Hype generator: Will Tesla become the next Apple?
Stocktake: car maker is sounding more like a cult, with Elon Musk as its hubristic leader
Tesla is valued at $50 billion, making it America’s most valuable car maker. GM sold 10 million cars last year, Ford 6.6 million; Tesla, which is rapidly burning cash, sold 76,230. Photograph: David Paul Morris/Bloomberg via Getty Images
Apple, the world’s most valuable company, is worth $765 billion; Tesla is valued at $50 billion, making it America’s most valuable car maker.
Tesla’s current valuation already appears “a bit preposterous”, as automotive research firm Edmunds put it recently. GM sold 10 million cars last year, Ford 6.6 million; Tesla, which is rapidly burning cash, sold 76,230.
Short sellers think Tesla’s valuation is nuts – more than a quarter of the stock has been shorted. However, they’re getting crucified by a share price that has risen 50 per cent in 2017, losing an estimated $3.7 billion this year.
Last month, US investment bank Piper Jaffray defended Tesla, saying it is different to other companies. “More so than any stock we’ve covered,” it said, “Tesla engenders optimism, freedom, defiance and a host of other emotions that, in our view, other companies cannot replicate.”
Huh? Tesla sounds more like a cult than a company, with Musk its hubristic leader. Betting against the bubble is a tricky business, though. As Keynes once said, markets can stay irrational longer than you can stay solvent – just ask Tesla’s shorts.
Lesson for Protégé guy: don’t bet your hedges against the Buffett
In 2008, Warren Buffett bet hedge fund Protégé Partners $1 million that the S&P 500 would beat a selection of hedge funds over the next 10 years. Last week, Protégé’s Ted Seides conceded he would lose the bet but remains convinced the next 10 years will be different.
He would, wouldn’t he? Seides contended that stocks were pricey in 2008 and they’re still pricey today. In other words, don’t blame hedge funds for being wrong – blame stock markets for staying expensive.
He argued the S&P 500 was an inappropriate benchmark, saying hedge fund returns almost exactly matched global equity returns over the period. Grand, but why make the bet in the first place, then? Did Buffett, that dastardly octogenarian, bludgeon him into accepting the S&P 500 against his will?
In 2015, Protégé complained it couldn’t have foreseen zero interest rates and unprecedented Federal Reserve stimulus. It also blamed fees, saying they accounted for more than half the differential. Now, Seides complains that global diversification “hurt hedge fund returns more than fees”.
Fear index nears all-time low – should we be afraid?
Risk, what risk?
Volatility has fallen to near all-time lows, with the Vix, or fear index, last week falling below 10 and hitting its lowest level in a decade. The index has closed below 10 only nine times since 1990, according to Merrill Lynch, and is near its all-time low of 9.31. Individual stocks are just as quiet, with “unprecedented little movement at the single stock level”, while global equity volatility is similarly dormant. In the near term, says Credit Suisse, “investors are pricing in zero risk”.
Have markets become ominously complacent? Merrill reckons the quiet is unlikely to last, warning higher inflation might eventually spell trouble for investors conditioned to buy every dip.
However, although volatility might be near the bottom, don’t presume things must necessarily become rocky. Price Action Lab blogger Michael Harris last week noted the S&P 500 had just recorded its most boring six-day spell since January 1994, sitting within a trading range of just 0.7 per cent.
Following the 1994 episode, prices “remained flat for a whole year”, notes Harris, “empirical evidence” that dull markets can stay quiet for longer than one might think.
Advice for traders: leave leveraged ETFs to the fruitcakes
Traders bored by subdued markets might like to dabble in leveraged ETFs.
Last week, US regulators approved the first quadruple-leveraged exchange-traded fund. If the S&P 500 rises 1 per cent, it will rise 4 per cent; if the index falls 2 per cent, the ETF will fall 8 per cent.
The approval is surprising. Globally, regulators have made more conservative noises in recent years, curbing the leverage available to retail traders.
Obviously, much greater leverage is on offer in the futures and foreign exchange markets. Additionally, it’s a free world, and speculators should be free to speculate.
The problem is leveraged ETFs aim to magnify daily movements, but amateur investors sometimes use them for long holding periods. Take an index that rises from 100 to 110 on one day and falls back to 100 the next – no change. In this case, a quadruple-leveraged fund would rise to 140 and then fall back to 89.1 – a big loss. Note that during the global financial crisis, one index gained 8 per cent over a four-month period but its triple-leveraged cousin fell 53 per cent.
Leveraged ETFs are popular with “fruitcakes, nut cases, and the lunatic fringe”, Vanguard founder John Bogle once quipped. Investors should steer clear.