I most likely do not need to go over the reason as to why your Tesla holdings have dropped in
price recently. Basically the FED is finally admitting the inflation is not transitory,
what a surprise, who would have thought, that if you have low interest rates
and print an absolute fortune, that perhaps prices might rise?
Don't get me wrong, there are still a lot of issues with supply chains too,
and shipping is still significantly more expensive. Not only that, but shipping
takes long currently, which means businesses require more working capital. Some businesses
are passing on this cost to the end user, others are having to wear the cost themselves.
But now the FED is admitting we have actual inflation, and are potentially
intending to raise rates as a result. However, judging by the markets reaction
raising rates may not be an option for the FED. It is clearly going
to kill the economy, people will lose their houses, and banks will go under.
The issue is that the government, or all governments, are stuck between a rock and a hard
place right now. Inflation is running rampant, but they can't crash the economy. Not only that
though, well no other entity on the entire planet happens to have as much debt as the US government.
The government also have to pay interest on their debt too. The interest on the public debt for
fiscal year 2021 is estimated to be $413 billion, according to the Congressional Budget Office.
If they raise rates as much as they are indicating,
then the interest payments will likely double. Of course to pay for this interest
will likely require more borrowing too. Which will lead to more interest, and more inflation.
You get the point, a downward spiral of debt and inflation, and potentially hyper inflation.
So the FED are trying to prevent inflation within the economy, yet it will mean they also have to
create more inflation potentially trying to pay for their own interest due to the rising rates.
You might think the government can use fiscal policy instead, this is part of MMT,
modern monetary theory, they can raise taxes to slow down the economy. But for one,
any tax rises won't bring in very much extra income, and most people are going
to be struggling enough to make ends meet as it is. Hence why there is so much talk about the
likes of unrealized capital gains. Of which Elon recently demonstrated the results of,
selling his shares. Even when we had these record deliveries we still didn't recover
to where we were before Elon started selling. Tax on unrealized gains will
remove so much more value from the markets, than the actual tax that will be received,
let alone the end result of how much actually gets spent once its been through the government.
But the government like to peddle the idea that there are these greedy billionaires
that have taken all your money, don't look at the government, we are here to help,
we don't make mistakes, we haven't taken your money, Elon Musk has. Despite seeing senators
flying on private jets, with your tax dollars. They hypocrisy makes my head spin. Bear in mind
the average senator spends about 30 hrs a week fund raising, and guess what,
they are not charities. These donations that are given, require something in return.
Alright so we saw just the mention of rates makes the markets freak out, especially tech stocks,
namely Tesla, ouch! That hurt, especially if you had options. So clearly I don't think
the government can really take this path. It could destroy the economy.
Why are higher interest rates bad for stocks? Well for starters the opportunity cost of investing
compared to receiving interest on cash increases. If before you only received e.g. 1% return,
and then it becomes 2% then the return is twice as good. So more money goes into the likes of bonds,
and savings accounts. This in turn effects the p/e ratios of stocks.
As you know p/e ratios are historically high. Obviously if p/e ratios reduce, then stock
prices will also reduce accordingly, even if profits remain the same.
With higher rates, then money becomes more expensive, as in it becomes more expensive
to borrow, due to higher interest payments. Therefore consumers are less inclined to spend,
along with the opportunity cost of getting better rates in the bank.
If consumer spending reduces, then they are buying fewer items. If fewer people are buying Teslas,
then there will not be as much revenue for the company. Although I don't think fewer people
will be buying Teslas, we will go over that in another video, I just used it as an example.
Obviously if there is less revenue, then there is less profit for the company.
With less profit, then the stock price reduces accordingly.
With rate rises, eventually home owners mortgages come up for renew,
then they have to renew their mortgages at a higher interest rate,
and thus higher payments. This means they have less money to spend on consumption,
which means businesses have less sales, less revenue, less profit, and a lower valuation.
If businesses are making less profit, or even losses then they have to downsize,
and lay off workers. These unemployed are then less likely to spend money in the economy,
and thus businesses suffer even more.
With all of this adding up, higher mortgage payments, and less employed, or others receiving
pay cuts, then some home owners simply can't afford to make their mortgage payments any more,
and must be forced to sell their home. Unfortunately, they are not the only ones, and
the property market enters a down cycle. If the property market crashes, then it's possible some
people will simply walk away from their homes, as they may now be worth less than the actual debt.
This in turn puts pressure on the banks. When there is pressure on the banks people
with savings are concerned the banks will go under, and may withdraw some funds. However,
the government in the US does insure up to $1/4 million in deposits to avoid this,
also the central banks help mitigate a run on the banks too.
This could bring on a severe recession. As there will be less money to go around
investors sell their equities so they have enough money to live on if necessary.
Anyway, that is why rising interest rates could be bad.
But the market may continue to run, with ups and downs, and continual scares just like this,
until it finally does crash. The bull goes up the stairs, the bear goes out the window. The
question is will this create the crash, will the music finally stop? Or could this even just be a
scare tactic of the Fed, to keep inflation in check, as they know they can't afford to
raise rates anyway. Personally I think it most likely the FED are just testing the waters.
Personally I just wanted the run to keep going for another month, when we had earnings out,
and hopefully the new factories with 4680 batteries. I have a lot riding on all this,
at least a lot relatively to myself. If it goes well, then I should make a good profit.
I was then planning on purchasing my insurance against such a crash.
As investors we just have to establish whether this is a dip,
or this is the start of the recession. As Tesla investors we also have a lot of wind
about enter the sails with a lot of positive events about to come to fruition.
We see these events play all the time, we just experience the Omicron scare only recently.
Let's just be glad that Tesla only has about $10 billion of debt, and not over $100 billion.
Anyway, I was super bullish on Tesla financials that placed an order for another options contract,
and it executed. Unfortunately for me, I am asleep during most of the time the market is open. I had
a put a low ball offer in on a Feb call option, and as it executed whilst I was asleep, I was
unaware of the news that was happening. If that hadn't been the case, I likely would have waited
it out. But sometimes this strategy also pays off, so I guess it balances itself out. I mean I have
had a pretty good run, so far since I have been running this channel, every single trade I have
done has won. I haven't bought one share, just options, and despite this drop, all of them are
still up, and still up to a few hundred percent. I mean surely I can't expect to win them all.
I still think I might be ok with this option, there is still about a month until it expires,
and a lot of exciting times ahead for Tesla over that time. I mean in addition to what I have
already said, it feels like so many other facets of Tesla are also coming together. Don't forget
Tesla is much more than simply a car company. It's just that's mainly the side that we focus on,
as currently that is literally where all the profits from the company are derived.
The question is, do I buy another option, this is looks to be a fairly substation
dip. The stock price is not close to what the EPS is going to be. I think I need to
start doing some preliminary expectations of the Q4 results, and see what we can come up with.
I was initially thinking 50 to 60% increase in profits from Q3, but I am starting to think that
perhaps the ASPs may be higher than I expected now, and maybe margins too. I get the impression
that Shanghai Model Ys have really good margins, and that is mainly what we have been seeing ramp
up the most this quarter. In addition to that LFP batteries in Fremont, more Model S and X sales,
and of course the price increases are starting to take effect. I think it might be prudent to do a
bear, bull and base case even. This feels like a really important quarter. Or maybe it's just
extra intense for me, as I don't think I have ever had so many options riding on them.
If this dips further I am not sure what strategy to take, I have a bit of cash on
hand at the moment, I can afford another shot at a contract, I am just wondering if I take a gamble,
or go back to my old ways, and buy another LEAPS contract,
probably January 2014. Let me know in the comments what strategy all of you are thinking.