Infrastructure Lag, Tesla & WeWork Bonds Falling

By Jeff Kelly on May 11, 2018

“The Democrats are going to change the name of the Hoover Dam. That is the silliest thing I ever heard of in politics . . . Lord if they feel that way about it, I don’t see why they don’t just reverse the two words.” – Will Rogers

I had a conversation with a client who had visited Hoover Dam with his children. He talked about how impressed his kids were with it and the powerful presence of being at the dam. He recited some of the statistics one learns on a visit there . . .

• 87 years after construction began, it’s still remarkable.
• The Hoover Dam was the most expensive engineering project in U.S. history at the time of its construction (between 1931 and 1935), costing $49 million.
• Adjusted for inflation, it would cost nearly $700 million to build in 2010.
  • According to “Architectural Wonders: The World’s Greatest Buildings” by Jody Thompson and Jessica Rewison.
• The Hoover Dam rises 726 feet and is 1200 feet wide at its crest. The base of the dam is 660 feet thick.
• It took 91.8 billion cubic feet of concrete to create a retaining wall that weights an estimated 6.6 million tons.

Can you imagine getting a project through Congress costing close to a trillion dollars? You’d need to add another trillion to the cost to pay off the pork included with the bill.

Sadly my discussion with this client moved to how little stomach we currently have large inspirational projects of this grandeur. While we have an incredible need for large infrastructure projects in our country, few get started and even fewer are properly completed. If you want an example of the sad state of one of these projects check out the articles on the new Denver Veterans Hospital. The hospital’s completion is many years late, more than a billion dollars over budget, and they have to keep the old hospital open due to poor design of the new facility.

Below is a map of completed and planned high-speed rail lines in China. I could have chosen many other measures, but this is pretty visually compelling. The airports in many parts of the world are so much better than those in the U.S. It’s shocking. As you can see on the two maps below, we have a long way to go to catch up to where China is today.

What do we need to do to turn the tide? Funds need to become available for these projects. We need to put in place rigorous and smart approval processes. Trained workers need to be hired to complete the projects. Let’s vote for those who will make the difficult decisions necessary to move the country forward.  We need to see building a bridge as cool and profitable as building an app. We are behind other countries in these areas. Simply, we need to do better.

Source: The Economist

Below are the completed lines in the United States.

Source: US High Speed Rail Association

A Recent US Success Story – Tesla

Sadly, this terrific story may be poised for a downturn.

Source: Hedgeye

The board of Tesla loves Elon Musk. Maybe too much.

Now, the board is being challenged by shareholders.

Tesla is having a lot of trouble meeting targets.

This is not a particularly good trend. Sell more, lose more.

That’s a tough business model.

Source: TeslaCharts, Shareholder Newsletters

This will make it very difficult for Tesla over the next few quarters.

Musk has said there will be no capital raise, however one appears necessary. He has also borrowed significant money with his stock as collateral.

Read more: When Margin Loans Go Wrong

Source: Bloomberg, TeslaCharts, Shareholder Newsletters

Tesla’s stock has held up while Tesla bonds are trading very poorly.

Source: FactSet, Bloomberg

I could put more charts here but they all show the situation is becoming more and more stressed. Musk is a genius but sometimes a company needs a professional manager. The market has rallied, as we discussed, the past few weeks. There will be setbacks but I expect this to continue into the summer absent any major geopolitical event.

***This is not a recommendation for/against Tesla.

The average one-day return for stocks after earnings has turned positive.

Source: Bespoke

Core inflation may be rolling over. For this to continue, oil needs to move lower.

Maybe some relaxing of tensions in the Middle East would help it move in that direction.

Source: Bespoke

Technology’s performance has it’s sector weighting pushing extremes.

Standard and Poors solution? Move Alphabet (Google) and Facebook out of the tech sector and into telecom. No, I’m not kidding.

Read more: Facebook, Alphabet shifted in sector classification system

Source: Bespoke

The chart below shows the yield on the 30 year U.S. Treasury Bond.

We have not closed above the 100 month moving average since 1985, 33 years ago. If this happens, about 3.4% on the 30 year bond, there will be a chorus of calls about the end of the bond bull market.

Source: Bloomberg, MI2 Partners

Rail traffic continues to be nothing short of fantastic. 

Source: RailFax

The WeWork bonds we discussed last week are having a pretty rough time.

Down about 8% since issued. I’m sure it will be fine…or not.

Source: Bloomberg

Lots of moving parts in the market and the economy. The problems won’t fix themselves. Name calling doesn’t work either. For now the market looks higher and we’ll play it that way. Have a great weekend.