Category: Newsletter

Markets New All-Time High

The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and starting on the first one.”
                                 
– Mark Twain

 

Markets New All-Time High

Contents:

  1. Last Week’s Closing Prices
  2.  Market News
  3. Tickers to Watch
  4. Discord Recap
  5. Earnings Recap
  6. Up-Coming Earnings

 

Last Week’s Closing Prices
April 1st, 2021

Market News

  Boeing Takes Flight 

A few weeks ago, The Wall Street Journal reported that Southwest Airlines was potentially looking to ink a new deal with Airbus, ending a 50-year relationship with Boeing.

Following the grounding of a large portion of their fleet and many partner companies deciding to move away from Boeing altogether, this news was yet another huge hit to the Boeing Company this year. On Monday morning, in what was a massive turn of events, Southwest announced they had signed an impressive deal to receive a whole new fleet of 737 Max 7 airplanes. Southwest has long followed a cost leadership strategy and the fleet-wide move to the smaller 737 Max 7 models is yet another step towards increased efficiency in training, maintenance, and consistent pricing.

This is the largest purchase Boeing has received since November, when U.S. regulators lifted the 20-month flight ban imposed on Boeing aircraft in 2019. The order consisted of 349 MAX  7 firm orders and an additional 270 Max 7 options from 2021 through 2031.

On top of Southwest’s current order, United Airlines announced they would purchase 25 additional 737 MAX jets and Ryanair has agreed to buy 75 new 737 MAX jets.

Stan Deal, Boeing’s CEO who was appointed in 2019 to navigate the company’s way out of the 737 crisis, has surpassed all expectations of how quickly (or if at all) Boeing would return to the forefront of major commercial airline suppliers.

Looking ahead, we predict continued growth for Boeing. With COVID-19 vaccine administration picking up pace, commercial air travel is rapidly approaching pre-pandemic levels. We will continue to see other airlines push for new plane purchases as travel demand continues to grow – especially after many airlines had portions of their fleets grounded and un-serviced for months.

 

Convicted Criminal Swipes Over 10B from Major Bank

The r/wallstreetbets GameStop rally earlier this year showed everyone just how much the holdings of a single, well-financed fund can impact the overall market. Last week, Archegos Capital gave us yet another demonstration of the power that the high-rollers hold over all of our portfolios.
Archegos Capital, a family investment vehicle (aka – a private company that handles investment management for ultra-rich individuals & their heirs) owned and operated by Bill Hwang, single-handedly caused a market-wide liquidation event of around $33 billion.

Here’s what happened:

When a single entity (like Archegos) owns a substantial amount of stock in a single company, the SEC requires that entity to adhere to strict reporting and disclosure guidelines. To avoid these requirements, Hwang chose to buy and sell a type of derivative called Total Return Swaps (or, equity swaps).

Total Return Swaps work like this:
An investment bank agrees to buy X amount of Y stock, upon the condition that the entity will pay a fee to the bank (to cover the cost of owning the shares). The bank then owns the underlying asset and pays out the dividends and capital gains earned from owning the shares back to the entity. The fee paid to the bank is lower when the share prices are high and higher when the share price drops.
The banks that Archegos partnered with in these Total Return Swap deals included major players such as Goldman Sachs, Morgan Stanley, Credit Suisse, UBS and Nomura.

Now, because of the very low disclosure requirements for entities owning the Swaps, the investment banks that partner in these deals are unaware of the other holdings of the firm.
Hwang, through Archegos, was leveraged over $30 billion in Total Return Swap holdings of eight blue chip companies. The fund only had $10 billion under management.

So, when one of the companies in which Archegos held a huge position, ViacomCBS, rapidly began to tank last week – the partner banks began issuing  Margin Calls. And Archegos was unable to pay.
All of these major investment banks now needed to sell off other Swap positions that they held with Archegos to cover the huge losses the banks were taking on as Viacom fell and Hwang faulted on the payments.

The liquidation event resulted in over $33 billion worth of assets being sold off and an estimated $10 billion in losses for the partnered investment banks. All because one man, who plead guilty to insider trading and wire fraud charges back in 2014, chose to risk more than triple what he could lose.

Microsoft Lands Defense Contract for 20 Billion
In yet another government contract win, Microsoft has signed a $21.9B deal with the United States Department of Defense.
Microsoft has been contracted to provide more than 120,000 of their HoloLens augmented reality headsets to the training and mission preparedness units of the US Army.

The announcement resulted in Microsoft’s share price increasing by 1.7% by the end of the trading day this past Wednesday.

This deal comes less than two years after a $10.5B contract between Microsoft and the Pentagon for a new cloud computing software.

What this means for the future of $MSFT…
While tech sector stocks tend to pull back in times of economic downturn, defense companies are usually considered safe long-term investments, even in times of economic uncertainty. So should a market correction or revenue decline occur that would negatively impact Microsoft’s share price, this recent induction into the ranks of defense contractor may act as a solid mitigator of any substantial loss of value.

Discord Recap 
A short week last week with Market’s being closed Friday due to celebrate Easter on Good Friday.

Overall, we did incur some losses but also some wins. 

The S&P500 hit a new all-time high of $4,020.63, indicators are pointing at more upside to come.

Earnings Recap 
Micron Earnings Show a Sector with Tons of Demand
Micron had Q2 revenues of $6.2B, and a net income of $1.1B. The semiconductor industry is booming, demand is climbing, and prices are surging. Data centers, computers, graphics, mobile systems, and the automotive industry are all relying heavily on semiconductors. The current growth of supply for Micron technology is expected to be well below industry demand in 2022. Micron’s Dynamic random access memory (DRAM) semiconductor drives over 70% of their revenue and this industry is growing faster than Micron can keep up. This is a positive sign as demand will remain until one company or the entire industry can increase capacity at a faster rate.  Micron currently allocates its capital in four ways: Share repurchases, Capital Expenditures, Restricted Cash, and liquid cash. We want to see Micron increase its capital expenditure spending to increase its capacity for buyers.
Up-Coming Earnings
April 5th, 2021 – April 9th, 2021
Events & Talks

Tiger Wolf Capital : Stocks to trade this week

$BA Boeing

News: Southwest Airlines on Monday said it is buying 100 new Boeing  737 MAX jets.

This is big news for Boeing, which lost hundreds of orders during a prolonged grounding of the troubled jet and reduced demand for travel during the coronavirus pandemic.

The order for the MAX 7 jets, the smallest MAX variant, means Boeing will retain its lock on one of its most important airline customers. Southwest’s fleet is made up entirely of 737 jets, but the carrier had been re-evaluating that strategy.

Technical Analysis: On Monday: $BA closed @ $250.52, +2.31% from Friday’s close.

In my personal opinion, I do not think this news is big enough to make the stock continue going up.

I think this was a 1-time push and we should anticipate more downside to come.

I do believe $BA will trade lower into $242.69 and maybe even 233.78

I like the $230puts for 4/9 – currently trading @ 1.90

 

 

PENN Penn National Gaming Inc.

News:  Deutsche Bank Gaming report warns about NY government being more pessimistic about passing new gaming laws.

Now I personally do not agree with the report, but I do see the stock continue to sell-off.

After recently joining the S&P500 ETF, SPY, investors are not interested in owning the individual company when they can just bet on the overall market doing well.

On Monday, PENN closed at $98.21, down 7.85% from Friday’s closing price.

I do see the stock heading lower into $86.17

I do like the $90 puts for 4/9, currently trading at 2.41

Join our discord for more trade ideas like this: https://www.tigerwolfcapital.com/discord/

Tesla increases Model Y price in China after successful launch in the market

Tesla has increased the price of the Model Y electric SUV in China last night after a successful launch in the market.

In January, Tesla launched the Model Y in China.

The launch of the electric SUV was highly-anticipated since the electric crossover/small SUV segment is very popular in the market, and since Tesla was waiting on producing the vehicle at Gigafactory Shanghai before launching it in the country, the market was curious about the price point Tesla could hit.

The automaker ended up launching the Model Y at a lower than expected price of 339,900 yuan ($52,000) for the Long Range Dual Motor version, and the Model Y Performance version started at 369,900 yuan ($56,600).

It was a successful launch as the automaker delivered just over 1,600 Model Y electric SUVs in China in January and quickly ramped up to 4,630 Model Y deliveries in February.

As we previously reported, Tesla sold out the first quarter of planned production in just a few days, and Model Y is believed to already be putting pressure on competitors NIO and Xpeng.

Now, Tesla has decided to increase the price of both Model Y versions in China overnight:

 

Tesla Model Y, China

The price has increased by 8,000 CNY, which is the equivalent of about $1,200 USD.

As usual, Tesla didn’t disclose the reason behind the price changes, but the automaker also made several price changes in the US and other markets in recent months.

Tesla’s Model Y production ramp-up at Gigafactory Shanghai is being followed closely by the market as it is expected to be the biggest contributor to the automaker’s growth in 2021.

The company has hinted at producing as many as 200,000 Model Y vehicles at the factory this year.

Gigafactory Shanghai could produce up to 450,000 vehicles in 2021.

The factory has already been a great success for the automaker, and now, it is trying to recreate that success at Gigafactory Berlin and Gigafactory Texas, which are currently both under construction and where Tesla plans to also produce the Model Y.

Disagreement about U.S. and Euro-Area Inflation Forecasts

FRBSF Economic Letter

2021-08 | March 22, 2021 | Research from the Federal Reserve Bank of San Francisco

Disagreement among economic forecasters about the outlook for inflation in both the United States and the euro area has increased since the onset of the pandemic. The nature of these forecast differences can provide insights into the inflation risks that lie ahead. Many forecasters initially expected substantially lower inflation over the next year but subsequently raised their expectations as economic activity began to improve. In contrast, changes in expectations and disagreement about longer-term inflation have been relatively subdued and suggest a balanced likelihood between higher and lower inflation.

The Week of The Fed

“I don’t stop when I’m tired, I stop when I’m done. ” -David Goggins

THE WEEK OF THE FED

Friday, March (3/19) Closing Price

TABLE OF CONTENTS
  1. Review of Past Week: News and events 3/15 -3/19
  2. Review of Past Week: Earnings 3/15 – 3/19
  3. Upcoming Week: Talks and events 
  4. Upcoming Week: Earnings from 3/22 – 3/26 
  5. Educational Learning Segment

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DISCORD
www.tigerwolfcapital.com/discord

Jerome Powell Speaks and the Market goes Parabolic

Markets reacted exceptionally well to Jerome Powell’s press release on Wednesday afternoon, with the S&P500 climbing nearly .64%. Some of the highlights from his recap of the FOMC (Federal Open Market Committee).

  • Projecting GDP Growth of 6.4%
  • Unemployment down to 4.5% by the end of the year
  • Inflation is currently below 2% projections
  • Federal Funds Rate to remain at 0 – .25% in the near future
  • Continue purchasing Treasury Securities and Mortgage-Backed Securities
  • Household Spending on goods is strong
  • Household Spending on services is weak

Let’s Break This Down

First and foremost, a GDP projection of 6.4% is an extremely healthy sign of a roaring back economy in 2021. In the last 50 years, the United States has reached a GDP growth rate of over 6% three times. This growth rate would mark an extraordinary bounce-back of the economy within the next 6-10 months. This is primarily due to vaccinations and herd immunity. Additionally, Powell highlighted a lower unemployment rate heading into 2022 as another indicator of a stronger economy. He did highlight that this figure may be slightly lower due to some individuals not participating in the labor market. He made sure to reiterate the position that inflation is well below their 2% projections for this year, and moving forward, we can begin to see it rise due to March and April data from 2020 leaving the picture.

When those two months are out of the data, we will see a “transitory” spike in inflation to around 2.4%. These remarks sent the 10-Year Treasury Yield on Thursday to a new 52-Week high of 1.75%, which subsequently took away all of the market gains from the day before. Most notably, in his speech, Powell remained steadfast on Interest Rates remaining at near 0%. He wants to wait “for actual data and not forecasts” to indicate that Inflation is above their 2% target for an extended period before raising rates. Lastly, Powell noted that supply might be bottlenecked for the next year with production not keeping up with such increased demand.


The Fed Declined to Extend Bank Lower Capital Requirements

One Friday, banks, including Chase, Citi Bank, Wells Fargo, and Goldman Sachs all took a dip after the Fed declined to extend a pandemic-era exemption that allowed them lowered capital requirements.

The brieftly stated that they will allow the exempation to expire on March 31st that has been in place since April of last year.

The decision to relax the capital requirements has been widely viewed as key to calming what had been tumultuous Treasury markets in the early days of the Covid-19 pandemic. A need for cash had caused a massive sell-off in the bond market that the Fed helped to cover through its liquidity programs.

“The Board will take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements,” the Fed said in a statement.

Bank stocks were sharply lower following the announcement, pulling down the broader market, but government bond yields were mixed.


Earnings Recap 3/15 – 2/19

Retail Therapy is Still As Active As Ever

On Friday, Fedex’s trading price increased over 6% after having better than expected earnings. On top of additional spending by consumers, FedEx is one of the leading logistics companies in the effort to deliver Covid-19 Vaccines across the globe. Operating Income increased primarily due to the increase of domestic spending by consumers. With household spending on goods remaining strong in the near future, FedEx will continue to have excellent earnings. FedEx is continually partnering with online retailers to be their logistics provider, and this will continue to increase revenue.

Some takeaways, while FedEx may have astronomical numbers, they are inflated due to Covid-19. Individuals, businesses, and families are all remaining home and using online shopping as a convenient way to get things. We can see FedEx’s earnings slowly normalize in the next few quarters  due to more in-person shopping and normalcy.

UPCOMING WEEK 3/22 – 3/26

EVENTS & TALKS
UPCOMING WEEK’S EARNINGS 3/22 – 3/26
EDUCATIONAL LEARNING SEGMENT
Is Buying the Dip Dead?

The Fed, the source of market volatility or an ally ?

The Fed could be a source of market volatility as Powell and others speak in the week ahead.

 

  • Fed Chairman Jerome Powell testifies before Congress twice this week, and a dozen other Fed speeches are slated for next week.
  • Personal consumption expenditures inflation data will be released at the end of the week.
  • It’s important as the market is focused on inflation and contending with the Fed’s willingness to let it run.
  • The direction of bond yields could continue to drive stocks after the 10-year reached a high of 1.75% this past week, its highest in 14 months.

See the source image

The Federal Reserve could remain a source of angst for markets in the week ahead, with chairman Jerome Powell scheduled to testify twice before Congress and more than a dozen other Fed speeches expected.

The bond market’s reaction to the central bank this past week was pretty volatile, as we would expect.

Though the market was initially steady after the two-day Fed meeting and Powell’s briefing Wednesday, Thursday came with a big selloff in bonds and spiking rates. Traders reacted to the fact that the central bank is willing to let inflation and the economy run hot while the job market recovers.

In the approaching week, bond market professionals will be watching Powell and other Fed members for further cues for what will come in the upcoming weeks.

“This is bonds’ — I wouldn’t call it a day in the sun — it’s more like a day in the tornado,” said Michael Schumacher, head of rate strategy at Wells Fargo. “Clearly, the bond market is the one the equity market is watching right now, and normally that’s not the case.”

Stocks were lower on the week, with the Dow off about 0.5% and the S&P 500 down 0.7%. The Nasdaq Composite was off 0.8% for the week.

 

Powell speaks

Powell testifies Tuesday and Wednesday before Congressional committees and Treasury Secretary Janet Yellen on Covid relief efforts and the economy.

He also speaks on central bank innovation at a Bank for International Settlements event Monday morning.

This week, other central bank speakers include Fed Vice Chairman Richard Clarida, Vice Chairman Randal Quarles, Fed Governor Lael Brainard, and New York Fed President John Williams.

Inflation and the Fed

There are also some key data.

Important releases include the personal consumption and expenditure data on Friday, including the PCE deflator, the Fed’s preferred inflation measure. Core PCE inflation was running at an annual pace of 1.5% in January.

The Federal Reserve this past week took no action at its two-day meeting, but it did present new economic projections, including a forecast of 6.5% for the gross domestic

product this year. The central bank’s forecast now shows PCE inflation going to 2.4% this year but falling to 2% next year.

The majority of Fed officials did not see any interest rate hikes through 2023.

“They will be trying to clarify the Fed’s message, but without a consensus on what those numbers and guardrails mean, it will be hard,” she said. “They will be explaining themselves as economists, and they’ll be speaking a different language than the bond market speaks.”

Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, expects the bond market could be more volatile than stocks, and inflation would be problematic for both.

At some point, he expects there could be a 10% stock market correction, and inflation or a sharp move in bond yields could be a trigger.

“The market is trying to make sense of what could be perceived as a disconnect between their economic projections and the Fed’s dual mandate of unemployment and inflation,” said Grohowski.

“Yet, they’re committed to keeping short rates on hold until the end of 2023,” he said. “That’s what the market is struggling with. I think it’s unsettling to me to hear words like ‘overshoot.’”

Rotation from tech into cyclical

Growth and tech have been most sensitive to rising rates, and the Nasdaq has corrected more than 10%.

 

Grohowski is concerned by the Fed’s willingness to let inflation overshoot because inflation is a negative for stocks.

Supply chain issues are a concern. He pointed to Nike’s comments Thursday that its sales were hurt by port congestion and the shortage of semiconductors, impacting automobile production.

“Inflation expectations are troublesome for P/E [price-earnings] ratios,” Grohowski said. The [stock] market is trading at 22 times our estimate for this year’s earnings.”

He said the market is having difficulty reconciling the lack of any forecasted interest rate hikes versus the Fed’s economic forecast strength.

 

“If you ask me what I lose sleepover? …It’s too much of a good thing. Too much of a good thing is being too accommodative,” Grohowski said.

Market Sell-Off Part 2: Zoom Earnings and 10 Year Treasury

THE SECRET SAUCE | COMPLEX IDEAS | SIMPLE SOLUTION

Market Sell-Off Part 2:  Zoom Earnings and 10 Year Treasury

Friday, March (3/5) Closing Price

 

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DISCORD RECAP (March 1st – March 5th)

We like energy and oil.

After OPEC’s surprise to cut oil production through April,  we anticipate oil prices will continue to climb.

Crude oil has been a top-performing asset this year, with variants like gasoline and diesel also delivering significant gains in 2021 of 38.6% and 24.3%, respectively.

To participate in this, we will be investing in Exxon Mobil, $XOM.

On Friday, XOM closed at $60.93 and we see a potential to hit $85.

If you trade this stock, we have a short-term target price of $63.17.

Day trading short-term call options could also be a good idea.

Zoom Logo - PNG and Vector - Logo Download

Fundamental Analysis Matters???

Investors have decided that fundamental analysis is essential this week, reflecting in Zoom’s stock price dropping $100 or 30% in two days.

Zoom released its earnings on Monday, and they blew expectations out of the water. The video-calling software maker reported its revenue grew 369% YoY in the quarter that ended on January 31st, after growing 367% in the

third quarter and losing fewer customers than executives had expected.

  • Revenues soared to $883 million, up from $188 million the year before.
  • Based on formal accounting rules, Zoom’s net income rose from $15 million to $260 million, or 87 cents a share.
  • The gross margin expanded from the previous quarter’s 66.7% to 69.7%.
  • small customers grew to 467,100 customers with more than 10 employees at the end of the fiscal fourth quarter, nearly five times as many as it had before the pandemic hit, or up 470% on an annualized basis, compared with 354% growth in the previous quarter.
  • It ended the quarter with $4.24 billion in cash, cash equivalents, and marketable securities, significantly up from the previous quarter’s $1.87 billion.
  • Consensus estimates for their Earnings per Share (EPS) was $0.79, and actual was $1.22 for Q4.
  • Zoom’s revenue topped $822B, almost 9% better than estimates, and provided 2022 earnings guidance of $3.62 per share.

Despite these robust estimates, investors do not agree that the stock should be trading at 110x its 2022 Earnings estimates as well investors are wary of whether or not Zoom can continue this momentum.

Just two weeks ago, researchers from Stanford University argued about possible “Zoom fatigue.”

The study found that all the countless hours spent on zoom calls take more of a tool on the human brain and body than regular office work.

The fact that we are always connected, and sharing is leaving us mentally fatigued. The address four key reasons.

  1. Excessive amounts of close-up eye contact are highly intense.

  2. Seeing yourself during video chats constantly in real-time is fatiguing.

  3. Video chats dramatically reduce our usual mobility.

  4. The cognitive load is much higher in video chats.

We wouldn’t be surprised if we started to see a decline in zoom video usage in the upcoming months with vaccine rollouts, re-openings, and taking a break.

Target Reports Record-breaking Earnings, stock sells off.

Target-Logo - Earl & Brown

best friends yes GIF by Target

Target’s stock closed down 6.8% on Tuesday trading but has soared 64% over the past year.

For the fiscal fourth-quarter ending on January 30th,

  • revenue rose 21% to $28.34 billion from $23.4 billion last year, higher than analysts’ expectations of $27.48 billion.
  • Comparable sales, a critical metric that tracks sales at stores open at least 13 months and online, went up 20.5% compared to the prior year as comparable digital sales rose by 118% YoY.
  • After strong holiday sales, online sales gained even more momentum as Americans cashed in their $600 stimulus checks in January.
  • Store sales increased by 6.9%, digital sales increased 118%, and same-day service grew 212%.
  • As impressive as they are, both metrics show a deceleration in growth rates versus the third quarter.
  • In mid-January, Target reported that sales grew 17% during the holidays, which is a slight slowdown from the third quarter’s 21% spike, but it is still a lot better than the 9% that Walmart experienced.

So why did the stock sell-off?

Target did not provide guidance within their earnings report, and this has spooked investors.

  • Target also reported on-GAAP EPS of $2.67, beating estimates by $.13, and revenue of $28.34B beating estimates by $920M.
  • The only real forward direction that Target provided is that they will spend $ 4B annually for the next several years.
  • A big step up from 2020 where they spend $2.7B and in 2019, they spent $3B.
  • Target is planning to increase the number of stores by 30-40 stores annually.
  • Target plans to remodel 150 stores this year and increase that number to 200 in the following year.
  • Investors did not take to this news lightly, and the stock price reflected it.

Their earnings were solid outside of the spending guidance, and their omnichannel business presence led to their revenue growth.

In conclusion, investors do not like spending more money.

Somethings AREN’T Best Left Unsaid 

Investors often make decisions based on what was said in meetings, press conferences, and interviews. In this case, markets moved because of things that were left unsaid; investors were left with a sour taste after Federal Reserve Chairman Jerome Powell failed to address the Gigantic Elephant in the room. 10-Year Treasury Yields are rising due to expected economic growth and inflation in the future. Due to the pandemic, borrowing is near an all-time high, and any change in interest rates can have a massive multiplier effect across the country. High Growth companies, small businesses, and millions of individuals will face defaults with higher interest rates. This lack of reassurance from Powell sent markets tumbling despite a positive jobs report showing unemployment rates falling to 6.2%. We will have to keep a close eye on the 10-Year Treasury Yield in the future with it carrying such grave implications.

Tesla Divides Believers and Values Skeptics

Elon Musk Mic Drop GIF by FullMag

The market is split between believers and skeptics.

Those who believe that Tesla’s value is limitless and those who are more pessimistic about its prospects, especially given its current market price.

The company’s progress so far in “accelerating the world’s transition to sustainable energy” is a credit to Tesla. Still, there is a lot more left to do in its master plan to justify today’s valuation.

Tesla’s history of executing many of its audacious goals seems to be expected to continue, given the optimism in the current stock price. This gives the company very little room for error.

Read more about it on our website: https://www.tigerwolfcapital.com/tesla-divides-believers-and-skeptics/

REVIEW OF PAST WEEK 3/1 – 3/5

UPCOMING WEEK 3/8 – 3/12

EVENTS & TALKS

March 4th, 2020 : Stock Market Crashing, here’s why.

March 4, 2021

Indices Around The Globe

  • S&P 500 Futures moved below 3,780 for the first time since late January, down 1.25% for the trading session.
  • UK’s FTSE 100 down 0.37% to near 6,650
  • Japan’s Nikkei 225 down 2.13% to near 28,930

Bonds

  • 10-year treasury yield at 1.55%

Commodities

  • Crude oil up 4.72% to near $64.17/barrel, highest in over a year.
  • Gold down 0.91% to near $1,699/oz
  • Silver down 2.92% to near $25.40/oz

Crypto

  • Bitcoin down 4.95% over the last 24 hours to near $48,067

Top News

  • Federal Reserve Chairman Jerome Powell spoke on the state of the U.S. economy at the Wall Street Journal’s Jobs Summit
  • U.S. Initial Jobless Claims data for the last week of February showed a week-over-week increase in new unemployment.
  • U.S. Senate plans to vote on President Joe Biden’s COVID-19 plan at 1 p.m. on Thursday.
  • Costco (NASDAQ:COST) reported worse-than-expected Q2 EPS results. The stock moved lower in after-hours trade.
  • Slack (NYSE:WORK) reported better-than-expected Q4 earnings results. The stock moved slightly higher in after-hours trade.
  • Connecticut’s Governor, Ned Lamont, made an announcement to ease some COVID-19 restrictions in the state. Beginning Friday, March 19, capacity limits will be eliminated for restaurants, retail stores, libraries, and personal services businesses. Face masks, social distancing, and other cleaning protocols will remain in force.

Preview for Friday, March 5

  • Nonfarm Payrolls – 8:30 a.m. EST
  • Unemployment Rate – 8:30 a.m. EST
  • Federal Budget – 2 p.m. EST
  • Baker Hughes Total Rig Count – 1 p.m. EST

Tesla divides believers and skeptics

Tesla divides believers and skeptics.

The market is split between believers and skeptics.

Those who believe that Tesla’s value is limitless and those who are more pessimistic about its prospects, especially given its current market price.

The company’s progress so far in “accelerating the world’s transition to sustainable energy” is a credit to Tesla. Still, there is a lot more left to do in its master plan to justify today’s valuation.

Tesla’s history of executing many of its audacious goals seems to be expected to continue, given the optimism in the current stock price. This gives the company very little room for error.

 

Investors Are Giving Tesla A Lot Of Credit For Future Execution

See the source image

Tesla (NASDAQ: TSLA) is easily one of the most controversial companies in the world right now. Most either love it or hate it. These two groups seem to be split into those who owned it through 2020 and those who watched on the sidelines as the price multiplied 10-fold.

What’s undeniable is that Tesla is working on some exciting innovations in the world’s transition to sustainable energy. The company’s grand ambitions for electric vehicles, autonomous driving, battery design, energy storage, and energy generation have contributed to the widely differing opinions on the business’ future. Some believe its plans are possible, while others are skeptical.

Let’s look at where Tesla is today versus its future expectations, plus what it needs to do to get there.

  • Tesla is in the early days of its ambitious plan.
  • Perfect execution is needed to reach its bold targets.
  • If any doubt arises about its ability to execute, the stock will re-rate downwards significantly.

Tesla Today Versus Tesla In The Future

Tesla currently generates revenue through 3 sources: automotive sales and leasing, energy generation and storage, and services.

The automotive business generated 97.2% of total revenue while energy generation and services contributed .7% combined during the 2020 financial year.

To understand the expectations related to Tesla’s future, we need to understand where the company is now versus where it is expected to be in, say, 10 years.

In 2020 Tesla did the following :

Production Deliveries
Model S/X 54,805 57,039
Model 3/Y 454,932 442,511
Total 509,737 499,550

In 2020, the company delivered half a million in vehicle sales and generated $27.23bn in revenue (sales and leasing combined). This is a 30% increase over 2019’s automotive revenue.

Years ago, in 2016, Tesla brought in $7 billion in total revenue, while in 2020, it brought in $31.54 billion while its earnings per share went from -.94 to now a positive .64, a 350% and 168% increase.

Sources: tesla.com

The company earns tradable regulatory credits because it operates under regulations related to zero-emission vehicles and clean fuel. It sells these credits to other carmakers who want to comply with the regulations and avoid fines because Tesla doesn’t need them. The CFO stated in an earnings call that demand for these credits would remain strong for the next few years. Still, as electric vehicles become more mainstream and other manufacturers also begin complying with the regulations through their own operations, earnings from these credits’ sales will decline.

Regarding future expectations for the automotive side, Tesla’s CEO, Elon Musk, stated the company plans to produce 20 million cars per year by 2030. That may sound audacious, and it is. But in 2014 (when it sold around 32k cars), Tesla said that it planned to sell 500k cars by 2020, which also seemed audacious, but it did it.

So to put that 20m into perspective, here are a few numbers. That means Tesla needs to increase its current production by 40x (a 44% CAGR). It needs to double what Volkswagen and Toyota (the two biggest carmakers currently) sold in 2020, which was 9.35 million and 9.5m cars, respectively. Plus, market forecasts from Deloitte and Bloomberg New Energy Finance’s likes expect the number of electric cars sold annually to be around 25m in the year 2030. So if true, this implies that Tesla would have an 80% share of the electric vehicle market in 2030, compared to its current 18% in 2020 (it was the market leader in 2020). Tesla is overly optimistic, or the industry forecasts underestimate electric vehicles’ total adoption in 10 years.

Considering that the company generated 43% YoY growth in cars produced from 2018 to 2020, it will need to continue expanding its production capabilities aggressively to continue this growth rate. Achieving this growth will rely heavily on three things: first, an improvement in the company’s capital efficiency (continual reduction in production costs), second, the successful creation of many new factories around the world to support production, and third, widespread adoption of Tesla’s Full Self-Driving (FSD) technology (if the software is successful). We will touch more on these points later.

Regarding Tesla’s energy generation and storage business, it deployed 3.02 Gigawatt hours of energy storage products and 205 megawatts of solar energy in 2020.

At Tesla’s recent Battery Day, Musk announced plans to get to 3 Terawatt hours (TWh) per year in batteries by 2030, a 1000x increase from its current installations.

Considering Bloomberg NEF predicts that energy storage installations around the world will reach 1.1TWh to 2.8TWh by the year 2040, it appears there are some big discrepancies. Tesla’s forecasted energy installations in 2030 would be more than 100% of what BloombergNEF forecasts for the entire world’s installations.

Again, either Tesla is optimistic, or industry forecasts are underestimating the growth of global battery installations.

How will Tesla Reach These Bold Targets?

These bold predictions from Tesla seem vastly different from what some market research by other firms suggests will occur. Regardless, to achieve what it’s claiming is possible, a few things need to occur.

1. Tesla Needs To Spend Big

To build more factories in its automotive and energy businesses, Tesla will need to spend money and lots of it. The company had $19.38bn of cash at the end of 2020 (after raising $10bn via equity in the second half of 2020, which was 2% dilutive), generated $5.9bn cash flow from operations, and spent $3.16bn of that on capital expenditures for the year. For 2021, 2022, and 2023, Tesla expects to spend between $4.5bn and $6bn on capital expenditures per year (page 33 of the 2020 annual report). Some forecasts suggest that Tesla will need somewhere between 20 to 40 new gigafactories to reach its goals by 2030, which could cost anywhere between $32bn and $64bn over the next 10 years (if we use the $1.6bn cost of the Shanghai factory). Yearly, that would equate to between $3.2bn and $6.4bn of capital expenditure over the next 10 years. Given the current cash flow from operations and the high cash balance, this seems affordable, at least for the next few years.

Here’s an outline of the company debt to equity situation since 2014 from our company report.

Source: Debt to Equity History and Analysis – Simply Wall St

 

2. Tesla’s FSD Software Needs to Win

Tesla FSD software is up against almost every other company in the space (e.g., Waymo, GM, Toyota), using LIDAR technology. It’s beyond my current capabilities to outline the technological differences between the two (and they are significant), but what is important to keep in mind is that neither are at full level 5 autonomy just yet. This means both systems are yet to prove they have the capabilities for full autonomy without a human driver.

However, while Tesla’s FSD software is reportedly only at level 2 autonomy, it claims it will be at level 5 (i.e., fully autonomous) by the end of 2021. This could be since it has accrued somewhere in the range of 3 billion miles of data from its fleet of cars on the road to building its FSD software. This is significantly more data than its competitors. So if that software comes to market successfully at the end of this year like the company plans, that would provide more substantial evidence that supports Tesla’s case for being the market leader in autonomous driving software and driving its potential exponential growth. Not only that, the software would provide a very high margin source of recurring revenue. But again, that’s yet to happen, and if it does experience any hiccups in the process, it could be incredibly damaging. So execution is key.

3. Tesla Needs To Continue Improving Capital Efficiency

In the manufacturing business, capital efficiency is key to growing production rapidly and affordably. Ark Invest, one of the most widely known bulls on Tesla (Ark owns around $3.7bn of Tesla across its ETFs), believes there is a 50/50 chance Tesla will be more capital efficient than traditional US auto-makers. The Bureau of Economic Analysis showed that traditional US automakers spent $14k per car on fixed assets in 2016. For reference, the Tesla Shanghai factory-required $1.6bn in financing with an initial capacity of 150,000 cars, meaning it costs $10,700 per car (Shanghai recently reached 8k cars per week and expects to produce 550k cars in 2021). To grow rapidly and affordably and enable this growth required to get to 20m cars by 2030, Tesla needs to continue to improve its efficiencies and productivity even further with its future factories.

The thing here is that it seems a lot of Tesla’s current market price is counting on the successful execution of these future events playing out. The CEO even noted this to employees in an internal letter in 2020. The expectations of exponential growth rely on simultaneously expanding production capabilities, increasing productivity, and successfully delivering FSD software to market. The company has a track record of executing, but if any doubt arises from investors about their ability to further execute, it would be incredibly damaging to the stock price.

What This Means For Investors

While Tesla seems to still be in the early days of its ambitious plans, the stock’s current market valuation seems to largely expect that all of these developments occur, even though they’re likely years away and not guaranteed. The huge share price increase in 2020 versus more conservative growth in the actual business indicates that a lot of the rise was due to increasing expectations that the company would successfully execute. As investors, we need to assess a range of possible future outcomes, assess the probability of each outcome occurring, and estimate the potential risk-reward that comes with each outcome playing out.

There’s a saying from Charlie Munger that goes, “No matter how wonderful a business is, it’s not worth an infinite price.” It’s up to us as investors to determine what an appropriate price is.

How to trade Tesla : 

On the overall 2hour, 360-day time frame, Tesla’s technical analysis reads bearish with more downside to come.

The 14-day simple moving average is now well below the 30-day simple moving average.

As a result, we now see more downside for tesla to come in the near future.

As a day trader and an option trader, we would be looking to buy $550 or $500 puts if this downward trend were to continue.

The price target will be $566.77 and then $533

Join our discord to see more real-time analysis.  

 

Tesla’s weight in SPDR S&P 500 ETF Trust, SPY, has led the stock market to retrace back down towards the $370 price level.

Price action has led to many stating that the stock market is crashing.

But to be honest, we have not seen a market crash yet.

Tiger Wolf Capital owner Frank Mercado wrote this article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

#18 The First Crack: Why the Market Crashed Last Week

Friday, February 26th Closing Price

 

“The secret of your success is determined by your daily agenda“ – John C. Maxwell

 

DISCORD RECAP (2/22 – 2/26)

We shorted the market.

$SPY (S&P 500 ETF)

We are anticipating more downside in the overall market.

On Friday, $SPY closed at $380.36; this is below our support level of $380.71.

Our 14-day simple moving average is below the 30-day simple moving average as well our MACD parameters are becoming redder and redder.

We are anticipating seeing SPY trading around $370 / $366 shortly.

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UPCOMING WEEK 3/1 – 3/5

EVENTS & TALKS

UPCOMING WEEK’S

EARNINGS 3/1 – 3/5

EARNINGS
REVIEW OF PAST WEEK 2/22 – 2/26

MARKET LAST WEEK (2/22 – 2/26)

MONDAY (2/22)

10-Year Treasury Yields Jumped

10-Year Treasury Yields jumped 14 basis points to 1.34% and reached1.37% overnight. Yields have increased 28 basis points so far in February, which can significantly impact high-growth companies who rely on low-interest rate loans. While this may hurt high-growth companies, this is a sign of growing confidence in the economy. House Democrats are looking to finalize a large stimulus package that could cause an uptick in inflation and increase short-term interest rates. Businesses are borrowing at low rates, and any increase can seriously hamper their growth moving forward. When vaccinations have been implemented, and society can resume, the economy may overheat in a short period with rapid amounts of inflation. The 10-Year Treasury Yield having an uptick is a preemptive measure to counteract the economy’s possibility of overheating.

TUESDAY (2/23)

In Spite of the Red, the Fed Shows Optimism

J Pow spoke with Congress on interest rates and inflation for the short-term. Jerome Powell says there is a lot of liquidity in the market, and people want to place it in Treasury bills. He is worried that downward pressure on rates and the Treasury General Account is shrinking in size. He also believes that there will be more realized gains later this year with the economy and vaccines.

Facebook reached an agreement with the Australian Government about proposed amendments to the media bill. The original bill would have made digital platforms pay for news content displayed in search results or feeds, meaning they would have to pay local media and publishers to link their content. Google previously agreed to pay for news, and Facebook has held out for a better arrangement.

WEDNESDAY (2/24)
Regulation Standards Under Review Across the Board

A new report has come out stating that Boeing and the Federal Aviation Administration have a flawed relationship, which may obstruct the FAA’s ability to identify future safety challenges. The FAA has agreed to implement 14 recommendations in the report and addressed innovations to existing aircraft designs and improved communication with Boeing.

The Securities and Exchange Commission has committed to reviewing its policies on Climate Change. They are evaluating and speaking with companies about the extent to which they are complying with climate change disclosure guidance. They are looking to make a comprehensive framework for companies to produce consistent climate-related disclosures. This will have a significant impact as companies will have to change their business models to factor in climate change practices, which can be expensive. Looking forward, we will have to watch the SEC’s change in policy overwatch.

THURSDAY (2/25)

Mcdonald’s Looks to the Future and the Outlook is Green

In a massive announcement, Beyond Meat has partnered with Yum Brands and McDonald’s to produce an alternative meat product for Vegan Customers. These are some of the largest food brands in the United States, and Beyond will begin to skyrocket in the future. This is a good deal for both partners as Vegan customers are continually looking for cheaper alternatives, and fast food brands are always looking for a new market segment to reach. McDonald’s is looking to create a full line of products, the “McPlant Series,” while the Yum brands will be making pizza toppings, taco fillings, and chicken alternatives. Beyond Meat is now involved in almost all fast-food chains within the United States.

AT&T sells a stake in its pay-TV unit to Private Equity firm TPG and carves out struggling business. AT&T will retain a 70% stake in the business, and TPG will pay $1.8B cash for a 30% stake. This deal values the new company at $16.25B, with about $6.4B in debt. AT&T will now be allowed to stop including the results of its U.S. video operations in its financial reports.

FRIDAY (2/26)

Midnight Riders Filled the House of Representatives

As usual, Friday never goes quietly into the weekend, and it was full of important events. Primarily, the house held the vote for the 1.9 trillion dollar stimulus bill. During the session, Democrats were able to pass the bill, and now the Senate will move to vote on whether it will pass. Although every vote is crucial one way or the other, it will be a tight finish, as even one non-partisan vote can decide the fate of the session.

    While the market continues to be erratic, treasury yield bonds briefly touched their highest point in over a year but came down slightly again, under 1.6%. If the market continues to be volatile, we may see an increase in investors picking up more bonds with a higher yield.