Barron’s Weekend Summary: China's cheap electric vehicles (EVs) pose no threat to US automakers like Tesla, Ford, and GM
Cover:
-China's cheap electric vehicles (EVs) pose no threat to US automakers like Tesla, Ford, and GM, but better vehicles might pose a problem. The Seagull, a cute four-door hatchback priced at $10,000, is a popular choice among Chinese automakers. The Biden administration raised tariffs on Chinese EVs to prevent them from crushing the US auto industry. A 100% import penalty will be imposed on EVs like the BYD Seagull, while select batteries and battery components will be hit with a 25% levy. Donald Trump has pledged even higher tariffs. The penalties effectively block Chinese companies from bringing their cars to America and prompt US auto makers to invest in domestic EV component manufacturers. China is now the largest market for new cars and EVs, and even US auto executives, including Tesla CEO Elon Musk, extol Chinese automotive quality and innovation. However, cheap vehicles pose no threat to US manufacturers, and American automakers must use the time to design and build affordable electric vehicles or risk seeing history repeat itself.
Interview:
-Solita Marcelli, now the chief investment officer for UBS Global Wealth Management, has experienced numerous career crises. She began her career as a technology equity analyst in the early 2000s, and soon joined JP Morgan's emerging markets fixed-income team. The global financial crisis roiled the bond market, and the Covid pandemic hit just three months after her hiring. Marcelli learned the importance of staying close to businesses and entrepreneurs, as data often offers insufficient information for decision-making. Conversations with UBS' high-net-worth clients, including restaurant franchise owners and furniture company executives, have confirmed her bullish view of U.S. stocks, especially technology shares, but also increased her focus on hedging positions. Marcelli's soft-landing economic forecast and market outlook are discussed in a Barron's interview.
Tech Trader:
-The world is investing heavily in Nvidia's artificial intelligence (AI) factories, with investors pushing its stock above $1,000 and data center builders increasing their spending five-fold in the company's latest quarter. The expected return on investment (ROI) for AI is unknown, but it is estimated to be 50%. Corporations and countries are refitting $1T worth of data centers with accelerated computing from Nvidia, with data centers earning $5 over four years for every dollar invested in Nvidia computing and networking products. However, real calculations of ROI are difficult due to the secrecy of competing firms and the newness of AI learning models. Marketed products based on OpenAI's ChatGPT or Google's Gemini are few, and Microsoft charges $10 to $30 a month for its Copilot virtual assistant. Netflix, Amazon, and Google use AI internally to determine what they present to their searching audiences, but this is a cost of doing business, not individually priced products.
The Trader:
-Memorial Day is here, but the market outlook is uncomfortably hazy. Despite recent volatility, the Dow Jones Industrial Average is up over 3% this month, while the S&P 500 index and NASDAQ Composite have gained 5% and 8%, respectively. However, the past week's wild swings, including Nvidia's strong earnings, have not prevented the Dow from losing over 2%. This coming week will not offer much to change the narrative, with earnings releases from Costco Wholesale, Salesforce, HP Inc., and Dell Technologies. Investors will also be able to digest the latest consumer confidence report, the Federal Reserve's Beige Book, weekly jobless claims, and a revision of first quarter gross-domestic product. The government's personal income and outlays report for April, which includes the latest PCE price index reading on inflation, will be released on Friday. Dan Genter, CEO and chief investment officer of Genter Capital Management, suggests that the Fed won't be easing monetary policy anytime soon, as the core number is expected to rise 2.8% year over year, unchanged from the previous month.
-Keurig Dr Pepper's shares have only gained 2.9% this year, underperforming larger rivals Coca-Cola and PepsiCo, which are both up about 7%. However, this could change as new management aims to shake up the underperforming coffee business. Keurig Dr Pepper owns Dr Pepper and other beverage brands, including 7UP, Hawaiian Punch, Snapple, and Yoo-Hoo, which are part of the company's U.S. "refreshment beverages" business. Sales rose more than 4% in the first quarter due to price increases. However, the company also owns the Green Mountain Coffee Roasters line of single-serve K-Cups for Keurig coffee makers, where sales fell more than 2% due to lower pricing and a decline in K-Cup pod shipments. Tim Cofer, previously the CEO of Central Garden & Pet and a 25-year veteran at Mondelez International/Kraft Foods, is expected to push coffee initiatives started by his predecessor, Bob Gamgort, to reignite growth in the business.
Features:
-Target's reputation as Walmart's more posh counterpart has made it a reliable shopping destination for middle-class Americans and a boon to the company's financial performance. However, with inflation squeezing household budgets, the company's cultivated aura of big-box exclusivity may be hurting its financials more than it is helping. As customers are looking for better value to stretch a dollar, they are finding it other places. Target's fiscal first-quarter earnings report showed a missed earnings estimate and a year-over-year sales decline, while competitor Walmart beat expectations due to its growing market share gains among higher-income customers. Target may need to take a page out of Walmart's book and position itself as a value-centric retailer to win back shoppers.
-GE Vernova stock has seen a significant increase, with its shares up 34% since being spun off from GE in mid-March. The company's shares have risen 8.6% on Friday, indicating a strong performance from the two GE companies. The Dow Jones Industrial Average has risen 0.1% on Friday, while the S&P 500 is up 0.7%. This indicates that low valuations and lower expectations remain a significant factor on Wall Street. Wall Street is raising price targets for GE Aerospace and GE Vernova, the power generation-related business, as both stocks have been successful since GE broke up. JP Morgan analyst Mark Strouse raised his price target for GE Vernova to $173 a share, keeping a Buy rating on the shares. GE Vernova stock closed at almost $164 a share on Wednesday, about $1 above Strouse's former price target. Aerospace, the former GE's business portfolio, is expected to be the better business, with strong margins and unassailable market share.
Europe:
-The European Central Bank (ECB) is expected to lower borrowing costs at its next meeting on June 6. The central bank, responsible for setting interest rates for 20 euro-using countries, has historically been slower to pivot than the Federal Reserve or the Bank of England. Euro-zone inflation held steady at 2.4% in April, near the 2% target, and ECB President Christine Lagarde has communicated that a cut is likely in June. However, moving first to control inflation and start the rate-cutting process brings risks, including currency weakness. Lower rates typically diminish a currency's relative value by making foreign investment less attractive. The euro has already fallen 1.6% to $1.09 in 2024 as the market believes the ECB will cut before the Fed.
Emerging Markets:
-Georgia's Prime Minister Irakli Kobakhidze has said an EU commissioner warned him of an assassination bid over a controversial law. Kobakhidze claimed on Thursday that the Commissioner was Olivér Várhelyi of Hungary (though probably not a supporter of Viktor Orban). The bill requires NGOs and media outlets with over 20% of their funding from abroad to register as bodies "pursuing the interests of a foreign power". Critics argue the measure mirrors Russian legislation used to stifle dissent, while Brussels warns it is incompatible with Tbilisi's longstanding bid for European Union membership. The ruling party has faced accusations of derailing the country from its EU membership path and leading it back towards the Russian orbit. The party insists it is committed to EU and NATO membership, which are enshrined in the country's constitution and supported by over 80% of the population. The party has repeatedly accused Western countries of attempts to drag Tbilisi into Russia's war on Ukraine. Kobakhidze called a "horrific threat", he quoted the commissioner as saying: "You've seen what happened to (Robert) Fico and you must be very careful."
--China's economy and property market are facing challenges due to a slump in housing prices since 2021, which has led to a freeze on spending. Consumer sentiment and real estate are suffering, with new home prices falling for a tenth consecutive month by 0.6%, the fastest decline since November 2014. China recently unveiled "historic" policies to rescue the housing sector, including measures to boost property prices, asking local governments to buy unsold homes from distressed developers, and easing rules on purchases. However, analysts say that local governments are vastly in debt across the country, making some of these steps likely to be ineffective.
Commodities:
- Commodities are experiencing a decline, with gold and silver experiencing their largest decline in a month. Copper is also down for its second consecutive session. This comes after a surge in prices this year, reflecting higher demand and tighter supply. Gold has already reached 22 record highs this year, while silver reached its highest value in over a decade earlier this week. Copper hit a record price of $5 a pound on Tuesday. In the agricultural market, inventories are tight for wheat due to production declines in Russia, the world's largest exporter. Soybean and corn prices have come under pressure, but analysts are watching for a spate of bad weather across the Midwest that could raise prices again. The commodity bull market is alive and well, with more upside. Retail investors should stick to the classic 60/40 portfolio of stocks and bonds, as commodities are speculative assets and are almost entirely at the mercy of supply and demand.
Streetwise:
-Alphabet is integrating generative artificial intelligence into its core search business, which could potentially change the rules of getting noticed online. Audience engagement experts have long explained that algorithms, relevance ranking, and clicks are important, but with AI, clicks might become less important. Google claims they won't, but it's unclear if they're talking from both sides of their Google hole. For example, Google's search results for a user asking which sneakers are best for a 51-year-old man might include paid links, product listings, pictures, and prices. However, Perplexity.ai, a small start-up, is taking on Google's near-monopoly in search. The company offers bullet points on how to complement a user's mature style, emphasizing cushioning and avoiding flashy colors, and specific model recommendations, but no endless list of links, paid or not.
Weekend Papers Summary
FINANCIAL TIMES
-Blackstone CEO Stephen Schwarzman has endorsed Donald Trump as a "vote for change" and a "vote for change" for the US president. This comes as Republican megadonors who had previously been critical of the former president are uniting behind him. Schwarzman had previously broken with Trump after the January 6 Capitol Hill insurrection and supported Trump critic Chris Christie in the Republican primary. He cited the dramatic rise of antisemitism as a reason for returning to Trump's camp and believed President Joe Biden's policies were misguided. Schwarzman's announcement could signal the start of more Wall Street money flowing to Trump, who has been tapping finance, technology, and energy billionaires for cash infusions as he lags behind Biden in the fundraising race.
-Taiwan experienced domestic political turmoil less than a week after new president Lai Ching-te took office, despite growing military pressure from China. Tens of thousands of people protested against opposition efforts to expand parliament's powers, which would severely constrain the president's administration. China's military conducted a second day of exercises around Taiwan, which it has called "punishment" of Lai, a staunch defender of his country's de facto independence. Beijing regards Taiwan as part of its territory and threatens to annex it with force if Taipei refuses indefinitely to submit. The People's Liberation Army sent fighters, bombers, and naval ships into areas off Taiwan's east coast, while China's coast guard conducted law enforcement patrols east of Taiwan, including simulated ship inspections.
-Meta and Elon Musk's xAI are vying for a partnership with chatbot-maker Character.ai, as tech groups seek to secure partnerships and investments in top AI start-ups in Silicon Valley. Facebook owner Meta recently held early discussions over a tie-up with Character.ai, which uses large language models to generate conversation in the style of various figures and personas. The groups discussed their top researchers working closely on initiatives such as pre-training and developing models. The fledgling group, backed by Silicon Valley venture firm Andreessen Horowitz, has also held exploratory talks with xAI over a similar partnership. However, the talks have not resulted in any deal being struck. Meta has already incorporated AI persona chatbots across Instagram, Facebook, and WhatsApp, including several that take on celebrity characters.
-A group of US Democrats, including senators Jeff Merkley, Bernie Sanders, Elizabeth Warren, and congresswomen Alexandria Ocasio-Cortez and Jan Schakowsky, have expressed concern over the appointment of Mukhtar Babayev as the president-designate of the UN COP29 summit. Babayev, the minister of ecology in Azerbaijan, spent over two decades at Socar before joining President Aliyev's cabinet. The letter to US secretary of state Antony Blinken and Biden climate envoy John Podesta urged the UN to update its conflict of interest guidelines to prevent similar situations from happening again. The letter echoes a call by over 100 US lawmakers and European parliament last year for the withdrawal of Sultan al-Jaber, the head of state-owned oil company Adnoc, as president-designate of COP28.
-Israel has been ordered by the International Court of Justice to halt the assault on the Gazan city of Rafah immediately. The UN's top court deemed the humanitarian conditions in Rafah, which has become a refuge for over 1 million civilians since the war began last year, "disastrous" and that Israel's efforts to protect them had been inadequate. This order reflects Israel's mounting diplomatic isolation as the war in Gaza continues, with the prosecutor at the International Criminal Court seeking arrest warrants for Netanyahu and defense minister Yoav Gallant, and three European states pledging to recognize Palestine. The week of setbacks also highlights how international opinion has hardened since Israel sent its forces into Rafah earlier this month, despite warnings from aid groups and pleas from the US not to do so.
-The UN's top court has ordered Israel to halt its military offensive in Rafah, a southern Gazan city that has become a refuge for over 1 million civilians since the war between Israel and Hamas began last year. Despite international pressure, Israeli forces entered Rafah earlier this month, insisting it was necessary to defeat Hamas. The International Court of Justice deemed Rafah's conditions "disastrous" and ordered Israel to stop. The court also ordered Israel to reopen the Rafah crossing between Gaza and Egypt for urgent basic services and humanitarian assistance, and to allow investigators into the enclave.
-With six weeks to go until another general election, Labour is about 21 points ahead of the ruling Conservatives in the opinion polls — leaving some Labour MPs in a mild state of disbelief at the speed of turnaround that Keir Starmer has achieved since he became party leader in early 2020. Critics have dismissed Starmer as a stodgy figure with a nasal voice who is yet to capture the imagination of the British public. Many supporters want the party to put forward a more positive message — and rely less on popular revulsion against the Conservative government.
-Labour is 21 points ahead of the Conservatives in opinion polls, leaving some MPs disbelieved at the speed of turnaround since Tony Starmer became party leader in early 2020. Critics dismiss Starmer as a stodgy figure and argue that the party should present a more positive message and rely less on popular revulsion against the Conservative government. Many supporters want the party to focus on a more positive message.
- Eli Lilly is investing $5.3B in a new Indiana manufacturing site to increase production of its diabetes and weight loss drugs. The investment brings the US drugmaker's total investment to $9bn, following the construction of Mounjaro and Zepbound. The company's diabetes and weight loss injector pens are currently facing shortages due to high demand. The sales of GLP-1s, the new class of drugs, have propelled Eli Lilly to the world's largest pharmaceutical group by market value. Analyst projections suggest that the new class could create a market worth over $100B by the end of the decade. Eli Lilly was valued at $768B at market close on Thursday. CEO David Ricks said the announcement was the largest manufacturing investment in the company's history and the single largest investment in synthetic medicine API manufacturing in US history.
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THE NEW YORK TIMES
- Israel continues its assault on Rafah despite an international court order to stop it, aiming to balance not angering American allies while achieving strategic aims. Both Israelis and Americans characterize this as a "limited operation," allowing the Israelis to proceed more cautiously than in other parts of Gaza. However, as the fighting pushes civilians towards areas with inadequate housing or medical aid, and the closing of the Rafah border crossing diminishes humanitarian aid delivery, critics abroad condemn the toll on civilians and are unconvinced by Israel's restraint. The International Court of Justice ordered Israel to halt its offensive in Rafah, but Israel insists it will not halt its military operation.
- Egypt has agreed to allow fuel and humanitarian aid to enter Gaza via Israel, reopening a vital channel for relief in the devastated Palestinian enclave. The agreement was reached during a telephone call between President Biden and Egyptian President Abdel Fattah el-Sisi. Fuel and aid will enter Gaza through an Israeli-operated crossing, Kerem Shalom, which has been one of two main land crossings into Gaza for months. The other crossing, between Egypt and Rafah, has also been the main way for sick and wounded Gazans to flee the war.
-Donald J. Trump returns to his Manhattan penthouse apartment after his criminal trial, which he built in the early 1980s. This is the silver lining for Trump, as he spends his first sustained period in Manhattan since moving to Washington in 2017. Despite facing 34 felonies and facing criticism from his old life, Trump enjoys being back in his penthouse apartment, which he considers home and a permanent reminder of the easiest period of his life. This period was the greed-is-good era, where Trump sold himself nationally as a titan of industry, despite a small real estate portfolio. He alludes to 1980s cultural touchstones, such as "60 Minutes," Time magazine, and boxer Mike Tyson, as he recalls the era.
-The Chinese Communist Party has been using extensive surveillance to prevent discontent and activists. During the coronavirus pandemic, this surveillance reached unprecedented scale, tracking nearly every urban resident to prevent infections. President Xi Jinping aims to make this control permanent and push it even further, aiming to embed the party deeply in daily life so that no trouble, even minor or apolitical, can arise.
-Hillary Clinton criticized her fellow Democrats for their decades-long failure to protect abortion rights, stating that they underestimated the growing strength of anti-abortion forces until the landmark Dobbs decision in 2022. She argued that Democrats had spent decades in a state of denial that a right enshrined in American life could fall, and that faith in the courts and legal precedent had made politicians, voters, and officials unable to see clearly how the anti-abortion movement was chipping away at abortion rights, restricting access to the procedure, and transforming the Supreme Court. Clinton said that most Democrats and Americans did not realize they were in an existential struggle for the future of the country.
-The migrant crisis has significantly impacted the hotel landscape in New York City, with the conversion of hotels to shelters causing a sharp decrease in room supply. This has led to a record high in tourist demand, which is projected to match pre-pandemic levels. Factors such as inflation, Airbnb short-term rentals loss, and expected decline in new hotel construction have also contributed to the nightly cost of an average room. The average daily rate for a hotel stay in New York City increased to $301.61 in 2023, up 8.5% from $277.92 in 2022. About 135 of the city's 680 hotels entered the shelter program, with many congregating in Midtown Manhattan, Long Island City in Queens, and near Kennedy International Airport. Participating hotels are paid up to $185 a night per room, but not a single one has converted back into a traditional hotel.
THE NEW YORK POST
- President Biden plans to address former President Donald Trump's Manhattan criminal trial in a "White House setting" when the jury delivers its verdict. His message will be tailored to the outcome of the trial, but he intends to stress that the US legal system worked and Americans should respect the process. Biden will deliver remarks whether the 77-year-old former president is convicted, acquitted, or the jury cannot agree on a verdict. Closing arguments in Trump's trial over alleged hush money payments made to porn star Stormy Daniels are set to commence on Tuesday, and it is believed that the jury could reach a verdict as early as next week.
-Silicon Valley venture capitalists, including David Sacks, Chamath Palihapitiya, Marc Andreessen, and Shaun Maguire, are turning against President Joe Biden and supporting former President Donald Trump. This change is a significant shift in the industry, which has traditionally supported Democrats. The moguls are disillusioned with Biden's policy proposals, such as a 25% "billionaire tax" and antitrust crackdowns by the Federal Trade Commission. Keith Rabois, an early PayPal executive, stated that it is impossible to support Biden.
GameStop Raises $933 Million From Past Week of Stock Sales
Videogame retailer filed with the SEC last Friday to sell up to 45 million shares of common stock at prevailing market rates
GameStop GME 3.71%increase; green up pointing triangle has completed the share offering it launched a week ago in the wake of a stock rally, saying it sold the maximum number of shares it had registered for $933.4 million in proceeds.
The videogame retailer filed with the Securities and Exchange Commision last Friday to sell up to 45 million shares of common stock at prevailing market rates. The move came after a weeklong share price run-up reminiscent of the meme stock rally that rocked markets in early 2021, though shares then retreated in the days leading up to the filing.
GameStop said after the bell Friday that it has sold the maximum amount of shares it had registered and intends to use proceeds for general corporate purposes, including potential acquisitions or investments.
The company filed for the offering last week at the same time that it reported preliminary first-quarter results showing an expected loss of $27 million to $37 million for the 13 weeks ended May 4. That narrowed from a $50.5 million loss in the same quarter a year ago. Sales are expected to hit $872 million to $892 million, down from $1.24 billion in the year-ago quarter.
Shares closed the market down 20% on May 17 and slid 15% more in the current week since to close at $19 on Friday.
After the market closed and GameStop disclosed the completion of its stock sale, shares rose 19% to $22.61.
Oaktree bets on history repeating in Milan
An aggressive US investment firm. A Chinese owner struggling to meet debt payments. And an Italian football club steeped in history.
This week Inter Milan treated fans of football finance to a reboot of the 2018 saga in which Elliott Management became the owner of stadium roommates AC Milan.
A quick summary of the Inter situation. The club was acquired by Chinese electronics retailer Suning in 2016. When the pandemic ravaged Inter’s finances in 2021, the owners turned to Oaktree — a specialist in debt — to borrow €275mn. The three-year loan came with a 12 per cent interest payment, so when the debt came due for repayment this week, the figure had jumped to almost €400mn.
The Zhang family that controls Suning tried to refinance with Pimco, another big US debt investor. But Oaktree decided to exercise its right to seize the club instead, just weeks after it was crowned Serie A champion.
As the FT’s Lex column notes, the Inter story is just the latest sign of increased activity of debt investors in European football. Specialist funds have stepped in to offer expensive loans based on punchy valuations.
Elliott’s experience at Inter’s fierce rivals points to the potential for attractive returns from such a move. Elliott stepped in at AC Milan after its Chinese owner failed to pay interest on a €300mn acquisition loan. The fund installed its own management team, revamped the playing squad, and swiftly returned the club to the top of Serie A.
In 2022, it sold up in a €1.2bn deal with private equity firm RedBird Capital, but provided about half that sum in the form of vendor financing. Elliott’s return from the deal equated to around 15 per cent per annum of ownership, plus the ongoing interest payments of around 7 per cent from the vendor loan.
Meanwhile AC Milan has started making money, recording its first profits in over 20 years last season.
Los Angeles-based Oaktree had said previously it had no desire to own or run a professional football team — it has zero experience in the sector. The expectation was initially of a quick resale, but now there is talk of a boardroom shake-up.
“We are committed to the long-term success of the Nerazzurri and believe our ambitions for the club are united with those of its passionate fans in Italy and around the world,” Oaktree said this week.
With big debt, persistent losses, and a new stadium to build, Oaktree will have a lot to deal with if it decides to stick around in Milan. But it’s not hard to see why it might still be worth rolling the dice.
Elon Musk and Henry Ford Made the Same Mistake. They Waited Too Long.
Even as he dabbles with driverless cars and sentient robots, the pressure is on Elon Musk to develop his long-promised “low-cost family” Tesla.
Investors worry Tesla’s car line with its four-year-old Model Y is becoming stale, that the world’s leader in electric vehicles is losing its first-mover advantage. Car makers from Detroit to Shanghai are catching up. Tesla’s stock price has tumbled by more than half since late 2021, including a 32% drop this year.
Henry Ford would have commiserated with his spiritual successor.
In 1924, Ford faced a similar dilemma. Sales of the Model T, America’s top-seller since 1909, were dropping. Rivals were gaining market share. Company executives believed it was time to produce a new, modern motorcar.
Henry Ford disagreed. He was sticking by his Tin Lizzie—and his opinion was the only one that mattered.
“The fight was long and bloody,” the historian Steven Watts writes in The People’s Tycoon: Henry Ford and the American Century. “[A] battle for the heart and soul of the company.”
Like the EV market before Musk, the automobile market before Ford barely existed. In 1902, the year before Ford’s entry, the best-seller was the Locomobile, a steam-powered buggy. It sold 2,750 units.
Cars were playthings of the wealthy, luxuries, too expensive for most people. Ford meant to change that.
“I will build a motor car for the great multitude,” Ford wrote in his autobiography, My Life and Work. “It will be large enough for the family, but small enough for the individual to run and care for…[and] so low in price that no man making a good salary will be unable to own one.”
Production of the Model T began in 1908. More than 10,000 rolled out in 1909, 170,000 in 1913, 500,000 in 1916, and two million in 1923.
What made the Model T so popular? “Not a thing of art and beauty, but of utility and strength,” as Barron’s wrote. The Tin Lizzie was reliable and cheap.
But there were signs of trouble. In 1924, The Wall Street Journal noted that Chevys were selling for $495, for the first time bringing a rival within “striking distance” of Ford’s industry low $380.
In 1925, GM matched Ford’s profit—around $100 million—despite selling half as many cars. GM’s higher margins and better business practices were paying off.
It got worse. Ford’s market share dropped from 51% in 1924 to 32% in 1926.
Clarence Barron, this magazine’s founder, knew all about Henry Ford’s resistance to a new model.
“He will not listen to popular clamor or the pleadings of his associates,” Barron wrote on July 26, 1926. “‘Won’t you give the people what they want?’ he was asked, and the emphatic reply was ‘No, I will give them what I know they ought to have.’”
A story is told, dated as early as 1912, that while Henry Ford was away, executives secretly built a prototype of “an improved Ford,” as Barron’s wrote. They showed it to the boss upon his return.
“Mr. Ford called for a hammer,” the story goes, and he proceeded to destroy the thing. “With every blow he cried out: ‘This is what I think of your —— new car.’”
Despite this, company leaders maintained pressure to replace the Model T and, in late summer ‘26, the old man relented. Then he threw himself into work on the new car, dubbed Model A to symbolize a new beginning.
Model T production shut down on June 1, 1927, and deliveries of the new car were promised for Aug. 1. That date came and went. Like Musk, Ford was bad with deadlines.
Though retooling took longer than expected, and cost $250 million (about $4.3 billion today), cars were rolling off the line by November.
Mob scenes were reported at Ford dealers around the country. The Model A was a popular and critical success, called a “baby Lincoln” for its looks, while costing the same $385 as the Model T.
Yet, it failed to restore Ford’s former pre-eminence. Ford instead would vie with Chevy in the starter-car segment, while GM—with brands at every price point—became No. 1.
Ford lost its dominance through Henry Ford’s refusal to change with the times, and the new Model A simply arrived too late. Or so goes one argument.
Another is that Ford made his choice back in the early 1900s, focusing on one model while William C. Durant —maker of America’s favorite horse-drawn vehicles—started collecting automobile companies. He fused Buick, Cadillac, Olds, Chevy, and more into GM, a company of companies.
Durant was forced out of GM in 1920 and, after years of get-rich-quick scheming, died bankrupt and forgotten in March 1947. Ford outlasted him by a month, mourned by the nation.
Returning to 2024, Musk seems more interested in moonshots—literally, in the case of his SpaceX rocket venture—than sure shots.
With his focus on autonomous driving, Musk is taking another moonshot. In a few years, perhaps, the sight of driverless cars will be commonplace. In a generation, children may marvel that their elders once actually drove cars—the way kids in Model Ts were amazed to hear their parents once traveled in horse-drawn buggies.
“Not quite betting the company, but going balls to the wall for autonomy is a blindingly obvious move,” Musk tweeted recently. “Everything else is like variations on a horse carriage.”
Henry Ford lost market dominance by sticking too long with an inexpensive car. Elon Musk may lose it by waiting too long to build one.
The Stock Market Is Looking Vulnerable. It Could Be the Start of a Summer Slump.
Memorial Day is here, but don’t expect these to be the lazy days of summer. The outlook for the market is uncomfortably hazy.
Sure, May hasn’t lived up to its reputation for being the time to sell and go away. Despite some recent volatility, the Dow Jones Industrial Average is still up more than 3% this month, while the S&P 500 index and Nasdaq Composite have gained 5% and 8%, respectively. All three indexes are near record highs.
But it’s hard to ignore this past week’s wild swings, which even Nvidia’s strong earnings couldn’t prevent. The Dow, off more than 2%, took the brunt of the pain, while the S&P 500 and Nasdaq both endured big fluctuations. This coming week won’t offer much to change the narrative. There’s a smattering of earnings releases on the coming calendar, with Costco Wholesale, Salesforce, HP Inc., and Dell Technologies set to report. Investors will also have the latest consumer confidence report, the Federal Reserve’s Beige Book, weekly jobless claims, and a revision of first quarter gross-domestic product to digest.
That means waiting for Friday, when the government’s personal income and outlays report for April, which includes the latest PCE price index reading on inflation, will be released. Dan Genter, CEO and chief investment officer of Genter Capital Management, says investors need to pay particularly close attention to the core number, which excludes food and energy costs, and is expected to rise 2.8% year over year, unchanged from the previous month. That’s too high for the Fed’s liking, Genter told Barron’s, and suggests that the Fed won’t be easing monetary policy anytime soon.
“We’re going to see rates higher for longer. We may not get any cuts at all this year,” Genter says. With that in mind, he says investors might want to position their portfolios defensively. He’s been buying beaten-up healthcare stocks such as CVS Health and Bristol Myers Squibb.
And even if the Fed does cut, investor expectations for how far those cuts go may be unrealistic, says Roger Aliaga-Diaz, chief economist of the Americas at Vanguard Group. He thinks the market hasn’t adjusted to the notion of higher-for-longer rates, adding that when the Fed does start cutting, it’s unlikely to bring rates back to pre-Covid levels of 1.5% to 1.75%.
That’s not good news for an S&P 500 whose valuation—at around 22 times 2024 earnings forecasts—is starting to look a bit stretched. That’s why Aliaga-Diaz expects more choppiness in the coming months as well. “We do believe the market is overvalued right now,” he says. “The risk for stocks is to the downside.”
And it’s not just rates and inflation that could knock it down, according to David Bianco, chief investment officer for the Americas at DWS Group. “The S&P may pull back a bit in the summer before the election,” he says, adding that “global geopolitical flare-ups could roil the market” as well. He says the S&P 500 could fall to 4800—a 9% drop from current levels, which just misses qualifying as an official correction.
That would qualify as a summer to remember—just not in a good way.
The Market’s Fear Gauge Is Signaling Trouble. What to Expect.
nvestors are likely to soon learn a harsh lesson about the Cboe Volatility Index, or VIX—especially those who get excited by milestones like the Dow Jones Industrial Average crossing 40,000 for the first time.
The message of the VIX, which measures implied volatility and is often referred to as the market’s fear gauge, is that stocks might be headed for a big new tumble.
When the VIX gets really low—as it is right now—the major stock indexes tend to reach new highs, and investors get greedy. History suggests that something has to give.
Volatility is mean-reverting. It behaves like a rubber band. When it gets to levels like these, it inevitably snaps back to the mean level. The cause of the mean reversion is always falling stock prices, which boost options volatility.
And volatility, of course, sometimes surges far beyond the mean level, set off by things like a stock market panic in reaction to geopolitics, hawkish economic data, or blowback from overly robust investment sentiment.
The VIX is a forward-looking index with complicated inner workings, which helps to make the so-called fear gauge one of Wall Street’s most misunderstood indicators. Its long-term average is around 19, a level that essentially prices the S&P 500 index as if it will move about 1.2% each day over the next 30 days. The VIX was recently around a subdued 12.
For options-centric investors, the VIX’s low level means that S&P 500 index options, and those of many of its component stocks, are priced without fear or greed premiums. The lack of skew—the difference between put and call volatility—is a big topic among options strategists and institutional traders.
Flat skew, or immaterial put and call volatility differences, suggests investors are too sanguine about stocks.
For institutional investors, flat skew is a call to action ahead of an event-heavy market calendar.
Known unknowns that could panic the mob and increase the VIX include Nvidia’s first-quarter earnings report on Wednesday, the June 7 nonfarm payroll report, and the June 12 consumer-price-index report, which coincides with the Federal Reserve’s interest-rate-setting committee meeting.
If the reports prompt the stock market to tank, investors should be ready to sell cash-secured puts at or below the associated stock price, with expirations of a week or two. Applying the strategy to blue-chip stocks that can be owned for several years, and ideally longer, monetizes the market mob’s fear and gets you paid by the options market to be a long-term stock investor.
Institutional fund managers can use “low skew” to buy index puts should the VIX spike and stocks decline. The strategy is best left to professionals, as it is a hard trade that drags down performance if stocks keep advancing. Instead, most everyone should focus on stock-specific goals—sans Armageddon.
Most everyone talks about the stock market via index levels, but the market is often experienced via individual stock positions. Broad market disturbances should be used by most people to add to core stock holdings, or to buy desired stocks at lower prices.
Any conversation about volatility is necessarily obtuse. To simplify, remember our VIX trading ditty: When the VIX is low, it’s time to go; when the VIX is high, it’s time to buy.
Throughout history, low VIX readings have preceded stock weakness, and high VIX readings have preceded stock strength. Adding that insight to your investing playbook should help you better navigate the market’s vicissitudes.