Tesla's Newest Boondoggle
Tesla's newest boondoggle... A new warning from the Federal Reserve... The 'Brexit' vote is near... What you missed last night...
Last night, billionaire entrepreneur Elon Musk made an "unsolicited" offer to buy out... himself?
We write that in jest, of course... But the facts aren't far off...
According to the proposal published on Tesla's (TSLA) website, the electric carmaker – where Musk is CEO and the largest shareholder – has offered to acquire solar-panel installer, SolarCity (SCTY) – where Musk is chairman and also the largest shareholder.
And as you might surmise, it's a heck of an offer...
The all-stock deal would value SolarCity shares at 0.122 to 0.131 times Tesla's share price... or $26.50 to $28.50 per share as of yesterday's close. That's a colossal 21% to 30% premium to SolarCity's previous market value.
SolarCity jumped more than 10% to nearly $24 per share when the market opened this morning.
Tesla says the move would create the world's first integrated energy company offering "end-to-end clean energy products" to customers.
As Musk put it in a conference call with analysts last night, "You could go into a store, or go online, and with a few clicks you can have everything from solar panels to batteries to electric cars."
It could also create "synergies" and economies of scale for producing the expensive batteries both companies' businesses depend on.
That may all be true... But the offer is also a de facto bailout of the struggling solar-panel firm.
SolarCity shares have plunged nearly 60% so far this year, as the company burned through an astonishing amount of cash ($6 for every $1 in sales, according to the Wall Street Journal).
The deal also represents yet another significant dilution of ownership for current Tesla shareholders.
The company just raised $1.4 billion in May by selling millions of new shares. That offering diluted investors by 4.9%, according to financial news site MarketWatch. (All but one, that is... Musk ended up owning a greater percentage of Tesla after the move.)
The SolarCity deal would increase outstanding Tesla shares by at least 12 million... representing an additional dilution of at least 9%. Altogether, current investors would end up owning 14% less than they did in May.
There's no guarantee that Tesla shareholders or regulators will approve the deal.
It appears to be an obvious conflict of interest... Not only is Musk the largest shareholder of each, but SolarCity's top executives – CEO Lyndon Rive and Chief Technology Officer Peter Rive – are his cousins.
Musk did say he would abstain from the Tesla shareholder vote required to approve the deal, but we doubt that's much consolation to investors...
Tesla shares were down nearly 10% as of midday trading today.
Whether or not the deal is approved, Porter and the Stansberry's Investment Advisory team believe both Tesla and SolarCity are doomed.
Longtime Digest readers know Porter and his team have been critical of "Steve Jobs-wannabe" Musk and his companies for some time now. But their latest analysis is downright damning...
In short, the business models of both Tesla and SolarCity are broken beyond repair. They are dependent on government support and huge infusions of cash to simply survive... and their access to both is rapidly vanishing.
Stansberry's Investment Advisory subscribers can read their detailed analysis on Tesla and SolarCity in the June issue right here.
Musk's announcement wasn't the only surprise yesterday...
In its semiannual Monetary Policy Report to Congress, the Federal Reserve uncharacteristically warned that U.S. stocks appear expensive and "vulnerable" today. From the report...
Although equity valuations do not appear to be rich relative to Treasury yields, equity prices are vulnerable to rises in term premiums to more normal levels, especially if a reversion was not motivated by positive news about economic growth.
The Fed also warned that commercial real estate ("CRE") is looking "frothy," as prices have soared above those seen before the last crisis. More from the report...
Valuations in the [CRE] sector appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income and exceed, by some measures, their pre-crisis peaks.
Nowhere in the report did we see a discussion of how the Fed's unprecedented easing programs and super-low interest rates helped create these problems.
We must have missed it...
After months of politicking, folks in the U.K. will head to the polls tomorrow to vote on the so-called "Brexit" – a U.K. exit from the European Union ("EU").
Government officials and establishment figures around the world have predicted disaster if the Brexit vote goes through.
EU President Donald Tusk warned it could lead to the end of Western political civilization, for example.
Billionaire George Soros – known nearly as much for his statist political beliefs as his legendary trading results – joined the fearmongering this week.
In an op-ed for the U.K.'s The Guardian newspaper, Soros warned a Brexit could lead to a "bigger and more disruptive" devaluation in the British pound than when he famously "broke the Bank of England" in 1992. From the article...
Too many believe that a vote to leave the EU will have no effect on their personal financial position. This is wishful thinking. It would have at least one very clear and immediate effect that will touch every household: the value of the pound would decline precipitously.
Soros also took a page from the standard government playbook and warned of evil "speculators" who could profit from the move...
Today, there are speculative forces in the markets much bigger and more powerful. And they will be eager to exploit any miscalculations by the British government or British voters.
Never mind that Soros did exactly that in 1992... and made a career of exploiting opportunities like this.
What Soros left out is that despite short-term market volatility, a Brexit is likely to be positive for the U.K. in the long run. As U.K. billionaire Peter Hargreaves – co-founder of Hargreaves Lansdown, the U.K.'s largest retail broker – explained in a recent interview with Bloomberg Brief...
Every year in the EU it gets more political, it gets more legislative, more regulative; we don't seem to get very much benefit from it. We will be far better out... There's a huge amount of vested interest, a lot people making these comments are politically motivated and also work for big banks that aren't British...
One thing every country in the world is trying to do is get the value of their currency down. That's why interest rates are low. It is quite likely the pound will come under a bit of pressure, initially... That will be compensation for any tariffs, so the tariffs won't bother us...
The pound will become strong again, just like after we left the ERM snake under John Major. [At that time] the pound came under enormous pressure, but within 12 months was one of the strongest currencies in the world because we weren't shackled to the euro...
Critics may say Hargreaves is biased as well. That may be true.
But unlike many of his opponents, he has a lot to lose if he's wrong. More from the interview...
I have more money in the stock market than any other person in the U.K., I have 2 billion pounds in the U.K. stock market. No one has anything like that. Do you think I would be intent on leaving if I thought that was going to endanger my wealth?
As we've discussed, U.K. citizens have good reason to dislike the current status quo. EU regulations control virtually every area of its members' economies. Meanwhile, corruption, cronyism, and waste are rampant.
But that's also why we're skeptical that an exit will happen this week.
Call us cynical, but too much political power – and money – is at stake for the establishment to allow the U.K. to leave.
Today, the Brexit polls remain too close to call. About 45% want to leave... and 45% want to stay.
Odds at U.K. bookmakers on the other hand – representing real-money bets on the outcome – continue to show "remain" in the lead. Odds suggest a 75%-plus chance the U.K. will vote to stay in the EU. But a report this morning suggests there may be more to the story...
According to bookmaker Ladbrokes, more than 60% of all bets made the past two days have been in favor of a Brexit.
Typically, this would be reflected in the odds... But that's not the case. Why? Because the average size of "remain" bets are five times bigger than the average "leave" bet.
What does this mean? We can't say for certain, but perhaps wealthy bettors are skewing the odds... meaning "leave" votes may be underrepresented.
Again, we don't expect a "Brexit" will happen this week, but anything is possible.
Fortunately, as regular Digest readers know, we believe a Brexit would be a non-event for U.S. investors.
According to financial data firm FactSet, S&P 500 companies make just 2.9% of their sales from Britain... and 11.5% from all of Europe.
Outside of some potential short-term volatility, you have nothing to fear about tomorrow's vote.
As you may have heard, last night Porter hosted a webinar with Agora founder Bill Bonner and top analyst Chris Mayer. During the call, Porter shared his thoughts on the vote, and why it could create an excellent buying opportunity in high-quality stocks...
I think this is a giant to-do about absolutely nothing. I think it matters over the very long term, in that it could produce less regulation for business in [the U.K.], and, over time, that will be bullish for the [British pound], bullish for property prices, and bullish for [the U.K.] as a whole.
But these things take so long to develop that it means nothing for investors. So if you see things sell off because of Brexit fears, it's an opportunity to buy.
I think it's just a media-created crisis that will thankfully scare some number of investors out of good, high-quality businesses, whereby people like [us] can buy them.
Of course, last night's webinar wasn't just about the upcoming "Brexit" vote.
Porter, Bill, and Chris also shared their thoughts on a number of subjects, including November's presidential election, interest rates, and gold.
We hope attendees enjoyed the unprecedented access to three of the most respected names in our business.
If you weren't able to attend, the most interesting news came from Bill...
After years of warning about the stock market, Bill explained why he has decided to put a big portion of his family's money – $5 million – into stocks again.
But he doesn't want to risk this money in just any stocks...
He's only interested in safe stocks that are likely to beat the market and 99% of hedge funds and financial "gurus," no matter what happens in the market. And he believes his colleague Chris Mayer has developed a foolproof way to find them.
Bill has put together a short presentation to explain this strategy in detail. If you're a fan of our research on capital-efficient stocks, World Dominators, and other safe, long-term investment strategies, be sure to check it out right here.
New 52-week highs (as of 6/21/16): Aflac (AFL), Hershey (HSY), Altria (MO), PNC Financial Services – Series P (PNC-PP), Spectra Energy (SE), AT&T (T), Wells Fargo – Series W (WFC-PW), and ExxonMobil (XOM).
A light day in the mailbag… Did you enjoy last night's webinar? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
June 22, 2016
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