Tesla and Forced Opinions
The market can be a cruel arbiter, eventually compelling all to have an opinion, kicking and screaming they might complain, but everyone is forced to place a bet. For much of last year, many, including this author watched in unbelief the incredible ascension of the stock price of Tesla, purveyor of electronic cars with factories in China, Europe and the US. Towards year end the market capitalization exceeded the total capitalization of all its automotive peers.
— jeroen blokland (@jsblokland) January 3, 2021
Any and all of our preferred metrics, have long since been eviscerated. We have a suspicion that the ascension of Tesla should be offset by creative destruction elsewhere in the industry, which we do not see. If we were to seek expert opinion, we would be inclined to listen to Elon Musk, who when commenting last spring with the now post-split stock trading as an equivalent price then of $140.26 per share said simply:
Tesla stock price is too high imo
— Elon Musk (@elonmusk) May 1, 2020
Since that time, even allowing credit for nearly hitting the annual production target of 500,000 vehicles, we struggle to use either a bottom up or top-down framework that explain the move from 140.26 at the 1st of May to the current price ~$700, an increase from the formerly over-valued market cap of 168 billion to 673 billion.
Using entire industries, instead of companies reveals some interesting assumptions as well. The entire energy complex has less value than Tesla, just one of its end customers. Perhaps energy is cheap, though we suspect whatever one’s view, this is not equilibrium.
TSLA market cap versus S&P 500 energy sector market cap pic.twitter.com/yJMCJF3Ura
— Sumit Roy (@sumitroy2) December 8, 2020
Certainly, versus peers, the owner’s opinion, and entire industries, the Tesla valuation appears optimistic.
What might we divine from the recent inclusion of the stock in the important indices? Recent years have witnessed several ill-timed and ill-considered changes in the Dow. Most recently Exxon, Pfizer, and Raytheon have been replaced by Salesforce, Amgen and Honeywell. With a bit less subjective emphasis, Tesla was added to the S&P 500 index in October with its then current market cap of nearly $650 billion.
We suspect the inclusion of Tesla in the S&P 500 will eventually have the effect of dampening the relative volatility of this stock as it is increasingly traded in a variety of relative trades amongst index constituents. The FANG stocks, excepting Apple, have exhibited little excess return or volatility in the past 6 months, and we believe Tesla will now join their orbit.
Source: The Irrelevant Investor
Tesla now has a near 2% weight in the S&P 500 index, at a valuation more than 4 x what was recently thought sensible by its owner. What might an open-minded owner of the index consider? A 50% decline in Tesla’s price, towards a relatively recent $310.00 (still more than double Elon’s overvalued assessment made at $140.00) would add 75 basis points of return to our imagined index owner.
Hidden Risk in Long Duration Stocks
Investors searching for safety in low p/e stocks as well as those offering high dividends, have recently found themselves behind in a market that favors new metrics. We have our suspicions about the old- fashioned math and metrics as well, but believe some relationships continue to hold. Among these are the imperative that cash flows received far into the future are worth less than cash flows received currently.
Dividend yield + Buyback yield = Shareholder Yield.
The S&P 500’s big Shareholder Yielders just absolutely died last year, losing to zero and negative Shareholder Yield companies by nearly 52%.
Reversion to the mean in 2021? pic.twitter.com/bcUNa6D74e
— Jeff Weniger (@JeffWeniger) January 13, 2021
One notable feature of the market in 2021 was the stunning underperformance of stocks that delivered a good yield, as measured by shareholder yield, which is a measure of the total return received by shareholders from both stock buybacks and stock dividends.
Some have characterized this underwhelming performance as attributable to the markets’ fascination with “story” stocks such as Gamestop. Others have created narratives around archaic and often inconsistent definitions of value specified around relationships such as price to book measures. We note that stocks with longer durations, that is longer time frames under which earnings, cash flows, dividends and buybacks will be realized, necessarily have lower current shareholder yields.
Real yields have starting rising again, which could be bad news for tech stocks pic.twitter.com/TStrvsQG6P
— MacroMarketsDaily Newsletter (@macro_daily) February 21, 2021
There appears to be a high correlation between the return of technology stocks and interest rates. Weighted by capitalization, much of the return from technology stocks will occur far in the future. How far one might ask. To keep this note simple we note that estimates of the duration of the stock market as a whole, is something on the order of 23 years. This measure implies the interest rate risk in long duration stocks is similar to that of a long duration, zero coupon bond. And bond rates are going up with prices going down.
30 Year Govt. Bond Yields… & 10Y3M The Ultimate Arbiter of Truth.. not Consensus…So far showing #Reflation $ZROZ or “Return Free Risk” could be in a world of pain in 2020 from recent lows. Let’s see. #DV01 #Losses pic.twitter.com/kKI1EMNZmo
— PlungeProtectionTeam (@gamesblazer06) May 28, 2020
Ten-year rates on US Treasury notes recently moved over 1.50%. While this move has startled some, much higher rates could easily be fathomed in a market led by a Federal Reserve wanting to see inflation and a government that appears to believe no amount of deficit spending is too large.
The percentage down move in interest rate products as of this writing, does not appear to be reflected in stocks. Long term interest rates do matter.
Thank you @GuruInvestor for summarizing my chat with @TheStalwart and @tracyalloway on @OddLots1 It was a blast – sharp questions mixing enthusiasm and skepticism to explore valuation vs cheapness. https://t.co/0nf4PatFIS
— Rafael Resendes (@rresendes) March 6, 2021
Sooner or later every generation is shocked by the behaviour of interest rates. – Sidney Homer
— Laeeth (@Laeeth) February 25, 2021
Direct indexing looks set to disrupt the retail ETF market | Financial Times https://t.co/ugGePZIbCC
— Paul Blinn (@PaulBlinn) February 10, 2021
Asset managers are rushing to launch a new breed of stock-picking exchange-traded fund, only to find that some of the biggest brokerages in the U.S. aren’t yet willing to pitch them to clients https://t.co/WAUh7JlA7p
— Paul Blinn (@PaulBlinn) February 19, 2021
Fed’s Brainard: Climate Change Already Affecting Economy, Financial System – WSJ https://t.co/ojIlvkO4Qt
— Paul Blinn (@PaulBlinn) February 21, 2021
Fed’s Bullard Says Bitcoin At $50,000 Not A Threat To Dollar, Sees No Asset Bubbles Anywhere: “It’s Just Normal Investing” https://t.co/UMRteBlC6F
— zerohedge (@zerohedge) February 16, 2021
— VIX Squared (@vixsquared) February 26, 2021
Here’s a chart I keep of the S&P 500 (black) and its earnings (blue). The two lines are scaled at a ratio of 18 to 1. The market appears to be anticipating a recovery in earnings that hasn’t started yet. pic.twitter.com/DkBwJBxXCq
— Eddy Elfenbein (@EddyElfenbein) February 8, 2021
This 35 year chart of lumber futures is something else. Looks like rather a lot of houses are going to be built in the US. pic.twitter.com/ArtXEaQOd1
— Ensemble Capital (@IntrinsicInv) February 23, 2021
Next stop $9,000 a tonne for copper pic.twitter.com/6q1TZK00Pb
— Neil Hume (@humenm) February 19, 2021
Goldman targeting $10,500 copper over the next 12 months. pic.twitter.com/g8CSqQwR04
— Neil Hume (@humenm) February 19, 2021
One of my partners, Derek Bergen, lays out the data explaining why “growth” dominated “value” over the past 10 years. The key – Wealth Creation – compounding higher profitability and investment. https://t.co/mcXsDiGkLp
— Rafael Resendes (@rresendes) March 11, 2021
— jeroen blokland (@jsblokland) February 26, 2021
— Nouriel Roubini (@Nouriel) January 25, 2021
— Teddy Vallee (@TeddyVallee) February 24, 2021
Keep buying high B/P stocks with no regard for valuation you get negative momentum in return. https://t.co/n4dFmIKGIp
— Chris Austin (@caustin34) March 11, 2021
This interesting & important paper found that the top four ESG ratings agencies (MSCI, S&P Global, Moody’s & Refinitiv) give, on average, materially different ESG ratings for the same company.
— Hide Not Slide (@HideNotSlide) February 21, 2021
Just to put things into perspective: Electronic vehicles require four times as much copper wiring as internal combustion vehicles. (via SRP) pic.twitter.com/YO8CWyrOgT
— Holger Zschaepitz (@Schuldensuehner) February 7, 2021
Dependence on #fossilfuel as a % in total energy consumption:
King of Nuclear, France: 46%
— Anas Alhajji (@anasalhajji) January 27, 2021
High beta up a cool 70% over the last 12 months is really what you’d expect given what the economy has experienced over the same period pic.twitter.com/3d2tjy39jn
— Lawrence Hamtil (@lhamtil) February 27, 2021
Getting blood from a stone
Getting actual news from a television https://t.co/lylrDa0jUG
— Geoffrey Miller (@primalpoly) February 27, 2021
— Saul Marquez (@saulmarquezafg) March 11, 2021
— Raul Panganiban (@rauljpanganiban) March 10, 2021
Here is the US Wage Phillips Curve. Can you spot government checks?https://t.co/XeymCmeqqW
— (((The Daily Shot))) (@SoberLook) February 25, 2021
Breaking Down The PRO Act – Labor Law Lite https://t.co/ASQWCRH90r
— Paul Blinn (@PaulBlinn) January 24, 2021
😳 GMO turned bearish US / bullish EM pic.twitter.com/t5KLtTs6B7
— Jake (@EconomPic) February 24, 2021
— HedgedIn (@noalpha_allbeta) February 22, 2021
The Loser Trade is making new all-time lows, again.
The Gold bugs lose, again. pic.twitter.com/pHlwU6mb2i
— J.C. Parets (@allstarcharts) February 19, 2021
Banff National Park pic.twitter.com/Lbd7jFODZO
— StockShaman ⚒ #PeakCopper (@StockShaman) February 21, 2021