Tesla Stock Craters 6%

Tesla Stock Craters - Stocks Fall Again

Tesla Stock Craters and S&P 500 fell 0.28% on Wednesday. This supports my thesis that the market won’t hit a new record high until economic data improves or the odds of a trade deal improve. 

A more specific way of saying this is I don’t expect stocks to rally until the Atlanta Fed GDP Nowcast expects 2% Q2 growth. It’s now at 1.2%. There would need to be a few decent reports or one very good report to push that Nowcast to 2%. 

An example of the trade war moving in the right direction is improved negotiations at the G20 summit which is from June 28th to the 29th. That’s still over a month away, which means this correction can linger. The possible outcomes of the meetings at that summit will be speculated in the coming weeks.

With this decline, the CNN fear and greed index hit 32 which signals fear. Lately, the market has been in correction mode, but I don’t see it ending just because this indicator shows the market is oversold. On the other hand, if you are short, you are certainly tempting fate because a quick turnaround on trade will give the market at least a 3% bounce over a few days. 

Nasdaq fell 0.45% and the Russell 2000 fell 0.88%. This decline in the small caps shows us this weakness isn’t all about trade.

Utilities Rise & Energy Falls

Tesla Stock Craters - Utilities sector increased 0.82% to a new record high. It is now up 14.23% year to date which is above the S&P 500’s gain of 13.94%. That’s a small outperformance, but it’s a huge deal because usually when the market rallies, utilities underperform. 

With such stability and low growth, it hardly ever makes sense for this sector to rally over 10% in a 6 month period. In full year 2019, utilities earnings are expected to grow 6.3% which is actually the 3rd best expected gain. The sector’s revenue growth is expected to be 3.4%. That's below the consensus for the overall market which is 4.7%.

2 worst sectors on Wednesday were energy and consumer discretionary which fell 1.58% and 0.9%. A rising dollar is putting pressure on commodities prices. The dollar index is now at $98.15 which is just 18 cents away from the 52 week high. Crude futures fell about 2% on Wednesday. Oil inventories increased last week to their highest level since July 2017.

Tesla Stock Craters - Tesla On Red Alert

Tesla stock craters to 6.02% to $192.73 which is its worst close since December 9th, 2016. That's also before the Model 3 was released. Essentially, the market is saying that the Model 3 was a failure. Tesla made a huge bet on Model 3 being a mass production car that would bring it to profitability, but it hasn’t delivered. 

It’s very tough to rely upon a car to drive growth when consumers desire SUVs. Also, the overall auto market is very weak. Lightweight vehicle sales fell in 3 of the first 4 months of the year. Growth was -4.5% in April which was the worst decline since August 2017 which was weak because of hurricanes.

On Wednesday a research analyst, who has been a long time bull, stated Amazon, Apple, or any other big tech firm won’t be acquiring Tesla. To me, that’s very obvious because those firms aren’t car companies. That’s not to say Tesla won’t find a buyer at some price. 

The problem is when a stock is cratering firms usually don’t want to stick their neck out at buy it. Also, Tesla can be a huge liability if someone dies using auto-pilot. This is similar to why firms wouldn’t buy Twitter when its stock was cratering as it is viewed as a website with a lot of controversy.

The Morgan Stanley analyst stated, “Tesla is not really seen as a growth story. It seems like a distressed credit and restructuring story.” Because Elon Musk has gotten in trouble with the SEC for tweeting material information about Tesla, he can’t support the stock anymore with public statements. He can’t pull the rabbit out of his hat anymore.

Biggest issue for Tesla is the company’s liquidity prospects prevent it from investing for the long term. 

Tesla Stock Craters - Because the company needs to be profitable now, it can’t put all its focus into Model Y which is set to be released next year. This company can’t grow in the long term if it needs to focus on short term profitability. 

It has gotten away with losing money for years, but now that demand is weak for Model 3, investors are losing patience. The firm’s decision to drop the Model S and X prices by about $10,000 was seen as a desperate attempt to boost demand. Also, it has been tough sledding for the firm ever since the tax credits were taken away.

Improved Surprise Index

Tesla Stock Craters - I’m always careful when reviewing the Citi surprise index. Just because economic reports are beating estimates, doesn’t mean growth is improving or the economy is doing well and vice versa. 

With that caveat in mind, the chart below shows the Citi surprise index has stopped cratering. It has been increasing for a few weeks. The table on the bottom shows how stocks have done when the Citi surprise index has gone from less than -50 to greater than -30 in 1 month. 

As you can see, the average 1 month return is only 0.46%, but the average 6 month return is 5.91%. This movement certainly isn’t a bad thing, but it’s not reason alone to buy stocks.

Tesla Stock Craters - Conclusion

This hasn’t been a terrible correction, but it has the potential to be a long one because of economic weakness and trade tensions. The next big meeting is the G20 summit in late June. 

Until I hear otherwise, I think the trade war negotiations aren’t headed anywhere anytime soon. Tesla is in the dog house. After years of claiming Elon Musk doesn’t meet his projections, the bears are finally profiting off shorting Tesla stock. 

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