Tesla Has a Brand-New Problem
A bull market darling meets its demise... Tesla has a brand-new problem... Germany sets its sights on the electronic-vehicle market... More signs of trouble for emerging markets... Big news on America's next 'industrial revolution'...
It's the end of the road for a former bull market darling...
Longtime readers may recall Theranos and its Steve Jobs "wannabe" founder and CEO Elizabeth Holmes were accused of fraud nearly three years ago. As it turned out, the firm's "miracle" blood-testing technology – which Holmes claimed could carry out hundreds of different laboratory tests with just a few drops of blood – didn't actually work.
Back in March, the U.S. Securities and Exchange Commission ("SEC") officially charged Holmes and former Theranos president and COO Ramesh "Sunny" Balwani of intentionally defrauding investors out of more than $700 million.
In June, federal prosecutors filed criminal charges against the pair. And just yesterday, we learned that what is left of the company will soon cease to exist. As the Wall Street Journal reported...
In the wake of a high-profile scandal, the company will formally dissolve, according to an e-mail to shareholders...
The dissolution process was precipitated by the fact that Theranos breached a covenant governing a $65 million loan it received from Fortress Investment Group last year. Under the loan terms, Fortress was entitled to foreclose upon the company's assets if its cash fell beneath a certain threshold.
Fortress is expected to receive ownership of the company's patents, which are likely worth a tiny fraction of the $65 million it's owed, at best. The company's remaining cash balance of roughly $5 million will likely be distributed to the firm's other unsecured creditors.
That's likely little consolation... But it's still better than how the company's shareholders will fare. These folks – which include several members of the Walton family of Walmart (WMT) fame, Rupert Murdoch, and the family of Secretary of Education Betsy DeVos, among others – will get nothing.
All told, Theranos investors stand to lose nearly $1 billion, according to the Journal.
If you've been with us for long, you know we expect another bull market darling to eventually meet a similar fate...
We've laid out the case against electric-car maker Tesla (TSLA) – and its own eccentric billionaire founder and CEO Elon Musk – many times, so we won't rehash it all here. In short, the company has a broken business model that is dependent on cheap financing and government subsidies to survive... is running dangerously low on cash... and is now the subject of a full-scale SEC investigation.
Again, none of this is new, but Tesla now faces another problem... And it's a big one. For the first time in its history, it's about to face some serious competition. As news service Reuters reported yesterday...
Mercedes showed on Tuesday how it is "aggressively" gunning for top spot in upscale battery cars market currently dominated by Tesla, as it unveiled the EQC, its first fully electric car, at an event in Stockholm.
The event marks the start of the German onslaught against the American upstart and showcased a SUV with a 450 kilometer range, distinctively full-width rear light and clean-cut interiors that Mercedes hopes will find favor with luxury customers and tech-savvy millennials alike...
Tesla has had virtually no competition up to now, which has allowed it to easily become the frontrunner and persuade early adopters to pay a premium for an all-electric car from a relative unknown, with no quality track-record or physical dealerships for servicing and support.
But the German carmakers have a century of manufacturing behind them, with sterling brands and an existing customer base in the millions and their new variants are about to hit the market as Tesla faces questions about its ability to generate cash and manage the scaling of its production.
The company says it plans to have up to 10 new all-electric vehicles on the market by 2022. But it isn't alone... Fellow German automakers BMW, Audi, and Porsche are planning to unveil their own high-end electric cars soon. Meanwhile, British luxury brand Jaguar promises to have its first electric vehicle in dealerships this year.
Elsewhere, the troubles in emerging markets appear to be spreading...
Last month, we highlighted the problems with Turkey and its currency, the lira. Since then, we've seen similar turmoil in Argentina and South Africa, the latter of which has officially entered recession for the first time since 2009.
This week, it was Indonesia's turn to make headlines. The country's benchmark Jakarta Stock Exchange Composite Index fell nearly 4% today, its biggest one-day drop since November 2016. Meanwhile, its currency, the rupiah, is currently trading at its weakest levels versus the U.S. dollar in more than 20 years.
While the details differ, Indonesia's problems are similar to those of several other emerging markets...
These countries share significant fiscal and trade deficits. In other words, they've all been "living beyond their means."
They also hold large existing debts which are denominated in (and therefore must be paid back in) in the U.S. dollar and other foreign currencies. According to Bloomberg data, these foreign-denominated debts have doubled to roughly $9 trillion over the past decade.
Nearly $3 trillion of this total is about to come due over the next two years. However, the recent strength in the U.S. dollar has made it far less certain these debts can be repaid or refinanced successfully. And this – along with rising trade tensions – has begun to trigger a vicious cycle of capital flight, rising borrowing costs, and further currency weakness in these countries.
Now, none of these economies are big enough to upset global markets on their own...
Rather, the fear is that these problems could continue to spread like we saw during the Asian financial crisis in the late 1990s.
According to Bloomberg, countries like Pakistan, Ecuador, Poland, and Malaysia are facing similar problems today. And several others – including Chile, Hungary, Colombia, Mexico, and even India – are only slightly better off.
Stay tuned... We'll be following this closely.
In the meantime, this week also brought some big news for one of the most exciting tech trends in the world today...
As we noted last Thursday, our colleague Christian Olsen and the Stansberry Innovations Report team believe a new wireless technology "is going to change everything." From the August 30 Digest...
Over the past two centuries, America has undergone three industrial revolutions. Behind each revolution was a central technology that changed everyday life as we know it.
The first was the steam engine... which allowed us to build factories across the country and opened the door to inventions like locomotives and the cotton gin. Next came electric power... which led to the lightbulb, refrigerator, the telephone, and air conditioning. Finally, we saw the creation of the Internet, which paved the way for online commerce, smartphones, social media, and more.
Now, they say, we're entering America's fourth industrial revolution... And like the last three, this one is will be led by a brand-new technology unlike anything we've seen before. This technology is called "5G," and Christian says it's all about one thing: sending massive amounts of data across the Internet at unbelievably fast speeds.
Again, the Stansberry Innovations Report team believes this trend will radically change everyday life for most Americans...
And they believe it could create incredible amounts of wealth for investors over the next several years, regardless of what's going on in the broad markets or the economy.
They also noted that the rollout of this ground-breaking technology is closer than most folks would believe possible. Mobile-phone carriers are already planning to introduce the technology in several U.S. cities later this year. And fully functional 5G networks could go live across the country by the end of next year.
But it turns out even this forecast may not have been optimistic enough. As the Wall Street Journal reported on Tuesday...
Federal regulators will vote in three weeks on a plan to accelerate next-generation 5G wireless networks around the U.S. by overriding some local rules that could hold up deployment.
The plan is aimed at boosting deployment of small cellular transmitters, backpack-size devices that will be a key feature of 5G infrastructure. Placement of such devices can be subject to local delays and high fees under current rules.
Telecommunications companies have called the local rules burdensome, while U.S. national-security officials have voiced concern that the U.S. could be falling behind China and other countries in the race to develop 5G networks and applications.
In other words, this game-changing technology could be here even sooner than Christian and his team originally believed... which means the opportunity for investors is far more urgent as well.
To learn more about this massive opportunity – including how you can get immediate access to their research on the one company in particular that is leading the 5G revolution – click here now. (This link does not go to a video.)
New 52-week highs (as of 9/4/18): Apple (AAPL), Amazon (AMZN), Becton Dickinson (BDX), CME Group (CME), ETFMG Prime Mobile Payments Fund (IPAY), Ingersoll Rand (IR), Match Group (MTCH), Okta (OKTA), and Verisign (VRSN).
In today's mailbag: More on Porter's latest controversial Digest... and two other subscribers weigh in on the ethanol boondoggle. Send your notes to feedback@stansberryresearch.com.
"Hello Porter, [regarding] your answer to [paid-up subscriber] Gary, starting with, 'Just ask yourself this question...' Holy cow, what a light bulb moment for me. Thank you." – Paid-up subscriber Neil S.
"Porter, your subscriber DH makes a valid point about the importance of octane ratings in gasoline blends: they are an important consideration in how the fuel burns in an engine. In short, the higher the octane rating, the smoother the burn you get: especially important in today's high compression/fuel-efficient engines.
"Ethanol is currently the least expensive way to boost octane (in large part because of the federal subsidies/mandates), so the oil companies and refiners are all-in because they can get away with less refinement (processing) while still achieving the necessary octane ratings.
"[However,] the downsides are that you are using food for fuel (I agree that is a really dumb idea), and ethanol only contains about 2/3 as much energy as gasoline, so you are actually using more total fuel volume to produce the same amount of energy (even with the current 10-15% ethanol blends).
"In short you are burning more total fuel volume in order to help 'save fuel.' Kinda brings to mind the old Vietnam military briefings: 'We had to destroy the village in order to save it.' P.S. Ethanol use comes with several other problems, the main one being that it readily absorbs water..." – Paid-up subscriber Mike L.
"Amen Porter! I had a friend start an ethanol company and go IPO... It lasted 1 year before everyone realized it was a fraud. [Ethanol] degrades engines, and should never be in gasoline. Even Forrest Gump would figure that out." – Paid-up subscriber Craig R.
Regards,
Justin Brill
Baltimore, Maryland
September 5, 2018