#52 S2N: Is Tesla going bankrupt?

S2N Spotlight

A friend of mine, an ex-Goldman Sachs investment banker (excuse the name drop), and I were discussing over the weekend whether Tesla would go bankrupt in the next few years. We both thought so. I have a long history with this view. I have followed Tesla very closely, just as I have followed Elon Musk. I don’t wish to take away from his many talents. However, I do believe he is a gambler (I am not sure he would disagree with me), and I also believe he likes to operate in a chaotic manner. Eventually, a chaotic gambler who has survived the whims of fortune is bound to meet his destiny. One of the things about a stock trading at a ridiculously high valuation is that it can only remain at extraordinary high valuations as long as it actually keeps growing extra ordinarily. We are seeing that play out, with the magnificent 7 selling off over the last few weeks while beating estimates. Its one thing to beat carefully orchestrated quarterly earnings, but it requires dazzling forward projections. Let’s take a deep dive into the Tesla performance numbers.

It isn’t a shock when seeing this chart and the 25,000% return at its peak to understand why Musk was the richest man in the world and the darling of so many. I have struggled to get 100 Twitter followers, and he tweets a nonsensical word and gets half a million likes.

If you want to get a sense of how tight you have to buckle in and believe, take a look at the force of these daily gyrations. It looks like price action in “ludicrous” mode.

The next chart caught me by surprise; I guess I was distracted with all the Musk noise. Last week, going into earnings reporting, Tesla was in its second largest ever drawdown of 64%. The stock price is closer to zero than its all-time highs. Let’s wait and see.

S2N Observations

I think April was a pretty epic month in terms of extreme price movements across so many different asset classes. Just look at the month column in the “Performance Review” section below to get a sense.

I have written in previous posts that I use the valuation of the US markets as an important part of my process to determine the long-term direction of the market. My favourite metric for this valuation is the Shiller PE ratio. You can read about it in more detail here as well as by typing Shiller in the search bar on the site to see more posts on the subject. The key point is that we got a sell signal in January 2024 as the Shiller PE traded 2 standard deviations above its mean. My backtest goes back nearly 150 years and is a major outperformer in risk-adjusted terms, so it is well worth being cautious with the Shiller PE at 34.41 more than its 97th percentile in terms of valuation.

I mentioned last week that we should be watching the 50-day moving averages on the SP500 and the Nasdaq to see if they cross above and reclaim the uptrend. They haven’t; the SP500 kissed it, and the Nasdaq blew a kiss and turned down again. I will let you know when I see any meaningful support levels, but I think there is still room for this market to drop.

I am also keeping a watchful eye to see if there is a broader breakdown of stocks making new 52-week lows. At this stage, there is nothing to be alarmed about.

The Bank of Japan (BOJ) spent $35 billion of its $1.2 trillion in foreign reserves trying to defend the yen. It seems their stoploss was 160. It helped a little but I am not sure they are going to be able to defend it. What is clear is that with their overnight rate at -0.1% and the US overnight rate at 5.3%, this currency is going to continue to weaken. Be careful for what you wish for. Japan has been dreaming of inflation for decades. Hello inflation.

Performance Review

Chart Gallery

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