Yes, you could be mine
Tonight and every night
I will be your knight in shining armor
Coming to your emotional rescue
-- "Emotional Rescue" Jagger, Richards (The Rolling Stones), 1980
Knight in Shining Armor?
The closing bell had finally finished ringing. Another long, slow, dull trading session, the umpteenth in a row, had come to its conclusion up and down Wall Street. That's OK. Wall Street has, or at least had a champion. That champion runs more than one business, and one of those businesses, a traders' favorite for years now, would report any second.
There it goes.... adjusted EPS of $0.85. OK, that's right on consensus. $23.3B in revenue. That missed. The stock had opened weakly on Wednesday morning, but had strengthened into the afternoon, selling off again though... just ahead of that closing bell. Now, traders were really selling Tesla ( TSLA) in the after-hours session.
Flash forward. Zero-dark thirty, Thursday morning. The people of Gotham rest their sleepy heads. I see TSLA down about 7.5% from where the stock closed on Wednesday afternoon and down nearly 10% since Tuesday's closing price.
We talked about Tesla and profit margin in this column twenty-four hours ago, and margin is precisely why shareholders are dumping the stock overnight. Total operating profit printed at roughly $2.7B, falling significantly short of what Wall Street was looking for. Operating profit margin hit the tape at 11.4%, down from 19.2% for the year-ago comp.
The highly followed automotive gross margin, which excludes regulatory credits, printed at less than 16%, which was down from roughly 21% for the quarter ended three months earlier. GAAP gross profit margin, which includes everything including leases, crossed at 19.4%, down from 23.8% for the fourth quarter, and down from 29.1% for the same period last year. The company had expressed the intention of targeting gross margins of 20%, and failing to defend that level, as it continues to slash prices is being felt by shareholders.
According to Barron's, Automotive sales plus lease revenue divided by deliveries comes to $47,200 per vehicle, down from 54,400 a year ago, as gross profit margin per vehicle sold (including leases) dropped to roughly $8,600 from $15.700 for that same comparison.
Musk
It was during the earnings call that CEO Elon Musk revealed the thought process behind these pricing actions. This may be good news for Tesla down the road somewhere, but certainly not good news for someone who had invested in Tesla because the company had become robustly profitable in a tough environment.
Early on, in the call, Musk said:
"We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy."
Autonomy: 1.. The quality or state of being self-governed. 2.. Self-directing freedom and especially moral independence. 3.. a self-governing state.
-- Merriam-Webster
"You will be mine, you will be mine all mine"
-- Jagger, Richards
Later on, in response to a question from analyst Rod Lache of Wolfe Research, Musk doubled down:
"Tesla is in a uniquely strong strategic position. Because we're the only ones making cars that technically, we could sell for zero profit for now, and then yield actually tremendous economics in the future through autonomy, no one else can do that. I'm not sure how many people will appreciate the profundity of what I've just said, but it is extremely significant."
"You will be mine, you will be mine all mine"
-- Jagger, Richards
Beige Book
The high of the day on Wednesday for the S&P 500 occurred at just about 14:00 ET. In other words, the release of the Fed's Beige Book was the high-water mark for equity prices on Wednesday. Why? The headlines seemed clear: Overall economic activity had changed little in recent weeks. Or has it? For your enjoyment, some quotes that the mainstream media may have left out of their reports:
"Employment growth moderated somewhat this period as several Districts reported a slower pace of growth than in recent Beige Book reports."
"Several Districts reported declining needs for off-cycle wage increases, compared to last year."
"Lending volumes and loan demand generally declined across consumer and business loan types. Several Districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity."
From New York: "Conditions in the broad finance sector deteriorated sharply coinciding with recent stress in the banking sector."
From San Francisco: "Residential and commercial real estate activity fell, and lending activity declined substantially."
From Kansas City: "Households pulled back on spending particularly on bigger ticket items like cars or home construction projects."
From Cleveland: "Labor demand eased, and the supply of workers increased, particularly for lower-wage positions. Wage and other cost pressures continued to ease."
From Philadelphia: "Banks reported tighter lending standards. Expectations were subdued as sentiment remained cautious."
Yup, one big nothing-burger. They told you... Overall economic activity had changed little in recent weeks.
Alarming Trend
Bloomberg News reported on Wednesday that nationally, foreclosure filings were up 22% for the first quarter on a year-over-year basis, according to real estate data analytics firm ATTOM.
The report does point out that foreclosure activity is still below pre-pandemic levels, but that on a year-over-year basis, such activity has now increased for 23 consecutive months.
Don't worry. It's probably nothing.
Fiscally Speaking
Speaker of the House Kevin McCarthy (R-Cal) proposed a bill on Wednesday that would add $1.5T to the U.S. debt ceiling and push out any potential for a U.S. payments default until late March 2024. The bill, which is 320 pages also includes a list of politically conservative proposals that would reduce federal spending. These proposals are likely to be non-starters for the Biden administration as well as for congressional Democrats.
Republicans hold a 222-213 advantage in the House and would need 218 votes in order to pass this proposal that would then go no further. I have no idea if McCarthy can keep House Republicans together on this, but if he can, then it's time for the other side to counter, not scoff and walk away.
Every market needs a bid and an offer. Even if not close, it is imperative that each side state their positions, or their starting points. McCarthy, assuming (which we really should not do) this bill passes in the House, has at least done that much. Let's see if the other side can at least return his serve and start a volley.
Have I Mentioned Lately...
How much new Chicago Fed Pres. Austan Goolsbee, who I had never really been all that enthusiastic about, has really impressed me with his public presence in his new position? This kid is clearly cut from a higher quality of fabric than we have become accustomed to when listening to our policy makers.
What Going on With Cisco?
Shares of Cisco Systems ( CSCO) dropped some 4.5% on Wednesday. There were reports of large options trades, blocks of put contracts being sold in particular, hitting the tape. The stock closed at $48.04, after entering April with a $52 handle.
In a joint advisory dated Tuesday, the U.K. National Cyber Security Centre, along with from the U.S.... the NSA (National Security Agency), CISA (U.S. Cybersecurity and Infrastructure Security Agency), and the FBI detailed how APT28, which is a state-sponsored hacking group operated by the Russian military had exploited a six-year old vulnerability in Cisco routers to deploy malware and target European and U.S. organizations and institutions for surveillance. APT28 is also known as "Fancy Bear."
Scanning option activity relative to Cisco, I noticed what seemed to be outsized trading volume in the April 21 $49 and $47.50 puts, the April 28 $50, $48, and $47.50 puts and the May 12 $49 puts. There were more, but these stuck out to me last night.
Where does CSCO bottom?
I'm not sure, but the 200-day simple moving average (SMA) (currently $45.83) appears to run even with where significant support for the stock had been shown this past December into February.
I am looking for a retest of those lows before I even think about deploying capital.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 242K, Last 239K.
08:30 - Continuing Claims (Weekly): Last 1.81M.
08:30 - Philadelphia Manufacturing Index (Apr): Expecting -19.6, Last -23.2.
10:00 - Existing Home Sales (Mar): Expecting 4.49M, Last 4.58M SAAR.
10:00 - CB Leading Indicators (Mar): Expecting -0.6% m/m, Last -0.3% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +25B cf.
The Fed (All Times Eastern)
12:20 - Speaker: Cleveland Fed Pres. Loretta Mester.
17:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( AXP) (2.68), ( T) (0.59), ( CMA) (2.27), ( KEY) (0.44), ( MMC) (2.47), ( NUE) (3.91), ( TSM) (1.22), ( UNP) (2.57)
