Friday Highlight Reel: Edition #9
A sampling of interesting observations from the Haymaker's network of market experts and favorite resources.
“Valuation tends not to be an important variable during a bull market…only when it ends.” -Craig Drill, founder of, shockingly, Craig Drill Capital.
“Undervaluations caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by overenthusiasm or artificial stimulus.” -Warren Buffett’s mentor, Ben Graham (who had no idea many decades ago how much artificial stimulus was in America’s future)
1: CNBC on Tesla’s Earnings Trajectory
“Shares in electric vehicle makers Tesla dropped 4% after the company reported first-quarter earnings after the bell. Here are the results.
Earnings per share: 85 cents adj. vs 85 cents expected, according to the average analyst estimate compiled by Refinitiv
Revenue: $23.33 billion vs $23.21 billion expected, according to Refinitiv estimates
Net income came in at $2.51 billion, down 24% from last year, while GAAP earnings came in at 73 cents, down 23% from the year-ago quarter.”
Haymaker Take: It’s been a rough week for Elon Musk. The company that almost single-handedly pioneered the EV industry is clearly feeling the competitive heat, as indicated above. The world’s largest EV market — by far — is China. However, even its demand for EVs has been slowing and lower-priced competitors are proliferating. China is also becoming a formidable exporter of a wide array of auto brands, putting pressure on both traditional and EV carmakers. Its leading EV producer, BYD, is selling new cars as low as $11,500. Lower prices are naturally pressuring TSLA’s operating margins, which crashed from 19.2% to 11.4%. Ominously for TSLA, Chinese EV producers are rumored to be soon unveiling models that operate with far cheaper sodium-ion batteries.
Based on China’s success in commercializing lower-cost lithium iron phosphate (LFP) batteries, this potential breakthrough should not be dismissed. BYD (a longtime investment of Warren Buffett) is apparently close to bringing a sodium-ion-powered car to market. Moreover, I’ve long believed that the powers-that-be in China (who are indeed powerful), would like to see Mr. Musk’s company lose considerable market share to domestic brands. TSLA’s hyper-growth-like valuation provides scant cushion against serious operating challenges. Accordingly, I remain highly skeptical about its investment merits.
Rubbing salt into Elon Musk’s wounds was the fiery disintegration of his latest SpaceX rocket. Hopefully, for his status as one of the richest persons, this isn’t a precursor of what will happen to his still half-a-trillion-dollar empire (even more, assuming a lofty valuation for privately held SpaceX).
#2: EPA on Smog (Relevant minutia: Smog is a portmanteau of “smoke” and “fog”. Save that up for your next Trivial Pursuit event… if anyone still plays that game.)
Haymaker Take: This EPA chart offers a pertinent piece of context to follow on the above Tesla topic. It seems that just as the environmental harms resulting from worldwide use of the internal combustion engine, or ICE, have been almost miraculously brought down to a manageable (perhaps even negligible) level, the Western World has developed an evangelical fixation on EVs, regarding the technology as a step towards ecological salvation. Never mind that this obsession ignores the landscape-scarring nature of intensive mineral mining (essential for EV battery production), or that electricity is itself a product of fossil-fuel burning — no, EVs are good for the planet, case closed. (Chile’s announcement today of the nationalization of its lithium mines portends poorly for future supply of that essential EV input.)
EVs have a big role to play in the transportation industry of the coming decades, but the conversation surrounding that role needs to be far less wish-fulfillment oriented, just as the counter-intuitively favorable reality of present-day emissions could use a bit more attention.
#3: The High-Tech Strategist on Bubbles and Jim Cramer
“A bear market to be sure, but it didn’t correct the historic excesses. Superbubbles normally collapse by at least 50%. Since October, stocks have rallied in fits and starts. The latest top came on February 2 with the S&P at 4195. The October-February move attracted momentum investors, market technicians, ‘liquidity experts’ (the bull argument in bear markets is always that there’s a ‘mountain of money’ on the sidelines waiting to pile in), and of course CNBC’s Jim Cramer, who never seems to fail to catch tops. Here’s a CNBC headline from January 31, just two days before the February peak: ‘Jim Cramer says we’re in a bull market, so buy on the dip.’ But Cramer wasn’t alone in calling for a ‘new bull market.’ There were lots of others including columnists at Forbes.com. Here’s a Forbes headline from a week ago: ‘A New, Exciting Bull Stock ‘Market’ Is Emerging.’
As I wrote in last month’s letter, the stock market was wild at the beginning of this year with the prior bull market’s favorites (tech) leading the charge. The tech-heavy Nasdaq Composite index posted its best January in 22 years. That’s typically not how bear markets end – there’s usually a change in leadership. There was also wild speculation in ‘meme’ stocks, cryptos and 0DTE (one-day-to-expiration) stock options - which continues today. That’s also not how bear markets end. Bear markets terminate when investors can’t take the pain anymore and finally capitulate, as they did in 2002 (see chart). Bear markets also don’t end with valuation metrics (market cap to GDP, price/sales ratios) near all-time highs. That’s where they are today. Bear markets don’t end with the Fed rapidly raising interest rates and before a recession has occurred.”
Haymaker Take: Frankly, I was going to cut back on some of my friend Fred Hickey’s above-quoted commentary, in the interest of brevity. However, upon a re-read, I think it’s too insight-rich to shorten. Instead, I’ll abbreviate my feedback to simply say “Amen!”, particularly, of course, with regard to Jim Cramer’s serial whiffs on proclaiming this bear market dead and gone. Okay, I can’t help adding this bit: Once “Booyah” Jimbo sounds semi-suicidal, it will likely be the time when you’ll want to become fully invested in stocks.
#4: Gavekal on Inflation and the CPI
“… the backward-looking rate of inflation as measured over the last 12 months continues to run hot. The US consumer price index was up 6% YoY in February. That was a moderation from 6.4% in January, but still too high for Fed policymakers. However, the measured inflation rate of today is a lagging indicator of policy decisions long past. Looking at financial conditions—whether before or after last week’s SVB failure—suggests the policy tightening that has taken place over the last 12 months has already initiated a powerful disinflationary process whose true magnitude will not show up in backward-looking CPI data for months to come.
By financial conditions, I mean whether aggregate conditions in the economy tend to favor or impede credit growth. In recent months, many observers latched onto the Bloomberg Financial Conditions Index, which before SVB’s implosion had rebounded into positive territory, and concluded that a near-term recession was unlikely.”
Haymaker Take: This is an interesting twist on a closely followed measure by another friend of mine, Will Denyer, the Fed and monetary policy maven at our partner firm, Gavekal Research. As he notes, the Bloomberg version of this tends to be the go-to data point in this regard. It’s been flashing benign signals in recent months. Yet, that seems at odds with the avalanche of banking crisis and credit-crush-related factoids we’ve seen since SVB Financial and Signature Bank met their makers. Put me in Will’s camp when it comes to real-world financial conditions.
To learn more about Evergreen Gavekal, where the Haymaker himself serves as Co-CIO, click below.
#5: Doomberg on Coal… and Streisand (excerpt from Doomberg’s February 27th, 2023 post)
“Although hardly anyone saw or even knew of the picture – it had apparently only been downloaded a total of six times, two of which were by her attorneys – Streisand decided it was unacceptable that this image was floating around on the internet and demanded the Adelmans remove it from their posted collection. As a sign of her determination that nobody should see her home without her permission, Streisand sued the couple in 2003 for violating her privacy, demanding $50 million in restitution. The staggering hypocrisy of it all backfired spectacularly. The story went viral and tabloids the world over splashed images of the estate for countless millions to see. Thus was born the ‘Streisand Effect,’ defined by the Urban Dictionary as a phenomenon in which efforts to suppress embarrassing information only serve the unintended consequence of popularizing it.
We were reminded of this rather humorous affair while researching the impact last year’s global energy crisis will likely have on the long-term demand for coal, the dirtiest of the fossil fuels. In the name of reducing carbon emissions, governments across the Western hemisphere have worked for decades to suppress the production of most forms of primary energy, ultimately culminating in the severe energy crisis that began in Europe in 2021. In the years leading up to the emergency, much of Western Europe effectively ceased domestic exploration and production of natural gas – implementing a complete ban on fracking, for example – while simultaneously and preemptively closing down perfectly operational nuclear power facilities. From these foolhardy decisions did a global calamity evolve.”
The Doomberg piece from which we sourced this excerpt includes and refers to the famous photograph (see below) of Barbra Streisand’s impressive coastal mansion. The green chicken’s photo caption, which credits the image to CCRP, reads: “Enough to make Joel Osteen blush” — That’s likely so.
Haymaker Take: To further increase its risks of an acute energy shortage next winter, along with soaring prices, Germany has decided to shut down its last three nuclear power plants. Apparently, its leaders didn’t get the memo that the Nord Stream I and II pipelines are out of service, and likely will be for a long while. To me, this move is sheer lunacy. However, it certainly strengthens the bull case for U.S. natural gas producers and liquefied natural gas exporters. It also underscores the improbability that U.S. natural gas prices will indefinitely stay in the $2 to $3 range.
#6: Jesse Felder on “The Big 5” and Their Cash Flow
“The five largest stocks in this index remain extremely overvalued, as well. In aggregate, they currently trade at just over 65-times free cash flow (less stock-based compensation) This, of course, is not a level at which you would expect a major low to be formed, especially when the greatest tailwind to their valuations over the past decade, the Fed’s monetary largesse, is now operating in reverse.”
Haymaker Take: Sixty-five times free, or excess cash flow, is an eye-opener, for sure. Another is that 95% of the S&P 500’s 7% first-quarter return came from just 10 stocks. Perhaps even more incredibly, 90% was generated by a mere five names, primarily the companies represented by Jesse’s above visual. This is a classic warning sign, despite the reality that the market nearly always records a positive year when it is up at least 7% in the first quarter. Another crimson flag is that the Equity Risk Premium (ERP) is the lowest since 2007, right before the wicked bear market that began the following year. Because the ERP compares the earnings yield (the inverse of the P/E ratio) on stocks to longer-term treasuries, low is bad and high is good. Ergo, let’s do an inventory of market positives and negatives:
Positives:
Upward momentum
The aforementioned as goes Q1, so goes the year
Negatives:
Two straight quarters of falling profits (i.e., an earnings recession)
High likelihood of an actual recession
Market halitosis, i.e., bad breadth, as in extremely narrow leadership
Heavy insider selling
Heavy retail (small investor) buying
One of the worst Equity Risk Premiums ever
Fed liquidity drainage, including the probable resumption of its double-tightening (selling Treasurys and raising rates)
Looming debt ceiling crisis
Distinct possibility of a federal fiscal funding fiasco
“Booyah” Jimbo is once again declaring the end of the bear market
How do those odds strike you?
#7: The Haymaker on Traders Summit
My profuse thanks to Blake Morrow for inviting me on his popular podcast, Traders Summit. Blake is a genial and bright host. We had a lively discussion that I think any of you taking the time to listen will enjoy. Fair warning: much of what we discussed has been covered in recent Haymaker editions. But sometimes the verbal is more interesting than the written word… especially when yours truly is at the keyboard!
