Told You So Tuesday - How Low Can the Markets Go?

Clearly you can't say I didn't tell you so! 

Just last Thursday, I titled the morning post "Rally Almost Out of Gas" and the next day we fell and I looked really smart but then we recovered and people said "see, you were wrong" and now we're down 1% in the Futures this morning and I'm right again.  The point, however, is not to be right or wrong on any given day but to PROTECT our portfolio with sensible hedges and THAT is what Thursday's post was all about.

We also did a Live Trading Webinar Thursday afternoon, where we discussed our idea to short the S&P (/ES Futures) at the 2,050 level and, as you can see from the chart, that led to a $500 per contract win at 2,040.  We also made $225 trading the Futures during the Webinar for our Members and that was our WORST performance for the month of March - when every Webinar was a winner.  We spoke extensively about using Futures and hedges to balance our portfolios near the end of the Webinar. 

That morning (Thursday), we added 100 SDS Sept $16 calls to our Short-Term Portfolio at $3.10, against which we sold the Sept $22 calls for 0.90, putting us in the $6 spread for net $2.50 with a $35,000 upside potential and we already have a July TZA spread for additional protection so we're essentially just amused by today's little pullback - nothing at all to panic about.  

In fact, we still haven't broken down enough to start taking our longs off the table, though we did sell a lot of calls against our existing positions to protect ourselves (and collect some CASH!!! while we wait).  CASH!!! is, by far, our favorite position at the moment and all 4 of our virtual tracking portfolios are stuffed with it.  In fact, our main Long-Term Portfolio has more cash ($890,000) than value ($878,000) thanks to all the short puts we sold.  

I already sent out an extensive market report early this morning so I'm not going to repeat myself analyzing today's move (it was also tweeted).  The most important parts are:

What a start, Europe is down at the 2.5% line already and our Futures are off about 1% but those should hold so we can play for bounces at 15,500 (/YM), 2,040 (/ES), 4,470 (/NQ) and 1,090 (/TF) but tight stops if ANY of them fail.  Nikkei in free-fall at 15,600 and that's a fun spot to play as well (/NKD) – same rules.  

Oil hit $35.24 and now $35.50 and NOW it's a good time to press USO since $32.50 is silly (could happen, but silly), so worth a chance here.  Not too keen on risking it on /CL, though, closer to $35, but certainly not under the $35.50 line. 

Watch that $37.50 line on Brent (/BZ) – if that goes back over, then you can follow long on /CL over the $35.50 line but it's Europe that's dragging us down at the moment.

IFF Silver (/SI) holds $15.05 (now $15.06) AND Gold (/YG) holds $1,230, THEN I like /SI long as gold has taken back the losses and silver is lagging behind.  Copper shows there's no industrial demand, so be very careful with Silver! 

We'll see how bouncy our markets can be but I was encouraged as the EU markets were down at the 2.5% line, where our 5% Rule™ dictates a 0.5% bounce was very likely.  As you can see from the /NKD chart, we're already up 85 points at $5 per point for a gain of $425 per contract and we put a stop in at 15,670 to lock in $250 but give ourselves room to run - hopefully back to 15,800 or 15,900 if the Dollar gets stronger (now 94.70). 

As I said, I already posted about all that this morning for our Members and what I want to emphasize this morning is DON'T BUY TESLA (TSLA)!  That's right, I'm going to try to stop people from making a terrible mistake and following the lemmings pouring into this overpriced auto company using (gasp!) LOGIC!  

TSLA recently announced the Model 3 and it's going to cost $35,000 stripped and, per Elon's own math, $42,000 with "normal" options, including a battery that actually gets the claimed 210 miles on a charge.  And that right there should tell you what's wrong with Tesla - they lie, they exaggerate, they make excuses - constantly.  Is that the kind of company you should invest in?  

Yes, TSLA has taken almost 300,000 $1,000 reservations for the Model 3, which is very impressive but TSLA customers lose their $7,500 government credit once the company sells more than 200,000 cars and 100,000 have already been sold so 2/3 of those reserved Model 3 customers may not get the rebates they expect unless the rules change under the Trump administration.  

TSLA just yesterday announced that they missed their production targets of existing Model S and X cars - delivering just 14,800 vehicles vs 16,000 expected - a 10% miss.  Yet Musk wants 300,000 depositors to believe that, in just two short years, the company will be delivering 50,000 cars a quarter and, even then, since 15,000 are the current models, that's only 35,000 Model 3s and it will take 10 quarters to work through just the current backlog - call it two years assuming they continue to ramp up production at that pace.  

But it's that pace that raises all sorts of red flags.  Tesla has been making cars for 14 years and they are still struggling to deliver on a 60,000 car annual pace yet they just took deposits for 5 years worth of cars at their annual production rate.  TSLA has 13,000 employees so, even at maximum efficiency, they would have to hire and train another 6,000 to double production - and that's being super-generous.

Hiring and training 50% more people than you have is not a one-year job - imagine trying to do this in your own company.  Not only that, but think of the cost!  TSLA sure isn't because they do not take into account any of the costs of more workers or more factories or more machines along their magical path to doubling sales.  It's as if they can just flip a switch and double production - even though they just blew production goals by 10% in the current quarter.  

Now, even if we ignore all that and have faith that Elon will just wave his magic wand and crank out 100,000 additional perfect cars a year starting 2 years from today - that still fills just 1/3 of the Model 3 reservations in 2019.  At $42,000 per car, that's $4.2Bn in sales on top of Tesla's existing $4Bn and you'll see "analysts" like Andrea James at Dougherty, doing the lazy math and declaring TSLA's stock can go from $250 to $500.  

Ridiculous doesn't even begin to cover a statement like that.  Nor does absurd.  Ludicrous springs to mind, as the definition is "so foolish, unreasonable, or out of place as to be amusing" - but it's not amusing when I see otherwise rational investors considering throwing their money at this ridiculously overpriced paper tiger of an auto company.  

As I mentioned above, TSLA sold $4Bn worth of cars in 2015 and, in doing so, they lost $888M or about 20% of sales.  Like our friend Jeff Bezos at Amazon:  Sure they lose money on every sale - but they make it up with VOLUME!  Sadly, in the world of car sales, 60,000 cars is not volume either - it's what most car dealers consider a failed model.  TSLA, oddly enough, is not even the World's best-selling electric car - Warren Buffett's BYD is by a wide margin:

BYD has 187,000 employees and sells $9.3Bn worth of cars a year and is valued at $21Bn despite making just $70M per year (though that's still $958M more than TSLA!) and tight margins are normal in the car business but losing $14,800 per car delivered is not!  That's what TSLA is currently doing - losing almost $15,000 per car.   That's where GM was right before they collapsed but at least their losses were due to mostly to unsustainable pension plans and legacy costs they had built up over 100 years - TSLA is losing that much per car at 14!  

Tesla is neither new enough or old enough to have that excuse and, at the rate they are burning cash - the $300M in deposits they have collected will only last them about 3 months before they have to dilute themselves further to raise capital.  Oh, and a note to Tesla depositors - those deposits are not in escrow (it's not even a real deposit), the company is free to use your money and, if they go bankrupt, you will get in line with their other creditors to try to get your money back - good luck!  

At $250 per share, TSLA currently has an implied valuation of $33Bn or about $550,000 per car.  That means TSLA needs to make a $5,000 profit per car 1,100 times in order to pay you back your $250.  Let's say they make $5,000 per car instead of losing $15,000 and let's say that happens instantly because Elon will wave his wand tomorrow and make it so.  Even then, if they sell 600,000 cars instead of 60,000 cars and those 600,000 cars make $5,000 each in profit - that's just $3Bn a year.  Of course, that's never going to happen, but that's the best case.

The real case is GM, who have a $46Bn market cap and make $5Bn a year or Ford (F), who have a $51Bn market cap and make $7Bn a year, both with about $150Bn in annual sales - 37.5 TIMES what Tesla sells.  Yet TSLA is already priced at $33Bn and, at $500, they would be at $66Bn - about 40% higher than their competitors.  Clearly that's insane but the $33Bn figure is already insane at $250 a share and that would be IF TSLA's books were showing the true numbers - WHICH THEY ARE NOT!  

As noted by Zero Hedge, if you were to apply Generally Accepted Accounting Principles (GAAP) to TSLA's earnings, they would look like this vs the non-GAAP earnings they reported:

That's 150% worse than the $888M they reported losing - if you do the math like an accountant, instead of like Elon Musk.  Again, if you use actual accepted accounting practices to analyze the numbers, you'll see that my estimate of $300M lasting Tesla a whole quarter may be far too generous as they burned $450M in December alone!  

How many red flags do you need to stay away from a company?  This will be the biggest "I told you so" of them all if I have to refer people back to this article down the road so please let it be a simple warning - there are 9,000 other stocks to invest in - this doesn't have to be one of them.  

$250 is our shorting line for the stock though we haven't made an official play yet as it's very dangerous and goes up for irrational reasons and the CEO tends to manipulate the stock by tweeting out well-timed disclosures and, of course, people like Jim Cramer steer the sheeple in like a carnival barker so they can get fleeced at the top by his hedge fund buddies looking for the exits.  

Please, be careful out there!