Surveillance: Tesla 4Q Is A Big Question Mark, Johnson Says

crushed estimates though, yes, the third prophet in its history. UM, I think on a quarterly basis. Gordon Johnson joining US now Vertical Group Managing director an analyst. Gordon, your view on this company on whether these numbers accurately reflect the company and it positions this company is in right now, Yeah, we don't think so. And what we want to highlight is that, you know, they essentially started putting the Model three out there. They opened reservations up in twenty sixteen.

The promise then was twenty seven and a half thousand dollar car um fully autonomous. You mean you climbing the back seat, drive coast to coast, sleeping, and you'd have free supercharging. None of those things are true. But on that promise in twenty sixteen, they got a bunch of reservations. We believe they pulled those reservations into two Q and three Q and that's the numbers look great. We don't think they're repeatable. UM So we think four Q is a big, big um question mark and we think it's

going to prove negative. We're we're we're more confident in the short than we've ever been. So you've come on my show, come on this show many many times. You've been very outspoken about your coal, which is a cell on this stalk. The cash flow position, though it looks more positive now than it has done for quite a while, um Gold, did you think they're gonna have to raise capital? It doesn't look like they're gonna have to raise capital, and that was one of the key positives. Clearly the

numbers were good. Uh, it doesn't look like they're gonna have to raise capital. But I think a couple of key questions were made. We need to see the tank Q think about this. Their DNA depreciation amortization was up only five percent, despite the fact that they advertized their tooling costs on a per unit basis and their productions up fifty so that doesn't pass the smell test. This is really important and this goes to just breaking all

that Vertical does in terms of acute research. You're gonna wait for the quarterly statement, which I'm gonna guess is thirty to sixties single space boring pages, where I would not often John Tuck, John Ferroll, John Tucker would not off as well, what are you going to look for in the ten Q about manufacturing processes? Yes, so I think that's a very good question. One other thing, though, I wanted to highlight their s g n A was down despite the fact that the unit deliveries are up

a hundred and five percent. They opened four new stores and forty four new superchargers. So we need to understand how their SGNA is dropping, i e. How are they basically paying less to their workers despite the fact that they're ramping up all these new facilities. We don't know the ansis critical because we don't want, we don't need. Mr musk dalical. But are you suggesting malfeasance or is this just the normal debate that any major accounting firm

would have about accounting. Well, we think that there's definitely some accounting shenanigans going on. Um, if you go back to the last quarter they had a profit Q three of twenty I think it was sixteen, and you look at that quarterly report, they were they were guiding to a profit thereafter and if you go go to the last time they reported a profit, their profits then after that quarter went significantly negative. Listen, they did a bunch

of things to pull forward demand into Q three. They offered free supercharging, They opened up their Freemont facility to buy cars, They did discounting, etcetera. We gotta rip John. This is really important because the word shenanigans goes back to Howard Schille. It's like a famous word in American counting. I don't know if that's when when we used that

word shenanigans. You're not saying anything untoward is going going. Yes, we don't want to go as far as to say that, but we do believe that, for instance, their services and other division margins are negative thirty five percent. Why is that? Elon must said a few quarters ago that that was a major firms are in them writers. They got some local shop out of Palm Dell. Which is it. It's

price price Waterhouse Coopers. But one thing go highlight. There was an l A Times article last week that stated that they were taking employee costs and taking those out of cost a good soul and capitalizing them. So this isn't just us saying this. That is a respectable newspaper essentially alleging accounting impropriety. Fascinating stuff and golden. I'm sure we'll have to get you back on and of course we'll have to try and get a comment from the

company as well. Going to Johnson Vertical Group managing director and analyst. But he just said, is so important John? Can we keep john You're in charge of the show. Can we keep Mr Johnson around? You can to do five things we need to know about accounting because what he just said is really really critical, really important. Is just believed in the street or do you feel like you're alone on the idea of shenanigans? I feel like

I'm alone. One other thing I'll highlight that it really gets to the core and really upsets me as a person. Tesla keeps talking about how safe their cars are. There's a medium called Medium Transportation that did an analysis and basically their analysis suggested you're four times more likely to die if you're in a Tesla car versus other luxury markets. Go on. Johnson joining us now from Vertical Group managing director and analyst after Tesla reports a really good quarter,

the third positive course for the company. Um the question, I guess, Gordon, and you use the word shenanigan. So let's talk about that again. Whether that word implies as something untoward is going on or whether they are just sort of artificially making things look better by squeezing suppliers, bringing orders forward, those kind of things. Which one is it? Well, I think it may be that there the latter and a couple of things we want to talk about with

respect to the queue. One thing we definitely want to see is their warranty reserves. You want to see what that number looks like, because we've definitely gotten comments from the Tesla Motor Club that there's issues with respect to quality, there's issues with respect the parts following off the car. So if that number ops, that number takes away from gross revenue and drops down to the gross profit line. So if warranty reserves are dropping out of time when

complaints are increasing, that is a concern. We we know that all of our audiences worldwide. Gordon Johnson have an accounting acuity there in financer in business, they have an interest in this. Does warranty reserves move the needle for Mr Musk? Is he gonna say that's inconsequential or is it a tangible reason to be cautious on the stock? It's it's It's one of the key things that I think.

It does move a needle. One other thing we definitely want to look at as well is we've gotten indications that they sold large amounts of cars being returned to enterprise I either rental car company and you can see that with respect to be almost the more than doubling in their accounts receivable. John does this cf A level five today. But this goes back to revenue recognition right, which you know in England John has been a big deal over the years in Germany particularly. I mean, are

you this is important? You're saying one of the things we need to know is revenue recognition is an issue Mr Musk company. In the auto industry. When accounts receivable show a significant increase, that is indicative of cells to the commercial space i e. Rental car companies and those cells are done at huge discounts. But if Tesla does not recognize the cost associated with those cells in this quarter,

that is a huge boost to gross margins. And and one other thing I'll highlight we we want to look at this and see if it's it's it's covered in the queue. We've heard of multiple instances of people getting a VIN number, paying for their Tesla car, going to pick the car up, and then the then being reassigned to someone else. That potentially enables Tesla to double book car sells in the quarter. Um that effectively selling one

car to two people that boost their cash flows. So these are all items that we think need to be looked into specifically, and we think the tim Q will provide some insights. We haven't seen that yet. So Golden essentially is saying this quota company repeates it. We think this quarter cannot be repeated one and we highlighted on the that the prior appearance was if you look at Norway. The reason why we highlight Norway is in Norway, if you buy an i C E engine car and tunnel

combustion engine car, you pay double the price. There's an excess tax that means you have to pay dull the price. So the cars in Norway are ev right now. The first month I eat October, that Jaguar I Pace is available, They've all sold Tesla by six those cars. Those cars are coming to America in the fourth quarter. I'm sorry you're wearing Dodger blue today. That's what it looks like. Well, the last thing we need to know, Gordon Johnson, and what do the Dodgers do about their pitching? I mean,

forget about all the distractions. They got to get somebody to put the ball over the plate. Where he is the next Cofax? I don't know, and I'm a Dodger fair it was. It was tough last night. Uh. You know, I can't root for the Red Sox because I believe New York Yankees blue. So Um. I don't know the answer to the question, but they have my backing. What he wanted to sign back to that you're supposed to say, but you're sick, you say, if they don't have a

co Fax, where's their Drysdal? Do you think I have a clue what you're talking about? God, I love it. Gordon Johnson, Thank you so much. A special Five things you need to know? Thank you. Interactive brokers. This is Bloomberg surveillance. I think we should bring in a man that really needs no introduction on Wall Street, Gary Shilling. We now get to call him a Bloomberg opinion columnist. Dr Shilling. I'm very pleased about that. So, Gary, what is going on in fixed income right now that you

think we need to be paying attention to? I'm sorry, what is going on in fixed income now that you think we need to pay attention to? I think it's I think it's emerging markets because they face it on on cheap borrowing UH, and after the financial crisis, UH, investors were only happen to happen to end there. They're zealous for yield. And of course a lot of this was dollar denominated, but now the dollars rising, so it

makes it much more difficult for them to service those debts. Also, as a dollar strengthens, UH, the commodity imports for most of these countries are are through the roof. You look at Turkey, for example, their price of price of oil in Turkish leras basically dollar. But you and I have seen this before in the basic difference. Now I'm told as dollarization, whatever that means. Are you suggesting dr showing that this is different, different than Ecuador, different than the

Three Mexicos. Well, that remains to be sane, Tom, because so far you haven't really got contagion in a big way. It's it's Argentina, Turkey, mainly UH and and of course in the late nineties that started in Thailand spread throughout Asia and then to UH, to Brazil and Argentina and ultimately to UH Russia and long term capital management. But but you very well could have a contagion uh. But but you know, it's it's interesting so far you're getting

you're seeing signs of access. Is you're talking earlier about this leverage loans, I mean they've they've basically doubled I think one point three trillion dollars in the in the sense of financial crisis. But you haven't seen junk bonds disappear junk bonds. You've had a punishment in emerging market equity, in debt, but you haven't seen it in in domestic

junk bonds. So you know, there's the real question. Is this In other words, it's this simply the calm before the storm, and we're gonna wake up one of these days. It's a huge contagion. There are a lot of things that are potentially in that category, but we haven't seen them yet. So which one are you expecting, Gary, Well, I I would I don't know, there's one country I would. I would definitely point out uh. But uh, you know, you gotta look at countries like South Africa, Brazil. I mean,

they've got election. You don't know how that's going to come out. But uh, I think you can almost throw a dart Bard and try to figure out which one. Can you maintain your history call on lower interests? I want you to justify that right now. You've got a few people in Wall Street. Good morning Steve Major at HSBC who are in the vicinity of shilling. But do you maintain that we haven't seen a turn in the Great Vulgar disinflation? Yeah? I think I think that's true, Tom,

because we're basically in a deflationary world. You look at you look at all the forces out there, you look at the UH, you look at globalization first and FOREMO was probably the most important development on the world seen in the last three decades. I mean that is massively deflation areas. You simply take Western technology and put it in areas of very cheap labor costs, principally in Asia, other things that you know, the Amazon, the Almazon effect

just really knocks out retailers. And and you've seen another services. Well, it's the highest thirty year bond you've ever remembered, the highest third year twelve point six twelve point six point six. So how do you respond to three point three six percent in the world's gonna fall apart if we get the four point zero percent thirty year. But well, I

think that's I think that's overdone. I mean, we've we've done work on this and and uh, in terms of you know, a debt bomb pre example, the point at which interest on the federal debt gets such a big element in the devilsit that it then it takes off geometrically. And and the worst you had was in the nineties and and and and today. To get to the equivalent, you'd have to go to eight percent yellow and Treasury. The distinction here is a John Farren and I on

a Thursday. Today's Thursday. Right, Oh, I'm gonna blur. You know, me and my good friend David Price can't fig out which day we got from which we did, thank you. Okay, So John Farren and I agree that every Friday the dooming gloom are nticles come out. Your charm, Gary is you've been cautious on yields, but you haven't been dooming gloom. What do the doom and gloom people get wrong about their worry about the economy, worry about the stock market

and the rest of it. I think that they have really our feel that we've had low rick rates for so long, that's how any any any break on that is the end of the world. I don't think they're looking at the greater scope of history, which is a technological progress and the new technology overlay which keeps driving this forward. Yeah, you've written about this for bloom Bird Opinion, you know, like five six eight essays on China. Yeah,

what did I say? I think there's there's there's so much of a tendency to look at the last couple of years and project that into the next millennium. Then how do you bring it over to the equity markets in the primal urge to go to cash? Well, you know equities, equities are are very expansive, and you have the FED no longer as a wind that you're back out the wind of your face. You know, they were saying is don't fight the fat, And I'd say you

can you own white Well shares today? White Well john was a firm a few years ago that Mr Shilling had a business card at. But can you own the banking shares right now who have not participated in the recent foolishness. I don't think so, because maybe maybe that has maybe well the banks in terms of spread lending, that that action may be over because of course their their rate increases led the increased costs they have for funds, and now they got to pay more for their money.

But you know the problem with banks is actually ad banks. They don't want to be in the banking business. They want to be in the growth stock business. And that's what's gotten them into all these things. We're hearing that a lot of inter loans and and and derivati origination and trading, all the kinds of things you got them into trouble in two thousand and eight, and and they you know that the traditional banker just wants to take

the positives and lend them out. They don't want to do make jokes about you being the poet from Amates. You are the physicists from AMATES steeped in Newtonian mechanics. What do you think of our art? Think of what our start, John Williams, And we're gonna, you know, we're gonna do three plugins and run some differential equations and figure out where I am. Um. I think that the idea that you are going to use mechanical means I A or whatever to beat the human brain is a

long way from fruition. And that's I think what all that that amounts to. Innother ways, you're you're looking, you're looking for patterns and you're assuming repetition. And you know, Mark Twain said history, Uh doesn't repeat, but it does rhyme, but it doesn't repeat enough. Very cool. He's with us next week. Gary Shilling, thank you so much. Greatly appreciated a Gary Shilling and is important newsletter worth pointing out that we actually um we crossed over to test and

asked for some comment on the comments from Johnson. I have a medical group on the Shenanigans in the accounting um Tesla saying nothing to add, so no comment from Tesla on the record. We we will see and we will feature Mr Johnson's comments on our podcast today. Thank

you Spotify, thank you Apple Podcast for their support. We've been thunderstruck by the success of the podcast and part of it is our team led by McKinnon d kiper Uh featuring those interviews john We don't have any I want to make clear I don't have an opinion by old cell and Tesla. I would hope you don't. I don't. I don't know, but I think within the intense questioning of Mr Johnson it may have been allowed to believe that,

but his his statements were really something. There was something and it's a judgment Cole, and I'm sure there will be a big debate off the back of them. Interesting that President drunks late to this one. Tom, He's late to the news conference side from Franklin. What is it signal? I have no idea, probably absolutely nothing. Wanting us on the bone is Christian Shield City Economics team direct. He

knows what Christian was? He like, well, it's a it's a sensitive press conference today given what's going on in UM in the Eurozone politically. Of course UM and Joy is right in the middle of things, so of course he might be having some last instructions and briefings on what to say and what not to say. But I mean, I think seriously, Um, it's very much so far at least a non event all changes at all in the decisions. Um. And let's see what he makes of it in the

press conference. Well, he's walking into the room right now. Have you had a question for him in the news conference? What would it be, Christian? Um? The I mean, the the key question is and what conditions the path that they've laid out until September next year for both acid purchases and for interest rates, and what conditions could they

shift from that in both directions? Christian Schild's City Economics team director joining us says, President Mario Drunkie walks into the headquarters of the European Central Bank kid Frankfurt, Germany, about to take a seat and take questions of the news conference. Gene Munster remains with us here he, of course,

of Loup Adventures, managing partner and analysts. Gene Munster, we were talking about Tesla and I want to ask you about Apple in relationship to automobiles, because during the break we got a chance to chat about that. You have the most expensive version of Apple Play. Correct. That's right, Pam, I UH, in some ways paid forty two hours for a version of Apple Play. Recent not so proud owner

of a Mazda nine. It is their larger suv, and I had the privilege of getting it tricked out to the kind of the full Touring edition, which is a forty two edition. Uh. The reason we purchased these cars we wanted something bigger, but ultimately wanted the biggest car with Apple Play that in in a matrix I put together. Even thoughts is a lot of money, it was the

cheapest largest car that had Apple Play. Okay. The reason I mentioned this is not to uh comment on your purchase of a Mazda, but to demonstrate how technology and the desire for technology drives purchases in ways that may not have been the normal consumer pattern in the past. And you mentioned Tesla not just as an automobile company, but as a company that is going to challenge the

business model of companies such as Uber and Lift as well. Tesla's, as we talked about earlier, is this concept of accelerating the globe's adoption renewable energy. It's not just a car company, but car is an important segment and when they think about that, they have a really a radical view about

how transportation can be changed and really de segmented. And so ultimately, and Elon Musk is very clear on the call last night, as the company has ambitions to compete directly with Uber and left that means a Tesla owned fleet, so they own the cars and they put it out there and they would presumably offer transportation, offer rides at less and then separately an Airbnb option where they allow Tesla owners when they're at work to turn their car

over to the fleet. That's just one example of how they're really taking the blinders off and thinking different about the future transportation, like the jets. Does the public want this stuff? Not very many people I think are gonna want to within the monster thing you did with Apple Play, does the public want that stuff? Yeah? I think if you have a let's say you have a children and they love Apple and Apple Play and everyone's got an

Apple device, what are you gonna buy? You're gonna buy cars that are Apple enable, which opens up the conversation about what Apple is going to do in the car longer term. Um, and you have to as part of my therapy around being a big belief that Apple was eventually going to do a TV. I need to mention projects that Apple works on don't necessarily see the light of day. But in fact, Apple is working on a car. They have a partnership with Volkswagen right now, they're doing

a lot of testing around AI. They just hired the head of manufacturing from Tesla or rehired him back to Apple. So I think that it won't just be car play in the future. I U am. I'm optimistic that eventually they're going to play a bigger role in transportation. You're not doing by hold Sells so much lou Ventures versus what you did at Piper Jeffrey. But where are you on Apple right now? When you look at some of the parts to be they're just ever dominant. But I'm

just speaking because they see all my kids. Their phones have all broken in the last twelve weeks. It's gonna be an expensive Last night was the laptop pitch at dinner and and you're resisting this because what you're going to give in later or when I mean, what's the point I need? I need a new laptop instead. I'm talking to Mr Munster tomorrow on radio, will ask him I mean that's what it's about. This about. Yeah, wait, wait till next Monday. They'll have new ones to announce there.

But you know, as far as Apple is concerned, I we're still very optimistic that this stock is I got a lot of room to go higher. It could be multiple times bigger. As hard as that is to believe, there's a shift in terms of how investors are thinking

about this. Instead of the anxiety around what the iPhone numbers in a given quarter, they're starting to get more comfortable that it's going to be a stable business and the overall hardware and software is operating more like a services business, So we refer to that as Apple as a service. If that does in fact take hold, that's a higher multiple and chairs should move higher based on that.

Can you share with Mr Keane the concept of the wireless earbuds, the ear pods, and also the notion that Apple is going to infiltrate other areas of daily life, not just your computing, but with the Internet of things in five G coming, there's gonna be a lot of stuff we don't even imagine right now. Yeah, a lot of the stuff that we're not imagining right now is around uh, transportations one. Also wearables. As you said, AirPods have been just an absolute grand slam for the company. Um,

and they're gonna continue to evolve on that. But the watch is surprisingly accelerating and growth. I was recently at an Apple store. There was a gentleman there in his nineties and he's looking at a watch and the salesperson was having a hard time explaining how to actually charge the watch, and I asked him why he's buying it, and he said, it's for fall detection, this new feature that they added. So they are coming up with products that fit a lot of areas of our lives that

you would never have thought of a decade. Is it bad that the eleven year old ist pitching me on, come on, we need to get the new one because it's got six core and quad core processors. I mean, these kids are all well. The fact that they were able to put those words together in a sentence, yeah, I would touch if I can just do a quick sidebar. So you can't talk to somebody who is more optimistic about the future positive impact of technology in our lives.

I think that I'm betting my career at Ventures on that. That said, is we are doing more work on this tech addiction problem. This is very real. You've seen some smile adjustments to the products that Apple's had on the software level to try to help manage addiction, but ultimately I think it's a hardware problem. And so what I think we're getting into as a period hopefully where people recognize some of the the damage that we're doing with our constant uh usage of these devices is where's the

technology loop on this? I mean everything they do a new core processors, they do this from an engineering standpoint, There's gotta be a shelving. There's gotta be where we go far enough or is it not? There? Just forever better and better. I'm in the camp it's forever better and better. I mean uh and so yeah, I think that the last hundred years would suggest that it's forever. But so the Apple x V I I I will

be just that much better. It will be uh five percent better, but that five percent will be indispensing the new one. Here. You can see this on radio and instantly the camera was just stunning. Little things like that, the five percent every year make a big difference from people the quality that Apple projects, not only in terms of the products they produced, but the comments and the thoughtfulness of their presentation, and I'm thinking of the alerts that they send to tell you how long you have

been using your device? Are they the only ones who are doing that? As far as you know, Google is doing it too. They just rolled out some tools around that this ring, so there. They call it digital well being, So um yeah, Android fallen start to have that as well. I thought you meant the alert dat I needn't do MyPad. Dore's that alert. It's not an alert, that's supporter, that's alert. Gene Monster, thank us. So what's great to have your

in our studios. Gene Munster, thank you. Blue Ventures of course, talking on Tesla and and really talking on technology as well. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast, you can always catch us worldwide. I'm Bloomberg Radio