Tesla (TSLA) shares jumped 10% on Monday, gaining over $50 billion in market cap in one day. For perspective, Ford has a market cap of $48 billion. Fueling investor optimism was a Morgan Stanley research report upgrading Tesla’s share price to $400. Such is a nearly 50% increase over where TSLA shares currently trade. In late 2021, TSLA shares peaked at $400. Because of its valuation at the time, TSLA stock was priced at multiples of its competitors, surpassing every other automaker’s aggregate market cap. Prior investor expectations for tremendous growth and industry dominance were mainly based on EV auto sales.
Morgan Stanley thinks TSLA will have a distinct advantage in autonomous cars, specifically in artificial intelligence (AI). Per the article’s opening: “The autonomous car has been described as the mother of all AI projects. In its quest to solve for autonomy, Tesla has developed an advanced supercomputing architecture that pushes new boundaries in custom silicon and may put Tesla at an asymmetric advantage in a $10 trillion TAM.” TAM stands for the total addressable market. The auto industry makes about $2.5 trillion in revenue annually. Companies like Tesla, involved in AI, have seen their shares surge. The question facing Tesla, Nvidia, and other AI leaders is, can profits ultimately catch up with such massive valuations? Also, consider if AI companies meet their grand expectations; competing companies that cannot innovate quickly enough will fail.
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Market Trading Update
Credit Availability Adds To The Lag Effect
When most people talk about the lag effect, they are primarily concerned with higher interest rates and how they dampen economic growth and dissuade spending. There is a second component that is important but not often appreciated enough. The shape of the yield curve plays a significant role in bank profits. Bank profitability and perceived credit risk are big factors driving a bank’s desire to lend money.
Inverted yield curves make borrowing short and lending long less profitable and sometimes unprofitable for banks. Further, inverted yield curves always lead to recessions. Consequently, not only are profits limited, but credit risk will increase on loans made during these periods when the recession does occur.
The graph below from the Daily Shot shows credit availability is harder today than at any point in the last ten years. So, while higher interest rates disincentivize borrowing and spending, some borrowers are also finding it more difficult to borrow.
A Unique Perspective On Unemployment
The graph below, courtesy of Trading View, presents the unemployment rate in a unique format. Instead of showing the actual rate, the unemployment rate is subtracted from 100, which inverts the line from what we are used to seeing. The graph is a mirror image of the traditional unemployment rate presentation, but one thing becomes more noticeable in this format. The unemployment rate is always rising or falling. It spends very little time consolidating at the same level.
Economic prognosticators with a soft or no landing consensus must believe, by default, that unemployment will consolidate at 50-year lows. History thus far proves that doesn’t happen. Might this time be different?
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