Tag Archives: short sell

The Fed’s Frankenstein

“Commentators keep asking why the Fed can’t raise rates if the economy is so strong? They still don’t realize that the economy was never strong. They confuse a bubble for strength. Without 0% rates and QE the bubble can’t survive. But a return to those policies kills the dollar” – Peter Schiff on Twitter

I made that same argument about the Fed funds rate, the dollar and why the Fed has to keep “nudging” the Fed funds rate higher in a podcast conversation with James Anderson at Silver Doctors last week.

Yesterday’s 1000-point spike up in the Dow may have been the largest one-day point gain in Dow, but it was far from the largest percentage point gain. The two largest percentage point gains occurred in October 2008: a 11.08% gain on October 13, 2008 and a 10.88% gain on October 28, 2008. Those two days took the Dow just above 9,000. A little more than four months later, the Dow closed at 6,626. Yesterday’s market action was nothing more than evidence that the Fed’s Frankenstein has gone off the chain…

Despite official prevention efforts, two-way price discovery has been introduced to the stock market. The Establishment, lazy, entitled and fattened-up on the 10-year stock bubble, has gone into convulsions over the possibility that the stock market will do anything but move higher. The Wall Street Journal published an article blaming the Christmas Eve stock market massacre on the algos. Even well-seasoned market veterans like Leon Cooperman were whining about the two-way price action and the role of HFT-driven hedge fund algorithm trading. Where were these cries of distress when the market was driven relentlessly higher by QE-armed algos over the last 10-years?

Some chart “experts” have labeled the market “extremely oversold.” But the stock market has been extremely overbought for the better part of the last 8 years. By what measure is the market “extremely oversold” in this context? Looking at a monthly chart of the SPX going back to 1999, the MACD was at it’s most extreme overbought by far at the beginning of 2018.

But the current sell-off has barely moved the needle on the monthly MACD. It’s nice to draw symmetrical geometric shapes and lines which are fit to charts ex post facto (i.e. Monday morning armchair QB). But the fundamentals beneath historically overvalued financial assets are cratering very rapidly.

The drop in stocks since early October has done little to correct the extreme condition of overvaluation – aka “the bubble.” Using real numbers to calculate preferred valuation ratios used by “analysts,” rather than manipulated Government GDP/inflation and phony GAAP numbers used by these “analysts,” the overvalued condition of the stock market the most extreme in history.

A coordinated Central Bank-engineered bounce is to be expected and certainly there’s extreme political pressure in the U.S. for this. But more intervention preventing true price discovery merely defers the inevitable rather than fixing the underlying systemic problems. Furthermore, as evidence of the market’s reaction on Monday after reports hit the tape that the Treasury Secretary (head of the Working Group Group on Financial Markets) was convening the CEO’s of the six biggest banks to discuss the market sell-off, official intervention serves only to signal to the markets that something is profoundly wrong with the system, contrary to official propaganda.

Wednesday’s 1000-point price-spike reflects a completely dysfunctional stock market. Just like the big moves in October 2008, it also foreshadows a much steeper sell-off coming. The story did not end well for Shelley’s Frankenstein. Neither will it end well for the Fed’s creature. It’s going to get a lot more painful for those who have been conditioned to believe that stocks only rise in price.

Tesla’s Phony Quarterly Numbers

Tesla reported its Q2 numbers this past Wednesday. It reported $4 billion in revenue, up 43.4% year over year. Its net loss widened to $742 million, or $4.22 per share (some of you may have seen lower net loss and loss per share numbers but the numbers I’m using come directly from the SEC-filed 8-K, which means those are the “official” numbers).

The market was excited and the stock soared because the cash “burn” was lower than expected and Elon Musk reassured everyone that the Company is still on track to show positive net income and cash flow in Q3 and Q4. I can assure you that you have a better chance of standing on the eastern shoreline of Egypt and seeing the Red Sea part for Moses.

The cash balance of $2.23 billion that is presented on TSLA’s balance sheet was higher than expected – with an alleged implication that TSLA burned less cash than expected. But this was accounting sleight of hand. TSLA achieved this feat by stiffing its suppliers as evidenced by the ballooning of the accounts payable entry on the balance sheet. From Q4 2017 to Q1 2018, TSLA’s accounts payable rose $213 million, or 8.2%, to $2.603 billion. But from Q1 to Q2 this year, TSLA’s payables rose $427 million, or 16.4%.

In other words, TSLA slowed down the rate at which is pays suppliers by a considerable amount, which enables TSLA to hold the cash it owes to suppliers on its balance sheet, thereby giving the appearance of a higher cash balance.

Netting out customer deposits of $942 million, TSLA actually only has $1.29 billion in cash. That said, there are some other balance sheet items on the liability side of the balance sheet that increased and will require the use of cash, like “other long term liabilities,” that I won’t be able to analyze until the 10-Q is filed, which is when I can study the footnotes. Furthermore, the 8-K does not contain a full statement of cash flows – it’s missing the details of the “cash from operations” – which will enable me to determine other areas on its balance sheet TSLA stretched in order keep cash net of deposits above $1 billion.

All of that said, I have discovered a clever manner in which TSLA has rigged its financials to look better than they should by keeping cash expenditures it will have to incur off the income statement and balance sheet in Q2. To my knowledge, I am the only analyst who has figured out this devious form of accounting manipulation.

The commentary above is an excerpt from the latest Short Seller’s Journal, which was released today.  Tesla shares several traits with Enron and some parallels with Bernie Madoff.  Elon Musk is a gifted con-man.

In the latest Short Seller’s Journal I layout the methodical manner in which Musk’s financial architects manage to defer cash expenditures for the purpose of making the Q2 financials appear better than expected.  I suspect the scam was used to set-up an attempt to raise more money later this year.  You can learn more about my newsletter here:  Short Seller’s Journal information.

Tesla (TSLA): “It’s Not A Lie If You Believe It”

TSLA stock has levitated on statements from Elon Musk that TSL A would be cash flow positive by Q3, an announcement that TSLA would roll out a Model Y “crossover” SUV by November 2019 and the reiteration of ambitious Model 3 production milestones. All three will never happen.

Elon Musk’s attorneys must be giving Elon the same advise given to Jerry Seinfeld by George just before Jerry took a polygraph test: “Elon, just remember, it’s not a lie if you believe it it.”

It looks like reality is catching up to TSLA and TSLA is going into a death spiral.  An amended complaint to an existing class-action suit against the Company, Musk and the CFO was filed. The suit accuses Musk and the CFO of knowingly making false and misleading public statements with regard to production and quality targets for all of TSLA’s models. The amended complaint includes testimony from several former employees.  The amended allegations give the lawsuit far sharper teeth than the original court filing. When I find the time, I’m going to read the entire court filing.

In addition, recently a judge denied Elon Musk’s request to dismiss a class-action suit stemming from TSLA’s acquistion of Solar CIty (which is turning into a disaster) against Musk and TSLA’s board

As for TSLA generating positive cash flow by Q3 and avoiding the need to raise more money, I found an analysis of TSLA’s current liabilities which shows TSLA’s current cash position is worse than it appears.

At the end of 2017, TSLA showed a cash balance of $3.3 billion. Of that, 25% or $840 million is refundable customer deposits. Another $1.3 billion is current payables which are due over the next few months. This includes $753 million owed for equipment, $378 million in payroll and $185 million in taxes payable. Netting out customer deposits and the accrued payables, TSLA’s net cash position at the end of 2017 was $1.3 billion.

TSLA’s current assets minus current liabilities showed a working capital deficit of $1.1 billion at year-end. TSLA generates a cash loss on every vehicle sold. It’s highly likely that TSLA’s cash net of current cash payable obligations is now well under $1 billion. Elon Musk must have taken LSD before he made the announcement that TSLA would be operating cash flow positive and would not need to raise money in 2018.

Although nothing would surprise anymore in this market, I just don’t see how TSLA breaks higher from the current chart formation. Lawsuits are piling up. Last week the NTSB kicked TSLA out of its participation in the NTSB’s investigation of that fatal accident involving a Tesla in California. The NTSB stated that TSLA violated agency protocols. Consumer Union, the consumer advocacy division of Consumer Reports, issued a report last week which stated that Tesla needs to improve the safety of its autopilot. On top of all of this, I’m convinced that Elon Musk, based on his erratic and volatile behavior, is certifiably insane.