Last week, while the media were wringing their hands over fake news, the Dow Jones Industrial Average jumped another 354.68 points or 1.7% to close at a record 20,624.05, hitting seven straight days of record highs. The S&P 500 popped 1.5% to a record 2351.15 and the Nasdaq Composite Index gained 1.8% to a record 5838.58. While Trump’s opponents may fear for the future of the Republic, they would do better to fear for the future of their 401ks because this rally is running on fumes.
The truth is that markets thrive on investors’ stupidity and we are seeing a perfect example of that today while markets rally on nothing more than hot air. Believe me, I thought the market would rise after Mr. Trump was elected; the opportunity to rid the country of 8 years of anti-growth policies was a game-changer that promised good things in the future. But that doesn’t mean that investors should be discounting a decade of growth and two terms of promises, many of which will not be kept, in a one month period.
The market is well ahead of itself and poised to correct. Sentiment and other warning indicators are flashing red. Investors chasing stocks at these levels are taking big risks. And one of the biggest risks is Tesla Inc. (NASDAQ:TSLA), which plans to announce earnings after close today.
Here’s what I expect will happen…
I told you last week that I’d have a piece for you on my latest “private equity victim.” I didn’t know then just how good this was going to get.
I released the full version of this piece, with a detailed recommendation, on February 6th for my Zenith Trading Circle members. (Subscribers can go here to get that recommendation now.) At that time, the company was still anticipating earnings, and I anticipated that it was headed for disaster.
I wrote, “[It] pays a $0.80 dividend, which gives it a ridiculous dividend yield of 8.87%. Look for the company to cut the dividend, which costs it roughly $40 million a year [it turns out the number is closer to $50 million – ed.], after another quarter or two of losses triggered by failure of its new strategic plan. A dividend cut will gut the stock even further.”
Yesterday, the company released abysmal earnings for Q4 2016 – same store sales were down 12%, revenue in the US and Canada fell by $41.1 million or 8% from $472.6 million to $513.7 million and even ecommerce sales dropped from 8.8% of the total to 11.4% of the total a year earlier (which is what happens when you raise on-line prices in a cut-throat pricing environment). Also – as I expected – the Board of Directors decided to suspend the company’s quarterly dividend in order to use free cash flow to reduce debt (which will save about $50 million a year but really won’t make a dent in the company’s $1.5 billion debt load).
The stock was down 10% on the news, and since it’s trading at about $7, it still has quite a bit of room to fall.
That means my Sure Money readers still have time to profit…