Interest Rates, Inflation And Algos: A Bad Formula For The Market And Tesla

Summary

• March came in like a lion, with another choppy week of trading.
• Interest rates continue to march higher, and Jerome Powell and the Fed don’t seem prepared to address it.
• Tesla has enough short-term issues affecting it to put it in a risky spot.
• Until new stock market highs are set, the downtrend may persist for both the market and Tesla.
• Looking for a helping hand in the market? Members of Nail Tech Earnings get exclusive ideas and guidance to navigate any climate. Learn More »

We received a lot of data last week for the markets. That data wasn’t great for traders, and we see risk for markets continuing this week. It starts with the Fed, which spoke and didn’t have a big problem with rates rising. That means rates can continue to jump. With rates moving as fast as they’ve been, algorithmic trading programs that are set to interest rates may run off track. And while the jobs report on Friday was strong, that underlines the key risk, that rates will go up sooner than the Fed is saying. This played out in an interview WSJ’s Nick Timiraos did with Fed Chair Jerome Powell. The end result: The Fed as of now is not going to control the yield curve like bulls are hoping.

As a result, we downgraded our strong buys to buys, meaning our position sizing is smaller. With the historic patterns around rising interest rates and what that means for the market, we want to be cautious until we’re given reason to be more optimistic. For that, we watch what’s happening in the S&P 500 (NYSEARCA:SPY) levels.

Tesla (NASDAQ:TSLA) is one of those buys, and there continue to be tough signs out there. The delivery estimates for this quarter continue to come down, which isn’t great, and the company continues to have trouble with semiconductor and nickel sourcing. I think the company remains cheap on next year’s earnings, but to get there the market has to start to agree with our earnings estimates, and we’re not there yet, so things could be choppy in the meanwhile.

The video discusses all of these points in more detail.

Reviewing the prior week 1:00

• SPY Levels

• The spike in interest rates, the effect on algo

• WSJ’s interview by Nick Timiraos with Fed Chair Jerome Powell and when the Fed might raise rates

• The market uptrend and whether it’s breaking

Temporary Inflation - do you buy it? 8:00

• The Fed’s guidance, but can we trust them?

• Risks around the price of oil and Middle East turmoil

• Is this a problem for the market effect or for the consumer effect?

Positioning and pulling back on Strong Buys - 15:45

• A time for less risk

• Hedges via the ETFs

• Where does tech sit amidst a market rotation

• The risks to top performers in a downtrending market

• Importance of developing conviction and what might drive that

Tesla’s past week of struggles - 26:30

• Delivery estimates coming down

• Semiconductor and nickel supply challenges

• Not much of a response from the FSD subscription announcement

• Importance of knowing your own time horizon and emotional responses in a position

• Preparing for the Q1 report and not just buying because the stock is down

Last comments for the week ahead - Keep it Simple - 40:45

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. All model portfolio trades are hypothetical to show direction, conviction and timing. Performance excludes all relevant transaction costs. Opinions given are at this moment and can change rapidly after this is published. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

Comments

[BossHoggg]

There is a natural time value of money due to the fact that people are mortal and get older. Rates went to an unnatural, unprecedented low level due to the ham hand of the Fed. That will inevitably unwind. The low end of normal for the ten year treasury starts above 3% based on history. The more the Fed interferes in the market, the higher the tension gets for rates to spring back up quickly.

[kimbillro]

@BossHoggg , I wish the Fed would hand me a free ham sandwich with their ham hand.

[BossHoggg]

@kimbillro Sorry, you don’t even get a crumb. Unless you are a banker, in which case you get a bacchanalia.

[kimbillro]

@BossHoggg , Thanks for sending me to google to look up the word. No, I haven't been to a bacchanalia yet. I am only 75, maybe too young to.

[Maurice Moschini]

Central Banks Are 'Printing Money' - But Deflation Is Still The Bigger Risk - Alpha Article April 2020 - 12 months later and we don't even have extremely strong jobs growth. The market is kidding themselves with all the negativity around rising inflation - Institutions are lapping up retailers sold off shares and Qtr 2 2021 looks very profitable for their clients

[kimbillro]

@Maurice Moschini , That's due to the velocity of money that is decelerating still.

[gbfalcon]

Seriously ... if interest rates go up to 1.5% - 3% per year ... yes per year !!
How would that affect a reasonable / startup business ? Interest rates form a very very small part of operating costs ... If such a low interest rate affects a company then in my view ... the company is vapor ware ... !!

[Eduardo Phantom]

@gbfalcon so true, go to Mexico to see interest rates above 12% and still manage to create jobs and businesess

[ConsideredInvestor]

@Eduardo Phantom existing companies and existing high levels of debt?

[Ernieballer]

This thing is like an algorithmic pump and dump grabbing liquidity from RH traders who get their order flow sold to people like Point 72 & Citadel.

[zinvest]

Telsa is or will eventually be like the Apple of EVs and battery tech, so eventually it may go up a lot but might also fall to 300 range.

[kimbillro]

@zinvest , Do I hear the $150 range?

[Will-G]

Dan I wish you guys wouldn’t keep pushing oil when you go to the video site, all that Elon has strived for is against conspicuous carbon consumption!

[SimonR2]

@Will-G You mean except for the prodigious quantities of CO2 emitted by his private jet and by SpaceX? In fact I'd say he's striven for conspicuous carbon consumption!

[MG_1]

@Will-G Is that why he invests in bitcoins, one of the most energy intensive and environmentally damaging activities in existence? That sure proves that all he cares about is saving the planet.

[Will-G]

@SimonR2 well you’re being unrealistic, there is amazing saving having one man organise everything even if he needs to travel a lot, when a rocket fuel mixes with oxygen it’s a clean burn equivalent to a couple of jumbos

[longnose]

This looks like just highly technical+herd story. Why would highly indebted company like ibm go up? It's not like they have protection against inflation or they own lots of net cash or not losing mkt share but it goes up.. patience is only story for tech right now

[kimbillro]

Tesla and tech are currently dealing out justice to those who deserve it.

[SimonR2]

@kimbillro With falling market share? Yes I'm sure they can take more of that!

[Shoeboxer]

@SimonR2 falling market share is the only knock shorts can come up with, and even that’s a stretch. For mid-long term investors, Tesla is a certain win and one of the most sure things there are in the stock market.

[kimbillro]

@Hallmarkius , Tesla dropped from $900 to $550 awfully fast.

[Palace Malice]

Rates can go no higher or Fed will step in and buy and drive down. High rates bankrupt USA so will not happen. Do the math and rates.

[kimbillro]

@Palace Malice , You're looking for a 3rd operation twist?

[Will-G]

@Palace Malice high rates now, or high rates in ten year bonds, you take your pick

[Virtual Viking]

@kimbillro I'm looking for operation screw. In particular, screw everyone with money printing and inflation. There's no way the FED is raising rates.

[Alpha Squared]

Thank you for the article.

Even at $574B market cap, still so many people are puzzled about this company. I take that as an opportunity to accumulate more shares. A bullish article like this could potentially increase my cost-averaged purchase price of TSLA. I need more bearish articles to come out in the next 1-2 months.

[SimonR2]

@Alpha Squared The Market cap is the puzzling thing though, the business simply cannot justify it, especially with revenue growth per share being pretty much zero for 7 consecutive quarters.

[Alpha Squared]

@SimonR2 I understand where you are coming from. At the same time, I try to be humble and respect the market. With billions of ppl in the world watching US market, especially the top 10s, the valuation of any stock cannot be way off and there is some efficiency in that sense.

[MG_1]

@Alpha Squared “the valuation of any stock cannot be way off” Said they at the top of every bubble. Pigeons learn faster than some people. Btw, what makes you think that billions of people in the world give a toss about what happens in the US, let alone its games with paper money? Ever been outside your county line?

[farwest]

Hilarious. As if tech traders relying on momo and absurd valuations give a damn about rising interest rates (from near-historic lows). But now that the tech trade is in full reverse, any excuse to suddenly be cautious is trotted out. What a hoot.

[locum2]

@farwest, if you have an alternative theory, please publish it. The guys who came up with the capital asset pricing model, won the Nobel prize (~$1 million tax free), got tenured professorships at prestigious universities, received lucrative consulting and book contracts.

[Outcast_Searcher]

@locum2: They used math and data and published a paper. Empty whining by pundits is far more common, but absolutely useless.

[RandyMatheson]

Great Q and A; insightful and logical thinking. Tks.

[Elazar Advisors, LLC]

@RandyMatheson Thanks Randy

[dmzporter]

Thanks for writing about Algos!

[Winnertakesall]

I wonder what the people at the S&P must be thinking... all these passive investors got pulled into this mania buy, they must feel like fools.

[kimbillro]

@Winnertakesall , You mean when they switched XOM for Tesla? We all make mistakes like when Wild Bill Hickok sat with his back to the saloon's front door for the first time in Deadwood, South Dakota.

[Will-G]

@Winnertakesall indeed they did try to keep Elon out, he was certainly stalled for a bit

[Alpha Squared]

@Winnertakesall may be they are thinking FSD technology is Winnertaksall and TSLA is likely to be the winner. I don't know.

[DaytonaDan]

I'm down 300k on TSLA and would hate to sell. Sell or hang on for dear life ???

[mikejack]

@DaytonaDan My favorite saying if a stock is trending down - "Your first loss is your best loss"
Or you can wait for a rebound which may never happen.
It took nearly 20 years for QQQ to recover to breakeven from the dot.com bust

[dmzporter]

@DaytonaDan i feel bad for you! I am not a financial advisor, but I spent 7k on OTM puts: so my position is that Tesla will fall a lot more. That aside, who knows? i think it’s a 75 dollar a share stock, others think it’s 7500.

I suspect it’s a bubble driven by a short squeeze and a fanatic tesla group that keeps buying calls and stocks. But that’s just a guess...
best of luck

[Maydaymindy]

@DaytonaDan Buy more, be patient. Learn from my mistakes

[josefajardo]

The best thing Tesla can do now is whatever cash on hand it has go buy bitcoin like micro strategy Tesla will make more money buying bitcoin than making cars.

[kimbillro]

@josefajardo , Then Tesla will be under a double collapse...both its cars and Bitcoin.

[josefajardo]

@kimbillro bitcoin is real way more real than cathie woods Arkk or Tesla stock price ! Bitcoin cannot be over printed by politicians. Bitcoin by the people for the people.

[Will-G]

@josefajardo they did that already to 1.5B and now btc is lower, it responds too you know, not like gold, or cobalt.

[josefajardo]

Tesla only down 1/3 needs to go to $25 a share in order to justify its valuation !

[kimbillro]

@josefajardo , $25 is still $20 too high.

[josefajardo]

@kimbillro it won’t happen overnight but yes Tesla headed towards the $20’s Tesla can no longer compete in China or Europe.

[josefajardo]

Arkk -12 % YTD ! I don’t believe in Tesla Tdoc zoom
Or that con artist cathie wood.

[BrandanS]

@josefajardo big talk there Jose

[josefajardo]

@BrandanS look at the graph you will see Arkk -12% YTD see it with your own eyes.

[kimbillro]

@BrandanS , He can back is anti ARKK talk up with his pet Aardvark.

[rkw29]

“I think the company remains cheap on next year’s earnings”
Define cheap. Love to hear what that means. Are we following traditional metrics or are we making up new ones?

[William Dupuis]

I hope it continues dropping. I'll finally get a second run on Tesla once it goes back up. Thought the times where I was making money on Tesla were gone with this insane valuation, but it looks like I'll be able to pick up a lot of shares very cheap if the technicals looks that bad and people start panicking. Profiting off of fear is the easiest way to make money in the stock market.

[Will-G]

@William Dupuis hmmm you don’t get all those “firsts” the second time around, once you’ve joined S&P500 that’s the lifting done, what’ve got left in the tank ?
FSD ?