TSLA Takes A Page Out of The Fed’s Inflation Playbook.

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August 16, 2020

Weekly Market Outlook

By Geoff Bysshe


blankElon Musk has a talent for creating news to inflate the value of Tesla. This week he did it again by following Apple and the Fed’s tactics for inflating asset prices.

In addition, he cleverly used this tactic to abruptly halt the slide in his stock as it was breaking an important support level and looked destined to head lower.

It’s surprising that more companies haven’t followed the Fed’s lead in this way because it’s really this easy…

When the Fed needs to support or inflate something, it does two things.

  1. Finds buyers (it has plenty of investors willing to follow its lead)
  2. Prints money

And the best part…

It starts working even before they print the money.

For example, the Fed engineered the March 2020 low in the S&P 500 with an announcement that they would begin to buy corporate bonds. As a result, the market exploded higher immediately, and the Fed didn’t actually start buying the bonds until months later.

Any well respected company with a stock price over $200 can do the same thing.

Mr. Musk clearly understands that equity (stock) serves as a form of currency for a corporation, so last week he came to the obvious conclusion…

Why not just “print more stock” to boost TSLA’s value?

It’s free, and with his announcement of a stock split, Mr. Musk will turn every share into five.

My only question is why he chose 5 for 1 when 10 for 1 would have one-upped AAPL’s 7 for 1 announcement, and been even more generous to the investors he’s reaching out to.

After all, this is simply an effort to enable more people the opportunity to attain the status of becoming a shareholder.

As for finding buyers for all his “new” shares, he was as effective as the Fed.

The news drove the stock up over $200 before closing $120 higher the next day. By the end of the week, the shares sat at an all-time closing high, $276 higher than the day before the announcement.

Many investment professionals will tell you that the fact of the matter is that a stock split doesn’t change the value of a company. True, the fact is that a stock split doesn’t change the value of the of the company if the stock price remains the same.

But that’s not reality.

So don’t let facts distract you from reality.

If enough stock traders buy the stock because of the news, the reality is that the company’s value does rise.

In this case, that increase amounted to $22.3 billion in just the first day.

Equally as impressive as the loyalty of Mr. Musk’s investors, is the timing of his announcement.

As you can see on the chart below, the stock was sliding through important support, and close at a dangerous multi-week low right before he mad the announcement.

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This reminded me of his famous tweet in Aug of 2018 stating that he was preparing to take Tesla private at a substantially higher price than its price at the time. This tweet came as the stock was rolling over in a bearish phase with the bears confidently predicting its demise.

The tweet resulted in an SEC investigation, and him being essentially “grounded” like a childhood punishment from tweeting unsupervised, but that didn’t stop the stock from rallying.

And of course, there was never any legitimate evidence of a private acquisition of the company after that tweet.

But it did anger the short sellers.

Mission accomplished and a small price to pay (for a billionaire with performance bonuses tied to the how quickly the valuation of the company rises)

That said, was the charts breakdown a coincidence?

I’ll let you decide.

And while we’re focused on inflation….

This week served up some interesting inflation news that really bothered the bond market, and perhaps it should get your attention too.

PPI, CPI and Import Prices all came in at levels that were much higher than expected.

As you can see from the chart below, month over month CPI spiked.

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The good news is that this should alleviate some serious concerns about deflationary pressures.

The cautionary news is in its strength in the context of the potential turn up in some of the year over year measures illustrated by the charts below.

Was that the low in CPI?

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While the year over year trend in the chart above may look like it’s too early to pick a bottom in the inflation trend, the bond market isn’t waiting for more.

As you can see from the TLT chart below the bonds took the news seriously.

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While the Fed is indicating that it’s not concerned about inflation challenging their efforts to keep rates lower for longer, the bond market may not cooperate as you can see by the 10-year break even inflation rate chart below.

Having seen what the ‘bond vigilante’s’ can do, I’m concerned because…

The 10-year breakeven rate measures the spread between 10-year Treasury Bond and Treasury Inflation Protected Securities (TIPS). As a result, it serves as an indication of the markets' inflation expectations over the 10-year horizon.

More interestingly, as you can see by the red lines on the chart, this measure has a history of indicating major turning points in the bond market when the two diverge.

I didn’t draw the current lines. I’ll let you do that.

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It’s true that inflation of measured by CPI is historically low, but the bonds don’t care about levels as much as they care about direction, real rates and expectations.

This week’s news and price action in the bonds suggests that the only interest rates that may stay lower for longer may be the “real” ones, and they’re currently NEGATIVE (which is a place the Fed said they wouldn’t want to go) and a place that won’t keep the bonds market or (soon thereafter) the stock market happy.

Keep your eye on the bonds.

Other important developments in BigView include:

  • SPY, IWM, and DIA have very nice bullish flags
  • Gas (UNG) continued it big rally from recent historic lows
  • Agricultural commodities (DBA) continued its move over a big base at historic lows
  • Rates rise notably as TLT, BND, JNK, and LQD all fall significantly
  • GLD down 4.3% is the worst week since March 13, 2020, and second-worst since Nov. 2016.
  • Risk Gauge on the SPY move to bullish
  • Top 3 country ETFs: Hong Kong (EWH), Russia (RSX), Mexico (EWW)

I’ve talked your ear off above so there won’t be a video this week.

I’d love to hear your comments below.

Best wishes for your trading,

Geoff Bysshe
President
MarketGauge.com

(Geoff is filling for Keith until August 31st)

15 Comments

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    Robin

    Given your comments on Inflation, what r u expecting to happen to Gold and Silver and the US dollar over the near term?

    Thanks and regards,

    Robin

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      Geoff Bysshe

      Good question Robin.
      I was tempted to joke that if the bond market is fearing inflation then why did gold collapse? I thought gold was an inflation hedge.
      Gold bulls right now will tell you it is a hedge for anything that's convenient. I think the in the near term gold and silver are a pure momentum cycle and gold just put in a blow off top that didn't need to be caused by any fundamental data. I don't think its a long term top but it bet on weeks or months before it sees those highs. Mish's service still has a core position which is sitting on good profits. As for new positions I think weakness will be a tradable correction to buy. I'm not sure when yet. Silver didn't blow off like gold and it's been even more parabolic, so that's a tougher call. Too extended to buy, to strong to sell if you want to enjoy the ride. The ideal situation for both in my mind would be a month or two of consolidation and then a fresh breakout higher.

      More important than any prediction would be to watch how all of these assets respond to any inflation data that especially if it is higher than expected. Higher than expected inflation should drive bonds and the dollar lower and gold higher. But higher interest rates can also be a headwind for gold. Therefore if gold moves higher despite lower bonds then the bulls are really back in control.

      Lower than expect inflation data is harder to call because as I said, gold bulls have so many reasons to buy gold (that are good) that I don't think it needs the inflation story to rally. Bonds on the other hand may rally if inflation expectations fall.

      As for the the dollar, if you're looking at UUP, it is sitting around the 200-week moving average after a big sell off and 25 looks like good support. I don't have a strong opinion other than this looks like a good spot to consolidate or bounce short term. The thing to look out for would be if bonds fall and the dollar falls, that would make me more bearish on the dollar because if higher nominal rates don't support the dollar that's indicative of big problems for the dollar.

      - Geoff

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    Richard Jordan

    very clear and understandable points with good substantiation. No obtuse, hard to figure out language. Your points a couple months ago about the Microsofts of the world being good, safe plays for the big investment managers proved true as seen in the MSFT stock price over the past month or two.

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      Geoff Bysshe

      Thanks Richard, as you may know the MSFT idea was part of following the market's rotation into big cap tech as the pandemic unfolded. There's some rotation out of those names now as I covered in last Thursday's webinar. It's certainly going to be an interesting market for the foreseeable future.

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    Glenn Higgins

    I own treasuries (TLT) and no stocks (SPY's,QQQ's, and IWM). I did not buy the SPY's when you came out with the signal, can I step in now with your model changing to risk on or is it too late and the setup has passed?

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      Geoff Bysshe

      Hi Glenn,
      In my opinion I'd wait because we're halfway to the target and we haven't moved up the stop so you'd be entering a trade that could make $10 at the next target but lose about $15 if it gets stopped out. And the SPY could easily pull back given its position right at major resistance. If the SPY pulls back to the entry point and the Risk Gauge is bullish that would make more sense. Personally I'd prefer to miss the trade than get stopped out on a trade that didn't have good reward to risk. There will be plenty of opportunities ahead.

      Geoff

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    Pa Mikos

    Followed you all the way to the inflation part! If bond prices are falling interest rates are increasing?

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      Geoff Bysshe

      Yes, when the price of the bond goes up the interest rate that you earn for holding that bond goes down. It is the math of bonds. It can be complicated and there are several different interest rates that can be calculated, but to make the concept simple consider this.

      If you buy a bond for $100 and it pays you $10 per year (that's the fixed coupon amount that bond pays. I will be getting a 10% rate of return.

      Now if the price of that bond moves up to $120 and I buy it. It's still going to pay $10 per year, but since I paid $120 for the bond my rate of return is only 10/120 = .083 which is 8.3%

      So as a price of the bond goes up, it's interest rate goes down.

      - Reply
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    Jeff

    Hi Jeff, If interest rates keep rising and bonds sell off do you think financials will outperform? Jeff

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    Jeff

    Sorry... Geoff. I'm Jeff 🙂

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      Geoff Bysshe

      LOL, lucky you with respect to people being able to pronounce your name, but you don't have the advantage of knowing when a random person on the phone calls you and you can tell they don't know you when they ask for geeeoff or even george or godfrey! So it has it's benefits. And when you combine it with my last name Bysshe pronounced 'bish' which I don't expect anyone to know unless they are an English major that knows Percy Bysshe Schelley from his part in the story of Frankenstein.

      - Reply
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    Joseph Breit

    Geoff, with Alpha rotation IWM 100% in TLT , what is your current view on TLT, now through the 50 day ? Feeling some pain being in Nov. 160 calls per Alpha options. Major support & resistance levels might help, thanks.

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    Chris

    Geoff,

    I think the world is watching your analysis. The day after you wrote the review on DBA, the stock firmly moved out of it's consolidation. Looks like an easy test of the 200dma coming up on price, but real motion has been above the 200 for some time.

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    Cary

    Geoff,
    Great summary with many actionable trade ideas. Look forward to this post every week.

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      Geoff Bysshe

      Thanks Cary

      - Reply

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