Suspension Of Disbelief

While perusing through Facebook’s quarterly results last night we were suddenly struck with inconsolable loneliness. That occurred when we noted the company reported 248 million monthly active users (MAU) in the US and Canada and we are not one of them!

And that’s just the half of it.

It seems that if you take the combined population of the two countries at 365 million persons and subtract—

  • children 11 years and under (51 million),
  • persons over 85 (6 million),
  • prisoners and mental institution inmates (3 million),
  • the illiterate population (36 million)
  • perhaps half the poverty population of 42 million who have not gotten a free Obama Phone (10 million) or can’t figure out how to swap food stamps for cash to buy their own (21 million),
  • you end up with 248 million eligibles.

That’s right. We are apparently the only non-poor, non-octogenarian, non-imprisoned, literate adult in America and Canada who is not a monthly active user on Facebook. And that’s lonely!

Then again, our unused Facebook account is not a Fake or Bot, either, of which there are apparently 10-20 million in the US alone by Facebook’s own reckoning and far, far more according to independent investigators.

So go figure. Are Facebook’s vaunted MAU’s really a measure of anything you can believe?

Obviously, we think not. But we also think they are par for the course in today’s Fantasyland of suspended disbelief.

For instance, during last evening’s Q4 earnings parade we also learned the facts summarized below about Telsa. After instantly surging by $60 per share (+10%) to an insane market cap of $115 billion, which represents a $40 billion or 53% gain since January 1, we were left to wonder would happen if Telsa actually posted a meaningful profit.

After all, there is no sign of it in the table. During 2019 it actually posted another net loss of -$862 million on top of the -$976 million it posted in 2018, -$1.96 billion in 2017 and -$675 million in 2016.

Still, the suspension of disbelief regarding Tesla is one for the ages. It gained more market cap ($40 billion) in the last 30-days than Ford ($35 billion) has to show for its entire 125 year history and its $1.6 billion of LTM net income; and nearly as much as GM ($47 billion) and its $9 billion of net income.

Similarly, Tesla’s total market cap ($115 billion) now substantially exceeds that of Volkswagen AG ($90 billion) despite the latter’s LTM net income of $15.6 billion and global sales of $280 billion or 11X those of Tesla ($24.6 billion).

Moreover, Volkswagen’s stock has tumbled by 13% during the last two weeks owing to China/coronavirus fears while Telsa has surged by 53% owing to, well, Elon Musk’s blather about the rapidly accelerating production in its Shanghai plant and substantial sales growth next year, which is virtually all attributable to China!

Indeed, lurking underneath its ballyhooed growth outlook is the fact that during Q4 Tesla’s automotive sales actually grew by the grand sum of 0.1% versus Q4 2018.

You really can’t make this stuff up. When you subtract $95 million of phony regulatory credits from the sales figure for Q4 2018, you get $6.228 billion of revenue from moving the metal; and for Q4 2019 on the same basis you get $6.235 billion.

And even that tiny $7 million gain is not the half of it. There were massive pull forward sales in Q4 in the US because the EV credit disappears next year, and the same story in Netherlands and elsewhere n Europe.

Worse still, if you subtract the regulatory credits from gross profit since it is sleight of hand income made by governments with no associated cost of goods, Telsa’s gross profit from moving the metal during Q4 last year was $1.442 billion compared to just $1.301 billion this year. That’s nearly a 10% decline.

Moreover, it only gets more pitiful as you move down the income statement. To wit, operating profit less the regulatory bottled air in Q4 2018 was $319 million, which figured dropped by 29% this year to just $226 million. That represents a margin of just 3.1% on sales.

Even when you get to the company’s recent break into positive free cash flow, the facts actually beg the question. That is, during 2019 Tesla generated just $1.08 billion of free cash flow (FCF), meaning that is currently valued at an absurd 115X FCF

And that’s with virtually all of the upside dependent upon the Red Ponzi– since US and European sales have already peaked out and before the tsunamis of new EVs from the likes of Porsche, Mercedes, Audi etc,. hit the show rooms.

Of course, what is going on now is the mother of all short-squeezes led by twenty-something hedge fund cowboys who are flat-ass drunk at their very first rodeo. They will soon be drug off the field comatose by the rodeo clowns, but not until they are shorn of $100 billion of Tesla market cap, at least.

Telsa is absolutely no outlier, however, when it comes to suspension of disbelief. It’s just the most spectacular flaming rocket on the exotic end of the spectrum.

But credulity has also reached the outer limits when it comes to the very mundane matter of the condition of the US economy and the endlessly repeated claim that it is “strong”.

Consider today’s Q4 number for GDP growth, which was reported as a welcome “beat” by the mainstream financial media, and proof that the business cycle still has legs.

Well, yes, it posted at 2.1% versus expectations of 2.0%, but the fine print was actually 2.058% at a seasonally adjusted annual rate. So we’d guess that’s a statistical “beat”, but a mere 0.0023% lower actual growth during the quarter would have made it not so.

More importantly, the contribution from gains in the core elements of GDP—real personal consumption expenditures (PCE) and fixed investment—-came to just 1.2% at an annualized rate. And that’s getting close to stall speed.

Moreover, the rest was all over the lot including the anomalous timing fact that plunging goods imports contributed a positive 1.44% to the 2.05% growth number because less imports means more GDP in the scheme of NIPA accounting.

At the same time, declining inventories subtracted -1.09%, meaning that inventory liquidation is apparently lagging the inflow of foreign goods, which declined at a 12.4% annual rate, but it will catch up soon (to the detriment of reported GDP in future quarters).

Needless to say, the very worst way to get GDP growth is via a sudden collapse of imports. It means that import users (both industrial and consumer facing retailers and wholesalers) see a sharp slowdown of demand coming down the pike, and are therefore abruptly lightening the load.



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