Sometimes the articles that float across my computer screen leave me literally scratching my head or yelling at the images. Thursday 8/17/17 has turned out to be one of those days. I have a feeling Elon Musk is having some of those thoughts today too or perhaps throwing things around his office.
(source: MarketWatch.com…no kidding)
For months now writers like Montana Skeptic, Bill Maurer, and yours truly have questioned the almost saintly halo bestowed upon Tesla, Inc (TSLA) and its much-adored CEO Elon Musk as saviors of Mother Earth. For months if not years, fans have waited breathlessly for any tidbit of information or a Tweet from the Great One. Any new product is hailed as a disruptive force to be reckoned with by any who dare to get in its way, even though none of the products are ever actually available for purchase at the time of their unveilings.
The tides they are a-changing.
But a sea-change seems to have begun. Even one of the bull’s leaders, ValueAnalyst (much to his credit) sucked up his pride and admitted not all is rosy in Teslaland in his latest article on the exodus of institutional investors in Q2. My take on the same event focused on the repercussions of this development for the small investor, which I believe could prove substantial.
I loved Anton Wahlman’s article dissecting Morgan Stanley’s Adam Jonas’ August 14th research note on Tesla. Jonas’ work was a questionable piece of writing, beneath his normal standards.
It had been a good week for me and I was ready to take the rest of the week off from writing. After attending a Jacksonville Planning Commission meeting and joining my sister and nephew for a late lunch, I arrived home and nearly got knocked off my chair by two new articles released while I was gone.
First, Trent Eady, a devout Tesla bull releases an article entitled “Why Tesla Might Fail”. Huh? Okay, seriously, did I get hit over the head coming in the front door and now I am hallucinating? C’mon SA, am I being punked here?
Then as I am recovering from that article and settling back into my chair I open my Fidelity account. Under news items for Tesla is a Marketwatch heading titled “Want to fight climate change? Don’t invest in Tesla” AW C’MON! ARE YOU KIDDING ME? Where are the hidden cameras capturing my reactions? What is going on here people? I go into town for five hours and I come home to find my world has turned upside down!
But that isn’t even the best part. I open the Marketwatch article and the article’s title comes from a research paper from none other than… you guessed it, MORGAN STANLEY! At that point, I headed to the kitchen for a glass, ice, and my favorite bourbon. I knew I needed a drink (or two) to write this article. While there I found myself wondering if a similar “event” is how Hemingway started and developed his “style”? Ultimately I passed on the bourbon and reached for the sweet tea.
Let’s break this down.
In the last seven days or so, Tesla succeeded in selling $1.8 billion in 5.3% 8-yr junk bonds. Sounds great until you realize that is about 4 months worth of cash burn at current rates, and the interest payments will be just over $95 million a year for eight long years. I have read many case studies of individuals going bankrupt just this way. When the credit lines max out, payments can’t be met and the house of cards collapses. I have not seen the filings but I have no doubt Morgan Stanley was involved here and collected fees.
Next, we learned that the Chinese are primed to launch efforts to spend $1.5 trillion over the next decade buying up every manufacturer they can find, perhaps starting with Fiat Chrysler Automobiles (NYSE:FCAU). Their angle is to focus on their leadership in the electric vehicle markets. A threat aimed pretty much directly at Tesla.
Then Toyota (NYSE:TM) releases information that makes it appear they want to leap frog the Li-I battery makers and users and proceed straight to solid state batteries by 2020-2022. If they succeed LI-I batteries will be pretty much obsolete. A technology where Tesla has invested $ billions.
Next up on Wednesday, with all the 13F SEC filings posted for 2Q17, we learn that the institutional investors have shed 10% of their holdings in Tesla shares, with Morgan Stanley selling over 2.1 million shares or 60% of their holdings. In total, more than 10.2 million shares moved from institutions to other investors in Q2. It would appear institutional confidence is Tesla is waning.
And now this article from MarketWatch on Morgan Stanley’s CO2 research. I believe the results laid out in the article are valid. For some time I and others have argued that how the electricity that powers EVs is produced must be added into the total equation of the effectiveness of EVs. Unless you are powering your car from stored energy produced from a field of solar panels, the electricity to power BEVs is being converted from another energy source. Whether that power plant is fueled by coal, natural gas, hydroelectric or nuclear power, the generation probably has a CO2 footprint that must be taken into account. As the article points out in Tesla’s case the CO2 expended to create the electricity exceeds the reductions generated by their vehicles.
I have argued before (to mostly deaf ears) that the amount of electricity that will be required to meet the goals of some of these EV mandates by countries in Europe and even China itself will require the construction of scores of new power plants around the globe to support the necessary grid expansion. How is that effective at helping the planet? Heavy construction machinery such as bulldozers and cranes run on off-road, heavy polluting diesel fuel. Has anyone added those CO2 emissions into the overall equation?
Much of my work in the aerospace industry in the 80’s and early 90’s centered around detecting and solving those unforeseen consequences that occur with every major program. Someone, Morgan Stanley in this case, just documented the real effects of BEVs. That is a frontal assault on Tesla and several major BEV builders in China.
Would it not be more effective and cheaper to focus on cleaner fuels that could be used in existing vehicles, even if it meant converting the fuel systems? This option would allow for much faster deployment. This option also does not require the enormous expense of creating massive recharging networks across the planet for use by EVs when home recharging is unavailable. While I will be crucified by the longs for daring to speak such things, and it no doubt makes perfect sense, such a plan could destroy Tesla’s growth.
Tesla fans have long enjoyed mocking companies like GM (NYSE:GM) and Ford (NYSE:F) for not taking a greater and faster stance on EV production. These companies get falsely painted as environmentally insensitive. Maybe now others will understand why they have been dragging their feet. Maybe they realized sooner or later the world would take off its blinders and see that the BEV revolution is not what it is cracked up to be. That at the end of the day Ford, GM, and others will not have blown $ billions of their investor’s money chasing a pipe dream with no actual benefit to the planet or our overall health as a civilization.
Today’s Morgan Stanley report needs further validation from other sources. But if proven valid, will shatter the fan’s belief in Tesla and Musk will have much to answer for. The most curious aspect of this report is this is the kind of information that could have been easily detected long ago and could have also easily been swept under the rug. Morgan Stanley has chosen not to do so, just three days after one of their top analysts gave a rousing, glowing review of Tesla’s prospects. Could this be as simple as the left hand not talking to the right hand? I find that very hard to believe.
Of course, this could all be because Elon Musk sent Morgan Stanley’s CEO James Gorman an insulting tweet or text, ran over his dog, or insulted his wife Penny at a party. We may never know the truth. But it sure seems someone at Morgan Stanley does not like Elon Musk these days. After today there is no turning back. The potential damage from this research study is real and could be devastating.
Bottom line for Tesla investors is the winds are shifting, the sails are fluttering, and the waves are crashing over the bow of the good ship “Teslapop”. My advice to investors after today is forget what they tell you in an emergency and run (do not walk) to the nearest exit.
Disclosure: I am/we are short TSLA VIA PUT OPTIONS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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