For Gundlach, These Are The Three Key Charts To Watch

Tyler Durden's picture

Yesterday afternoon, we presented readers with the latest Jeff Gundlach webcast and presentation, in which the DoubleLine fund manager was surprisingly non-committal in his outlook on the future, predicting no imminent - or even belated - recession and adding there is no risk of a high-yield junk bond "meltdown."

Among other things, the sanguine Gundlach touched on US policy, saying that with healthcare legislation overhaul derailed, U.S. tax cuts will be "really, really hard to get done."

He told Reuters following the webcast that repealing and replacing Obamacare "was always going to be hard to get done. But, yes, the first round failure to repeal is a negative omen" later telling Reuters' Jennifer Ablan that repealing and replacing Obamacare "was always going to be hard to get done. But, yes, the first round failure to repeal is a negative omen."

Gundlach also remarked on one of Wall Street's darlings du jour, namely Tesla, which yesterday surpassed GM briefly in market cap, and which he called a "momentum stock."  He told Reuters: "As a car company alone, Tesla is crazy high valuation. As a battery company - one that expands and innovates substantially - maybe the valuation can work."

Gundlach repeated his call for a rally in TSYs, saying “I expect a rally on the 10-year and the 30-year, to below 2-1/4 at a minimum on the 10-year, maybe a little bit lower than 2 and then it moves back up." He added that  he doesn't “think we’re going to see 3 on the 10-year this year.”

While much of the above was a rehash of previous discussion topics by Gundlach, he made several notable comments. The first was that his outlook on inflation may be supportive of bonds as "the reflation narrative may be fading" and inflation globally has peaked. "With inflation falling in the months ahead, pressure for higher yields is reduced," Gundlach told Reuters after the webcast. "The bear case will need another narrative because CPI (the consumer price index) will be back below 2 (percent)."

Gundlach said that he still favors non-U.S. stocks over U.S. equities because of the huge run-up in US indexes. As evidence of the overvaluation of US stocks, Gundlach pointed to the outlier signal sent by the Price to Sales ratio in the S&P, which is fast approaching 2 standard deviations from the mean, a level which led to a crash during the dot com bubble.

Finally, while Gundlach said he does not expect a recession, he warned that there is one chart that is ringing alarm bells, namely the ratio of corporate debt as a % of GDP which is now at previous recession highs.

Gundlach's full presentation can be found here.

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TeethVillage88s's picture

Why didn't Bloomberg & WSJ bring this up for Presidential debates:

- Ratio of corporate debt as a % of GDP which is now at previous recession highs
- Pensions unfunded by $6 Trillion USD
- Pension Bailouts running at $6 Billion a year for 7 years ($6 Trillion Dollar Shortfall in Funding)
Ed Bartholomew consultant pension financial management ( @e_bartholomew )
Jeremy Gold Society of Actuaries / American Academy of Actuaries ( @jeremygold )

Arnold's picture

Ours is a small group, you are in it.
99.999% are not.
Where's my beer.

Comtrend's picture
Comtrend (not verified) Arnold Apr 5, 2017 8:00 AM

Nothing about how awesome the auto market (read Tesla) is? How they drive the auto industry, with no driver whatsoever, I might add.

Little shopping carts on rubber wheels that are selling like candy in the snowflake land. Tesla greater than Ford, even though

Analysts Say Tesla’s Market Gains are Coming from Elon Musk’s Groupies

Art Van Delay's picture

Elon Musk is one of those iconic figures the world occasionally conjures up to wow and entertain the masses. As media generated symbols of success go he ranks up there with the best of them. Much of the aura that surrounds Musk comes from his success at PayPal. Musk co-founded, an online financial service and e-mail payment company, in March 1999. One year later, in a 50/50 merger, joined PayPal a company that operated an auction payment system similar in size to Musk was instrumental in organizing this deal due to his belief in emerging online transfer technology. The combined company at first adopted as the corporate name, but in February 2001 changed its legal name to PayPal Inc. Musk is credited in driving the new PayPal to expand and focus on a global payment system, in October 2002, PayPal was acquired by eBay for $1.5 billion in stock, Musk, the company’s largest shareholder, owned 11.7% of PayPal’s shares.

Elon Musk, Visionary And Wonder-Boy?

With his youthful looks and forward thinking the media latched on to Musk and propelled him into being viewed as a visionary and wonder-boy that turns everything he touches to gold. When talking about the CEO of Tesla Motors, Bloomberg News almost always says “Billionaire Elon Musk”, this happens so often that many people probably think his first name is “Billionaire”. As to the source of his success, it seems Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support, according to data compiled by The Times. This figure includes a variety of government incentives, including grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell. It also includes tax credits and rebates to buyers of solar panels and electric cars. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups. He definitely goes where there is government money,” said Dan Dolev, an analyst at Jefferies Equity Research.

An example of how deep these subsidies feedback into the numbers is that Tesla collected more than $517 million from competing automakers by selling environmental credits. In a regulatory system pioneered by California and adopted by nine other states, automakers must buy the credits if they fail to sell enough zero-emissions cars to meet mandates. I have written several articles about Tesla and Musk over the years but as I continued my research for this update and a more in-depth piece my eyes literally began to glaze over at the magnitude of the subsidies. Government support is a theme of all three of these companies, and without it, none of them would exist. Then comes the issue of corporate incest, in August of 2016 Tesla formally announced it would be acquiring ailing SolarCity in an all-stock $2.6 billion merger. At the time Musk owned 22% of SolarCity which was founded by his cousins. The merger was promoted on the idea that Tesla’s mission since its inception was part of Elon Musk’s overall “Secret Tesla Motors Master Plan” to expedite the world’s transition to sustainable energy and away from a fossil fuel economy. Musk called the merger a no-brainer and said it was an accident of history that Tesla and SolarCity were ever separate companies.

Only About 1 In 5,000 Cars Is A Tesla!

Tesla is in the news far more than a company with such a small footprint would merit. Much of its significance is derived from Musk who remains a master at getting press coverage, most of it “free” and positive advertisementPlease take note of how insignificant these numbers really are. Tesla Motors announced in early August 2009 that it had achieved overall corporate profitability for the month of July 2009 when it earned approximately $1 million on revenue of $20 million. Profitability arose primarily from improved gross margin on the 2010 Roadster, Tesla’s award-winning sports car known for its designs and “very sexy lines”, similar lines have been on the drawing boards for years but were impractical because of the internal combustion motor and all the mechanical junk required to support it. Tesla, which like all automakers records revenue when products are delivered, shipped a record 109 vehicles at the time and reported a surge in new Roadster purchases. Even to date, Tesla’s numbers remain small Tesla is said to have delivered 50,580 vehicles in all of 2015.

The value of Tesla’s stock dramatically changed years ago following the report where it made its first quarterly profit, its market value soared to more than $10 billion. It should be noted a large part of the increase in the stock price occurred when people that had short positions in the stock were caught in a short squeeze and forced to buy back their stock. At the time Musk said, “I thought it would be quite difficult to raise the capital for Tesla.” he went on to state his realization the electric-car maker could retire its U.S. loan nine years early didn’t arise until Tesla shares unexpectedly surged. Since that time Tesla’s fortunes have moved in lockstep with a surging stock market. In an upbeat article just published by Inside EVs, it was pointed out that Ford stock has fallen 23 percent from 2015-2017 and now sits at $12.65 per share. Tesla stock is on the rise, approaching an all-time high, at about $281 right now. This accounts for a market share of $43 billion for the electric startup, compared to Ford’s $49 billion.

Tesla currently has a market cap that is 88% of Ford its much large competitor. It is important to note that in January 2016, Ford Motor sold 173,723 vehicles in January 2016 while Tesla made a little over 80,000 cars in all of last year and has sold only about 191,000 vehicles to date. Ford built over 6.5 million vehicles in just the last year alone. As for Tesla’s stock which continues trading at incredibly high multiples, much of that can be contributed to the historically low-interest rates and the luck of being in the “QE moment” rather than the company’s financial success. Bears and those that doubted if the company could hold together ironically have pushed up the stock adding to the image that Musk lives a charmed life. Remember the company had received a huge government low-interest loan to kick start its existence, also note that it has no legacy cost or issues that plagued so many of its competitors. Now thanks to the gobs of money looking for any kind of return, Tesla can borrow cheaply. Like several other high flyers lead by self-promoters and propelled forward by media hype Tesla has been on a roll.

While it has not received the attention Tesla has garnered it should be noted that most automakers have placed fuel cell electric vehicles with customers, and many plan to introduce a Fuel Cell Electric Vehicle better known as an FCEV to the early commercial market over the next year or so. By 2020, automakers expect to place tens of thousands of fuel cell electric vehicles in the hands of California consumers. Among the automakers which are trying to bring this technology closer to customers are Honda, Toyota and Hyundai Fuel cells could derail Tesla’s vision of a world where its battery-powered vehicles fill our roadways. Currently, lithium-ion battery technology powers Tesla’s electric vehicles. It could be argued that Tesla could do a “switch-a-roo” and simply change out its power source from battery power to fuel cells. Adoption of the fuel cell as the most desirable way to power not only vehicles but other power hungry devices would be a big setback for Tesla because the company has invested a huge five billion dollars in a new battery factory. If fuel cells rule the day this would spell big problems for Tesla.

It does not take much research to see public subsidies for Musk’s companies stand out both for the amount, relative to the size of the companies, and for their dependence on them. No effort has been spared to spin Tesla and Elon Musk as a finished success, of course, the “proof will be in the pudding” when we look back years from now. Time will most likely determine whether Musk is viewed as an unabashed promoter or a serious visionary. Using government programs and loans as well as money from investors Musk has built a pulpit from which to position himself for praise and at times ridicule. David Stockman wrote in May of 2015, In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder.

Tesla enters 2017 with the goal to launch a new car, open a large battery factory, and perfect autonomous driving. When all the hoopla ends, the question is whether larger competitors will simply overwhelm and crush Tesla, or will Tesla instead position itself to grow and maybe take over a competitor to help propel it forward. Remember this is a field where many have failed, one great example was the Delorean. I have become predisposed to discount, and have actually grown a massive aversion to “media hype”, this is one reason you should color me skeptical. The city where I live, like other cities across the world, have a long list of bold men herald and declared to be “gods gift to business,”  many in the end flew too close to the sun only to crash and burn. In any case, what has happened at Tesla Motors and to Elon Musk’s other ventures up until this point might be enhancing the meaning of the phrase, “I would rather be lucky than good!”

Fed-up with being Sick and Tired's picture

No one else covers economic issues better than here, so I accept the flaws as well.

VD's picture

"Gundlach said he does not expect a recession" --> lost all credibility right there.

mily's picture

I suppose he meant "this year"

CHX13's picture

Being in a structural depression already his statement is not entirely wrong. These guys are slick with their wording.

Iconoclast421's picture

The only chart I'm watching is the chart I generate myself:

TheRealDrBill's picture

No axis titles.  No units.  No title.  No legend.  No explanatory notes.  That's a ZH special, right there.

Greenspazm's picture

He is taking an aggressively neutral stance here.

PaperTaperFakerCaper's picture

The Best Tesla Short Thesis You've Ever Seen - YouTube

How Many Beers Needed To Believe Tesla?