Leave it to the Brits to coin a new phrase for the chaotic process of implementing Brexit.
Theresa May's government has proposed a "flextension" to the original Article 50 withdrawal agreement from the European Union.
While the market has yawned at the chaos surrounding Brexit -- the FTSE 100 has rallied more than 10% thus far this year -- it would not seem to be the only flextension being granted to equity holders around the world.
The problem with flextensions is that, just as has occurred with Brexit, they don't address the underlying problem. So, beware of flextensions, and here are several that are evident in the markets now.
Tesla
U.S. District Court Judge Alison Nathan yesterday gave Tesla (TSLA) CEO Elon Musk and the SEC an extension of two weeks to resolve the SEC's contempt complaint against Musk.
Does that mean Musk will stop tweeting? Does anyone believe that?
I certainly don't.
While Judge Nathan was accommodating, Tesla shareholders should be aware the bond market never grants flextensions.
With Tesla's benchmark 5.3% August 2025 notes priced at 86 cents on the dollar (yielding 8.2%), and a $566 million maturity of convertible notes looming in November, this company's cash position should be the number one focus of investors.
Including a line that "cash is sufficient" in Wednesday's deliveries press release really shouldn't reassure anyone.
Tesla's in trouble. Model 3 demand has dropped off a cliff in the U.S. At the same time, having to settle in cash the $920 million convert that matured March 1 has, by my figuring, left the company in a precarious position now that production has exceeded deliveries, a situation that should produce working capital drain, not a boost.
Oil
Crude has had a terrific run in 2019 and the current, front-month futures price of $62/barrel sits at a level that ensures profitability for U.S., producers.
While the markets have embraced riskier assets in 2019's bounce, the chief driver of oil pricing remains the same: OPEC. The cartel's 1.2 million barrel per day production cut seems to be holding, and, as always, Saudi is the alpha dog in that group, although Russia's influence certainly has grown as a member of "OPEC+."
OPEC+'s production cuts were meant to expire in June, but Saudi oil minister Fatih has been sending signals to the market that those cuts may need to remain in place until year end. So, Saudi is giving the oil markets a "flextension" and the kingdom's balance sheet certainly looks healthier with $60/crude than $40/barrel crude, regardless of the level of current output.
The Bond Market
The equity market's selloff two weeks ago showed that market participants are indeed worried about the yield curve. Though it was a brief inversion, the 3-month/10-year yield curve flip did in fact spook investors.
Friday's jobs numbers would seem to give a flextension to worries about an extended inversion, even though the "belly" of the Treasury curve -- 2-year and 5-year notes -- still sports lower rates than short-term bills do.
The non-farm payrolls figure was a bit of a Goldilocks number, and I would suspect the bond market has been given a flextension in terms of yield curve concerns.
So, those are three flextensions driving the market today, but don't forget the most important driver of individual stock valuation -- earnings.
Even for companies like Tesla that seemingly take forever to report their quarterly figures, there are no flextensions during earnings season.
Cash flow never lies.
