2022-12-18

The escalating cost of interest on government debt

https://www.mcoscillator.com/learning_center/weekly_chart/federal_government_not_ready_for_high_rates/?mc_cid=793a116649&mc_eid=a3bd2f3664

All governments promise to ‘fix’ the deficit, but no government dares to cut spending or raise taxes. The various factors that have sent rates to zero have allowed this unsustainable behaviour to continue for most of my lifetime.

The problem is enormous, as I have said many times, but this article gives more detail on how large the problem is in the USA. The situation in the UK is almost certainly even worse.

Weekly Wrap

This week did not see any major movements in any asset class: - bond yields were up a tiny bit over the week. The US 10Y yield stands at 3.47%, which is the top of its range back in June. This is still higher than most developed countries, so it continues to give support to the dollar, - US stocks were down for a second week, with the SPX down at 3850. After fairly violent up and down moves, it’s back down to where it was in June and Sept. Nearly every equities market on the planet is down a similar amount, with the exception of Istanbul (in lira), a market that most western traders have no hope of entering. - Energy (WTI futures, near month) continues to drift down. There are lots of reasons to suppose that it’s going higher in the long run, but the overall trend seems to be just going down fairly endlessly. A technical rally this week pushed it p 4.6% though. - Tesla is under pressure. Briefing.com had a good, balanced account on Friday: > Tesla avoids another crash after Musk’s latest stock sale is disclosed, but troubles remain (TSLA)

Cathie Wood, Founder and CEO of Ark Invest, is literally buying what Elon Musk is selling. From December 12 through December 14, the eccentric CEO of Tesla (TSLA) has unloaded nearly 22.0 mln shares of TSLA stock for a total of about $3.5 bln in proceeds. As TSLA continued to skid lower on Wednesday afternoon, Wood added more than 74,000 shares of TSLA across three of her funds. With TSLA shares plunging by about 55% so far this year, it’s easy to understand the allure of taking a bet on the stock.

However, the leading EV maker is attempting to navigate around a number of obstacles at the moment.

• Musk’s penchant for selling TSLA stock is one such impediment for the stock. Since last December, when Musk first hinted that he may buy Twitter, he has executed four substantial sales of TSLA, including this week’s disposal. 
  • In total, Musk has raised about $23 bln in capital through TSLA sales to help finance his $44 bln acquisition of Twitter. Even after these sales, Musk still holds nearly 425 mln shares of TSLA, which means he still has plenty of dry powder remaining should he choose to unload more stock.
  • Given Twitter’s rough financial situation, which seems to be worsening by the day as more advertisers flee, it’s not out of the question that Musk will tap into his TSLA holdings again. In fact, many investors believed that Musk was done selling in August when he tweeted that his selling spree was over. That declaration proved to be false and now many are wondering what Musks’ true intentions are.
• Demand is on shaky ground, especially in China, where COVID-related restrictions continue to hinder economic growth. In November, passenger vehicle sales declined for the first time in six months and auto sales are expected to be relatively flat in 2023.
  • These demand concerns were amplified last week when Reuters reported that TSLA was planning to suspend its Model Y output at its Shanghai plant during the last week of the year. This news followed a Bloomberg report from December 5 that stated that TSLA was cutting its December Model Y production by 20% in Shanghai. The company later refuted the story, but investors took a “where there’s smoke, there’s fire” mindset, sending shares sharply lower that day.
  • What is not debatable is that TSLA has become more promotional in recent months as it looks to clear out inventory after ramping up production. In October, the company cut prices by 5-10% for the Model 3 and Model Y in China. 
• Although the stock has plummeted this year, shares are still quite expensive with a P/E hovering around 30x. Furthermore, the “E’ component of that ratio could be poised for a drop as ASPs and automotive gross margin sink in the face of sluggish demand.

The stock is experiencing a reprieve from its sell-off today, even with the market taking a strong hit, likely due to the idea that the bad news surrounding Musk’s stock sale is already priced in. Whether today’s relative strength translates into a more lasting rebound remains to be seen, but we believe TSLA is facing an uphill battle as Musk’s attention and focus centers on his flopping Twitter acquisition.