Is This the End for Europe?

  • Where does the ‘risk buck’ stop?
  • Tiny stocks
  • In the mailbag

From the Financial Times:

Long queues stretched outside foreign exchange bureaux in the City of London on Wednesday as people cashed in their pounds ahead of the EU referendum.

Online currency-exchange companies also reported a surge in activity as customers decided to take advantage of a 3 per cent rise in the value of sterling against the dollar, to $1.48, before the uncertainty of Thursday’s vote.

That’s all very well and nice.

But we wonder how much the folks are changing into foreign currencies.

Based on the report, folks are buying euros and US dollars. We wonder if some are stumping for a few of the more exotic currencies. Perhaps, say, the Norwegian kroner.

Or the Polish zloty.

But our biggest question is: How many are buying gold?

According to Reuters:

Gold investors piled on near-term bullish and bearish options bets on Wednesday, racing to protect against whipsawing prices as Britons head to the polls to decide on the future of their European Union membership on Thursday, data showed.

Implied volatility, a measure of options activity, in Comex July gold calls and puts with strike prices that are as much as $50 higher or lower than current prices soared to record highs on Wednesday.

A vote for Brexit is expected to spur a rush to safe haven assets like bullion.

Electronic gold is a nice idea, but physical gold is an even better idea. Our tip for Britons would be to skip the Bureaux de Change, and instead head straight for their local bullion dealer.

If Britain does leave the EU, perhaps it could be the end of the ‘paper money’ experiment. In which case, pounds, euros and dollars will all be worth the same — zero.

Only gold has value…real value.

Markets

Overnight, the Dow Jones Industrial Average fell 48.9 points, or 0.27%.

The S&P 500 index fell 3.45 points, or 0.17%.

In Europe, the Euro Stoxx 50 index added 10.97 points, or 0.37%. Meanwhile, the FTSE 100 gained 0.56%, and Germany’s DAX index added 0.55%.

In Asian trading, Japan’s Nikkei 225 index is up 38.94 points, or 0.24%. China’s CSI 300 index is down 0.33%.

In Australia, the S&P/ASX 200 index is up 4.15 points, or 0.08%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$49.62 per barrel. Brent crude is US$50.34 per barrel.

Gold is trading for US$1,262 per ounce, and silver is US$17.28 per ounce.

The Aussie dollar is worth 75.23 US cents.

Where does the ‘risk buck’ stop?

Yesterday we wrote to you about Tesla Motors Inc. [NASDAQ:TSLA].

It’s a remarkable story. The company has a market capitalisation of US$28.9 billion.

That’s about half the market cap of Ford Motor Company [NYSE:F], which has a market cap of US$52.3 billion. And it’s about two-thirds the market cap of General Motors Company [NYSE:GM], which has a market cap of US45.1 billion.

By that measure, you’d think the companies have comparable revenues and profits. You may think that…and if you did…you would be wildly wrong.

Last year, Ford had revenues of US$149.5 billion, and net profits of US$7.3 billion.

Tesla’s revenue was…US$4 billion…with a loss of US$888.7 million.

In 2015, Tesla produced a grand total of 20,580 vehicles. By comparison, Ford produced more than three million passenger cars in 2015.

In other words, Ford surpassed Tesla’s annual production within the first six days of the year!

Still, that hasn’t stopped the Tesla fans from ramping up expectations of future greatness.

However, even they must have been mystified by Tesla’s announcement to buy another company chairman Elon Musk holds a stake in, SolarCity Corp [NASDAQ:SCTY].

As we reported yesterday, Mr Musk owns a 22.54% stake in the loss-making solar business. So the 100% takeover bid for SolarCity by Tesla is…to put it mildly…interesting.

Should the takeover go through, it would value SolarCity at around US$2.8 billion. SolarCity investors would receive stock, rather than cash.

So, what’s the deal? By that, we don’t mean the boring nitty-gritty, we mean, what’s the deal?

According to the PR spin from Tesla, it’s all about…

Tesla’s mission has always been tied to sustainability. We seek to accelerate the world’s transition to sustainable transportation by offering increasingly affordable electric vehicles. And in March 2015, we launch Tesla Energy, which through the Powerwall and Powerpack allow homeowners, business owners and utilities to benefit from renewable energy storage.

It’s now time to complete the picture. Tesla customers can drive clean cars and they can use our battery packs to help consume energy more efficiently, but they still need access to the most sustainable energy source that’s available: the sun.

This, dear reader, is where we simultaneously reach for the barf bag and the Pulitzer Prize. The barf bag is for us; the Pulitzer Prize is for the communications guru behind the PR spin.

The spin continues:

The SolarCity team has built its company into the clear solar industry leader in the residential, commercial and industrial markets, with significant scale and growing customer penetration. They have made it easy for customers to switch to clean energy while still providing the best customer experience. We’ve seen this all firsthand through our partnership with SolarCity on a variety of use cases, including those where SolarCity uses Tesla battery packs as part of its solar projects.

So, we’re excited to announce that Tesla today has made an offer to acquire SolarCity.

Hurray!

Of course, that’s one view of the deal…the Tesla view of the deal.

But we prefer the alternative view. We are contrarians, after all. That view comes from Angelo Zino, analyst at S&P Global Market Intelligence.

As Bloomberg reports:

“This deal has everything to do with debt. Call it a bailout, call it what you will,” Zino said in an interview Wednesday. “SolarCity is one bad economic downturn away from going belly up.”

Oh! Excuse us for a while. We’ll just go through the Tesla press release again…just to see what it says about SolarCity’s debt position…

…Hmmm. Not a word.

Perhaps that’s not surprising. A cursory glance at SolarCity’s balance sheet shows that Mr Zino could be on to something.

In 2010, SolarCity’s total long and short term debt was US$64.5 million.

At the end of the 2015 financial year, that number had jumped to…US$2.9 billion. And that’s to help support a business which last year had revenues of US$399.6 million…and made a loss of US$58.3 million.

As always with these things, we like to look at the company’s debt. Perhaps that will give us a clue about what the market thinks of SolarCity.

To our immense surprise…bond investors love the company that can’t make a profit. SolarCity’s January 2021 3.6% bonds currently yield 1.343%.

US government five-year bonds currently yield 1.215%. You may have been forgiven for thinking that a solar energy company, with over two billion in debt, and no near-term prospect of eking out a profit, would yield more than 1.343%.

But no. Perhaps just as the US government has the implied backing of the US Federal Reserve, investors must believe that SolarCity has the implied backing of Tesla and Elon Musk.

On that score, regardless of the soundness of the company as an investment, those canny bond investors appear to be right.

However, should the takeover go through, we have but one question to ask: If Tesla bails out SolarCity, who will bail out Tesla?

On that, the market appears to be a little more wary. Tesla’s March 2021 1.25% bonds currently yield 4.72%…a number which, in recent days, appears to be rising.

In the great merry-go-round of risk, the buck has to stop somewhere. Right now, it stops with Tesla.

Tiny stocks

What a nice little day for ‘tiny stocks’. Not all tiny stocks, but certainly for holders of BPH Energy Ltd [ASX:BPH] shares:



chart image

Source: Bloomberg
Click to enlarge


As you can see from the table above, BPH Energy is up 116.67%…in a single day.

That’s better than that old ‘laggard’, Superior Resources Ltd [ASX:SPQ]. It’s ‘only’ up 100% for the day. Tut, tut. What a disappointment.

Our series on ‘tiny stocks’ began yesterday. More than 5,000 Aussies have already watched the first episode. Part two goes out today.

If you haven’t signed up (it’s free), you can still do so. Go here.

In the mailbag

Subscriber Warren writes:

It’s just as well that you are a climate change sceptic. This means that your BS meter is functioning correctly.

I don’t want share recommendations from someone with a faulty BS meter!

Man-made climate change is a scam foisted on us by the so called Progressive Left. It now has the hallmarks of a religion – a junk religion founded on voodoo science. They seek to advance their cause by a mixture of conjecture masquerading as ‘fact’, half-truths and outright lies. Of course the climate is changing. It has been doing so for thousands of years. There is no direct evidence that this particular warming period is caused by human activity.

The sea level is not rising at an increased rate. The rise is a steady 150 mm per century.

The sea is not becoming acid. It is mildly basic and will remain so.

The world is not warming at an increased rate. Warming has flat lined since 1998.

Warming has not caused an increase in extreme weather events.

Warming has not caused an increase in bush fires.

Polar bears are not dying out. They are thriving.

You can visit this website for a dose of reality. http://www.climatedepot.com/

I like the cut of Warren’s jib. But then, I would, wouldn’t I?

Subscriber Bradley writes:

More political IN-correctness PLEASE!

Just to be clear, we don’t say or write things purely to be controversial. We say and write things because it’s what we believe.

We find it improbable that there hasn’t been a single male capable of performing the role of Sex Discrimination Commissioner since the post was established in 1984.

It just doesn’t seem possible to us.

By the same token, we find it equally improbable that there hasn’t been a single female capable of performing the role of US President or French Prime Minister in goodness knows how many hundreds of years.

Our beat is that we’re just generally fed up with over-sensitivity. We’ll agree that Eddie McGuire is far from being the funniest bloke who’s ever walked the planet.

And, on reading the transcript of his comments, we doubt if he’ll win any awards for comedy. But were his comments sexist? Was he condoning violence against women? Does he really believe that someone should drown The Age journalist, Caroline Wilson?

No. All we can say is that, by invoking the sexism or racism argument every time somebody says something with which you disagree, it only serves to harm both causes rather than help them.

So endeth the lesson from the your evil, middle-aged white guy editor.

Cheers,

Kris