Melting Up?

Tesla

On Thursday, I wrote that “Tesla has been forced to pony up for those converts. They now have $2.2 billion, $1.5 billion less than at the end of the last quarter. I think the need for more capital is a question of when, not if. But if Tesla is successful in raising money well before the next convertible is due, then it is a good signpost regarding risk.”

Well, today, Tesla announced that it was going to raise capital in both debt and equity, in a bid to get as much as $2.3 billion. And the shares were up on the news. The point about Tesla is there’s a very large bankruptcy overhang. You take that off the table and the downside risk becomes less. That means people re-focus on the upside.

It looks like Tesla is going to be able to raise the capital. I see this as a bullish signpost.

IPOs

But don’t look at Tesla in isolation. Look at the IPOs coming to market now. Almost all of these companies are losing money: Lyft, Uber, WeWork. Let’s look at Beyond Meat for a second because they priced at the top of their range yesterday.

Beyond Meat priced its initial public offering at $25 a share, the company said on Wednesday.

That’s at the top end of the company’s expected range of between $23 and $25 per share, which was boosted from the originally set range of between $19 and $21 per share. The company is offering 9.625 million common shares, it said.

At its IPO price, Beyond holds an implied market valuation of $1.46 billion.

[…]

For 2018, Beyond reported revenue of $87.9 million and a net loss of $29.9 million.

Never heard of them? Well, Beyond Meat is a unicorn company, worth well over a billion dollars. A year and a half ago, it raised money at a $550 million valuation. It’s now going to market at more than double that valuation.

Jeremy Grantham’s melt-up hypothesis

Back in February, I wrote in a post about Lyft’s IPO:

So, an IPO makes a lot of sense for Lyft and Uber. We are likely very near the end of this business cycle. Funding is likely to dwindle for companies like them. Now is the time to sell shares to the public, cash in on the investment you have made so far, scale the business further, and raise more money to safeguard against leaner times to come.

I still stand by those comments. But, how close are we really to the end of this business cycle? Yesterday, I spoke to Darius Dale, a macro analyst at Hedgeye, who I plan to interview for Real Vision on Monday. And he told me that, while Hedgeye thinks year-over-year US growth rates will continue to slow through 2019. They are slowing from high enough of a level to avoid recession for the foreseeable future. He sees a US economy with growth slowing and inflation rising in 2019. That’;s not bullish for value in his view. It’s favorable for loss-making growth stories of the likes of Beyond Meat. Shades of 1998?

All of this reminds me of Jeremy Grantham’s melt-up thesis of early 2018. Was he early or just wrong? At this point, he looks to have been early, stopped out by the Fed’s overtightening and subsequent pullback due to recession fears.

My take

2018 was a decent year economically in the US. Yet stocks fell. And even if the US economy decelerates in 2019, the fact that the Fed continues to signal its on hold and that there is no sign of recession anywhere on the horizon is a great underpinning for shares.

And all of the IPOs of loss-making companies tells you there is plenty of risk appetite, despite the flow data.  This bull market continues to be resisted. The latest I see on fund flows comes from Dion Rabouin at Axios. He wrote this morning that:

Stock funds have seen $4 billion of outflows so far in 2019,surpassing the $2.9 billion of outflows for all of 2018 when the S&P fell by 6%. This year’s outflows included a drawdown of nearly $11 billion in just the month of March, according to data from Lipper, which tracks $49.1 trillion in assets globally.

He also wrote that “Safe-haven fixed income funds, on the other hand, have seen $107.7 billion of inflows year to date.”

I see those flows as a contrary indicator in that it makes melt-ups more likely in the aftermath of any upside surprises.