The Most Difficult Market in History
The most difficult market in history... Elon Musk sets his sights on Mars... One of the biggest scandals since the financial crisis... Uncle Warren bites his tongue... P.J. O'Rourke tackles the first presidential debate...
Editor's note: Be sure to read to the end of today's Digest for a can't-miss essay from contributing editor P.J. O'Rourke, who recaps the first presidential debate between Hillary Clinton and Donald Trump with another "instant classic" essay...
If you've found it difficult to make sense of today's market, you can take solace that you aren't alone...
Many of the world's top professional investors are struggling, too. Yesterday, Joe Baratta – the global head of private equity for alternative-investment giant Blackstone Group (BX) – admitted he has never seen anything like it before.
As he noted yesterday at the Wall Street Journal's Pro Private Equity Analyst Conference in New York...
For any professional investor, this is the most difficult period we've ever experienced... You have historically high multiples of cash flows, low yields. I've never seen it in my career. It's the most treacherous moment.
Tesla Motors (TSLA) CEO Elon Musk would likely agree with that sentiment... but for different reasons.
After all, in just the past few months, Tesla has missed its lofty delivery targets (again)... it has had to raise an additional $1.5 billion from investors because it's burning through cash so quickly... the U.S. Securities and Exchange Commission has launched a probe over Tesla's crash disclosures... investors have railed against the company's incestuous bailout of Musk's second firm SolarCity (SCTY)... and a rocket built by his third firm – SpaceX – exploded before launch.
But if you thought a few "minor" problems like these would take priority over Musk's grand visions, think again...
You see, yesterday, Musk laid out his plan to colonize Mars. (No, we aren't kidding.)
In a presentation at the 67th International Astronautical Congress in Guadalajara, Mexico, Musk explained how he plans to make man a "multiplanetary species" in his lifetime. As digital news outlet Quartz explained...
Elon Musk wants a ticket to Mars to cost less than $200,000. It's an ambitious goal, but then so is establishing a viable human presence on the Red Planet.
On Sept. 27, the SpaceX CEO laid out his blueprint for putting a colony on Mars, which he says would need at least a million people to become self-sustaining. It's a milestone he says would be feasible within 40 to 100 years from today. Musk imagines fleets of hundreds of ships leaving Earth every few years, when the two planets are at their closest.
The timeline and the scale may sound ludicrous, but the point of the discussion – and SpaceX itself – is to "make Mars seem possible. Make it seem as though it is something we can do in our lifetimes."
But not everyone was impressed. While Musk explained the necessary technologies in incredible detail, you probably won't be surprised to hear he glossed over one important piece of information. The New York Times may have put it best...
Elon Musk's plans to get to Mars start with a really big rocket. He still needs to figure out how to pay for it.
Like Musk's previous ventures, this plan is expensive... He estimated it would cost at least $10 billion to develop the necessary rocket alone, and would require a "huge public-private partnership." He also said the first rocket could be ready in as few as four years, but admitted that when it comes to meeting deadlines, he is "not the best at this sort of thing."
We aren't holding our breath.
To be clear, we don't find fault with Musk for his big ideas. We just have a problem with his business practices. As Porter noted last fall, all of Musk's "success" has come at the expense of taxpayers...
Take SpaceX. Are we really going to Mars? I don't know, maybe. But where will the money come from? Musk has invested $100 million. That seems like a lot... But NASA has spent $500 million on payments to the firm. Without this government spending, SpaceX would have just been another "X."
If you dig into the accounting at Tesla, you'll see the same kind of stuff. The company receives hundreds of millions of dollars in tax credits on its vehicles, which it's able to sell for cash. It also bends the rules around lease accounting beyond recognition. Without these maneuvers, the poor economics of its business would be much more obvious...
What we see when we look at Musk's operations is a classic flimflam. There's a lot of fancy talk and some cool gizmos. But what's really driving these businesses is a gullible government and even more gullible investors. How long can Musk keep the swindle rolling? Our hunch is that Musk's reputation (and the share prices of his companies) are linked to this bull market. When the bull goes, so will Musk.
Speaking of swindles, U.S. banking giant Wells Fargo (WFC) – the country's largest mortgage originator – is embroiled in one of the biggest banking scandals since the financial crisis...
If you haven't heard, earlier this month regulators fined the bank $185 million for "widespread illegal" sales practices – including opening as many as 2 million deposit and credit-card accounts without customers' knowledge and transferring funds without permission. According to reports, these practices had been going on for the past five years.
As a part of the settlement, the bank avoided admitting any wrongdoing... but it did admit to firing 5,300 employees, including managers, for "improper sales practices."
Why would so many employees willingly commit fraud? Because they were paid to do so, of course. As the Journal reported at the time...
Like other banks, Wells Fargo has pushed cross-selling of multiple products to its customers to bolster sales and profitability at a time when both have been under pressure from a sluggish economy and superlow interest rates. And Wells Fargo, which in recent years has managed to post returns above those of big-bank peers, has often highlighted how many products it sells to its customers.
But the sales tactics and practices, which were fueled by an incentive structure that rewarded employees on the more products they sold, got out of hand, according to regulators.
The bank has remained silent on how much top-level management knew about these practices.
In testimony before the U.S. Senate Banking Committee last week, Wells Chairman and CEO John Stumpf repeatedly said only a "tiny sliver" of the bank's employees were responsible for these problems, suggesting he and his management team were unaware.
We're skeptical. It's hard to believe more than 5,000 employees could commit fraud for five years without their knowledge or willful ignorance. Of course, that doesn't mean we expect management to suffer any meaningful consequences for these actions.
Former Wells Fargo employees have filed a class action lawsuit seeking $2.6 billion for folks who were demoted, fired, or forced to resign for not meeting inflated sales targets – essentially, employees who were punished for not committing fraud.
But any potential settlement here – like the $185 million fine regulators issued this month – will be shouldered by shareholders, not by management.
This morning, the bank's board voted to "claw back" unvested equity awards of $41 million for Stumpf, and $19 million for former retail-banking chief Carrie Tolstedt. Stumpf will also forfeit his salary while the board leads an "independent investigation."
These figures may sound impressive, but let's put them in perspective... $41 million is just one-fourth of Stumpf's total compensation during his tenure at the bank.
Meanwhile, $19 million is just 20% of Tolstedt's total pay. She received more than $20 million in annual bonuses from 2010 to 2015 alone, and still holds $35 million in unvested equity awards.
Tomorrow morning, Stumpf is expected to testify in front of Congress again... this time to the U.S. House Financial Services Committee. We predict more political bluster... and little real result.
We can't help but wonder what Warren Buffett – whose Berkshire Hathaway (BRK) is the bank's largest shareholder – thinks of all this.
Many in the financial media have noted that Buffett spoke out in defense of Goldman Sachs (GS) CEO Lloyd Blankfein and JPMorgan Chase (JPM) CEO Jamie Dimon when each of those firms faced "regulatory scrutiny" in recent years. But Buffett hasn't said a word in defense of Stumpf, and says he won't be making any public comments until after November's election.
Some have assumed this means "Uncle Warren" has soured on the bank, but a simpler explanation is likely. As Bloomberg reported...
Buffett, the billionaire chairman of Berkshire Hathaway Inc., is backing the presidential candidacy of Hillary Clinton, a Democrat who wrote in a letter to the bank's customers that she was "deeply disturbed" by Wells Fargo's conduct.
In the meantime, new evidence suggests "improper" sales tactics may not have been limited to Wells Fargo alone...
The Journal reported this morning that the number of customer complaints about account mismanagement at Wells Fargo was similar to other major U.S. banks last year...
Wells customers filed approximately 1.3 complaints for every billion dollars in deposits at the bank as of June 30. But Citigroup (C) received 1.8 complaints, Bank of America (BAC) received 1.7 complaints, and JPMorgan Chase received 1.1 complaints.
Federal regulators have vowed to investigate whether the same types of fraud seen at Wells Fargo may extend to other U.S. banks. We wouldn't be surprised if this is the case...
After all, executive compensation is often tied to earnings growth, and banks – like many companies – are desperate for growth today. They've exhausted virtually every cost-cutting measure available, while record-low interest rates and tepid loan demand have crushed their revenues.
In short, when managers are incentivized to boost earnings at any cost, we shouldn't be shocked when they do just that.
New 52-week highs (as of 9/27/16): Nuveen Floating Rate Income Opportunity Fund (JRO).
A busy day in the mailbag... Subscriber Don T. responds to your recent comments, and several readers weigh in on Steve Sjuggerud's concert. Let us hear from you at feedback@stansberryresearch.com.
"How clear does one have to be when stating it was an observation? It was a fact but there was no judgment (read the second bullet point for a judgment and read the whole note for context). The implications are your own and the rest is just spin. The candidates would be proud, regardless of their race, color or IQ." – Paid-up subscriber Don T.
"I was at Steve's concert... He is a very accomplished musician and the guitar was not just interesting looking but sounded amazing. After seeing the ATG video you provided I understand some of the things I was hearing. My ears suffer from years of Harley, car racing and very loud music but even with this I'm pretty sure I heard Steve changing tuning on the guitar without ever turning a string key. He played some pretty darn great guitar. Rock on." – Paid-up subscriber Bill P.
"I was not at the conference in Vegas, unfortunately. Although [Steve is] talented, I think he looks fabulous! He's lost some weight and he is starting to look healthy. Kudos for guitar playing but I think the real surprise is his weight loss! Well done!" – Paid-up subscriber Lorraine B.
"Killer!" – Paid-up subscriber Doug S.
"I wasn't able to make the conference this year, however, last year myself and a couple of other alliance members were talking to Steve and asked him if he and maybe Dan could play a little bit of music since they are both accomplished. I'm glad to see that he took us up on our suggestion. Sorry I missed it." – Paid-up subscriber Gary S.
"I just watched the video clip of Steve playing the guitar at the conference in Las Vegas last week. I really was impressed – both by his talent and his appearance. Some months ago, Steve told his readers that he resolved to drop several pounds. From the video, it appears that he's well on the way. In recent months, Steve has written nothing about losing weight, so I may be mistaken. If Steve actually hasn't lost weight, he should market the white shirt that when worn with the tails out made him look slimmer. – Paid-up subscriber Robert M.
Regards,
Justin Brill
Baltimore, Maryland
September 28, 2016
Report From the First Presidential Debate
On Monday night, presidential candidates Donald Trump and Hillary Clinton met for their first head-to-head debate. What was the evening's big news?
Deion Jones returned a 90-yard interception to score a touchdown and cap the Atlanta Falcons' victory over the New Orleans Saints, 45-32!
I didn't get to see that, though. I was watching the presidential debate – so you didn't have to.
Compared with the NFL matchup, watching the presidential debate was like standing on the sidelines at a flag football game between a couple of Montessori schools.
The only talented player on the field was NBC anchor Lester Holt, and what Holt was talented at was piling on Trump and making late hits for Team Hillary.
The candidates themselves were no good.
Trump has the gut issues going for him. But he can't articulate them well enough to make your reasoning fully agree with the feeling in the pit of your stomach. And he has trouble giving concise and to-the-point examples of what he means.
Trump is too fond of the "broad stroke." He's trying to paint a detailed picture of what's wrong with American politics while using only a four-inch brush.
Hillary is good with the details – too good. Details are all she has. Lots and lots of highly detailed little thises and thats. Like she's furnishing a dollhouse instead of filling the White House.
Hillary kept saying, "I have a plan." It's a phrase that always sets off alarms for me. People who really have a plan are acting on the plan, not standing around saying they have one.
"I have a plan" is right up there with "Hold my beer and watch this!"
Who won the debate?
That assumes it was a debate. It wasn't. It was a tedious rehash of issues that both candidates had already made a hash of.
This was interspersed with some name-calling that commentators characterized as "heated," "harsh," or even "scorching." Which shows what wimps these commentators are. None of it would get you punched in the nose on the playground.
Hillary had the best riposte. She brought up the notion, yet again, that Donald is someone who shouldn't be allowed anywhere near the nuclear launch codes.
Trump: "That's getting old."
Hillary: "But good."
And Trump had, by far, the best line. He saved it for the very end: "Hillary has experience, but it's bad experience."
The winner was whomever you wanted to win. As far as I can tell from clicking around sources on the Internet, the candidate who won was the candidate that the source in question had already decided to declare victorious.
It reminded me of Soviet judges scoring Olympic gymnastics back during the Cold War.
Thus, the Washington Post and all its opinion columnists said Hillary won. Ditto for the New York Times. And in CNN's instant viewer polling, 62% of respondents gave the laurels to Hillary.
On the other hand, the Drudge Report's instant polling awarded Trump the prize by 82%. And Charles Krauthammer – who, to my mind, is the smartest person on TV – called the debate "something like a draw."
Did we "learn" anything from the presidential debate?
Short answer: No.
Long answer: No.
And yet, the debate turned out to be highly informative – if you turned the sound off.
The event was broadcast with a split screen so that each candidate was visible while the other was talking (or, to use a technical term, "blabbing"). The blab was dull, but the expressions on the candidates' faces were fascinating.
Trump was serious of mien. He was concentrating intently on what Hillary was saying. He sometimes developed a little twitch of annoyance. Other times, he wore a small frown of disagreement. But mostly, he looked deeply thoughtful. (And let's be frank, this is a man who could stand to do a bit more deep thinking.)
Hillary is supposed to have a whole bunch of deep thoughts – concerning her endlessly convoluted plans to fix all the problems under the sun. But there she was, thoughtlessly making rude grimaces whenever Trump spoke.
Mom always said, "You shouldn't make faces because your face may get stuck that way." Hillary's face got stuck that way.
She spent the whole evening with a wipe-that-look-off-your-face look on her face. She smirked. She sneered. She radiated smugness.
She repeatedly mugged for the camera with a ham actor's pantomime "gasp of disbelief." Except she is no actor. It came off like a cheap infomercial for new dentures.
She indulged in nasty smiles of condescension. She adopted a pout that said, "What's a smarty like me doing with a dummy like him?"
Hillary had an air about her as if she just couldn't believe that somehow, oh my gosh, she had been dragged up on stage to debate a talking dog.
Hillary had a plan for the debate. Of course she did. Hillary has a plan for everything. And she stuck to her plan. The plan was to be utterly dismissive of Trump and anyone who backs him and to treat every single thing he has to say with total contempt.
As I've said before, I'm not happy with either of these presidential candidates. It's a tough election. Do you roll the dice with Trump? Or do you let Hillary just set the bones down on the table, so you crap out again like always?
I don't care, personally, if Hillary mocks Trump. But I do care, personally, when the nature of democracy itself is mocked.
Trump is a man who decisively triumphed in the contest for the Republican Party's presidential nomination. And he is, as of the latest polling, in a dead heat with Hillary in the presidential race. When Hillary doesn't treat Trump with any measure of respect for the public support that he has achieved, she isn't insulting him, she's insulting American voters.
If politics in a democracy has one rule, it's, "Don't insult the voters."
Regards,
P.J. O'Rourke
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