With Tesla being one of the most watched stocks by everyone from institutional investors to the average Joe on the street, reactions are already set to be exaggerated on any earnings release. Tesla is not just a company. To many, it is a symbol of a better future, of human progress, of environmental achievement and whatever other universal hopes are pinned to it. If the luster on those hopes dims by even a tiny degree, investors can get quite emotional and price movements will reflect this.
But slightly lowered guidance is just a catalyst. The real problems in the background that are likely causing are, first, the continuing collapse in the price of oil, which hurts Tesla by taking away a PR point. Namely that oil is unsustainable and unaffordable and consumers must switch to electric. That will affect sales, if only slightly, and slightly is indeed what we saw in its least earnings release. Going forward though, pressure from low oil is unlikely to be sustained.
The bigger problem is loose credit in the auto loan sector, which cannot get any looser than it already is. Tightening credit may have less of an impact on sales of the Model S and X in the $70,000 price range, as those who can afford that price tag are less dependent on extremely easy credit. But it will affect the market for its cheaper Model E, forecast to be on the market in late 2016 or 2017.
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The most important factor has nothing to do with Tesla or the electric vehicle (EV) industry, or even the automotive industry as a whole. Money supply as of Thursday’s release remains dangerously low at $11.94 trillion (see table 2), down $50 billion from last week without seasonal adjustments, and still no weekly increase since the mid-April high of $12.08 trillion. This is a systemic threat that will affect all equities.
Good news for any company, on any release, will seem only OK. Tepid news will seem bad — see Tesla. Bad news will be reacted to intensely as a cloud of selling pressure thickens over Wall Street. Only great news will be enough to counter bad monetary conditions.
Despite some pundits casting doubts as to Tesla’s finances, there is still no immediate danger there. Tesla can equity raise easily with institutional investors clamoring for shares. Maybe at a lower price, but Tesla will get any cash it needs.
A slightly broader perspective though does not look nearly as gloomy. Tesla is still 33% off its lows this year, hit back on March 27. Despite falling 10% in the past two days, shares are still up 10% year to date. The Nasdaq is up 7% and the S&P only 1%.
Given the sheer volume of attention Tesla gets, all it really has to do is meet or slightly exceed its own guidance to make investors happy again, but this would have to be coupled with better monetary conditions, and it would be helped by higher oil prices, though the latter is not necessary.
Until then, the systemic monetary threat from zero money growth remains, and downside could easily accelerate.
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