2017 Investor Roundtable:General Discussion

[neroden]

My margin interest is under 5% annual. Do you not think Tesla is a good risk:reward when offset by 5% carry cost?

My effective annualized carry cost on the Jan 19 DITM calls I bought was, IIRC, 2.43% -- this is for paying about 50% down, 50% later. I therefore consider paying 5% to be higher than necessary. (Unless you are taking such huge positions that you would swamp the options markets, which of course is a possibility.)

('Course if you wanted to lever up higher you could buy the DITM calls on margin. I wouldn't.)

 

[neroden]

Sure, but God speed in unpacking the intricacies of SCTY's SPEs/VIEs and HLBV transactions. To me, they are like the sliced and diced tranches of credit default swaps of a decade ago. No one understood them. but their promoters assured the naive they were "can't lose" (aka "no brainer") investments.

Well, they're actually nothing like credit default swaps (CDS), they're more like the tranches of *Mortgage Backed Securities* (MBS) And while I didn't understand those at the time, I do understand them *now* (after months of post-2008 research). It was actually spotting these things on the financial statements of AmEx and going "they're underestimating the default risk" which caused me to bail out of financial stocks at the correct time in 2008.

The key thing with those MBS tranches was the default rate. If the default rate spikes? Lots of money lost. The evidence is that SolarCity's default rate will *probably* remain very low, though there is some concerning news of less-well-underwritten recent transactions. But that's OK because their stated intent is to get out of the lease/PPA business, so this isn't going to propagate or expand (like it did with the MBS).

Another aspect is that MBS tranches were advertised as "AAA" through the miracle of tranching, which was just nonsense; this isn't happening with SolarCity and nobody is treating their solar-lease-backed notes as AAA.

Another aspect is that money market funds were buying these MBS tranches (lending long term!) and then acting as if they were demand deposit accounts (borrowing short term!) -- engaging in maturity transformation banking. SolarCity WAS doing this maturity transformation, it was deadly, and they're getting out of it.

Regardless of what SCTY can lay off to SPEs/VIES, if the underlying leases/PPAs are unprofitable

They're profitable. SolarCity has stated this so many times in so many ways; they have stated that they simply do not sign contracts which are unprofitable; they have had a history of higher prices than their competition; and I believe they're telling the truth about that profit. I don't think they're very profitable, though, and I do think they've been uncompetitive (growth not good). This is why i've been treating the solar business as effectively breakeven.

The solar *financing* business is where the losses get made...

Another issue is :

"Of the more than 300,000 solar power systems the company has installed, the majority are under leases and PPAs and are contracted to generate more than $8 billion in customer payments over the next 20 years, and up to $4.8 billion more with customer renewals after year 20." ​

So the cost per year to the lessees and PPA purchasers in years 20 to 30 is going to be 20% higher than in years 0-20? This only works if technology stands still and the price from legacy utilities for electrical service sky-rockets. If not, SCTY incurs the obligation after 20 years to remove obsolete systems from the properties.

The renewals are worthless. Nobody's going to renew at the contracted prices. I don't consider there to be any significant liability from the "obligation to remove the systems". More likely, SolarCity will sell the systems to the homeowner for pennies plus the discharge of obligations. Or offer a new PPA at much lower rates.

The pre-renewal income is, of course, contracted; it's going to happen.

With respect to the VIEs, there may be an unrecognized liability exposure:

"The arrangements used are complex and the number of parties that have been willing to invest in tax equity has been limited. As a result, both the administrative costs (in terms of legal and accounting fees) and financing cost (in terms of rate of return required by tax equity investors) are high. As of this writing, tax equity investors require 7.5-9.5% for unleveraged projects. This is the after-tax return to the tax equity investor, net of its tax benefits. The cash return to the tax investor and cost of capital seen by the developer are lower."

The tax equity partner's benefit can generally be determined in advance, except when the tax code changes. This doesn't end up being a liability in general. Particularly since solar panel production is now highly predictable.

 

[neroden]

China, IMHO, has no love for generation 3 of the N. Korean dynasty. Their trusted liaisons with the N.Korean govn't have been executed by generation 3. Further he basically spat on Xi's face by killing his own half-brother, who was under Chinese protection. Not wise. China is unlikely to raise a finger against N. Korea, but then again, they may not raise a finger for generation 3 when and if push comes to shove. I wouldn't be surprised if the US was to successfully take out gen 3, that China would step in with a convenient successor and prevent further chaos, thereby maintain status quo.

My assessment for several years has been that China wants to kick out the current (gen 3) North Korean dictator, because they consider him unstable, unreliable, and dangerous, and the whole country is now dependent on food imports from China, and they have constant refugees crossing the border -- but they haven't figured out a good way to remove him, especially since his family has created an *actual religious cult* around themselves.

China doesn't want to blunder around militarily making enemies the way the US dies. They have to make the dictator much less popular within North Korea; tricky when he's a *religious icon*. I think he *knows* China's been trying to remove him which is probably why he's become paranoid and started murdering all his closest aides (fearing that they're working for China).

I would not be surprised if the posturing over Syria (by Russia) is just that. They were likely not particularly happy with Assad's use of Chemical Weapons, but as an "ally" didn't feel they could prevent it. So basically let the American's do it, and we'll just wag a finger and tell Assad "told you so..." and chastise the Americans for being belligerent.

I've even heard a suggestion that the whole thing was a setup between Putin and Trump.

 

[mmd]

Tesla Investors Press for Board Members Without Ties to Musk

• Managers of $721 billion urge stronger corporate governence
• Conflicts of interest permate the board, investor letter says

 

[AcesDealt]

Alright, I'll eat crow on this scenario of DITM call vs. margined share. The scenario luvb2b proposed to trendtrader does appear to have the superior characteristics he gave for it (improved carrying cost and protection against going below strike price without negative tradeoff). I learned something.

In practice (and maybe this is wrong as well), I believe the LT gains distinction doesn't start counting until you execute the option, which is why I never studied this case.

 

[AcesDealt]

There was recent talk with Eberhard and Tarpenning at Stanford, and Eberhard claimed that if there is a cobalt shortage, or the price gets excessive, it can be replaced by manganese, so to the Cobalt investors here, look into it. 21:18 36:34

btw. good talk, Eberhard seems still be somewhat hostile towards Tesla

I don't know if he clarifies it later (I bailed early), but I think he is confused. The manganese chemistry which Tesla uses in storage but not automotive, still uses cobalt. In fact, it uses more cobalt. I've never heard of a manganese only cathode.

On edit,
Hmm: Manganese Spinel Cathode Material｜Automotive Energy Supply Corporation

appears to claim a manganese and nickel solution without cobalt.

 

[neroden]

Alright, I'll eat crow on this scenario of DITM call vs. margined share. The scenario luvb2b proposed to trendtrader does appear to have the superior characteristics he gave for it (improved carrying cost and protection against going below strike price without negative tradeoff). I learned something.

In practice (and maybe this is wrong as well), I believe the LT gains distinction doesn't start counting until you execute the option, which is why I never studied this case.

You're actually correct about this, the holding period for the stock starts on options execution, which is one of the few issues with it.

Here's the funny thing, though. If you buy a LEAP call and hold it for over a year and then *sell* the LEAP, the gain is LT capital gain. So if you bought DITM Jan 2019 calls now, and sold them in May 2018, the gain would be LT capital gain.

 

[Papafox]

a long dated deep in the money option (1) costs less than a share, (2) costs less to carry than a share at your margin rate, and (3) gives you the same upside as that share, with (4) less risk.

and you would rather borrow money to own shares? that sounds economically irrational.

Good points. The downside of DITM leaps is they're not as liquid as shares when you want to sell quickly.

 

[Intl Professor]

I've even heard a suggestion that the whole thing was a setup between Putin and Trump.

More likely than a setup is the possibility this was act by one of the terrorist groups as the Russians say. Some evidence that is what happened in 2013 incident, according to Seymour Hersh who I respect muchly.

LRB · Seymour M. Hersh · Whose sarin?

Also, this from the Huffington Post by Scott Ritter who had a lot of experience in the Middle East on chemical arms stuff.

Wag The Dog -- How Al Qaeda Played Donald Trump And The American Media | The Huffington Post

It makes no sense for Assad to do this from his perspective. Terrorists think like this and seize opportunities to urge "let's you and him fight."

Mind you, I'm not above blaming Assad for this, he's certainly pursuing evil policies by targeting hospitals and barrel bombing the population. I do find it passing strange that all of our media, including my cherished PBS, fell so quickly in line with the guvment. A colleague who is widely published as a journalism critic can show with scholarly polish our media usually uncritically accept the US line on foreign policy until things get too far out of hand. Sometimes it takes years as during the Vietnam war.

 

[geneclean55]

There might be some scenarios where shares on margin offer benefits for short term trades?
How about an earnings play, where you don't have enough money to buy an equivalent number of shares in cash?
A day trade of shares on margin doesn't incur margin interest I believe.
You can sell the shares AH, which affords more flexibility than options.
You are not subject to IV dump the next trading day after earnings.
Down-side is more capital on the line.

 

[TrendTrader007]

Alright, I'll eat crow on this scenario of DITM call vs. margined share. The scenario luvb2b proposed to trendtrader does appear to have the superior characteristics he gave for it (improved carrying cost and protection against going below strike price without negative tradeoff). I learned something.

In practice (and maybe this is wrong as well), I believe the LT gains distinction doesn't start counting until you execute the option, which is why I never studied this case.

I actually agree with you on this. What these guys are talking about is not a real life scenario. At least not for someone trading in size. Yeah if all someone is doing is trading a few hundred thousands you can buy and sell options to your heart's content. . For someone running significant money in a single stock it's idiotic to put a ton of money in DITM calls. First, liquidity concern. Secondly, why on earth would I put my capital in call options when I have enough money to buy tons and tons of TSLA stock at a moment's notice and dispose of it in under a minute. Why would I risk my capital in calls when I have no time decay in common. I personally think it's totally unrealistic unless someone is a small time trader in which case options make more sense (unless you get it directionally wrong)
Now I'm no stranger to options. My personal options portfolio is quite significant but I fully well realize that options are like a drug. Use too much and it rapidly becomes toxic
I've been trading stocks since 1998. I've made and lost significant capital. The only reason why I'm still not in the poorhouse is because I never put more than a rather small percentage of my capital in options.
In real money terms my options portfolio is relatively significant but in % terms it is not
The only main focus of an investor should be to figure out which way a stock is headed and how fast
Everything else is conversation

 

[TrendTrader007]

Just a hypothetical example: Try putting $10 million in DITM. Good luck
No one in their right mind does it unless all they have is under a million to invest and if that is all they have they better watch out
As they say, the fastest way to make a million in the stock market is to start with two million

 

[luvb2b]

i did not mean to suggest that he would forcibly jack the share price.

what i meant is there is a menu of revenue that could be chosen to be realized this quarter or next, i think. they can choose when and how many zev credits to sell. the ap update came so late you could say it wasn't proven well enough to take now and push it to next quarter.

good management wouldn't take everything off the menu this quarter and then leave nothing for next. they would likely smooth volatility or choose to help show growth.

the side effect of that choice plus not even most bulls on this board expecting gaap profitability (leave aside rest of world) is the headline record revenues + record earnings + 120% revenue growth + massive earnings beat will jack the share price. that's my guess anyway.

Yep, sure do Mitch.
And he may have another way to accomplish besides Cap raise (or at least with only a limited one). I think that's a very good possibility.

If so, that would reduce the priority to forcibly jack the SP, with a specific strategy of financial levers as luvb2b is suggesting. I think the SP will increase just on execution and GF announcements alone.

Although Tesla may in fact GAAP positive for 4 quarters, I'm not seeing it as a pressing priority, which for me, translates to levers not being pulled unnecessarily...

Sooooo - my 'warning' is with that as a risk, play TSLA with long term stock or DITM calls J19 (keeping anything else to discretionary monies).

at $150/day x 365 days you're at $55,000 in annual interest. that's probably a million dollar margin loan that could be replaced with at most 40 calls. with the $30,000 savings you could trade in that civic for a well equipped model 3 and not sweat margin calls.. or keep driving the civic.

but i like being economically irrational!

i eagerly await the day when i have learned so much that i have nothing left to learn. because then i will walk away and start a new profession.

 

[TrendTrader007]

I hold my call options long term and usually but not always realize long term capital gains
My margin interest is peanuts compared to the money I make on my stock holdings
Why should I worry about 5 vs 10% vs 20% interest when my average returns on my own as well as borrowed money exceed 30%
Focus on wrong things in the stockmarket like margin interest or instruments of leverage and you risk losing sight of the big picture which is that in a single day depending on what time of the day you liquidate your stock your returns on entire capital can fluctuate anywhere from 3 to 30% or even 50%
Not selling a stock when it needs to be sold that is where the real risk lies

 

[TrendTrader007]

i did not mean to suggest that he would forcibly jack the share price.

what i meant is there is a menu of revenue that could be chosen to be realized this quarter or next, i think. they can choose when and how many zev credits to sell. the ap update came so late you could say it wasn't proven well enough to take now and push it to next quarter.

good management wouldn't take everything off the menu this quarter and then leave nothing for next. they would likely smooth volatility or choose to help show growth.

the side effect of that choice plus not even most bulls on this board expecting gaap profitability (leave aside rest of world) is the headline record revenues + record earnings + 120% revenue growth + massive earnings beat will jack the share price. that's my guess anyway.



at $150/day x 365 days you're at $55,000 in annual interest. that's probably a million dollar margin loan that could be replaced with at most 40 calls. with the $30,000 savings you could trade in that civic for a well equipped model 3 and not sweat margin calls.. or keep driving the civic.

Just to set the record straight I could be a billionaire and still drive that Civic. The amount of money I make or lose or have has absolutely nothing to do with my lifestyle choices as a consumer. I play the game this way because I like winning more than anyone else I personally know of and as Ted Turner said money is how we keep score.
Making money to me is just a game. I really don't care to use it (other than to make more money)
Who's the richest man in the cemetery: that is the name of the game

 

[luvb2b]

Who's the richest man in the cemetery: that is the name of the game

and suddenly i feel very sad for you.

who taught you this?

 

[brian45011]

That's boilerplate; you don't need a guarantee or a liability to pay off a subsidiary's debt.
Watch the trend in the debt outstanding on each facility from quarter to quarter.
Of course, it just makes sense to use lower-interest-rate sources of borrowing. That's kind of a "duh".

That's OK. It's simply beyond your ability to comprehend. Tesla has drawn $969 million against its credit facility of $1.2 billion. SCTY has drawn $364 million against its credit facility of $418.5 million (which matures at the end of 2017). Both facilities are secured by the "collateral" of the respective corporations' assets and are subject to financial covenants, including fixed charged coverage ratios. If Tesla were to use the remaining $231 million to repay some of SCTY's $364 million, it would not only exhaust Tesla's ability to fund its own operations and CapEX but also likely violate the financial covenants.

Moreover, Tesla's consultants and outside counsel went to great pains to "ring fence" SCTY so it could be cut loose in the future if necessary without undue harm to Tesla. Amendment Four to Tesla's Credit Agreement was by no means "boilerplate." It dealt solely with the SCTY acquisition. Did you even bother to read it before posting? Did you happen to notice:

"2.1.3 The definition of “Collateral” in Section 1.1 of the Credit Agreement shall be amended by inserting “; provided that in no event shall the term “Collateral” include any property, interest or other rights with respect to SolarCity or any of its Subsidiaries or any Equity Interests of SolarCity or any of its Subsidiaries” immediately after “11” in the fourth line thereof."

Tesla is not about to muck up what has been carefully orchestrated just because you think there could be some marginal savings in interest expense.

 

[Intl Professor]

Who's the richest man in the cemetery: that is the name of the game

Now that is wacko!

You evoke images of Steven Bannon and Mnuchin collaborating on a movie where they, dressed in drag, of course, go around cemetaries looking for the richest man to dig up and ask for advice on the next day's market, after doing an appropriate dance to "The Shadow" music, and the squeaking door.

 

[dw4ngg]

Just to set the record straight I could be a billionaire and still drive that Civic. The amount of money I make or lose or have has absolutely nothing to do with my lifestyle choices as a consumer. I play the game this way because I like winning more than anyone else I personally know of and as Ted Turner said money is how we keep score.
Making money to me is just a game. I really don't care to use it (other than to make more money)
Who's the richest man in the cemetery: that is the name of the game

I'll spend it for you if you want to win in the game of altruism.

 

[vgrinshpun]

You're mocking our assertion that there are competitive competitors by linking to a competing project that is actually fully funded, with work already in progress and commission set for date end of this year? I fail to see your point, this project is an actual counterexample of your position : that despite the apparent cost advantage on batteries, Tesla is not the de facto sole competitive player in the field.

But Tesla *is* a sole *competitive* player as it has the lowest cost, my original post on the subject being a good example of this. That *is* the reason TE went from 0% market share (do not forget that AES is working in BES space since 2008) to roughly 30% (at least in US), while others saw their market share shrink. I am not saying that other players will necessarily go away, rather that Tesla is having the lowest battery cost and *does* have competitive advantage over others because of this. In fact how else would it go from 0 to about 30% of US market, gaining on incumbents? This is just a fact. So my point is that assertions that tesla will not be able to scale TE (a crowded field with a lot of competitors and solutions !) do not have much of a basis.


Further, fact that this merchant system is fully funded does not mean that it will be financially sound at based on the Lyons cost structure. Yet you seem to make this leap of faith, which is ironic, given your healthy dose of skepticim (at least as far as Tesla is concerned). The examples of large corporations miscalculating are numerous. Take this example of Toshiba writing off $6B due to their escapades in nuclear sector in US. The bottom line is that the fact that this project obtain financing does not necessarily mean that it is “competitive” as you seem to suggest. In fact, it is telling that when touting Lyon Group advantage over Tesla one of the partners, David Green, did not mention the cost.

Mr Green said his company’s advantage over Tesla is that it already has one project announced in South Australia with three more to be announced “in the next couple of weeks”

.

I say they are lucky that their projects were initiated well before the Tesla announcement. I doubt that they would’ve gotten off the ground otherwise.

Also, you can't use US utility scale PV costs and assume they are the same for Australia.

Are you saying that utility scale PV costs are *higher* than the number I used ($1.4/Watt)? I would like to see some data to back this up. Note that if AU PV costs are *lower* than $1.4/Watt, it will make BES portion of the system even more expensive than I estimated.

The battery component of the project is projected to cost between $200 and $300 AUD ($150 to $225 USD) Lyon Group to build world’s largest solar-plus-storage project in South Australia.

This is just an estimate of the author of the article, and the numbers do not make much sense. If total cost is not a range, but fixed number (AU$1 billion), and the PV portion is also a fixed number, claimed to be AU$700 million by the author, how come the BES portion is estimated to be AU$200-300? AU$700M +AU$300M does equal AU$1B, but AU$700M + AU$200 does not. Once again, I would like to see the basis for this “estimate”.

To recap : the proposal is actually this company's third utility scale PV+BES project (of which one is already fully commissioned). So yes, the field is crowded and the solutions of competitors are actually competitive.

I do not know what is the basis for your assertion that competitors are actually competitive. The data actually point the other way.