A client recently asked me for an opinion on Tesla Motors (NASDAQ:TSLA) and I snickered. Not because I had a negative outlook on the electric-vehicle manufacturer. Nor because I doubt Elon Musk’s ability to lead.
Did I chuckle because auto demand might be peaking? No, that wasn’t it. Or because low gasoline prices may be dampening enthusiasm for alternative energy? Not at all. Perhaps I giggled because eventual profitability for the company remains a huge question mark. Surprisingly, my reaction did not relate to non-existent earnings either.
The reason that I reacted the way that I did was because the decision makers in the federal government and at the Federal Reserve hold the only opinions that matter. Indeed, the greater the direct government subsidies by the government and the greater the central-bank stimulus, the greater the potential for Tesla's stock to rise.
Ironically enough, the central bank of the United States is one of the very few monetary authorities on the globe that is actually talking about raising rates. Think about the humor in that. Low rates for far too long was one of the biggest reasons that property values ballooned to unsustainable highs before collapsing in conjunction with the Great Recession. And now, with the Fed Funds Rate at a nominal target between 0.25%-0.50%, the slightest nudge higher might tank asset prices (e.g., stocks, corporate bonds, real estate, etc.) once again.
Sure, I could look at Tesla from a fundamental perspective. Sales are unimpressive. They have not been able to figure out how to make an affordable model. And competitors are gaining ground. Yet the larger reality is that neither political party is addressing budget deficits let alone skyrocketing debts as measured by government debt-to-revenue (2nd worst in the world) and government debt-to-GDP. As long as the executive and legislative branches advocate excessive borrowing, the powers-that-be are likely to keep handing Tesla cash until they get it right. Maybe they’ll get cut it off one day, but I doubt it.
I suppose I could look at the well-being of consumers for clues about Tesla. Real wages have grown at a frighteningly weak pace of less than 1% (0.87%) over the last three-and-a-half years. Total business sales at corporations have declined for six consecutive quarters. And year-over-year retail sales have been trending in the wrong direction for quite some time. Then again, sub-prime auto loans with negligible interest make it possible for people to buy $80,000-plus luxury sedans, don’t they?
Of course, it is always possible to look at Musk’s baby from a technical perspective. The corporation’s share price has essentially moved sideways since April of 2014. Its price-ratio with the S&P 500 SPDR Trust (NYSE:SPY) has been waning for at least as long. And the 200-day moving average for TSLA has flatlined for 20 some-odd months.
Then again, doesn’t the bull market in complacency assure us that any sell-off in shares of TSLA would be short-lived? Don’t we already know that the Federal Reserve will jump into action to reflate asset prices, including the shares of the electric car maker, whenever a stock-market correction occurs?
At the moment, at least, nobody really cares about the S&P 500 trading at a GAAP P/E of 25; nobody cares that the S&P 500’s earnings have declined for five consecutive quarters. In Tesla’s case, they don’t even care if the company turns a profit. In fact, the CBOE Volatility Index (VIX) is only pricing in the possibility of a 5% decline in the next 30 days. That’s one of the lowest readings on the “fear gauge” in two years.
So does this mean that I think that investors should be “all in” on Tesla? Or “all-in” on the SPY? Not exactly.
Even though I shifted moderate client allocations from 65%-70% widely diversified equity to 45%-50% large-cap domestic in Q4 2014, we continue to maintain the subdued allocation. A tactical shift lower would require greater evidence of a loss in faith in the world’s central banks, including but not limited to, a European banking crisis, a series of Fed rate hikes that the market does not anticipate and/or an abrupt change in stimulus delivery by prominent central banks employing negative interest rate policy (e.g., Bank of Japan, European Central Bank, etc.).
The latter is something that bears particular attention. It is highly likely that $13 trillion in global negative-yielding bonds will lead to detrimental ramifications down the road. And it's also highly probable that the creation of electronic money for the purpose of buying junk-rated debt and stock ETFs by monetary policy leaders in Japan and Europe will lead to an eventual unwinding of the wealth effect.