All Time Highs

By some marvelous act, I managed to breached my prior account highs today, without even being full long in the markets. It is a queer thing, sitting on 30% cash with SCO and EUO and yet still discovering that you’re making money every day.

I’m not greedy – if this bull market could last forever! I would be more than content to sit here collecting half a percent every trading session.

The errors from 2011 are now fully behind me. I lost quite a chunk of my money on a bad oil short then (it was much larger than the one I’m carrying now). That was the first big oil implosion after the 2008-2009 near total collapse, when it fell from almost $110 back down to inside of $80. I didn’t take my gains, instead believing that we were experiencing an epic slowdown (EU). It wasn’t long after that oil completely rebounded.

Energy markets nowadays are prone to sudden collapses that are immense in size. But they don’t last. There’s not resetting based on demand or supply. Rather, buyers pick themselves up from the beatings, quickly absorb the additional supply, and force the price higher again. It’s hard for me to imagine how this is going to work out, undisclosed bidders buying $100 oil when the US is quickly becoming a stable production powerhouse.

But for now, the name of someone’s game is to keep oil elevated. There are so many speculations for why this might be the case, it doesn’t do well to even start getting into them. We are nearing another crash, I feel. Multi million barrel inventory builds going into summer can’t go completely unnoticed. But after the quick money has been made, I’ll move on fast. The price will probably recover going into the fall, after just a few short months; nothing but a blip, in the grand scheme of things.

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Greece’s 10 year has soothed down tremendously, now trading inside of 10% yield, just above 8%. It was above 30% just this time last year.

It appears that a Greek default has been taken off the table. If anyone actually made a pile of money on that move (as opposed to averaging down or getting back to even) well then, I congratulate you. I certainly wasn’t going to touch it.

So what happens now?

Well, 8% is still very expensive. Greece has a host of problems mostly stemming from economic contraction and, I suppose if you really believe they even tried to implement any, austerity. And I believe the europroblem demands further attention and, most importantly, central bank intervention. If the EU ultimately holds it together, or if they decide to part ways, the euro will need to be accommodating in either case.

Now I think it was a year ago, I ran into a piece that was analyzing the behavior of countries who had debt market problems – I can’t quite remember who was the author.

But the gist of the material was that countries actually don’t tend to default on their obligations in the middle of the crisis. They wait until they have things under control and are in a more stable position. And that’s when they look at their books and realize how well they’d be doing if they didn’t have to be making payments.

It’s when the country is in a good place that they actually hit the switch.

The study looked at places like Russia and Argentina and the defaults they underwent; which were largely unexpected.

Another paper I was able to track down comes from Stanford University, authored by Mr. Tomz and Mr. Wright. The good folks at Stanford found that countries do default more during the middle of crisis, but that the correlations was remarkably weak: http://www.stanford.edu/~tomz/pubs/TW2007.pdf

In any sense, the development in the Greek bond market is a remarkable turnaround. I am not convinced that we’ve seen the last of the consequences to come from the last twenty years. And I would not be surprised if, at some undisclosed time in the future, the market was ear holed by a surprise default from at least one of these countries.

But at present the Greek turnaround is incredible to watch. One can only marvel at it all.

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I know many of you hate my politics; of which I couldn’t care less. It’s sad, I know, but the degree to which today’s market is dominated by elected (and occasionally unelected) officials is such that you’d be crazy not to follow the politics.

Now, back in December, in the aftermath of a blood hound-bastard seeking his kicks on the backs of butchering kids, all of a sudden the administration swung around in the most opportunistic way imaginable, as if someone had dished them up a free five course meal with which to sake their hunger.

At that time, not quite as shocked as I might have thought possible, that they would try to capitalize on the tragedy, I offhandedly remarked that Obama had just put in motion the events that would make him an early lame duck.

As if the failure in the Senate of gun control wasn’t the first shot across the bow, now I’m pretty well sure this administration is firmly in the “dead at sea” category.

There’s no coming back from this. The administration’s top brass are seriously trying to stall on these three scandals. And one of them was directed at one of the press’s sacrosanct principles. You don’t run the clock out in a game like this…

If you want to gauge just how bad things are for legislative impasse, just take a good look at the mental gymnastics the administrations staunchest, most diehard of supporters are having to pull to write this all off.

So, what does this mean for things that can make you money? Well, for starters, the obvious is that gun stocks are no longer in the cross hairs, and won’t be again anytime soon. State legislation is probably still being pushed, but it’s all localized, and gun manufacturers are really good at leaving states that punish them. Plenty of other, more receptive places to call home – those stocks should be trading back where they were before December.

I can’t see any of these scandals hurting gun sales either…

The second outcome is going to be less direct and more “what would have happened?” kind of stuff. If the economy should start to slow and require more federal stimulus, you can forget it. It’s dead; done. Not happening.

As it is, negotiations on standard fiscal house affairs are going to be very contentious, and this time around Team Executive is going to have to keep its head down. It doesn’t do well to complain that those nasty Republicans are trying to destroy the country when your own IRS department just got caught targeting them.

Fiscal affairs usually poll conservative anyway – in principle people hate the debt and want government spending reigned in. Obama’s charisma and the trust placed with him were the only things that were leveling that playing field.

Every time Holder and Carney open their mouths, you can watch those things get shredded in real time.

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The EURUSD is being flayed.

Oil is rallying back to $100 on the backs of demand destruction and record supply coming to market.

Cain Thaler has apparently forgetten basic financial reporting concepts.

TSLA stock is rallying because a company that’s never made money selling a car, to this day, has decided to increase the size of its secondary offering.

And of course, everything is up.

I’ll back off my TSLA trash talk a little. Clearly there was no grounds to say that TSLA hasn’t sold any cars. A little hyperbole is fun, but obviously they have had some success. Despite that, there is no doubt in my mind that they are padding the shit out of this quarter. Some of this is political – I don’t trust anyone in bed with the DOE. Some of it is prejudice – I come from Detroit, so if I don’t see cars, I assume they don’t exist.

As it stands, even with the rookie cash flow miss not getting picked up before I rushed to publish, there’s a lot for me to hate about that company’s books. If I’m wrong about sales of the electric platform, I promise I’ll hold a big post where I self flagellate and get all melancholy. But it won’t be for a few quarters because I’m going to give the company plenty of time redact earnings and own up.

I think the problems are there, not initially because of any numbers, but because of the small comments and way the disclaimers and disclosers are being laid out. I went searching for the numbers to support that, and largely failed. But that doesn’t mean I’m going to start jumping up and down with trust of the management.

Ultimately, my opinion is that Tesla’s product is a beautiful piece of craftsmanship and engineering that won’t make any money. The EV1 will have a gravemate yet. I’m not advocating shorting TSLA; merely commenting that paying $90 plus for a company that turned one quarter of profits in 10 years, largely not from selling their main product, is a very bad idea.

For the moment, I am still largely cash, short the euro with EUO, short oil with SCO, and holding AEC, CLP, CCJ, BAS, RGR and physical silver that’s getting cheaper by the day.

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All the hype about Tesla made me curious, so I did what apparently no one else has thought to do, and looked at their books.

A few things you should know about TSLA:

1) If you take the company’s own reporting at face value, the stock is good for – maybe – $1.50. And oh since $200 million of their “net worth” is tied up in inventories at the moment, realistically the stock is worth $0.00. Remind me what the long term value of unsold car inventories is again…

Clearly this is about the earnings. I guess if TSLA can sell like the wind, it will more than compensate, and build some value here.

Too bad…

2) The company’s earnings aren’t believable.

TSLA claims it booked half a billion in revenue last quarter. Alright, so I mosey on down to the cash flow section.

Someone show me where any of those numbers adds to half a billion? Hell, even their financing isn’t showing evidence of any “gimmick” cash flow. So they did half a billion dollars last quarter without half a billion dollars ever changing hands…um, anywhere. (Oops that’s embarrassing. That’ll teach me for writing quickly and not proofreading. Ottnot pointed out why that was clearly wrong – hat tip. I’m caught red handed here. What I was attempting to look for was where the financing for vehicles was going – but it’s run through BAC and another bank so it wouldn’t even show up on their report. Duh)

(That being said, this is a car company that still hasn’t made any money selling cars, as easily witnessed below)

Buried deep in the report is this paragraph:

“Significant operating cash inflows were comprised primarily of automotive sales of $555.2 million, an $18.2 million decrease in inventory and operating lease vehicles, $6.6 million of development services revenue and a $4.1 million net increase in deferred revenue associated with various vehicle service plans introduced in March 2013. Significant operating cash outflows for the three months ended March 31, 2013 were primarily related to $465.5 million of cost of revenues, $101.9 million of operating expenses, a $26.6 million decrease in accounts payable and accrued liabilities primarily due to the timing of vendor payments, an $8.1 million net decrease in customer deposits as a result of the sales of Model S and a $2.6 million increase in prepaid expenses and other current assets.”

That’s funny: 466 + 102 + 27 + 8 + 3 = a number that is definitely greater than 555. It sounds like Tesla didn’t make any money selling these $555 million worth of cars that don’t appear on their primary cash flow statements.

So I push down into their report and find this gem:

“We recognize revenue when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and there are no uncertainties regarding customer acceptance; (iii) fees are fixed or determinable; and (iv) collection is reasonably assured.”

I’m thinking that “and” there before point iv should actually be an “or”; as in, “if we think maybe we really actually are going to sell a car then we just count it right then, rather than, you know, using the same standard of ‘revenue’ as every other person on this planet uses”.

“And – Or” all those other definitions of revenue. Follow?

And someone tell me what this means:

“5. Customer Deposits

Customer deposits consist of payments that allow potential customers to make an advance payment for the future purchase of a Model S, Model X or Tesla Roadster. These amounts are recorded as current liabilities until the vehicle is delivered. We require full payment of the purchase price of the vehicle only upon delivery of the vehicle to the customer. Amounts received by us as customer deposits are generally not restricted as to their use by us. Upon delivery of the vehicle, the related customer deposits are applied against the customer’s total purchase price for the vehicle and recognized in automotive sales as part of the respective vehicle sale.

Historically, we have referred to such customer deposits as reservation payments and these initial reservation payments have been fully refundable until such time that the customer selected the vehicle specifications and entered into a purchase agreement. We recently eliminated the reservation process for Model S in North America as vehicle production became more reliable and customer wait times decreased. Customers now initiate their purchase by ordering their customized Model S rather than placing a generic reservation in queue. As a result of this transition away from reservations, we have renamed the “reservation payments” caption on our condensed consolidated financial statements to “customer deposits.” “

All in all, I very much question whether Tesla sold any real cars. There are only something like 40 servicing stations in their entire network. They’re hoping to double that, but still, not exactly a huge target market here.

I think what Tesla really did was sold options to sell cars. Refundable options…

Which is why their cash flow sucks.

On the plus side, they also don’t seem to have any off balance sheet entities – I was shocked by that. But I guess you don’t need to when the government is handing you hundred million dollar loans.

But other than that, the prospect for high end electric vehicles is pretty much what it’s been since the 90’s…terrible.

If this is really going to take off, the infrastructure for refueling needs to be there, and I doubt Tesla can pull that off on their own.

I’ll leave you with these disclaimers, which were absolutely SUNK in the dark nether regions of their filing:

“If we are unable to adequately reduce the manufacturing costs of Model S or otherwise control the costs associated with operating our business, our business, financial condition, operating results and prospects will suffer. “

“The range and power of our electric vehicles on a single charge declines over time which may negatively influence potential customers’ decisions whether to purchase our vehicles. “

“We are dependent upon our loan facility from the United States Department of Energy. “

“Our distribution model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating our business, operating results and future prospects difficult. “

“Reservations for Model S and Model X are fully refundable to customers, and significant cancellations could harm our financial condition, business, prospects and operating results. “

“We have very limited experience servicing our vehicles and we are using a different service model from the one typically used in the industry. If we are unable to address the service requirements of our existing and future customers our business will be materially and adversely affected. “

“Regulators could review our practice of taking reservation and deposit payments and, if the practice is deemed to violate applicable law, we could be required to pay penalties, refund the payments stop accepting additional payments, and restructure certain aspects of our sales program. “

“We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock. “

“Mr. Musk borrowed funds from an affiliate of our underwriter in our public offering in 2011 and pledged shares of our common stock to secure this borrowing. The forced sale of these shares pursuant to a margin call could cause our stock price to decline and negatively impact our business. “

_____________________________________

Sorry, the amateurish cash flow point not withstanding, this is a very expensive car company, particularly if they can’t get costs down.

And I still can’t help but think maybe the (now announced) secondary offering wasn’t perhaps a little in mind when “sales” were being transacted this quarter…

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Let’s set aside for the moment the passionate struggle to subvert other market players to our line of thinking, in that mighty attempt to “spark the inflection point”. In my own mind, the rally is in the process of sputtering, as sector rotation exhausts buying enthusiasm; but I don’t want to argue about that right now.

Rather, let us just stand and remark in awe at the utter magnificence that was the last eight months. Truly, such a thing is like a rare glimpse of a comet or supernova – a celestial blessing to be observed in solemn wonder.

We all got rich here (unless you’re a dumb short seller)…whether you’re sitting 100% long or 80% long, or 50% long, or less, we’re all still making money off of this.

Truly the greatest winter Christmas rally of all time.

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