Tesla Is A Busted Growth Story, Like AOL: Gordon Johnson

days for Tesla. It had its worst one day loss ever yesterday just on the SMP five hundred snubs, so it's not in the SMP five Also GM backing Nicolo, which is a little bit of a rival in some senses. Our next guests say, is that, you know, maybe that down draft was not completely unexpected, nor was it, you know, unreasonable. We are up eight percent today, but let's bring in our next guest now to tell us exactly why he believes that Tesla may have some room to go below

where it is right now. Gordon Johnson is CEO and founder of g LJ Research. So, Gordon, yesterday you know we were blaming sort of the lack of inclusion in the s and P five hundred for the sell off. There was also the Nastack sell off. More generally, would you say Tesla deserves to be valued much lower than it is right now? And there are several reasons behind that. Take us through some of them. Right, So we have a nineteen dollar price target on Tesla more than downside.

That's the one year and price started right Tesla's around, you know, just under four hundred dollars. Keep in mind, till right stock went from two hundred to five first solar stock went a while ago from two hundred to twelve, so you can see moves like this. Listen, Tesla is a busted growth story. UM. Their US revenues peaked in the fourth quarter of eighteen, their global revenues peaked essentially in the fourth quarter of eighteen. Um they're global, I'm sorry,

they're auto. Growth margins peaked in the third quarter of eighteen. And listen, even if Tesla hit their guidance for five five hundred thousand cars delivered this year, that's only sixty of their capacity. They're expected capacity exiting this year before they build two more plans in Germany and the United States. So they're only selling of their existing capacity. Uh, that's a very negative dynamic. It's just no one talks about.

So we think that Tesla. I'm sorry, go ahead, Well, I was just going to point out that till Ray, which he referenced as a cannabis company, they make medicines and drugs and drops and so on, and for a solar is obviously a solar module company. Very different stories though, albeit you know that the same type of company in

terms of what people invest in. I suppose if if you want to talk about growth companies, but but so is Amazon, and you know you wouldn't fold Amazon for having a capacity greater than what it's delivering upon, So wife all Tesla. Right, So Amazon is a very different company, right, people who often make that comparison, but we think Tesla is more like a O L or BlackBerry. Right. They're the first stout with evs and now everybody's coming with competition.

Um So, I think there's big misconceptions out there. Tesla does not make their own batteries. I think a lot of your listeners think they do. They buy batteries from Panasonic, C A, T L and LG Kim. LG Kim just signed a deal with GM. Anybody can buy those batteries that Tesla buys Panasonic. Anybody can buy the batteries that Tesla buys, and the same with with C A t L and T A p L has a million mile battery. Listen, people talk about, you know, evs being disruptive, electric vehicles

being disruptive. Here's the reality. In the United States twenty eleven and nine uh total evs, not just Tesla's. Here, Tesla total electric vehicles have went from point three percent of the market to one point four percent, right, you know, that's not disruption. And globally e vs twenty nineteen have went from point three percent of the market to one

point seven percent one point seven percent. So both in the in the world and the US, despite billions of dollars of government and centims you know, basically handed out to people buying vise, people just don't want to buy them, so they're not disruptive. And with respect to Tesla, listen, Tesla is not a technology leader. Right. People talk about full self drive. They have this thing called full self drive. If they sell for eight thousand dollars a pop. We

think it's vapor ware. We think it doesn't exist. Consumer Reports just did a review of it. It was a scathingly negative review, and Elon Musk is on record in teams and consumer report reports. Is always um always fair, they said, it's not when it's cracked up to being it's dangerous for the driver and other people on the road. And Navigant ranks Tesla dead last and full self drive.

My point is, I think that a lot of your listeners will probably think their ranked first, given where the stock price did and how people say they're a tech leader and disruptive. But the reality is just so much different um than um. You know what people think and we think. As numbers come out, you know things are gonna look bad. One other thing, if you take away the one time credit revenues, right, Tesla basically gets taxpayer and sentiff to sell credits to other automakers who previously

weren't selling, weren't making evs. Now every automaker's a making evy. But if you take away those one time credit sells over the past twenty four quarters and only four of those quarters has has has Tesla been profitable? The most recent which was Reach You nine three Q three Q nineteen. The point is, um even in two cute this most recent quarter, taking away those one time sales, they lost

three hundred million on the night income line. This company is a perpetual loss making company excluding those excluding those credit cells. And those credit cells they're guiding down in the back half and they're gonna basically go away next year. So it sounds like you have secular arguments based on you know, people's preferences free easse and do you have sort of individual problems with Tesla itself? Almost out of time, but I do want to ask you what you think

of Nicola. Do you think Nikola is also you know, smoking mirrors as you seem to think Tessa is. Well, one other thing I want to highlight on Tessa. Right, if you go to one La must said they were gonna be profitable going forward forever and they never need to raise money again. A month later, they lost seven hundred million dollars, and since then they've raised ten billion dollars. Right when he said they're never gonna need to raise money again. Just last year, right, they said they were

gonna have a million robo taxes on the road. This year they use that promise to raise a billion dollars. There's not one robot taxi on the road. So again people, you know, people talk about these promises that Elon musk makes and I you know, I highlight this. You know, given the battery days coming up. Keep in mind it's fifteen Elon must sit in a year to two years, your testa will be able to do over SIS on one charge. They're still not They're still not there. So

he makes these promises he doesn't meet. With respect to Nicola, listen the GM investment yesterday, no cash was changed the hands right. GM took an ownership interest in Nicola, and Nicola gave GM shares um. With respect to Nicolas technology, you know, we're going to actually have to get that Nicola thought from you another time. We are out of time. Gordon, thank you so much for joining us today, though much

appreciated from g l J researcher at Gordon Johnson. The ten year yield at sixty seven basis points, the two stands spread at nearly fifty four basis points. What exactly is the focus for the treasury market liston right now? Well, let's bring in Jim Vogel of f h N Financial. Following all of the data and interest rates and rates mark it's for the last X number of years. Jim.

It is great to have you on. It's been a really interesting right, and equities, but rates have been sort of like the cows watching equities passed by quite happily. Oh yes, And what they're really focused on right now is the supply this week, uh CPI on Friday, and then the Fed next week. You're absolutely right, equities for the moment as far as rates are concerned, or aside to right. So what is this calm in the treasury market?

Is it just the absolute conviction that central banks are going to you know, keep underpinning the fundamentals of the economy and that central banks will also save us should inflation get out of control, like stan Rock and Miller is telling c NBC, or should we see deflation, which sand Rock and Miller is also telling CNBC. Well, Um,

the couple of things. The main one is that right now the bond market is more uncertain than many of the pundits and the people that appear on the media on a regular basis, and so they're waiting to see

what happens and develops. Because we do have the election, we've got the what the Congress is going to consider with fiscal stimulus, and then we have the next steps that the Fed is going to employ Meanwhile, many of the people that sat on liquidity during the early part of the third quarter are continuing to put that money to work. So you have the tension of uncertainty against the need for people to continue to spend cash. That's

so interesting. So there's an underlying tension there that may not be obvious if you just look at the actual levels. So when do we get a change in that gym? Does does something happen? You know, does does the dam break? At some point? It does? There are two things to watch. One is the actual credit experience that will start to see from households and small businesses in terms of delinquencies and unfortunately the possibility of defaults and charge offs in

the fourth quarter. And then the second is the progress that we make on the twin of vaccine development and then how the US continues to try to adapt to the pandemic without a vaccine today. Yeah, do you have a base case at f H engine or just yourself, what is your base case for how the economy reacts? You know that we're in the W camp, so that

the fourth quarters um disappoints relative to current expectations. Uh, and that creates the opportunity for people to rethink the idea that inflation is going to run out of control simply because the FED has changed uh its approach to managing um their policy for the next four to five years. What did you make of that is something that you're anticipating, and what does it change practically for traitors of rates

or those trying to conserve some cash. For the most part, the FED changes reflect things that are going to happen maybe in the next two to three years. It's unlikely that they come into play at any point in in so there's time to consider what the Fit's going to do. The big reason for the change was is that the old policy just simply was not working and it needed to change. It's not a revolution, it's an education process

for everyone, Jim. Outside of the obvious, you know unemployment, under employment, you know social inequality, all of the things that are troubling the US at the moment and that have potential implications for the bond market. Do you look outside the US for other challenges, obviously China being one. So you have to constantly watch the combination of the demographics of an aging population in Europe and the dependence

of the European economy on emerging market growth. So there's stories that started literally five or six years ago that are still going to be with us when we come out on the other side from the pandemic. Yeah, that's for sure. You talk about Europe there, and we did

see a move in yields yesterday. But essentially, as you're talking about negative yields and Europe, you know, how much does it matter whether we have a five or six basis point move and say a French bond or a German bond, Right, we need something like a thirty to forty basis point change in terms of the outlook and the landscape for European interest rates, and that is perhaps possible by two, but it's not a near term event either. Do you see inflation becoming a problem, you know, in

the next decade, Jim. If it becomes a problem, it's going to be because the spending patterns and the consumption patterns of the next generation that's coming behind the Boomers fundamentally changes their attitude toward um spending and the mount they borrow. So inflation comes from uh in effect, credit fueled spending that was the hallmark of the Boomer generation so far that has not been absorbed by the cohort coming up that that has already past the boomers in

terms of its total size in the US. That is so fascinating. And Jim, before we let you go out of time, really, but how is Memphis, Tennessee? These days open? Not open? Uh? Schools are virtual for public schools. We have still a good number of rules in place. But thankfully the COVID infections are falling all right. That is Jim Vogel. Always love chatting with Jim, who is of course based in Memphis, Tennessee. He's interest rate strategist for f h N Financial, FED Water, ECB Water and much

much more are thanks to Jim Vogel. Well Sweeney is off today. Let's get now to our next to guess. Gina Martin Adams is chief equity strategist for Bloomberg Intelligence and has been watching, I'm sure the last few days moves with extreme interest, so extreme in fact that she talks about momentum extremes and how they're easing and that means that new equities leadership should emerge. Gina, thanks for joining so so are we definitely saying that these are

extremes or have we decided. Yet, Yeah, we definitely did get to a momentum extreme. We saw by the end of August, three of the biggest sectors in the SP tech communications as well as consumer discretionary reaching multi year extremes on momentum. At the same time, we saw index valuations rise almost exclusively due to text docs and mega cab text docs, and the gap between broad index valuations as well as UH and index valuations excluding those text

docs reached the multi decade high. So we certainly did reach an extreme point in time. Now the question is where do we go from here? What does extreme really mean? Because I think that your natural reaction maybe oh quite

fearful on the other side of an extreme. But what you can see and what you know, our view is we'll actually see pe s normalize, will most likely see leadership shift to other cyclical sectors um and it We could be in for a choppy period in the interim as we see that leadership shift, But there's still very little evidence that the broader ball market is coming to an end or anything like that. It's really just an

adjustment from extreme levels. Sometimes those adjustments take you from you know, upside extremes to downside extremes, but so far it looks like more of a normalization from what we're pretty out of balance conditions by the end of August. So talk to us a little bit about the new

leadership that you say will emerge. You give us some details there, But are we talking about a post pandemic world in which investor is just value stay at home stocks and real performer like Amazon that can just get consumers what they want to their doorsteps immediately, much richer than other companies. Yeah, I think that we'll see some

normalization of that. I mean, we certainly have seen valuations expand enormously for some of the COVID nineteen winners or some of the more sort of persistent earners over the

course of the last six months. What we're expecting to see into one is more normalized conditions emerge where some of the most beaten down cyclical care groups like industrials and materials, some of the consumer discretionary names outside of Amazon are expected to lead in earnings recovery, and in an environment where they lead in earnings recovery off of a very low base or not, you should see some leadership migrate to those names to take advantage of that

earnings recovery. So a lot of this depends upon what the outlook looks like. How much do economies improve, how much do we see humors sort of go outside of their homes, visit restaurants, you know, resume pre COVID type of activities over the course of the next six to

twelve months. But if you look at the consensus forecast very differently than the environment we've been in for the last six months, where tech and healthcare have taken a very very strong and consistent earnings lead, we should see earnings distribute, earnings growth distribute to more secular sectors and importantly too different sectors over the course of one and that should create a migration two groups outside of of

tech and healthcare to some degree. So does the pe gap between tech and then by tech I suppose, I mean the biggest five tech companies and some of the rest even in tech. Will that tolls Gina? I think it should. I mean, there's some argument to be made that it doesn't necessarily need to close by valuations falling for tech stocks, who could see valuations for the rest

of the market starts to catch up to tech. When we look at the broad market, and we try to determine what a fair value multiple for the index is. We find the result of extremely low interest rates in combination with a likely double digit earnings recovery into supports the fair value pe for the broad market of well north of twenty times earnings. Currently, the market is trading at about twenty times earnings, even including those big Tex docs, so there is room for some reratings still in the

non tech areas of the market. It's difficult to argue that you would need to see tech valuations move higher in an environment where their earnings dominance is starting to fade a little bit, So it's unlikely that tech multiples continue to expand they may even normalize by coming down a little bit, meeting somewhere in the middle the rest of the market as the rest of the market starts to catch up. Fascinating and give us a time frame for this, You know, when when is the latest that

this might happen? Yeah, So our sector scorecard actually started to signal as of September one, we put out the scorecard and it's the first time that we saw tech fall out of the top three sectors on the scorecard since um we saw materials, industrials and discretionary stocks already starting to rise. There is some evidence even as of August that value um, the value factor in the SMP

five hundred anyway, was starting to outperform. If you look at the long short value factor, uh, it performed better than quality or volatility or momentum in the month of August for the first time and sometimes. So we're already starting to see some evidence of this rotation. If you look at the last five days, even material stocks are up while the rest of the index is down. Industrial stocks have fallen half as much as the index. So I think we're starting to see a little bit of

this rotation. Now will it continue really depends on some solidification of that earnings outlook. I do think we need to go into third quarter earning season and see companies start to confirm that they do see a better environment emerging into one. They do see order flow improving, they do see manufacturing activity starting to pick up around the world. Um, maybe even some references to the week dollar as a support to their multinational operations, and multinational economic activity starting

to improve. So I do think, well, we'll go through a period of of you know, really assessing, reassessing. You know, probably see a chopping market as we go through this transition, but ultimately it will depend upon earnings really proving the case to broaden out exposure in the SMP five beyond these COVID winners. Yeah, it really is fascinating if you look at the value index versus the growth index and how they've performed. The value index is down twelve sance

the beginning of the year. The growth index is up twenty since the beginning of the year. Very briefly, we're out of time, but I did want to ask you, you know, doesn't matter who are the players here, whether they're you know, big hedge funds or big pension funds or robin Hood investors. Yeah, I think it matters to some degree. Um, you're certainly seeing a heightened amount of

interest in specialty packaged products like epf UM. You know, obviously the Triple Q products have driven a lot of slow over the course of the last couple of months. That does indicate that this sort of um presence of the retail investor is significant. Our work says the retail

investor flows the market. They've historically averaged about fift for the last five years, so there is more retail participation in this to the extent that some of that gets washed out through this um this tech sort of adjustment. I would suggest that somewhat healthy. We want to have less speculation and more investing. Gina Martin Adams, always eliminating speaking with you, Sank huge if equity strategist for Bloomberg Intelligence.

Gina Martin Adams, there alright. Astros Zeneca in the news today. One of the candidates for a vaccine, of course, is astro zenecas, and we got to report yesterday that there was some adverse reaction in one patient or perhaps more. Today the ft is saying that trials may resume next week. To make sense of it all, let's bring in Sam Fazally, senior pharmaceutical analyst and head of E M e A Research for Bloomberg Intelligence. Sam, what exactly is going on

at astro Zeneca h Q? On Twitter yesterday, for example, there was a lot of discussion about the difference between saying the word adverse effect and side effect and so on. Just bring us up to speed with the story. Yeah, Hi, BONI, So I mean advertifact, side effect, toxicity, safety signal, They're all the same kind of things. So um I would just see this as obviously sufficiently big enough safety signal for the company to have decided to voluntarily hold the trial.

Once they've done that, though it's necessarily up to them to restart it. They would have to satisfy their data safety monitoring board, which every trial has, and the regulators that it is safe to restart the trial and continue dosing patients. So whether the company thinks that it would be over or not must be something to do with what they're talking about with regulators. But at the end of the day, it is them who are going to

decide to allow the trial to restart. Yes, the f T I should explain is reporting that sources to the FT are saying that the trial could resume early next week. And this is a trial, of course in conjunction with Oxford University. Now, is this a large trial? Explained to us? Where it sits in the universe of trials right now? Yes.

So the biggest trial which hasn't or maybe just has started recruiting, is one from Johnson and Johnson, which would be sixty individuals, and that's international arranges from Philippe Means to Brazil to Chile to many centers in the United States sixty. Then you have the thirty thousand trials in the US, mostly by moderna finds a rayontic and astro

itself that was just beginning to start dosing. And then you've got asterro itself, which has got the biggest trial that's already been running is the UK trial where this adverse event was recorded, which is twelve thousands, three and thirty four as of the latest update in terms of subjects. So there's are big trials. You know, if you had that that that you you you surpass hundred fifty thousand subjects.

So j J leads on that one exactly. Now we should mention that obviously placebos are involved here as well, and that's what makes it a trial and and and that's how we get vaccines eventually. So not all hundred and fifty thousand or doosed with the drug that the drug maker is making. Explain to us whether the astro Zenica trial in the UK is the same as the Astrosonica trial in the United States. You know, so at the after trial in the United States when it starts

is a standard one dose and then a booster. The one in SA booster being twenty, say, about four weeks after the first dose. The one in the UK started off as a single dose vaccine trial, and then at some point and I think the first injection I can't remember exactly, was sometime in early June, for the first half of June um and then at some point the company decided to move this to a to dose trial.

So there are individuals in there who had a second dose, not necessarily four weeks after, but six weeks after or eight weeks after, which, of course, in a trial that already has many arms in it if you count it, depending on how you county, it could be up more than ten arms, ten different groups of tests being conducted.

Is it really makes it difficult to figure out what kind of days that you're going to get out of that, especially when you've kind of to all up a little bit with deciding in the middle of the trial to give two doses. Yeah, exactly. I also want to just clarify that the suspected serious adverse reaction was suffered by one participant in the UK as far as we know, and that participant fell ill with a rare inflammatory condition

called transverse myelitis. According to two people familiar with the trial who spoke to the f T. So we really don't know exactly what this individual came down with. We don't know if it was one individual, and we really don't know if it was because of the astrosenega injection, right, but we can sort of assume that it had something to do with it. But we also don't know if that individual was given a real injection or a placebo. So there are many questions to be asked and answered.

What's the normal, you know, adverse reaction that's allowable for a vaccine. Presumably some people in every trial have some kind of an adverse reaction. Sure, sure, And I would suspect, just to a point that you made, that the Data Safety Monitoring Committee knew that this is a vaccinated individual because they are unblinded to the data that comes through. They can see everything that's coming through, and I suspect they wouldn't have stopped it if it was just a placebo.

But the sorts of um adverse events. Remember, in these trials, people are told anything that goes wrong or anything that's out of the ordinary recorded, So even if they have food poisoning, they have to record it, which is then afterwards when you do the data triage, you try and figure out what's related to the vaccine and what's not. UM but you know, high temperatures, UM, chills and eggs and fever and fever has as just said, UM some

perhaps fatigue. Those are the sorts of things that are very normal with their vaccination and and similar to what you yet when you're when you've got a virus that's infected you because you're basically activating the immune system, and those are related to the activation of the immune system.

So it's always so fascinating taking with you very clear explanations for what's going on and what most of us don't typically know, even though these trials go on all the time for all sorts of drugs and treatments are Thanks to you, Sam Fazali, Senior pharmaceutical analyst and head of e MU Research for Bloomberg Intelligence. Thanks for listening to Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer.

I'm Bonnie Quinn. I'm on Twitter at Bonny Quinn, and I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast You can always catch us worldwide at Bloomberg Radio.