Tesla Motors… maker of "luxury" battery-powered cars… has been enjoying a run of great press clippings. In addition to reporting its first quarterly profit and aggressive sales projections, Tesla also announced it is repaying a $465 million Department of Energy loan.
You'll recall that we like to short stocks for three reasons: We short stocks that we believe are "frauds;" we short stocks whose products we believe are obsolete; and we short stocks that have an unsustainable debt loads. In Tesla, we sort of have the trifecta.
First, I believe Tesla's cars were obsolete before the first one ever rolled out of the factory. What I mean is, I believe these cars will have zero resale value, because after five years their batteries will be dead... completely dead and not usable.
I also think this car is obsolete because it's impossible to use it in the way that most people would use a large, fast road car. You can't drive the thing from New York to Florida because you have nowhere to recharge the battery. And even if you did, it would take too long.
As for its debts… It's hard to say what an insurmountable debt load is for a company that doesn't have any real profits. But Tesla has plenty of debt no matter how you measure it. It's doing an equity offering to pay off the $400 million it owes the government, which is a sign that it's not really able to afford its debts.
Is Tesla a "fraud"? Now remember… This criterion is not necessarily about a fraud in the legal sense. And we aren't implying an actual crime is being committed. (Though when you can find evidence of an actual, legal fraud – that's a great situation to short.) We mean this more generally… that a company is being sold as something more than it is.
Extreme Value editor Dan Ferris laid out the case against Tesla in December (which we reviewed here).
Editor's note: With the majority of the Digest team traveling home today from the Stansberry & Associates Spring Editors' Conference at the Greenbrier resort in West Virginia… we're taking the opportunity to share some of our most popular recent Digest Premium material.
As S&A subscribers know well, Porter has warned for years that the U.S. government's colossal debts – and the trillions in new dollars created to pay interest on those debts – will cause an inflationary crisis in America. It's inevitable, and it will be disastrous…
Over the last few months in Digest Premium, Porter offered a few practical suggestions people can take to protect themselves…
Hedge-fund billionaire David Tepper of Appaloosa Management is super-bullish on stocks...
Tepper agrees with Steve Sjuggerud's "Bernanke Asset Bubble" thesis – that asset prices across the board could reach obscene heights on the back of government money printing (so-called "quantitative easing"). In an interview with CNBC, Tepper said, "If we don't taper back on quantitative easing, we're going to get into this hyper-drive market."
I (Porter) agree we are in the middle of Steve's Bernanke Asset Bubble... what I've described simply as an inflationary boom.
Another great sign of this boom... I read that Bill Ackman, a New York hedge-fund manager, is paying $90 million for a Manhattan apartment.
Similarly, subscribers are telling us about collectible Ferraris that sold for $1 million last year and are now selling for $2 million-plus.
These are all signs of people fleeing the dollar as a form of savings. Instead of holding dollars, they're buying art, cars, apartments, and everything else under the sun...
I have no problem believing that you could see securities prices go way up in terms of the multiples. The S&P 500 hit its price-to-earnings multiple peak in 2002 at nearly 47 times trailing 12-month earnings. (This excludes 2009, when the S&P 500 multiple hit triple digits because corporate earnings collapsed.) I would say it's certainly possible we could see a similar multiple again.
I think people are afraid of the consequences of this giant inflation... They ought to be. It's likely the bond market will crash when the Fed stops buying bonds (via quantitative easing). And when that happens, it will probably also hurt the stock market.
But it's hard to say when people will decide they would rather own gold or dollars as opposed to securities. You can't predict exactly when that will occur. I can just tell you that buying stocks around 20 times earnings today... buying a Ferrari after it's doubled in price in a year... or buying an apartment at $90 million probably won't work out very well for you in the long term.
As you likely know, I believe everyone should own physical gold to protect himself from reckless, money-printing governments. And if you don't already own physical gold, you should buy some... even at today's high prices.
But people always ask me what – other than buying gold – they should do to protect themselves from the upcoming crash...
I think the most important thing you have to do to protect yourself is just be conservative. People will do foolish things over the next several quarters (like paying record prices for fine art and buying $90 million Manhattan apartments). Now that credit markets are wide open, you'll see people borrowing money to buy these expensive assets to speculate.
I recently read that New York Stock Exchange margin debt is at its pre-2007 highs. In other words, people are more leveraged today in order to buy stocks than before the financial crisis. It's very, very foolish. When people get greedy, you must get cautious. And there is no doubt we have tipped way over from rational investing to greedy investing.
We are beginning to see signs of a top almost every day. Now is the time where you ought to be extremely cautious. So what does that mean? Well, it means that you should probably begin to build liquidity for yourself. In an era of totally phony paper money, I would define liquidity as a mixture of gold and 90-day Treasury bills (T-bills).
Now, why would you buy T-bills if you believe the dollar is going to crash? You buy T-bills if you believe the dollar will crash because they are still, up to this point, the most widely exchanged form of liquidity. So you buy T-bills simply because they're liquid. And you'll hedge it by also buying gold. I really like this trade.
And I would recommend scaling out of cash into this trade... Each month, you should see if people are still acting foolish. If they are, raise 5% of your assets in cash and divide that into gold and 90-day T-bills.
And as you do that, you should whittle down your portfolio to the point where you're holding only the highest-quality businesses that you bought at the best prices. I don't think it's too soon for you to begin raising cash today. However, it is difficult for you to define what cash is in an environment like we have now where paper is becoming progressively more worthless. Again, I would recommend you do this by splitting your cash between 90-day T-bills and gold.
I also advocate buying foreign assets to keep money out of the government's grubby paws.
If you're like me and favor free markets and increased per-capita gross domestic product, you probably know that the recent flood from the printing press is going to swamp your financial boat. And you're not happy about it. Perhaps you've considered some up-close-and-personal oversight of your foreign assets. Maybe you've thought about leaving the U.S. altogether. I know where I would go...
With the help of the right lawyers, you can look into acquiring a Swiss passport and citizenship.
Switzerland is a confederacy, an almost forgotten form of government. Each of its 26 cantons is sovereign. You can pay a flat annual fee in lieu of income taxes, a spectacular idea in its own right. It's a great deal for the citizen. It seems much more rational.
Of course, that would never work in America. The government here has become a "People's Socialist Republic" where the government claims unlimited authority to take what it wants from you. And it's not just the idea that's scary. That Americans support it is what's so shocking.
It's no surprise that the government would argue it has the power to tax on an unlimited basis or to take away our privileges. It's a huge surprise that the overwhelming majority of Americans back such initiatives and believe they can live happily at the expense of their neighbors.
Often when I walk our streets or read our newspapers, I don't recognize my neighbors anymore. They've become a mob for the most part – a hungry, raging horde that wants me and my blood. They'd get half of it if I chose to emigrate and submit to the 50% exit tax.
However, there are ways around that kind of attempted robbery. Many of the best portable assets are hard to value. What's the worth of that painting on the wall? What does that rare gold coin cost? What's the price of your wife's jewelry collection?
Accountants and lawyers can help minimize the impact of that tax. And taxing all your assets once may be preferable to handing over half your income for the rest of your life.
I'm 40 years old. I've been accumulating assets for about 20 years. But I've got 40 more years of income ahead of me, if I'm lucky. So why wouldn't I take that 50% hit now in exchange for 40 years of freedom?
I would fight and die for the idea of America. And I would never renounce my citizenship in the idea of America. However, I'll say it again: The America I have pledged allegiance to – and dearly miss – is so far dead and buried.
I'd probably have to renounce my U.S. citizenship if I moved to Switzerland. Even if I didn't, I'd still love to go to a place where everyone is equal under the law... that stands for freedom... that's a beacon of prosperity and tolerance.
America is none of those things. We live in a country that tells people what they can do in their bedrooms. It's none of my business what you do in your bedroom. We live in a place that claims the right to send troops abroad to tell people how they should live. It's absurd.
I saw on 60 Minutes that we have military advisors in central Africa, chasing warlords with child armies. As if we don't have enough problems here, we have to send our armed forces across an ocean to chase these criminals. There's no question, these warlords are a terrible problem. But it has nothing to do with us. I don't want my tax dollars involved in that mess.
We launched Digest Premium in December as a way to deliver this kind of material – that's both educational and actionable – from Porter every day. In recent weeks, we've covered topics including the role high-end collectibles can play in preserving wealth… why private-equity stocks are booming right now… and how far the gold correction could go…
If you'd like to learn more about Digest Premium and how to receive this kind of insight from Porter every day, click here.
The market (and our offices) will be closed for Memorial Day, so we won't publish the Digest on Monday. Enjoy the holiday.
New 52-week highs (5/23/2013): Walgreens (WAG).
In today's mailbag… more thoughts on Apple's tax strategy… and one subscriber suggests a way to further our education efforts. Send your comments to feedback@stansberryresearch.com.
"I just finished last night's Digest. It is apparent Mr. Kavanagh misunderstood your comments about Apple and the issue of nonproductive cash earned overseas and not repatriated.
"I loved your response concerning not wasting 65 cents to spare 35 cents in taxes. It is spot on. I am a CPA. I have adopted over the years a bit of a saying about my clients and their taxes, 'I wish for my clients to pay the most taxes they can possibly pay.' This comment usually draws all sorts of weird looks and scorn until I explain myself, indicating that I want my clients to make as much money being as innovative, productive and efficient as possible and quit worrying about tax consequences.
"Sure, certain transactions require some tax planning, and you don't want to feed the beast any more than they can legally extort from us through the tax code. But spending too much effort on tax reduction/avoidance reduces time better spent on strategy for selling/producing/serving.
"Not to get all biblical, but Jesus said, 'Give to Caesar what is Caesar's. Give to God what is God's.' Essentially, the beast is going to be there whether or not you like it, so you best get on doing the best you can to live your life as productively and morally as you can so you can be happy. In the end, isn't it far healthier to place your thoughts on how you can be the best you can be instead of trying to figure out how you can manipulate a beast that will tear you to shreds in the process?" – Paid-up subscriber Jeff Hartzel
"I appreciated Porter's discussion of investing in companies based on book value, cash profits, and cash profit margins. However, I have a suggestion to address his lament that few of his subscribers rarely invest this way.
"When a stock is presented in the various newsletters published by S&A, include the very graphs he showed in his article – as a routine practice. I know these issues are discussed in the text, but the graphs are powerful, and are easier (at least for me) to digest the information quickly. Perhaps these graphs, published consistently, would reinforce the very discipline that Porter is encouraging his subscribers to develop. Thanks for the on-going education." – Paid-up subscriber Gary Zachary
Regards,
Porter Stansberry and Sean Goldsmith
White Sulphur Springs, West Virginia
May 24, 2013