By: Ross Silver, CEO Sylva International
Boom time is here, right?!?! To the city folk reading this, when you walk down the street you likely are seeing brand new foreign sedans, SUV’s with all the bells and whistles, rideshare drivers by the thousands, and “old” rideshare technology (taxis). For those of us in the country, like your author scribing this newsletter, all I see is brand new pickup trucks with customized everything and new homes going up faster than people can swipe their credit card. That can only mean one thing; financial obesity is back. Here in Bend, located in the center of the great State of Oregon, I can’t drive more than a quarter mile without seeing some brand new customized pickup truck with a modified exhaust system, custom wheels and monster tires. Oh yes friends, the good times are here for all based on aesthetics, unless this is just a big game of dress up.
Back in 2009, Bend was hit hard by the recession and while the large cities began to recover in 2011/2012, small cities like the one I live in (population 120,000) did not feel any effects of a recovery until 2017. It seems everyone is feeling the need to upgrade their lifestyle and boy are they ever, and fast. Home prices here are up nearly double from 2009 lows, new restaurants that serve fusion (is that food?) have arrived, new hotels are popping up like acne on a teenager and tourism couldn’t be hotter. I mention all of this because I have asked others in cities both large and small if they too are seeing the signs of financial obesity, which typically ends in financial ruin lest we forget, and oh yes, the epidemic is in full swing. That’s great Ross but what is the point?
The point is that credit card debt is at an ALL TIME high. The average American has a credit card balance of $6,375, up nearly 3 percent from last year, according to Experian. Total credit card debt has reached its highest point ever, surpassing $1 trillion in 2017, according to a separate report by the Federal Reserve. The swipe and pay later mentality is going to get people into a lot of trouble especially with the Fed planning on additional interest rate hikes this year and over the next 2-3 years. While the good times are seemingly rolling, professional investors lay and wait. They are waiting for the person who just paid $70,000 for their new pickup truck to falter so they can scoop that truck up for $15,000 six months from now, they are waiting for someone to buy a home they cannot afford and then scoop that home up. Professional investors prey upon the mindless obesity that takes hold of people because humans are innately wired or trained to think positively and believe in dreams, not reality, and that more is better and more equates to greater self-worth. Be careful and let us not forget how awful the country was economically just 10 years ago. While capitalism is great, it is also predatory, don’t be the prey!
Warren Buffett famously said, “if you don’t know who the rube is at the table, it’s you.” When financial obesity is in full effect, very smart people can do some very foolish things, all in the name of chasing returns. In effect, their greed gets the better of them and they fall prey to those patiently waiting for an obese investor trying to cross the proverbial desert without water.
Ackman v Icahn – The Herbalife Lesson
By far, the greatest predator-prey sequence I have seen in my lifetime was when professional investor, Carl Icahn, took advantage of a very foolish mistake made by another professional investor, Bill Ackman. The mistake cost Ackman dearly and made Ichan a lot of money.
Get your popcorn ready because this is a fun one. Bill Ackman, a guy who the media loved decided to wage war on multi-level marketing company Herbalife (HLF). Ackman claimed to have a moral compass and as such based on the grounds of morality,
he decided help the people the people he thought were being taken advantage of (use of strikethrough text intentional throughout :)), he decided to short Herbalife stock to show that Herbalife was taking advantage of people. Pretty funny that the word moral was used when describing his actions, right? he viewed Herbalife’s inflated stock price as the tacit result of financial obesity. Ackman shorted over one billion dollars (not a typo) of Herbalife stock and also spent hundreds of millions of dollars on an anti-Herbalife propaganda campaign.
The media seized on Ackman’s crusade and bestowed upon him a bunch of other heroic titles. Meanwhile, Carl Icahn (very sharp investor) must have caught one of Ackman’s
moral financial crusade press conferences and smiled. So not too long after Ackman goes public with his anti-Herbalife propaganda, Icahn comes out and announces that he has decided to go long Herbalife. Icahn just so happens to purchase one billion dollars of Herbalife stock, the same amount Ackman shorted, leading to a monster short squeeze and in turn causing the share price of HLF to go higher. This of course led to massive money loss for Ackman, gain for Icahn and high comedy for those of us watching this soap opera unfold. This really happened folks.
One thing to consider, that Ackman clearly missed in his diligence, is Herbalife (HLF) has 3 million people working for them. 3 million people are PAYING HLF for the right to sell HLF’s products which means, 3 million people believe in what they are doing and believe in HLF making HLF a “holy” stock (more on “holy” stocks later). My first 30 mins of diligence on considering this trade has me guessing 3 million people may decide to buy $100 of HLF stock to protect THEIR Herbalife from some Wall Street as*hole, that equates to $3B of buying and equals DANGER for anyone contemplating shorting. To be fair, Ackman knows HLF is structured as a multi-level marketing company selling “nutritional supplements”. Of course nothing Herbalife sells has been FDA approved meaning they could be selling people tap water with green food coloring and say it’s a dietary supplement for the management of breathing, lol. Dietary supplements do not require an FDA approval because food and supplements are not regulated by the FDA, but by the USDA, Herbalife does not manufacture, or market medications, food-stuffs (what Herbalife sells) do not require “proper medical trials”, as they are not intended to treat, diagnose or cure/heal any disease. So Ackman thought he could somehow break 3 million people with a short trade and some propaganda? You know what, you have to have some serious confidence to think you can swing that. Bill Ackman, I tip my cap to you for trying to think you can flap your arms and fly and for betting over $1B to prove to people you are right and they are wrong, lol.
In the end Icahn/Herbalife (HLF) crushed Ackman because Ackman categorized Herbalife incorrectly and failed to recognize its “holy” status versus being financially obese. Betting against a “holy” company like Herbalife, wherein the people selling Herbalife products believe they are doing right by humanity is usually a money furnace. A company like Tesla (TSLA) is another example of a “holy” company. Tesla management has proven time and time again that they are terrible at execution (what milestone have they not missed?), they have a solid corruption angle that short investors have run with (Solar City deal) and yet Tesla has the valuation it does because people who buy Tesla stock believe they are environmentalists. Tesla’s are status symbols (so are nose rings) and the shareholders and customers of Tesla believe they are saving the world with electric cars. The Tesla
shareholder environmentalists look past the fact the car’s materials are made from plants using coal power, the batteries destroy the environment and the cars are charged with electricity derived from fossil fuels. In the end, shorting Telsa is not a side you want to take because of its “holy” stock status. Will companies like Herbalife and Tesla eventually fail, who knows? One thing I learned is stocks can stay irrational longer than you can remain solvent. Also, when you are deciding to invest either long or short, make sure you understand what you are investing in.
Another Triple Crown Winner?
This weekend we will get to see if Justify can become the second horse in the past 40 years to win the Triple Crown. In 2015 American Pharaoh did it and boy was that a fun ride! I wrote this before the Derby and I will write again now, Justify is the best horse I have seen in my lifetime not named Zenyatta and he is rapidly approaching Zenyatta status because this horse is just special. His trainer Bob Baffert looks like a kid the night before Christmas whenever he sees Justify and his body language when he speaks about the horse tells me Justify is the best horse he has ever had. That is a major statement to make considering the horses that have come through his barn. Enjoy this horse folks because we will only see him two more times after the Belmont given he will retire undefeated and a champion, barring some weird racing anomaly or injury. Stay healthy sweet Justify and run them off their feet this weekend, I am rooting for you!
I hope you enjoyed reading and thank you for the feedback we get from you daily; it’s always appreciated good or bad! We are pivoting to video based delivery so the days of the written newsletter are numbered. Be sure to visit our website www.sylvacap.com for vlogs (video articles/blogs) and some written content.
Have a great month and be sure to check out our brilliance (lol) by looking at our mock portfolio of companies which we use to track how good (or bad) we are at picking stocks. So far this year we’re up 13%, which means we’re yet again beating the major indexes by a wide margin: https://sylvacap.com/sylva-portfolio/
The Other Side of the Tesla Story
By: Greg Harrison
I couldn’t resist the opportunity to respond to Ross’ comments about Tesla; I have a very different perspective, and below are a few points for your consideration.
1. Ross has never actually driven a Tesla. I have. Two to be exact – the Model S and the Model X – and I can tell you they are hands down the best cars I have ever driven; my next car will definitely be a Tesla. Without exception every Tesla owner I know (and I know many), say they will never own a gas-powered vehicle again. Sit behind the wheel of any Tesla, and you’ll quickly find out why.
Perhaps it might be prudent to actually test a product before declaring it a total fraud. Just sayin’…
2. People don’t buy a stock to help the environment, and none of the Tesla car owners I know bought the cars to save the planet. They bought the cars because they’re incredible driving machines, and they never have to stop at a gas station again. Isn’t that enough?
3. If you were to ask most people what kind of company Tesla is, many would respond, “it’s a car company”.
Of course, that’s the wrong answer.
Tesla is only a car company the way Apple is a phone company. Yes Tesla makes a car, just like Apple makes a phone, but what makes both products special is the technology inside. That’s why Apple is actually a technology company that happens to make phones, and Tesla is actually an energy company, that happens to make cars.
That’s right. Tesla is a green-energy play that makes the most advanced batteries in the world. Tesla’s batteries are so revolutionary that they’ve turned an electric-powered supercar into a practical every day motor coach. But the cars are just step one in Musk’s master plan for his batteries. He actually wants to control the entire energy grid.
In 2006 Musk wrote, “the overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy (emphasis added), which I believe to be the primary, but not exclusive, sustainable solution.”
That statement should put some very clear framework around the long term vision for Tesla, as well as Musk’s true ambition. With that in mind, we can now evaluate the Solar City acquisition.
To be sure, the transaction reeks of nepotism and self-interest, and it should. After all, Solar City CEO, Lyndon Rive is Musk’s cousin, and Musk was already a large shareholder in the heretofore struggling Solar City. I wish it were a more arms-length undertaking, but that doesn’t mean the merger should be dismissed outright as corrupt, or even labeled inexplicable.
Ostensibly, the acquisition makes a lot of sense. That’s because the biggest problem with solar power is that it cannot be stored. It’s a “use it or lose it” kind of renewable energy. But what if solar energy could be captured and harnessed – say in some kind of giant battery? Specifically, what if a fully integrated energy company could make solar panels that would feed batteries large enough to store power for our homes, and energy for our cars?
In that case maybe, just maybe, the maker of the world’s most advanced batteries might like to control its very own solar company. And that’s exactly the point. Thanks to the Solar City acquisition, Tesla can now “create fully integrated residential, commercial and grid-scale products that improve the way that energy is generated, stored and consumed.”
Far from being a “fraud” pedaling snake oil, Tesla is executing against the vision Musk laid out in 2006. They are making the best cars on the road, and they are now expanding to solar panels and mega-batteries that will power your home and office.
Yet despite the fact that Musk has been clear about his objectives from the outset, some people still refuse to see Tesla as anything other than just an ordinary car manufacturer that for some incomprehensible reason bought a solar company. Go figure.
4. Obviously I’m a big fan of Tesla (the company), but I’m actually not a big fan of TSLA the stock. The company has a lot of debt (more than $20b to be exact), which is concerning in an environment where interest rates are on the rise, and maturity dates are fast approaching. Additionally, innovation is expensive and I’m concerned about Musk’s ability to keep the company funded with such a large cash burn and a bottom-heavy balance sheet.
As if that’s not enough, Musk’s vision is incredibly ambitious, which means there’s a considerable amount of amount of execution risk as evidenced by the Model 3 production difficulties. If anyone can pull this off, it would be Elon Musk, but that’s still a big “if”.
Should the stock become more appropriately priced, or if the company can strengthen its balance sheet, I’ll be an enthusiastic buyer. Until then, I’ll be happy to own the car and wait on the stock.
If you’re interested in learning more about Tesla and Elon Musk, I highly recommend Tesla, SpaceX and the Quest for a Fantastic Future, by Ashlee Vance. It’s a fantastic read.