Once again, market historians are all about superlatives and historical comparisons as the second-worst May in six decades gave way to the best week of the year. It’s clearly the best of times and the worst of times, depending on your point of view. Given our longer-term perspective, we favor the most constructive comparisons. This is still one of the best years we’ve seen in some time, with the S&P 500 up 16% YTD and BMR stocks surging 27% in the same period.
Cut through all the dithering and these numbers are huge. Of course, for the S&P 500, all the upside this year barely only recovered the ground lost last year. Our stocks, on the other hand, are up an average of 55% since our initial Research Report on each one. This isn’t extraordinary for us. It’s really only in line with our long-term performance.
That’s what gives us the confidence to take “the worst month since X” along with “the best week since Y” and still know that our investment universe has what it takes to come out ahead. The Mexican tariff threat came and went, giving investors nothing but whiplash. As that threat recedes, new clouds on the market will come and go in turn. People who want to feel nervous will find plenty of fear factors to obsess over. The rest of us will stay in the market for the long run and reap the rewards.
We’re even seeing what would normally be considered “bad” news greeted with cheering on Wall Street. Friday’s job creation numbers were not great, but stocks soared as investors embraced the implication: A weakening economy will drive the Federal Reserve to cut rates and get cheap money flowing again. While the logic looks a little backward to us (can the cure really be better than the disease?), even such convoluted optimism ultimately keeps stocks pointed in the right direction as we wait for more straightforward good news in the form of stronger data and real earnings growth ahead.
In reality, Wall Street’s future is never as awful as the worst-case scenarios suggest. When Chinese tariffs became a concern several months ago, corporate executives incorporated the costs into their long-term planning. Some companies shifted supply relationships to other Asian countries or Mexico. Others figured out how to cut expenses elsewhere to balance the impact. They’re still in expansion gear. That’s a good thing for investors.
There’s always a bull market here at The Bull Market Report! This week we took an in-depth look at one of our stocks that has TRIPLED in the last five months. (Which stock is it? Only subscribers know.) Out here, you're getting our latest thoughts on Tesla, which jumped 10% last week and is up another 6% today. Go go go!
Key Market Measures (Friday’s Close)
BMR Companies and Commentary
The Big Picture: Rate Relief Is Coming
(But Maybe Not Right Now)
Investors who once only passively hoped that the interest rate tightening cycle would pause are now almost unanimously betting that the Fed will cut soon to take pressure off the global economy. At this point, our only question isn’t whether short rates are going down but when the process will start. (Long rates have been going down since October (and 1981 for that matter), to almost historically low levels.)
While the economy still looks strong on the whole, hiring activity has clearly slowed as companies shift to a more cautious posture. They aren’t eager to expand payroll dramatically until they have a clearer sense of where import costs and export markets are going. Likewise, while manufacturers haven’t seen any substantial downturn in demand, they’ve reined in future orders in order to stay nimble.
They aren’t worried. They just aren’t eager to take chances right now. And that’s exactly where the Fed is. Their eyes are open and they’re ready to make policy adjustments necessary to keep the global economy expanding. Reading between the lines, that means that either interest rate relief is coming or business activity will pick up again on its own. Either way, the employment and industrial numbers we’ve seen in the last few weeks will almost certainly go down in history as just another soft spot on the road.
Interest rate futures markets are banking on the Fed. Practically everyone now thinks we’ll get one to three 0.25% cuts by the end of the year, which takes overnight lending rates down to 1.5% and gives the near-term end of the yield curve all the breathing room it needs.
Most investors are looking at July 31 for the first of those cuts, so don’t get disappointed if the Fed holds rates steady in its next meeting two weeks from now. This isn’t about instant gratification. It’s about making sure the need to cushion the economy is urgent enough to justify any relief at all. After all, rates are still low by historical standards and if anything, long-term rates are arguably too low for comfort.
However, the end of July is a long way off. The G20 summit later this month provides a context for a trade breakthrough or at least a truce, in which case the Fed can legitimately hold its fire for the time being. As far as the markets are concerned, even a gesture toward a loosening posture in the next policy statement is all it takes to support stocks until a rate cut becomes necessary or tariffs are off the table at last.
July is also important because we’ll see the first wave of 2Q19 earnings in the weeks leading up to that particular Fed meeting. If the trade war has put Corporate America on the defensive, we’ll know at that point. The Fed will know too.
In terms of our strategy, this doesn’t change much. We remain focused on the quarter-to-quarter flow of cash across our portfolio companies as we factor out the day-to-day noise. Headlines only hurt when they change the fundamentals. If other investors want to flee the news cycle, that’s their herd response, not ours. As such, while the next few weeks will probably remain choppy and reactions to the Fed may be a little confused, we retain our long-term edge.
Tesla (TSLA: $205, up 10% -- all returns are for the week)
We’ve been telling you for months that Elon Musk isn’t going to make life easy for the short sellers who have already promised to buy an astounding $7.5 billion in Tesla stock to cover their positions. Last week proved that the Tesla story is far from over and that Musk himself still has enough leverage to make his detractors miserable when they step too far out of line.
It’s all about demand for the cars that is driving orders. Overseas sales of the mass-market Model 3 hit a bottleneck in the first quarter, pushing over 10,000 cars into the current reporting period and pushing the company back out of profitable territory in the last quarter. But that bodes well for the current quarter that ends on June 20. Stay tuned.
A few prominent critics seized on the seasonal decline in North American delivery numbers to support their arguments that people just don’t want electric vehicles. Musk says they’re wrong. According to early progress reports he’s shared with his sales team (and leaked to the rest of us), North American sales can top 72,000 this quarter if the incentives line up right.
Add the cars going to Europe and China back in, and there’s a good chance that Musk will not only hit his global target of 90,000 deliveries in April, May and June but exceed the company’s 4Q18 record. That’s impressive in light of the expiration of U.S. environmental subsidies at the end of last year.
Admittedly, upgrades and improvements to lure buyers will move Tesla a little farther from profitability on each sale, but this is more about shaking up the delivery-focused short thesis than protecting the margins. We already knew the Model 3 would take a little time to become a profit center for the company. Proving that people can still be motivated to buy electric cars sends Wall Street a signal that the sales curve hasn’t hit a wall.
The story here has always been that margins will improve when global deliveries scale up. And that’s actually the most exciting thing about the early 2Q19 sales trends Musk’s leaked comments confirm. Europe is coming along nicely, with initial sales tracking above 10,000 cars per month. If that holds, the global landscape looks mighty good.
China, on the other hand, isn’t really a factor. The people with the gloomiest view on Tesla think the company will struggle to sell more than 4,000 cars per month into that vast market under ideal conditions. That’s roughly what we’re seeing. Any uptick in Asian sales is a bonus. Any obstacles are practically factored into the stock now.
This stock is all about North America and Europe right now. The trade war will sting but nobody seriously thinks it will make much difference in the immediate future.
BMR Take: Given the profoundly aggressive nature of investing in Tesla today, we’ve been willing to forgive the stock dropping below our $310 Sell Price as long as Musk gives us a reason to keep paying attention. This is that reason. Getting sales moving in the right direction has already made short sellers nervous. Confirming that Model 3 demand is more than a one-quarter boom will force them to cover their bets. They helped push Tesla down nearly 40% YTD but now they need to buy 37 million shares, a breathtaking 28% of the stock available on the open market. We suspect that’s enough to turn the tide.
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