22/08/2018Is Tesla Inc Heading for a Car Crash?

By Joshua Portway, Trading Intern, Owen-Lloyd Futures.

A share price down nearly $80 in less than two weeks. A business model with immense manufacturing costs and low sales, dependant for growth upon improved battery technology that hasn’t yet materialised. A confused and apparently unstable Chief Executive whose Twitter activity has included calling a British diver a paedophile and announcing that he has ‘funding secured’ for potentially the largest buyout in history, without actually having secured any funding (an act which the SEC is considering investigating as market manipulation). Short-sellers Crispin Odey and George Schultze have called the company in ‘the final stage of its life’ and ‘over-levered’ with ‘a cash flow problem’ respectively. In other words, Tesla Inc is having a very tough year.

In many ways it seems as if the company’s dream of transforming the global vehicle market has been brought to a rather tragic end. Like many other young people, I hoped that Elon Musk’s vision of efficient and effective electric cars for the masses would be an overwhelming success and another step towards dealing with the immense threat that climate change poses to the modern world. However, following a tough year and a battering from short-sellers, who point towards Tesla’s low sales, high costs and shaky quality control (evidenced by viral images of a Model 3’s bumper having fallen off in the rain) as evidence for its share price being heavily inflated. In response, Musk has committed himself to taking the company private at $420 a share, but this announcement has increasingly come under scrutiny for its practicality.

In particular, it remains unclear if there is any individual, corporation or fund which has the wealth, the ability and the desire to provide the funding to carry out a buyout nearly three times the size of the legendarily enormous purchase of RJR Nabisco in 1989. For example, Musk himself has pointed towards Saudi Arabia’s sovereign wealth fund as a potential investor, but any investment from the Middle East is likely to come under extensive scrutiny from Cfius and it remains unclear how much capital the Saudis actually have to invest or whether they are genuinely willing to make a financial commitment. Having hired Goldman Sachs to advise him on his buyout plans, it may seem logical for Tesla to follow the LBO model of the aforementioned RJR; relying on junk bonds, asset sales and debt financing to generate enough income to purchase the company. However, unlike RJR, Tesla already holds $10bn of debt on its balance sheet and lacks a steady stream of income or any major assets that could be sold to help deal with the increased financial strain. Finally, there are several other tech giants who are socially close to Musk and are ideologically aligned with his vision, most notably Peter Thiel and LinkedIn’s co-founder Reid Hoffman, but although these venture capitalists may wish to help their colleague they have nowhere near enough capital or financial clout to carry out a buyout on their own. In case it was not already clear, a buyout of Tesla Inc is nowhere near as simple or viable as Musk has clearly hoped, and to cancel his plans would only bring the company under even greater pressure from the short-sellers.

Thus, it appears that the death of Tesla Inc as an economically viable company may be inevitable at this point; a combination of extensive debt, low revenue, a lack of willing buyers, short-selling and Musk’s own personal character condemning it to business oblivion. However, that is not necessarily the end for the dream of the electric vehicle revolution which Musk has so vividly conjured. Other vehicle manufacturers, who tend to be much larger and more efficient than Tesla, have begun to invest heavily into batteries and electric vehicles; Ford for example announced plans in January to double its electrified vehicle spending, with Executive Chairman Bill Ford Jr announcing that his company was ‘all in’ on a green future for American vehicles. As a result, Tesla Inc and Elon Musk’s legacy may not be in their own designs or production, but rather in the profound impact that they have had on the wider automotive industry.

23/11/2017Brexit Etc

Finest of Margins

It is striking how apparently minor, irrelevant events can have a disproportionate effect and influence on all of our lives. The man in the picture above Boris is Anthony Weiner, until 2011 Congressman for the 9th District of New York, and until recently husband of Huma Abedin (also pictured), chief of staff on Hilary Clinton’s 2016 Presidential campaign. He has a fine record defending the democratic rights of his constituents in Brooklyn, but has a fatal flaw – he likes to send saucy texts and photos to people who don’t really want to receive them – including, appallingly, a 15 year-old girl. As a result of this hobby, Weiner was, on 25th September, sentenced to 21 months in prison, starting next month.
His text thumb is the reason Hilary lost the Presidential election and that the world faces Donald Trump in the White House. Trump himself did not think he would win – indeed, he may not even have wanted to win, but Weiner put him there. On 21st September 2016 the Daily Mail (they had to be involved) printed an article about the minor and Wiener. The FBI seized Weiner’s laptop during their subsequent investigation: on the laptop the FBI found a number of confidential emails from Hilary and Huma which caused FBI Director James Comey (correctly) to reopen his investigation into Hilary’s treatment of classified government information and use of a private email server. When the US went to the polls on 8th November, that was foremost in voters minds, not Trump’s manifold horrors and untruths. Awful though he was, he made no attempt to hide who or what he was. Hilary, on the other hand……….The world thanks you, Anthony.

Omnishambles

Which brings us to Boris. Who knows what little quirk of fate lumbered us with him and caused the Leave victory in the European referendum last June. David Cameron, George Osborne and the EU itself must all take large deliveries of blame. Austerity too, and the general unsavoury and talent-free nature of the current political class – a large number of voters chose to give the latter the finger, as they were to in the US later in the year.

This puts the United Kingdom into a state of division and panic, apparently. Journalists thrive on this kind of political disintegration; the Prime Minister made it a lot worse by calling and then winning by a feather her snap general election. Self-important and frankly hopeless backbenchers and fringe politicians now think they have great power, and nihilism rules. We are all going to hell in a hand cart, apparently, exiled from Europe, snubbed by the rest of the world, and the cost of a plumber is going to roof it when we deport all the Poles.

In the long term, leaving the European Union is the right decision. It is an undemocratic, bureaucratic money-consumer that will only succeed if there is full monetary and political union. We cannot entertain that, so we are better to leave now and build our trade with the rest of the world. London is a world city, not a European capital, and there are greater opportunities in thegreater world than there are in the EU. Economic growth is to be found in the US, China and India. That is where we should be travelling and trading. The City of London made its reputation trading with the world, and it still excels in world markets such as Foreign Exchange.

In the short term, leaving the EU will cause some dislocation and economic changes. This is where we need to hold our nerve and stop the national funk in which we seem to be indulging. All the scare stories about leaving have focussed on small issues or on scare stories generated by those who have a vested interest in reversing the exit decision. Farms, coffee shops and “casual” restaurants will be forced to stop relying on cheap immigrant labour. They may be forced to pay a living wage. Goldman Sachs threatens to move its operations to Frankfurt. I helped move a trading operation to Dusseldorf in 2008, and I wish them the very best of luck in Frankfurt. Not many of the people I moved in 2008 now live in Germany, and the whole move was a disaster for that company. The Common Agricultural Policy is the invention of madmen, only possible in an political system which has unelected commissioners and no democratic institution to speak of. Our withdrawal from it is a huge opportunity for our agricultural industry to stop being a branch of the civil service and to thrive. Our fishing industry will thrive. The City will thrive – it always does in time of great upheaval, as it is full of the brightest and the sharpest who know where to go and what to do to find gold.

The behaviour of the EU in the negotiations over our exit tells us we were absolutely right to decide to go. It is in the interest or every citizen of the EU that the latter maintains its trading terms with the UK. The UK is a net importer from the EU. The UK has a £60bn trade deficit with the EU. Last year Germany sold is 900,000 cars. Angela Merkel should be protecting her workers by making sure a deal is done quickly. Ireland’s economy is heavily dependent on trade with the UK – hence its panic over its land border with Great Britain. If the EU asked its citizens what they wanted, most would say a trade deal and let’s move on. Instead, we have a refusal by the EU to discuss trade until they have extracted their pound of flesh as punishment for our departure, and the likelihood of an exit on WTO rules grows more likely by the day. We will be hurt by this, but so will the people of the EU. But is unelected leaders don’t care about that – they care only about the “project”. The biggest threat to the Euro and the EU is Germany’s massive trade surplus with the rest of Europe, but they care not to tackle that.

The UK needs to hold its nerve, trust its position and get the best deal it can. There is no need to panic; we need to offer the EU a departure payment that satisfies the EU’s vanity and hurt at thedivorce. The sum being demanded is about the same as the cost of HS2. Pay it, get the trade deal done. Then we can move on to the sunlit uplands. The EU will still be there, not much will change. We will be free of the ECJ.

This crisis has exposed the low grade of two sectors of our economy: politicians and the journalists who cover them. I hear journalists who should know better repeating the nonsense that “business needs certainty”. Indeed. If I had the certainly that the oil price would be higher tomorrow, I would be a wonderful trader. The fact is there is no certainty. The most successful businesses are the ones which thrive on change and disruption. Was Google “certain” that we would all be using the internet on our phones? Brexit will throw up huge opportunities for business – the uncertainty will provide the brave with rewards if they act upon their instincts. The ones that sit moaning that their businesses don’t work now that cheap Romanians are no longer available deserve to fail. We have faced greater threats than the wrath and stupidity of the EU in our history.

05/07/2017HMS Jupiter and RBS

In June 1984 HMS Jupiter, a Leander-class frigate of the Royal Navy, visited the pool of London. Departing the berth alongside HMS Belfast, Jupiter’s captain, Commander Colin Hamilton decided to ignore the advice of the pilot and declined the offer of two PLA tugs which were provided for him. The strong incoming tide swept Jupiter broadside against London bridge, bending masts, radar and aerials, as well as damaging the bridge itself. City workers crossing the bridge on their way home gazed down at the stuck vessel and chunks of granite falling into the Thames. Commander Hamilton was court-martialled and spent the rest of his career teaching at a shore facility; he never held sea command again. The navy vests great power in its captains, but holds them responsible for the safety of their vessel and the lives of their crew.
The shareholders entrusted Fred Goodwin and his fellow directors with the responsibility of managing the Royal Bank of Scotland. The commonwealth of the United Kingdom trusted him too, as RBS is a clearing bank and a key part of the UK economy. Mr Goodwin indulged in a large amount of reckless lending, grew the bank’s balance sheet to dangerous levels and then bought a fourth-rate Dutch bank without doing any due diligence. Had he been a naval officer I suspect he would have been reduced to the rank of stoker, but as a civilian he was allowed to retire to his large Edinburgh house with a pension worth £500,000 a year. He gambled the bank, his employees’ livelihoods and his customers’ savings, knowing that his downside was a comfortable retirement.
The financial crisis of 2008 was a crisis of corporate governance as much as anything else, and nothing has changed since that is likely to prevent such a disaster befalling out economy again. the behaviour of Lloyds Bank over the frauds perpetrated on its customers by the HBOS operation in Reading shows that these banks have learnt nothing – as does the crisis at Wells Fargo in the United States. No bank executives or directors have been held to account for their behaviour in the years leading up to 2008. Those who enjoy the rewards and privileges of command must know that they have great responsibility as well, and that they will be held to account if hubris, recklessness or incompetence bring their organisations to disaster. Commander Hamilton discovered that; it is a great shame that Fred Goodwin did not also. It would certainly sharpen the focus of those sitting atop banks today.
In what seems a belated and doomed attempt to hold some bankers to account, the SFO has charged a group of Barclays executives with offences relating to their capital raising from Qatar. This seems odd, given that Barclays took not one penny of taxpayers money. John Varley is the first global bank chief executive to face criminal charges stemming from the financial crisis. He can count himself extremely unlucky, given the roster of rogues and thieves who could be in the dock alongside him. RBS launched a rights issue which looks frankly fraudulent, given that the information provided in the prospectus was mostly bollocks and the bank collapsed within six months. The directors were either dishonest or incompetent. I think it will be very hard to prove that Varley and his colleagues acted dishonestly in raising private capital to save their bank, rather than collapse into the lap of the taxpayer. The prosecution is also connected to the fact that Mrs May wants to abolish the SFO – this case is their punt for survival. Mrs May is wrong to want to destroy the SFO – on the contrary, she should be strengthening it and empowering it to ensure that future Fred Goodwins find themselves in the dock when they drive their ship onto the rocks.

15/05/2017Culture or Big Stick?

Climb the steps from Bank tube station beneath the portico of the Royal Exchange, and your eyes are drawn left to the imposing bulk of the Bank of England. Its impenetrable curtain walls, important entrance and pink-coated doorman are designed to project an image of soundness, safety, security and tradition. Walk past the Bank, down Throgmorton Street and at the junction of Old Broad Street you will find a Tesco Express. There you can buy a packet of raspberries wrapped in a plastic sleeve bearing the name Rosedene Farms and an oak tree logo. There is no such farm, no such place. It is a sham to trick the customer into imagining the fruit comes from a picturesque farm in Devon, nestling in hedge-bound countryside. Floodlights, tarmac, vast sheds, razor-wire and roaming guard dogs are the reality, but that would shift no fruit.

The Bank of England and its fellow regulator the FCA are just as guilty of projecting an image which is not real. The latter sits in a showy glass tower in Canary Wharf, aping the companies it regulates, yet has consistently failed to prevent major financial frauds and disasters, and is no match for the people it regulates, never ahead of them and surprisingly reluctant to have a go at them when they misbehave.

I mention all this as the history of the Libor-rigging scandal made me wonder whether regulation was a total waste of time and money. The FCA and others operate an apparently solid regime which should make all those it regulates fear its reach and its vengeance. From 2005 on large numbers of people in the interbank interest rate market operated in a way that would not be out of place in Wyoming in 1830. On a daily basis they sought to rig Libor, a key benchmark which is set in the City of London, in order to mark their trading positions in their favour. It was fraudulent and criminal behaviour, and the copious emails and phone tapes of their activities suggest that they did it without fear of the regulator, of management, of anybody. They sought only to make themselves wealthier at the expense of those who relied on Libor, and had lost all sight of any moral compass. They were completely out of control. There was nothing surreptitious about their behaviour, and they left a gleaming audit trail in their wake. So the Bank of England or the FCA must have felt their collars. Er, no. Tom Hayes is the only person who has suffered a significant penalty for his actions. The judge, in his sentencing remarks, said that Hayes had threatened the integrity of an index which was backed by the reputation of the City of London, and that the sentence must reflect that – and gave him 14 years. An appeal cut the term to 11 years, but nobody in positions of responsibility for Hayes’s trading has been indicted. People who knew what he was doing, who were paid bonuses based upon his profitability, who had supervisory jobs – no charges. It is not possible that Hayes did what he did without the knowledge and approval of his superiors.

Hayes’s trial brought to light a large amount of email evidence which showed that the people he dealt with in the setting of Libor, brokers, traders, middle-office staff, thought nothing of setting the rate wrongly. They were operating in an industry lousy with compliance officers, anti-money laundering regulations, FCA approval forms etc etc. Yet they were completely out of control. This is where the regulators get it so wrong – the key to people’s behaviour in an organisation is culture, and culture is set by the leadership. That is why the Barclays CEO’s pursuit of a whistleblower is so egregious – that tells the people that work at the bank that they will not be supported if they report wrongdoing; instead they will be hunted down. Regulators should focus on culture, leadership, example – then they will find the behaviour of traders and others will become compliant. The Royal Navy has a very simple culture, which stems from Nelson: if you see the enemy, close with them and destroy them. It is the bedrock of the Navy’s success. If the FCA and others wish to improve the behaviour of those it regulates, it needs to concentrate on the culture fostered in banks and brokerages by the directors and managers, and support those who report malfeasance. The Navy shoots its admirals if they fail to uphold the service’s values – the FCA should follow its example, metaphorically.

29/03/2017It may well be fake news.

The ranting about “fake” news, the banning of journalists from press conferences, the conspiracy accusations. They all seem to be examples of President Trump’s erratic behaviour, like his incontinent and crazy tweeting day and night. We laugh at him.

But he has a point.

The terrible violence experienced by London in the space of two minutes last Wednesday afternoon demonstrates much. A lone psychopath decided to try and kill some people. He was successful, but was shot dead by one of a number armed policemen present. It was all over very quickly. The palace of Westminster was swamped by armed police, the Prime Minister was removed and the whole parliamentary estate was sealed off. Brave passers-by comforted the wounded, staff from St. Thomas’s Hospital ran onto Westminster Bridge to give first aid. An air ambulance landed on Parliament Square, a large number of ambulances and paramedics attended the wounded; the Fire Brigade sent a boat across from Lambeth and rescued one of the wounded who had fallen from the bridge. Inside the Palace, MPs, Lords and staff sat around waiting for the all clear, guarded by armed police.

How was this reported? It was reported as “chaos”, “knife to the heart of British democracy” “busiest part of London sealed off”. The reporting was breathless, the journalists locked in the Palace were loving it, the peddling of suppsoition, rumour, untruth was constant. MPs were moved to Westminster Abbey reported the BBC; this was untrue and, if they had paused and thought about it, a stupid thing to report. They were in Westminster Hall, part of the Palace. If you believed the news services, the whole of SW1 was in a state of panic. The opposite was true; and act of unspeakable violence had triggered a planned response from the police, and the fire and ambulance services had attended swiftly to save those who were hurt. The most striking thing about the television footage was lack of chaos – a large number of highly trained people reacted as we would expect them to. Lots of people ran bravely towards the incident to help. People on the bridge might have fled the sound of gunfire. They did not, but stayed beside the injured. The reporting was misleading, breathless and designed to scare people. The one good journalist who spoke, Quentin Letts, calmly and without embellishment related what he had seen from his office window. At the end, he quietly said “this is what I saw”.

At best this was irresponsible, at worst it was deliberately misleading. Journalists seem happy to report truth as they see it, if that is what their story needs. Reporting is replaced by opinion, which is surely not good journalism. A few years ago, when working for E.On, I was at an Ofgem conference about UK winter fuel prices. I gave a speech which warned that the UK generation fleet was knackered, nothing was being built and we had run out of North Sea gas. Power prices were set to rise sharply – which they have (UK electricity is 65% more expensive than German or French). During the q&a session afterwards, two broadsheet journalists quizzed me on the volatility of the UK spark spread (the difference between gas and power prices, which is the generator’s margin). When they reported our exchange, I apparently had said that gas prices were set to rocket and E.On were going to make a load of money. This was a lie, and Ofgem had recorded everything. The two journalists had a story that they wanted to write, and adjusted the facts to fit that story. One now makes consumer television, the other was hired by a rival loss-making broadsheet as a political reporter. The story which their readers should have been told was that the UK’s lack of energy policy was going to result in a steep long term rise in power prices – and worse, potential power cuts. None, bar the FT, were interested in this. That was the true story.
owen-lloydfutures.com

29.3.17

20/03/2017Spreadbetting with the weapon of knowledge

Spreadbetting companies are highly profitable. IG Group’s website hails 2016 as “another record year for IG”, boasting record pre-tax profit of £208m on revenue of £456m. Their accumulated pre-tax profits since 2011 are £948 million. They take no positions themselves – that money all comes from the pockets of their customers. IG is a very well run company, with skilled staff and very sophisticated trading and risk-management systems. Their trading platform deploys the latest technology and offers a professional-standard trading and charting front-end. They make it slick and easy for you to spend your money with them.

The response of the FCA to this successful industry which forces nobody to trade with it, and is highly competitive, is to attack it and threaten to regulate it even further to no obvious purpose. They have nothing to say about the HBOS scandal, involving predatory bankers stealing people’s livelihoods. The financial markets are aware that the UK stock and bond markets display evidence of unusual trading activity before the release of major economic statistics. They are not looking into that, nor do they have any plans to – despite this clear threat to the integrity of markets. They have no interest in the fund management industry, which mostly fails to beats its benchmark index, but charges huge fees to its captive pensions clients. I recently saw a client’s pension statement from a large fund manager, proudly trumpeting an annual percentage growth rate which underperformed the FTSE100 by 15%. No apology or explanation. Fees pocketed. FCA approved.

But back to spread betting. As with most assaults by regulators, their attack on IG and others is misconceived and will help nobody – least of all the punter. For a start, a number of these companies are located abroad – many in Cyprus, where regulation is mild and the FCA has no jurisdiction. The answer to the problem is not regulation, but instead education. I would say that, as I offer support and mentoring to traders and spreadbetters. But it is true. Trading financial and other products through IG et al should be approached with the same knowledge, rigour and discipline that any professional trader would deploy in the market. If you do not, you will be run over. IG hold your money, dictate where your stops are, generate the prices from the underlying instrument, vary the bid/ask spread according to market conditions and, most importantly, know what your position is. They hold a powerful advantage over their customers. Trading very volatile products with too little capital is unlikely to end well. I am guessing that many of IG’s customers deposit £250, start trading £/$ (cable) and lose their stake within a couple of days. You cannot approach this sort of trading as if you were backing a horse in the Grand National; it is important to get good advice and trade with adequate capital and a trading plan. People like me can help you do that; the FCA should promote education, rather than banning certain of the companies’ products. Encourage the punter to understand what he is doing and he is far more likely to enjoy what he or she is doing, and less likely to have his capital wiped out. It is a big ask of the FCA, but it would be the intelligent course of action.

Mark Owen-Lloyd,
Owen-Lloyd Futures
17.03.17

mark@owen-lloydfutures.com

20/03/2017What do regulators DO?