Wall Street Is Feeling The Pain Of The EV Bubble Burst

Pirelli is making eco-conscious tires, Wall Street agrees that gambling rocks, and Joe Biden wants point-of-sale rebates for EVs. All that and more in The Morning Shift for May 19, 2021.

It was around this time last year that Tesla's stock began an incredible ascent, following previous incredible ascents. With it, there are dozens of companies that have tried — in some cases, successfully, in others not — to ride its coattails. And with that, as Reuters reports, there are big funds on Wall Street that have tried to ride all of their coattails.

These are funds like Fidelity and BlackRock, which earn their living by pretending to know better than the average retail investor, but who, in reality, aren't any different than sophisticated gamblers. That's not an insult — lord knows I love gambling, please park me at a poker table in Reno so I can die peacefully — but that does run counter to decades of conventional wisdom about Wall Street.

Or at least decades of claims that Wall Street sharps have an edge somehow. If they do, that is usually because they are cheating, but, in reality, most of them don't.

Fidelity Investments, BlackRock Inc (BLK.N), T. Rowe Price Group Inc (TROW.O) and Scotland's Baillie Gifford are among the fund houses helping to bankroll the shift from fossil-fueled transportation with investments in one or more of 32 electric vehicle industry companies which they believe will be long-term winners in the electrification movement.

In the short-term, there have been some bumps in the road.

In just three weeks, from late April to mid-May, the combined value of those 32 companies has slid more than $200 billion to $810 billion, according to data compiled by Reuters and investor website Pitchbook, with Tesla, the world's most valuable automaker, accounting for three-quarters of the drop.

The steep slide in the EV sector is, for some market observers, a natural progression from the sky-high valuations being doled out in a crowded market to companies, which in some cases have no revenues or even products to sell.

"You are going to see some roadkill," said Evangelos Simoudis, venture investor and author of "Transportation Transformation".

Reuters can't say how much each firm is hurting, "as some of the investments are private and it is unclear how much each firm has invested in each," but that, too, is also part of Wall Street's black magic. Any gambler will happily tell you about their best bets, but will get real squirrelly if you ask about their worst.

Anyway, dogecoin, bitcoin, and other cryptocurrencies are also heading downwards steeply, suggesting that perhaps the stock market is reverting back to more time-tested investment strategies, like judging companies based on "whether they make money or not" and not because Reddit user big69win420 has decided to only live once. Nevermind, who am I kidding, that is not the world we live in right now.

These are guys — almost all guys — who cultivate a myth about their ability to beat market gains year in and year out. Some of these guys you may have heard of, like Warren Buffett. Most are more obscure. Many of them are named David or Bill. One who is in the semi-famous space is Michael Burry, who was portrayed by Christian Bale in the 2015 movie The Big Short.

Burry became famous for foreseeing the housing bubble that precipitated the Great Recession. That means that probably for the rest of his life every time Burry lays down a big bet in the stock market it will make waves. That's what happened on Monday, when Burry's firm disclosed its holdings in its quarterly report to the Securities and Exchange Commission.

That report indicated a sizable bet that Tesla's stock price would fall. Per Reuters:

Scion Asset Management said in a regulatory filing on Monday that it had put options on 800,100 shares in Tesla as of the end of the first quarter. Based on Tesla's closing price of $667.93 at the end of the first quarter the value of that many shares would be about $534 million.

[...]

It is possible the puts disclosed in the filing may be part of a larger trade that would curb losses if the put position goes against the fund, options analysts said.

"That could be the long leg of a put spread," said Henry Schwartz, head of product intelligence at Cboe, referring to a strategy involving a combination of purchase and sale of put options.

"That said, since they reported no long shares, and Burry is a pure 'value' investor it probably is a short bet," he said.

If you're blessedly unfamiliar with Wall Street lingo, a put option is a kind of security you buy that goes up in value as the value of the stock it is tied to goes down. Of course, if the value of the stock goes up, then the value of the put option also goes down. Sophisticated gambling, all of it.

Here is an item about the world's biggest rubber producer, Thailand's Sri Trang Agro-Industry Pcl, via Bloomberg. It is a very good time to be in the rubber business.

"Since this is the year of recovery for tires and autos, demand will rise while supply stays stable, so prices should be on an uptrend," as long as there are no more disruptions to the global economy, Veerasith Sinchareonkul, executive director, said in an interview. "In the past, supply grew at a faster pace than demand, but this year supply grows much more slowly."

Rubber demand will expand 5%-7% in 2021, while supply growth will be flat to 2%, Veerasith said. Rising demand for car tires as a result of a recovery in auto sales and travel is the key driver for prices as 80% of supply is used for tire manufacturing. Demand for rubber gloves is expected to continue to expand after the pandemic as emerging economies widen people's access to health care and the population ages, he said.

The idea here is that the federal tax credit on EVs — up to $7,500 — isn't good enough to encourage mass adoption, because a future tax credit isn't much good to you if you can't afford to get by till you get it. Also, EVs remain too expensive across the board, period.

Via Bloomberg:

President Joe Biden is "looking to invest more than $170 billion and he's going to build out the electric charging stations that we need for consumers to buy these vehicles and feel confident that they can get where they want to go and back again," McCarthy said in an interview on Bloomberg Television's "Bloomberg Technology."

"He's looking at actually providing consumer rebates at the point of sale," she said.

[...]

Critics say the current EV tax credit has chiefly benefited wealthy Americans. By contrast, a point-of-sale rebate — which is also championed by Senate Majority Leader Chuck Schumer — could help encourage more low- and middle-income motorists to buy electric vehicles.

This is all contingent on whether Biden can get his big infrastructure bill moving in Congress, an open question at the moment because Democrats — who control Congress and the presidency — currently lack grit. That is something you could get mad about if you wanted, but that has always been so.

If that is your thing. Via Pirelli:

Pirelli has become the first company in the world to produce a range of FSC-certified (Forest Stewardship Council) tyres designed for the BMW X5 xDrive45e Plug-in-Hybrid. These tyres contain FSC-certified natural rubber and rayon and represent a new horizon for increasingly sustainable tyre production.

FSC forest management certification confirms that plantations are managed in a way that preserves biological diversity and benefits the lives of local people and workers, while ensuring it sustains economic viability. The complex FSC chain of custody certification process verifies that FSC-certified material has been identified and separated from non-certified material as it makes its way along the supply chain, from the plantations to the tyre manufacturer.

The Pirelli P Zero tyre, the world's first FSC-certified tyre using FSC-certified natural rubber and rayon sourced from FSC-certified plantations will be supplied in the 275/35 R22 size for the front and 315/30 R22 size for the back on the BMW X5 xDrive45e Plug-in-Hybrid.

Spotted in the Catskills this weekend: a First Edition Land Rover Defender, a few new Broncos, a Ferrari 812 Superfast, some Ford Flexes, and so many goddamn Porsche Macans. Not a single 944, sadly.