Tesla | General Risk Advisors

Poor young grandson, there’s nothing I can say,

You’ll have to learn just like me, and that’s the hardest way,

Ooh La La…

The Faces

Full disclosure: I’ve written about Ooh La La before. It was back in the days of “The Left Tail Report” – a publication I put out every quarter, the content of which was so “out there that”, by comparison, my current weekly musings look more like the Editor’s Note in Readers Digest.

Anyone out there remember “The Left Tail Report”?

For those that do, I freely acknowledge that I once dedicated an entire installment to O-L-L. The song – title track from the Faces last album –is an interchange between a grandfather and grandson about the mysterious ways of women. It was written and sung by Ronnie (Woody) Wood, and I think he did a fine job. By the time of its release, his bandmate Rod the Mod was flaking off to a solo career, whence we began to bear witness to his steady, horrifying, 45-year decline into a caricature of what he once was. From a commercial perspective, the Faces couldn’t survive his departure. Woody soon bailed, of course, to the Stones, and even here I was disappointed. I think they could’ve done better. When Mick Taylor split suddenly, I took great interest in his replacement, hoping for someone like Jeff Beck or even Mick Ronson. But they hired Keith-clone Woody, and I knew then and there they were going to settle into a comfortable middle age. And history proved me right; post Woody’s arrival, they seldom, if ever, challenged themselves musically. For the most part, they have simply mailed it in, writing boring songs, basking in their monumental, unshakeable legacy, and, of course, banking scads of cash along the way.

So Woody’s mid-70’s move arguably ruined two great bands. And it is the demise of the Faces that I particularly lament. So spontaneous, so delightfully under-rehearsed. For years, I’ve offered the following warning to my clients: the only development that could impel a hiatus from my professional toils would be a reunion of the Faces, because I’d have no choice other than to accompany the band on the road. This warning, for the record, still applies.

So it is with all of this in mind that I address the unavoidable the astonishing facial that those modern-day Faces: social media behemoth Facebook, delivered to their investors. Admittedly, nobody can shut up about this, but there’s something strange going on here, and duty calls me to weigh in. Let’s just say that the episode was so catastrophic that it’s causing me to rethink my general approach to financial advisory. Loyal readers will recall that earlier this year, and in advance of Zuck’s much-anticipated testimony on Capitol Hill, I advised him to eschew his trademark tee in favor of his Bar Mitzvah suit. I think he tried to comply, but presumably finding it a poor fit, he at least rocked a reasonable facsimile thereof. And he managed to endure the episode without emerging much worse for the wear. I further predicted that the markets would soon forget the incident, and I was proved right on that score – at least insofar as FB not only recovered, from a valuation perspective, everything it had lost from the grilling, but added another >20% to its historical highs – all within what amounted to about three months. I don’t know if the Zuck Suit did all of the heavy lifting in this respect; let’s just agree it didn’t hurt.

But perhaps thus feeling himself able to fully accept my counsel, he might’ve taken too literally my sentiments that the Q2 earnings cycle was logically setting up for downward guidance. Because boy did he guide down. And he had help. In fact, the earnings call evolved in such a way as hasn’t been seen in these realms, well, in forever. It all began innocently enough. Zuck took to the podium with chipper demeanor. It was a good quarter, he said. Just a tad light on revenues, but gosh almighty aren’t people loving Insty and Snapchat? He then turned the mic over to the redoubtable Sheryl, who put a damper on the festivities by fretting about such matters as currency impacts and ad revenues.

Here, the stock started to waver, but still, we were not in red flag configuration. That is, until 5:20 PM – EDT, when Sheryl punted to CFO Dave (Dr. Doom) Wehner, who not only punctured the sagging balloon, but burned down the all of the party favors, the house and the entire block. He didn’t simply guide down for Q3, or even just for the back half of 2018. He suggested that growth rates would be on a downward trajectory for years. We all know what happened after that.

FB shares plummeted to generate the biggest one day/single stock valuation destruction in market history. Again, a great deal has been written about this, but for our purposes, a number of factors merit our further attention. First, I don’t ever recall a company in such fine shape overall guiding down anywhere near that far into the future. Second, while I am not as laser-focused on earnings as some of my readers, it is my experience that when a CEO brings bad news to the podium, he or she usually drops it in the first five minutes of a call. But the Faces waited nearly an hour and a half before cluing in the investment community their fears that their fabulous innings in the sun are winding down.

I’m puzzled, here, about a number of things. Most of all, there’s no reason on this earth that a company generating > $10B annually in free cash flow, which has 2.5 Billion users (competing, at these levels, with Air and Water as the most ubiquitous product on the planet), and which clearly has resources and reach to continue to achieve astonishing consumer technology breakthroughs, should be talking about topping out on its growth. And for me, there is only one possible explanation: management tanked the stock, wanted it to go down. And hard. The obvious question follows: why?

But whatever the true explanation, I feel it behooves me to now be much more careful in offering my counsel about such matters as earnings guidance, because, if my sentiments are over-interpreted, the consequences can apparently be dire.

There were other hits (Googlers, Amazonians) and misses (beyond FB: Twitterers and Netflixers) across the rest of the week’s earnings extravaganza, but on the whole, we’re still looking at a >20% quarter. We’re now past half-time in this here contest, and I think we can safely assume that the last three months will be shown to have been kind to the bottom lines of public companies. Investors appear, on balance, to be mildly impressed, but pockets of doubt clearly remain, and maybe rightfully so.

The week’s other quarterly tidings feature our first glimpse at Q2 GDP, which clocked in at a robust 4.1%. The media-politic stuck to the script, with the current holders of power not slow to grab all of the credit, while their detractors groped about to tell the other side of the story. By any standard, 4.1 is a pretty solid number, but now, less than 48 hours after its revelation, it already feels like old news. In addition, after months of trade war brinksmanship, there appears to be some sort of détente in place between America and Europe, and this, my loves, if authentic, is unilaterally good news. Among other matters, it caused Commodities to move modestly off the schneid:

Commodities Off the Schneid

But the news isn’t all rosy. Virtually every metric associated with the domestic housing market is on it (the Schneid, that is). And the timing for its underperformance is arguably less than ideal. Bear in mind that ALL macro statistics are backward looking, but Housing particularly so. Right now, we’re getting our first insight into May numbers – a point in the calendar that represents the peak of the selling season. Not much buying (and hence selling) activity is in evidence.

One can identify numerous causes here. Mortgage rates are higher; inventory is low. Some areas in this country are just plain unaffordable.

However, in perhaps the unkindest cut of all, the ubiquitous website www.mansionglobal.com reports that the purchase of American terra firma by non-Americans has suffered a 20% drop. Leading the way are the two biggest sources of historic demand: the Chinese and the Canadians. At the risk of stating the obvious, it’s just possible that their feelings are hurt.

So I’d check any instincts I might otherwise have to ascend to giddiness about the GDP report. Among other matters, as we remain in a turbo-charged information release cycle, it might behoove the rational to be a bit reactive here. Next week brings a number of noteworthy earnings reports. First, of course, there’s Apple, and if that’s not 2018 enough for you, Tesla reports, in characteristic fashion, after the bell on Friday. Also, while admittedly a stretch for some of you, I personally have my eyes on the Pride of Peoria, IL: the Caterpillar Corporation. CAT’s been guiding up but getting no love for their troubles. If the numbers are bad/or and they guide down for the future, it’ll be look out below. I also think their briefing will be greatly informative for such topics as the strength of the overall economy and the potential impacts of trade wars.

Lest we forget, there’s plenty of data love for left out non-equity types as well. Tuesday/Wednesday is the next FOMC meeting, where no action is expected, but for which the accompanying policy statement will be parsed down to the letter. Also meeting – under high-drama conditions – are the Banks of England and Japan, respectively. There’s a good deal riding on these transoceanic monetary policy statement exercises – particularly in Japan, which is showing signs of getting tired of issuing debt at 0% interest rates:

And once we’re through all of that, we can point our peepers to the July Jobs Report, scheduled for release at its regular time next Friday. Everyone expects the number to be a pretty strong one: ~200K in new gigs; maybe a drop in the base rate and a rise in the Labor Force Participation level.

However, in familiar refrain, it is likely that all eyes will be trained towards the Average Hourly Earnings print; perhaps (but not likely) to solve the vexing mystery of why an economy humping along as ours is, that is known to have a labor shortage, cannot seem to gin up the wage inflation that would bring tears of joy across the great wide way.

I’ll be watching closely all week – unless, of course, the Faces reunite and decide to go on tour, at which point matters will be out of my hands. I’m not expecting this, so I wouldn’t worry overmuch on that score. In fact, it may never happen. Rod is working the Casino circuit, no doubt enjoying the swoons of females from ages 8 to 80. I’ll give him a pass on that one. Woody is scheduled to play to crowds in excess of > 100,000 across the globe for the next several months, so he’s presumably unavailable. Ronnie Laine and Ian McLagan have shed their mortal coils, leaving only drummer Kenney Jones to carry on. If so, then the Faces become the Face, and I’m less interested.

The band, no doubt, passes into finite history, but a few of us fans remember, and will try to pay it forward. I did manage to make my son and his friends hip to the Faces, and perhaps one or two of them are carrying on.

Now’s not the right time, but when it comes, I’ll share these gifts with my grandsons. But I won’t overdo this. I’ll play the records, tell the story and leave it at that. From there, we know what to expect: they’ll have to learn just like me, and that’s the hardest way. And now we can conclude this week’s business, as there’s only one more thing to say, and I hope you’ll say (or sing it) with me:

Ooh La La…

TIMSHEL

“Spotcheck Billy got down on his hands and knees

He said “Hey mama, hey let me check your oil all right?”

She said “No, no honey, not tonight.

Come back Monday, come back Tuesday, and then I might”

— Lowell George

Any of y’all remember a few weeks back when I invited my readers to be a good rascal and join the band? Course you do. But not many of you followed through. I guess being a good rascal, never an easily attainable objective, is now barely worth aspiring to. No musical knowledge was even required; only that you follow me on Twitter @KenGrantGRA, where my numbers are indeed up, mostly as populated by Bots. They have handles like @JonitaDouwood (Daffy Duck Avatar) and @YaniessyCruff (Homer Simpson/Tighty-Whitey Avatar) and their accounts were created in May of 2018.

Anybody know these cats? Didn’t think so. On the other hand, though I looked carefully, I did NOT see @InsertYourName/TwitterHandle on my roster. But it’s OK; I forgive you. Again. And now all I can do is carry on like the band that I am. That’s right. I. Am. A. Band. Just like the Black Eyed Peas, or, more pertinently for our purposes, just like Little Feat.

So, if it’s all the same to you, I think I’ll just go ahead and join myself.

But before I do, I must encourage you to give LF’s seminal live album “Waiting for Columbus” a listen, because: a) it pretty much captures to perfection the Feat sound; and b) it came out early in 1978 — just 6 short months before the release of the film adaptation of “Sgt. Pepper’s Lonely Hearts Club Band” starring Peter Frampton and the Bee Gees.

Historians, wherever else they may differ, are generally in agreement that the film version of “Pepper” marks the low point in the ~3,500 years of organized human civilization. And, to add insult to injury, it was produced by the magnificent George Martin, and featured performances from such legit rockers as Jeff Beck, Alice Cooper, Billy Preston and Earth Wind and Fire.

It came out that July, and is now mostly known for setting the Siskel/Ebert Thumbs Down Speed Record. But back in February, when “Columbus” dropped, we were blissfully ignorant of what fate had in store for us. So we popped on Side One, which opens with the “Join the Band” chant and then folds into an energetic “Fat Man in the Bathtub”.

And I have decided to follow the same sequence.

I’ll begin like Spotcheck Billy, getting down on my hands and knees and asking: hey mama hey let me check your oil, alright?

Because there is indeed a fat man in the bathtub, with the blues. If you listen carefully, you can hear him moan.

What ails thee, fat man? As one like you, I’d say that things are perking up for us adult males of formidable gravitational force. The large contingent of us who are investors can rejoice in the reality that our already-corpulent holdings are expanding further. The equity securities we own – and I mean anywhere in the world – experienced a noticeable valuation swelling about the belt this past week, and what’s bluesy about that?

Some of us pudgy types might even go so far as to take a victory lap, in celebration of the heroic recovery of some of our favorite names — each of which, including Facebook (attacked for cynically selling our data), Amazon (Trump Tweet victim) and Apple (myriad naysayers taking shots) suffered under recent threat by a series of diverse and nefarious forces.

How do you like ‘em now?

Fat Cat FB Ample-Bellied AMZN

Anti-Newtonian AAPL

Heck, even Tesla, the most hated enterprise this side of Enron, has recovered a good measure of its valuation equanimity:

Notably, this is a company that burned through a cool $1 Billion that it didn’t have in the first quarter, whose CEO refused to answer questions about incremental funding sources on the earnings call – because he found them boring, and who, on the same call, practically begged investors NOT to buy his stock.

But who could resist such a pitch? Not us fat men for sure. So, while my In-Box is assaulted on a daily basis by articles suggesting the that the Company will not, CANNOT survive, the stock that simply HAS to go to zero (and soon) has risen a cool 20% in Q2 alone. And we’re only half way through the quarter.

All of this action contributed to an increasingly rotund Mr. Spoo’s breakout — to ranges above it’s 50, 100 and 200 Day Moving Averages. He’s been fatter before (say, in January), and it’s now anybody’s guess whether he continues to gorge himself or backs away from the table and/or mixes in a salad now and then.

There’s a similar story to be told about zaftig bond holders, who, after suffering the early week indignities of a selloff into 3% yield territory, could not but be pleased about the subsequent rebound. Notably, these markets were able to incorporate the issuance of $75B of new paper and live to tell the tale.

3% on the 10-year still looks like an unbreachable wall, but Fixed Income bears could at least take some comfort in the continued selling activity on shorter-duration instruments, perhaps in part catalyzed by some truly tepid inflation statistics issuing from the Commerce Department this past week. These and other factors wedged the yield curve into increasingly narrow, and likely unsustainable “skinny jean” territories:

2s/10s – Looking Increasingly Scrawny:

Of course, even us obese gentlemen occasionally look beyond the financial pages as we digest our Grand Slam Breakfasts, and were not slow to notice that the U.S. is now out of the dubious Iran Nuclear Deal and gearing up for a potentially dubious summit with one of our own: Little Fat Man Kim Jung Un. These things mean something, but I’ll be switched if I can put my finger on what that might be.

One might hazard a guess that the risk premium has dropped in recent sessions, but I wouldn’t necessarily bank on its continued suppression. Trust me on this: just like everyone else, Mr. Risk likes to eat, and if we don’t feed him appropriately, he’s perfectly capable of gorging himself – at our expense.

But the plain truth is that across the back half of Q2, there’s just not that much to write, much less write home about, in risk-land. I’ve predicted quiet, and I reckon I’ll stick with that prediction.

And to my fellow fatties out there I say this: if the action bores you, go take a bath. And, for what it’s worth, I don’t see much reason for you to cry the blues. Spotcheck Billy is going to take another crack at that whole oil-checking thing — as soon as Monday, and, if you clean yourselves up and stop your moaning, perhaps you can do the same.

Alternatively, you can still join the band @KenGrantGRA. And be forewarned: if you don’t, then within a short period of time, I’ll be forced to continue down the “Columbus” track sequence and lay a little “All That You Dream” on everyone.

The opening line of that song says it all: “I’ve been down, but not like this before”.

Let’s not go there, OK?

TIMSHEL