They know…

  • ‘Hostage’ investors
  • Enough? Not yet
  • In the mailbag

Something incredible is about to happen.

And it will happen right inside your email inbox.

Next Thursday, 25 May, is the date.

I can’t give you any more details today, but we will give you more details in the coming days…before the big reveal next week.

If you’re curious, it’s an incredible way for investors to get access to some of the most exciting and potentially lucrative investment opportunities in Australia.

It’s got nothing to do with trading. And it doesn’t involve leveraged instruments, such as options or CFDs.

This is different. That’s what makes it so incredible. Look out for more details soon.

Markets

Overnight, the Dow Jones Industrial Average gained 85.33 points, or 0.41%.

The S&P 500 added 11.42 points, for a 0.48% gain.

In Europe, the Euro Stoxx 50 index closed up by 4.36 points. Meanwhile, the FTSE 100 gained 0.26%, and Germany’s DAX index added 0.29%.

In Asian markets, Japan’s Nikkei 225 index is up 40.83 points, or 0.21%. China’s CSI 300 is down 0.07%.

In Australia, the S&P/ASX 200 is up three points, or 0.05%.

On the commodities markets, West Texas Intermediate crude oil is US$49.05 per barrel. Brent crude is US$52.01 per barrel.

Gold is trading for US$1,233.48 (AU$1,665.30) per troy ounce. Silver is US$16.73 (AU$22.59) per troy ounce.

The Aussie dollar is worth 74.07 US cents.

‘Hostage’ investors

More fun among our favourite short-selling candidates.

One, if we had placed the trade, would have delivered ample returns. The other, if we had placed the trade, would have (so far) delivered us much pain.

The former is Quintis Ltd [ASX:QIN]. The shares are currently in a trading halt, pending an announcement from the company.

The latter is Tesla Inc. [NASDAQ:TSLA]. The shares are currently trading near an all-time record high.

High prices are good for short-sellers, but only before the placement of the trade. High prices after the placement of the trade? Not so good…especially when the price goes even higher.

While we already feel vindicated by the Quintis trade to say ‘victory is ours’, we aren’t yet in a position to celebrate the Tesla trade idea.

However, we are slowly feeling more optimistic as each day passes — providing each day doesn’t coincide with another record high for the share price.

Back to Tesla in a moment. First, we’ll take a moment to wallow in the disaster that is Quintis.

Yesterday morning, prior to the ASX market open, Quintis asked the stock exchange to place its shares into a ‘trading halt’.

According to the request, Quintis plans to provide the market with updated financial information and details of its ‘strategic outlook’. We pre-empt the announcement by saying it has no strategic outlook.

But enough of our editorialising for the moment.

The company also says that it needs to respond to the ASX ‘Aware Query’ it received on 11 May.

From what we can see, the nature of the ‘Aware Query’ hasn’t been publicly revealed. But it doesn’t take a sleuth of Sherlock Holmes’ ability to know the general gist.

We think we could sum it up as follows:

‘Why did it take until May 2017 for Quintis to inform shareholders that a major customer had cancelled its contract with the company in December 2016? We eagerly and enthusiastically await your reply.’

We’re sure the ASX will have expressed their query in a more formal way. But the sentiment is likely the same.

Aside from the short-selling research report issued by US short-seller Glaucus Research, another short-seller has valued the Quintis share price at zero.

Viceroy Research has its own rationale for its [cough] valuation. Claims of ‘Ponzi-like behaviour’ and ‘fictional institutional sales’ are among them.

We’ll bow to their better knowledge on that. Assuming it is better knowledge.

We will say that the word ‘Ponzi’ is often overused. But, in this instance, as with Tesla, the description may be apt.

However, we do have one qualification. In most Ponzi schemes, the victims (investors) aren’t aware that it’s a Ponzi scheme. They believe the returns and investment performance is genuine.

It’s why most victims of Ponzi-like schemes don’t try to cash-in their investment. They assume the gains will continue. However unlikely and implausible those gains may be.

But in the case of Quintis and Tesla, we think something else is at play, which means neither really are ‘traditional’ Ponzi-like schemes.

The difference is that we suspect investors in both companies know that neither has a sustainable business model. The trouble is, for the big investors especially, they can’t do anything about it.

They are hostages. They can’t sell or withdraw support, because they know that doing so would spell curtains for the respective companies’ valuations.

They can’t even sell a small parcel of stock. Once a shareholder has attained ‘significant shareholder’ status, they have to report every increase or decrease in their holding.

Perversely, that probably makes them more likely to add to their shareholding. Whether that’s buying on market or through a new share issue. They must show their support. What better way than to pour good money after bad!

The fact that Quintis was able to survive the collapse of other similar schemes is, we admit, impressive. But unless the company has something extraordinary to announce prior to the resumption of trading in its shares, we can’t see how the share price can do anything other than fall.

It’s a similar story for our buddies at Tesla. As we’ve admitted, we’ve been theoretically short-selling this stock since it was around US$230 per share.

At this morning’s close, it was US$315.88 per share.

Nonetheless, we suspect that investor attitudes towards the electric car company may be starting to turn. As Bloomberg reports:

Tesla Inc. lost a buy rating from one of its longtime bulls, with a Morgan Stanley analyst boosting his projection for how much cash the carmaker will burn through as more prosperous rivals encroach on its business.

The analyst believes that cash-rich tech companies, like Apple Inc. [NASDAQ:AAPL] and Alphabet Inc. [NASDAQ:GOOG], will threaten Tesla’s business, especially in the market of self-driving (autonomous) cars.

For that reason, Morgan Stanley now has an ‘equal weight/cautious’ recommendation on the stock, and a price target of US$305.

We would like to think that a price closer to US$105 or less would be more appropriate.

We are in the minority. The consensus price target among analysts who cover the stock is US$281 — around 10% below the current price.

To our mind, that’s far too generous a valuation. Especially when you look at the raw numbers. And when we say raw numbers, we mean market capitalisation and sales numbers.

The following chart from Business Insider (no friend of Tesla of late) explains everything:



chart image

Source: Business Insider
Click to enlarge


In 2016, General Motors Co [NYSE:GM] sold over three mln cars. It has a market cap of US$50.87 billion.

For every vehicle sold, the market allocated a value to GM of US$16,718 (market cap divided by vehicles sold.)

In 2016, Tesla sold 76,230 cars. It has a market cap of US$49.3 billion.

For every vehicle sold, the market allocated a value to GM of US$646,727.

You can question this valuation approach if you like. We’re not even going to claim that it’s an appropriate way to value any kind of company.

Although, in the mining sector, it’s not uncommon for analysts to value a miner based on the ounces or tonnes of metal produced, or of ore in the ground.

Or, let’s take Apple as an example. It sold 211 mln iPhones in 2016. And it sold around 40 mln iPads. Just those two products alone accounted for around 250 mln units sold.

During 2016, the company’s market cap averaged around US$575 billion. That means investors valued each sale (of iPhones and iPads only) at around US$2,300 each.

Even if you factor in the higher price of a car, investors were still prepared to value the Tesla stock at around seven or eight times the average price of one of its cars.

With Apple, investors were prepared to value the stock at just one, two or three times an average product price.

Again, we accept the fallibility of valuing a company in such a way. It’s not perfect. But we highlight it because it screams ‘overvaluation’ to our sensitive eyes.

And furthermore, we consider an overvaluation such as this not just as a singular and isolated occurrence in the world’s stock markets but, rather, something that’s likely far more deep and widespread than most investors think.

Enough? Not yet

Maybe you think we bang on too much about Tesla. That we should just get over it.

Maybe we should. But we consider stocks like Tesla to be a warning sign. They signal to us that investors are coming up with any old excuse to push a share price higher.

In the case of Tesla, and before that Quintis, we believe it’s only a matter of time before investors finally come to their senses.

In the mailbag

Subscriber Donald G writes in with a response to our comments on the federal Budget:

I like your article on Superannuation changes: “We don’t think much of the super system. Each new government creates a new set of rules that makes a complicated system even more complicated.”

It seems to me to be farcical that a tax such as GST is sacrosanct when it should be adjustable to suit the economic conditions and at the same time, a system that is designed to take the load off the Old Age Pension is treated as a short term political football.

Has it occurred to you that we downsize our house which is not assessable for the pension and put our money into Super where it IS assessable for the pension! [The government will] give you a little tax deduction now to make you feel better (but you still pay full stamp duty etc), and then [the government] will make sure that you don’t get a cent of the Old Age Pension. And, by the way, [the government] will still probably change the tax rules in Super some time down the track to get back the bit that we “gave” you in this budget.

Please let me know if I am wrong — But please let all the potential suckers know if I am right.

Thanks for your good work.

Donald won’t find your editor arguing.

Governments have form when it comes to this kind of thing. Remember Kevin Rudd’s $900 cheques after the financial meltdown? It was supposed to stimulate the economy.

Supposedly, the chief secretary to the Treasury at the time, Dr Ken Henry, advised the government to put cash directly into consumers’ pockets. The government did just that.

The federal government then spent the past eight years grabbing the cash back…plus more. The Queensland flood levy, followed by the disability insurance levy, followed by the Temporary Budget Repair levy, followed by an increase in the Medicare levy.

The old saying is that governments ‘rob Peter to pay Paul’. In this instance, it seems that the government rather niftily ‘paid Paul’ first, and then ‘robbed him’ afterwards as punishment for accepting the payment in the first place.

If you get our drift.

Cheers,
Kris