Tag Archives: Tesla

Tesla Is The Poster Child For The Golden Age Of Fraud

“Elon Musk has personified the hopes and dreams of this bull market; Tesla burnishes its results through aggressive accounting; it’s a culture of deception because it is selling self-driving, which doesn’t yet exist.” – Jim Chanos from “We Are In The Golden Age Of Fraud” (Financial Times)

Jim Chanos is perhaps the most well-known remaining short-seller in this market. Don’t be fooled by his demure characterization of Elon Musk and Tesla. It’s calculated diplomacy. The numbers are far more than just polished up to look good and the accounting is not just “aggressive,” it’s fraudulent, and Chanos knows that as well as anyone. Large, successful hedge funds that have lasted as long as Chanos’ Kynikos Capital Partners spend a considerable amount of money hiring private investigators and financial forensic sleuths before putting on and sticking with large short positions. I don’t know if Chanos hires P.I.’s but he knows all well as anyone that the accounting is fraudulent rather than just “aggressive.”

Tesla’s stock ran up to $1650 in the two days before reporting Q2 numbers. After that, it closed lower every day, including losing $175 on Thursday and Friday combined after the earnings report. Tesla is promoted as a “growth story.” But its revenues unequivocally do not exhibit any growth (graphic courtesy of @TESLAcharts):

Anyone see any growth in those numbers? Tesla’s Q2 revenues declined 5% vs Q2/19, despite the continued ramp up the Shanghai factory and the addition of the Model Y to the revenue stream. The virus crisis was not a factor in the lower revenues because unit deliveries increased 3% from Q1 2020. Tesla cut prices on all of its models in every market multiple times during Q2. Outside of China, Tesla’s deliveries declined in every market, especially the Models S/X, which are rapidly trending toward zero deliveries. YoY total Model S/X deliveries including China plummeted 40%.

Tesla played the typical games it plays in order make the gross margin appear larger and to squeeze out an operating profit. The Company managed to show a $327 million operating profit. But $428 million of that is attributable to TSLA’s sale of emissions credits to OEMs. Most of this is from a deal with Fiat/Chrysler. Recall that emissions credits are a regulatory mandate in every country. The large OEMs do not produce enough EVs and thus need to buy some of the excess credits generated by TSLA. But as OEMs ramp up their production of EVs, they’ll no longer need to purchase these credits. Even the CFO admitted on the earnings call that the revenue/profits from this source will eventually disappear. Without this revenue source TSLA’s operations would have lost money again. In other words, without the Government mandated emissions regulations, TSLA’s business model does not generate income.

Tesla also once again slashed R&D expenditures, which were $279 million in Q2 vs $324 million in Q2/19. In fact, TSLA’s R&D expenditures averaged $331 million over the previous four quarters. And yet, despite supposedly developing an EV truck, semi and roadster plus working to develop full automatic driving, TSLA spent 16% ($52 million) less on R&D in Q2. Every dollar reduction in R&D translates into $1 of operating income. Additionally, TSLA’s capex expenditures every quarter continue to be less than its depreciation expense. TSLA is cannibalizing its existing manufacturing assets. This is apparent from the rising complaints about the quality control, especially with regard to the Model 3 and the Model Y. To some extent, reduced capex reduces the cost of revenues and helps pad the gross margin.

And of course I would be remiss if I didn’t touch on the Accounts Receivable (A/R). I detailed the A/R scam in last week’s issue. Refer to that if you want an in-depth review. Once again TSLA’s A/R hit an all-time high, soaring 29.4% higher Q2/19 to $1.48 billion. This is despite the 5% drop in revenues. The A/R was 24.6% of revenues in Q2 vs 18% of revenues in Q2/19. Recall that GM’s A/R is just 10% of revenues and GM is a sprawling global auto OEM and defense contractor. Furthermore, in the auto business, customers are required to pay for a vehicle (either with cash or bank financing) before they can drive away with their vehicle. There is just no conceivable explanation that can justify this red flag and the one given by the CFO on the earnings call was an exercise in blowing smoke.

Chanos referred to the regulators, like the bank puppets at the SEC, as “finanical archeologists” who tell us what happened after a Ponzi company implodes. As an example, Harry Markopolos laid out an air-tight case about Bernard Madoff’s Ponzi scheme and put the report in the lap of the SEC. The SEC ignored him. Madoff blew up in late 2008 and was arrested shortly thereafter.

The reason this occurs is because the SEC exists as big bank puppets. JP Morgan made a fortune on Madoff’s “business.”  Same applies to Tesla and Elon Musk. Goldman and Morgan Stanley will skim $100’s of millions in various fees between now and the time when Tesla blows up.  But don’t complain you weren’t warned if you get burned holding the shares or stuck with a dysfunctional EV that will no longer be serviced.

The Precious Metals Bull Market Is Beginning To Rage

The precious metals and mining stocks have a long way to go before this secular bull market is over. My view is that it will culminate with a global monetary reset that will re-incorporate gold/silver into the monetary system. The dollar-based price of gold and silver will end up at multiples of their current prices.

Silver Doctor’s Paul Eberhart invited me back on to his podcast to discuss the big move in the precious metals market, including whether or not the current investor sentiment is overly euphoric, the degree to which the mainstream media spits out anti-gold propaganda, the U.S. dollar and the general economy/stock market/Tesla (Silver Doctors):

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Several of my junior and larger cap stock ideas have had huge moves higher. I will be discussing what to do with these stocks in the next few issues of my Mining Stock Journal plus presenting any new ideas I uncover that have yet to be widely discovered. You can learn more about Investment Research Dynamic’s newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Note:  I do not receive any promotion or sponsor payments in any form from the mining stock companies I present in my newsletter. Furthermore, I invest in many of the ideas personally or in my fund.

The Historical Stock Bubble, Idiot Stocks And Gold

The Fed has blown the current stock bubble to an unprecedented magnitude. While the most outrageous overvaluations are concentrated in the tech sector, the valuation insanity has engulfed the entire stock market. Bubble chasers ran Hertz, a bankrupt company that will either liquidate or restructure, up to a valuation close to $1 billion after the Company filed for bankruptcy.

Perhaps the poster-child for this historic stock market Hindenburg is Tesla. Its valuation makes a mockery of our markets and shows what a complete farce the regulatory, legal and judicial systems have become in our country. It is the perfect reflection of the Banana Republic into which the U.S. has transformed over the last 10 years.

The precious metals sector is just getting warmed up. Since late March, when the Fed opened up the floodgates of its digital money printing press, gold is up 21%, the SPX is up 37%, silver is up 54% and the mining stocks are up 86%. Expect the large cap gold/silver producers to produce another round of big earnings beats for Q2 and Q3, which will drive the mining stocks even higher.

Lior Ganz invited me onto his Wealth Research Group podcast to discuss the current stock market insanity and what’s ahead for the precious metals sector:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Note:  I do not receive any promotion or sponsor payments in any form from the mining stock companies I present in my newsletter. Furthermore, I invest in many of the ideas personally or in my fund.

“New subscriber here. Thank you for the Great newsletter with a very professional analysis.”

The Stock Market, Gold, Silver, Mining Stocks And Tesla

The stock market has become a powerful political and economic propaganda tool. It’s hard to dispute the idea that economy is not “in a good place” or “booming” when the Dow goes up 100 points or more everyday. Trump understands this and has been coercive in the Fed’s decision to loosen monetary policy and re-start the money printing press. Ironically, Trump tweeted this in 2012 (as sourced by northmantrader.com):

Make no mistake, the economy nearly every sector of the economy is contracting  except consumer spending and defense spending, both of which are being driven by record levels of consumer and Government debt.

Meanwhile, the precious metals sector is getting ready for another move higher and, according to Factset, currently 45% of all research analysts either have a sell or underweight (which is diplomatic “sell”). Silver Liberties invited me onto this podcast to have some fun and discuss these topics:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Will Tesla Ever Generate A Real Profit?

The only part of Tesla’s business model that generates profitability – gross, operating and net – is the sale of greenhouse gas credits to other OEM manufactures and tax subsidies.  Neither of those sources of profitability is sustainable.

The GAAP net income of $105mm in Q4 was 17% below the consensus of $126mm. Regarding net income, Tesla generated $133mm of income from selling Zero Emission/Greenhouse Gas credits to the big OEMs who need them – for now – to remain in compliance with environmental regulations. Net of these credits, Tesla lost $28 million in the quarter (before the fraudulent accounting manipulation). Subtracting these credits from the full-year loss, Tesla’s 2019 net loss attributable to shareholders is $1.5 billion.

The problem with this reliance on the sale of these credits to generate income is that, starting this year, the buyers of these credits (GM, Audi, Chrysler, etc) will soon be selling more than enough EVs and hybrids to remain in compliance. This source of income for Tesla will thus eventually be non-recurring.

With subsidies disappearing and an onslaught of competition,  2020 could be a bloodbath for Tesla in terms of deliveries. Not only is the global auto market contracting, but the much larger, better funded and operationally credible OEMs will be flooding the market with competitive EVs that will significantly cannibalize Tesla’s market share.

There’s just no telling when this Electric Tulip will inevitably crash. But, like with any investment bubble,  the popping will happen suddenly and unexpectedly, when the bulls are convinced that the upside is limitless and the bears are in a state of terror

Tesla, Gold And Coronavirus – Fraud And Global Depression

To say the current stock market is in a bubble is an insult to the word “bubble.” Tesla experienced an insanely idiotic stock price move after reporting “shock and awe” headline numbers for revenue and EPS which “beat” estimates – estimates that had been lowered by analysts throughout 2019. But as always there’s plenty of dirt in the details which point to a reality that is far different than is represented by headline numbers and Tesla’s highly orchestrated earnings presentation.

There’s just no telling when this Electric Tulip will inevitably crash. But, as with any investment bubble the popping will happen suddenly and unexpectedly, when the bulls are convinced that the upside is limitless and the bears are in a state of terror.

Meanwhile, the physical gold market which underlies the complicated web of paper gold derivatives continues to push the gold price higher despite aggressive efforts by the western Central Bank and bullion bank price management team. In fact, data from the BIS indicates that the BIS had a heavy hand in the effort to cap the price-rise of gold during January using its physical gold swap and leasing transactions.

Paul at Silver Doctors invited me onto its podcast to discuss these issues

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Tesla’s Warranty Expense “Income”

Note: Tesla is a fascinating case in fraud and of the “wizard” behind the fraud, who has managed to pull the wool over a large population of stock gamblers. Tesla is a saga for the ages and likely the biggest Ponzi scheme in U.S. history.  The Company and its CEO are truly emblematic of the fraud and corruption that has engulfed the entire U.S. economic, financial and legal/political  system. If this country survives what’s coming, there will be semester long classes in top-10 business schools and psychology masters programs devoted to the case study of Tesla.

A long-time Tesla critic published an article in Seeking Alpha outlining the fraudulent nature of Tesla’s accounting for “warranty expense.” I did not read the article beyond the summary because it was placed behind Seeking Alpha’s subscription firewall.  But I’ve detailed this aspect of Tesla’s accounting fraud in previous issues of the Short Seller’s Journal . Tesla has been reducing its provision for warranty expenses relative to the number of vehicles it sells for several quarters. While the warranty provision should rise in correlation with the rising number of vehicles delivered, Tesla and its auditor have decided an inverse relationship between these two variables makes more sense.

In addition, as it turns out Tesla in many instances allocates warranty expenditures incurred to “goodwill” and other non-warranty expense categories, which enables it to move the expense – a cash expense incurred – off its income statement and on to the balance sheet or to the “operating expenses” section of the income statement.

GAAP accounting no longer requires a company to amortize goodwill evenly over time as an expense on the income statement. Those of you who might know GAAP warranty accounting rules might say that the warranty expenses as they incur only affect the income statement to the extent they exceed the “provision for warranty expenses” that accumulates on the balance sheet.

However, in all likelihood Tesla is playing these games with its warranty expenditures because it has already exceeded the amount it has previously reserved for warranty expenses. OR over time if Tesla reports – fraudulently – less on actual warranty expenditures than it has reserved for them, it can “release” the warranty expense reserve into the GAAP income statement as a contra expense to boost gross margin and operating margin. This in turn contributes to the accounting manipulations used in any attempt to generate positive net income.

Furthermore, understating current warranty expenditures enables Tesla to understate future provisions for warranty expense, which should be expensed every quarter as part of the cost of goods sold. In other words, moving warranty expenditures into other expense categories or into goodwill reduces the cost of goods sold thereby artificially and fraudulently boosting the reported GAAP gross margin.

Moreover, the amount of warranty expenditures tossed fraudulently into goodwill never hits the income statement. It sits in the goodwill asset account on the balance sheet which no longer has to be amortized into operating expenses, thereby boosting operating and operating margin OR reducing operating losses. Yes, there is an accounting rule that applies to the revaluation of goodwill but don’t hold your breath waiting for Musk to adhere to any accounting regulations.

This is crucial to understanding the breadth and scale of Tesla’s accounting fraud. Tesla has made it a point of emphasis to boast about its gross margin, which is much larger than the gross margin for the legacy auto OEMs.  Also, Wall Street analysts focus on Tesla’s gross margin. When the gross margin reported is higher than expected, the stock price jumps. This accounting scheme also fraudulently boosts Tesla’s operating and net incomes. In fact, if Tesla adhered to strict GAAP accounting, its gross margin would be substantially lower and in all likelihood the Company would have never been able to report positive earnings per share in Q3.

But wait, there’s evidence that backs my assertion above that Tesla fraudulently misclassifies warranty repair expenditures. Tesla owners who have taken their car in for warranty-related repairs have been reporting that on the final invoice the warranty service repair is classified as “Goodwill – service.”  You can see a photocopy of one such example in an article published by InsideEvs.com. There are also several lawsuits filed against Tesla with documentation showing that Tesla’s misclassification of warranty service expenditures is standard operating procedure at the service centers.

As it turns out, Tesla labels warranty service expenditures for two more fraudulent reasons. First, under California’s Lemon Law, in many instances Tesla would be required either to buy back for full price the tarnished vehicle from the owner or replace it with a brand new vehicle. Likely this law is similar in most States. Second, repeated warranty repairs for the same problem would require per NHTSA regulations for a recall of the defective parts involved. But labeling these repairs as “goodwill” enables Tesla to fraudulently avoid both of these costs of adhering to the law.

Musk’s business per se is not to be sell cars but sell stock in a company that sells cars.  Musk’s accounting schemes are aimed directly at pushing the stock price higher. The primary motive behind this effort  is Tesla’s insane CEO compensation plan, which would award Musk with $364 million in stock/options if the market cap hits $100 billion (which is more than Ford and GM combined).

Though I can’t prove it without access to the actual records, I suspect that Goldman Sachs and Morgan Stanley have a lucrative fee-generating business lending money to Musk against the value of his Tesla shares.  In other words, Musk – along with Gold man and Morgan Stanley,  will do and say anything to try and force the stock higher in order to achieve that compensation milestone level and to protect the value of the collateral used secure loans to Musk.

Stock Bubbles And Dutch Tulip Bulbs

“People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. Such a scheme could not last unless someone was ultimately willing to pay such high prices and take possession of the bulbs. In February 1637, tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs. As this realization set in, the demand for tulips collapsed” – “Extraordinary Popular Delusions and the Madness of Crowds,” Charles Mackay

“So yes, in a way I’m saying we can keep going up while at risk of reverting at any moment”NorthmanTrader.com

The market is melting up and indicators that a top is approaching are proliferating. This is one of the typical anecdotes that accompany markets nearing a top:   On CNBC last Wednesday morning the hosts plus a couple guests were discussing the market and one of the guests said that value doesn’t matter anymore “it’s all about momentum.” I almost fell off my chair when I heard that because the “fundamentals don’t matter it’s all about momentum” was one of the mantras in late 1999.

Chris Marcus (Arcadia Economics) and I discuss the current stock market melt-up and whether or not it can be shorted with success and how to manage the risks of being short:

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Some of the commentary above is  excerpted from the Short Seller’s Journal. Each weekly issue contains macro economic analysis, market analysis, and short ideas.  I  To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

The Telsla CyberTruck Event: Elon Musk’s Travelling Burlesque Show

As many of you are aware by now, Tesla’s roll-out of its Cybertruck, an event which pushed the stock price irrationally higher ahead of time, was a complete disaster. The vehicle itself, which one commentator said “looks like the product of a DeLorean that had sex with a triangle,” was visually quite unappealing. Morgan Stanley conducted a snap poll of its email distribution list to determine viewers’ impression of the Cybertruck.  Zero percent (0%) of those surveyed thought the truck would be a success.

Whether or not the claims by Musk & Co are true that over 250k people have plunked down a $C-note to “reserve” a Cybertruck, at this point it’s unclear whether not the vehicle will ever make it to production. Notwithstanding inconvenient realities, Musk fraudulently refers to the refundable reservations as “orders.”  Electrek.co and Musk’s Twitter pimps behave as if Tesla has already pre-booked $10 billion in revenues.

But Tesla has several hurdles to overcome before this electrified Lego block on wheels ever rolls off the production line, not the least of which includes addressing a technically insolvent balance sheet and raising the $100’s of millions of capex required. Notwithstanding this, the entire auto industry, including Tesla, faces gale force economic headwinds as the sector globally plunges into recession.

Based on YTD sales through October – plus estimates for November and December – data published by EV-Volumes, a service that provides a database of sales statistics for EVs, shows that total EV sales in the U.S. will decline 4% from 2018. After 10 years of EV availability, the market penetration rate for EVs is just 2% – and ex-California it’s 1%. Think about this in the context that the Government has provided enormous subsidies for EV/hybrids, thereby lowering the all-in cost for the buyer. As the largest EV seller in the U.S. (currently but not for long), Tesla is by far the most affected by the negative trend in EV sales.

Finally, because of plunging EV sales (along with plunging sales for the entire Chinese auto market), the Chinese Government is implementing major cuts to its EV sales subsidy program. The Chinese Association of Automobile Manufactures said that weak demand for the vehicles is one of the reasons for the pullback in the subsidy program.

Eric Peter’s Autos blog captured the essence of Musk’s farcical CyberTruck burlesque show:

Thousands of affluent marks have already put down deposits, unsightliness seen. And in spite of one of Elon’s many promises about the Cybertruck revealed to be a blatant lie right in front of their very eyes – the “shatterproof” door glass that wasn’t. It’s wondrous, baffling. Elon’s mesmeritic powers are so puissant he could probably get his followers – this includes the press – to bark like dogs if he asked them to.

You can read Peter’s entire commentary here:    And So They Drooled

Tesla Is A GAAP Accounting Dumpster Fire

“If there is any brilliance to TSLA, it is in the accounting slight of hand” (from @georgia_orwell)

Unfortunately, the key regulatory agencies in the Government, like the SEC, have been co-opted by the big banks and by Wall Street lawyers who built a lucrative practices assisting big banks in  breaking the law.  As we’ve seen,  when caught the banks at worst receive a small financial wrist-slap that could be considered the cost of doing business. The same holds true with the big accounting firms. Witness this quote from a Wall St Journal article detailing the rationale used to justify burying accounting fraud in Mattel’s financials:

[S]senior finance executives and Mattel’s auditor, PricewaterhouseCoopers, decided to change the accounting treatment of the Thomas asset, effectively burying the problem…It was known within Mattel that if we took this approach, at worst we might get a slap on the wrist from the Securities and Exchange Commission” (this disclosure is from a whistleblower who was the director of Mattel’s tax reporting at the time).

Mattel considered disclosing the accounting “error” and restating its financials. But instead, the Pwc partner in charge of the Mattel account figured out a way to completely bury the issue, after which the partner was seen “walking down the hall, high-fiving people, after this decision was made.”

I’m certain that the PwC partner would have never buried the accounting fraud if he thought there was any risk of an SEC audit or of a whistleblower emerging to tell the truth.

It’s becoming increasingly apparent that Tesla’s accountant, Price Waterhouse (PwC), is readily complicit with looking the other way on Tesla’s accounting frauds, if not in fact helping the Company implement illegal accounting gimmicks.

In light of the Mattel situation, I am certain that PwC is fully aware of TSLA’s openly reckless accounting.  PwC earned $9 million in fees from Mattel while the accounting fraud scheme occurred. TSLA’s revenues are 3x larger than Mattel’s so I’m sure PwC is getting paid significantly more than $9 million in fees either to look the other way or to help with the accounting deception.

The Solar City acquisition deposition was a dumpster fire for the Tesla.  As it turns out, a lawsuit file by certain Tesla shareholders who assert the deal should have never happened  is working its way through the court system.  Notes from a recent deposition disclosed that Solar City’s form audit firm, Ernst & Young, testified that Solar City was insolvent at the time Tesla’s board “agreed” to pay $2.6 billion to acquire the zombie company.

The deposition of Kimble Musk, Elon’s brother, reads like a chapter from “The Gang That Couldn’t Shoot Straight.” The skilled questioning by the plaintiff’s attorney made it clear that the acquisition of Solar City was rife with extreme conflicts of interests.

After Kimbal was deposed it was clear that the acquisition served as a quasi-bailout for Kimble and possibly Elon, as they both had Solar City shares pledged as collateral against various loans, some of which were extended by Wall St banks. Solar City may well be the Company’s undoing rather than the implosion of the EV operations.

It’s likely that Tesla will be left alone by the regulators, who serve as hand-puppets for the big Wall St banks, until firms like Goldman Sachs and Morgan Stanley – financial advisors to both Tesla and Elon Musk – have completely milked any possible fees from the Company.

Eventually Telsa’s business model will dissolve from intensifying, superior competition and an inability to service its massive and growing load of debt and other fixed obligations.  This is happening already, as numbers for October from the U.S. and the EU show a stunning decline in Tesla registrations across all three models.  The only unknown is China.  But auto sales in China are falling like a rock every month. In October auto deliveries plunged 6%. The industry fundamentals are not conducive to the fairytale told by Musk that TSLA will eventually sell 12,000 cars per month in China.

Perhaps in the end justice will be properly apportioned and served on PwC for its role in helping Tesla and Elon Musk perpetrate what will eventually emerge as a largest financial fraud in U.S. history…but I’m not holding my breath