Most of Tesla's Value Lies in Its Expectations, Denning Says

co host Lisa Abramowitz. Each day we bring you the most important, noteworthy, and useful interviews for you and your money, whether you at the grocery store or the trading floor. Find the Bloomberg P and L Podcast on iTunes, SoundCloud and at Bloomberg dot com. Tesla reported earnings yesterday after the bell and what they delivered up was very pleasing to traders, at least initially in after hours, but they've kind of backed away from some of those bets now.

I want to bring in somebody who knows much more about this than I do, Liam Denning. He is a Bloomberg gad Fly columnist, and you wrote a column that highlighted one number in particular, nine hundred and seventy million dollars. That's the amount of cash the Tesla burned through in the last three months of two thousand sixteen. So what was your biggest takeware? Was this your biggest takeaway from

from the Tesla earnings? I mean, yeah, that's really the only number that that counts with Tesla any any time. I mean the earnings themselves. They were distorted this quarter by the acquisition of Solar City UM. And in any case, whether Tesla beats earnings MSS earnings, there is zero correlation between that and what happens to the stock price the next day. I've gone back and checked it. There's none.

Why because the key issue here is UM is Tesla's cash flow and its ability to realize this ever expanding vision that Elon Musk lays out. If you look at any valuation model for Tesla, most of the value resides in what people expect it to be doing. You know, five of our ten years from now, you know, whether it's producing millions of vehicles or you know, installing solar

roofs or building its fifth giga factory. The the constant need for cash necessitates a strong message of growth and transformation. And that's kind of what I meant when I said, you know, investors take Elon Musk seriously. They don't take him literally, that's a good that's a good distinction to make. Liam. I was looking at the f A page because I love it of Tesla, and I note the free cash flow has a wonderful minus sign next to it. As you just mentioned, at least for the year one point

four billion. As a matter of fact, how much is there any estimate how much they're going to need? Um? Well, it's you know, it's looking like they're gonna need a lot well not a lot of god, but I mean are we talking? I mean because obviously you know, Well, the reason that the reason it's interesting also is because Elon Musk of course owns what about of the company, So what is what is the most what he wants

is probably most likely to happen. Well, the way to think about it is this, so, um, you know, revenue cash flow, Yeah, but cash flow from operations in the last quarter was about minus you know, four hundred someone

between four hundred and five hundred million UM. Their guidance for CAPEX just for the first half of this year is somewhere between two and two and a half billion, So that means net net they're probably going to burn through I would say somewhere between two and a half and three and a half billion in the first half

of the year. And that kind of makes sense because they're about to launch the Model three, which is there they're kind of mass market ev that's where they try and get from producing you know, eight thousand cars a year up to more like five or six thousand. Well, let me just offer this note. This comes from our colleague Corey Johnson, who you know, coming up on a

Bloomberg Markets PM, he said. A year ago. Chief executive Elon Musk stated on their Q four earnings call that quotes something I'm personally quite excited about is that we expect to be positive cash flows starting next month and then continuing into Q two and beyond. Well, analysts don't agree.

I'm looking at the expectation for fiscal year two thousand, seventeen h that was a year ago, all right, Well, that didn't didn't come looking at a sort of an expectation among analysts of negative basically a hundred and seventy billion dollars, right, Um, But I would go back to the original message, which is that none of it matters, which is right, you know, he can say whatever. He

was missed. Sales forecast its original sales guidance for the last three years running, and it's got a market cap which is almost the same as as awards. That will give them the wherewithal to go out and sell more equity, to raise more money. And as long as they keep pushing out a message of growth and transformation, and as long as enough investors believe in it, then they can keep raising money to keep pushing towards it. Okay, So

what could happen to disrupt this virtuous chain of events? Okay, so it's hard to say specifically, but I think what would have to happen is some sort of real disruption to something like the Model three. Now it's looking like the guidance for the Model three's production, I mean that looks pretty shaky to me. The numbers that they were putting out last night. We haven't even seen a fully

functioning pre production model yet. Doesn't look like we're gonna see one before production is supposed to start in July. So if some if there was some real setback to that, then I think that might shake people's confidence. I think the other thing is as time rolls on, we're seeing more competitors like GM for BMW launched their own electric vehicles. I mean, GM has pretty much beaten Tesla to the punch with the Bolt, which is going to be the

main competitor to the Model three. And I think over time, although right now Tesla is seen as the force for change in the auto's market, at some point there is going to be the reality of having lots of other competitors who are also able to offset their risk with other cars producing their own electric vehicles. Thank you very much, Liam Denning, Bloomberg Gadfly columns. Shares of Tesla data about

five and a half percent. I want to turn to Krishna Mamani, chief investment officer at Oppenheimer Funds UH, to talk a little bit about what are you seeing in the bar market specifically. I want to start Krishna with comments that we heard today from US Treasury Secretary Steve Minution basically expressing great interest frankly and issuing longer dated US treasuries. This would be the fifty year or possibly even a hundred year UH treasuries. What's what's your feeling

on this? Do you think this is realistic? I think from a demand perspective, so in any policy change, you have to kind of focus on whether there will be some buyer for the security. But you're a buyer, right, I'm a buyer, and I think there are lots of people who are buyers of really long bonds special fuer quality. So you would buy a fifty year US treasure absolutely, because if you if you have really long term liabilities that you're looking to extinguish and extinguished with really high

quality assets, there really isn't a better instrument available. So do you have a sense of what premium you would need for a fifty year treasury over a thirty year treasury or a ten year treasury in order to make it worthwhile? So I guess would be that that premium

is probably smaller than most of us anticipate. And the reason for that is because the the convexity characteristics which is a technical term to say the the the price appreciation and appreciation qualities of really long bonds is very good and from a from a liability extinguishment standpoint, the demand is quite solid. So I think that premium would be much less than what we think uh it would be, and much less than what the differences between ten years

and thirty years today. As much as I would like to say that I'm going to be around in fifty years, I got to say that there are chances that I might not. So why would you buy something that is going to be subject to the vagaries of inflation, global instability? Uh, in order to satisfy a current And I don't mean you personally, but I mean to satisfy a current and hole in the portfolio because number one, you can't think

of anything better to buy. Second, you need to keep your job, and no one's gonna fire you for buying us treasuries. You're gonna say, here, I bought them. It matches our liability. But you know, I'm not gonna be around when this thing blows up. So that's that's funny that you say that. But you you you have to recognize, uh that while you and I may not be around in fifty years, there are pension plans. No, no, no,

I got I. I understand all that. But I mean, if you're to tell me that you were to buy a thirty year let's say it's thirty years right now at three percent, you mean to tell me that in thirty years you're not going to take a hit in terms of what it is. Maybe your new customer base wants in terms of a return, because if you're an

insurance company, you're matching future liabilities future new customers. Sure, so, but I today I have some liabilities that I need to fund and demonstrate to the accountants that my liability is fully funded. So you're limited in what you can exactly. Okay, alright, Well, moving moving on to something else that Minution said. He said that he thinks it's completely feasible that the U S should see three percent or even higher growth. That's up from two rate or less. Frankly, now, first of all,

do you agree with this assessment? And second of all, if this is true, what bond is going to get hit hardest? So I I think that's that's really more hope than reality in my view. Alright, And so you don't think that's true in the current environment, The likelihood that we get to higher than three percent growth rate anytime soon, I'm not holding my breath, you know. It's it's not it's not to say that it couldn't happen, but for it to happen, a whole lot of policy

initiatives have to come into play. And policy initiatives like significantly higher level of fiscal deficit, which I don't think the Republican administration, at least the Republican Congress is really very much in the mood mood to do without that. The likelihood that we get three percent, in my mind,

is virtually zero. And yet you do still think that benchmark borrowing costs in the US will rise enough to legitimize or justify uh favoring leverage loans or other floating rate debt correct well, so the floating rate debt market is really not just about your view on where rates are going. That certainly helps, but I think what you have to factor in is the fact that floating rate yields are comparable to high yield yields, and therefore the

the end they are senior. So the downside in loans is significantly less than what it is in high yield bonds, and as a result, I think in the current market environment, loans is the best asset class in all of all of credit. Having said that, you know the interest rate component of loans is a side benefit rather than the primary driver of the value and loans, thank you very much, very interesting. Christian Memony is the chief investment officer at

Oppenheimer funds uh. He is based here in New York and joining us in our eleven three OHD studios. Thank you very much for being here. P and L is brought to you by proper Cloth, the leader in men's custom shirts. At proper cloth dot com, ordering custom shirts has never been easier. Create your custom shirt size by answering ten easy questions, select from over five d fabrics to suit your personal taste. Shirts start from eighty five dollars and are delivered in just two weeks with proper

Cloths perfect fit guarantee. Remakes are completely free and expert staff are standing by to help. For premium quality, perfect fitting shirts, visit proper cloth dot com Custom shirts made smarter. When you think of appliances, Lisa Bramwitz, do you think of J. C. Penny? Yes, I do you do? I do well. I'm glad you do because this was a category that they well, they exited at one point and now um they are back in the world of appliances, so you must have a very good memory. Here to

tell us more. Craig Johnson, President Customer Growth Partners. They're based in New Canaan, Connecticut. Craig, always a pleasure. Thanks for coming into the studio, tell us about j C. Penny and whether there is any way they can offset that weak store traffic and also the negative soft apparel trends that a lot of retailers are facing. Well, him and Lisa, great to be with you all today. Um, yeah, j C. Penney has been doing a lot better under

the still fairly new CEO, Robert Allison. Uh, he came out of out of home Depology, you might recall, and so he knows a lot about major appliances now. Um, they extualed the major pints is like thirty plus years ago, but they've always been in small pints is kitchen, the pints as and so forth. Um, and so they're looking that is one of the things they're looking at to increase the productivity of the store floor. The floor is still jc pnny stores are still way under productive where

they used to be some years back. And they're working on the Internet. That helps. They're doing much better on that than they used to be. I used to do. And um, major plinants is is not gonna be a panacea because for major appliances, I would argue a little bit there at least it's not it's not top of mind for most customers. Most major plants sales are what are known as duress sales when the old unit conks out. When the old unit conks out, you're probably gonna go

to Loads, which is number one in market share. Maybe Sears Home Depot or best Buy. J. J. Penney just doesn't pop up, then Greg just zooming out a little bit. This is peak earnings week for the retailers, and it comes at a time when a lot of people are writing off retailers as uh soon to be victims of the Amazon boom and the online move to shopping. And yet we're seeing Beats Coals this morning beat expectations. We saw Macy's beat expectations earlier this week. Does this point

to signs of recovery in your opinion? Well, the fact that they beat pretty dour expectations doesn't always bode well. In other words, it's it's maybe a moral victory at most best to have only negative two point comps as calls we boarded they can get right right exactly. But I distinguished between the department store sector and the apparel sector, which have been the most troubled, and department stores are mostly apparel and accessory stores mostly for women that you

will have a home section and so forth. But it's mostly apparel, and that whole sector is declining. It's so much slower share of market that used to be department sto as a generation ago. Um Uh used to have ten percent of the retail market. Now it's sounded one point six. So you do the math. That is not

that is not a good thing. But other parts of retail off price apparel, such as t j X, which had fairly decent numbers, Ross and Burlington, which is reported in the next you know week ten days, they'll do very very well. Um and and there's been a major rotation to home um, whether it's home improvement or the homeport instance. Players w Wayfair just reported this morning, did you know very strong numbers not make any money by the report of the strong top line tell us about

I gotta go to l brands. I know that the results are already out, so I was just watching to talk about Victoria's secret. Well, I just don't know. I mean, here's the stock. It's down at sixth the body works, I see good, thank you down six Uh. They don't know.

They they've got their own stores. Obviously a brand but I mean, is this the story that is this like a business that's going to be around in five years in the same format somehow, I think the market for intimatewear or innerwears calling it these days, I suspect that's gonna be around for a while. The difference is is that Victoria's Secret uh, as apart from Bath and Bodyworks, which is you know, different little bit of different animals.

But for the for Vicky, um, we believe that it's overexpanded. It kind of breathed, was breathing its own exhaustumes too much. And any good retail you have, even if you have a great concept, you don't want to make it so it's totally ubiquitous. So there's one on every corner because you'll you'll overserve the market. And right now the market for for for intimate underwear is uh, it's you know,

it's modestly growing, but it's not rampant. Well and also didn't Victoria's Secret come under some fire for not having big enough sizes for some clients and there was some discussion about should they have should they cater to a larger population. Does that matter to you at all or is that sort of just a relevant kind of side show. Well, the the size of the average woman has over the last generation has increased, and uh, the full figured woman does have a market, and right now that's a little

bit underserved, we believe. And so Victoria's secret, you know, it's the image of Victoria's sacred is maybe you know, a little thinner, younger, et cetera. But there's a ton of women that may need, you know, a little bit larger sizing, and there we believe they're a little bit undeserved. Craig, you said that you just returned from a trip to Chicago. I know you spent a lot of time on the

road actually checking out the retail operations. What can you tell about what's going on in the middle of the country in Chicago, Well, he was, you know, we have a team of eighteen people. We've been doing this for years across the country. They go about to about ninety major venues um and I like to travel myself and native Chicago's I remember Marshall Fields in its better days, and so you remember the chocolate, the mints, I guess the Franco mits where which macis. I believe they just

sold that the great thing and so um. Retail in the rest of the country is doing, you know, kind of much better than the pundits think because the headlines are all around the department store as the well known names and departments are a sector is tanking, it's it's a it's a near free fall. Now there's a role for department stores, but they have to rethink and reconceptualize

really what they are. But what you see in Chicago, can you tell us, I mean any are there any retail concepts that are new that we need to pay attention to? One of them, just as expanding rapidly is a warby Parker, the the the eyeglass maker, and they have I was in their stores on North Rush Street and it's great. Locations like Catty Corner from an urban outfitters, you know, sort of serve a little bit of the same customers and so forth. And so they now have

a couple of locations physical location. Because this is a retailer that started online. Classes. Yeah, but they started online and now they're now they're rapidly going to building out a store fleet. Craig Johnson, thank you so much for joining us. Craig, uh, it sounds like they're eighteen people go around secretly shopping for for for their business. I love it. Craig Johnson, president of Customer Growth Partners in

New Canaan at Connecticut Well pim Fox. We heard quite a bit this morning from US Treasury Secretary UH Steve Minution. Now that he has been confirmed, he is making the rounds and giving some sense of what his priorities will be over the next couple of years. I want to bring in Salaha Moson, she is a Bloomberg News reporter, to talk a little bit about what we've learned about

manutions policies. So, Sala, let's first start with the longer dated US Treasury since this is moving markets and causing a quarter into some traders. This is what's causing the yield curve to steep in somewhat today. Um, what exactly did he say about the U s issuing fifty one hundred year treasuries? So the Secretary Minution said that the

Treasury will explore issuing longer term debt maturities. As you said, Um, he said that with rates seen historically low for some time to come, it is time to seriously explore whether Treasury should be issuing these bonds. Well, what is the likelihood that this will happen? Who does he have in support? You know, there are a few members in Congress who have asked about this in the last year, uh and including some Democrats, But so far in the Senate there

hasn't been a lot of movement on this. It's not clear that he would actually even need congress um full support to do this, But I think for now it's more just the sake, a question of asking market participants and investors what they think and then going from there.

You know, one thing that I found interesting both today as well as yesterday, there was an article about Treasury Manution in the Wall Street Journal where he talked about the dollar policy and that the strong the strong dollar is a good reflection on the US over the long term. That seemed to go in contradiction to what President Trump had said about the dollar being too strong. He also said today that there is no urgency to brand China

a currency manipulator. How much is Treasury Secretary Manution in sync with President Trump? You know, it's hard to know, um, when something might come out on a tweet and where the signaling there might when it might shift, um. But you know, we have seen some clear signals from Trump himself where he is softening on his views of China. UM. That started after the elections and it's continued as he has become president. UM and Manution is pretty much echoing that.

But this is new that you know, no announcement will come before April, and that means that they are looking to the traditional mechanisms to investigate whether they should be labeling them now or or how they can start raising any alarms before they would actually formally designate them. It just shows that we're not going to do this haphazardly. We're gonna look to what existing established mechanisms. We have

to do this now, Sala. Earlier, President Trump spoke about the United states is economic relationship with Mexico, and did he reference that Secretary of State Rex Tillerson is in Mexico today beginning that relationship. What if you could speak a little bit about what you know about repealing or changing or reforming NAFTA. You know, right now it looks like a very strong initiative to start, like a ninety day review of the law has not started. Um, it

looks like they're still in the talking mode. Let's connect with all of our counterparts and see what we hear back as the rest of the world kind of starts to re adjust to the US's new trade stance. You know. One other aspect of Minutions comments earlier today was his expectations for the growth rate in the US. He said that it was completely reasonable to expect a three percent or higher growth rate. Did he give any idea of what he thought would push growth to that rate, which

we have not seen for years. Yeah, So he stuck to the party line that it is tax cuts and cutting regulations that will unlock this economic growth of at least three percent. Mission did say today on TV and a scene LEAs the interview that he doesn't expect that to really feed into the economy until the end of next year. But that's why they want to get started on this sooner rather than later, just so that that

can start showing up in the economy. Now. Recently, I believe, you know, there was a G twenty meeting, and this was at a time when I believe the Secretary of the Treasury had just been installed, and I'm wondering if you could just give us the reaction to some of those UH from the Foreign UH Finance chiefs about Stephen

Manuchition and about the US policy. So the next twenty meeting is in Germany in mid March UM, and what we had was a leadership gap at Treasury that was longer than before between administrations, So the Treasure secretary counterparts around the world had no one really to pick up and call as they heard Trump and his advisors, including Manuchian, making comments about bilateral trade issues and currencies that were

moving markets. Um. So as soon as Minuition was installed, we saw that within half a day we had his German counterpart UH talking about saying, you know, be careful how you talk about cutting regulations because they don't want a race to the bottom of the very regulations that were put in place two Uh sort of keep another financial crisis from happening. And then shortly after that we heard from Japan's pair also about how Minution should be

cautious and careful in remarks about the yen. And that kind of comes from Trump's comments that China and Japan are playing in currency markets. Although you know, aside from just the big Dodd Frank rollback which some people are expecting, Treasury Secretary Minution could have a much more direct effect

on rolling back some of these regulations. Correct, I mean he could potentially direct the Federal Reserve of the o c C or work with f STOCK, uh this Financial Stability Committee to potentially ease certain sort of de facto policies that are that are just basically governed by guidance. Right.

That's right. He is as treasure Secretary's ahead of f STOCK, and so it's up to him if he decides to put some different issues on the backboard burner and re prioritize that is one way to sort of start loosening regulations. Like what types of things you're talking about, I mean, it's hard to say. Right now. He seems very focused on doing anything he can to help small and medium

businesses grow investment. They said for a long time that small community banks aren't able to make loans that really are a part of a large part of the economy and are holding back part of growth according to their base case, because they are kind of weighed down by regulation. And if they can loosen that up and make it easier for these smaller banks to operate, then you know that's they're going to aim for. First. I wonder if you just give US about twenty seconds on the euro.

On the Euro, you know, we did hear from Peter Navarro, who is the Trade Council Director at the White House, that Germany does have a large trade imbalance with the US and that was kind of, you could say, a soft attack to the on the Euro. Now, we haven't heard a lot on Europe. UM. I know that UM

in Germany. Merkel is often seen or heard talking about an interview that Trump did many years ago where he says that maybe Mercedes should be pariffed, and you kind of wonder if she is now kind of darting to gird herself to maybe be a weary of a trade war. Well that and uh in a coming election. I want to thank you very much, Salleja most Economy Treasury reporter for Bloomberg News giving us details about the new Treasury Secretary Stephen. This is Bloomberg. Thanks for listening to the

Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio. P and L is brought to you by proper Cloth, a leader in men's custom shirts, with proprietary smart sized technology and top rated customer service. Ordering a

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