Elon Musk Pulls An ICO

By Chris at www.CapitalistExploits.at

First up, this beauty received by one of the crew here at HMS Capitalist Exploits:

Marketing an ICO...

Killer!

The Tesla ICO

Speaking of ICOs, last week something amazing, breathtaking, and revolutionary happened. We had another ICO... the very first of its kind.

An Initial Car Offering.

Pundits said it was an unveiling of the Tesla semi truck, but we now all know it was actually a thinly veiled capital raise.

Like many good things in life, this also began with foreplay.

Customers and shareholders are like women ovens - they need to be warmed up first.

So a few weeks before launching the ICO, the oven was dialled up:

Amazingly, I woke up this morning and, though having watched the unveiling, I looked around me and couldn"t notice anything different (though my dog had this strange look in his eyes).

My mind was surprisingly still in my skull and had not been sent into an alternate dimension, which was disappointing as I was quite excited by the prospects of that.

Anyway, so once the engine was warmed, we were treated to the de-robing of this.

I thought at first I"d missed it. Then I watched it again. And no, I hadn"t.

There was zero explanation of how Tesla would get all the dough to build this creature, where it would build it, and how (given the competition all have existing production plants, positive cashflows, dough in their treasuries, and access to credit markets) Tesla miraculously thinks that by the time it gets there it will have all of these things as well as the technology (that does not yet exist) to pull it off.

But then my nerves were calmed when they offered a warranty on the product. Wait, what? A warranty BEFORE they have a product? Killer!

I guess there"s a first time for everything.

But that wasn"t to be all.

No, then came the real showstopper as Elon went a step further in prostituting promoting Tesla. The fastest sports car in the world. And it may even just fly.

The kid in me did backflips. I sooo want a car that flies. Don"t you?

But then I remembered that there was a time when I really wanted the Easter bunny to be real, too.

Now, being older and wiser, I realise that rabbits screw up your lawn and chocolates make you fat, and I want nothing to do with either of them.

What I would like to know is how they found the time to muck around developing both a sports car and a giant truck when they can"t get a little Model 3 out?

Maybe that"s just me being a grouch. Heck, what do I know about cars? Mine"s 5 years old and smells of kids sweaty football socks which are buried in the back there somewhere.

Thankfully, I didn"t have to wait too long to figure out how they intend to fund some of this:

Now, when I saw this I"ll admit to having made the sort of noise a cat would make if fed through a mangle.

I realised then that Tesla was trying to pull off an ICO.

You see, the thing with 99% of ICOs is they"re kinda like the deals on Kickstarter, which means that you don"t actually get anything. It"s more like a donation... or part of a rewards points system. You know, like your air points where you get to trade them for a flight to Greece for a dirty weekend away or to upgrade your flight to first class so you can sit next to all the folks who eat lobsters in their bathrobes.

This works spectacularly well for anyone uneducated in investment markets. And that, my friends, is perfect for Tesla. Because you know what?

That"s about 90% of the population.

For the other 10%, here are some things to consider.

I"ll gladly admit to not really knowing a lot about cars. I like them very much as long as they take me where I want to go and do all the cool things that modern cars do.

But try explain to me about all the ins and outs of the bits inside and my brain does that man thing - it stops working and starts thinking about sex.

But what I do know a thing or two about is numbers and markets. And frankly, when Musk starts talking about these things he may as well be speaking Nepalese and explaining how to cook a yak stew because it"s all complete gibberish.

Tesla by the Colours

Last week when we were staring at Margot Robbie (don"t tell me you didn"t stare), and we said:

It was overconfidence that led the pointy-shoed suits on Wall Street to package subprime mortgages up, believing that a pile of isht when added to other piles of isht through the magic of diversification turns isht into non isht.

Like Margot explained in the Big Short (and bear with me as I"m extrapolating here): If we use Wall Street logic, you take the colour red and add it to more red... much more... you can get green.

So let"s run through Tesla by the colours, and then after that we"ll run through it by the numbers. Sounds fair?

• SolarCity: Red


• Gigafactory: Red


• Model 3: What Model 3?


• Model 3 in full production: Red


• Tax credits: Green... ah isht... no, make it red

Excellent!

So red + red + red + red + red = Green.

Tesla by the Numbers

Let"s take Q3 cashflow and toss in interest charges for 2017 (which is only fair — after all, someone has to pay them).

With that we realise that Tesla burned through about US$1.7bn or about US$500m a month.

Now, let"s be super conservative and say capital expenditures remain at 2017 levels, which is absurd and impossible given the new initial car offering and that semi truck, too (it"ll be far higher).

Anyway, let"s give it to them.

Well, let"s say they can find 1,000 fools buyers to drop a quarter million bucks on a pre-order for a car that they hope to receive some years in the future. Let"s say they can do that.

That"ll put US$250m into Tesla"s treasury, which will buy them less than 3 weeks. Killer!

I"m going to go out on a limb here and say that in the first quarter of 2018 Tesla"s going to lose US$1bn. Crazy, I know. How long for? It"ll go on until it doesn"t.

And here"s something to think about...

Here"s Venezuela"s 5-year sovereign CDS spread:

You may ask, why Chris are you posting this in an article about Tesla?

Well, Venezuela — like Tesla — made promises it couldn"t keep.

What I"d really like to know from you today is this:

Cast your vote here and also see what others think will happen

- Chris

“If you wouldn’t be short a multi-billion-dollar loss-making enterprise in a cyclical business, with a leveraged balance sheet, questionable accounting, every executive leaving, run by a CEO with a questionable relationship with the truth, what would you be short? It sort of ticks all the boxes.” — Jim Chanos

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About That Debt Ceiling Crisis...

With just one month left until the "X Date", better known as the first day on which Treasury has exhausted its borrowing authority and no longer has sufficient funds to pay all of its bills in full and on time, and also known as the date the US is technically in default on its debt obligations and would be forced to prioritize debt payments according to that infamous 2011 Fed transcript...

... traders were hoping if not for resolution, then at least a modest dose of optimism in the days ahead: after all with Houston reeling, the last thing the US needs is a full government shutdown in addition to the emergency crisis in Texas.

Alas, that"s precisely the opposite of what is taking place in the market, where the September/October Bill Spread has again blown out to record levels...

... making the October T-Bill "hump" the worst it has been yet.

One potential catalyst for the spike in odds of an adverse outcome is that earlier today, the chairman of the conservative House Freedom Caucus said aid for victims of Hurricane Harvey should not be part of a vehicle to raise the debt ceiling.

Quoted by The Hill, Rep. Mark Meadows (R-N.C.), a Trump ally who leads the conservative caucus, said disaster aid should pass on its own, apart from separate measures the government must pick up in September to raise the nation"s borrowing limit and fund the government.

“The Harvey relief would pass on its own, and to use that as a vehicle to get people to vote for a debt ceiling is not appropriate,” he said an interview with The Washington Post, signaling agreement with Trump on the approach. It would “send the wrong message” to add $15 to $20 billion of spending while increasing the debt ceiling, Meadows added.

Ironically, it was precisely the Harvey disaster that prompted Goldman yesterday to lower its odds of a debt ceiling crisis from 50% to 33%, on the assumption that it would make conseratives more agreeable to a compromise, when in fact precisely the opposite appears to have happened, and the new dynamic is now playing out in the market where the odds of a government shutdown have never been greater.

So what does it mean for the US if the T-Bill market is correct and a debt ceiling deal is not reached in time over the next 30 or so days? For an unpleasant perspective on what may happen next, here is Deutsche Bank"s preview of what a debt ceiling crisis would look like:

Guide to a Debt Ceiling Crisis

If Congress doesn’t act in time and the above fallbacks are deemed untenable, the Treasuries with affected principal or coupon payments would likely be handled in two ways, according to scenarios considered by SIFMA. The first option would extend maturity and coupon payments, where payment decisions are explicitly announced by Treasury one day at a time, and both coupon and principal payments are ultimately made in full once the debt limit is raised. These securities would be able to be transferred normally, and a market for them would develop. While the security is not “defaulted” as its maturity date has been extended in systems, the extension would likely constitute a change in terms that triggers CDS.

The other outcome would a failure pay , where Treasury does not set a date for future payment, and there is no pre-announcement (or it comes last minute). A failure to pay would mean the affected securities drop off the Fed system and cannot be transferred normally. A market would eventually develop, but once there is a failure to pay and the securities are not extended in systems, they cannot be “unmatured” and maturity extended.

Regardless of whether it is a payment extension or a failure to pay, the longer Treasury remains in default, the worse the situation for financial markets. Market reactions and market functioning might be comparatively stable at first, but the concern is of widespread panic and systemic market disruptions.

As for immediate ramifications, noted that CDS would likely triggered either default scenario , as sovereign CDS is triggered by either a failure to pay, repudiation/moratorium, or a restructuring. A failure to pay occurs when a sovereign doesn’t pay principal or interest when due, with a 3 day grace period applying to that due date in the case of the US. In our view, a CDS trigger would apply to all debt obligations backed by the full faith and credit of the US government (including GNMA, FHA securities, etc.). A CDS event is unlikely to have much direct market impact, however, as net CDS exposure is a modest $1bn as of the end of July, down from about $4bn in 2013 and its peak near $6bn in 2011. As long there is no one particular bank that is overly short protection, we do not expect any knock-on CDS event. 5y CDS is currently suggesting no real concern, sitting at the bottom end of its 19-24bp ytd range. While the supply of deliverable securities is more than adequate to satisfy the outstanding contracts, demand deliverable bonds may cause distortions . The 2.25% Aug 2046 bonds are currently the cheapest-to-deliver into the CDS, and would likely trade upward in price towards recovery value.

Among Treasury market investors, money market funds are a key group possible propagation risk . Even after money fund reform, government funds continue to be quoted at a stable $1 NAV, leaving them vulnerable to perceptions around “breaking the buck,” and therefore large scale investor redemptions in an extreme scenario. Treasuries accounted for $678bn of money funds $2.7tn AUM as of the end of July, while Treasury repo makes up another $595bn (with about $150bn of that made up by RRP’s with the Fed). Money funds’ Treasury holdings tend to be concentrated in securities maturing in the first month – more than 40% of their Treasuries held at the end of July matured in August. This suggests that the bias will be for money funds to accumulate more securities maturing around the debt ceiling, though they may be cautious around specific issues. However, it’s worth noting that they then owned over $40bn combined in the October 5 bills, October 12 bills, and October 15 coupon maturities – more than 20% of the amount  outstanding. Of the $1.3tn of Treasuries (bills and coupons) that mature between October and mid-January, money funds own about 19% - potentially an important factor in the event that a default drags out. Also note that maturing notes and bill holdings are concentrated in a relatively few fund families.

Potential outflows from money funds has implications repo market . Possible forced selling of Treasuries, money funds would likely cut back on their provision of financing to banks through repo. While reforms have reduced banks’ reliance on short term funding and put them in a place to better withstand a significant reduction in availability of things like repo funding, a sharp contraction in overall repo financing would likely have ramifications for market functioning and liquidity.

In terms of market plumbing, given the reliance Treasuries managing credit risk derivatives , a default event could spread quickly to derivatives market via a sudden drop in the valuation of UST collateral. This loss in value would trigger calls for additional collateral, and given the widespread use of UST’s, it is possible that a number of market participants fail to post sufficient collateral; this would constitute a default in a centrally cleared trade. The requirement that the surviving counterparty replace the risk of that trade could subsequently result in a major revaluation of all related trades, triggering new collateral calls, and potentially create a vicious cycle.

How might the Fed might react to a major disruption?

The question is complicated by a possible reinvestment decision in the September meeting, but extracting that for the time being, there is nothing immediately apparent in the Federal Reserve Act that would preclude the Fed from purchasing defaulted Treasury securities. This would likely not be a proactive step, as the Fed would not want to be seen “bailing out” the Treasury, but given the extremity of a default situation, the Fed would be governed by its financial stability mandate.

The Fed could intervene by removing defaulted securities from the market and sell or repo non-defaulted issues to provide the market with good collateral. Additional emergency facilities similar to those seen in 2008 are another option wherein the Fed could support money funds by accepting their assets and providing liquidity. To the extent that liquidity concerns became extreme the Fed could obviously move to add further monetary accommodation especially if it perceived knock on effects to the growth and inflation outlook.