Trouble in Cyprus
10 Stocks to Hold Forever – Tesla Motors
With Cyprus in the news today, I’m reprinting today’s update from Cabot Options Trader Editor Jacob Mintz to his subscribers. I think you’ll like it.
“Over the weekend, the finance ministers of the eurozone decided on a bailout package for Cyprus. The small country of about a million people has an unusually large banking sector that is in near ruin and in desperate need of a bailout.
“While Cyprus is a small economy (around 0.2% of the eurozone), what has shocked the markets is the unprecedented structure of the bailout.
“The terms of the bailout are that ALL funds in Cyprus banks will be hit with a one-time tax of 6.75% on accounts holding less than 100,000 euros, and 9.9% on accounts of greater than 100,000 Euros. This tax will be withdrawn immediately from every bank account. So if you have money in a bank in Cyprus, you will have less.
“Predictably, a bank run has begun. People are lined up outside ATMs trying to get their money out. Bank runs are the great fears of every economist and policymaker because they can VERY quickly lead to the fall of a financial institution and social unrest.
“Imagine if you were driving by your local bank and you saw 50 people lined up at the ATM. The first thing you would ask is “why are they lined up like that, and is my money safe?” Then you would get in line and try to get your money out as well.
“So why does this matter to us? There are many reasons; here are a few in no particular order:
1.There is the potential for a bank run in any economically troubled country. If I had money in another troubled European country, I would pull my money out fast, thinking that if the tax could happen in Cyprus, it could happen in Greece, Spain, Italy or Portugal.
2.Who has money in the Cypriot banks? Does Goldman Sachs have a couple of billion dollars resting in a bank there? Does a large hedge fund? Large Russian oligarchs? We won’t know for some time which big players will get hurt by this. But if they just lost 10% of their money, they may start selling assets elsewhere to raise cash.
3.This is absolutely unprecedented. Therefore, it’s anyone’s guess as to its full ramifications. Markets love certainty and despise uncertainty. They sell first and ask questions later.
“Just last Monday I said the following in my Cabot Options Trader Update. “So when will fear and the VIX pop back to life? I honestly don't see a lot of catalysts for this. Every market dip has been bought this year, and the bulls have extreme confidence. That being said, it will happen. I don't know when, and I don't know why, but the VIX will rise up. Few people expected the Italian elections a couple of weeks ago to be a major event, yet the market dropped dramatically and the VIX exploded. As the old saying goes, "It's always calm before the storm."
“I followed up a couple days later with an article named “Using Options to Hedge a Portfolio.” In the article, I outlined several ways to hedge a portfolio and mitigate risk.
“By NO means am I saying I saw this unprecedented action by the eurozone finance ministers coming. But time after time in my trading career, I’ve found that when everyone on the Street is turning bullish, you should be turning bearish, or at least hedging your positions.
“As yet another old trading saying goes, “Buy puts when you can … not when you have to.”
Today is the anniversary of the day that Studebaker went into receivership, in 1933, and here’s my Studebaker story.
My grandmother’s last car was a Studebaker Lark. It was light blue. As people tend to do with their last car, she kept it a long time, in the final years driving no further than half a mile to her daughter’s house. The car barely got warmed up before she turned it off.
So as teenagers, my brothers and cousins told ourselves we were doing her a service by borrowing the car to take on ski trips, where we’d get on the highway and “open it up” to burn off the carbon. It’s nice when being “helpful” is also fun. But she was no fool; she knew what we were doing.
Eventually the Lark’s paint faded, so one day, she took the car to the nearby body shop to get it repainted. Referring to the paint chart, she pointed to the color she wanted them to use. But when she returned to pick up the car, it wasn’t blue, it was orange! Either her finger or the auto body guy’s eye wasn’t quite as accurate as it should have been! She wouldn’t tolerate orange, so they painted it again, blue.
But back in 1933, when Studebaker went into receivership, the Lark was decades away. In 1933, the Depression was the big problem, and it didn’t help that Studebaker had acquired Pierce-Arrow in the late 1920s and then 95% of White Motor Company at prices that quickly appeared extravagant. In July 1933, overwhelmed by both corporate troubles and personal debt, the company's president, Albert Erskine, committed suicide.
Stepping in to help with the reorganization was a company named Lehman Brothers. The government didn’t help.
But by the mid-1950s, Studebaker was lagging again, plagued by higher wages at its South Bend, Indiana, plant and a narrower range of models than Ford, Chrysler and GM. The launch of the compact Lark in 1959 proved a brief tonic, but it didn’t last long, and in 1963, Studebaker closed its Indiana plant, and three years later shut down completely with the closing of its Hamilton, Ontario, plant. But remnants of Studebaker remain, not least in a grove of 5,000 pine trees planted in 1937 at the company’s proving grounds outside New Carlisle, Indiana. In the photo below, taken in the 1960s, the letters are quite clear. If you go on Google Maps today, you can still see the letters, but they’re less well defined.
Still, you can say that Studebaker lives on!
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In recent weeks, I’ve been writing a series called “10 Stocks to Hold Forever,” featuring ten stocks, selected by Cabot editors, that you might choose to, well, “hold forever.”
The tenth and final stock is Tesla Motors (TSLA), and it was selected by me. In fact, though I work very hard to avoid falling in love with stocks, I will confess that TSLA is my favorite stock.
Tesla Motors was founded 10 years ago by Elon Musk, who made a small fortune selling PayPal to eBay, and it’s different from traditional automobile companies in five big ways.
First, its cars use no gasoline. They’re all-electric, recharged primarily by plugging in and secondarily by regenerative braking.
Second, its cars are made in California, guided by a business plan generally used for technology companies.
Third, its cars are not sold by dealers; they’re sold directly by the company, either in showrooms (like Apple) or remotely.
Fourth, Tesla carries no inventory. It has a backlog of orders, so each car is manufactured for a specific customer.
Fifth, Tesla offers no financing; it takes deposits when taking reservations, and is paid in full upon delivery.
In short, the Tesla buyer gets a much cleaner experience than what most of us are accustomed to when buying a car. And maintenance of the cars is simpler, too, with only tires, brake pads and windshield wipers needing regular attention.
But here’s the best part. In addition to all the above, the company’s first high-volume car, the Model S, is simply a joy to drive!
It can go from 0-60 MPH in 4.1 seconds (with the biggest battery pack); that’s quicker than a Porsche 911. Or it can go 300 miles on a single charge. Its center of gravity is so low (the battery is the floor) that it corners like a go-kart. And it seats five adults, with room for luggage in both the back and in the front (where the engine is in most cars).
(Note: I’m not buying one until I can get two features I’ve grow accustomed to in my Audi: all-wheel drive and a back-up camera.)
The Tesla Model S has won:
Motor Trend’s Car of the Year Award, with the first-ever unanimous vote.
Automobile Magazine’s Automobile of the Year Award.
Yahoo Autos’ Car of the Year Award.
In short, the car is wonderful. And the engineering has been nearly perfect.
Contrast that with competitor Fisker Automotive, born soon after Tesla and competing for the same market with a hybrid powertrain. Fiskers have had numerous technical troubles. Battery supplier A123 went bankrupt. 300 cars were ruined by Hurricane Sandy. And founder Henrik Fisker recently resigned, reportedly as the Chinese firm Geely (which now owns Volvo) discussed a takeover.
Tesla, meanwhile, is on target to turn a profit in the first quarter of this year, and to deliver 20,000 cars this year. And the Model S has been so well received that the company is delaying the production of its lower-priced SUV (Model X), so it can manufacture more Model S sedans.
Now, investing in automobile companies is always challenging, mainly because this is a mature industry. And investing in automobile startups has traditionally been an excellent way to lose money. But I think Tesla is going to succeed in a big way precisely because it is doing so much differently, because Elon Musk is an exceptionally capable leader, and because the world (this is a global story) is ready for a car that frees its users from the tyranny of the gas pump.
I first recommended TSLA in Cabot Stock of the Month on December 28, 2011, when the company’s fortunes were far shakier. But I had a lot of confidence in Elon Musk, and I had a lot of confidence in what the stock chart was telling me.
This is what I wrote back then:
“Tesla came public in June 2010 at 17, and peaked at 36 that November, before retreating to a low of 21 in February of this year. And the big market selloff this August pulled it down to 21 again, establishing a double bottom. It pushed up to 35 in November and December, but selling pressures (sparked by a negative Morgan Stanley opinion on electric cars in general) pushed it down to touch 26 last week … and that leaves it sitting right on its 200-day moving average, which we view as a buying opportunity.” (Subscribers who followed my advice bought at 29, and they should still be holding.)
And luckily for you, the timing of today’s recommendation (the last of my 10 stocks to hold forever) coincides with another buying opportunity!
In short, TSLA’s main trend remains up. But it’s a volatile stock, not least because there are short-term traders in the stock, many of whom sell the stock short to make money on the downside. The stock hit a high of 40 in February before falling to 34. Two weeks ago it was back up at 39.5, but last week sellers took over, and sent it back down to 35, where it’s found renewed support. I’m not saying you should bet the lunch money, but from a long-term perspective, this looks like a decent entry point.
Yours in pursuit of wisdom and wealth,
Editor of Cabot Stock of the Month
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