Navellier Weekly Market Commentary
The market weakness in the last couple days is just normal consolidation. However, there is no doubt that National Economic Advisor Larry Kudlow’s comment on Thursday, that a “sizable distance” remains between the U.S. and China in protracted trade negotiations, spooked some nervous investors. Kudlow said that previous talks covered “a tremendous amount of ground” and added that enforcement will be very important, as well as technical and structural issues. Whether or not President Trump will meet with Chinese President Xi before the March 1st deadline is uncertain, but Kudlow confirmed that in the spirit of good faith that the tariffs on Chinese goods would remain at 10% (versus the scheduled 25% increase). So overall, the Chinese trade deal negotiations are proceeding and both sides appear to be acting in good faith.
Fortunately, our dividend growth and conservative growth stocks continued to exhibit relative strength this week. Treasury yields remain remarkably stable, despite a lower bid to cover ratio at this week’s Treasury auctions. As a result, Wall Street is no longer distracted by interest rates and is now much more focused on the fourth quarter earnings announcements and 2019 guidance. So far this announcement season, the 60% stocks in the S&P 500 that have announced their fourth quarter results have posted annual sales growth of 7.9% and annual earnings growth of 14.6%, which are significantly above analyst estimates.
One reason that companies continue to post better than expected earnings is due to the fact that 2018 was the biggest year ever recorded for stock buybacks. I do not have the final buyback figure for 2018 yet, but since over $800 billion in stock buybacks were announced, I suspect that there was between $800 billion to $1 trillion in stock buybacks last year.
Speaking of stock buybacks, Senators Chuck Schumer and Bernie Sanders wrote an opinion piece in The New York Times this week entitled “Corporate self-indulgence has become an enormous problem for workers and for the long-term strength of the U.S. economy.” In this opinion piece, Schumer & Sanders said “When a company purchases its own stock back, it reduces the number of publicly traded shares, boosting the value of the stock to the benefit of shareholders and corporate leadership.” Frankly, I am at a loss why Schumer & Sanders believe that companies should not try to benefit shareholders, especially since workers’ pensions are typically invested in the stock market. Schumer & Sanders were apparently attempting to insinuate that stock buybacks hurt workers, but they provided virtually no evidence that stock buybacks hurt workers! Overall, I found the Schumer & Sanders’ NYT opinion piece to be truly bizarre and meaningless.
President Trump and Treasury Secretary Steven Mnuchin had dinner with Fed Chairman Jerome Powell at the White House this week. I suspect now that Fed Chairman Powell is doing what President Trump wants, namely not raising key interest rates, that the dinner was very cordial, especially since it was Powell’s 66th birthday. What is unknown is whether or not the Fed is also taking the stock market into consideration in its decision making process. Since the Fed acknowledged that it is reluctant to raise key interest rates due to global events (e.g., the China economic slowdown, Brexit, etc.), I suspect that the Fed also is being influence a bit by the stock market, but right now Treasury yields remain low and have effectively stopped the Fed from further raising key interest rates.
The economic news this week was mixed. The Commerce Department announced this week that factory orders declined 0.6% in November, due to sharp declines in electrical equipment and machinery attributable to falling energy prices. Economists were expecting factory orders to decline 0.2%, so this was a big surprise. Interestingly, the Commerce Department also reported that durable goods orders rose a revised 0.7% in November, down slightly from 0.8% previously estimated.
On Tuesday, the Institute for Supply Management (ISM) reported that its non-manufacturing, service index decelerated to 56.7 in January, down from 58 in December. Although any reading above 50 signals an expansion, this was the lowest ISM service index reading in six months, so the service sector’s growth appears to be slowing a bit. A big decline in the new orders component to 57.7 in January, down from 62.7 in December, was largely responsible for the decline in the ISM service index. Eleven of eighteen industries surveyed reported growth, while 7 industries contracted. Overall, some of this declaration appears to be weather related, since agriculture, forestry, education, retail and information industries reported lower revenue.
On Wednesday, the Labor Department reported that U.S. productivity surged 1.3% in the fourth quarter. This is good news for fourth quarter GDP estimates. The biggest surprise on Wednesday was that the Commerce Department reported that the U.S. trade deficit declined to $49.3 in November as exports dropped 0.6% to $209.9 billion and imports plunged 2.9% to $259.2 billion. In the past year, the U.S. trade deficit has risen 10.4%, but November makes the first decline in the past six months. A smaller trade deficit means an upward GDP revision, so some economists are now likely revising their fourth quarter GDP estimates higher.
Finally, the situation in Venezuela remains tense. Tankers full of crude oil are just sitting offshore are no longer delivering crude oil to the U.S., since the U.S. will not pay PDVSA as long as Nicolas Maduro remains President and controls the military. Desertions among rank and file soldiers are steadily rising, so it appears that Maduro’s days are numbered. National Assembly leader Juan Guaido has promised military defectors amnesty, so it will be interesting if the military desertions continue to rise. Senator Marco Rubio said on Thursday that Juan Guaido will name a new board for Citgo, which is a U.S. based refinery owned by PDVSA, so Maduro’s influence is fizzling fast. Overall, the standoff in Venezuela remains a mess, but with its oil revenue severely restricted, Maduro will not be able to pay his military leaders much longer.
Special Commentary on Tesla’s Excessive Valuation
The stock market’s recent strength has artificially lifted a lot of stocks, especially stocks in the NASDAQ 100 (QQQ) index. However, I expect that at least one flagship stock in the QQQ will falter in the upcoming months, namely Tesla (TSLA). For the record, I am a fan of electric vehicles and have an Audi e-tron ordered and am also on the list to be one of the first to order a Porsche Taycan. VW Group (Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat and VW) will be making the most electric vehicles in 2020 that are widely expected to be less expensive and higher quality than its Tesla competitors. In fact, Tesla recently curtailed production of its expensive Model S & X models due to increasing completion from quality competitors, including Audi, Jaguar, Mercedes, Porsche and Volvo.
Tesla is now essentially betting everything on its Model 3, which is an attractive vehicle, but unfortunately characterized by quality problems and poor internal design that complicates manufacturing. As an example, there are 12 structural aluminum components in a Model 3 front fender vs. 3 in most modern cars, so the Model 3 requires more labor and energy to manufacture. Tesla is anticipated to have growing glut of Model 3 vehicles and recently cut the price by $1,100 per vehicle to stimulate sales.
Dismissed and disgruntled company employees have broken their silence and said that Tesla is “building the plane as we’re flying it.” My friend that set up the Gigafactory (outside of Reno, Nevada) robotic manufacturing systems quit over constant redesigns, plus the fact that Elon Musk liked to personally belittle employees as well as make unreasonable demands. Now the Gigafactory II (in Buffalo, New York) is having similar production problems and has also fallen short of its manufacturing goals.
In fact, my friend said at one time that 8% of the batteries made in the Gigafactory were bad and dangerous. There have been too many instances of Tesla’s catching on fire due to its battery problems. Furthermore, two of my youngest daughter’s classmates were burned alive last year in a Model S accident in Fort Lauderdale that the NTSB is investigating. One interesting fact is the Audi and Porsche electric vehicles will not accelerate as fast as Teslas, since it bad for the lithium batteries get too hot under extreme acceleration. Specifically, Tesla’s “ludicrous mode” that is used to accelerate quickly overheats lithium batteries and shortens their battery life.
In conclusion, it makes no sense for Tesla to have a $53 billion market capitalization, when Ford, GM and VW Group have market capitalizations of $33 billion, $54 billion and $83 billion, respectively. VW Group rejected the dangerous “round” lithium battery cells that Tesla continues to utilize and its new mission statement is to quickly surpass Tesla’s market share with higher quality vehicles that utilize safer as well as longer lasting lithium batteries.
Interestingly, one of Tesla’s biggest investors, namely Saudi Arabia, who Elon Musk cited as institutional investor that would help him take to company private, has hedged its 4.9% stake in Tesla. Apparently Saudi Arabia does not believe that the stock can continue to appreciate as the company (1) lays off more employees, (2) curtails production in its most expensive models and (3) bets everything on the Model 3, which is too expensive to manufacture and continues to be characterized by quality control problems.
The only reason that Tesla’s stock has not collapsed yet is that it is in the NASDAQ 100 and has been artificially boosted by being in this famous index. However, as the stock market gets increasingly bumpy in the upcoming months, I expect that Tesla will be one of the flagship NASDAQ stocks to fizzle fast and eventually collapse in the upcoming years. VW Group and GM will be making more quality and cheaper electric vehicles than Tesla soon, so I expect that Model 3 sales will steadily decline in the upcoming years. Tesla is simply the greatest short that we will witness in our lifetimes! After Tesla’s stock collapses in the next few years, I expect that Volvo’s parent will buy what is left of Tesla when its market capitalization falls below $10 billion, so be prepared to cover your short.
This information is general and does not take into account your individual circumstances, financial situation, or needs, and is not presented as a personalized recommendation to you. This is for informational purposes only and should not be taken as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in your investment making decisions. Individual strategies discussed may not be suitable for you, and it should not be assumed they were or will be profitable. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Navellier & Associates, Inc. claims compliance with the Global Investment Performance Standard (GIPS) and has prepared and presented this report in compliance with GIPS standards. A copy of this verification report is available upon request. All investing is subject to risk, including the loss of your principal.
Navellier & Associates does not own TSLA in managed accounts or a sub-advised mutual fund. Louis Navellier and his family do not own TSLA in private accounts.