August 16, 2020
Weekly Market Outlook
By Geoff Bysshe
Elon Musk has a talent for creating news to inflate the value of Tesla. This week he did it again by following Apple and the Fed’s tactics for inflating asset prices.
In addition, he cleverly used this tactic to abruptly halt the slide in his stock as it was breaking an important support level and looked destined to head lower.
It’s surprising that more companies haven’t followed the Fed’s lead in this way because it’s really this easy…
When the Fed needs to support or inflate something, it does two things.
And the best part…
It starts working even before they print the money.
For example, the Fed engineered the March 2020 low in the S&P 500 with an announcement that they would begin to buy corporate bonds. As a result, the market exploded higher immediately, and the Fed didn’t actually start buying the bonds until months later.
Any well respected company with a stock price over $200 can do the same thing.
Mr. Musk clearly understands that equity (stock) serves as a form of currency for a corporation, so last week he came to the obvious conclusion…
Why not just “print more stock” to boost TSLA’s value?
It’s free, and with his announcement of a stock split, Mr. Musk will turn every share into five.
My only question is why he chose 5 for 1 when 10 for 1 would have one-upped AAPL’s 7 for 1 announcement, and been even more generous to the investors he’s reaching out to.
After all, this is simply an effort to enable more people the opportunity to attain the status of becoming a shareholder.
As for finding buyers for all his “new” shares, he was as effective as the Fed.
The news drove the stock up over $200 before closing $120 higher the next day. By the end of the week, the shares sat at an all-time closing high, $276 higher than the day before the announcement.
Many investment professionals will tell you that the fact of the matter is that a stock split doesn’t change the value of a company. True, the fact is that a stock split doesn’t change the value of the of the company if the stock price remains the same.
But that’s not reality.
So don’t let facts distract you from reality.
If enough stock traders buy the stock because of the news, the reality is that the company’s value does rise.
In this case, that increase amounted to $22.3 billion in just the first day.
Equally as impressive as the loyalty of Mr. Musk’s investors, is the timing of his announcement.
As you can see on the chart below, the stock was sliding through important support, and close at a dangerous multi-week low right before he mad the announcement.
This reminded me of his famous tweet in Aug of 2018 stating that he was preparing to take Tesla private at a substantially higher price than its price at the time. This tweet came as the stock was rolling over in a bearish phase with the bears confidently predicting its demise.
The tweet resulted in an SEC investigation, and him being essentially “grounded” like a childhood punishment from tweeting unsupervised, but that didn’t stop the stock from rallying.
And of course, there was never any legitimate evidence of a private acquisition of the company after that tweet.
But it did anger the short sellers.
Mission accomplished and a small price to pay (for a billionaire with performance bonuses tied to the how quickly the valuation of the company rises)
That said, was the charts breakdown a coincidence?
I’ll let you decide.
And while we’re focused on inflation….
This week served up some interesting inflation news that really bothered the bond market, and perhaps it should get your attention too.
PPI, CPI and Import Prices all came in at levels that were much higher than expected.
As you can see from the chart below, month over month CPI spiked.
The good news is that this should alleviate some serious concerns about deflationary pressures.
The cautionary news is in its strength in the context of the potential turn up in some of the year over year measures illustrated by the charts below.
Was that the low in CPI?
While the year over year trend in the chart above may look like it’s too early to pick a bottom in the inflation trend, the bond market isn’t waiting for more.
As you can see from the TLT chart below the bonds took the news seriously.
While the Fed is indicating that it’s not concerned about inflation challenging their efforts to keep rates lower for longer, the bond market may not cooperate as you can see by the 10-year break even inflation rate chart below.
Having seen what the ‘bond vigilante’s’ can do, I’m concerned because…
The 10-year breakeven rate measures the spread between 10-year Treasury Bond and Treasury Inflation Protected Securities (TIPS). As a result, it serves as an indication of the markets' inflation expectations over the 10-year horizon.
More interestingly, as you can see by the red lines on the chart, this measure has a history of indicating major turning points in the bond market when the two diverge.
I didn’t draw the current lines. I’ll let you do that.
It’s true that inflation of measured by CPI is historically low, but the bonds don’t care about levels as much as they care about direction, real rates and expectations.
This week’s news and price action in the bonds suggests that the only interest rates that may stay lower for longer may be the “real” ones, and they’re currently NEGATIVE (which is a place the Fed said they wouldn’t want to go) and a place that won’t keep the bonds market or (soon thereafter) the stock market happy.
Keep your eye on the bonds.
Other important developments in BigView include:
I’ve talked your ear off above so there won’t be a video this week.
I’d love to hear your comments below.
Best wishes for your trading,
(Geoff is filling for Keith until August 31st)