

  • Watch what’s happening in the South China Sea and the potential invasion of Taiwan.
  • The world pretty much understands that China’s claims over the entire South China Sea are bogus, concocted through the Communist Party’s reading of history.
  • They have been trying to assert military control through island building over the last seven years, as well as massive military buildup.

Ward advises a comprehensive approach to dealing with China:

  • Economic engagement that transfers our industrial base to our primary adversary is probably one of the great mistakes of the past 100 years, and we are going to have to reverse that.
  • We have to reduce our engagement to reduce China’s growth, which fuels China’s military and global communist ambitions.
  • We have to make sure the US military budget is sufficiently resourced to deal with both China and Russia.

Ultimately, the US is going to have to work with its allies to cut off Beijing from financing for Western technology; rebuild our industrial bases; rebuild the coordination between our countries; form an alliance-based trading system; and isolate Beijing from the wider global economy, which must be done over time.

 

Thought of the Week

 

Be kind. Be grateful.

 

Picture of the Week

 

My wife Diane petting a white tiger in Thailand 2019.

 

 

All Content is the Opinion of Brian J. Decker