Market Recap – Tesla Motors and Saudi Arabia

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Market Digest – Week Ending 10/21/16

US stocks bounced around amid myriad earnings reports, while international stocks notched more than a percent on a strong performance from emerging markets. An early Friday selloff threatened gains, but a string of M&A reports lifted shares and allowed indexes to remain positive for the week. US treasuries, gold and the dollar also ended the week higher.

Weekly Returns:

S&P 500: 2,141 (+0.4%)
FTSE All-World ex-US: (+1.2%)
US 10 Year Treasury Yield: 1.73% (-0.07%)
Gold: $1,267 (+1.2%)
USD/EUR: $1.088 (-0.8%)

Major Events:

• Monday – Bank of America reported earnings, showing surprising strength within its fixed income trading unit. This echoed similar results from Citigroup and JP Morgan from a week earlier.
• Tuesday – Netflix announced much stronger than expected subscriber growth, driving a sharp jump in after-hours trading continuing the following day.
• Wednesday – US housing starts fell 9% in September, due mostly to a slowdown in multi-family dwellings. Single family home starts continued to rise.
• Wednesday – Saudi Arabia issued $17.5 billion in bonds, it’s first ever international offering.
• Thursday – US weekly jobless claims came in slightly higher than expected, possibly due to Hurricane Matthew and Columbus Day.
• Friday – A cyber-attack took down the websites of Twitter, Amazon, Netflix, Tumblr and other sites for an extended period of time.
• Friday – Reports surfaced that AT&T is in advanced talks to acquire Time Warner.

Our take:

On Wednesday Saudi Arabia announced a $17.5 billion bond sale, its first international debt offering and the largest ever for an EM country. That very same day, Elon Musk announced he will equip all Tesla vehicles with hardware to make them fully capable of self-driving. What do the two have in common? Perhaps more than you think.

Saudi Arabia is attempting to broaden its economy and move away from its dependency on oil, the nation’s single largest export accounting for three-quarters of government revenue. The country has long held a current account surplus, but this recently shifted to a deficit amidst falling oil prices. Of course its unlikely oil will remain this depressed indefinitely—prices have almost doubled over the last eight months from February lows. But the writing is on the wall, and the Saudis know it.

The automotive industry has long been the largest demand driver for oil, a trend Tesla is doing everything in its power to reverse. And the environment is ripe—we’re at a pivotal point on the technology evolution curve. To quote famous futurist Ray Kurzweil:

“Our intuition about the future is linear. But the reality of information technology is exponential, and that makes a profound difference. If I take 30 steps linearly, I get to 30. If I take 30 steps exponentially, I get to a billion.”

In other words, technology is changing at an accelerating rate. Tesla’s upcoming Model 3 is now promising a range of 215 miles on a single charge, and is expected to retail for $35,000 without any upgrades, only slightly higher than the current average selling price for all automobiles. Not to mention virtually every automotive maker in the world is focusing on electric car technology (plug-ins). They still make up a small portion of overall new car sales, primarily due to limitations such as price, low mileage per charge and a lack of charging stations. But as Tesla is demonstrating, these limitations won’t last long.

So how does self-driving technology play into this? No one can predict the future, but it could lead to a situation where fewer cars are needed on the roads. We’ve seen a proliferation of ride sharing services like Uber that have made getting around cheaper and more convenient. Even Google is inching its way into the market. Along with Tesla, these firms are all experimenting with self-driving technology. One can only surmise that costs for these services will fall without the need for human drivers.

All of this brings about some interesting questions. Is it only a matter of time before every vehicle on the road is electric? Will it really be worth owning your own car? Or will it be more cost effective to simply hail a driverless car when you need it? I don’t think anyone has definitive answers at this point, but the questions are worth thinking about.

And while this could all play out over decades, one thing is clear: the long term impact on oil will be significant. The Saudis are smart to seek a little diversification.

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Brendan Erne, CFA
Brendan Erne serves as the Portfolio Management Team Leader with Personal Capital Advisors. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.
Brendan Erne, CFA

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