A New Warning From the Currency Markets

Last call for tonight's market update... Signs of a bottom in the world's most hated commodity... Elon Musk could be in serious trouble... A new warning from the currency markets...

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Back in June, we noted 'signs of life' in one of the world's most hated commodities...

We're referring to uranium, which has been the worst-performing commodity over the past seven years. Since the 2011 Fukushima nuclear disaster in Japan, uranium prices have plunged from near $70 per pound to less than $20, a massive 70%-plus decline.

But as our colleagues Ben Morris and Drew McConnell pointed out at that time in their DailyWealth Trader newsletter, both the fundamentals and prices were beginning to paint a bullish picture for the first time in years.

In short, uranium prices had fallen so far that most producers could no longer produce a profit. So naturally, they began cutting production. Most notably, last December, Kazatomprom – the world's largest producer – announced it was slashing production by 20%.

They also noted that prices had been making a series of higher lows since falling below $20 in late 2016.

This trend has continued...

Just last month, Canadian miner Cameco (CCJ) – the world's second-largest producer – announced it was shutting down operations at two of its mines indefinitely.

This is a big deal. As Marcelo Lopez, manager of a $30 million uranium investment fund at L2 Capital Partners noted in an interview last week, this is the "equivalent of Saudi Arabia leaving the oil market."

As longtime readers know, this is exactly how long-term bottoms are formed in the "boom and bust" resource sector. Lower production eventually leads to dwindling supplies... And lower supplies inevitably lead to rising prices.

Meanwhile, all signs continue to point to growing demand for uranium in the years ahead as well. According to the World Nuclear Association, China – which currently accounts for just 39 of the world's 450 nuclear reactors – is planning to build 222 new reactors to replace coal-fired power plants over the next decade. Russia and India are both planning to double their capacity from 37 and 22 reactors, respectively. And total capacity in the Middle East is expected to nearly quadruple in the next 10 years.

In addition, uranium's price action continues to improve...

As you can see in the following chart, the recent rally has continued...

Uranium is now trading at a fresh nine-month high of more than $26 per pound... and is less than $1 per pound away from a breakout to multiyear highs.

Elon Musk could be in serious trouble...

Last week, we noted that the controversial CEO of electric-car maker Tesla (TSLA) created a firestorm when he unexpectedly tweeted that he was considering taking the company private.

Specifically, Musk said the buyout would value Tesla at $420 per share – a premium of roughly 20% to where Tesla shares were trading when the announcement was made last Tuesday – and said funding for the deal was "secured."

This latter is important. You see, without a firm source of funding in place, Musk's tweet could be construed as misleading at best... or intentional market manipulation at worst.

However, that isn't the only reason Musk could be in hot water. He followed that announcement with another Twitter message saying, "Investor support is confirmed. Only reason why this is not certain is that it's contingent on a shareholder vote."

This tweet implies that Musk has already discussed this plan with some (presumably large) shareholders before he publicly announced it to all shareholders. Even if he did in fact have funding, this would be a clear violation of securities law, known as "selective disclosure."

Of course, as is often the case with Musk's grand statements, he declined to provide any further details to clarify these issues at that time.

But the U.S. government had apparently heard enough to be concerned... As we noted last week, the Securities and Exchange Commission reportedly opened inquiries into these claims the next day.

Yesterday, Musk finally decided to 'clear the air'...

In a blog post on Tesla's corporate website, he provided an update on his plan. First, he explained how last week's surprise announcement came to be. As he wrote...

On August 2nd, I notified the Tesla board that, in my personal capacity, I wanted to take Tesla private at $420 per share. This was a 20% premium over the ~$350 then current share price (which already reflected a ~16% increase in the price since just prior to announcing Q2 earnings on August 1st). My proposal was based on using a structure where any existing shareholder who wished to remain as a shareholder in a private Tesla could do so, with the $420 per share buyout used only for shareholders that preferred that option.

After an initial meeting of the board's outside directors to discuss my proposal (I did not participate, nor did Kimbal), a full board meeting was held. During that meeting, I told the board about the funding discussions that had taken place (more on that below) and I explained why this could be in Tesla's long-term interest.

At the end of that meeting, it was agreed that as a next step, I would reach out to some of Tesla's largest shareholders. Our largest investors have been extremely supportive of Tesla over the years, and understanding whether they had the ability and desire to remain as shareholders in a private Tesla is of critical importance to me. They are the ones who believed in Tesla when no one else did and they are the ones who most believe in our future. I told the board that I would report back after I had these discussions.

But again, it would have been illegal for him to 'reach out' to Tesla's largest shareholders before making his public announcement...

Fortunately for Musk, he (sort of) appears to understand this. As he explained (emphasis added)...

The only way I could have meaningful discussions with our largest shareholders was to be completely forthcoming with them about my desire to take the company private.

However, it wouldn't be right to share information about going private with just our largest investors without sharing the same information with all investors at the same time. As a result, it was clear to me that the right thing to do was announce my intentions publicly.

To be clear, when I made the public announcement, just as with this blog post and all other discussions I have had on this topic, I am speaking for myself as a potential bidder for Tesla.

Now, we would suggest that "wouldn't be right" is a bit of an understatement, but at least Musk did apparently follow the law in this case. However, by publishing this statement, he's also publicly testifying that his previous tweet confirming "investor support" was in fact materially misleading... a detail that appears to be lost on him.

Unfortunately, that isn't his biggest problem...

You see, his explanation regarding his "funding is secured" statement was also problematic. More from his letter...

Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction.

Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed.

I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving.

Call us cynical, but that sure doesn't sound very 'secure' to us...

We're not alone, though. As the Wall Street Journal reported this morning...

"The release issued earlier Monday clearly raised at least as many questions as it hopes to answer. The probability that there will be an SEC enforcement action is, I think, quite high," said Joseph Grundfest, a law professor at Stanford University and a former SEC commissioner.

Other experts agreed. John Coffee, a securities and corporate law professor at Columbia University, said the SEC can credibly argue that Mr. Musk's tweet last week, which caused Tesla's stock price to jump 11% the day he posted it, didn't give shareholders the full picture they needed.

"This is a clear statement that he has nothing more than an expression of interest as opposed to a binding commitment," Mr. Coffee said. "It will tell the SEC that they have a virtually open-and-shut case if they wish to sue."

But that's not all...

Adding insult to injury, a separate Journal report this morning suggests Saudi Arabia may not actually have the capital to take the company private even if it wants to.

In short, its Public Investment Fund (or "PIF") has already made large commitments to several big investments. In addition to the 5% stake in Tesla disclosed last week, these include $20 billion for an infrastructure investment fund managed by Blackstone (BX)... $45 billion for a technology fund managed by SoftBank... several billion dollars to a number of Silicon Valley "startups," including Uber Technologies, Magic Leap, and Noon.com... and an undisclosed amount for Neom, a $500 billion high-tech "megacity" the country is planning to build.

According to the report, Saudi officials are already concerned it may not be able to fully fund those commitments that it has already made, let alone another big investment in Tesla.

Finally, yesterday we noted the recent turmoil in Turkey's currency, the lira...

The troubled country's currency has lost more than 40% of its value since January, including nearly 20% over the last few days.

But the lira isn't alone. A number of other emerging market currencies – including the Argentine peso, the South African rand, the Indian rupee, the Indonesian rupiah, and the Kazakh tenge, among others – have suffered significant recent declines as well. And these moves have caused expected global currency volatility – as measured by the JPMorgan Global Foreign Exchange ("FX") Volatility Index – to surge higher.

Just as the CBOE Volatility Index ("VIX") – which measures expected volatility in the S&P 500 Index – is considered the U.S. stock market's "fear gauge," you can consider this index a fear gauge for the global currency markets.

Why do we bring this up?

Because these two indexes tend to be positively correlated. In other words, a big move in one often coincides with a similar move in the other. However, that hasn't been the case over the past few months.

The Global FX Volatility Index just experienced its biggest one-day surge since 2016's "Brexit" vote, and now sits near its February peak...

Yet, as you can see above, the VIX remains near its lowest levels of the year. According to Bloomberg data, the divergence between the two is now at its widest in more than two years... And history suggests it may be just a matter of time before the U.S. stock market volatility plays "catch up" to the upside.

New 52-week highs (as of 8/13/18): Sysco (SYY).

If you join us tonight, we'd love to hear from you. What did you think? Drop up a line at feedback@stansberryresearch.com.

Regards,

Justin Brill
Baltimore, Maryland
August 14, 2018