August 14, 2018

CNBC reported last Tuesday that Saudi Arabia’s Public Investment Fund bought a 3% to 5% stake in Tesla via public markets. Reuters also confirmed that this Saudi fund bought a stake “at just below 5%” of the company. However, there is no evidence that this Saudi fund wants to help Tesla go private at a whopping cost of approximately $66 billion, plus all the corporate bond debt as well as an ongoing burn rate that would cost at least another $10+ billion. Previously, the most recent mega deal to go private was HJ Heinz in a $28 billion deal back in 2013, so the proposed Tesla deal is much bigger. The rumor that Saudi Arabia is the mythical backer behind Tesla going private may be credible, but if shareholders transfer their public shares for private shares, then they will likely be diluted further by whoever is proposing to fund Tesla’s seemingly perpetual burn rate, plus its more than $10 billion in high yielding junk bonds.

Frankly, I do not see how Tesla can survive with the onslaught of new, more efficient quality competitors coming from VW Group, Toyota, Nissan, Volvo, Jaguar, GM, and other major automakers. As of Friday’s market close, Ford and GM have market capitalizations of $38.8 billion and $51.6 billion, respectively. Toyota Motors is widely viewed as the best-managed automobile company in the world, with a market capitalization of $178 billion reflecting that reputation. Toyota is a pioneer in hybrid electric vehicles. VW Group, with a market capitalization of approximately $82.4 billion, also has an extensive line-up of Tesla killers, like the 2019 electric Audi E-Tron SUV that will premier in San Francisco on September 17th as well as the Porsche Taycan that is accepting orders. These are just two of the all-electric vehicles that VW Group is launching to “destroy Tesla” by offering quality electric vehicles at competitive prices. So, you decide if Tesla is worth $82 billion – more than Ford or GM, or about the same as VW Group?

(Please note: Louie Navellier does not currently hold a position in Tesla, Ford Toyota, Nissan, Volvo, General Motors, VW Group or Apple. Navellier & Associates does not currently own a position in Tesla, Ford Toyota, Nissan, Volvo, General Motors, VW Group or Apple for any client portfolios).

If a money-losing company like Tesla can go private in the biggest deal ever to go private, then the entire stock market could be at risk of disappearing. Stock buy-back activity this year is running at close to a $1 trillion pace and according to The New York Times, $754 billion in new stock buy-backs have been authorized this year, up 80% from the same period in 2017. In the first quarter of 2018, companies in the S&P 500 bought back a record $178 billion in stock. In the first six months of 2018, Apple alone bought back $43.5 billion in shares, a record for a six-month period. According to Bespoke Investment Group, an average of 14.7% (and median of 19%) of the outstanding shares in the Dow Industrials have disappeared in buy-backs in a little over a decade and 90% of the Dow Industrials (27 of 30) are buying back shares.

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The U.S. Dollar is the Global Safe Haven in the Emerging Markets Collapse

The headlines proclaimed rising inflation, but I thought the news on the inflation front was encouraging last week. On Thursday, the Labor Department announced that its Producer Price Index (PPI) was unchanged in July, significantly below economists’ consensus estimate of a 0.2% increase. Wholesale electricity prices declined 1.6%, causing overall energy prices to decline 1.3%. Furthermore, wholesale meat prices caused food prices to decline 0.9%. Excluding food, energy, and trade margins, the core PPI rose 0.3% in July. Overall, the PPI was up, but not enough for the Fed to change its interest-rate policy.

On Friday, the Labor Department announced that its Consumer Price Index (CPI) rose 0.2% in July, in line with the economists’ consensus estimate. Excluding food and energy the core CPI rose 0.2% and 2.4% in the past 12 months. Food prices rose 0.1%, while energy costs declined 0.5%. Shelter (housing) costs rose 0.3% and now seem to be the primary catalyst behind consumer inflation. Since housing is interest-rate sensitive, any slowdown in rate hikes this year should help improve the housing market.

I suspect that the Fed will raise key interest rates 0.25% at its September 25-26 Federal Open Market Committee (FOMC) meeting, but any rate increases beyond that are very uncertain, since the Fed under no circumstances wants to invert the yield curve. I am expecting a relatively dovish FOMC statement in September, which may ignite a significant market rally; so if you have more money to invest, I recommend that you invest it just prior to the Fed’s September FOMC statement.

Finally, the other reason that the Fed may want to pause raising rates after its September meeting is that the U.S. dollar is getting “too strong.” On Friday, the Turkish lira collapsed after President Trump authorized doubling tariffs on steel and aluminum imports from Turkey to 20% and 50%, respectively, over the lack of progress in releasing Andrew Brunson, a U.S. pastor that is charged with supporting a group blamed for a failed coup attempt against the Erdogan regime in 2016. On Friday, Erdogan called for Turkey’s citizens to convert out of the dollar and gold and buy the Turkish lira to help in this “national struggle.”

The fact of the matter is that the Turkish lira has been collapsing for some time and is now a major threat to European banks, which effectively means that the European Central Bank (ECB) may have to continue with its quantitative easing beyond 2018. What has essentially happened is that any country that has had tariffs imposed by the U.S. has caused their respective currencies to weaken further – as Canada, China, the European Union, and now Turkey have learned the hard way. On the other hand, any country that has cooperated on trade with the U.S., like Mexico, has not had any material currency erosion.

Overall, the emerging market crisis in Southeast Asia, much of Latin America, and the Middle East (e.g., Iran & Turkey) is spreading. Amidst this crisis, the U.S. dollar is the oasis. Since commodities are priced in U.S. dollars, inflation should continue to subside in the U.S. Interest rates will remain relatively low in Japan and the European Union, so international investors looking for real returns will continue to flock to the U.S. dollar for currency appreciation as well as higher interest rates; so I strongly recommend that investors continue to trim their international investments and invest in more domestic U.S. companies without significant currency risk, so they can also continue to benefit from a strong U.S. dollar.

About The Author

Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. *All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

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