Budget

This Is A Tesla Market

By David Stockman  |  August 8, 2019

Another earnings season is winding down, and it’s time to wonder what comes after the journey from “sublime” to “ridiculous” is complete.

Kraft Heinz Earnings Report 

Here we have Kraft Heinz (NYSE: KHC) reporting before the market opened this morning; it didn’t go well. The condiments king posted a 4.8% decline in first-half revenue and a 55% slide in operating income.

CEO Miguel Patricio said it’s “nothing we should find acceptable.” Management also delayed the filing of its 10-Q with the Securities and Exchange Commission (SEC), as an investigation into its accounting and procurement practices continues.

There’s also lingering concern in the aftermath of February’s announcement of a $15 billion writedown of its Kraft and Oscar Mayer brands and a 36% dividend cut. So, that’s why KHC gapped down by more than 13% when the bell rang at 9:30 a.m. ET.

This is not the “ridiculous” stuff. In fact, all of that about KHC, including the double-digit drop in the share price, makes sense. It’s healthy, even. We see far too little of it.

Pull back from Kraft Heinz and its numbers today, in fact, and you’ll lose it all in another sea of green…

Tesla’s Earnings Report 

It all calls back to mind the Bubblevision commentator who, a couple weeks ago, when Tesla (Nasdaq: TSLA) reported its numbers, chided Roger McNamee for being too “quarter focused” with respect to Elon Musk’s lemon.

The gist is Elon’s another brilliant disruptor who needs time to work his magic. And, therefore, Tesla shouldn’t be judged by ordinary standards of profitability.

Of course, Tesla’s quarterly look was not good… again. Never in its 14-year history has it generated an annual profit, and the couple quarters it did post in the green were down to government support.

As Wolf Richter noted, you could give Tesla infinite time because its business model is all about burning cash and winning praise from its wealthy customers:

Tesla lacks a viable business model in the classic sense. Its business model is a new business model of just burning investor cash that it raises via debt and equity offerings on a near-annual basis because investors encourage it to do that, and love it for it, and eagerly hand it more money to burn, and they’re rewarding each other by keeping the share price high. It’s just a game, you see. And nothing else matters.

And that’s the “beyond ridiculous” part

Tesla net income/loss

A Ponzi Scheme

Since 2009, Tesla has generated negative $10.4 billion of free cash flow. It’s been kept alive only by serial capital raises, billions of dollars of customer deposits, and billions of dollars more of supplier payables.

Its total debt currently stands at $13 billion. That’s up from just $370 million in 2009, and it’s on top of $2.2 billion of new equity issuance over the last decade.

Its net payables (that’s supplier payables and accrued expenses less receivables) were roughly balanced back in 2009. But, now, it owes a net of $4.6 billion to the supply base and other vendors.

That, folks, is a Ponzi scheme.

But, so long as Elon’s con holds, Tesla will take customer deposits, supplier IOUs, and investor funds faster than its helter-skelter factories and production systems can burn cash.

When Wall Street crashes again, though, and the U.S. economy lurches back into recession, Tesla will be in Chapter 11 bankruptcy in a heartbeat. Its preposterous $40 billion market cap will vaporize and send TSLA’s army of momo-lemmings into coronary arrest.

There’s only one reason this auto-wreck has lasted 10 years and burned through $10 billion of cash: the delusional belief in the power of the Federal Reserve to keep easy money flowing and forever putting off market crashes and economic recessions.

This “suspension of disbelief” and the destruction of honest price discovery in our financial markets is the ultimate downside of monetary central planning.

A Square Deal

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR