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Wednesday, August 8, 2018

Elon Inflates Tesla Stock with Hot Air


On Tuesday, Elon Musk tweeted that he is considering a buyout of the company from the stock market. The Wall Street Journal explains:
The notion of a buyout, which would value Telsa above $70 billion, is itself extraordinary, as it would be far larger than any previous take-private deal. ... While Mr. Musk continued tweeting about the possibility over the next few hours on Tuesday, Tesla's public-relations team and main Twitter account remained silent, adding to the intrigue. 

There is only one reason for Elon to do this, and that is to inflate the stock price. Marketwatch.com reports that Tesla's stock has drifted downward over the past year, from the $350 dollar range to $300, occasionally dipping lower:

Figure 1
 

In July, Tesla rallied on the stock market following production and cash flow reports that were not as bad as some analysts had predicted. TheStreet.com suggested that the stock could reach $500. However, as soon as analysts and investors realized that there was no new substance behind the stock market inflation, the stock tumbled, again dipping below $300. 

Elon then goes on the psychological offense, trying again to blow more hot air into a leaky balloon. First the news breaks that a Saudi investment fund has bought almost five percent of the company, then Elon starts tweeting about a stock-market buyout. 

Both these news items are aimed at saving Elon from the humiliation that would come with bankruptcy. Nothing has changed, either in Tesla's manufacturing or on the market for electric vehicles. The company still burns cash like there was no tomorrow, and after fifteen years it still cannot survive without fat government support

In other words, the prospect of a corporate implosion still lies ahead, and Elon is well aware of it. His talks about taking the company private is a way of boosting the stock price should be viewed in this context. It is likely an overture to a sale to new owners. By bringing Saudi investors onboard, he can now talk to them in peace and quiet. That does not mean the Saudis would agree to buy the company, when they see how it is bleeding money and how dependent it is on one specific brand of environmental policy. 

The latter point is only going to grow in importance. Current tax breaks for electric-car buyers are in jeopardy. President Trump's original tax plan proposed terminating the $7,500 tax break for electric cars. It survived the final tax reform, but as the New York Times explained at the time,
Given that Tesla and General Motors are by far the top producers of electric vehicles, you’d expect their executives to be thrilled. G.M. has made a huge commitment to an electric vehicle future, and has pledged to have 20 new models on sale by 2023. It lobbied to preserve the incentives. But Tesla has been conspicuously silent on the law. And G.M.’s response has been qualified. ... That’s because as now structured, the tax credit puts Tesla and G.M. at a competitive disadvantage, especially compared with foreign rivals who are just starting to ramp up electric vehicle sales in the United States. The tax credit begins to phase out after a company sells 200,000 electric vehicles — a threshold both Tesla and G.M. are expected to reach this year.
While they may want to see an extension of the credit to all electric car buyers, there is a chance that a reform to the tax credit could go in quite a different direction. For example, a reform could be structured in such a way that it would benefit others than the electric-car companies per se. As it works today, the tax credit is a flat price cut on the manufacturer's price; a future reform could make it much harder for the manufacturer to use the reform to incentivize buyers. From WardsAuto.com:
Case Western Reserve University researchers recommend scrapping the standard $7,500 federal incentive to buy electric vehicles in favor of a sliding scale favoring states where EVs least harm the environment. This after their research found the “green” value of EVs can vary dramatically across the U.S. due to climate differences, whether producing the electricity to recharge them relies on fossil fuels, and how far the vehicles are driven each day. 
It should not take researchers at a top academic institution to figure this out. Anyone who lives in the snow belt knows what difference it is driving a regular car here vs. in sunshine country. Furthermore, hybrid owners reluctantly admit that the electric performance of their vehicles is not exactly impressive during the cold, snowy part of the year. Nevertheless, it is refreshing to see academic research that actually is useful and makes sense from a public policy perspective.

WardsAuto.com again:
Lead researcher Chris Yuan, an associate professor in Mechanical and Aerospace Engineering at Case Western Reserve, says the study concludes that how environmentally friendly EVs are as alternative to fuel-burning vehicles actually may depend on where you live. “EV batteries degrade so differently in each state that the battery life and the greenhouse-gas emissions should both factor in EV incentives,” Yuan says in a statement. ... “It may not be a good option to offer the same financial incentive to EV drivers in all states.”  
And now for the punch line:
The study finds EVs sometimes can contribute as much in greenhouse-gas emissions (GHG) as their internal-combustion-engine-powered counterparts – even if indirectly from the electricity consumed by the battery in powering the vehicle. ... Recharging EV batteries in states which rely heavily on coal or natural gas to generate electricity produces more GHGs. Conversely, batteries recharged in states with a large share of hydropower or renewable energies – such as wind and solar – produce less GHG emissions. Warmer weather and more driving miles wear out EV batteries faster, requiring more frequent recharging, which gradually increases an EV’s energy consumption and GHG emissions.
Considering that there are some 40 million people in the North East Corridor alone, another 20 million from Chicagoland up to the Twin Cities, five million in the greater Denver area, and so on, a reform of this kind would have major impact on the sale of electric vehicles. If Congress wants to keep the tax credit true to its goal of reducing global warming (assuming, for a moment, that the false notion of "climate change" actually has some truth to it) they would have to move the base of the credit away from the vehicle. It would have to be based on where the buyer lives and on his individual driving habits. 

All manufacturers of electric vehicles would suffer as a result. The sale of these "cars" would drop dramatically, and the cost of maintaining a new, individualized credit would go up substantially. The IRS would have to ask each and everyone of us to report where we recharge our vehicles, how far we drive each year, and where we drive. 

The problem, of course, is not the IRS but the micro-management that this version of the EV tax credit would require. Yet the Case Western Reserve researchers have a point: if the credit is going to reflect an environmental choice by car owners, the credit cannot be based on the manufacturer's sale of the car. It has to be individualized.

As of today, we have no reason to believe that this owner-based tax credit would become the law of the land. On one side, Elon and his EV lobbyists will fight tooth and nail to keep the current system, without which his business endeavor would collapse in short order. On the other side, it is hard to imagine that President Trump would sign into law a reform of this tax break that would make the cost of enforcing the tax break exponentially more costly, while also dramatically increasing government micro-tracking of people's lives. 

In conclusion, Tesla's problems continue to grow and Elon is pulling stock-market tricks out of his sleeve, desperately trying to fend off the inevitable verdict of free-market capitalism. And this is not all: if we really want to tie the EV tax credit to its true impact on our world, we should consider the enormous moral price tag that comes with every Tesla. Its batteries are made with cobalt, the global supply of which largely depends on the diabolic practice of child-slave labor in Africa. It is impossible to see how any battery-powered vehicle would survive on the market if its buyers had to pay a price appropriate for the harm they help inflicting on pre-school age children in a faraway country.

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