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Robert Duval
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Professional Trader, 16 years. Started as a equity index futures floor trader, now swing / intermediate trade, US stocks, international ETFs and commodities. Believe in correlation of markets, must understand all markets to trade one well. Self taught by studying myself and other investors,... More
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  • Tesla's Achilles Heel: Falling Used Electric Car Prices.

    This is a brief missive detailing my short thesis on Tesla Motors inc., focusing on a new risk to the upstart auto maker's dream to break into the high volume, mainstream car market, and a path to profitability.

    First a brief review of my existing short thesis on this stock. All of these points have been extensively debated, I will only summarize them:

    1. Lower oil prices diminish the widespread appeal of plug in vehicles.

    2. Competition. BMW, Audi, GM, and others are launching multiple new hybrid and plug in vehicles. This is not academic -- Tesla earns (over 200 million in 2014!) substantial dollars selling excess EV credits to automakers not producing enough qualified vehicles in California. Competition levels the field -- and reduces the value of these excess credits.

    3. Political change threatens existing and new tax credits for electric vehicles. It's no secret republicans are no friend of the democrat led push into alternative energy solutions.

    4. Delays on model 3 and model X. Well discussed, giving competition more time.

    5. Opaque accounting practices. Bulls will defend this -- but less than full transparency is ALWAYS a red flag on any company. A company that desires to be the leader -- MUST be that in its disclosure too.

    And now.. and perhaps most important for the bull thesis on Tesla: Falling prices -- fast -- for used electric cars:

    Tesla has essentially guaranteed a floor for used values for their Model S -- creating a future massive liability on their balance sheet if actual used values don't hold the guarantee they have provided.

    Details on the program:

    Used car prices falling:

    This development may not affect the model S very much. But remember TSLA is not priced at todays valuation based on the Model S, a limited appeal super car. Its all about the model X and even more about the Model 3 -- the high volume mainstream offering.

    If comparable used cars from other makers are collapsing in price, how does this affect pricing of new cars? How does Tesla offer their lease buyback guarantee in this environment -- on the 3 or even on the X?

    Last question. Model S buyers are risk taking first adopters. Tesla, per their last quarterly report, is burning cash -- fast. Will risk adverse middle America -- take a huge risk on Tesla able to honor warranty claims and being in business in 5 or 10 years - in the numbers required for Tesla to achieve profitability?

    TSLA is currently holding just above key support in the 200-202 area. A violation of this support brings 185 into play.

    Short Tsla

    TSLA Chart

    TSLA data by YCharts

    Tags: TSLA
    Feb 28 7:05 PM | Link | Comment!
  • Selling Goldilocks -- The Absent Wall Of Worry.

    In my last post I wrote about the dangers, and my many past mistakes in this area, of using traditional timing tools --- to establish valuation metrics and predict market tops on an intermediate basis, during a rare period historically of zero risk free rates and unlimited Central Bank accommodation.

    Many, many professional traders, with decades of experience and enviable long term records, have been frustrated by a market that all but ignores frothy sentiment gauges, reversion to the mean theory, and mostly only presents the shallowest of dips.

    Does this mean US markets are undervalued with exploding earnings trends ahead, as the technical strength would imply, or simply a complete lack of competition from alternatives?

    This is for the investor to decide, but fundamental analysis strongly argues for the latter, in the backdrop of slowing earnings growth and a still somewhat tepid US economy 6 years into the recovery.

    Zero rates, continue to make overvaluation a moving, fluid target, even as the SPX PE ratio reaches a 20 handle.

    Selling always risks being left behind, and shorting risks being run over as the potential remains for an end game resulting in a parabolic blow--off intermediate top, as both domestic and foreign money pour into the US.

    SPY Chart

    SPY data by YCharts

    So so what is an investor to do with a dearth of alternatives?

    I will stop here briefly with a note to readers: This is not a bearish article. I am very positive on the long term future of the US economy for reasons I've expressed before, including:

    Powerful free enterprise culture,

    Innovation and creativity,

    Consumers that have and continue to strengthen their personal balance sheets,

    Future pent up demand in areas like housing and infrastructure,

    Immigration to offset an aging population,

    No established competition militarily, for reserve currency, and in business innovation.

    However, few would argue at today's valuations and popularity, such advantages are well factored. Simply put, much like I despise paying full retail at a name brand store for a household item when I can buy at Amazon or Costco for discounted prices, when it comes to US markets, for most securities I don't like the price, and I'm not alone.

    Take a look at a chart of the German DAX on the eve of QE in Europe, and tell me if this chart reflects a margin of safety in entering now:

    ^GDAXI Chart

    ^GDAXI data by YCharts

    This is the definition of a blow - off move, in the leading country in the Eurozone with intractable issues including an older population and demand than North America, and an unworkable Euro currency that is destined to fail, ultimately.

    However the 2 most popular areas for investors to reallocate capital are those with deep rooted secular issues, Japan and Europe. Do I wish I had bought the Dax? Of course -- but expressed in US currency the move is far less impressive:

    EWG Chart

    This makes the point that we continue to live in a world dominated not by organic growth, but by currency wars designed to attempt to export inflation to one's neighbours.

    Organic growth opportunities are where I am choosing to focus my long side exposure, including US housing and infrastructure (VMC, FNMAS, FLR) , India, (NYSEARCA:EPI) and the Phillippines. (NYSEARCA:EPHE) See related ideas below in charts:

    EPI Chart

    EPI data by YCharts

    EPHE Chart

    EPHE data by YCharts

    VMC Chart

    FLR Chart

    FLR data by YCharts

    FNMA Chart

    FNMA data by YCharts

    I've written about the above themes in greater detail in past postings.

    Now to get to the point of the title of this article, I am choosing to answer the question "how does one manage a very expensive market with few alternatives" through active portfolio management of net exposure, depending on my perception of valuations, earnings growth, and the state of the wall of worry.

    My analysis of the current situation is as follows: Wall of worry is currently very weak. Europe QE is starting, Greece is "fixed" again, Fed continues to be patient on rates, and a (soft) earnings season is behind us. Nothing to worry about, which is when I start to worry! Technically we are highly overbought, with bullish sentiment dominant.

    Hence while not shorting any indexes -- I basically refuse to do this --this week I began scaling further into selected individual shorts with weak fundamentals, which brought my overall exposure from fairly well invested to very slightly net short. As the market hopefully corrects in a minor fashion, and fear and anxiety rise, I will gradually move exposure in the other direction.

    These incremental moves avoid dramatic top or bottom calls I had attempted in the past, and treat the market as a "market of stocks", while (hopefully) adding beta to overall results.

    My key short is TSLA, which is steadily weakening both technically and fundamentally, IMO. After a terrible earnings call with missed targets, Tesla, which is burning cash, hovers just above key support in the 200-202 area. A violation of this support leads directly to major support at 185.

    This week the WSJ highlighted rapidly falling prices for used electric cars, an ominous sign for Tesla and the planned model 3, the key mainstream vehicle for their future profitability.

    In addition Tesla longs are almost fanatically loyal about their company and its future, and far too emotionally attached. This kind of behavior is characteristic of a bubble asset throughout history.

    Gopro is another perfect example of this kind of company -- a product seller competing with other product sellers, who nevertheless is promoted into something much larger. Regretfully I missed out on GPRO's very large decline from 98 to currently 42, as put options were outrageously expensive and I was not able to borrow the stock to short sell.

    GPRO Chart

    GPRO data by YCharts

    I remain modestly short a few other names that are burning cash or with quickly weakening business and technical trends like CAT, while holding substantial long core positions as outlined above.

    I believe this constantly fine tuning barbell approach -- holding adjustable quantities of core longs against weak shorts or cash --will continue to be a prudent method to participate in the economy, while remaining well protected against the backdrop of a somewhat frothy market.

    I am blessed to be enjoying a strong start to the year, holding at year highs up 24% YTD.

    Best wishes to all investors!

    TSLA Chart

    CAT Chart

    CAT data by YCharts

    Feb 28 3:14 PM | Link | 3 Comments
  • Trading / Investment Plan - Spring 2015

    First the mistakes...then the "bias" and plan.....

    A conundrum of mistakes and foolishness. All mine. All the ways -- I have found to make my life and trading, more difficult.

    1. Shorting a period with unlimited liquidity, and zero rates to compete with stocks as an investment class. Record stock buybacks and healthy dividends. High profit margins. Those factors can overlook a whole host of sins, weak revenue growth, slow path to profitability.

    When the alternative is zero, or 1-2% government bonds -- people will pay a lot more for 3% yielding stocks. This in turn -- provides a stronger bid for the Twitter's of the world.

    2. Anticipating blow ups of some sort or another. Every year there has been a list. Every year a wall of worry. Europe will blow up, China, etc. Anticipating the long awaited "big one". Overthinking things. So many years since a 10% correction, stuff like that. Reversion to the mean theory. Think this has cost me. Every cycle is different.

    3. Misjudging the words "slow" with "weak and fragile". This recovery has likely been the slowest in amplitude any of us have ever seen. I have repeatedly thought in the past it would turn over, at different times. It hasn't, although it's been lumpy. Need to judge that in the lens of contractionary fiscal policy. I'm convinced that will eventually return to some balance.

    4. Shorting Strong vision because of a lack of current profits. Accepting I don't know the future for company performance. Visionaries like Jeff Bezos, Elon Musk, Steve Jobs, when he was with us, will always get 20 benefits of the doubt from Wall Street. Institutional support. Even IBM with weak vision IMO would have been a profitable, but tough and grinding short.

    The only very reliable short candidates have consistently been tied to commodities, as commodities have endured a widespread bear market. However I suspect, although not sure, those days may be getting closer to an end.

    This bull -- will end one day. I suspect the catalyst will be after a series of Fed rate hikes, which would be preceded by much higher inflation expectations, which first imply a period of long bond weakness and a steeper curve.

    So unless the Fed gets too aggressive and jumps the gun -- may have some time left. Certainly -- Fed mistake is single biggest risk -- as fiscal policy has already been contractionary -- assuming a complete disorderly Euro implosion, doesn't happen. (Don't see this).

    This all leads to the I see it..Briefly....

    Primary Bias -- Long Risk.

    Please the market ripped higher, certainly fooling me; off of the major support just days ago, on friendly noises from Greece. We rally 60+ S&P handles and stop Wednesday at resistance, then sell off viciously at the close on news there is no "deal" for Greece. This morning -- just on flimsy news of a MEETING only-- boom we have ripped right back up.

    My bias is we are going higher, and will retest, likely successfully, all time highs on major markets, and soon. My plan is as follows:

    -- Stay long core stocks, and trading positions anticipating ATH test. Looking for major breakout on IWM from year long range.

    -- Dollar has potentially topped, on an intermediate basis. Fed will be very slow and cautious on tightening. Look for counter-Dollar trades. Currently long British Pound, Aussie Dollar, Nibbling on Crude oil, cautiously.

    --When -- Confident Crude oil has bottomed -- look carefully at selling rallies in TLT or equivalent.

    -- Refrain from shorting -- other than the occasional specialty situation, like BOX Ipo.

    Tags: SPY
    Feb 05 8:59 AM | Link | 4 Comments
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