March 29, 2019

Friends and Fellow Investors:

For March 2019, the fund was up approximately 5.5% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 1.9% while the Russell 2000 was down approximately 2.1%. Year-to-date 2019 the fund is up approximately 12.8% while the S&P 500 is up approximately 13.6% and the Russell 2000 is up approximately 14.6%. Since inception on June 1, 2011, the fund is up approximately 85.4% net while the S&P 500 is up approximately 148.5% and the Russell 2000 is up approximately 102.4%. Since inception the fund has compounded at approximately 8.2% net annually vs. 12.3% for the S&P 500 and 9.4% for the Russell 2000. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two. (If you’re an investor in the fund, you should have your 2018 K-1 next week.)

I continue to believe that what we’ve seen since the market’s late December low is a bear market rally, albeit a fierce one. The U.S. economic slowdown is in its early stages and we’re a long way from QE4; in fact, the Fed is still removing approximately $50 billion a month from its balance sheet and – despite the taper announced in March – will continue removing tens of billions of dollars a month through September, while real short-term U.S. interest rates are positive for the first time in over a decade. We thus remain short the Russell 2000 (NYSEARCA:IWM), an index which-despite incorporating almost a full year of drastically lower corporate tax rates-has a trailing twelve-month GAAP PE ratio of around 43 (and I strongly suspect the “E” will go down this year) and a record-high percentage of its constituent companies losing money…

…along with a median EV-to-EBIT that’s (almost literally!) off the charts:

Elsewhere in the fund’s short positions…

We remain short stock and call options in Tesla, Inc. (NASDAQ:TSLA), which I consider to be the biggest single stock bubble in this whole bubble market. The core points of our Tesla short position are:

1. Tesla has no electric vehicle “moat” of any kind; i.e., nothing meaningfully proprietary in terms of design or technology, while existing automakers-unlike Tesla-have a decades-long “experience moat” of knowing how to mass-produce, distribute and service high-quality cars consistently and profitably.
2. Tesla is now a “busted growth story”; demand for its existing models has peaked and it will have to raise billions of dollars to produce new ones.
3. Tesla is again losing a lot of money with a terrible balance sheet while suddenly confronting massive competition in every aspect of its business
4. Elon Musk is extremely untrustworthy.

In mid-March, seemingly in response to its sliding stock price (which may have been approaching Elon Musk’s margin call territory), Tesla rushed out an ill-prepared Model Y unveiling on extremely short notice, inspiring its chief engineer to immediately quit. Supposed to be a small Electric SUV/crossover, the event showed only a fake clay model and a bodywork-disguised Model 3, and was a complete embarrassment beautifully summarized here by Zero Hedge. By the time the Model Y is available in late 2020/early 2021 (if Tesla is still in business then), it will face superior competition from the much nicer Audi Q4 e-tron, BMW iX3, and Mercedes EQC.

Tesla’s backlog is now gone and new orders severely lag, and in response this month it finally introduced a $35,000 version of the Model 3. Despite the fact that this car has just 220 miles of range and comes only in black with a cheap cloth interior, I estimate it will have an EBIT loss of at least $3000 before options, which is undoubtedly why Tesla is delaying its arrival despite taking deposits for it. Tesla also introduced a 240-mile version for $37,500; that one may “only” lose around $1500 but is less likely to be “optioned up,” as it has power seats and a nicer interior (although the only standard color remains black).

Also keep in mind that since January Tesla has slashed thousands of dollars from the prices of all its other cars – longer-range Model 3s as well as the S and X, so throughout 2019 (vs. the peak quarters of Q3 & Q4 2018) Tesla will experience a deadly combination of declining volume and declining ASPs. In January, the company reported a Q4 2018 GAAP profit of $139 million that was considerably smaller than Q3’s never-to-be-topped and highly misleading (as explained in previous letters) figure of $312 million, and now as ASPs and volume decline while under-reserved warranty expenses soar, Tesla shall slide back into losses that I estimate on a GAAP basis will be well over $1 billion for 2019. That said…

In yet another example of typical Tesla “wise-guy scamminess,” the Q1 2019 GAAP loss may not be anywhere near as bad as it should be, as there’s a real chance that Tesla may use its sudden redefinition of “Full Self-Driving” (which, according to Tesla but NOT the customers who paid for that feature, now means nothing of the sort) in order to recognize hundreds of millions of dollars of deferred revenue to which it’s nowhere *near* entitled. See this excellent Twitter thread.

What else did this alleged “growth company” do in March? Well, after initially announcing (in a spur-of-the-moment cost-saving measure) that it was closing 90% of its retail stores, Tesla soon backtracked and decided to close “only” around half of them, most likely when someone informed Musk – who is truly a business moron – that the company was on the hook for all those leases anyway.

In late February, the SEC finally lost patience with Elon Musk’s continual violation of last year’s settlement stemming from his fraudulent “$420 buyout” tweet and asked the presiding judge to hold him in contempt, to which Musk (of course) swiftly responded by further mocking the SEC. Written arguments were presented by both sides in March and the presiding judge will hold a hearing on April 4th. Despite the terrible precedent Musk’s behavior sets for the CEOs of any other public company, I don’t have much faith that justice will be served here by either the court or Tesla’s fully complicit board; of course the latter’s source of complicity is clear: this is the most grotesquely overpaid group of corporate whores I’ve ever seen on the board of any public company…

…and here’s what Musk gets for his shareholders’ money from his new figurehead of an “independent” Chairwoman:

Musk’s public persona of impetuous stupidity as exemplified by his Twitter account undoubtedly provides an illuminating window into his private persona. Tesla has the most executive departures I’ve ever seen from any company (here’s the astounding full list), a dubious achievement that continued in March when in addition to the aforementioned departure of its chief engineer, still more folks departed from its already gutted finance department, as well as multiple other departments. This followed February’s departure of its general counsel after fewer than two months on the job, which followed January’s departure of its CFO, which followed the departures of a massive number of financial, manufacturing and engineering execs in 2018 and 2017. These people aren’t leaving because things are going great (or even passably) at Tesla; rather, they’re likely leaving because Musk is either an outright crook or the world’s biggest jerk to work for (or both). Could the business (if not the stock price) be saved in its present form if he left? Nope, it’s too late. Even if Musk steps down in favor of someone who knows what he’s doing, emerging competitive factors (outlined in great detail below) and Tesla’s balance sheet make the company too late to “fix” without major financial and operational restructuring.

Also in March, Navigant Consulting came out with its annual ranking of autonomous driving capabilities, and just as last year Tesla ranked dead last among active automakers and suppliers. Meanwhile, the number of lawsuits of all types against Tesla continues to escalate – there are now over 500!

How poorly is Tesla run? The quality of its products is one indication, and in February Consumer Reports published its annual auto reliability survey and guess who finished second-to-last? As one wag said on Twitter: you can now officially call Tesla “the Cadillac of electric cars”:

Consumer Reports’ awful Tesla reliability data jibes with the latest survey from True Delta, which ranks Tesla last among all available vehicles, while in September, British magazine What Car? ranked Tesla reliability so low that it’s in “a league” of its own.

But what about all those Tesla owners who tell you how much they love their cars despite the service and reliability problems?

I’ve always argued that Tesla owners (and TSLA bulls) confuse “luxury electric car love” for “Tesla love,” and now that superior European alternatives are beginning to roll out, Tesla drivers will flock to them. For instance, among those relatively near-term alternatives (out in late 2019) is the Porsche Taycan (OTCPK:POAHY) (here’s a great new video of it), and according to Porsche’s surveys, it’s Tesla drivers who are most interested in buying it. After its U.S. tax credit price advantage over Tesla (whose credits will be gone at the end of 2019), the stunning, Autobahn and Nürburgring-tested Taycan will cost roughly the same as the least expensive Tesla Model S and, among innumerable other advantages, will charge 2 ½ times as quickly and in the U.S. include three years of that charging as part of the purchase price. Hmm, Tesla or Porsche… Not a tough choice! Porsche has the capacity to build 40,000 Taycans a year, roughly the expected number of 2019 Model S sales before the Taycan steps in to steal pretty much all of them, and in March, Porsche announced that it already has over 20,000 orders. So Model S sales are about to be *so* dead. And if that’s not enough, a crossover version of the Taycan will follow soon thereafter, as will an all-electric version of the next Maycan. So Model X sales are *also* about to be *so* dead, especially in light of the other electric crossovers and SUVs discussed below…

Porsche’s offerings are just part of an onslaught of luxury EV competition that’s about to rip the face off sales of Tesla’s most profitable models, the S&X. The Audi (OTCPK:AUDVF) e-tron and Jaguar I-Pace (see below) are already crushing S&X sales in the European countries where they’re available, and the Audi arrives here in the U.S. in April. The e-tron is an all-electric SUV with a much nicer interior (and better build quality!) than any Tesla and a price that’s around $15,000 lower than the Model X before the Audi’s (initial) $3,750 to (eventual) $7,500 U.S. tax credit advantage. (Although the Audi’s range is expected to come in at around 225 miles vs. 295 miles for the Model X, the Audi will charge faster.) The e-tron received solid reviews (here, here, here and here), and three more electric Audis will follow it: the Sportback in late-2019 and, in 2020, the spectacular e-tron GT that recently debuted at the L.A. Auto show, as well as (in late 2020) the Q4 e-tron small electric crossover.

Also currently in showrooms is the Jaguar I-Pace (which received fabulous reviews, handily beating Tesla in comparison test after comparison test) and costing $20,000 less than the Model X and $15,000 less than the Model S, price gaps that widen by an additional $3,750 with Jaguar’s current U.S. tax credit advantage and escalate to $7,500 in January 2020. I’ve driven the Jaguar and can assure you that no objective person will say it isn’t much nicer than any Tesla.

The Mercedes EQC (OTCPK:DDAIF) (OTCPK:DMLRY) all-electric SUV will be widely available in Europe in the summer of 2019 and in the U.S. in early 2020, with an EPA range of around 225 miles and a price that will be nearly $30,000 (!) less than the Model X before the Mercedes’ (by then) $7500 U.S. tax credit advantage. And by 2022 Mercedes will have ten fully electric models, covering nearly all its model lines.

And let’s not count out BMW (OTCPK:BMWYY); here’s a fascinating interview with its head EV powertrain engineer and a preview of its upcoming 2021 i4 and iX3.

Less expensive and available now are the excellent new all-electric Hyundai Kona (OTCPK:HYMLF) (OTCPK:HYMTF) and Kia Nero, extremely well reviewed small crossovers with an EPA range of 258 miles for the Hyundai and 238 miles for the Kia, at prices of under $30,000 inclusive of the $7,500 U.S. tax credit. I expect these cars to have an immediate and negative impact on sales of Tesla’s Model 3 and a future negative impact on Tesla’s Model Y (assuming, of course, the latter makes it to market before Tesla declares bankruptcy).

So here is Tesla’s competition in cars (note: these links are continually updated)…

THE NEW ALL-ELECTRIC JAGUAR I-PACE

2019 Jaguar XJ to be reborn as high-tech electric flagship

VW Group to launch 70 pure electric cars over the next decade

Audi e-tron electric SUV is available now

Audi e-tron Sportback comes late 2019

AUDI E-TRON GT FIRST DRIVE: LOOK OUT, TESLA (available 2020)

Audi’s Q4 e-tron previews entry-level EV for 2021

Porsche Electric Taycan Launches Late 2019

Porsche Taycan Cross Turismo to launch in 2020 after Taycan Sedan

The next generation of the Porsche Macan will be electric

New VW ID. hatch: order books for VW electric car open on May 2019

Mercedes EQC Electric SUV Available Mid-to-Late 2019

Mercedes to launch more than 10 all-electric models by 2022

258-Mile Hyundai Kona electric is available now for under $40,000

239-Mile Kia Niro EV is Available Now For Under $40,000

Kia Soul (available mid-2019) EV’s Range Jumps to 243 Miles

Kia Europe to have six pure electric models by 2022

Chevrolet Bolt Offers 238 Miles On A Single Charge
GM is transforming Cadillac into an electric brand

Nissan LEAF e+ with 226-mile range is available now

Nissan Leaf-based SUV coming in 2020

The 2020 Volvo Polestar 2 Is Priced to Beat Tesla’s Best-Selling Model 3

BMW iX3 electric crossover goes on sale in 2020

New BMW i4: Tesla-rivalling coupe seen winter testing

BMW to have 25 electrified models by 2025

Ford CEO says 16 electric models are in design & development

Peugeot 208 to electrify Europe’s small-car market

Toyota, Mazda, Denso create company to roll out electric cars beginning 2019

Toyota to market over 10 battery EV models in early 2020s

New Renault Zoe to feature 400km range

Renault aims to remain EV leader in Europe

Infiniti will go mostly electric by 2021

DS 3 Crossback will give PSA’s upscale brand an electric boost

ALL-ELECTRIC MINI COOPER COMING IN 2019

Smart Will Electrify Its Entire Line-up By 2020

SEAT will launch 6 electric and hybrid models and develop a new platform for electric vehicles

Opel/Vauxhall will launch electric SUV and van in 2020

2019 Skoda e-Citigo confirmed as brand’s first all-electric model

Skoda planning range of hot all-electric eRS models

New Citroen C4 Cactus to be first electrified Citroen in 2020

MG E-Motion confirms new EV sports car on the way by 2020

Fiat Chrysler bets on electrification for Alfa, Jeep and Maserati

Maserati offering three fully electric cars between 2020 and 2022

Rolls-Royce is preparing electric Phantom for 2022

Honda will offer full-EV or hybrid tech on every European model by 2025

Bentley mulls electric car to help reduce carbon footprint

Subaru to introduce all-electric vehicles by 2021

Korando will lead SsangYong’s push into electrification

Dyson Moves Ahead on $2.6 Billion Electric Car Plan

Lucid Motors closes $1 billion deal with Saudi Arabia to fund electric car production

Rivian (electric pick-up truck maker) Announces $700M Investment Round Led By Amazon

Borgward BXi7 Electric SUV Flies Under The Radar

Detroit Electric promises 3 cars in 3 years

SF Motors reveals two electric SUVs for 2019 with 300 miles of range

Two new electric cars from Mahindra in India by 2019; Global Tesla rival e-car soon

Saab asset owner NEVS plans electric car production

EV startup Canoo will only sell cars on a subscription basis

And in China…

VW, China spearhead $300 billion global drive to electrify cars

Audi Q2L e-tron debuts at Auto Shanghai

Audi China to roll out 12 locally-produced models in total by 2022

BYD launches EV535, all-electric SUV

BYD Song MAX BEV version with 500km range to hit market in 2019

2019 BYD Yuan EV360 goes on sale with prices starting RMB89,900 after subsidy

Daimler & BYD launch new DENZA electric vehicle for the Chinese market

BAIC and Daimler to Build $1.9 Billion China Plant

BAIC brings EX5 Electric SUV to market

BAIC BJEV, Magna ready to pour RMB2 bln in all-electric PV manufacturing JV

Daimler to Start EQC Electric SUV Production in China in 2019

GM China raises new-energy vehicle target to 20 models through 2023

Nissan & Dongfeng to invest $9.5 billion in China to boost electric vehicles

Toyota to Introduce 10 New Electrified Vehicles in China by 2020

Infiniti bringing EVs to China’s luxury car market

NIOS ES8 Electric Crossover debuts with half the Tesla Model X’s price tag

536 HP Nio ES6 Midsize Electric SUV Launches With 317-Mile Range at 1/2 the price of Tesla X

NIO’s third model said to be a sedan dubbed EP7

BMW will develop and produce electric Mini in China

Ford ramps up electric vehicle push in China

Jaguar Land Rover’s Chinese arm invests £800m in EV production

SAIC building factory in China for EVs from Roewe and MG

Renault and Brilliance Automotive to build 3 new electric light commercial vehicles for China

Honda launches new all-electric Everus VE-1 for ~$25,000 in China

Honda to roll out over 20 electric models in China by 2025

Geely all-new BEV sedan Jihe A starts at RMB150,000

Geely unveils GE11 compact BEV

New Geely Emgrand GSe crossover has EV range up to 400km

Changan building large scale NEV factory

Mazda and Changan Auto join hands on electric vehicles

XPENG Motors kicks-off sales of Tesla-infused EV for €30,000

XPENG Motors to unveil second model at Auto Shanghai 2019

WM Motors/Weltmeister EX5 Electric SUV Launched On The Chinese Car Market

Chery Breaks Ground on $240M EV Factory in China

Chery’s second EV plant open in Dezhou

BYTON to launch mass-produced M-Byte into market at the end of 2019

DearCC Launches ENOVATE Electric SUV

GAC NE to roll out 12 new models for Aion series, including solar-powered models

Guangzhou Auto To Launch Four New Electric Cars By 2020

Great Wall Launches New EV Brand (NYSE:ORA) In China

Singulato iS6 Electric SUV Debuts With 249-Mile Range

Singulato, BAIC partner to promote smart new energy vehicles

Hongqi launches E-HS3 BEV SUV with AWD option, 390km range and 0-100kh/h in 5.9 seconds

FAW (Hongqi) to roll out 15 electric models by 2025

JAC’s Electric Car Has A Range Of 500 Kilometers

ICONIQ to build electric cars in Zhaoqing with total investment of RMB 16 billion

Quianu Motor aims to grab share of US electric vehicle market

Hozon Kicks Off Mass Production With All-Electric Neta N01

Aiways U5 long-range electric SUV

All-electric NEVS 9-3 sedans (nee Saab) being built in China

Youxia Motors raises $1.25 billion to start 2019 EV production

CHJ Automotive buys Lifan for shortcut to EV production

Wanxiang Gets China Electric Vehicle Permit to Make Karma Cars

Qoros Auto’s new owner plans to be an EV power

JMC (Jianling Motor Corp.) Starts New EV Brand In China

Thunder Power Chinese EV manufacturer clinches deal with Belgian investment fund

Leapmotor raises RMB2.5 billion for Series A round to build electric cars

Continental, Didi sign deal on developing EVs for China

Here’s Tesla’s competition in autonomous driving…

Navigant Ranks Tesla Last Among Automakers & Suppliers for Automated Driving

What Smart Tesla fans Get Wrong about Full Self-Driving

Tesla has a self-driving strategy other companies abandoned years ago

Waymo Starts First Driverless Car Service

Jaguar and Waymo announce an electric, fully autonomous car

Waymo Expands Chrysler Self-Driving Fleet 100-Fold to 62,000

Nissan-Renault alliance to tie up with Waymo on self-driving cars

Uber, Waymo in talks about self-driving partnership

Lyft and Waymo Reach Deal to Collaborate on Self-Driving Cars

Cadillac Super Cruise Sets the Standard for Hands-Free Highway Driving

GM ride-hailing fleet would ditch steering wheel, pedals in 2019

Honda Joins with Cruise and General Motors to Build New Autonomous Vehicle

SoftBank Vision Fund to Invest $2.25 Billion in GM Cruise

Ford and VW Discuss Autonomous Car Team-Up at a $4 Billion Valuation

Volkswagen Group and Aurora Innovation Announce Strategic Collaboration On Self-Driving Cars

VW taps Baidu’s Apollo platform to develop self-driving cars in China

An Overview of Audi Piloted Driving

Daimler, BMW deepen cooperation with self-driving venture

Mercedes plans advanced self-driving tech for next S class

Bosch and Daimler join forces to market fully automated, driverless taxis by 2020

Daimler’s heavy trucks start self-driving some of the way

Volvo, Nvidia expand autonomous driving collaboration

Continental & NVIDIA Partner to Enable Production of Artificial Intelligence Self-Driving Cars

Intel’s Mobileye has 2 million cars (VW, BMW & Nissan) on roads building HD maps

Toyota’s moonshot: Self-driving car for sale – in 2020

Nissan and Mobileye to generate, share, and utilize vision data for crowdsourced mapping

Magna joins the BMW Group, Intel and Mobileye platform as an Integrator for AVs

Intel collaborates with Waymo on self-driving compute design

Fiat Chrysler to Join BMW, Intel and Mobileye in Developing Autonomous Driving Platform

Baidu, WM Motor announce strategic partnership for L3, L4 autonomous driving solutions

Baidu plans to mass produce Level 4 self-driving cars with BAIC by 2021

Volvo, Baidu to co-develop EVs with Level 4 autonomy for China

BYD partners with Huawei for autonomous driving

Lyft, Aptiv (formerly Delphi) partner on driverless ride-hailing at 2018 CES in Vegas

Lyft, Magna in Deal to Develop Hardware, Software for Self-Driving Cars

Hyundai, Aurora to release autonomous cars by 2021

Deutsche Post to Deploy Test Fleet Of Fully Autonomous Delivery Trucks This Year

Byton cooperating with Aurora on autonomous vehicles

ZF autonomous EV venture to start output this year, names first customer

Magna’s new MAX4 self-driving platform offers autonomy up to Level 4

Groupe PSA’s safe and intuitive autonomous car tested by the general public

Tencent, Changan Auto Announce Autonomous-Vehicle Joint Venture

Self-driving startup Momenta ready to launch fully automated driving solution in Q3 2019

JD.com Delivers on Self-Driving Electric Trucks

NAVYA Unveils First Fully Autonomous Taxi