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Fake Quiet In The Eye Of The Storm


The S&P 500 moved by a mere 0.16% yesterday, making it 13 straight days in which the principal stock market average has changed by less than 0.3%. We mention that because it turns out that 13 straight days of virtual flat has never occurred before in records going back to 1927.

But despite the implication of the graph below, this is not about watching grass grow. That's even given that the S&P's closing prints over this unprecedented stretch of equipoise—–2474, 2473, 2473, 2470, 2477, 2478, 2475, 2472, 2470, 2476, 2478, 2472, 2477, 2481, respectively—–suggest exactly that.

To the contrary, it resembles something altogether different—– the absence of wave action in the eye of a hurricane, for example. Indeed, we have encased the graph in red to implicate the extreme dangers that are lurking all around.

These dangers start with the market's demented internals—such as Amazon at 187X earnings, Netflix at 219X or Tesla valued at $62 billion. And the latter is after the company racked-up an unbroken string of cumulative losses which total $3.6 billion over the last decade, and with no profits visible anywhere on the horizon, either.

What is visible, by contrast, is the sheer mania in the capital markets which have fed its cash burning machine with more than $10 billion of capital—-including last night's announcement that Tesla will issue $1.5 billion of junk bonds to fund the launch of its Model 3 "people's car".

Even by Elon Musk's own admission, the launch of it's first mass production car with a targeted build rate of 10,000 per week, compared to a maximum production rate of about 1,500 per week on its existing low-volume luxury models, will be an exercise in "manufacturing hell". The potential for massive cost over-runs and expensive rework and parts scrappage on flawed vehicles coming off an untested assembly line, in fact, staggers the imagination of anyone who has been around the mass production auto business.

So does the fact that even prior to the Model 3 launch, Tesla burned through $3.2 billion of cash during the LTM period ending in June, and consumed $7.5 billion of cash since 2012. Yet the indicative pricing on the Musk's new mess of junk is just 5.5%.

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