Tesla Investor's General Macroeconomic / Market Discussion

[Words of HABIT]

jhm, you have made some good points. however I will agree to disagree with you on my main point.
The adoption rate of EVs is very slow. EV crushing ICE will not happen with the introduction of the Model 3, again due to supply constraints and lack of EV choices (not everyone will want/need a compact sedan). IMO this "crushing" will happen around 2030 - 2040. By then oil will likely be significantly higher and having appreciated faster than the electricity rates. My thesis remains for the next +-10 years, an increase in oil will increase TSLA SP, a decrease in oil will decrease TSLA SP. Let's look at extreme cases: Current US gas at the pump is +-$3/gallon.
1) If US gas sold for $1/gallon at the pump, IMO TSLA SP would decrease substantially based on this fact alone.
2) If US gas sold for $7/gallon at the pump, IMO TSLA SP would increase substantially based on this fact alone.
If in agreement with the above two statements as extreme examples, would this thinking still not apply on a lesser degree based on more realistic changes in the price of oil? I think so.
Let's watch in the coming months and compare notes in the new year.
- For each day oil price increases or decreases by over 1.5%, is TSLA SP correspondingly up or down? If TSLA has more up days on increased oil days and TSLA has more down days on decreased oil days, than vice versa, I win. Otherwise you win. I'll throw in the Nasdaq for good measure and wager $1 CAD. I'll post on February 1st, 2015 with the results.
Cheers.

 

[jhm]

I am making no claims about the share price. I am talking about Tesla's earnings. There are a lot of idiots moving the TSLA share price around every day, and it has little to do with future earnings. If enough traders think the share price has something to do with the price of oil, then it will trade that way. This is why I suggest that long-term investors be prepared to make an opportunity of it. If you want to play with the short-term traders on this, buying when oil goes up and selling when it goes down, be my guest. But the whole game is irrelevant to the franchise that Tesla is building.

BTW, for gasoline to get down to $1/gallon, the price of oil needs to be about $25/bbl. I have serious doubts that we will ever see oil that cheap in the future. Moreover, if oil were that cheap, electricity would be cheaper too. There is an arbitrage inequality that prevents oil from becoming cheaper than electricity, basically you can make electricity from oil with higher efficiency than what an ICE in a vehicle can deliver. If oil were to become that cheap, it would be used to make electiricity and drive down the cost of electricity. So there is always a positive spread in the cost per mile between gas and electricity, albeit low oil prices will compress this spread. But all this is academic, oil cannot go that low for any sustained amount of time. The Saudis would have to put just about every other oil producer out of business to do that. And even if they had the reserves to do that, it would not be worth it to them to undercut the whole industry so egregiously. Currently, the Saudis produce under 10 million barrels per day, and world consumes about 96 million barrels per day. But at $25/bbl, demand would go up substantially, perhaps to 120 mbpd. So the Saudis would have to expand their production tenfold to make that happen and deplete their reserves ten times faster. This is an absurd scenario.

Regarding your $7/gal scenario, that would mean oil goes well above $150. While I do belive that is plausible, it would probably trigger a global recession. It would definitely motivate big time investment in all EV makers. So as a Tesla shareholder I'd be pretty happy, but we would all be dealling with a really crappy economy. Would this constitute a good environment for Tesla's earnings? Not sure.

My basic outlook is that the price of oil will generally stay within $60 to $120. I believe that is sufficiently high not to compromise Tesla's earnings potential or growth rate. However, I do agree with you that the share price will show some correlation with oil, but the underlying premise behind this is the belief that Tesla is demand constrained or quite nearly so. So this correlation is simply a product of bearish sentiment. Will bears attack more aggresively when oil prices drop? Likely. Will shorts become cautious when oil prices go up? Perhaps. Will bears try to scare investors with exaggerated alarm regarding falling oil prices? You bet. It's called FUD. Should long-term Tesla investors worry about any of this? Not so much.

 

[Robert.Boston]

Also keep in mind that natural gas prices are loosely linked to oil prices. (There are some uses where one can substitute for the other.) NatGas prices had been heading up towards $6 in the first half of this year, but are now looking to stay at $4 for as far out as they are traded. Natural gas sets the price of electricity throughout most of the US, so there's an additional ripple effect improving Tesla's margins as oil (hence natgas) prices fall.

Problem is, too few Americans do a TCO calculation. There's a psychological effect of high-priced gas, squeezing ones budget unexpectedly, that drives some people to reconsider why exactly they're driving that Suburban. At <$3, I don't think we'll see that effect as much.

 

[Words of HABIT]

...My basic outlook is that the price of oil will generally stay within $60 to $120. I believe that is sufficiently high not to compromise Tesla's earnings potential or growth rate. However, I do agree with you that the share price will show some correlation with oil, but the underlying premise behind this is the belief that Tesla is demand constrained or quite nearly so. So this correlation is simply a product of bearish sentiment. Will bears attack more aggresively when oil prices drop? Likely. Will shorts become cautious when oil prices go up? Perhaps. Will bears try to scare investors with exaggerated alarm regarding falling oil prices? You bet. It's called FUD. Should long-term Tesla investors worry about any of this? Not so much.

jhm, I agree with your comments as above. We are on the same page.

 

[AlMc]

Well, as macroeconomics go, this is not good news for Japan, and possibly will have some ripple effects: http://finance.yahoo.com/news/japan-says-economy-contracted-1-6-pct-july-000851820--finance.html

 

[blakegallagher]

Well, as macroeconomics go, this is not good news for Japan, and possibly will have some ripple effects: http://finance.yahoo.com/news/japan-says-economy-contracted-1-6-pct-july-000851820--finance.html

Well darn ....

this line seems confusing "The 1.6 percent drop in annual growth for the world's third-biggest economy was much lower than expected"

 

[FluxCap]

Well, as macroeconomics go, this is not good news for Japan, and possibly will have some ripple effects: http://finance.yahoo.com/news/japan-says-economy-contracted-1-6-pct-july-000851820--finance.html

Indeed. The bears in my twitter feed have been salivating all night over this. I'm less convinced this situation translates to long-term weakness in US equities, but today will be a market down day, most likely.

 

[tftf]

Well, as macroeconomics go, this is not good news for Japan, and possibly will have some ripple effects: http://finance.yahoo.com/news/japan-says-economy-contracted-1-6-pct-july-000851820--finance.html

Japan is in a catch-22 situation. As one Japanese economist aptly described it: "If interest rates rise in Japan, the country goes bankrupt. If the government tries to prevent rates from rising, the yen collapses.”

 

[Robert.Boston]

The decline in world oil prices is a huge gift to Japan; should help Q4 numbers. The Japanese economy is being dragged down by extraordinarily high energy prices at home; not only did taking the nukes off-line destroy Japan's trade accounts, turning it from an net exporting to an net importing economy, but the cost of production has driven a lot of jobs out. And, it's hampered the disposable income of a lot of people there.

 

[FluxCap]

The decline in world oil prices is a huge gift to Japan; should help Q4 numbers. The Japanese economy is being dragged down by extraordinarily high energy prices at home; not only did taking the nukes off-line destroy Japan's trade accounts, turning it from an net exporting to an net importing economy, but the cost of production has driven a lot of jobs out. And, it's hampered the disposable income of a lot of people there.

Indeed, thanks Robert.

Tangentially, I think this is yet another compelling case for large-scale solar deployment. Some cheap, broken solar panels in the aftermath of an earthquake are easily replaced and nearly harmless to the environment in comparison to Fukushima, and distributed generation rather than centralized means less single points of failure. Plus you know, free sun.

Photovoltaic usage is increasingly looking like good national security and economic security policy, worldwide.

 

[InTheShadows]

Indeed, thanks Robert.

Tangentially, I think this is yet another compelling case for large-scale solar deployment. Some cheap, broken solar panels in the aftermath of an earthquake are easily replaced and nearly harmless to the environment in comparison to Fukushima, and distributed generation rather than centralized means less single points of failure. Plus you know, free sun.

Photovoltaic usage is increasingly looking like good national security and economic security policy, worldwide.

I have never heard of a solar panel breaking in an earthquake. There are gaps between the panels to allow them some flexibility. Also seismic zones are taken into consideration when designing systems.

I guess Solar City will find out when a big one hits California.

 

[jhm]

jhm, I agree with your comments as above. We are on the same page.

Glad we could work it out. All the best.

 

[FluxCap]

Just an FYI, Fed just released minutes of meeting:

FOMC Minutes

Released On 11/19/2014 2:00:00 PM For 11/19/2014 2:00:00 PM

Highlights
The latest Fed minutes are somewhat complex. Of course, quantitative easing ended. The key point currently is that the first rate increase is still data dependent. Some FOMC participants wanted to remove "considerable time" in the statement while others did not.

There was notable discussion of headwinds from Europe and Asia. This means that the Fed is not in a rush to raise rates but this not new news.

The Fed still sees the labor market as sluggish even though the unemployment rate has dipped. Notably the Fed sees inflation down in the near term but expects firming further out. The drop in gasoline prices is seen as boosting near-term consumer spending.

FOMC participants see risks to the economy as essentially balanced.

Essentially, the Fed sees the U.S. economy as slowly improving but is somewhat concerned about low inflation. Rates are likely to rise in 2015 but the questions are when and how fast. Increases are almost certainly to be slow.

The December FOMC statement will add clarification to timing of policy changes with both the Fed forecasts and the chair press conference.

 

[FluxCap]

Today's market plan will be: buy everything.

China rate cut, Draghi QE, Philly Fed numbers that were insanely high, there will be some short covering around the market today.

If the market makers want to defend flat prices they will have to spend an enormous amount of capital today, and I doubt they have the will / stamina for that. I think they will cover.

 

[FluxCap]

Today's market plan will be: sell everything.

Market does not like Chinese equities frothiness and Fed is floating a test balloon to remove the "considerable time" language, potentially signaling rising Fed interest rates. Oil hammered with no real end in sight despite slight uptick.

S&P down significantly premarket.

Grim outlook market-wide right now, less fear and more uncertainty.

Fasten your seatbelts.

 

[FluxCap]

Reposting a little of my macro analysis here so it doesn't get lost in the short-term thread:

For those worried about Oil prices. The producers aren't going to bankrupt themselves. It doesn't change the fact we only have one planet. These are all facts and are truth. That and, in this price range for Model S... these people aren't worried about pump gas prices. The big implication is on things like freight and production of products.

You need to do some math to understand the scope of what you are saying. Saudi Aramco / Saudi Arabia has SO MUCH MONEY in reserve (over $30 *trillion* in 2012) that it can literally sustain market-breaking prices almost indefinitely for purposes of investment. They do not have to break even to survive.

On the flipside, all the heavily leveraged US producers very much DO need oil above breakeven to survive. Many of them won't. That is the plan. And if they default, the banks that backed them potentially get hammered too. And jobs are lost, and chaos ensues, etc.

We also have central banks all over the world scrambling to increase QE, while our own Fed is getting ready to raise rates.

This is spooky stuff. It's either the buying opportunity of the year, or a disturbing preview of further carnage.

Bank of America sees $50 oil as Opec dies - Telegraph

I couldn't stand it anymore and had to regress the weekly change in TSLA price on the change USO (oil future ETN that tracks the price of oil). Result is an R-squared stat of 1.6% on most recent 100 weeks. The slight correlation is easily due to general.market conditions. There is no statistical support for the belief that price of oil drives Tesla stock performance.

Further, jhm you do a great job with statistics, but you used flawed variables to analyze market movements. You cannot use historical correlation to oil prices to judge the current and future correlation. The market has decided this recently, so it does not "Show up" in any regression. The market prices equities on expectation of FUTURE profits, not past.

 

[FluxCap]

A couple charts to start your morning:

First up, here's the cost to produce oil for the Saudis vs. everyone else (oil is currently at almost $60/bbl and falling):

Next up, here's what is keeping Janet Yellen up right now (or should): look at the portion of US jobs that were created largely from this recent shale boom, and imagine what happens to the US economy if those jobs vanish:

 

[FluxCap]

[Memorializing some more charts on the oil situation]


First up, here's the cost to produce oil for the Saudis vs. everyone else (oil is currently at almost $60/bbl and falling):

Next up, here's what is keeping Janet Yellen up right now (or should): look at the portion of US jobs that were created largely from this recent shale boom, and imagine what happens to the US economy if those jobs vanish:

View attachment 65704

 

[RobStark]

When you transfer wealth from the shale boom economies to the rest of the US economy then we will do just fine. Better than fine. Low energy prices are good for the overall US economy.

Texas,North Dakota, Oklahoma may not do so well.

And maybe Louisiana and Alaska will suffer a bit from low overall oil prices.

But every other State will greatly benefit from lower energy prices. As will the overall US economy.


Oil prices rise dramatically leads to US recession. Low sustained oil prices leads to economic boom.

Hopefully, in the near future our economic destiny will no longer be so tied to the price of oil.

 

[techmaven]

I think the fear is that low oil demand is a leading indicator of a poor economy. However, this time around, a lot of the other data does not seem to agree. As a country, we have also worked hard at reducing our oil consumption. This does not mean that we cannot talk ourselves into some sort of collapse however.

You would think at some point the data coming from the boost of low oil prices will start to gain the upper hand. That's why I don't think we stay below the global average of the cost to produce oil for long. Matter of fact, this could set us up for even higher oil prices in 2015 if the low prices does succeed in cutting production in the U.S.