We’re now three and a half months into 2024.
Already, we’ve completely forgotten if we started this year with what’s known in the newsletter business as a ‘predictions issue.’
And if we’ve forgotten, chances are you’ve forgotten too.
So, regardless, we’ll share two ideas that probably have zero chance of happening this year (if at all)…
And how you can play them. Details below. But first…
Market Data
The S&P 500 closed down 0.2% to end the day at 5,011.12… the NASDAQ lost 0.5% to close at 15,601.50.
In commodities, West Texas Intermediate crude oil trades at $82.68, down eight cents…
Gold is $2,395 per troy ounce, up $7 from yesterday…
And Bitcoin is $63,415, up $2,159 since yesterday.
And now, back to our story…
Ludicrous Prediction #1
Yahoo! Finance reports today:
Tesla (TSLA) filed its proxy statement ahead of the EV maker’s June 13 shareholder meeting with two big requests: that shareholders vote to move Tesla’s state of incorporation to Texas and that they ratify CEO Elon Musk’s 2018 pay package that a Delaware judge rescinded earlier this year.
In her letter to shareholders in the proxy statement, Tesla board chair Robyn Denholm said the time is right for Tesla to move its corporate home to Texas, where the company has been headquartered since December 2021.
It’s no secret that Elon Musk has been under a huge amount of pressure over the past 18 months, at least.
He led a group that took what was then known as Twitter private. A whole bunch of advertisers left the platform… he fired 70% of the staff… and it’s still losing money.
Meanwhile, as the Yahoo! Finance story notes, a Delaware judge blocked Musk’s pay deal, stripping him of a multibillion-dollar payday.
At the same time, the Tesla (TSLA) stock price has hit the proverbial skids. It’s down 48% since its recent July 2023 peak. And it’s down 63% since its November 2021 all-time high.
Not to mention all the talk about slowing demand for electric vehicles and the underwhelming reaction to the Cybertruck launch.
Our prediction here? It’s that Musk will quit as Tesla’s CEO before the end of the year. This will result in a complete cratering of the Tesla stock price… at which point, he’ll attempt to form another syndicate to take Tesla private.
Likely at a total value of no more than $100 billion… which would be roughly 75% below the current market capitalization.
So, what’s our justification for this ludicrous prediction? Musk strikes us as a guy who pursues projects he enjoys, where he sees an altruistic outcome in one form or another… and he has to personally enjoy those projects.
But we figure that enjoyment is fading fast at Tesla. It was a leading-edge company… with new technology… it was a genuine ‘disruptor’ in a market (the auto industry) that hadn’t really changed for nearly 100 years.
Today, Tesla isn’t innovative or leading-edge at all. It’s getting squished on all sides. Mostly from China and the legacy car makers. The fact is, if you’re a Ford guy, a Mercedes guy, a Volvo guy, or a BMW guy, you’ll buy their respective EVs, rather than switch over to a Tesla — or any other EV.
The Tesla fanboys already own a Tesla. So the company already has its hardcore fans locked in. Everyone else is marginal. Does that sound like the kind of exciting industry Elon Musk wants to be involved with?
It doesn’t to us. So our bet is, whether or not he gets the $56 billion payday from Tesla, he’ll quit before the end of the year. In fact, we’ll take our ludicrous prediction one step further by saying he quits before Labor Day.
Ludicrous Prediction #2
A recent story from Reuters tells us:
Federal Reserve Chair Jerome Powell said on Wednesday recent high inflation readings had not changed the underlying “story” of slowly easing price pressures in the U.S. as the central bank stayed on track for three interest rate cuts this year and affirmed that solid economic growth will continue.
The Fed also left interest rates unchanged and released new quarterly economic projections that showed officials now expect the economy to grow 2.1% this year, above what’s considered the U.S. economy’s long-run potential and a substantial upgrade from the 1.4% growth seen as of December. At the same time, the unemployment rate is only expected to hit 4% by the end of 2024, barely changed from the current 3.9% level, while a key measure of inflation is projected to keep falling, though at a somewhat slower pace, to end the year at 2.6%.
We’ve written about this before. The Federal Reserve has no intention of letting inflation fall back to around 2%.
It will be a drawn-out process, but by the end of this year, it will become fully ingrained in Wall Street – and repeated by the metronomic talking heads on cable business channels – that the new inflation target is 3%.
Intuitively, you may think that means the Fed will cut rates to keep inflation higher. But we argue that the Fed will keep rates where they are to re-condition the public into believing that interest rates around 5% are ‘normal’… something many people already believe…
And then align the 3%-plus inflation rate with the ‘normal’ interest rate. The risk is that if interest rates fall, folks will continue to associate higher inflation with an ‘abnormal’ economy… they’ll start to worry… they’ll cut back on spending… which will force inflation lower, making it even harder for the government to repay the interest on its $30 trillion debt.
Sounds complicated? It is. But our bet here is that while the market expects three or four rate cuts this year, the real outcome will be no Fed interest rate cuts at all… not this year, and maybe not next year either.
How to Play it
Who knows if we’ll be right? Odds are, we won’t.
But it’s worth a speculation.
Mostly, we leave options trades to the experts who really know how they work.
But if we were going to play the ‘Musk quitting’ trade and the ‘Fed inflation’ trade, we would look at a vertical spread put trade.
For instance, you could buy a January 2025 $135 put for a premium of around $16, and at the same time sell a January 2025 $110 for around $7.50. That would be a net debit from your account of $8.50, being the maximum loss on the trade.
But if it pays off and Tesla falls to around $110, you’ll lock in a net profit of around $17. Not bad.
For the ‘Fed inflation’ trade, we would also recommend puts here. That may also seem counterintuitive, seeing as inflation often isn’t necessarily bad for stocks. The point here is that the market has driven up stock prices (especially mega-cap tech stocks) on the expectation of rate cuts.
If those rate cuts don’t happen, megacap tech especially, will take a beating. So here, we’d look at the Invesco QQQ Trust ETF (QQQ). It tracks the performance of the Nasdaq 100.
Here you can buy a November 2024 $415 put for around $19, and at the same time sell a November 2024 $380 put for around $10. That’s a net debit from your account of $9… give or take.
If things play out as we expect by the time these options expire, you could end up with a $25 gain. Not bad either.
Anyway, something to think about. Just remember, our predictions are ludicrous… so only a madman would actually make these plays and expect to win. But if you have some spare change in your brokerage, and you after some fun… well… do with it as you will.
We’ll follow along and see how it all plays out.
More Markets
Today’s top gaining ETFs…
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iShares MSCI Chile ETF (ECH) +1.8%
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Global X MSCI China Consumer Discretionary ETF (CHIQ) +1.5%
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Invesco KBW Property & Casualty Insurance ETF (KBWP) +1.3%
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iShares MSCI Peru ETF (EPU) +1.2%
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SPDR S&P Insurance ETF (KIE) +1.2%
Today’s biggest losing ETFs…
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Invesco Dorsey Wright Healthcare Momentum ETF (PTH) -2.4%
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Global X MSCI Colombia ETF (GXG) -2.2%
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SPDR S&P Semiconductor ETF (XSD) -2%
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Invesco Semiconductors ETF (PSI) -2%
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VanEck Semiconductor ETF (SMH) -1.8%
Cheers,
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Kris Sayce
Editor, The Daily Cut