Tag Archives: Model 3

Upper Management Exodus At Tesla Continues – Why?

Phil Rothenberg, VP of Legal at Tesla, is leaving the company.  He’s been at Tesla for nearly 8 years; previously worked at the SEC.  I assume Phil has a lot of stock and a lot of stock options, having been at the Company for eight years, including a nice chunk of options he’s leaving on the table because they will never vest.  If everything at the Company was as amazing as presented by Musk and his meat-puppet CFO in the 3rd quarter earnings report, why leave now?

Apparently Phil, trained in securities law,  would have been the designee of reviewing and monitoring Musk’s Tweets and other social media venues per the terms of the SEC settlement.   Jonathan Chang, the other VP-level lawyer at TSLA, was not a trained securities lawyer.  I have to believe that the potential legal liabilities connected to being legally responsible for overseeing the manner in which Musk operates as his own PR organization weighed heavily on Phil’s decision to flee Telsa’s corporate Sodom and Gomorrah.

Although the SEC, for whatever reason, let Musk and Tesla off the hook on a slam-dunk securities fraud case with a mere wrist-slap, the provisions of the settlement will likely create a sticky legal spider web that can be utilized to snare Musk and those around him at the Company on several counts down the road.  I am certain a desire to legally disconnect from Tesla/Musk  explains the sudden exodus of high-level executives in the past 12 months.

After Tesla’s post-earnings price spike, the torrid stock market run-up that started October 30th played a major role in keeping Tesla’s stock propped up over the last two weeks. At the beginning of the week after Tesla reported (Monday, October 29th) Tesla’s stock was about to sell-off. But the major stock market indices began to shoot up, keeping Tesla’s stock supported. Today’s action in Tesla stock reinforces this theory, as TSLA plunged 5.5% while the SPX dropped just under 2%. Tesla’s stock is going lower – a lot lower.

Tesla will eventually implode – all Ponzi schemes fail. But Musk has proven to be adept at kicking the can down the road. In the analysis I did of Tesla’s Q3 10-Q that I presented to my Short Seller’s Journal on Sunday evening, I didn’t drill down into the 10Q as thoroughly as I could have because of lack of time. But I’ve never seen this degree of manipulation in the numbers from a company the size and profile of Tesla. Bernie Madoff’s company was private so there were never publicly available numbers to scrutinize. Tesla’s operations will eventually collapse under the weight of liabilities and a collapse in auto sales related to the economy and competition.

Tesla’s Bag Of Halloween Tricks

I have not had a chance to scour the 10-Q, which was finally filed this morning. GM and Ford are 7-8x larger than Tesla in terms of revenues and 40-50x larger in terms of number of vehicles sold worldwide.  Those two companies file their 10-Q almost immediately after filing the quarterly 8-K financial summary.  There’s no reason for TSLA to delay the filing of its 10-Q by over a week other than it needs the extra time to make its fraudulent numbers conform to SEC-filing standards (which have a low bar as it is).   I will be sharing my observations with my Short Seller’s Journal subscribers on TSLA’s 10-Q either this week or next.

For me the big event last week was Tesla’s earnings report. And Musk did not disappoint. With regard to that, I’m wondering if it’s possible to be astonished and not surprised at the same time.

Tesla originally was going to report earnings this week. But, curiously,  moved up its earnings release by a week to last Thursday. At the same time, the CFO exercised stock options that did not expire until 2022. While this is technically legal, it begs scrutiny. Why exercise options with a $31 exercise price that do not expire until 2022 unless your intent is to unload the shares when the blackout period is lifted?

For me the obvious answer is that the CFO knew the earnings report would cause a big spike-up in the stock price of which he wanted to take advantage. However, if the CFO truly believed that Tesla was undervalued and was going to be worth a lot more in the long run, he would have held onto the $160k in cash he spent exercising the options until the options approached expiration. Anyone who takes a basic finance class knows that you always hold free in-the-money money options for as long as possible, especially if you believe there’s a good probability that they’ll become more valuable over time – unless you have inside information and know that the stock is going to go lower before the options expire.

The Q3 earnings report produced by Telsa did not disappoint in terms of the high level accounting magic performed. It’s important to note that quarterly financials are not audited. The CEO and CFO can essentially do what they want with the numbers. Automotive sales soared from Q2 to Q3, from $3.1 billion to $5.8 billion. Yet, every other major expense and balance sheet item as a percentage of sales is completely out of whack with same items over the previous four quarters. Perhaps this chart captures the essence of the matter (@TeslaCharts has prepared a stunning visual summary of Tesla’s numbers):

In general, there should be some relative degree of continuity in any company’s income statement and balance sheet accounts, barring some major fundamental change, like a merger or large asset restructuring.

The cash from operations in TSLA’s Q3 this year sticks out like a sore thumb. Over 40% of this came from stretching out the accounts payable by $566 million (more on this below).
The other portion of this “cash” generated by operations came from “net income.” Over the last four quarters, TSLA’s average net loss per quarter was around $760 million. Then suddenly net income swings nearly a billion dollars from a $743 net loss in Q2 to net income of $255 million in Q3. This is simply not credible without fraudulent accounting schemes at work. Please note that these are GAAP accounting numbers. In order to verify that real cash was produced by Tesla’s operations, we would have to see an independent audit of Tesla’s bank accounts, something that will never happen.

From Q2 to Q3, TSLA’s automotive gross profit improved by $882 million based on delivering 42,760 more cars. That’s $20,655 of incremental gross profit on a car that sells for as little as $49,000. The weighted average sales price for the Model 3, S and X combined is around $63,000 (based on the number of each sold). This suggests a gross profit margin of nearly 33% per incremental car sold, which is impossible in the automotive business. No other auto manufacturer in the world comes even remotely close to this level of gross margin.

For it’s latest quarter, GM’s gross profit was 10%; in 2017, Daimler Benz’s gross profit was 20%. It’s simply not credible that Tesla generated this level of profitability on its vehicles without accounting fraud. This is especially true given that Tesla claimed that it built and used its own delivery trailers to make deliveries. This should have caused a noticeably large jump in cost of automotive revenues. Yet, miraculously TSLA’s automotive sales gross margin soared from 20.5% in Q2 to over 25% in Q3. Simply not believable and reeks of fraudulent accounting.

One area of Tesla’s income statement that contains probable fraud is SG&A expenses (sales, general and administrative expenditures). Over the previous four quarters, TSLA’s level of SG&A was running around 20% percent of revenues. It was 18.7% of revenues in Q2 2018. But this quarter, Musk somehow parted the Red Sea and was able drive SG&A down to 10.7% of revenues. SG&A outright actually fell from Q2 to Q3. SG&A has averaged $19,000 per vehicle delivered every quarter since 2014.

In Q3 TSLA reports that SG&A plunged to around $9,000 per vehicle delivered. We know Tesla brought in mechanics from its service centers around the country to help push production levels to the limit. This should have caused a large jump in SG&A.  It’s impossible to explain how a drop in SG&A expense like this occurred without access to the inside books. My best guess is that millions of dollars worth of expense invoices were mysteriously misplaced and not recorded for the quarter. This would partially explain by accounts payable soared by over half a billion dollars.

Another area of cost accounting that has red flags waving and warning flares firing is depreciation. Depreciation expense as a percent of revenues plunged from 12.1% in Q2 to 7.3% in Q3. It was 13.4% in Q3 2017.  Generically, part of the depreciation is straight-line useful life of equipment. The “tent” built in Q2 should have added to this part of depreciation.  But there’s also depreciation expense attached to each car produced and sold on a per car basis. This too should have caused an increase in depreciation. From the cash flow statement, TSLA’s depreciation expense in Q3 was $502.8 million, or $6,021 per car delivered. In Q2 the depreciation expense was $485.2 million, or $11,922 per car delivered. Again, this is theoretically and realistically unexplainable, other than fraud.

Tesla shows a cash balance of $2.967 billion at the end of Q3, up from $2.2 billion at the end of Q2. However, Telsa’s accounts payable surged by $566 million vs. Q2. It’s hard to imagine how this occurred when capital expenditures and SG&A declined. The only explanation is that TSLA stretched out its payment of bills to suppliers and vendors in order to conserve cash. This is consistent with the steady flow of smaller vendors who are forced to file legal complaints in order to get court-ordered payment judgments.

Accounting fraud would explain why there’s been a steady exodus of accounting and finance executives over the last year. The number of senior executives leaving the Company accelerated over the summer, including the Chief Accounting Officer, who quit in early September after less than a month on the job.

By the most stringent measure, TSLA is technically insolvent. Current assets less current liabilities is negative $1.855 billion. Cash balance less customer deposits is $2.062 billion. TSLA has a $230 million convertible bond payment due in November. Less this, cash is $1.832 billion. If we were to assume that accounts receivable and payable – theoretically the most liquid assets on a balance after cash – were settled tomorrow, net of cash it would leave a cash deficit of $609 million. That’s insolvency. On top of that, after the November convertible maturity, another $1 billion in debt is due by March 2019.

Keep in mind TSLA’s cash balance was artificially generated by stretching payables, slashing capex to the bone and somehow miraculously cutting back on expenses. This is simply not sustainable, let alone not credible. Note: Tesla’s capex as a percent of revenues was 7.5%. Over the last six quarters TSLA’s capex as percent of revenues has averaged 25% of revenues. In other words, Tesla is plundering its asset base and burning furniture to pay bills and show cash on the balance sheet.

To make things more interesting for the Company, it was reported last week that Tesla slipped several spots in the Consumer Reports reliability ranking. In its analysis of 29 auto brands, Tesla ranks 27th. CR characterized the Model 3 as having “average reliability.” Also of interest is the effect of newly available competition. In Norway month-to-date, Jaguar has delivered 365 newly available Jaguar i-Pace while there were 185 Tesla X+S combined. The EU has not approved the Model 3 for deliveries yet, but the i-Pace competes with the X and S models. When Audi’s e-Tron is available, I doubt there will be any demand for the Model 3 plus it will put a huge dent in European demand for Telsa’s X & S models.

Add on to this the news report that the FBI/Justice Department is probing whether Tesla misstated information about production of the Model 3 for the purpose of misleading investors. The FBI has subpoenaed former employees seeking to interview them. The FBI is looking into Musk’s public forecasts about Model 3 production vs. the actual production numbers, which turned out to be substantially lower that Musk’s continual assertions that deliveries would be significantly higher. It will be hard for Tesla to raise money with this investigation in process.

It’s been suggested that TSLA insiders knew that the FBI report was going to hit on Friday and that’s why the Company moved its earning release up a week with two days’ notice. It would also explain why the CFO exercised deep in-the-money stock options that do not expire until 2022. Musk knew that the news report would have less impact on the stock if it hit the tape a day after the fraudulently inflated earnings report. At some point, many of the large mutual fund companies with big positions in the shares will have to consider the possibility of facing breach of fiduciary duty charges for continuing to hold TSLA shares given latest the Justice Department/FBI development. Keep in mind the Justice Department has several other areas of inquiry and the SEC is examining other issues beyond the issue recently settled with Musk.

TSLA’s stock likely would have sold off this week absent the massive short-squeeze that has caused the Dow and SPX to go vertical. In fact, Tesla stock declined from it’s opening level on Monday through Tuesday’s close. In all probability, TSLA would be below $300 if the Dow and SPX simply flat-lined or drifted lower the past three days.

While not a Ponzi scheme in a strict sense because TSLA does generate revenues, TSLA requires a steady inflow of funding from the capital markets to remain solvent. At some point it will need a few billion to address the money it owes to suppliers and contractors and to service its enormous and growing pile of debt. Like Enron, at some point its cash furnace will run out of printed money to fuel it and the stock will collapse. I provide my Short Seller’s Journal subscribers with both short-term and long-term short-sell and trading ideas on Tesla.

The Demise Of Tesla: We’ve Seen This Movie Before

Enron was a product of the late 1990’s dot.com / tech bubble.  Similar to Tesla’s “production tent,”  Enron would set entire floors of buildings to look like elaborate energy trading rooms.  The operations were nothing more than a fraudulent shell game, set-up for the benefit of Wall Street analysts and journalists.

Bear Stearns was a product of the mid-2000’s mortgage bubble.  It created catastrophically leveraged mortgage-backed securities hedge funds that would inevitably collapse.  The managers of these funds kept these funds alive by hiding positions from upper management and fraudulently over-marking the value of the underlying assets, which eventually proved worthless.

And now, Tesla’s path to demise seems quite similar to the recent implosion of Theranos.  Theranos was biotech company which collapsed after it was revealed that it had fraudulently promoted claims about its blood testing technology.   This story resonates in Tesla’s decision to skip a critical brake test in order to meet a superficial production goal last week.  Anyone who takes delivery and pays for a Tesla Model 3 is putting themselves and their families at risk.

While not widely reported, there has been a rapid exit of high level executives, including the chief engineer, who resigned the day after Elon Musk issued the command to skip the brake test.  After this story broke, one of my subscribers emailed me:  “I design and build (from my bare hands) electrical testing equipment for the automotive industry. Plants shutdown rather than let their stuff go out the door untested.”  Now we know why the chief engineer bolted from the Company.

The proprietor of the Adventures  In Capitalism blog published a comparison between Tesla and Theranos.  He focuses on the recent erratic behavior of the CEO and potentially lethal production decisions implemented:

The question is, who would want to invest new capital when Tesla is now admitting to knowingly selling cars without testing the brakes in order to hit some arbitrary one week production target? When a company admits that it will sacrifice vehicle quality and even risk killing its customers to win a twitter feud and start a short squeeze, regulators must step in. The question is; what else has Tesla done illegally to hit its targets? We know that Tesla long ago passed over the ethical threshold of selling faulty products that have killed people—what other allegations will soon come to light? Elon Musk demanded that Tesla stop testing brakes on June 26. Doug Field, chief engineer, resigned on June 27. Is this a coincidence? Of course not—Doug Field doesn’t want to be responsible for killing people…

You can read the rest of this here: Tesla Is The New Theranos

The only ingredient missing from the chain of events that precedes the complete collapse of Tesla is a table-pounding, frothing-at-the-mouth “buy” recommendation from CNBC’s Jim Cramer.

Another Blow-Off Top In Stocks?

And just like  that, the  VIX index crashes right back to where it was before the late-January 10% drop in the stock market – a reflection that the remaining stock market speculators and hedge fund bots have been completely cleansed of any fear impulse that hit daytrader keyboards in the first quarter of 2018:

Hedge funds went from insanely short VIX futures to long VIX futures after the market had dropped 10% and the VIX soared. They were slaughtered on their shorts, now they are getting bludgeoned on their long position. But guess what?  They went net short again about  four days ago.  Selling volatility again at the bottom of the volatility index.  Not a good omen for perma-bulls.

The Dow has recovered about 56% of the decline that occurred from January 26th to March 23rd. Correction over and on to higher highs? Possibly. The Russell 2000 broke out to all-time highs starting in mid-May. The Nasdaq hit an all-time high Tuesday. Everything appears to be heading higher…or is it?

The Dow is being driven primarily by Boeing (BA), Microsoft (MSFT), Caterpillar (CAT) and United Health. On Tuesday, I calculated by hand that the big move higher by AMZN was responsible for 43% of the performance in the S&P 500. If AMZN had just been flat that day, the SPX would have closed lower from Monday instead of up 8 pts. By all indicators, the move in the Russell is being driven by a short-squeeze. TSLA was up $28 – 9.6% – yesterday because Elon Musk whispered the phrase, “Model 3 production target,” into the ears of the romance-starved Tesla bulls. Also known as a “shot of short-squeeze Viagra.”

When the market was plunging earlier in the year, the hedge fund bots shifted from insanely long to recklessly short.  Now they are being squeezed.

The Italian debt and Latin American currency crises have not only not gone away but they are getting worse.  As long as the reports don’t hit the headlines, the problems do not exist for moronic daytraders and hedge fund computer program news spiders.

Economically in the U.S. the bold propaganda-laced, heavily “adjusted” Government-manufactured economic reports continue to diverge from the economic and financial reality on Main Street.  Housing, auto and retail sales are deteriorating now as the majority of U.S. households have found themselves stuffed like a French goose readied for foie gras production.

Of course, the smart money is not hanging around for Part Two of what’s to come.  The “smart money index” shows that professional money is leaving the stock market at a rate that has only been equaled in the last 20 years in 2000 and 2008…

There’s no telling how much longer this insanity can persist this time around.  But it brings to mind Hemingway’s description of how to bankrupt as conveyed in “The Sun Also Rises” – “Two ways: gradually then suddenly.”

By the way.  Keep an eye on gold. The majority of the market looking to the sky for stocks and down over the cliff for gold, we could get a surprise move higher in precious metals and mining stocks.