Episode 3

Welcome to Episode 3 - in which we discuss stock market gyrations; we speculate on the future of Tesla (and TSLA); and reflect on Musk’s AI company buying Twitter. Plus, the musical interlude makes its first appearance. Will the newsletter actually contain a recommendation for first time? If this episode of the newsletter seems abnormally short (and, yet, paradoxically still grotesquely too long) do not worry - a second, bonus episode of the newsletter is right around the corner!

Corrections

No, not corrections from my last newsletter. Probably because there weren’t any mistakes. But I figured I should acknowledge that the S&P500 briefly hit the “correction” level of a drop of 10% from its high this last month, and maybe hit it again midday at quarter end. I didn’t actually check on the morning of March 31 – and partly that is because these technical levels are completely irrelevant.  Except when they are not (in the short term).  Why? Well, first because so many people believe in (or, at the least, engage in) technical analysis of the stock market. Or maybe the “correction” is enough for thousands of bogleheads to re-balance their portfolios en masse.  Or the media suddenly unleashes a tsunami of doom and gloom stories (using the same picture, of course), and people who haven’t thought about the market for years realize their risk tolerance wasn’t quite as high as they thought!  But, as is so often the case, the problem is that you never know when these levels are actually going to relevant until afterwards!  And for long term investors, the technical “correction” level can safely be ignored.

Historically, “corrections” happen pretty frequently (and don’t often turn into deeper bear markets) – Schwab had a decent little article on it with some good charts. If you are nervous about the market and worried about historical parallels with past stock market crashes, those charts will hopefully help assuage some of those fears.  Now if your fears are based on other political developments – well, your concerns probably shouldn’t be ignored and those charts won’t help!  I have to admit I had been thinking of (or kinda hoping for?) different political developments in mid-March, remembering the timeless warning to “beware the Ides of March”.  But, alas there was no historical parallel, just normal stock market gyrations. Also, if there is no newsletter next month, it’s probably because that joke landed me in an El Salvadoran prison.  But before I am extraordinarily renditioned to Central America [rendited? rendered? shit…I need one of those real English Professors!], I’ll make sure that you get a lot more Shakespeare references in the bonus newsletter.  And the Quote of the Month is only for the brave souls who read the bonus newsletter!

Newsletter Development and Artificial Intelligence

I started this newsletter after launching Fangorn Wealth Management for a couple of (inchoate) reasons, but thought it might be useful to clarify them for my readers (and myself) and let you know what to expect:

• I wanted a mechanism to highlight specific developments (e.g. tax or rule changes) that might impact your personal finances, and I wanted a space to discuss interesting approaches or concepts related to investing, retirement, and personal finances.  If you have some thing to ask - others might be interested.  Write me!
• I wanted to provide further insight into my thought processes and perspectives; so that means you’ll see lots of items about behavioral finance, game theory and behavioral economics, the legal industry and lawyers, doctors and health care, and veterans affairs (and various other complete non-sequiturs, of course!).
• I wanted to provide context, humor, musical references and interesting asides to liven up these topics, which are too frequently boring, overly complex and/or narrowly focused on minutiae.  
• And finally, I hoped this would help to develop further and deeper relationships with friends, readers, and clients.  And to that end, I wanted to encourage you again to write newsletter@fangornfinancial.com with ideas for topics, questions, recommendations, and or song suggestions!  And I will do my best to incorporate your feedback to share with everyone (anonymously, of course).

Now surely some readers are thinking.  “Ok, he’s already trying to shirk the work of coming up with new topics, not surprising. And..hold on… can we trust him anyway? Where is the discussion of the AI industry, enlightened by the astute (and optimistic) opinions of real English professors. It was promised last newsletter, and it was undoubtedly going to be a refreshing change from reading half-baked takes from a financial advisor pretending to be an English professor”!   

First – good memory, second - I usually pretend to be a doctor, and third – apologies!  This episode was way over the word count.  (It is still way over the word count, but it was also).  And the update on our recurring theme of behavioral finance/economics/game theory was already bestowed the honor of (downgraded to?) being the focus of the bonus newsletter this month. So the AI discussion will be pushed until next month’s newsletter - assuming the singularity and robot apocalypse doesn’t come first.  I’m feeling lucky though.  Hope I get lucky with the extraordinary rendition too!  

Musical Interlude

In case anyone needed a break before we dive into the somewhat distasteful (and certainly overwhelming topic) of Elon Musk, feel free to grab a coffee and pretend this is intermission.   Warren Zevon sings this about Honduras, but I can imagine a different verse being applicable today: “El Salvadoran prisons/
made me a desperate man/send lawyers, guns and money/the shit has hit the fan!”.   

Protests, TSLA, and xAI buying X (née Twitter)

TSLA closed at $251 on Election Day (November 5).  By then it was already pretty clear that Elon was “all in” on Trump [I think my favorite description is still Tim Walz’s “skipping around like a dipshit” quip] but it wasn’t clear Trump was going to win. With Trump’s win, TSLA ultimately hit $480 (mid-December) but on March31, it closed at almost 260, not quite cut in half (and who knows where it will be by the time I get this out - and then by the time you actually read all the way down to this part of the newsletter). There are lots of reasons for the drop, but it’s pretty clear that Musk’s non-Tesla activities aren’t redounding to the benefit of shareholders.  I don’t think anyone (even Musk) thinks the little QVC infomercial with President Trump at the WH ican repair the damage.   Meanwhile, anti-Tesla protests are widespread; sales are tanking across the US and absolutely plummeting in Europe. Meanwhile, in Canada, Tesla likely committed widespread fraud by claiming to sell approximately 1 car every 2 seconds for an entire weekend (in just 4 dealerships).  Coincidentally, that weekend was immediately after all dealerships were notified that the Canadian EV rebate was almost out of money and ending early.  Tesla must be lucky, because that purely coincidental rush of sales resulted in Tesla claiming almost all of the remaining $40ish Million in rebates.  Hmm…

First, it seems clear that (i) protests targeting Tesla are having the intended effect [I put a anti-Elon sticker on my car, so please don’t burn it!], (ii) sales are going to (continue to) suffer, and (iii) Elon is persona non grata amongst his here-to-fore primary customer base. To the extent you sell expensive status-symbol cars (and it’s not a stretch to say that Tesla’s were originally status symbol cars – particularly with coastal elites interested in technology and stopping [or, less charitably, appearing to stop] climate change) it’s crucial to have lots of wealthy customers who will buy new cars on a whim.  But can Tesla possibly replace the sales to wealthy coastal elites (where, by the way, most of their charging and sales infrastructure resides) with sales to wealthy MAGA Republicans?

Second, TSLA is historically been (very) overvalued compared to other car companies. (The classic “crazy fact” is that TSLA market cap has frequently exceeded that of all the other car companies combined). Part of that has been a first-mover advantage, part has been better tech and better/more reliable charging networks, part has been“optimistic” marketing claims about (i) full self-driving and robo-taxis (or similarly, “it’s an AI company”); (ii) Cybertrucks which are indestructible and can even turn into boats [Spoiler: They don’t work as boats –in fact, try not to expose them to water.  Or wind, apparently];and (iii) the mythical under $35,000 “economy car” [Spoiler: It’s always right around the corner]. Another huge piece, however, has been what can be most charitably called fan-boy purchasers of the stock. 

But, times have changed.   People who want a good EV have options[i](though not true economical ones; and the new tariffs won’t help).  Except maybe Tesla,who has big plants in Fremont, CA , Austin, TX, Buffalo, NY.  Meanwhile, Tesla’s tech advantage is shrinking, and their charging network has been opened to other brands (plus, other charging networks are slowly catching up). But the reputational hit will be the most damaging: (i) geo-politically and (ii) to his “optimistic” marketing claims. And then ultimately his fan boy support will be at risk (though this is the biggest unknown).

Third, Geo-political risk. Being associated so closely with Trump is already tanking Tesla’s reputation with customers (and crushing sales numbers) – and if he wants to build/sell cars in Europe, he needs to keep the regulators and the unions happy too.  Seems unlikely.  And where else is he going to sell them? What wealthy markets does Elon have left? China? Nope, BYD is eating Tesla’s lunch. The Middle East? A tiny wealthy populations and autocrats which depend on oil revenues.  Russia?  Hmm…not great optics. Brazil? Whoops, Lula won and won’t be keen on helping Elon – who would (did?) support Bolsonaro (if Bolsonaro were ever allowed to run again – Hey Democrats, take notes!). Australia? Whelp, sales are already down 70% in Australia, so that’s not great.  India?  Well, they aren’t for sale in India yet – but hope springs eternal, I guess. And Trump’s tariffs can’t help! I note that Canada was already focused on reciprocal tariff’s that hit “red states”;  so if Tesla already allegedly committed fraud in your country, oof.   But Tesla will certainly be an easy targets for regulators globally.

Fourth, Marketing . When your reputation is in tatters it becomes a lot harder to spin any optimistic stories, whether about full self-driving (which you have promising for nearly a decade) or robo-taxis (where Google’s Waymo is far outpacing you. Additionally, how many media outlets (besides Newsmax) will breathlessly report on his new claims?  When is he going to do his typical marketing stunts (sleeping at the Fremont factory for weeks at a time)?  He is on Twitter all the time. He is at the White House and Mar-a-Lago and managing (?) DOGE and SpaceX (plus xAI andTwitter, which I guess are together now anyway).  And the last vehicle they delivered (the Cybertruck) has been an unmitigated failure (apparently Tesla no longer accepts them as trade-ins, which is funny and wild). Plus, can you market TSLA stock with “Tesla is actually an AI company” when Musk actually has a different, separate AI company.

Fan-Boys to the Rescue  

Can the fan-boys save it, just like they saved Gamestop and AMC.  [Actually,hold on – I just checked GME and, oof…not great. But AMC is probably still doing… holy shit, ok, ok, ok….it looks like they didn’t save AMC either.]   Fine - forget those examples.  But Tesla stockholders are wealthier (due in large part to the amazing Tesla stock performance in the past) and they can keep buying, right?  I don’t know. What I do know is that Musk is distracted(including passing out $1,000,000 checks to voters in a Wisconsin judicial election).  And that Musk was so desperate that he asked a President who doesn’t drive anything bigger than a golf cart and can’t pronounce his company’s name (I love Tesler) to shill for him on the White House lawn. Perhaps he’s already struggling to motivate his fan-boys to hold?  It is not super inspiring to beg your employees to not sell their company stock.  Particularly when your board members and executives have ONLY sold stock for the past six (maybe 12 months) – not a single open market buy[i].   And it should be embarrassing to go on TV and whine about Tim Walz making fun of the stock price decline – but I guess not. Of course there has been speculation that Musk is highly leveraged, since we know he pledged significant chunks of Tesla stock to purchase Twitter (the theory being that too much selling pressure and stock declines could result in margin calls, additional pledges of Tesla shares or, the most unlikely, forced liquidations?  Oh wait.  

xAI buys Twitter (Ok, X)

That is the only dead-naming I engage in, but I can't quite quit calling it Twitter! And I admit the margin call theory was a bit of a red-herring (the English professor usage, not the financial professional usage - see call out below), because I actually don’t believe that this transaction is related to the personal de-leveraging for Musk (my understanding is that Twitter debt was already off-loaded (or repurchased by Musk), but I don’t have good insight into his personal finances). But I am concerned (or would be concerned if I held a significant TSLA position) that his wealth is now (or soon will be)more dependent on SpaceX and xAI and the results of the Delaware court decision about his previous pay package than it is on future Tesla stock performance. Has corporate governance moved on from trying to align manager/shareholder incentives?  I never went to B-school so… 

My main takeaway here is that this transaction reinforces the idea that Musk is losing interest in (and devoting less attention to) Tesla, and pivoting to SpaceX and xAI.  Remember, Musk had already caused waves [I’d say “gotten into hot water”, except that implies he might be scalded, and he doesn’t appear to have ever actually been held accountable] for allocating scarce NVIDIA chips to xAI, instead of to Tesla, who had originally placed the order!  That suggested some shifting priorities already, but now Musk’s attention may be even more diverted (for example, will the current CEO of Twitter stick around since it’s just a business unit of xAI?). Plus, with Musk’s claims that xAI’s valuation has somehow increased to$80M, he basically bailed out all of the Twitter shareholders (mainly employees and some big investors) at super high premium to what outside investors thought Twitter was worth (Fidelity had reportedly marked its Twitter holdings down by70%). That is a significant unrealized loss for all the Twitter stock holders that has been erased. And somewhat striking compared to the public admonition to Tesla stockholders to not sell stock (as hinted at above, I think that discussion with employees was directed more towards his fan-boys):  “Hey guys, don’t sell your stock like my brother Kimbal did.  Just HODL, you’ll be fine.  Anyway, I’m off to Wisconsin.  Stay safe.” Again, not a great look. [Late Update:  Worse! Musk passes out millions of dollars and Wisconsin resoundingly rejects his candidate. Tesla employees might have preferred he spent that $2M (maybe up to $25M in total?) on them; I mean that’s a lot of pizza parties! Plus, now Musk looks like a loser.  And Trump hates losers!)  If I had to hazard a guess, I’d say that some of his fan boys have been burned by HODLing shitcoins before.  Are they ready for yet another rug pull by their hero? If not, I am still accepting new clients!

Of course, an alternative explanation is that Musk thinks that xAI is super over-valued, and he is taking advantage of these excessive AI valuations in the market to, effectively, “sell high”.   Of course, as the CEO of xAI (and previously involved in OpenAI), Musk probably has insights about the overall AI market, business uses cases, and valuations that I don’t…so perhaps we should take notice that he thinks it’s a good time to sell? I have to admit that Grok, xAI’s artificial intelligence agent, can be pretty funny when it is asked to evaluate Elon Musk’s actions.  I have lots of stuff already written about AI – maybe there will be time for it next month?!

Conclusion/Recommendation

Keep it Simple, Stupid.  Buy ETFs which are diversified and with low expense ratios like VOO, VXUS and (depending on your risk tolerance) BND.  End of recommendation. Kidding, of course, because (although I do love me some index funds) good asset allocation is frequently more complex (or at least more personal).  Even though I do have a soft spot for the VT and Chill crowd.

But I guess if you are still reading, you are looking for my theory on TSLA 😊; and I need to make my readers happy so I’ll oblige! But it’s definitely not a recommendation (that’s what I assume my lawyer would say, if I had one).  Tesla’s historically inflated valuation is on its last legs.  If Tesla returns to a more normal industry valuation, we are going to see Tesla stock drop (and keep dropping,and then, when you think it might be done, keep dropping).  Now, this isn’t “new” at all; this has been warned about before (and those prognosticators have been burned – since even McKinsey knows that being too early is indistinguishable from being wrong), but crucially, I don’t see tons of upside catalysts here, which is the biggest danger for any short (i.e. downside) bet and why, typically, early is wrong.   The lack of upside catalysts makes this abetter time (though still risky) for any trade that bets against Tesla – or even a trade that simply doesn’t give credit to continued Tesla out performance. [Late Update:  Tesla sales dropped by 13% YoY, 32% QoQ, and – fittingly – the stock was (at least at some point in time this morning) up to $280.  So, yeah, be careful.]

Why do I see no/limited upside? Well, does Musk resigning as CEO of Tesla reverse this situation? If he is still making “roman salutes”, but now his title is CEO of only SpaceX and xAI, does everything go back to normal?  What about resigning from DOGE (after firing hundreds of thousands of federal employees) and returning full time to Tesla.  Maybe a short boost, but isn’t he worse for the brand now?  What if Trump cuts him loose (not that the President ever turns on former allies or anything) and then even the MAGA fan base won’t buy the Cybertruck?  I don’t think the environmentally conscious buyers will rush back (assuming they enjoy schadenfreude as much as I do) [Yes, I am working with my therapist on that, but no real progress]😊.  And if he walks away from Tesla, and focuses just on SpaceX and xAI, then who will fix the Cybertruck or finally deliver on the robo-taxi?[i] I can easily imagine Tesla, the company,surviving and growing sales again, but probably only after Musk resigns,divests, and replaces the Board (unlikely in the short term).  And Tesla, the car company, surviving doesn’t mean TSLA, the overvalued stock, grows or even maintains its crazy high multiple.  So it seems that the fan boys (who might be propping up the stock now) are stuck.  If Musk leaves (or divests), will they sell all their stock (furthering any decline caused by Elon’s sales) or will they HODLin the hopes Musk comes back in a few years like Steve Jobs?  If they do start selling, then Tesla could fall even more precipitously.

No target price. I am not so rash as to make a price recommendation; but this seems like a time when someone could use their “playing around” investment account to go short.  But it being TSLA means that is still risky (for example, xAI succeeds in developing AGI and Elon makes a tender offer to take Tesla private in yet another all stock transaction;presumably he would announce that with a tweet announcing funding secured at $420 per share).  Plus,even in the midst of long-term declines, you can expect short term volatility.  So probably the best approaches would be (i)buy long dated and way out-of-the-money puts or (ii) sell bear call spreads (and, of course, if you need me to explain it in the newsletter, you shouldn’t buy/sell them!); or (iii) if you are already invested in a personalized direct indexing product [which I am not necessarily a fan of, but that is a long and complicated topic] that allows for ticker exclusion just exclude Tesla? Although I have purchased a (very, very) few of each of (i) and (ii), I haven’t priced out all various permutations to see if I’d be inclined to make a bigger bet on some specific risk/return profiles.  Obviously (i) is more of a swing for the fences sort of play, as you need to be willing to lose the entire bet, whereas (ii) is defined risk and more conservative (but maybe that’s my old lawyer habits holding me back).  And why should you not just put in a regular short position on the stock?  Well, because you aren’t as rich as Bill Gates. 

Oh well, I still find it fun to think about (and make some tiny bets on) these speculations, before I swallow my pride, clutch my dog-eared copy of A Random Walk Down Wall Street to my chest, and buy some more index funds.  And with that, I wish you all a very happy Liberation Day! (and pray to the ghost of Warren Zevon that that will keep me out of El Salvadoran prison)