Stanphyl Capital Letter – March 2019

March 29, 2019

Friends and Fellow Investors:

For March 2019, the fund was up approximately 5.5% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 1.9% while the Russell 2000 was down approximately 2.1%. Year-to-date 2019 the fund is up approximately 12.8% while the S&P 500 is up approximately 13.6% and the Russell 2000 is up approximately 14.6%. Since inception on June 1, 2011, the fund is up approximately 85.4% net while the S&P 500 is up approximately 148.5% and the Russell 2000 is up approximately 102.4%. Since inception the fund has compounded at approximately 8.2% net annually vs. 12.3% for the S&P 500 and 9.4% for the Russell 2000. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two. (If you’re an investor in the fund, you should have your 2018 K-1 next week.)

I continue to believe that what we’ve seen since the market’s late December low is a bear market rally, albeit a fierce one. The U.S. economic slowdown is in its early stages and we’re a long way from QE4; in fact, the Fed is still removing approximately $50 billion a month from its balance sheet and – despite the taper announced in March – will continue removing tens of billions of dollars a month through September, while real short-term U.S. interest rates are positive for the first time in over a decade. We thus remain short the Russell 2000 (NYSEARCA:IWM), an index which-despite incorporating almost a full year of drastically lower corporate tax rates-has a trailing twelve-month GAAP PE ratio of around 43 (and I strongly suspect the “E” will go down this year) and a record-high percentage of its constituent companies losing money…

http://si.wsj.net/public/resources/images/B3-DO131_Dshot_NS_20190328041637.png?mod=djemDailyShot

…along with a median EV-to-EBIT that’s (almost literally!) off the charts:

http://si.wsj.net/public/resources/images/B3-DM812_Dshot_NS_20190322044352.png?mod=djemDailyShot

Elsewhere in the fund’s short positions…

We remain short stock and call options in Tesla, Inc. (NASDAQ:TSLA), which I consider to be the biggest single stock bubble in this whole bubble market. The core points of our Tesla short position are:

  1. Tesla has no electric vehicle “moat” of any kind; i.e., nothing meaningfully proprietary in terms of design or technology, while existing automakers-unlike Tesla-have a decades-long “experience moat” of knowing how to mass-produce, distribute and service high-quality cars consistently and profitably.
  2. Tesla is now a “busted growth story”; demand for its existing models has peaked and it will have to raise billions of dollars to produce new ones.
  3. Tesla is again losing a lot of money with a terrible balance sheet while suddenly confronting massive competition in every aspect of its business
  4. Elon Musk is extremely untrustworthy.

In mid-March, seemingly in response to its sliding stock price (which may have been approaching Elon Musk’s margin call territory), Tesla rushed out an ill-prepared Model Y unveiling on extremely short notice, inspiring its chief engineer to immediately quit. Supposed to be a small electric SUV/crossover, the event showed only a fake clay model and a bodywork-disguised Model 3, and was a complete embarrassment beautifully summarized here by Zero Hedge. By the time the Model Y is available in late 2020/early 2021 (if Tesla is still in business then), it will face superior competition from the much nicer Audi Q4 e-tron, BMW iX3, and Mercedes EQC.

Tesla’s backlog is now gone and new orders severely lag, and in response this month it finally introduced a $35,000 version of the Model 3. Despite the fact that this car has just 220 miles of range and comes only in black with a cheap cloth interior, I estimate it will have an EBIT loss of at least $3000 before options, which is undoubtedly why Tesla is delaying its arrival despite taking deposits for it. Tesla also introduced a 240-mile version for $37,500; that one may “only” lose around $1500 but is less likely to be “optioned up,” as it has power seats and a nicer interior (although the only standard color remains black).

Also keep in mind that since January Tesla has slashed thousands of dollars from the prices of all its other cars – longer-range Model 3s as well as the S and X, so throughout 2019 (vs. the peak quarters of Q3 & Q4 2018) Tesla will experience a deadly combination of declining volume and declining ASPs. In January, the company reported a Q4 2018 GAAP profit of $139 million that was considerably smaller than Q3’s never-to-be-topped and highly misleading (as explained in previous letters) figure of $312 million, and now as ASPs and volume decline while under-reserved warranty expenses soar, Tesla shall slide back into losses that I estimate on a GAAP basis will be well over $1 billion for 2019. That said…

In yet another example of typical Tesla “wise-guy scamminess,” the Q1 2019 GAAP loss may not be anywhere near as bad as it should be, as there’s a real chance that Tesla may use its sudden redefinition of “Full Self-Driving” (which, according to Tesla but NOT the customers who paid for that feature, now means nothing of the sort) in order to recognize hundreds of millions of dollars of deferred revenue to which it’s nowhere *near* entitled. See this excellent Twitter thread.

What else did this alleged “growth company” do in March? Well, after initially announcing (in a spur-of-the-moment cost-saving measure) that it was closing 90% of its retail stores, Tesla soon backtracked and decided to close “only” around half of them, most likely when someone informed Musk – who is truly a business moron – that the company was on the hook for all those leases anyway.

In late February, the SEC finally lost patience with Elon Musk’s continual violation of last year’s settlement stemming from his fraudulent “$420 buyout” tweet and asked the presiding judge to hold him in contempt, to which Musk (of course) swiftly responded by further mocking the SEC. Written arguments were presented by both sides in March and the presiding judge will hold a hearing on April 4th. Despite the terrible precedent Musk’s behavior sets for the CEOs of any other public company, I don’t have much faith that justice will be served here by either the court or Tesla’s fully complicit board; of course the latter’s source of complicity is clear: this is the most grotesquely overpaid group of corporate whores I’ve ever seen on the board of any public company…

…and here’s what Musk gets for his shareholders’ money from his new figurehead of an “independent” Chairwoman:

Musk’s public persona of impetuous stupidity as exemplified by his Twitter account undoubtedly provides an illuminating window into his private persona. Tesla has the most executive departures I’ve ever seen from any company (here’s the astounding full list), a dubious achievement that continued in March when in addition to the aforementioned departure of its chief engineer, still more folks departed from its already gutted finance department, as well as multiple other departments. This followed February’s departure of its general counsel after fewer than two months on the job, which followed January’s departure of its CFO, which followed the departures of a massive number of financial, manufacturing and engineering execs in 2018 and 2017. These people aren’t leaving because things are going great (or even passably) at Tesla; rather, they’re likely leaving because Musk is either an outright crook or the world’s biggest jerk to work for (or both). Could the business (if not the stock price) be saved in its present form if he left? Nope, it’s too late. Even if Musk steps down in favor of someone who knows what he’s doing, emerging competitive factors (outlined in great detail below) and Tesla’s balance sheet make the company too late to “fix” without major financial and operational restructuring.

Also in March, Navigant Consulting came out with its annual ranking of autonomous driving capabilities, and just as last year Tesla ranked dead last among active automakers and suppliers. Meanwhile, the number of lawsuits of all types against Tesla continues to escalate – there are now over 500!

How poorly is Tesla run? The quality of its products is one indication, and in February Consumer Reports published its annual auto reliability survey and guess who finished second-to-last? As one wag said on Twitter: you can now officially call Tesla “the Cadillac of electric cars”:

Consumer Reports’ awful Tesla reliability data jibes with the latest survey from True Delta, which ranks Tesla last among all available vehicles, while in September, British magazine What Car? ranked Tesla reliability so low that it’s in “a league” of its own.

But what about all those Tesla owners who tell you how much they love their cars despite the service and reliability problems?

I’ve always argued that Tesla owners (and TSLA bulls) confuse “luxury electric car love” for “Tesla love,” and now that superior European alternatives are beginning to roll out, Tesla drivers will flock to them. For instance, among those relatively near-term alternatives (out in late 2019) is the Porsche Taycan (OTCPK:POAHY) (here’s a great new video of it), and according to Porsche’s surveys, it’s Tesla drivers who are most interested in buying it. After its U.S. tax credit price advantage over Tesla (whose credits will be gone at the end of 2019), the stunning, Autobahn and Nürburgring-tested Taycan will cost roughly the same as the least expensive Tesla Model S and, among innumerable other advantages, will charge 2 ½ times as quickly and in the U.S. include three years of that charging as part of the purchase price. Hmm, Tesla or Porsche… Not a tough choice! Porsche has the capacity to build 40,000 Taycans a year, roughly the expected number of 2019 Model S sales before the Taycan steps in to steal pretty much all of them, and in March, Porsche announced that it already has over 20,000 orders. So Model S sales are about to be *so* dead. And if that’s not enough, a crossover version of the Taycan will follow soon thereafter, as will an all-electric version of the next Maycan. So Model X sales are *also* about to be *so* dead, especially in light of the other electric crossovers and SUVs discussed below…

Porsche’s offerings are just part of an onslaught of luxury EV competition that’s about to rip the face off sales of Tesla’s most profitable models, the S&X. The Audi (OTCPK:AUDVF) e-tron and Jaguar I-Pace (see below) are already crushing S&X sales in the European countries where they’re available, and the Audi arrives here in the U.S. in April. The e-tron is an all-electric SUV with a much nicer interior (and better build quality!) than any Tesla and a price that’s around $15,000 lower than the Model X before the Audi’s (initial) $3,750 to (eventual) $7,500 U.S. tax credit advantage. (Although the Audi’s range is expected to come in at around 225 miles vs. 295 miles for the Model X, the Audi will charge faster.) The e-tron received solid reviews (here, here, here and here), and three more electric Audis will follow it: the Sportback in late-2019 and, in 2020, the spectacular e-tron GT that recently debuted at the L.A. Auto show, as well as (in late 2020) the Q4 e-tron small electric crossover.

Also currently in showrooms is the Jaguar I-Pace (which received fabulous reviews, handily beating Tesla in comparison test after comparison test) and costing $20,000 less than the Model X and $15,000 less than the Model S, price gaps that widen by an additional $3,750 with Jaguar’s current U.S. tax credit advantage and escalate to $7,500 in January 2020. I’ve driven the Jaguar and can assure you that no objective person will say it isn’t much nicer than any Tesla.

The Mercedes EQC (OTCPK:DDAIF) (OTCPK:DMLRY) all-electric SUV will be widely available in Europe in the summer of 2019 and in the U.S. in early 2020, with an EPA range of around 225 miles and a price that will be nearly $30,000 (!) less than the Model X before the Mercedes’ (by then) $7500 U.S. tax credit advantage. And by 2022 Mercedes will have ten fully electric models, covering nearly all its model lines.

And let’s not count out BMW (OTCPK:BMWYY); here’s a fascinating interview with its head EV powertrain engineer and a preview of its upcoming 2021 i4 and iX3.

Less expensive and available now are the excellent new all-electric Hyundai Kona (OTCPK:HYMLF) (OTCPK:HYMTF) and Kia Nero, extremely well reviewed small crossovers with an EPA range of 258 miles for the Hyundai and 238 miles for the Kia, at prices of under $30,000 inclusive of the $7,500 U.S. tax credit. I expect these cars to have an immediate and negative impact on sales of Tesla’s Model 3 and a future negative impact on Tesla’s Model Y (assuming, of course, the latter makes it to market before Tesla declares bankruptcy).

So here is Tesla’s competition in cars (note: these links are continually updated)…

THE NEW ALL-ELECTRIC JAGUAR I-PACE

2019 Jaguar XJ to be reborn as high-tech electric flagship

VW Group to launch 70 pure electric cars over the next decade

Audi e-tron electric SUV is available now

Audi e-tron Sportback comes late 2019

AUDI E-TRON GT FIRST DRIVE: LOOK OUT, TESLA (available 2020)

Audi’s Q4 e-tron previews entry-level EV for 2021

Porsche Electric Taycan Launches Late 2019

Porsche Taycan Cross Turismo to launch in 2020 after Taycan Sedan

The next generation of the Porsche Macan will be electric

New VW ID. hatch: order books for VW electric car open on May 2019

Mercedes EQC Electric SUV Available Mid-to-Late 2019

Mercedes to launch more than 10 all-electric models by 2022

258-Mile Hyundai Kona electric is available now for under $40,000

239-Mile Kia Niro EV is Available Now For Under $40,000

Kia Soul (available mid-2019) EV’s Range Jumps to 243 Miles

Kia Europe to have six pure electric models by 2022

Chevrolet Bolt Offers 238 Miles On A Single Charge
GM is transforming Cadillac into an electric brand

Nissan LEAF e+ with 226-mile range is available now

Nissan Leaf-based SUV coming in 2020

The 2020 Volvo Polestar 2 Is Priced to Beat Tesla’s Best-Selling Model 3

BMW iX3 electric crossover goes on sale in 2020

New BMW i4: Tesla-rivalling coupe seen winter testing

BMW to have 25 electrified models by 2025

Ford CEO says 16 electric models are in design & development

Peugeot 208 to electrify Europe’s small-car market

Toyota, Mazda, Denso create company to roll out electric cars beginning 2019

Toyota to market over 10 battery EV models in early 2020s

New Renault Zoe to feature 400km range

Renault aims to remain EV leader in Europe

Infiniti will go mostly electric by 2021

DS 3 Crossback will give PSA’s upscale brand an electric boost

ALL-ELECTRIC MINI COOPER COMING IN 2019

Smart Will Electrify Its Entire Line-up By 2020

SEAT will launch 6 electric and hybrid models and develop a new platform for electric vehicles

Opel/Vauxhall will launch electric SUV and van in 2020

2019 Skoda e-Citigo confirmed as brand’s first all-electric model

Skoda planning range of hot all-electric eRS models

New Citroen C4 Cactus to be first electrified Citroen in 2020

MG E-Motion confirms new EV sports car on the way by 2020

Fiat Chrysler bets on electrification for Alfa, Jeep and Maserati

Maserati offering three fully electric cars between 2020 and 2022

Rolls-Royce is preparing electric Phantom for 2022

Honda will offer full-EV or hybrid tech on every European model by 2025

Bentley mulls electric car to help reduce carbon footprint

Subaru to introduce all-electric vehicles by 2021

Korando will lead SsangYong’s push into electrification

Dyson Moves Ahead on $2.6 Billion Electric Car Plan

Lucid Motors closes $1 billion deal with Saudi Arabia to fund electric car production

Rivian (electric pick-up truck maker) Announces $700M Investment Round Led By Amazon

Borgward BXi7 Electric SUV Flies Under The Radar

Detroit Electric promises 3 cars in 3 years

SF Motors reveals two electric SUVs for 2019 with 300 miles of range

Two new electric cars from Mahindra in India by 2019; Global Tesla rival e-car soon

Saab asset owner NEVS plans electric car production

EV startup Canoo will only sell cars on a subscription basis

And in China…

VW, China spearhead $300 billion global drive to electrify cars

Audi Q2L e-tron debuts at Auto Shanghai

Audi China to roll out 12 locally-produced models in total by 2022

BYD launches EV535, all-electric SUV

BYD Song MAX BEV version with 500km range to hit market in 2019

2019 BYD Yuan EV360 goes on sale with prices starting RMB89,900 after subsidy

Daimler & BYD launch new DENZA electric vehicle for the Chinese market

BAIC and Daimler to Build $1.9 Billion China Plant

BAIC brings EX5 Electric SUV to market

BAIC BJEV, Magna ready to pour RMB2 bln in all-electric PV manufacturing JV

Daimler to Start EQC Electric SUV Production in China in 2019

GM China raises new-energy vehicle target to 20 models through 2023

Nissan & Dongfeng to invest $9.5 billion in China to boost electric vehicles

Toyota to Introduce 10 New Electrified Vehicles in China by 2020

Infiniti bringing EVs to China’s luxury car market

NIOS ES8 Electric Crossover debuts with half the Tesla Model X’s price tag

536 HP Nio ES6 Midsize Electric SUV Launches With 317-Mile Range at 1/2 the price of Tesla X

NIO’s third model said to be a sedan dubbed EP7

BMW will develop and produce electric Mini in China

Ford ramps up electric vehicle push in China

Jaguar Land Rover’s Chinese arm invests £800m in EV production

SAIC building factory in China for EVs from Roewe and MG

Renault and Brilliance Automotive to build 3 new electric light commercial vehicles for China

Honda launches new all-electric Everus VE-1 for ~$25,000 in China

Honda to roll out over 20 electric models in China by 2025

Geely all-new BEV sedan Jihe A starts at RMB150,000

Geely unveils GE11 compact BEV

New Geely Emgrand GSe crossover has EV range up to 400km

Changan building large scale NEV factory

Mazda and Changan Auto join hands on electric vehicles

XPENG Motors kicks-off sales of Tesla-infused EV for €30,000

XPENG Motors to unveil second model at Auto Shanghai 2019

WM Motors/Weltmeister EX5 Electric SUV Launched On The Chinese Car Market

Chery Breaks Ground on $240M EV Factory in China

Chery’s second EV plant open in Dezhou

BYTON to launch mass-produced M-Byte into market at the end of 2019

DearCC Launches ENOVATE Electric SUV

GAC NE to roll out 12 new models for Aion series, including solar-powered models

Guangzhou Auto To Launch Four New Electric Cars By 2020

Great Wall Launches New EV Brand (NYSE:ORA) In China

Singulato iS6 Electric SUV Debuts With 249-Mile Range

Singulato, BAIC partner to promote smart new energy vehicles

Hongqi launches E-HS3 BEV SUV with AWD option, 390km range and 0-100kh/h in 5.9 seconds

FAW (Hongqi) to roll out 15 electric models by 2025

JAC’s Electric Car Has A Range Of 500 Kilometers

ICONIQ to build electric cars in Zhaoqing with total investment of RMB 16 billion

Quianu Motor aims to grab share of US electric vehicle market

Hozon Kicks Off Mass Production With All-Electric Neta N01

Aiways U5 long-range electric SUV

All-electric NEVS 9-3 sedans (nee Saab) being built in China

Youxia Motors raises $1.25 billion to start 2019 EV production

CHJ Automotive buys Lifan for shortcut to EV production

Wanxiang Gets China Electric Vehicle Permit to Make Karma Cars

Qoros Auto’s new owner plans to be an EV power

JMC (Jianling Motor Corp.) Starts New EV Brand In China

Thunder Power Chinese EV manufacturer clinches deal with Belgian investment fund

Leapmotor raises RMB2.5 billion for Series A round to build electric cars

Continental, Didi sign deal on developing EVs for China

Here’s Tesla’s competition in autonomous driving…

Navigant Ranks Tesla Last Among Automakers & Suppliers for Automated Driving

What Smart Tesla fans Get Wrong about Full Self-Driving

Tesla has a self-driving strategy other companies abandoned years ago

Waymo Starts First Driverless Car Service

Jaguar and Waymo announce an electric, fully autonomous car

Waymo Expands Chrysler Self-Driving Fleet 100-Fold to 62,000

Nissan-Renault alliance to tie up with Waymo on self-driving cars

Uber, Waymo in talks about self-driving partnership

Lyft and Waymo Reach Deal to Collaborate on Self-Driving Cars

Cadillac Super Cruise Sets the Standard for Hands-Free Highway Driving

GM ride-hailing fleet would ditch steering wheel, pedals in 2019

Honda Joins with Cruise and General Motors to Build New Autonomous Vehicle

SoftBank Vision Fund to Invest $2.25 Billion in GM Cruise

Ford and VW Discuss Autonomous Car Team-Up at a $4 Billion Valuation

Volkswagen Group and Aurora Innovation Announce Strategic Collaboration On Self-Driving Cars

VW taps Baidu’s Apollo platform to develop self-driving cars in China

An Overview of Audi Piloted Driving

Daimler, BMW deepen cooperation with self-driving venture

Mercedes plans advanced self-driving tech for next S class

Bosch and Daimler join forces to market fully automated, driverless taxis by 2020

Daimler’s heavy trucks start self-driving some of the way

Volvo, Nvidia expand autonomous driving collaboration

Continental & NVIDIA Partner to Enable Production of Artificial Intelligence Self-Driving Cars

Intel’s Mobileye has 2 million cars (VW, BMW & Nissan) on roads building HD maps

Toyota’s moonshot: Self-driving car for sale – in 2020

Nissan and Mobileye to generate, share, and utilize vision data for crowdsourced mapping

Magna joins the BMW Group, Intel and Mobileye platform as an Integrator for AVs

Intel collaborates with Waymo on self-driving compute design

Fiat Chrysler to Join BMW, Intel and Mobileye in Developing Autonomous Driving Platform

Baidu, WM Motor announce strategic partnership for L3, L4 autonomous driving solutions

Baidu plans to mass produce Level 4 self-driving cars with BAIC by 2021

Volvo, Baidu to co-develop EVs with Level 4 autonomy for China

BYD partners with Huawei for autonomous driving

Lyft, Aptiv (formerly Delphi) partner on driverless ride-hailing at 2018 CES in Vegas

Lyft, Magna in Deal to Develop Hardware, Software for Self-Driving Cars

Hyundai, Aurora to release autonomous cars by 2021

Deutsche Post to Deploy Test Fleet Of Fully Autonomous Delivery Trucks This Year

Byton cooperating with Aurora on autonomous vehicles

ZF autonomous EV venture to start output this year, names first customer

Magna’s new MAX4 self-driving platform offers autonomy up to Level 4

Groupe PSA’s safe and intuitive autonomous car tested by the general public

Tencent, Changan Auto Announce Autonomous-Vehicle Joint Venture

Self-driving startup Momenta ready to launch fully automated driving solution in Q3 2019

JD.com Delivers on Self-Driving Electric Trucks

NAVYA Unveils First Fully Autonomous Taxi

Fujitsu and HERE to partner on advanced mobility services and autonomous driving

Lucid Chooses Mobileye as Partner for Autonomous Vehicle Technology

First Look Inside Zoox’s Autonomous Taxi

Nuro’s Robot Delivery Vans Are Arriving Before Self-Driving Cars

Here’s Tesla’s competition in car batteries…

LG Chem targets electric car battery sales of $6.3 billion in 2020

LG Chem to build $1.8 bln EV battery plant in China

Samsung SDI Unveils Innovative Battery Products at 2018 Detroit Motor Show

SK Innovation to boost EV battery production capacity more than tenfold by 2022

New Toshiba EV Battery Allows 320km Charge in 6 Minutes

Daimler starts building electric car batteries in Tuscaloosa – one of 8 battery factories

Panasonic Opens New Automotive Lithium-Ion Battery Factory in Dalian, China

Panasonic forms battery partnership with Toyota

CATL’s Chinese battery factory will be bigger than Tesla’s Gigafactory

CATL to set up battery cell manufacturing in Germany

BYD to quadruple car battery output with lithium site plants

GM inaugurates battery assembly plant in Shanghai

Volkswagen plans entry into battery cell production

VW Wants to One-Up Tesla With a Next-Generation Battery

Honda Partners on General Motors’ Next Gen Battery Development

Energy Absolute Plots Asian Project Rivaling Musk’s Gigafactory

France’s Saft plans production of next-gen lithium ion batteries from 2020

Northvolt making ground on Gigafactory in Sweden

ABB teams up with Northvolt on Europe’s biggest battery plant

Chinese Battery Maker to Open Factory Next to Swedish EV Plant

Sokon aims to be global provider of battery, electric motor, electric control systems

BMW Group invests 200 million euros in Battery Cell Competence Centre

BMW Brilliance Automotive opens battery factory in Shenyang

BMW announces partnership with solid-state battery company

Toyota promises auto battery ‘game-changer’

VW increase stake in solid-state batteries with $100M investment

Hyundai Motor developing solid-state EV batteries

Wanxiang is playing to win, even if it takes generations

UK provides millions to help build more electric vehicle batteries

Rimac is going to mass produce batteries and electric motors for OEMs

Elon Musk Has A New Battery Rival (Romeo Power) Packed With His Ex-Employees

Evergrande acquires Cenat battery production

Bracing for EV shift, NGK Spark Plug ignites all solid-state battery quest

ProLogium Technology Will Produce First Next Generation Lithium Ceramic Battery For EVs

Here’s Tesla’s competition in storage batteries…

Panasonic

Samsung

LG

BYD

AES + Siemens (Fluence)

GE

Bosch

Mitsubishi Hitachi

NEC

Toshiba

ABB

Saft

Johnson Contols

EnerSys

SOLARWATT

Schneider Electric

sonnenBatterie (acquired by Shell)

Kokam

Sharp

Eaton

Nissan

Tesvolt

Kreisel

Leclanche

Lockheed Martin

EOS Energy Storage

ESS

UET

electrIQ Power

Belectric

Stem

ENGIE

Exergonix

Redflow

Renault

Fluidic Energy

Primus Power

Simpliphi Power

redT Energy Storage

Murata

Bluestorage

Adara

Blue Planet

Clean Energy Storage Inc.

Tabuchi Electric

Younicos

Orison

Moixa

Powin Energy

Nidec

Powervault

Schmid

24M

Ecoult

Innolith

LithiumWerks

Natron Energy

And here’s Tesla’s competition in charging networks…

Electrify America: Our Plan

EVgo Installing First 350 kW Ultra Fast Public Charging Station In The US

Tritium’s First 350-kW DC Fast Chargers Coming To U.S.

Porsche plans network of 500 fast chargers for U.S.

ChargePoint To Equip Mercedes Dealerships With 150kw Charging Stations For EQC

Recargo Ultrafast West Coast Charging

BMW, Daimler, Ford, VW, Audi & Porsche form IONITY European 350kw Charging Network

E.ON to have 10,000 150KW TO 350KW EV charging points across Europe by 2020

Enel kicks off the E-VIA FLEX-E project for the installation of European ultra-fast charging stations

Europe’s Allego “Ultra E” ultra-fast charging network now operational

Allego & Fortum Launch MEGA-E High Power Charging network for Europe’s Metropolitan areas

ChargePoint Secures $240 Million in Additional Funding; $500 million raised in total

UK’s Podpoint installing 150kW EV rapid chargers this year; 350kW by 2020

UK National Grid plans 350kW EV charge point network

Fastned building 150kw-350kw chargers in Europe

Deutsche Telekom to build electric car charging network in Germany

ABB powers e-mobility with launch of first 150-350 kW high power charger

Shell buys European electric vehicle charging pioneer NewMotion

BP buys UK’s largest car charging firm Chargemaster

Total planning EV charging points at its French stations

VW Is Setting Up Electric Car Charging Stations in China

Yet, despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???

Elon Musk Settles SEC Fraud Charges

Elon Musk, June 2009: “Tesla will cross over into profitability next month”

Tesla SEC Correspondence Shows A Pattern Of Inaccurate, Incomplete & Misleading Disclosures

Tesla: Check Your Full Self-Driving Snake Oil Expiration Date

As Musk Hyped and Happy-Talked Investors, Tesla Kept Quiet About a Year-Long SEC Probe

The Truth Is Catching Up With Tesla

With Misleading Messages And Customer NDAs, Tesla Performs Stealth Recall

Who You Gonna Believe? Elon Musk’s Words Or Your Own Lying Eyes?

How Tesla and Elon Musk Exaggerated Safety Claims About Autopilot and Cars

When Is Enough Enough With Elon Musk?

Musk Talked Merger With SolarCity CEO Before Tesla Stock Sale

Debunking The Tesla Mythology

Tesla Continues To Mislead Consumers

Tesla Misses The Point With Fortune Autopilot Story

Tesla Timeline Shows Musk’s Morality Is Highly Convenient

Tesla Scares Customers With Worthless NDAs, The Daily Kanban Talks To Lawyers

Tesla: Contrary To The Official Story, Elon Musk Is Selling To Keep Cash

Tesla: O, What A Tangled Web We Weave When First We Practice To Deceive

I Put 20 Refundable Deposits On The Tesla Model 3

Tesla’s Financial Shenanigans

Tesla: A Failure To Communicate

Can You Really Trust Tesla?

Elon Musk Appears To Have Misled Investors On Tesla’s Most Recent Conference Call

Understanding Tesla’s Potemkin Swap Station

Tesla’s Amazing Powerwall Reservations

So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition (and things will only get worse once it does), while its market cap tops that of Ford (NYSE:F) and nearly matches General Motors’ (NYSE:GM) despite selling approximately 300,000 cars a year while Ford and GM make billions of dollars selling 6 million and 8.4 million vehicles, respectively. Thus, this cash-burning Musk vanity project is worth vastly less than its roughly $60 billion enterprise value and-thanks to roughly $34 billion in debt, purchase and lease obligations – may eventually be worth “zero.”

Elsewhere among our short positions…

We continue (since late 2012) to hold a short position in the Japanese yen via the Proshares UltraShort Yen ETF (NYSEARCA:YCS) as Japan continues to print nearly 5% of its monetary base per year after nearly quadrupling that base since early 2013. In fact, of the world’s three largest central banks (the Fed, ECB and BOJ), the BOJ is now the only one still conducting QE, and in February, it reiterated its intent to continue doing so. One result of this insane policy (in 2018, the BOJ bought approximately 67% of JGB issuance and in 2019 anticipates buying 70%!) is there are days when no 10-year JGBs trade in the cash market! The BOJ’s balance sheet is now larger than the entire Japanese economy – it owns approximately 43% of all government debt…

http://si.wsj.net/public/resources/images/B3-DI987_Dshot_NS_20190307033740.png?mod=djemDailyShot

…and over 75% (!) of the country’s ETFs by market value.

Just the interest on Japan’s debt consumes 8.9% of its 2019 budget despite the fact that it pays a blended rate of less than 1%. What happens when Japan gets the 2% inflation it’s looking for and those rates average, say, 3%? Interest on the debt alone would consume nearly 27% of the budget and Japan would have to default! But on the way to that 3% rate the BOJ will try to cap those rates by printing increasingly larger amounts of money to buy more of that debt, thereby sending the yen into its death spiral.

When we first entered this position, USD/JPY was around 79; it’s currently in the 110s, and long term, I think it’s headed a lot higher – ultimately back to the 250s of the 1980s or perhaps even the 300s of the ’70s before a default and reset occur.

We continue to hold a short position in the Vanguard Total International Bond ETF (NASDAQ:BNDX), comprised of dollar-hedged non-US investment grade debt (over 80% government) with a ridiculously low “SEC yield” of 0.81% at an average effective maturity of 9.4 years. As I’ve written since putting on this position in July 2016, I believe this ETF is a great way to short what may be the biggest asset bubble in history, as with Eurozone inflation now printing 1.5% annually, these are long-term bonds with significantly negative real yields. In mid-December, the ECB halted quantitative easing, thereby removing the biggest source of support for those bonds’ bubble prices. Currently, the net borrow cost for BNDX provides us with a positive rebate of over 1.7% a year (more than covering the yield we pay out), and as I see around 5% potential downside to this position (vs. our basis, plus the cost of carry) vs. at least 20% (unlevered) upside, I think it’s a terrific place to sit and wait for the inevitable denouement of this insanity:

And now for the fund’s long positions…

We continue to own Westell Technologies Inc. (NASDAQ:WSTL), a 43% gross margin telecom equipment maker (of primarily small-cell repeaters) in turnaround mode. In February, Westell reported a mediocre FY 2019 third quarter, with revenue down 22% year-over-year but up 6% sequentially, and although it burned around $970,000 in free cash flow, it ended the quarter with $27.1 million in cash ($1.75/share) and no debt, and on the follow-up conference call, management explicitly indicated that it expects to return to break-even or better within a year. Westell sells at an enterprise value of only around 0.10x (i.e. 10% of) revenue, but in addition to the (hopefully soon-to-reverse) cash burn, the “hair” on this company is the long-term decline in revenue (which now appears to have stabilized and should soon reverse), a cash pile that could potentially be squandered on dumb acquisitions (a risk with all cash-rich companies) and – perhaps most annoyingly – a dual share class, with voting control held by descendants of the founder. However, on the conference call, management claimed the controlling family is open to merging the two share classes, and Westell is so cheap on an EV-to-revenue basis that if management can’t start generating meaningful profits, it seems primed for a strategic buyer to acquire it. An acquisition price of 1x run-rate revenue (on an EV basis) would be around $4.50/share.

We continue to own Aviat Networks, Inc. (NASDAQ:AVNW), a designer and manufacturer of point-to-point microwave systems for telecom companies, which in February reported a decent Q2 for FY 2019, with revenue up 2% year-over-year (adjusted for a GAAP-mandated change in revenue recognition to ASC 606; unadjusted revenue was up 5.5%). For FY 2019, the company guided to $250-$255 million of revenue and non-GAAP EBITDA of $12.5-$13 million, and because of its approximately $330 million of U.S. NOLs, $10 million of U.S. tax credit carryforwards, $214 million in foreign NOLs and $2 million of foreign tax credit carryforwards, Aviat’s income will be tax-free for many years; thus, GAAP EBITDA less capex essentially equals “earnings.” So if the non-GAAP number will be $12.5 million and we take out $1.7 million in stock comp and $6 million in capex, we get $4.8 million in earnings multiplied by, say, 16 = approximately $77 million; if we then add in at least $30 million of expected year-end net cash and divide by 5.4 million shares, we get an earning-based valuation of around $20/share. However, the real play here is as a buyout candidate; Aviat’s closest pure-play competitor, Ceragon (NASDAQ:CRNT) sells at an EV of approximately 0.7x revenue, which for AVNW (based on the mid-point of 2019 guidance) would be around $207 million. If we value Aviat’s massive NOLs at a modest $10 million (due to change-in-control diminution in their value), the company would be worth $217 million divided by 5.4 million shares = $40/share.

We continue to own the Invesco DB Agriculture ETF (NYSEARCA:DBA), which I first bought in late 2017 because agricultural products were the most beaten-down sector I could find that wasn’t a “buggy whip” (something on the way to obsolescence) or cyclical from a demand standpoint. The “DBIQ Diversified Agriculture Index” on which DBA is based is at its lowest level since 2002, and I continue to anticipate a major bounce following a favorable outcome from U.S.-China trade talks. Trump is very conscious of the fact that farm states constitute a significant part of his political base and the China deal implications for U.S. ag products would be huge. Meanwhile, extensive midwestern U.S. flooding (a real tragedy for those affected) put a bit of a tailwind behind this ETF in mid-March (although it subsequently surrendered some of those gains).

Thanks and regards,

Mark Spiegel

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Author: Celia Graham

Celia Graham is a Canadian technology journalist who has written for many news outlets. she has covered the web hosting and cloud computing industry. She also has a roving brief to write about Startups, Venture Capital, technology trends and emerging markets.