Shorting Oil, Hedging Tesla

[SwTslaGrl]

German police raid Porsche execs in diesel probe
Prosecutors from Stuttgart and Munich were joined by some 160 police officers in a search of "10 sites" in the states of Baden-Wuerttemberg and Bavaria, the Stuttgart prosecutor's office said in a statement. The three unnamed individuals are under investigation for suspected fraud and false advertising stemming from the manipulation of exhaust treatment in diesel vehicles manufactured by Porsche.
German police raid Porsche execs in diesel probe

 

[Starno]

Short All Things Oil timeline preliminarily set for the summer of 2019.

This target may change wildly, and determining factors will include, in order:

1. How high will the oil price spike? Current expectation: Brent $100+ by 4Q18
2. When will global recession start? Current expectation: end of 2018 to early 2019
3. When will Tesla achieve Level 4/5 autonomy? Current expectation: Level 4 in 2019, FSD in 2020/21
4. When will Tesla reach one million unit annual production? Current expectation: end of 2020
5. When will Tesla ramp Semi production to 200k to 300k units per year? Current expectation: 2021/22
6. How quickly can other EV producers scale? Current expectation: 5+ years behind

Again, all of the above are subject to change... setting the framework for now.

2. I really doubt end of 2018, there's way too much money in the pocket of a lot of people. "Everyone" need to be all invested and thinking it's going to the moon before the recession hits. There is too much cash on the sideline right now.
I'd say mid to end 2019 at the EARLIEST. But I'd put my money toward 2nd quarter of 2020. Though I could be wrong.

3. FSD end of 2020.

 

[ValueAnalyst]

2. I really doubt end of 2018, there's way too much money in the pocket of a lot of people. "Everyone" need to be all invested and thinking it's going to the moon before the recession hits. There is too much cash on the sideline right now.
I'd say mid to end 2019 at the EARLIEST. But I'd put my money toward 2nd quarter of 2020. Though I could be wrong.

3. FSD end of 2020.

#2 Quite a few smart people I have followed for a long time believe a recession may start even earlier than my estimate, although I agree with you on your "cash on the sidelines" point. The question is: will that cash eventually go into equities or bonds? That remains to be seen. In any case, it's better to be early on a recession call than late, so I'll be watching developments closely throughout the coming months. More specifically, let's see how the ongoing quantitative tightening affects market sentiment and what surging oil prices do to inflation and short-term interest rates, which affect lending/leverage, which affects consumption, which affects GDP growth rate, and on and on it goes until a recession wipes out the levered optimists. TL;DR: Be conservative.

 

[Starno]

#2 Quite a few smart people I have followed for a long time believe a recession may start even earlier than my estimate, although I agree with you on your "cash on the sidelines" point. The question is: will that cash eventually go into equities or bonds? That remains to be seen. In any case, it's better to be early on a recession call than late, so I'll be watching developments closely throughout the coming months. More specifically, let's see how the ongoing quantitative tightening affects market sentiment and what surging oil prices do to inflation and short-term interest rates, which affect lending/leverage, which affects consumption, which affects GDP growth rate, and on and on it goes until a recession wipes out the levered optimists. TL;DR: Be conservative.

Agreed, I think even if you go cash toward the end of 2018, you won't miss too much of return afterwards. The bulk of the growth from now until the start of the recession is going to happen in the next few months (even if recession happen in 2020). So yea...

 

[ValueAnalyst]

EXCLUSIVE-OPEC's new price hawk Saudi Arabia seeks oil as high as $100 - sources

 

[jhm]

Short All Things Oil timeline preliminarily set for the summer of 2019.

This target may change wildly, and determining factors will include, in order:

1. How high will the oil price spike? Current expectation: Brent $100+ by 4Q18
2. When will global recession start? Current expectation: end of 2018 to early 2019
3. When will Tesla achieve Level 4/5 autonomy? Current expectation: Level 4 in 2019, FSD in 2020/21
4. When will Tesla reach one million unit annual production? Current expectation: end of 2020
5. When will Tesla ramp Semi production to 200k to 300k units per year? Current expectation: 2021/22
6. How quickly can other EV producers scale? Current expectation: 5+ years behind

Again, all of the above are subject to change... setting the framework for now.

Interesting idea. Are you thinking that the next recession would be triggered by high oil prices? It seem items 3-6 are not so necessary for your thesis. As they come after an oil crash, they might only contribute to the crash in terms of resetting market expectations, not as fundamental drivers.

 

[jhm]

EXCLUSIVE-OPEC's new price hawk Saudi Arabia seeks oil as high as $100 - sources

This undisciplined quest for yet higher oil prices looks like desperation. Some analysts have suggested that Aramco would need oil at $120 to justify a $2T valuation. (But at that price level the global economy would creep to a halt!) So the ambition here does not seem anchored to economic realities, but only to desperate hopes. This article sets out some of the aspirations Saudi Arabia has that may be driving this lack of realism: Can Saudi Arabia Afford Its Megaprojects? | OilPrice.com Sinking $700B into a Saudi city does not look like an attractive investment to international investors. This whole thing could be a ghost town once growth in oil demand dries up.

 

[ValueAnalyst]

Interesting idea. Are you thinking that the next recession would be triggered by high oil prices? It seem items 3-6 are not so necessary for your thesis. As they come after an oil crash, they might only contribute to the crash in terms of resetting market expectations, not as fundamental drivers.

I don’t know how forward looking oil market participants will be. Hostorically, they have been super near-sighted, even more so than equity investors, so we’ll see.

 

[mspohr]

Oil rises two percent as Saudi Arabia aims at $100/bbl, U.S....

Looks like SA is aiming for $100 bbl to help their sale of Aramco.

 

[adiggs]

Oil rises two percent as Saudi Arabia aims at $100/bbl, U.S....

Looks like SA is aiming for $100 bbl to help their sale of Aramco.

Does it only seem obvious to me ... if SA is busy saying, or signalling, that they want US$100/bbl oil for the IPO of Aramco, then doesn't it obviously follow that the bias on oil prices after the IPO is down? And that the valuation of Aramco will be pushed up by higher oil prices, and that Saudi Arabia is trying really hard to sell Aramco at its peak (or at least a local peak)?

And that therefore buyers of Aramco shares will be buying something that is pretty much designed to go down onces its sold.

And that the motivation for high oil prices for Saudi Arabia will disipate with the IPO, and there will be a different financial motivation (market share, get all the reserves out of the ground and paid for them as can be done)?


This IPO is looking more and more to me like a share issuance that is designed to decline in value from the IPO, and that pretty much runs counter to the motivation of buyers to buy the shares. If there's a good dividend story to be told, that will attract some buyers.

It looks to me that if what SA wants is cash now, and to then return that cash over time in the form of dividends, then they might be better off seeing what Aramco can raise in the bond market, using cash flow from oil sales to back those sales. Skip the IPO, skip the annoying transparency / financial reporting requirements (ok - maybe reduce the reporting requirements), and raise cash by way of bond. The dividend buyers will get involved, and Saudi Arabia can stop being in the business of distoring the oil market AND losing market share.

Buying something that will go down in value, and that will return less than its original purchase price in dividends, is a flat out bad investment. That's going to be a tough sell, and I think they won't like the optics of trying to sell Aramco and having the market tell them its a bad investment. Of course, if they try to issue bonds to raise cash and investors don't buy the bonds (want too high of an interest rate), that might look about the same as a failed IPO

 

[TheTalkingMule]

It looks to me that if what SA wants is cash now, and to then return that cash over time in the form of dividends, then they might be better off seeing what Aramco can raise in the bond market, using cash flow from oil sales to back those sales.

They're already doing that......Saudi Arabia to tap bond market for third year in a row

Bonds net them a few tens of billions. Letting women drive and movie theaters open allows them to cut a few dozen billion in welfare subsidies. Shaking down legitimate business owners nets them 150B.

They're trying every angle to raise/save money and are now in desperation mode with this "IPO". If this fails you have total chaos inside of 2 years, if it's semi-successful that might buy them 2-3 more years depending on how much they can sell.

 

[adiggs]

They're already doing that......Saudi Arabia to tap bond market for third year in a row

Bonds net them a few tens of billions. Letting women drive and movie theaters open allows them to cut a few dozen billion in welfare subsidies. Shaking down legitimate business owners nets them 150B.

They're trying every angle to raise/save money and are now in desperation mode with this "IPO". If this fails you have total chaos inside of 2 years, if it's semi-successful that might buy them 2-3 more years depending on how much they can sell.

That's kinda how I see it, which also has me wondering how they can remain so disciplined about (in effect) withdrawing from the oil market. I'd think that their internal economic needs would drive them to take as much market share of the oil market as they can get, anywhere and everywhere. Even if it tanks the market for everybody.

I guess a 10% less volume on 50% higher prices is worth more than max volume, and I can see that. I'm amazed that they've been able to keep it together as long as they have.

 

[renim]

Disagree,
Tesla is around 10% of global plugin vehicle unit sales, give or take a couple of percent. ...
The oil price affects Tesla, not the other way around.

2013, the first full year of model S production, early days, EVs like the LEAF cross over the valley of death (2012)
EV Sales: January 2014 tesla is 11%

2016, Tesla ranking has improved to No.2, but global market share is dropped to 9%

2017, the most recent we have, Tesla drops to No.3, but market share is down to 8%
Chinese are now 4 of the world top 10.

2018 will be a step 2 for EVs (2013 was step 1) new Tesla 3, New LEAF, New etc etc
but its also the 'trial' year for Chinese ZEV credits.

2018, makes EVs mainstream for automakers, or else they leave China. No automaker wants to leave China.

 

[neroden]

Sooooo, with oil and gasoline prices going back up again... are we going to get a repeat of the prior phenomenon where electric car stocks traded up whenever gasoline prices went up?

Opinions?

 

[neroden]

Agreed, I think even if you go cash toward the end of 2018, you won't miss too much of return afterwards. The bulk of the growth from now until the start of the recession is going to happen in the next few months (even if recession happen in 2020). So yea...

If you invest in market indices, this makes sense. As an individual stock investor, I absolutely do not want to be in cash rather than TSLA during 2018-2020 regardless of whether there's a recession. Same with most of the rest of my list of stocks (now quite short, as I keep selling out of one after another as I decide they are overvalued or have poor futures).

 

[wnorris]

Sooooo, with oil and gasoline prices going back up again... are we going to get a repeat of the prior phenomenon where electric car stocks traded up whenever gasoline prices went up?

Opinions?

Yes, but the question to ask is what is the price of oil that would begin to trigger rising valuations of EV companies? I do not believe we are there yet. When gas prices become a factor in car purchase discussions then we should see an impact.

If I was to take a stab at this I would say it would be at a $10-20 dollar increase from today's price of oil.

 

[ValueAnalyst]

Sooooo, with oil and gasoline prices going back up again... are we going to get a repeat of the prior phenomenon where electric car stocks traded up whenever gasoline prices went up?

Opinions?

Yes, but the question to ask is what is the price of oil that would begin to trigger rising valuations of EV companies? I do not believe we are there yet. When gas prices become a factor in car purchase discussions then we should see an impact.

If I was to take a stab at this I would say it would be at a $10-20 dollar increase from today's price of oil.

At what price of gasoline would the masses rather buy a used Model S over a new 7 Series?

Tesla first needs to adjust the assumption used in calculating "gasoline savings" from $2.70 to $3.50 per barrel for premium gasoline.

Gasoline prices will continue to rise in the coming months. $4.00+ is highly likely, $5.00 is possible.

 

[Starno]

If you invest in market indices, this makes sense. As an individual stock investor, I absolutely do not want to be in cash rather than TSLA during 2018-2020 regardless of whether there's a recession. Same with most of the rest of my list of stocks (now quite short, as I keep selling out of one after another as I decide they are overvalued or have poor futures).

Agreed. You should use it as an opportunity to accumulate if you think your stocks have high chance to survive the recession.
But it's interesting to keep in mind that a lot of stocks will crash 50%+ and trade sideways for 2 years+ , even if the company doesn't die.

Not talking about Tesla.

 

[ValueAnalyst]

I expect rising oil prices to increase demand for used Tesla's:

ValueAnalyst on Twitter

 

[jhm]

2013, the first full year of model S production, early days, EVs like the LEAF cross over the valley of death (2012)
EV Sales: January 2014 tesla is 11%
View attachment 295132


2016, Tesla ranking has improved to No.2, but global market share is dropped to 9%
View attachment 295136

2017, the most recent we have, Tesla drops to No.3, but market share is down to 8%
Chinese are now 4 of the world top 10.
View attachment 295138


2018 will be a step 2 for EVs (2013 was step 1) new Tesla 3, New LEAF, New etc etc
but its also the 'trial' year for Chinese ZEV credits.

2018, makes EVs mainstream for automakers, or else they leave China. No automaker wants to leave China.

This is a nice view. The field is definitely deepening, becoming less concentrated. Look at what has happened to the market share for the top producer each year. It has fall from 23%, 11% to 9% these three years. The top five collectively held market share of 71%, 46% and 37% in those three. So it will be come increasingly difficult for any EV maker to hold on to a 10% market share. That would actually signal contraction in the field.

It is also important to see that the race is fairly tight among the front runners. BYD and Tesla were separated by about 11k in 2015, but this narrowed to 6k in 2017. BYD grew by 77%, while Tesla grew by 104% in 2017 over 2015. So Tesla is definitely keeping the heat on. But props goes to BAIC for growing five-fold in this two year timeframe.

The frontrunners definitely need to grow at a quick pace if they want remain in the top spots. Come 2019 Tesla could be producing 500k to 600k. That would be 5 to 6 times the volume in 2019. Can BYD, BAIC, and BMW keep with that pace? I hope so. Who else will jump into the top five. If the top five frontrunners are taking collectively 2.3 to 2.8 million in 2019, this will exert enormous pressure on all automakers to get into the EV race. Even though two of these are primarily selling in China, this will still challenge all major automakers to compete with EVs in the very important growth market. Any automaker that is not growing in China is probably not growing globally. So building a competitive EV in China is becoming an essential requirement of growth anywhere.

The top five EV makers collectively held 37% share of the plug-in market in 2017. What will this share be in 2019? Likely it will continue to shirk. Let's suppose the top five (whoever they may be) will hold 30% market share. So with this group producing 2.3 to 2.8 million (so as to keep pace with Tesla), this implies a market size of 7.7 to 9.3 million in 2019. In this kind of competitive scenario, Tesla's market shared drops from 8% to about 6.5%. While that may look bad for Tesla individually, it is actually a huge win for EVs as a market. This would push EVs to nearly 10% share of the whole auto market in 2019. This is much faster EV penetration than anyone in the oil industry would like to believe is remotely possible.

Yet that scenario may in reality be too aggressive on EV growth in such a short time. Any alternative scenario where Tesla grows nearly to 600k in 2019 while EV market is less 6 million implies that Tesla is growing market share and taking the largest share of the market. Some Tesla investors might view this as a plus for Tesla, but a more dynamic EV market could be very good for the stock too.

So the basic point here is that so long as Tesla is growing a fast pace it really does not matter if it is losing market share. What matters for the auto and oil industries is that competition within the EV space is strong. If this is a tight race among the top five EV makers, this spells rapid transformation for the rest of the auto industry and for the oil industry. Fierce competition is a force multiplier of the impact that Tesla is able to achieve.