Elon Musk Changes His Mind
Some good news on trade... Elon Musk changes his mind... It could be 'too little, too late' for Tesla... An ideal strategy for today's unprecedented market... Praise and vitriol in the mailbag...
We'll begin today with a little 'breaking news' on trade...
Fortunately, unlike most we've discussed lately, this one is positive: According to reports this morning, the White House has officially reached a deal with Mexico, which could ultimately replace the North American Free Trade Agreement ("NAFTA"). As financial-news network CNBC reported...
President Donald Trump said the deal would be called The United States-Mexico Trade Agreement, getting rid of the NAFTA name. "The name NAFTA has a bad connotation because the United States was hurt very badly by NAFTA," he said. Trump added that the deal will help farmers and manufacturers. "We've made it better" for both countries.
The new deal will last 16 years and will be reviewed every six years, according to U.S. Trade Representative Robert Lighthizer. The deal must also be approved by Congress and stipulates that a certain amount of steel and aluminum must come from North America. Lighthizer also said the plan will not cap imports of light vehicles from Mexico, but keeps the steel and aluminum tariffs that are already in place.
"We're very excited about this agreement. We think it is going to lead to more trade, not less trade," Lighthizer said.
Of course, to fully replace NAFTA, the deal must also gain support from Canada. According to the president, no negotiations with the country are currently underway, but they could resume soon.
Rising trade tensions have been among the biggest market worries of late, so today's positive news should be seen as a bullish development. But until (or unless) the White House can make similar progress in talks with China, we're likely to see these fears resurface again.
Who could have seen it coming?
Last week, Elon Musk – CEO of electric-car maker Tesla (TSLA) – stunned the world again: He is no longer considering taking the company private.
As regular readers can surely guess, we write this with tongue firmly in cheek.
We were skeptical of Musk's pronouncement from the start. The deal simply made no sense, and we're not surprised to see that he has finally admitted it. As he explained in a post on Tesla's website late Friday night...
Based on all the discussions that have taken place over the last couple of weeks and a thorough consideration of what is best for the company, a few things are clear to me:
- Given the feedback I've received, it's apparent that most of Tesla's existing shareholders believe we are better off as a public company. Additionally, a number of institutional shareholders have explained that they have internal compliance issues that limit how much they can invest in a private company. There is also no proven path for most retail investors to own shares if we were private. Although the majority of shareholders I spoke to said they would remain with Tesla if we went private, the sentiment, in a nutshell, was "please don't do this."
- I knew the process of going private would be challenging, but it's clear that it would be even more time-consuming and distracting than initially anticipated. This is a problem because we absolutely must stay focused on ramping Model 3 and becoming profitable. We will not achieve our mission of advancing sustainable energy unless we are also financially sustainable.
- That said, my belief that there is more than enough funding to take Tesla private was reinforced during this process.
After considering all of these factors, I met with Tesla's Board of Directors yesterday and let them know that I believe the better path is for Tesla to remain public. The Board indicated that they agree.
Still, we can't help but wonder if it's a case of 'too little, too late'...
We've already seen that several Tesla board members appear to be fed up with Musk's antics. Meanwhile, a Wall Street Journal report last week noted that 18 out of 22 of the company's suppliers now believe Tesla is a financial risk to their business.
Most important, Musk's erratic – and by our understanding, illegal – behavior has triggered a full investigation by the U.S. Securities and Exchange Commission ("SEC") for the first time. And this weekend's "turnaround" may only strengthen its case. As news
Teresa Goody, CEO of law firm Goody Counsel and a former SEC attorney, said Musk's statement on Friday appeared to undermine his Aug. 7 tweet that investor support was confirmed. She also raised concerns about a second comment Musk made on Friday, where he said it had become apparent that compliance restrictions would prevent many of Tesla's institutional shareholders from holding private Tesla equity.
Both statements are likely to raise further questions among SEC officials as to whether Musk had performed sufficient due diligence to have had a reasonable basis for his Aug. 7 tweets, she said.
Another statement in the blog that could catch the eye of SEC officials is Musk's reference to his discussion with Tesla's board on Thursday, during which both parties decided not to pursue the deal, said M. Ridgway Barker, a partner and chair of the corporate finance practice at law firm Withersworldwide.
Such discussions are unlikely to be subject to legal privilege and the SEC could subpoena minutes of the meeting, he said. "If the board discussion included that the deal is not financeable, or prohibitively expensive, that is going to cast further doubt over Musk's claims," he said.
Finally, we noted some news last week from our colleagues Ben Morris and Drew McConnell...
They have formally introduced a new strategy to their DailyWealth Trader service. This strategy is what's known as "pairs trading." And as Ben explained in Friday's issue, it's ideally suited for today's unusual market environment...
The stock market is full of companies that trade at rich valuations... Yet share prices keep climbing. At some point, a big move lower will hit the market. It will shock stockholders with its suddenness and severity. And many (or most) of them will take large losses. My friend and colleague Steve Sjuggerud calls this the "Melt Down" after the big "Melt Up."
We don't want to miss out as the bull market continues... But we recommend taking precautions. They include smart asset allocation, position sizing, stop losses, and a variety of other trading strategies.
Today, we'll talk about one of these strategies... It allows you to profit in stocks whether the market rises or falls. It reduces your volatility and increases your peace of mind. And it may even allow you to ride out the next big drop in stocks without taking major losses.
If you're not familiar, a pairs trade is exactly what it sounds like. It "pairs" two contrary positions into a single trade. As Ben explained...
A pairs trade is when you buy one asset (betting that it will go up), sell another asset short (betting that it will go down), and treat the two positions as one trade. This results in a pair of trades that is "market neutral"...
In other words, a pairs trade is equally likely to profit, whether the asset class rises or falls. For example, if you buy one stock and short another stock in the same industry, your profits aren't tied to how that market sector performs... or even how the stock market as a whole performs.
This type of trade is profitable as long as the asset you buy outperforms the asset you sell short. This is a fantastic way to take the broad market risk out of the trade.
But as Ben noted, pairs trading isn't just a powerful tool to profit in bull and bear markets alike...
It's also a favorite "hidden" strategy of some of the world's best investors. More from the issue...
Once a quarter, investors who manage at least $100 million are required to file forms called "13Fs" with the U.S. Securities and Exchange Commission (SEC). These forms detail which stocks they've bought and sold from one quarter to the next... and which stocks they held at the end of the most recent quarter. By reviewing their filings, we can "look over their shoulders" for ideas.
The thing is, we get a one-sided view. These stock market gurus are only required to reveal their long positions – the stocks that they own. They aren't required to disclose their short positions – their bets on falling stocks...
Big money managers place pairs trades to reduce the risk in specific holdings. And they sell stocks short... both to profit and to reduce the risk of holding long positions in general. This all fits into how they allocate their assets. But this guru activity is hidden from the public, unless they talk about it...
Ben shared the example of the so-called "Bond God," Jeffrey Gundlach, to illustrate his point...
Jeff Gundlach is a great example. He's one of the world's top bond experts. And he manages more than $100 billion in his fund, DoubleLine Capital. Over the years, Gundlach has announced new pairs-trading ideas at big investment conferences like the Ira Sohn Conference...
In 2012, he recommended shorting Apple (AAPL) and buying natural gas. The pair of contrarian trades resulted in an enormous profit. [In 2016], Gundlach recommended shorting utilities and buying a mortgage real estate fund, also a winning trade. And [last year] he announced that he was shorting U.S. stocks and buying emerging markets.
Of course, most gurus don't share these ideas. And the only reason we know about Gundlach's pairs trades is
Of course, you don't have to be a professional investor managing billions of dollars to put this strategy to work for yourself...
Ben says any investor can use it to make more money without taking greater risks, no matter which way the broad market moves next...
Are you going to buy a high-flying tech stock? You might consider shorting a fund that tracks the tech sector. Are you going to buy an energy stock you think will outperform? Consider pairing it with a short position in a fund that tracks energy stocks... or with a short position in an energy stock that you think will perform worse than the rest of the sector.
The stock market is in extreme territory. You don't want to be out of stocks completely because the bull market could continue for months, or years, with big gains to come. But you don't want to ignore the risk, either.
Pairs trading with a portion of your portfolio is an excellent solution. You can take part in the profits without increasing your overall risk. It's a hidden guru strategy that you should be using.
You can learn more about this timely strategy – and find out how to get immediate access to Ben's favorite pairs-trading opportunities right now – by clicking here. (Please note, this link does not lead to a long promotional video.)
New 52-week highs (as of 8/24/18): Automatic Data Processing (ADP), Becton Dickinson (BDX), First Trust Nasdaq Cybersecurity Fund (CIBR), Cisco Systems (CSCO), Fidelity Select Medical Technology and Devices Portfolio (FSMEX),
A busy weekend of reader feedback: Kudos and criticism for Thursday's mailbag... thoughts on the corporate credit boom... some "boots on the ground" commentary on the housing market... and several folks weigh in on Porter's controversial Friday Digest. Send your notes to feedback@stansberryresearch.com.
"Hey Justin, great comments to Tim N. and Dave L. in [Thursday's] Digest. I appreciate your and Porter's consistent honesty and integrity of the information you provide that if our roles were reversed, you yourselves would want and expect to receive out of a financial advisory service. I like the fact that you guys are willing to give the raw and hard facts regardless of what kind of consequences or negative feedback it may have. I rely extensively on it to make my own financial decisions and
"Keep up the fantastic job that you all do, there is no one else out there in the financial newsletter industry that is as good as Stansberry Research." – Paid-up subscriber Ryan R.
"I, too, am weary of 'the end is near' rhetoric of the Digest, notably from Porter and, apparently, Justin... Yes, you will get to be 'right' when a crash actually happens – and classically you will have been 'just early' in your divinations.
"Too bad you've been calling for the end times since 'The End of America' and weren't prescient enough to be positive about the longest bull market in history! I'll continue to stick with Doc, Steve, Ben & Drew, and [Stansberry's] Credit Opportunities for my actionable investment advice.
"In anticipation of the usual response that long positions have been recommended, etc. – yawn! The glass ain't always half empty fellers." – Paid-up Stansberry Alliance member Jim B.
Brill comment: Thanks for the note, Jim. Let's quickly review the facts... As a longtime subscriber, you should know we don't make official recommendations in the Digest. But despite our growing macro concerns over the past couple years, we have consistently urged readers to stay long stocks.
Likewise, despite his concerns, Porter – as expressed by his and his team's work in Stansberry's Investment Advisory, as well the positioning of The Total Portfolio – has kept his subscribers consistently long stocks as well. (We'll also remind you that it is Porter and his team who produce Stansberry's Credit Opportunities, one of the publications you singled out for outstanding performance.)
And yet, you judge us as "too bearish"... based not on our actual advice and recommendations – which is what you pay us for, after all – but rather because we also point out that there are very real and significant problems on the horizon? Seriously?
"You did not say much about the extended growth period [in corporate credit] I have been tracking these numbers, as well as the growth of money and other
"Since I read everything from Stansberry, I don't remember where I got the information about the continuing appreciation in home prices, so I thought I would send you some boots on the ground observations.
"I retired to Texas several years ago and my brother-in-law retired before me. He came to visit me this week from Lake Charles La. I know there has been a real boom in that area for the last several years due to oil, gas, and petrochemicals. Since he has been retired he has been making drawers for cabinet makers, which gives him some extra spending money. He talks to a lot of contractors in the housing business and it sounds to me like things are slowing down quite a bit.
"One guy that builds spec houses one at a time and sells them as he finishes, (so he doesn't get in trouble with debt) told my brother-in-law that he has had his last spec house on the market for 15 months. At this
"Porter, while you can see a direct correlation between your Friday Digest, angry letters and Monday cancellations, know that your honesty and willingness to share is a reason many of us are loyal subscribers. The trust that you have built is what ultimately convinced me to make the considerable investment to become an Alliance member. But I think you know this. You are playing the long game, similar to what you suggest in this very Digest today. Thank you and your team for all of the great work." – Paid-up Stansberry Alliance member Roger C.
"Not sure why anyone would take issue with [Porter's Friday] Digest. Excellent advice, in my opinion. The problem that I have found with much
"[I'm] not angry. I have been a client for several years and I am an Alliance member. I have never been disappointed in what I have learned or what I have been reading. I think everyone has to evaluate the information for whether it is appropriate for them. I am 76 years old (or young) and when I read about a long time
"When the market went down in 2008 and I was not yet a Stansberry client my account valuations was around $250,000. I follow a lot of the recommendations, probably too many and I have learned to use puts/ calls. I have been very successful with them.
"Today my account is valued at over one million mostly because of what I learned from reading your newsletters. I have not added any new principal to the account.
"I believe that you preach what you believe and that you do it for your clients' welfare. I think you are honest and straight, and I am happy to be able to do business with you and the entire Stansberry team." – Paid-up Stansberry Alliance member Joel G.
"No, Porter, your Friday Digest didn't make me angry, and I'll tell you something you might not believe. A while back you offered a
"Here's the deal. Almost 100% of my investment funds reside in a company sponsored 401K. Absent the 401K money, I don't have all that much. $150 per year I could
"I debated and argued with myself for several weeks whether I should just give Stansberry Research up. Let it go and either find something else or just invest using the things you've already taught me (
"But then I thought about the Friday Digest, and believe it or not, I just couldn't stand the thought of losing that. I'm not kidding. So I sold a rifle and essentially gave you the $1000 for a lifetime of Friday Digests..." – Paid-up subscriber K.Y.
"Based on experience thus far, I think Stansberry Venture Value might be the best place for me to hang out long-term. I wasn't sure if I could attach a spreadsheet so I didn't, but the capsule summary is that I currently have positions in ten of the seventeen recommendations. Some of those positions still have limit orders hanging out there for a better entry price and in terms of outliers, I completely missed the BXC trade.
"Nonetheless, my returns as of the close on Friday ranged from -18% to 82% for total returns of $5,959.68 against a cost of $34,014.00 for a portfolio return of 18%...
"The moral to the story is that even with missing the three largest gainers, I *still* am looking at 18% gain. Obviously, I need to revisit exactly why I have been on the sidelines for those three – I know that I was out of town during the meteoric rise of BXC and it was above my price before I had a chance to buy in. In my defense, by delaying my entries and using aggressive limit orders, I did get into a few of the positions at considerably less than the reference price. For example, NCMI was entered at $5.50 as compared to the reference entry price of $7.09 and that has resulted in the outsized gains on that particular position even while it resulted in me not getting into some positions at all because my limit was never reached.
"In terms of passion-raising barnburner [Digests], the one received today was pretty mild. But I do have a suggestion – if you can find a derivative based on the probability that Trump stays in the Presidency until the election in 2020, the bull and bear case for that instrument should demonstrate political passion at its most extreme and get both sides suitably riled up. Kind of like the folks who write the most strident responses to Bill Bonner's letters, alternately assigning him to opposite extremes of the political spectrum." – Paid-up subscriber Paul W.
"Boy was I taken in with all this serious talk about another way of investing, blah, blah, blah. Just another article to sell another subscription.
"Why don't you guys have an honest ounce of respect for readers. If you are doing another sales pitch, just say so rather than waste my time reading all this gibberish. I'm not
"And, why can't you cancel a subscription. Are you afraid the track record will disappoint, and people will cancel – for good
Brill comment: Larry, you do realize the Digest is free, don't you? As we've explained many times, these "sales pitches" are what allow us to publish each day at no charge to you.
Yet, we'll also remind you that Friday's Digest revealed four open Stansberry Venture Value recommendations: Carrols Restaurant Group (TAST), Clarus (CLAR), SiteOne Landscape Supply (SITE), and Hanger (HNGR).
TAST remains in "buy" territory today, while two of the other three are currently trading within a few dollars of their maximum buy-up-to prices. And again, you learned about these names – which would otherwise require a $5,500-per-year Venture Value subscription – for FREE, in exchange for reading a brief advertisement.
Regarding your second concern, perhaps you don't realize we publish a detailed Report Card on every one of our services each year. The reality is, no one in our industry is more transparent or honest about their track records
But we've found your assertion that "If a publication is worthwhile... buyers won't cancel," simply isn't true when it comes to our more expensive services. An unfortunate number of folks seem to have no problem subscribing to these services simply to get the recommendations, with no intent to remain a subscriber.
However, even here, we do more than most in our industry. While we don't offer refunds, we do offer a 30-day Stansberry credit guarantee on most of these higher-priced services. In short, if you decide a particular service isn't right for you within the first month, we'll issue a credit for the full purchase price, which you can then apply to another service of your choice.
Regards,
Justin Brill
Baltimore, Maryland
August 27, 2018