Going into this week I was short only Citi on the equity side which I wrote about here. Thankfully after a couple of weeks in the red I am now profitable on my Citi short and expect financials to continue to give back their illusory gains. I was able to move my stop up to guarantee a profit. I have been dying to add some other names to my list of shorts and as of today could no longer stand on the sidelines.
Today I went short XLE as well as GM and TSLA. Lets take a look at each individually.
I went short energy as I am very bearish on oil in the shorter term. This is certainly a trade and not a long term position. The spec money is insanely long oil while the producers are as short as they have ever been. OPEC managed to drive positioning to absolute extremes. Oil has ignored the price of the dollar, which I see heading back to new highs after it tests the zone I outlined on the DXY chart below. Oil cannot ignore the price of the currency it is traded in (in my opinion).
Outside of positioning and the dollar, it is clear to me that supply/demand remains a problem with insanely high inventories. OPEC is already talking down expectations for the future which will not be helpful. With that said, I expect much more *negative* jawboning from OPEC in order to build up a pile of shorts to later burn to ignite a squeeze to $60 in time to IPO Aramco. They may need to do a couple more short squeezes to get there but I expect them to let the price go low enough to encourage the shorts to move in. I would like to profit from this in the meantime. Energy was the best performing sector in 2016 and I expect some give back early this year, much like financials. The US is a very resilient swing producer and alternative energy gains market every day. There are a lot of headwinds for oil and most of them will drive price over the shorter term. If a lot of shorts pile in I will go long and wait for OPEC to burn them down again.
Next up is GM who has had a great run with strong auto sales. The problem is they have sold a lot of cars to a lot of people with a lot of bad financing for people with a lot of bad credit. Now they have a lot of inventory and a lot of used cars piling up because they leased a lot of cars in a myopic strategy of getting cars out the door by any means. Well, payback is approaching for those misdeeds as the US consumer is tapped out paying for Obamacare, rising rents, rising energy, with wages struggling to keep up with actual real-people inflation (I call it RPI). Consumers appear to be using credit cards more and more for every day purchases which tells you a lot.
That is all bad enough but now GM is starting to onshore a lot of jobs (Thanks Obama!...wait...) which is not going to be friendly to margins. Workers in Mexico are nearly free compared to US auto workers so expect GM to struggle to overcome this challenge. Sure they will get a tax cut but their effective rate is already well under 25%. The auto sector was already in trouble, but tearing up production expansion plans in cheap markets to build in the US will make the problems that much worse over time.
Last but not least is TSLA. Honestly if you want to understand the Tesla thesis, just read Jim Chanos because he is smarter than me. For the short version...the company is cool and makes awesome cars but financially is an absolute grease fire. Their GAAP vs non GAAP accounting is truly something to behold and appears to be getting sketchier by the day to my amatuer eyes. They face a lot of competition all of a sudden from around the globe. Most automakers are getting on the electric bandwagon wholeheartedly and while Tesla will keep the higher end market I am sure...the stock is priced like they will sell more cars than Ford, which is just crazy. The valuation of the company is honestly offensive, and it has rallied since bringing on dumpster fire Solar City. So in my view this company is a dumpster fire wrapped inside a grease fire financially. With that said as you can see from the chart, Tesla has been on a relentless rise since November really. I wanted to jump in the entire way and managed to hold off, but decided to take the plunge today. I would have lost my shirt if I went short in December and I believed in this trade then too, so this one is one I will be very careful with. Tesla hit a nice technical level today that I believed would hold up. We shall see.
Short sellers have been brutalized for a long time now and I may well get my ass handed to me on these shorts, but I really think now is the time to start testing the waters with some selective shorts. Trumphoria is starting to wear off and the reality of tightening conditions and rising rates will eventually cause the tide to go out on an immense amount of misallocated capital. The Fed has cover to sneak rates up to a level that puts a few bullets back in the gun and they know they have to use it. One of those bullets is going to shoot the Fed in its own leg though. When the Fed goes Plaxico Burress this year, you want to be positioned to take advantage.