Friday, May 17, 2013

Stupid Is The New Black–Tesla Stock Worth More Than Fiat

The only reason someone starts an auto company is because of passion or stupidity or both.   Sometimes that combination actually can be a winning one for obvious reasons.  That is, if you are passionate enough, you can often create solutions to large obstacles.  If one contracts much of the component engineering and/or production to the massive excess capacity of auto suppliers, it certainly is possible to start an automotive  company comparatively cheaply.  ie, The excess infrastructure, engineering, production and design capacity exists and that can allow for a reasonably low-cost startup when using a prudent sourcing, engineering and design strategy.   In fact, Tesla probably could not even exist were the economies of scale and excess capacity within the auto supplier and auto industry not to already exist.  It uses a former GM facility and its stamping equipment to build its cars and in a bout of corporate cooperation, Toyota formed a joint venture with Tesla to share battery packs with its RAV4 in addition to much of the other supplier-provided componentry it uses.  But battery advances are happening so quickly Tesla almost certainly will have to change its strategy.  And, at what cost to a startup in a very capital intensive business?  Future manufacturing and production innovations may  make the success of smaller auto firms a reality but today building a sustainable boutique auto firm is challenging at best.   Tesla relies heavily on the existing overcapacity in the auto industry just as Fisker did. 

I certainly have no desire to minimize the accomplishments of Tesla Motors.  In a financialized world where temporary perceptions of wealth are created through pushing paper, they actually make something of value.   And they seem to have gotten a lot right.  That said, I suppose anyone with a guaranteed government loan and a few dozen laid-off automotive designers and engineers in the Detroit area could probably start a car company.   But this is a very tough business and that is the reason why more people aren’t starting auto companies.   There are large barriers to entry and as noted in many posts over the years the capital requirements to sustainably engineer, design, build, maintain and service a single automobile model are very substantial.  The cost to actually build a sustainable auto company are even more obscene.   Any single leap in technology could leave a startup with limited capital lagging competitors or worse.  And without deep pockets, it’s hard to catch back up.  Tesla is essentially a single model auto experiment that has yet to prove its sustainability.  Personally, I wouldn’t classify it as a legitimate auto company.  Yet.  They haven’t even begun to tackle the endless red tape and legalese of dealership franchise laws.   And that’s just the beginning. 

Over the last five years Tesla’s cash flow has never been positive and it has deteriorated  500% in that period of time.  Now some of this may be explainable as they ramp up production but then again, taking ten years to ramp up production isn’t going to lead to success.  Additionally, Tesla benefits from government subsidies for electric vehicles or it would be an even tougher road to profitability.  And although Tesla reported a minor profit this past quarter, it is bleeding cash at a very rapid clip.  In other words, Tesla already needs to raise more capital.  So, just a few days ago the company announced it was going to issue more stock and debt.  And its founder was going to purchase $100 million in shares at this price.  Even though that means stock and value dilution, the shares exploded higher.  Ahem.  Obviously, the rationale for a higher stock price would be that Tesla needs more cash so its business must be good?  Ha!   The reality is there is no rationale other than financial manipulation.  Tesla is lucky that credit is extremely loose right now thanks to the money-pumping Fed that is recreating more future crises.  If the economy turns south again, Tesla’s cash flow problem won’t be easily solved as a company with a cash flow problem isn’t likely to be able to easily tap credit markets, if at all.

“The stock (Tesla) is trading like it’s 1999 and we’re in the Internet bubble again,” said Maryann Keller, principal at consulting firm Maryann Keller & Associates in Stamford, Connecticut. “It has nothing to do with Tesla’s fundamentals. It has to do with pie-in-the-sky aspirations that don’t reflect the realities of the auto industry.”   -- Maryann Keller, auto analyst

It has been half a dozen years since Maryann’s name has come across this blog but she’s the real deal.   I used to write extensively about the auto industry and my knowledge of its   operations is competent.  Maryann is the only auto analyst I trust.   Let me also addend Maryann’s remarks.  Tesla’s stock price is really more of a reflection of too much leveraged money chasing too few financial assets rather than pie-in-the-sky aspirations although one could proffer that they are on in the same.  Aspirations matter not if there is no speculative money bubble to ram Tesla’s stock to the moon.  One of my long-time theses on here is oil is headed for a price collapse as the reality of this cycle reveals itself.  The fundamentals behind that thesis are starting to line up quite nicely yet no one believes this is possible because propaganda has conditioned people to believe we have run out of carbon-based energy sources.   If that happens, electric cars are likely to head the way of the Dodo bird without some very substantial propping up by government.  I suspect government will have its own problems that will be too distracting to worry about electric car subsidies.   Then there is the small problem of the largest money bubble the world has ever seen and that it has no reflection of true wealth.  As central banks torch their currencies, the future for expensive cars may not be a very compelling one.   These factors may mean the limited resources of Tesla could very well lead to its demise given it is exclusively an electric car company without the intellectual capital, operations, money or lines of credit needed to adjust.  ie, Their $90,000 electric car may serve nicely as a dual purpose boat anchor.

Wall Street is now valuing Tesla Motors at a higher worth than Fiat.  Tesla has produced 10,000 cars in ten years.  Its current electric car with a price tag upwards of $90,000 has received great reviews.  I have no doubt it is a great car for the price of a home in many markets.  But let’s get real.   Fiat makes 20,000 cars a day.  Literally.  (Well over 4 million a year)  That includes the brands of Ferrari, Alfa Romeo and Maserati. (drool)   The new Alfa 4C may be the most beautiful car ever made and its going to be $35,000 less than a Tesla when it hits showrooms in a month.  Plus it will be powered by an internal combustion engine which I consider to be a plus when it comes to sustainability.  At least given current technology and developing macro factors.  Bigger surely is not better when comparing Fiat to Tesla.  And as noted on here many times, this cycle will likely see the demise or substantial shrinking of many large corporations.  That might even include Fiat.  But critical mass is very important in a highly capital-intensive business.  Fiat has that critical mass.  It’s intellectual, design, engineering and production capital are staggering comparatively.   That Tesla is worth more than Fiat is absolutely ludicrous Wall Street bubblenomics.   That Tesla’s owner has agreed to buy another $100 million of stock at this price shows how this current generation really has no idea what the future holds for them.  They have lived in a money bubble for so long that most have no idea what reality looks like. 

Tesla’s stock price is simply another reflection of the endless distortion of financial assets that defines our criminal financial and monetary system.  Endless speculation has driven Tesla to a level that is absolutely ludicrous while the city of Detroit, as just one counter example, has greater than 50% unemployment.  ie, The United States’ citizens of Detroit are denied access to society’s capital needed to become productive, inventive, creative and self-sufficient contributors to democracy while private, for-profit capitalist financial predators steal our democracy’s money to manipulate Tesla’s stock for their own outrageous fraud and paper profits.  Who wins and who loses? 

What did the United States’ citizens of Detroit do to deserve their enslavement to poverty and injustice?  Absolutely nothing.  Victimization is inherent to class-based, private for-profit capital.   So Tesla’s management, the investor class,  hedge funds and investment bankers become richer for doing absolutely nothing productive while tens of millions of American citizens rot.  All the while democracy loses its economic vibrancy that would be gained by empowering the citizens of Detroit and elsewhere.    For now.  These endless frauds and schemes are just perceptions of wealth and just like every other financial bubble and every other false perception of reality, eventually the illusion disappears and reality reveals itself. 

This is the same type of financial fraud that defined the Internet bubble and almost everything in our economy since the Reagan administration-created S&L crisis.  In fact,  we have a current  generation of uber wealthy who have all been benefactors of the massive fraud that defines private, for-profit capital and its deregulation.  Untold numbers of companies came public in the 1990s with no real business model and no earnings whatsoever.  Untold hundreds of thousands of people defrauded society by going public and looting the treasury with the help of Wall Street during the deregulated Clinton era.  Just as untold numbers have defrauded society since with ever-more financial schemes and bubbles.   Many of these people are considered our corporate and social leaders today because money talks when democracy is for sale.  The corporate state wrongly considers class-based wealth as a barometer of intelligence and so those who have the money make the rules and that means the rules are going to reinforce their continued accumulation of society’s resources.   It’s everywhere. 

Seemingly nonfinancial firms are just as complicit.  Even firms like Google that are benefiting from the massive ad bubble.  Their IPO price and subsequent revenue and earnings are all driven by a larger dynamic of financial fraud created by the money bubble.   Were these not bubblenomic times, Google’s IPO price, ad revenue and profit may be 10-20% of what it is today.  Google itself may be completely unaware of this dynamic and running its firm by the rules but it still contributes to economic aberrations and manipulation by assigning paper wealth to people that isn’t actually real.  As noted on here countless times, that too will pass when the corporate ad bubble pops and/or the dollar loses its reserve currency status.  (Although Google, like every other deregulated capitalist firm large enough to manipulate governments rigs the rules and cheats democracy whenever it can get away with it.  Just another example of what has been written on here time and again.  Corporate tax receipts are at the lowest levels since at least the 1950s.  They are probably the lowest in history but I don’t have data going back that far.)

These dynamics are representative of our financial and corporate capitalist system’s endless crimes of treason and crimes against humanity.

No assets on Wall Street are valued at any level of reality.  We haven’t seen stocks priced at fair value in decades.  Which is one reason why my long-time downside target for the S&P is and remains at 200-450 or its 1990-1995 price levels.  It’s all one big Ponzi scheme in the biggest financial bubble the world has ever seen. 

We need a public banking and financial system whose primary intent is to serve democracy and human development and not financial looters, corporate masters, crony networks, criminals and predators.  

posted by TimingLogic at 11:35 AM

Links to this post:

Create a Link

<< Home