Tesla reports more shady numbers

Plus Fed keeps it frothy, Ford misses chips, Brazil sells out, Credit Suisse stays sorry

Happy Monday! It’s time for a whole new round of Contention -- eight minutes of shrinkflated dissident business news. In this edition:

  1. Stocks sluggish as inflation surges 

  2. Tesla reports more shady numbers 

  3. Rapid Round: Ford slashes for want of chips, Credit Suisse mea culpa continues, Bolsonaro sells it all off

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Stocks sluggish as inflation surges 

Markets ended last week essentially flat despite soaring economic indicators and strong corporate earnings. The Dow and Nasdaq both fell slightly, 0.5% and 0.4% respectively, with the S&P 500 up 0.1%.

Weighing on equities: a recovery that may be at its peak with deep contradictions lurking just beneath the surface.

Thursday saw the release of the first stab at Q1 U.S. GDP numbers, printing a 6.4% annualized rate of growth. Aside from last summer’s reopening surge, this was the strongest quarter for the U.S. economy in 18 years. Gross output has now recovered 96% of its shutdown decline.

Driving the gains: government stimulus, responsible for at least 4.3% of the 6.4% gain. The $1,400 direct checks accounted for the lion’s share of an all-time record growth in personal income, a 21% increase in March alone

This new rabbit is already moving down the rattlesnake to corporate balance sheets, with 86% of companies beating earnings estimates so far, each by an average of 22.7%. But even shining outperformance from the tech megacaps failed to register on stock exchanges.

Facebook, Apple, Amazon, Microsoft, and Google’s parent Alphabet -- collectively called the “FAAMGs” -- all beat on revenue and profit estimates, with an average earnings beat of 41%. Nonetheless, three of the companies saw their stocks drop on reporting day, with an average return of zero across the class. 

All of these stocks -- and the market at large -- have seen huge valuation run-ups over the last year, and it seems that elevated prices have already accounted for this boom. No force has been more important for this rally than central bank interest rate suppression, and Fed Chairman Jerome Powell confirmed expectations last week that the party would keep going for a while to come.

Wednesday, the Fed’s Open Market Committee voted unanimously to keep interest rates near zero and to continue purchasing $120 billion in bonds and mortgage securities every month. This artificial demand raises prices on these assets, forcing down yields, which move in the opposite direction. This interest rate suppression drives capital investment into stocks and other risk assets.

Powell responded to a question that specifically referenced Dogecoin -- a once satirical cryptocurrency at one point up 8,000% on the year -- by acknowledging some “froth” in capital markets, but argued that monetary policy was not primarily to blame for the lather. 

The foam is now most apparent in swelling inflation, both official and real-world. The Fed’s preferred inflation measure, the core personal consumption expenditure (PCE) price index, came in at 2.3% for the first quarter, a near high for the decade and above the bank’s 2% target. “Core” prices ignore food and fuel costs; adding these back in, PCE prices rose 2.3% year-over-year in March alone

But as we’ve noted before, none of this reflects the actual pressure on household bottom lines. Warren Buffett announced that his Berkshire Hathaway brands would be raising prices to meet rising input costs, echoing similar recent moves by Proctor & Gamble, Kimberly-Clark, Coca-Cola, Whirlpool, and Chipotle. Bank of America analysts found the word “inflation” appearing three times more often in this year’s earnings reports than last year’s, the biggest increase in 17 years. 

This is a good thing for big business: rising consumer prices and eliminated discounts mean the fattest profit margins since 2006. Of course, smaller businesses and families facing the highest grocery prices in seven years don’t have this same luxury, and these impacts pose significant risks to the recovery. 

It is our hypothesis that long-term declines in returns on labor have produced a perfectly rational attenuation of the labor force. Now, surging inflation means an accelerating decline in real wages, reinforcing labor force bearishness. Enhanced unemployment benefits may subsidize some of this withdrawal, but they pale in comparison to the subsidy central banks have paid to corporations in the form of zero-cost capital policies. 

The combination means rapid business expansion and intensified employer competition over a stunted labor pool, exacerbating shortages. We anticipate bipartisan demand for an end to enhanced unemployment soon, further tilting the subsidy regime towards capital. 

Their hope is that an increase in labor supply will relieve market pressures, but if it doesn’t we’ll have hastening erosion of real incomes alongside continued asset inflation. How this soaring inequality and deepening misery for working Americans plays out politically should define the next several years.

Tesla reports more shady numbers 

Tesla, the world’s largest electric vehicle (EV) automaker, reported its Q1 financials last Monday, a beat on both earnings and revenue, with record profits of $438 million. The company’s stock nonetheless lost 4.5% the next day -- a huge amount for one of the world’s most highly valued companies, in line with its historic volatility.

The price action suggests that markets may finally be looking beneath the headlines at Tesla’s true fundamentals. The company’s historic returns -- 700% in 2020 -- could be threatened if investors look too hard. 

The last year has apparently been good not just for the company’s stock, but for its actual business as well: revenues increased by 74% with unit sales doubling. But two line items in particular caught analyst eyes last week: regulatory credit sales and Bitcoin returns:

  • Sales of emissions credits generated $518 million for the company in Q1.

  • Bitcoin sales added another $101 million to the top line. 

These two non-automaking items account for more than 100% of the company’s quarterly profit, meaning that Tesla’s core business operated at a loss. The company only got into the Bitcoin game in February with a headline-grabbing $1.5 billion purchase, but regulatory credits have generated all of the company’s profits since Q4 2018.

Tesla generates these credit sales from programs in the United States and Europe where automakers with  fleets whose emissions exceed policy benchmarks buy credits from those with fleets under the cap. Tesla’s all-electric fleet has lots of credits to sell, allowing major automakers to keep pumping out gas-guzzling trucks and SUVs. 

With Audi, Ford, BMW, Volkswagen, Hyundai, Kia, Mercedes, and Nissan now releasing all-electric SUV competitors to Tesla, demand for these credits should peak this year. Europe’s auto industry may be in 100% compliance by 2022. 

As for Bitcoin, Tesla CEO Elon Musk said in February that the cryptocurrency is a “less dumb form of liquidity than cash.” Musk had earlier tweeted that Bitcoin is “almost as bs as fiat money.”

Why the change? It seems Musk used his influential Twitter account to drive down the asset’s price, acquired a stake in it, announced Tesla's position -- sending prices soaring -- and then sold a piece of that stake to boost Tesla’s bottom line before earnings

Musk has done this before: the SEC fined him and Tesla each $20 million in 2018 and removed him as the company’s board chair following a series of tweets that manipulated his company’s stock price. 

Other suspicious accounting decisions have dogged the company for years. Most notably, Tesla has an unusually high amount of accounts receivable (AR) for an auto company -- $1.9 billion in the quarter reported last week

Car companies shouldn’t have much AR -- you can’t drive a car off the lot without paying for it. But accounting rules let companies claim AR the same way they would count completed sales on their balance sheets. As of last year, fully 20% of Tesla’s revenues since 2014 didn’t come from final sales, but rather AR. This includes a dramatic 103% increase in a single quarter in 2018, which just happened to be the first quarter Tesla ever showed a profit. 

Tesla’s story keeps changing as to why it has so many IOUs on the books, but this year it landed on regulatory credits as a good excuse. Even still, Tesla claims that 60% of its AR comes from new sales -- which are supposed to be paid up front, remember -- and from enterprise fleet sales, which is way more than such sales should account for. 

A more likely explanation: channel stuffing, the practice of shipping product a company knows it can’t sell but booking the invoices as AR anyways. If Tesla is pulling all of this AR out of thin air, it could be in deep financial trouble. 

Despite these red flags, Tesla may not be an out-and-out fraud. It may just be a growth company still behind the profitability curve leveraging a unique regulatory opportunity to secure cash flow without weighing down its balance sheet with debt. Its books may not be cooked, but they are at least parboiled to give it breathing room as it invests in game-changing long-term plays. Fake it ‘til you make it. 

But Tesla’s sky-high valuation indicates that markets have not discounted the stock whatsoever for this extremely high risk. Recent high-profile tech failures and delays only make things worse. Tesla is the perfect icon for an era of dramatic risk subsidy from pro-Wall Street Fed state planning. Who all loses if and when this risk blows up or the subsidy ends remains to be seen. 

Rapid Round

Chip shortages hit automakers

Ford Motor Company posted a $3.26 billion first-quarter profit last week, but said a semiconductor shortage could cut its vehicle production by half in the second quarter of this year. For the second half of the year, Ford expects to produce 1.1 million fewer vehicles and has taken to setting partially-completed vehicles aside until the missing chips arrive.

This is all because of a reallocation shock rippling through global supply chains. Apple, despite their earnings beat last week, said it’s struggling to keep up production of iPads and Mac computers. Even U.S. companies that make electronic dog-washing booths can’t find enough chips.

Intel CEO Pat Gelsinger expects the shortage to last for years, and the company confirmed on Sunday that it will build a $10 billion chip plant in Israel. That’s on top of $20 billion plants under construction in Arizona capable of producing highly valued 7-nanometer chips by 2023. Intel has lagged behind the two main players in the 7-nanometer production space: Samsung and Taiwan’s TSMC.

TSMC and Taiwan’s other major chipmaker UMC also announced they’re ramping up production of 28-nanometer chips which are critical to auto production.

Credit Suisse’s ex-boss says ‘sorry’

Former Credit Suisse chairman Urs Rohner apologized on Friday for “inexcusable losses” after the collapse of Archegos, a family office managing the assets of American billionaire Bill Hwang. 

The debacle cost Credit Suisse $5.5 billion in losses, weeks after the blowup of Greensill Capital, a financial services company deeply enmeshed with the investment bank. Former Lloyds Banking Group executive Antonio Horta-Osorio has now taken over Rohner’s job.

There’s more bad news. Last week, European Union regulators slapped an €11.9 million fine on Credit Suisse and two other banks for colluding on trading U.S. government bonds. U.S. regulators also reopened a case from three years ago alleging the bank engaged in market manipulation while shorting the VIX, a measure corresponding to market volatility.

Horta-Osorio is reportedly considering shutting down some of the departments in the bank’s investment business, or selling them off. Credit Suisse earlier reported a $275 million loss in the first quarter of the year.

Business backs Brazil’s privatization spree

Brazil privatized Rio de Janeiro’s publicly-owned water and sewage treatment company Cedae on Friday, raising $4 billion. "Brazil is going to return to growth. We are going to get through both waves,” said Paulo Guedes, Brazil’s economy minister and a former advisor to Chilean dictator Augusto Pinochet.

The two “waves” are Brazil’s economic crisis and COVID, which has claimed at least 400,000 Brazilian lives -- the world’s second-highest death toll behind the United States. The IMF projects Brazil’s official unemployment rate will rise to 14.5% this year as extreme poverty has increased by 45%, encompassing 11 million Brazilians.

Brazilian Pres. Jair Bolsonaro’s approval rating has fallen below 30%, but privatizations of state assets have underwritten continued business support. In April, the government raised $600 million by selling off 22 airports, and there are plans to auction off Dataprev and Serpro, which handle data storage and processing systems for the government’s social security system.


Our only investments advice: Skip SNL this week.

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