Last week, while the media were wringing their hands over fake news, the Dow Jones Industrial Average jumped another 354.68 points or 1.7% to close at a record 20,624.05, hitting seven straight days of record highs. The S&P 500 popped 1.5% to a record 2351.15 and the Nasdaq Composite Index gained 1.8% to a record 5838.58. While Trump’s opponents may fear for the future of the Republic, they would do better to fear for the future of their 401ks because this rally is running on fumes.
The truth is that markets thrive on investors’ stupidity and we are seeing a perfect example of that today while markets rally on nothing more than hot air. Believe me, I thought the market would rise after Mr. Trump was elected; the opportunity to rid the country of 8 years of anti-growth policies was a game-changer that promised good things in the future. But that doesn’t mean that investors should be discounting a decade of growth and two terms of promises, many of which will not be kept, in a one month period.
The market is well ahead of itself and poised to correct. Sentiment and other warning indicators are flashing red. Investors chasing stocks at these levels are taking big risks. And one of the biggest risks is Tesla Inc. (NASDAQ:TSLA), which plans to announce earnings after close today.
TSLA Can’t Expect Anything But Bad News – Here’s Why
The nausea factor has risen so high for those of us who have lived through earlier bubbles and know how this is going to end that all of the Dramamine in the world isn’t going to settle our stomachs. When you see the type of near-parabolic market moves we saw recently – seven straight days of record highs – it feels like we are partying like 1999 except Prince is dead and that party ended with one of the worst market crashes in recent history. Naturally, these moves are accompanied by epic levels of smugness by what I call the country club crowd, by whom I mean the amateur investors who know nothing but think they know everything simply because the value of their retirement account statements has risen (and whose after-tax value, by the way, is much lower than they think, but that’s a story for another day). These are the same know-nothings who weep the moment their accounts are down a couple of percent and blame their brokers (er, excuse me, their “wealth managers”) for putting them in such “risky stuff.”
These are the same amateur investors who have bid up TSLA, one of my least favorite stocks, to sky-high valuations. Unfortunately for them, the party isn’t going to last forever.
Today after market close, TSLA is due to report earnings, which in this case means it is going to report a loss unless one of two things happens: it cooks the books like it did last quarter, or God came down from heaven and bought thousands of its cars last quarter.
TSLA is the brainchild of the PT Barnum of our age, Elon Musk. But PT Barnum, as far as I know, didn’t flout the securities laws or break virtually every promise he made, and he did provide a real live circus as advertised. Mr. Musk only provides a fraction of what he promises while claiming every excuse in the book for his failures and engaging in every accounting trick in the book to try to cover his tracks. And then for good measure he decided to bail out another money-losing company he owned, Solar City (SCTY), adding hundreds of millions of dollars of losses to Tesla’s bleeding balance sheet.
Investors ignored all of these facts to bid the stock to a recent high of $280.98 after the company opened its empty Gigafactory in Buffalo (a development that made me physically ill). We already hear from Goldman Sachs that Tesla missed its fourth quarter delivery target, we know that it pumped up last quarter’s earnings with the last California tax credits it was eligible for and by stretching payables by hundreds of millions of dollars, so Mr. Musk will have to pull new rabbits out of his hat to put lipstick on this quarter’s pig of an earnings report. I can’t wait to see how Wall Street’s sycophantic analysts and the heavy breathers at CNBC explain away the bad news next week – no doubt they will blame Mr. Trump and the Russians!
The company’s cheerleaders (i.e. large shareholders) are working overtime to pump up the stock. Highly respected investor Ron Baron recently said he expects to make four times his money on the stock (from current prices) by 2020. With due respect to Mr. Baron, that statement is not only delusional but completely irresponsible from a man who is widely respected by individual investors. Unless Mr. Baron is using options (and he gave no indication he was), the odds of Tesla stock rising to $1100 a share by 2020 is zero. If Mr. Baron wants to make claims like that, he should share his research because he is the type of investor that others follow and he is putting other people at risk with his hyperbole.
I expect Tesla to announce a large loss accompanied by the usual unverifiable production goals and other promises. Investors with brains will sell the stock and those who want to behave like Fox Mulder in The X-Files and want to believe will continue to behave like members of a cult. But they should remember what Groucho Marx said – they should not want to be members of any club (or cult) that wants to have them as a member. Anyone with a functioning cerebellum can see that buying Tesla stock is a mistake from a hundred miles away. As I tell people, keep the car and sell the stock. (As I recommended in an earlier issue of Sure Money, investors should buy TSLA January 2018 $100 puts (TSLA180119P00100000).)
And make sure your cerebellum is functioning whenever you invest in stocks. Right now, too many people have checked their brains at the door.