Connect with us


Growth Stock Capitulation: Tesla’s Fall May Mark A Turning Point



Pullbacks in the market are normal. They’re not fun – nobody likes being down on their investments – but they’re healthy. You need times of stress to reset expectations and get overzealous investors chasing returns to come back down to earth.

Sometimes during pullbacks investors get fearful and overshoot to the downside – people start to sell first and and ask questions later. It’s a normal behavioral component of the markets.

The recent rise and fall of tech and growth names is no different. Tech names rose during the Covid-19 shutdowns and seemed unstoppable in 2020 and 2021. Then the music stopped – the Fed announced a shift in policy to respond to inflation and all of a sudden the enthusiastic valuations and forward projections started to crumble.

Now, a lot of growth companies are near multi year lows. Some of the falls are justified; for example, companies without competitive edges and long term growth drivers like Peloton. But some companies have been sold off aggressively and could be great additions to your portfolio at bargain prices.

It’s Not The Dot Com Era

Comparisons to the dot com bubble in the late 90s and early 2000s have been everywhere over the past few months as technology valuations have collapsed.

While that comparison might be tempting, it’s also wrong. The dot com bubble saw wild upward movements in companies that didn’t have products, didn’t have businesses, who only had ideas. Today’s technology landscape is very different.

Some recent technology valuations may have been generous in terms of outlook, but broadly, the underlying businesses are sound. Companies like Alphabet or Salesforce generate billions of dollars of free cash flow and post robust revenues. Farther down the food chain where valuations were more aggressive the story is similar. A company like Okta might be priced for aggressive growth over the next several years, but they are still a real company, generating real revenues, with real products.


Tesla’s Fall

You can’t talk about growth companies without talking about Tesla TSLA . It’s the company that could, the one that overcame skeptics at every turn. At one point it was weeks from bankruptcy, and yet today it’s the largest electric car company in the world and Elon Musk is one of the world’s richest people.

Yet it’s Tesla’s fall from its peaks that’s actually more interesting to us. Tesla coming down was essential – it’s the standard bearer for high valuation technology companies. Whether you like the product or believe wholeheartedly in Elon Musk, the math around Tesla’s valuation is really difficult to understand. They trade at a significant premium to both technology oriented peers and to traditional auto manufacturers. So, when companies like Microsoft MSFT or Salesforce or Okta sold off and Tesla managed to stay up, that didn’t make sense.

But finally Tesla came down. As we write this, it’s down more than 30% from its high and had been down approximately 40%. That’s the kind of drop that’s more in line with what other large technology companies had seen. That capitulation, seeing Tesla with its hugely loyal investor base finally come down, to us that signals that sentiment on tech is finally starting to bottom.

So We’re Buying Tesla?

Despite Tesla’s fall potentially indicating a turning point, we don’t think that’s necessarily the best name out there. Even after falling, the company still looks expensive – especially as every other car company on the planet is starting to go electric in a competitive way. That, and Elon Musk seems increasingly distracted. The guy is a genius, sure, but he’s still got limited hours in the day. The Boring Company, Space X, and possibly Twitter – Elon has a lot of different things on his plate and all of them by themselves could be full time jobs.

Proceed with Caution

Before we get into the spaces we think are attractive, we have to reiterate that not every fallen tech name is automatically a buy.

People like to look at Tesla and Amazon AMZN and imagine every tech company can spend every dollar on growth, spend money they don’t have, and then come out as a behemoth on the other side with incredible profit margins and market dominance. People forget about all the companies who get squeezed out of their niche, who see an incumbent roll out a big new competing product before they’re able to profitably compete.

For every successful Tesla or Amazon there are dozens of others who fail. According to data from Factset and Bloomberg, between 1980 and 2020, more than 40% of the stocks ever included in the Russell 3000 suffered a drawdown of 70% or more from their peak that wasn’t recovered.

So be careful – not every tech company that’s fallen since the peaks last year is a buy. Some of them were just hype.

Attractive Companies in Attractive Spaces

We are looking for companies in attractive spaces who look like relative bargains after the recent sell offs.

There are a few spaces worth commenting on in particular. First, productivity. The United States is experiencing a labor shock – we don’t have enough workers to fill all the jobs that are open and wages are rising across the spectrum, even as margins are compressed by inflation.

Companies have two ways to try to deal with the situation – they can pay up for higher wages, or they can look for technology solutions to increase productivity. And note, this is a long term trend – our demographic situation isn’t going to improve overnight.

Companies like Salesforce in software or Rockwell in industrial automation are great examples of companies whose products address productivity and have significant competitive advantages over the rest of their peers. Getting the most out of the people you have, setting up automation to reduce the number of people you need to create the same output, that’s the kind of innovation we want to be a part of across industries.

Another space with long term growth prospects is cybersecurity. It’s a nascent space of increasing importance as large companies and countries across the globe put together more comprehensive security solutions. It’s an area where there are going to be some winners and losers; the established behemoths like Microsoft represent a significant threat and there are plenty of innovators in the space. That said, companies like Palo Alto with established user bases and critical security technologies look attractive after the valuation resets we’ve seen in the past few months.

Finally, semiconductors are worth some consideration. In a world where everything is increasingly digital, semiconductors are increasingly important. The space may be highly cyclical but the long term demand outlook is robust. Given the highly competitive nature of the space, more oligopolistic names like Lam Research LRCX or Applied Materials AMAT who focus on supplying and maintaining semiconductor manufacturing may be worth a look for aggressive investors.


Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street



America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.

Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.

For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.

Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”

Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.


But that’s not good enough to protect public pension stakeholders.

No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.

The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.

Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?

Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.

Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.

Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.

Continue Reading


It Is Time To Buy Bonds



US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.

Monthly Return- US 10-Year Notes

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.

10-Year Note Monthly Cycle


These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.

The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.

10-Year Notes Broke Through Resistance

Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.

Continue Reading


Will There Be War Over Taiwan – The Next Spy Thriller



I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.


Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.


Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

Continue Reading