Early premarket gappersGapping up:
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Gapping down:
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Tesla CEO Elon Musk has been talking a lot about Tesla Network lately, part of Tesla’s “Master Plan, Part Deux” which will enable Tesla cars with full self-driving hardware to operate as autonomous robotaxis to generate revenue for owners and for Tesla itself.
This is all still a ways off, but that hasn’t stopped Musk and others from theorizing about what might happen when the technological problems behind self-driving are solved. Recently, Musk stated that any Tesla bought today is an “appreciating asset” due to its potential to be used to generate revenue in the future. But an asset wouldn’t really appreciate unless a new, similar asset couldn’t be bought at the same price. So now, Musk has committed to making that happen, stating that once robotaxis become possible, Tesla will likely stop selling cars to consumers, at least at anywhere near the same price.
The exchange came, as it often does, as part of a nighttime tweetstorm from Musk. Among various other questions about the timeline for upgrading HW2+ hardware to Tesla’s new FSD computer and a comment about Tesla’s potential to have a million-robotaxi-fleet by the end of next year, Musk was asked whether prospective buyers would be able to keep buying Teslas well into the future, or if their potential as a revenue generating asset would make that price unattainable for a typical consumer:
Production fully switched over ~3 months ago. Functionality won’t diverge until Q4, as it’s limited by software validation. Will be later for Europe compared to rest of world due to regulatory constraints that were put in place years ago by big ICE companies.
And Musk answered, short and sweet, in one word:
Do consumers have limited time left to buy a Tesla car, since prices would have to go up severalfold to balance supply & demand once you solve FSD?
This plan is not unexpected for those of us who have been following Tesla’s robotaxi aspirations, but this is the first time Musk has stated explicitly that consumers have a limited time to buy a car at anything close to what most consumers would consider a reasonable price.
The concept here relies on a few assumptions. 1) That Tesla will be able to make a car that can drive itself fully, at all times, with no human inside it. 2) That a car driving itself will be safer and cheaper to operate than a car with a human driver in it, since the human driver won’t need to be paid. 3) That these robotaxis will be able to make enough money driving themselves around that the potential profits will significantly eclipse the purchase price + running costs of a $40,000-$50,000 car even when the time value of money is taken into account.
If all those things become true, then Tesla has a choice between selling a car for $40,000 once or keeping that car and operating it as a robotaxi and generating perhaps ten times that amount over the life of the vehicle. If that’s the case, then the company would be foolish to sell the car and miss out on that future profit potential.
And Tesla shared some numbers showing that they think this will be the case. At their recent Autonomy Investor Day, they showed a slide suggesting that an average robotaxi would be able to bring in $330,000 worth of profits over its useful lifetime. In keeping with this projection, Tesla recently raised the price of the still-unreleased full self-driving option (just a couple months after temporarily lowering it in a pretty shady way).
So this is what Musk is getting at when he says that consumers have a limited time to buy a car. All of a sudden, a $40,000 Model 3 would need to cost six figures for the equation to pencil out for Tesla, and consumers will likely balk at that. This, then, would give Tesla little reason to retain a large retail presence and they would likely focus on offering robotaxi services or possibly fleet sales.
Theoretically, Tesla could still sell cars at high prices, but Musk’s laconic answer suggests that Tesla plans otherwise. Tesla has already stated that they plan to buy back leased Model 3s and put them into service as robotaxis after the lease term is up.
This is Tesla’s “master plan,” anyway. Tesla owners will be able to use cars they already own to participate in the robotaxi fleet, but if Tesla can make more profit by keeping those cars themselves, they will do so. Musk recently indicated that Tesla is thinking about opening up Tesla Network early as a human-driven Uber/Lyft competitor so owners can make a little cash on the side with ridesharing before full self-driving is achieved.
An autonomous robotaxi fleet isn’t just Tesla’s idea, either. Several companies are aiming for the same thing, including Uber, Waymo and others. Tesla’s approach differs in that they do not use LIDAR and other companies do. It remains to be seen which technology will win the race to self-driving, but whichever one does will likely result in massive revenues for the company or companies which solve the problem first – and likely massive resistance and lobbying playing up the “dangers” of self-driving vehicles from those companies which don’t.
Update: Musk now states that rather than consumers having a “limited time to buy a Tesla car” as he originally responded “yes” to, instead Teslas will still be available for purchase, but at a “significantly” higher price:
As pointed out above, it seems unlikely that a consumer would want to buy a formerly-$40k car for “several times” more than that price, so it seems that in this eventual scenario, Tesla would probably not focus on consumer sales anyway. Again, Tesla’s (quite optimistic) projection for the lifetime profit value of a Model 3 is $330k, a price that consumers are likely to be reluctant to pay. If Tesla’s assumptions are correct, then for all practical purposes consumer sales would fall precipitously, to be replaced by fleet sales/Tesla-operated vehicles, in keeping with the scenario imagined in Musk’s original tweet.
Electrek’s Take
For a long time Musk has stated that his intent with self-driving cars wasn’t to stop humans from being able to drive on their own, but simply to make your typical day-to-day driving more safe and convenient. Time and time again he has stated that Tesla wants to still make a car that’s fun to drive, regardless of autopilot.
And the Model 3 is very fun to drive as is. Giving it the capability to drive itself won’t stop that from being the case.
But if Tesla moves to focus on building cars that can only be used in robotaxi fleets and are not within the reach of regular car buyers, that sort of throws the whole “fun to drive” thing out the window. Sure you’d still be able to rent one and have fun driving it, presumably, unless Tesla decides that human drivers are more likely to cause accidents and therefore remove a car from the fleet and reduce revenue generation potential.
Of course a lot of this seems inevitable from the standpoint of a futurist. It’s clear that, in the long term, there will be fewer and fewer places to drive a car manually, and this won’t just happen because regulators want it to, but because the public will demand it. When human drivers are seen as unsafe, this will end up being a public health issue and people will want to put a stop to it.
It’s a shame, because driving the Model 3 – and my manual-steering Roadster, for that matter – is so much fun.
Of course there are a lot of assumptions here, as stated above. But this does seem like a reasonably likely future scenario, as none of the individual steps to get there seem particularly unrealistic.
What do you think about Tesla’s potential plan to stop selling vehicles and operate robotaxis instead? Let us know in the comments below.
Wall Street giants split over outlook for stocks
Morgan Stanley cuts equities to ‘underweight’ while JPMorgan sees room for the rally to run
How much upside is left for global stocks which have marched higher this year despite trade worries and cooling economic growth? Two of Wall Street’s biggest banks have different opinions.
JPMorgan expects equities to advance as much as 15 per cent higher over the next 12 months, but Morgan Stanley has issued a warning on the prospects for stock markets this year.
Morgan Stanley said earnings estimates are too high amid a weak economic environment, while investors are overly optimistic that central banks will come to their rescue.
The bank’s cross-asset strategists are consequently cutting their investment recommendations to ‘underweight’ equities, their lowest weighting towards stocks in five years, via a reduction in US and emerging markets. In a note published late on Sunday they said they prefer emerging market sovereign debt and Japanese government bonds.
JPMorgan’s equity strategists are more optimistic: “We expect equities to advance further before the next US recession strikes, perhaps of the order of 15 per cent over the next 12 months, which hands-down should beat the returns of bonds and cash.”
Markets have largely brushed off signs of weakening economic growth and worries over persistent trade tensions as investors have instead zeroed in on a dovish tilt from some of the world’s leading central banks in the hope that interest rate cuts and even new stimulus could prolong the current economic cycle.
The MSCI All World equity index, a broad measure of developed and emerging market stocks, has risen more than 16 per cent this year, while sovereign bond prices have also rallied.
Morgan Stanley said: “Poor estimates for risk-adjusted return is a central part of our argument. But around this, we see a market too sanguine about what lower bond yields may be suggesting — a worsening growth outlook.”
Valuations lie at the heart of the differing views.
JPMorgan argues that analysts estimates for earnings over the next 12 months are still trailing previous market peaks. “While the consensus view is that multiples can only go lower, we think there is a potential for the market to start to price in that the Fed will end up too dovish for the remainder of the current cycle,” the bank said.
In contrast, Morgan Stanley sees valuations as stretched, with the bank’s expected 12-month returns for global equities near their lowest levels in six years. “We think earnings estimates are generally too high, and second-quarter earnings season could drive adjustments.”
The S&P 500 posted its best first half of the year since 1997, up 17 per cent, but FactSet data has showed that analysts have been slashing their US earnings’ forecasts.
In addition, Morgan Stanley pointed to continued weakness in global PMIs and commodity prices as pointing to genuine economic risks, and is unconvinced that the expected central bank response will prove a panacea: “Neither the yield curve nor inflation expectations reflect much bond market confidence that central bank easing will ‘work’, reviving growth and realised inflation.”
Morgan Stanley did confess there are “plenty of risks” to its downgrade, chief among them the lack of other options as investors hunt for yield. “For all the challenges facing equities, the lack of other investment options could mean that these concerns simply don’t matter,” the bank said.
Google denies talks with Dish on creating new major U.S. carrier
Google has been operating an MVNO using broadband from T-Mobile, Sprint, and U.S. Cellular since 2015. Following a rebrand to Google Fi late last year, the wireless service is targeting more customersthan ever with expanded Android and iOS support. A new report today claims that “Google is in talks to help create a fourth US wireless carrier” with Dish.
According to the New York Post, Alphabet director Alan Mulally — a former Ford CEO — has “recently been in discussions with satellite-TV giant Dish Network about a plan to create a fourth US telecom player.”
Since last year, T-Mobile and Sprint have tried to merge into one major U.S. carrier to better compete with Verizon and AT&T. The Department of Justice has been hesitant to approve the deal due to antitrust concerns that leave consumers with one less national service.
The latest developments suggest that the government would allow this deal if a fourth network was created in place of Sprint. Dish has been increasingly positioned as taking on that position.
Today’s report suggests that Google would “help” launch this new carrier by working with Dish. One obvious role would be to supply the backend infrastructure needed to manage a complex network. TheNY Posts cites an estimate from “insiders” that a “new, fully independent wireless network” could launch in “about three years.”
The NY Post also claims that there are no apparent concerns from U.S. regulators about Google helping form a fourth major provider. However, there is pushback from T-Mobile parent Deutsche Telecom about Google’s role.
Specifically, Deutsche Telekom lately has insisted that it will only sell assets to Dish if it promised not to sell more than a five-percent stake in itself to a third party, according to the sources.
This would be a huge step up for Google’s cellular ambitions, but the company has firmly denied that there are “any conversations with Dish about creating a wireless network.” While it’s possible that Mulally is in discussion with Dish, he could be acting outside his capacity as an Alphabet board member.
“These claims are simply false. Google is not having any conversations with Dish about creating a wireless network” a Google spokesman said, declining to comment on whether Mulally was speaking to Dish.
China’s Financial Plumbing Is Getting Leakier
Money-markets ructions expose a vulnerability that still hasn’t been patched: dependence on low-quality collateral
Markets are a psychological phenomenon—a set of beliefs about how the world works and what things are worth. When assumptions are challenged, the results can be stomach-churning.
Unnoticed by most of the world, this is what happened in China last month. After regulators took over a small bank called Baoshang—and upended assumptions of state backing by announcing probable haircuts for creditors—short-term borrowing rates spiked. The episode laid bare the fragility of China’s gargantuan interbank money market, whose daily transactions come to about 3.3 trillion yuan ($479 billion).
It also highlighted a vulnerability that still hasn’t been patched: Some nonbank financial institutions—a category that includes brokerages, insurers, funds and shadow banks like trusts—appear too dependent on low-quality collateral such as corporate bonds to backstop short-term borrowing. This raises risks for China’s money markets and struggling corporate borrowers alike.
After big cash injections by the People’s Bank of China, average short-term borrowing costs in China’s money markets fell sharply. But some individual lenders still are charging usurious rates. On Friday, the closing rate for the 21-day collateralized interbank repo was 10%. A day before, the one-month repo closed at 18.5%—a universe away from the weighted average rate, which was below 3%.
These are the aftershocks of June’s monetary earthquake. In the midst of the panic, some lenders nearly stopped taking corporate bonds as collateral at all. Nonfinancial corporate bonds are a small portion of overall interbank repo collateral—government and policy-bank bonds accounted for close to 90% in 2016, according to the Reserve Bank of Australia. But when much of the remainder became useless overnight, it was enough to cause major problems.
Worryingly, just as money markets are getting twitchy, corporate creditworthiness is getting more precarious. There were more than twice as many bond defaults in the first half of 2019 as a year earlier, according to Enodo Economics. Next time money markets get spooked, corporate-bond collateral may look even more dubious, and authorities may have to intervene even more forcefully to reassure lenders.
Alternatively, interbank borrowers may now try to wean themselves off all but the highest-rated bond collateral. There are already hints of this: The yield premium of three-year AA-rated medium-term notes over their AAA counterparts has widened by about a fifth of a percentage point since late May, according to Wind, after narrowing continuously for most of the year.
By making credit less accessible to embattled small companies, this could ultimately mean a weaker recovery, or that more-aggressive monetary policy is necessary to turn things around. At the very least, the reverberations from the regulatory takeover of Baoshang Bank will be around for a while. The next time money markets panic about counterparty risk, it might be even tougher to calm them down.
WeWork to Raise Billions Selling Debt Ahead of IPO
Workspace company is raising cash that could help it dodge issues that plagued Lyft and Uber debuts
WeWork Cos. has a plan to shore up confidence in its business before it goes public: offer billions of dollars in debt that would fund its growth until it can turn a profit.
The money-losing office-space manager is seeking to raise as much as $3 billion to $4 billion in coming months through a debt facility that could grow as big as $10 billion over the next several years, the people said. This debt offering would be independent of the money WeWork raises in its initial public offering and could even raise more money for the company than the IPO itself.
The huge capital raise even before the IPO reflects the skepticism surrounding well-known companies like Lyft Inc. and Uber Technologies Inc. that have racked up steep losses and gone public with much fanfare but without much trading success. Both Lyft’s and Uber’s stock prices are below where they went public—and even further below lofty pre-IPO expectations of how high they could trade.
WeWork, which lost $1.9 billion last year, has been dogged by comparisons to Uber and Lyft and haunted by a huge planned investment from SoftBank Group Corp. that fell apart after some key investors balked at the plan. The cash from this debt facility could help shore up demand for the IPO, people familiar with the planned deal said, in part by showing the company will be able to fund growth for years without having to turn again to equity markets.
Goldman Sachs Group Inc. and JPMorgan Chase & Co. are structuring and backing the deal, potentially along with other banks, the people said. WeWork Chief Executive Adam Neumann met in recent weeks with the banks’ CEOs, Jamie Dimon and David Solomon, to discuss this deal and the company’s IPO, people familiar with these discussions said.
WeWork’s primary business is to rent long-term spaces, renovate them, then divide the offices and sublease them on a short-term basis to other firms. The company owns few properties itself. Through this debt offering, WeWork would use the cash flows it generates from individual buildings to fund the interest payments on the debt, the people said.
WeWork, which has been in talks about the potential debt deal for more than a month, is looking to put the facility in place before it moves forward with its IPO later this year or early next, these people said. The transaction could be finalized in the next several weeks, though people familiar with the deal cautioned that it could still fall apart or could shift and take another form.
Raising as much as $4 billion in the debt markets is a rarity for a company with WeWork’s financial profile. People familiar with the deal said that while fast-growing companies like Uber, Spotify Technology SA and WeWork have tapped the debt markets in recent years—a historically unusual move for money-losing companies—raising debt at this size through cash flows is a rare, if not unprecedented, move.
Tesla Inc., which has yet to generate consistent profits, has used lease payments on some vehicles as collateral to sell more than $1 billion in bonds. As is generally the case with auto-lease bonds, the debt was issued by a special entity aimed at protecting investors in the event of a Tesla bankruptcy.
By raising billions in new debt, WeWork would have less of a need to raise money from potential public stockholders. The IPO still would likely raise several billion dollars, these people said.
Because investors in WeWork’s potential new debt facility would get access to cash flow from WeWork’s buildings in the U.S., Europe and Latin America to fund debt payments, the company could raise money at a lower interest rate than it could get in the corporate bond market, where its bonds trade at a high risk premium over safe government debt. WeWork last year raised a significantly smaller chunk of debt—$702 million—at a high interest rate of 7.9%, and the bonds were assigned ratings in junk territory.
The debt deal is designed to help WeWork showcase the value of its leases and the cash flows from them, some of the people said. It is also expected to show that profitability is something within the company’s control, these people said, because many of its individual properties are profitable and much of its loss-making comes from growth efforts.
WeWork has posted rapid revenue growth, but its losses have been ballooning at a similar clip. The nine-year-old New York company’s $1.9 billion loss last year outstripped the $1.8 billion of revenue it generated. Its huge losses mean it has a ravenous appetite for cash.
There have been questions about whether WeWork, which rebranded itself earlier this year as the We Company, could garner a valuation anywhere near its last private round of funding. It was last valued at $47 billion when it raised capital from SoftBank earlier this year. However, at that time, SoftBank also bought shares from WeWork employees and investors at a valuation of around $23 billion, giving the company a blended valuation of around $36 billion.
Some investors have said it is likely to be valued lower than its $47 billion valuation in its IPO, but this debt deal could help boost its public valuation.
Late last year, ahead of Uber’s and Lyft’s offerings, WeWork had been discussing a potential deal with SoftBank that could have made an IPO unnecessary for years. SoftBank was considering investing as much as $16 billion into the real-estate company—$6 billion of new money and $10 billion to buy shares from existing investors. But the deal crumbled after some of SoftBank’s investors balked over concerns including WeWork’s high valuation, and the firm instead invested $1 billion directly in WeWork and bought another $1 billion of existing shares.
WeWork, which confidentially filed for an IPO late last year, has aspirations to be more than a real-estate company. Mr. Neumann and his deputies have said investors should treat WeWork more like a tech company, pointing to its rapid growth and various services it eventually hopes to offer that cater to its tenants.
In financial markets, there's always a new reason to worry.
Over the weekend, Deutsche Bank announced a new "strategic transformation" after a decade of woeful underperformance. The headline-grabbing figure was 18,000 -- the number of jobs it expects to cut as part of the restructuring. You can read the FT story here, there and just about everywhere.
But of course, it's a large bank. So that means it poses systemic risks. Which means bad news for everyone, or something. So cue a pack of market bears over the weekend speculating over the bank's long-term health, and what it might mean for the broader market.
And that means, of course, citing Deutsche Bank's notional derivative exposure, which as of Dec 31 2018, according to the bank's annual report, stood at a terrifying €43.5tn.
A few examples. This article by Wall Street on Parade from April was doing the rounds Sunday. Then there's this tweet featuring some sort of evil eye graphic:
While here's another comparing Deutsche Bank's exposure, a stock, to erm, Europe's GDP, a flow:
The issue with banging on about Deutsche Bank's notional derivative exposure, as ex-IMF economist Mark Dow pointed out yesterday, is that the German business's net exposure is infinitesimal compared to the notional number. The total in Deutsche's report represents positions both long and short positons including hedging transactions.
Indeed, according to the International Swaps and Derivatives Association, the gross credit exposure of over-the-counter derivatives, which " is a more accurate measure of counterparty credit risk", was just $2.3tn for the entire market at the end of 2018, a decline of 0.4 per cent from 2017.
So unless you think Deutsche's risk management is so bad that it would expose €61.3bn of capital to €43.5tn of unhedged derivative positions, perhaps it's time to start looking elsewhere for a market event that will pull the plug on the longest equity bull market in history.