Tesla Prints Money To Fund Its Expansion

Modest Thursday Decline

After the number of coronavirus confirmed cases increased due to a change in methodology, the stock market fell modestly on Thursday. S&P 500 was down 0.16% and the Nasdaq fell 0.14%. Russell 2000 was up 0.26% as it outperformed the large caps for the 3rd straight day. It has been on a great run. 

VIX increased 0.41 to 14.15 as the stock market continues to be placid. On February 13th, there were 116 new deaths because of the coronavirus and 4,823 new cases. 3,095 of those were “clinically diagnosed.”

No Euphoria Despite Great Run

CNN fear and greed index fell 2 points to 58 which is greed. Even though it seems like the market is due for a correction because stocks have had such a good run since Christmas Eve of 2018, there isn’t euphoria. Fact that it seems like markets should fall might actually be a reason to buy stocks. You aren’t near a top when so many investors are calling for a correction. You’re near a top when traders buy because they think stocks can’t fall. 

As you can see from the chart below, the percentage of bulls in the AAII investor sentiment survey increased 7.5% to 41.3% in the past week. That’s only 3.3% above average. There’s no euphoria here. Percentage of bears fell 8.8% to 26.4%, but that’s only 4.1% below average.

Tesla To Offer $2 Billion In Stock

Tesla stock rose 4.78%. It is up 9.43% ever since its 17% decline earlier this month. It’s still in a euphoric stage. The news on Thursday was that the company plans to issue $2 billion of stock. That’s just 2 weeks after Elon Musk stated the company wasn’t going to do so. 

Musk stated, the company is “spending money, I think, efficiently, and we’re not artificially limiting our progress. It doesn’t make sense to raise money because we expect to generate cash despite this growth level.” I’m not knocking this move though as the company can literally print money by raising capital and having its stock rise further. It’s like shareholders are begging Tesla to take its money and the firm is begrudgingly acquiescing.

The stock briefly fell 6% in pre-market trading after the announcement, but it quickly rallied during normal trading hours. Elon Musk plans to buy $10 million in stock on this offering and Larry Ellison, a board member, will buy $1 million worth. The stock is clearly a competitive advantage. 

At this point how could Tesla possibly not dominate the EV category in the next 5-10 years as it has a battery technology lead and virtually unlimited capital to invest in new tech? Competition isn’t an issue within the space. A main question is how quickly the market for EVs will grow.

Update On Democratic Primary

The Democratic primary is wide open. But you wouldn’t know it by looking at the equity and bond markets because they haven’t reacted much to it. Only thing we have seen is a 7% drop in health insurance stocks which quickly reversed in the past few days. 

That’s because markets think the most likely thing to happen is Donald Trump being re-elected President. Investors also aren’t concerned with Bloomberg winning. A concern would be Bernie Sanders winning. Despite winning the popular vote in the first 2 elections, he has recently been slipping in the betting market.

As you can see from the chart below, the expected volatility in the S&P 500 on Super Tuesday, which is March 3rd, is highly correlated with Bernie’s odds of winning. This chart doesn’t show Bernie’s recent dip in the betting market which correlates with the shown decline in expected volatility.

It has been very interesting to watch the betting market for the Dem primary because despite the fact that there were no new polls until one Georgia poll late in the evening, the market seemed destined to give Bloomberg higher odds. It’s like when stocks move on no news. 

Latest odds are that Bloomberg has a 33% chance of winning and Sanders has a 42% chance of winning. Betting market thinks Bloomberg will do the best in the South. Even though the latest Georgia poll showed Biden at 32% and Sanders and Bloomberg at 14%.

Personally, I have always thought Biden was the best challenger to Sanders because he does well in the South which is Sanders’ weak point. However, the over $300 million that Bloomberg is spending and his momentum in the polls seems to have convinced some traders in the betting market that he will win. The chart below shows the latest spending totals. 

Ignore CNN’s title that refers to TV spending, because Bloomberg is also spending millions on Facebook ads. It will be very interesting to see how Facebook does next quarter. Twitter is at a terrible disadvantage by not accepting campaign spending. They essentially allowed Trump and Bloomberg to tweet at each other for free.

Even with Bloomberg’s momentum in the betting market, Sanders has a 72% chance of winning the Nevada caucus. His supporters being very loyal helps at caucuses which take more effort than just voting. Nevada’s diversity hurts Pete and Amy’s chances of winning. Bloomberg isn’t competing there. 

Also, Bloomberg needs 1 more national poll of at least 10% to make the debate on Wednesday. Since no national polls came out, he is still out of it as of Thursday night. It will be interesting to see how he does in the debate because many of the candidates will criticize him because he is a new threat.

Conclusion

The stock market is near its record high, but there’s no euphoria. Bears don’t have a great argument against stocks as the coronavirus will be temporary. And the election will only be a negative catalyst for stocks if Bernie wins. 

Volatility on March 4th will be determined by who does the best. We're still waiting to see if Bloomberg makes the debate. Tesla is literally printing free money which gives it a competitive advantage over the other automakers which are already behind in EVs. Only question is how large the EV market will grow once the Model Y is launched in the next couple of months.  

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