BOOM Finance and Economics 10th March 2024 -- a Global Review
WEEKLY -- On Sunday -- All previous Editorials are available at LinkedIn and at Wordpress https://boomfinanceandeconomics.wordpress.com/
BOOM HITS THE TARGET YET AGAIN – THIS TIME IN CHINA
TESLA SHARES FALL OUT OF BED
US ELECTRIC CAR SALES GROWTH IS SLOWING
POTENTIAL PROBLEMS FOR MUSK, TESLA AND TWITTER
TRITIUM COLLAPSES FURTHER – IS THE ELECTRIC DREAM A NIGHTMARE?
BOOM HITS THE TARGET YET AGAIN – THIS TIME IN CHINA
It looks like BOOM’s recent forecasts may have nailed a major market turning point yet again, this time in China‘s stock markets.
On 21st January, BOOM wrote “BOOM’s China trade indicator has turned upwards in the last 2 months and is gaining strength. This is a reliable sign of increased Chinese trade which usually precedes a resurgence of the domestic economy.” And …. “… if the upswing in external trade continues, then we should soon see a rebound in the Chinese economy and a subsequent rebound in stock prices.”
Then, on Sunday 4th February, BOOM wrote -- “the Chinese stock market indices have not yet shown a base formation. However, with huge investment inflows and a recovering trade picture, there is potential here for a significant turnaround soon in stock market valuations.”
Check the charts below to see what happened the next day, 5th February.
Then, on the 18th February, BOOM wrote --
“China’s government is communist. However, they must now encourage all of their citizens to become buyers of shares in Chinese companies. If they don’t, the Chinese stock markets will be at risk of progressive slow melt down with no end. And if that were to happen, the ownership of corporate China will become locked into fewer and fewer hands, creating an elite class of citizens who own the productive assets of China. This elite class would become the robber barons of China by default, capable of exerting great influence. China’s communist ideals could then become corrupted by the financial power of an organised group of oligarchs.
None of that is compatible with communist ideology. Therefore, the best way forward is for the central government of China to encourage its citizens to start buying shares as soon as possible.
“BOOM is expecting such a direction from the Chinese government soon. It is actually inevitable because the consequences of not doing this are too great to ignore.”
So – what happened? The Shanghai Stock Index hit a sharp Bottom on Monday 5th February around 2,640 (the day after BOOM made the 4th February forecast) and has been climbing ever since to reach 3050. It has gained by 15.5 % in that time frame – just over one month.
BOOM knows that senior Chinese readers are reading and watching BOOM. Many major fund managers, central banks and finance professionals are also reading and watching.
SHANGHAI STOCK INDEX OVER 5 YEARS
SHANGHAI STOCK INDEX OVER 6 MONTHS
TESLA SHARES FALL OUT OF BED
One month ago, on 11th February, BOOM wrote this about Tesla -- “Tesla shares (TSLA) finished the week up by 3 % which sounds promising. However, they did so on progressively falling daily volumes. This is an unconvincing bounce. BOOM is waiting and watching closely for further weakness here as this is the “moment of truth” for Tesla.”
Since then, Tesla shares have slowly traded to slightly higher prices. However, progress has continued to be unconvincing for tentative buyers. Last week, it all came to an end with Tesla shares falling out of bed during Monday’s trading session. On that day, the share price fell by more than 7 %. By the end of the week, they had fallen by almost 13.5% and were desperately trying to hold above $ 170.
The TSLA Weekly chart from Stockcharts.com shows what has happened over the last 12 months.
So – what is happening to Tesla? There are many problems --
1. China Sales Volumes and Revenues are falling
2. US Sales Growth and Revenue Growth are slowing
2. A major Tesla investor seems to have lost enthusiasm for the stock
3. The Tesla factory in Germany was shut down due to apparent sabotage to its power supply
4. Major regulatory and legal problems are affecting Elon Musk and Twitter (“X”).
Firstly, Tesla is facing stiff competition in the largest market for electric cars in the world in China. Sales numbers are falling there and so are revenues. BYD is the major competitor but there are many other Chinese companies to contend with such as XPeng. BYD is about to slash the price of its updated Yuan Plus SUV by 11.8%. That is a huge discount which Tesla will have difficulty matching.
Data from the China Passenger Car Association last week showed deliveries from Tesla’s Shanghai (so-called) “Gigafactory” are at their lowest point in more than a year. Tesla is trying to maintain sales through price reductions but, of course, this causes revenues to fall and inspires the competition to drop their prices as well.
Tesla delivered 60,365 vehicles from its China factory in February. That marked the lowest level since December 2022 and was 19% lower year-on-year. A horror result. Tesla’s China factory produces over half the company’s global production.
The 12 month chart for BYD shares, as traded on the OTC Market in the US, is almost identical to Tesla in overall appearance. Both companies began to downtrend in August. Investors have been selling since then. BYD’s sales in February were 37 % below the numbers achieved in the same month last year.
XPeng shares are following the same trajectory.
This suggests that car buyers are slowly becoming reluctant to buy any electric car.
The share charts for other electric car companies, NIO and Rivian, look exactly the same.
Perhaps August 2023 will go down in history as the end of the electric car frenzy?
NIO 12 MONTHS
RIVIAN (RIVN) 12 MONTHS
US ELECTRIC CAR SALES GROWTH IS SLOWING
Sales growth in electric cars is now slowing in the US.
Note the decline from 3rd Quarter 2023 onwards.
US SALES GROWTH – Source: Cox Automotive – Quarterly since Last Qtr 2021
TESLA REVENUE GROWTH QUARTERLY SINCE 2020 Source: Refinitiv
Note (again) the sharp decline from 3rd Quarter 2023 onwards.
LOSS OF INVESTOR ENTHUSIASM
Last week, a major enthusiast investor for Tesla, Ross Gerber, was reported as being less confident about the company’s future. Gerber’s wealth management company manages US $ 2.3 Billion for clients, according to its website. He suggested that Musk has too many projects and problems on his plate. Perception matters in the world of investment, especially for any company without a long history of net profits and regular dividends. Unfinished artificial intelligence and self driving technology projects are a distraction which means the company is now being valued as just another car supplier. AI and self driving are the reasons stated by many long term investors for Tesla’s valuation premium.
GERMAN FACTORY PROBLEMS – TESLA STOPPEN
Last week, the Tesla factory in Germany, near Berlin, was the target of a sabotage attack by environmental activists. The factory had to shut down production for a few days.
Yes – some environmentalists in Germany are opposed to electric cars. BOOM expects this trend to grow in many nations very soon indeed.
Reuters reported that local media had published a letter from a far-left activist organisation called the Volcano Group that claimed responsibility for the incident, in a 2,500 word attack on Tesla and its billionaire CEO Musk. The letter apparently said "Tesla consumes earth, resources, people, workers, and in return spits out 6,000 SUVs, killer cars and monster trucks each week."
The factory manager made the following comment. "We are shocked by what happened today. It's the second direct attack on power supply to the factory and there was a third attack on the railway nearby. We are very concerned.”
Local residents have also previously blocked expansion at the plant. They were unhappy with plans to cut down trees in the area. A group of climate activists, calling themselves, "Tesla Stoppen" which involves 80 – 100 people are also attempting to stop the plant from expanding.
POTENTIAL FINANCIAL PROBLEMS FOR MUSK
And then there are the lawsuits and regulatory issues to consider plus the financial aspects in regard to Musk’s newest project of scale, Twitter. These all have an impact on Tesla indirectly.
Musk acquired Twitter for US$44 billion back in October 2022. He sold shares in Tesla to help him fund the deal, possibly up to $ 27 Billion worth. According to a report by Al Jazeera at the time on 28th October 2022, the total sum of the deal also included $ 5.2 Billion from investment groups including Larry Ellison, Qatar’s Sovereign Wealth Fund and Prince Alwaleed bin Talal of Saudi Arabia. The rest of the money – about $13 Billion worth – was provided by bank loans, including from Morgan Stanley, Bank of America, Japanese banks Mitsubishi UFJ Financial Group and Mizuho, Barclays plus the French banks Societe Generale and BNP Paribas.
These loans are guaranteed by Twitter, not by Musk himself. It is the company which will assume the financial responsibility to pay them back.
If Twitter falters in revenues and gross profit, then the loans could theoretically become a default risk. In such a situation, Musk could sell some of his personal assets to fund Twitter with personal loans. Such loans could then be used to pay the outstanding interest on the bank loans.
Or Musk may have other options – (1) to sell some of his personal Tesla shares and buy out the banks or (2) have Twitter borrow more money from the original banking consortium to cover the loan repayments (unlikely) – in effect, capitalising the interest or (3) borrow from yet another banking consortium hastily assembled to pay out the original consortium if and when they become disgruntled lenders.
Selling Tesla shares to fund Twitter’s interest payments buys precious time and causes minimum disruption. All the other options are more public and alert Tesla investors that the whole pack of cards may collapse.
The possibility of Musk becoming a significant seller of Tesla shares would have a major dampening effect on their price. He reportedly owns 715 Million shares which at $ 175 (Fridays closing price) are valued at US$ 125 Billion. On paper, Musk could easily raise the $ 13 Billion, the capital sum owed to the Twitter banking consortium, by selling just over 10 % of his Tesla shares. However, this could damage the share price very significantly. In such a scenario, the share price of Tesla could plunge back to US 100 or below. In such an event, Musk would still retain approximately 640 Million shares. Even if the share price fell to $ 50, that shareholding would still be valued at $ 32 Billion, a sizeable sum. But the reputations of both Tesla and Twitter would be severely damaged.
So it appears that Musk has taken a big gamble with his investment in Twitter, but the fact is, he can afford to. This is the advantage of his extreme wealth as measured in Tesla shares. Big wave riders are always wondering if the next big wave is going to be the one they don’t survive. That is why they do it, by the way. Musk can take this gamble and still wind up as a Billionaire even if the whole pack of cards does collapse. Investors in Tesla may suffer a different outcome, depending upon their average entry price.
Reference: https://www.aljazeera.com/economy/2022/10/28/how-elon-musk-financed-his-twitter-takeover
POTENTIAL LEGAL PROBLEMS FOR MUSK
The deal to buy Twitter upset a lot of people. BOOM saw one media report that stated, under Musk’s ownership, the company has stopped paying rent on some of its offices, which has led to lawsuits and evictions. It has also been reported that Musk laid off about 80% of Twitter staff after he took over the company. Nobody really knows the extent of the carnage. Several class action lawsuits have been launched with sacked workers seeking more than US$ 500 Million in severance pay. In the suits, this statement was reportedly made -- "This is the Musk playbook: to keep the money he owes other people, and force them to sue him".
And last week, another lawsuit was filed on behalf of four former high-ranking Twitter executives. They're asking for a total of more than US$128 million in unpaid severance.
Twitter's sacked executives reportedly stated in the lawsuit documents -- “Because Musk decided he didn’t want to pay Plaintiffs’ severance benefits, he simply fired them without reason, then made up fake cause and appointed employees of his various companies to uphold his decision.” And “He claimed in his termination letters that each Plaintiff committed ‘gross negligence’ and ‘wilful misconduct’ without citing a single fact in support of this claim.”
THEN THERE ARE THE (EXTRAORDINARY) LAWYER FEES TO CONSIDER
As reported in the mainstream media, the lawyers who blocked Musk's $ 56 Billion Tesla compensation package as being excessive are now seeking a record US $6 Billion legal fee for achieving success in that matter. The fee is payable by the company because the action saved the company $ 56 Billion. Tesla is being asked to pay the legal fee because it benefited from Musk's pay package being blocked. If the company pays the fee via the issuance of Tesla shares, it would not cost them any cash and apparently the lawyers are happy to accept shares as settlement. The fee is roughly equivalent to 30 Million shares in value (at $ 200 per share). However, the number of shares required to cover a fee of $ 6 Billion is rising as Tesla shares fall in price.
The lawyers' request comes over a month after a Delaware judge effectively stopped Musk's $56 Billion pay package because his close ties with the directors who approved the deal weren't fully disclosed to shareholders and the package's performance targets were easier for Musk to meet than the company acknowledged. The $ 56 billion package was the largest ever provided to the CEO of a publicly traded US company, although Musk wasn't guaranteed any salary.
All of this prompts the (now moot) question – was Musk attempting to have Tesla pay him this sum in order to (somehow) help bail him out of his difficulties with Twitter and (possibly) some of his other loss making ventures? We will never know.
TWITTER MAY BE DESIGNATED A GATEKEEPER IN THE EUROPEAN UNION
Then there is Twitter’s operations in the European Union to consider. Musk’s X (formerly Twitter) could be forced to follow a set of strict guidelines in the European Union after the European Commission (EC) announced that it may be classified as a ‘gatekeeper’ under the Digital Markets Act (DMA) and digital antitrust rules.
The European Commission (EC) has explained that companies may be subject to additional regulations if they operate what is described as a “core platform service”. This includes search engines, app stores, and messenger services that have over 45 million monthly active end users, more than 10,000 yearly business users, or over €75 billion ($81 billion) in market capitalisation.
According to an announcement published on the EC’s website on March 1, Twitter/X, Booking.com and TikTok have submitted notifications that their services potentially meet the DMA thresholds. The commission now has 45 days to decide whether to designate the three companies as gatekeepers.
“Gatekeepers” are required to let third parties inter-operate with their services, allow business users to access the data they generate on the platform and to let them conclude contracts with their customers outside the gatekeeper’s ecosystem. They must also seek explicit consent from users to track their activity outside the gatekeeper’s core platform service for the purpose of targeted advertising.
If companies fail to abide by the EU’s rules, they may face fines of up to 10% of their total worldwide annual turnover, or up to 20% in the event of repeated infringements. Businesses may also be slapped with periodic penalty payments of up to 5% of their average daily turnover.
If Twitter becomes designated as a Gatekeeper, then its advertising revenues could suffer. Of course, Musk has already seen this as a threat and is slowly changing Twitter to a paid subscription service and recently announced that Twitter would launch an email service called Xmail (presumably for a fee). But these initiatives may badly affect his user base. Google already has the bulk of the email market with 1.8 Billion active users worldwide and it is free.
NEW CHEAP MODELS PLANNED
Tesla is planning new, cheaper electric cars which will (hopefully) appeal to a whole new market segment. But new products take up a lot of capital and time to develop. Maybe Musk will just start buying other electric car companies and re-badging their already developed products? Last week, Rivian shares rose by 12.6 % while Tesla’s shares fell by 13.47 %. Last week’s closing price values Rivian at a total of US$ 12.5 Billion.
TRITIUM COLLAPSES FURTHER – IS THE DREAM A NIGHTMARE?
Another company worth looking at in the electric car sector does not make any cars. It makes fast chargers, principally for the US market. Tritium explains itself on its website -- On a Mission to Electrify Transportation, Founded in 2001, Tritium designs and manufactures proprietary hardware and software to create advanced and reliable DC fast chargers for electric vehicles. It sells its products in 47 nations and has sold 14,500 DC fast chargers worldwide. However, its shares are in a state of utter collapse. They began life on the Nasdaq stock market in the US two years ago at $ 10 per share. Last week, they closed at 10 cents per share. This is another indicator that the electric car boom may well be over.
Can Tesla survive in such a climate and if so, at what valuation? Time will tell.
Here is the chart for Tritium, Inc (DCFC) on Nasdaq over the last 2 years.
And here is the chart for Tritium shares (DCFC) over the last 9 months
In economics (and finance), things work until they don’t. Do your own research. Make your own conclusions. BOOM does not offer investment advice.
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By Dr Gerry Brady
BOOM has developed a loyal readership over 5 years which includes many of the world’s most senior economists, central bankers, fund managers and academics.