I don't know how the latest twist in the Trump drama will end. The president finds himself without a lot of friends in Washington D.C. in recent days.
But here is one thing I do know: There is one person who, as unlikely as it would have seemed only a few short months ago, must be praying for Trump to remain in power. And that person is Tesla (TSLA) CEO Elon Musk.
Long or short, Tesla investor prudence dictates that we have to examine a scenario where were President Trump turns into President Pence. This scenario analysis will be crucial for how to trade this stock in the coming days, weeks and perhaps months.
To understand why, we have to backtrack to the morning of Nov. 9, 2016, and what has transpired since. In the immediate aftermath of the election, Tesla stock traded down based on Trump assembling a cabinet that included Environmental Protection Agency head Scott Pruitt and Steve Bannon as White House Chief Strategist.
So, the initial reaction to the election results was not good for Tesla, given the early advisor and cabinet talk. The market assumed a hard line on all things subsidies and preferences for selling one product over another.
But then in early-mid December 2016, something happened.
Al Gore paid a visit to Trump Tower, and venture capitalist Peter Thiel pulled together a boardroom with tech executives that included Elon Musk. Soon thereafter, Goldman Sachs' (GS) Gary Cohn established himself as Trump's reliable Wall Street right hand. Cohn seems to view Elon Musk in the most favorable light as far as the Trump administration goes.
Somewhere in this process, starting in mid-December 2016 and increasingly in 2017 thus far, things turned relatively quiet on the "let's get rid of subsidies and preferences" front. Yes, the EPA re-opened the CAFE standards review, and that's good for Ford (F) , General Motors (GM) and Fiat Chrysler (FCAU) , but that -- while certainly an incremental negative for Tesla -- is not the single most crucial negative for Tesla. There are far more consequential regulatory and budget parameters relevant to Tesla.
What Tesla needs from the U.S. government in order to survive, are at least four things:
-- Keep the existing $7,500 federal tax credit legislation in place, as it enables Tesla (and other automakers) to sell an unlimited number of cars with the FIT credit over up to six full quarters once the first 200,000-unit mark has been passed.
-- Keep California's ZEV (zero emissions vehicle) mandate in place, as it enables Tesla to sell its credits, even if at a discount to the $5,000-per-unit face value. And yes, each car sold in these geographies qualifies for multiple ZEV units, and don't forget to include the so-called "travel provision" multiplier. You can see how extremely difficult this is to calculate when you attempt to follow the instructions here. Given the travel provision multiplier of the ZEV mandate, that amounts to a significant dollar amount per car sold in California or any of the other applicable ZEV states. In the third quarter of 2016 alone, this amounted to more than $138 million in "free money," which considering that the number of shares was not dramatically more than 138 million, means almost a dollar per share in earnings contribution in one quarter alone.
-- Keep Tesla away from regulatory scrutiny when it comes to things such as Autopilot regulatory oversight. This regulatory oversight includes these kinds of issues.
-- From the solar subsidies side of the business, Tesla would like to ensure that the subsidies keep flowing, so that its very rich customers can continue to outfit their homes with roofs/panels and batteries at taxpayer and/or electric utility ratepayer expense. This would be an example.
As you may have noted, since mid-December, we have heard crickets from the Trump administration regarding these issues. One does not need to be Sherlock Holmes to at least suspect that the president may have been influenced by the fashionable green voices in his immediate surrounding: daughter Ivanka, son-in-law Jared Kushner, and economic advisor Gary Cohn.
With these helpful forces holding back Trump's anti-green-subsidy attack dogs Pruitt, Bannon and Vice President Pence, Tesla's stock begun to soar in December and increasingly as we got into February, March and April. The stock went from below $200 to well over $300.
Tesla scenario analysis: President Pence
Mike Pence is more of a traditional economic conservative. He does not fancy expensive government infrastructure expansion, including spending on tunnels and Hyperloops, that would prevent tax cuts or expand the budget deficit. If non-governmental entities want to invest in these areas, God bless, but it is not an activity that is spelled out in the U.S. Constitution as a legitimate federal one.
Under a President Pence, Tesla would no longer have the air cover of "New York Limousine Liberals" Ivanka, Kushner and Cohn. There would be no more flattering meetings with Al Gore, no more talk of trillion-dollar infrastructure projects, no more "stand down" on getting rid of subsidies and "green" mandates.
Rather, it is reasonable to believe that President Pence would do the following four things relevant to Tesla's financials and therefore stock price:
1. Propose to the U.S. Congress that the $7,500 federal electric car credit be abolished or phased out quicker than the law currently on the books. At an absolute minimum, put a stop to the ability to sell an unlimited number of cars during the six quarters following the first 200,000 unit-per-manufacturer number has been achieved.
2. Propose to Congress that subsidies to install solar panels/roofs, and any attendant batteries, be abolished, probably in full and immediately.
3. Encourage regulatory oversight to ensure that experimentation with robots on four wheels (Autopilot) by all automakers, be considered in the context of public and national security.
4. Put pressure on California and the other ZEV states to stop dictating to automakers what kind of mix of products they must sell inside those states. Mike Pence is not in favor of Soviet-style five-year plans dictating production schedules for factories.
The initial reaction to Trump's election victory did not contemplate the outsized influence upon Trump by Ivanka, Jared Kushner and Gary Cohn. The initial reaction in the two to three weeks following Nov. 9 had Steve Bannon, Scott Pruitt and Mike Pence as the larger forces that would shape economic and regulatory policy. That's when the stock traded down.
Any prudent Tesla investor, long or short, now has to contemplate a reversal of these influences that underpinned Tesla's move from under $200 to over $300. What we have seen over the last five months in terms of Trump's shifting economic policy priorities has surprised Tesla investors greatly. Trump turns out to have zig-zagged a lot more, and a lot differently, than almost any observer predicted in the weeks following the election.
But with Mike Pence, few would dispute that investors would be dealing with a far more conventional economic conservative as president, one who has advocated and implemented traditional conservative economic policies as part of a long voting record. Unlike Trump's non-actions on these issues, this would mean the end to the various subsidies and preferences that engineer demand for Tesla's products.
As unlikely as it seemed in the immediate days and weeks following Nov. 8, President Trump finds himself with one person who must be praying for his position in power more than any other American short of blood-relatives, and that person is Elon Musk.
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At the time of publication, the author was long GM and F, but positions can change at any time. The author regularly attends new vehicle launches, press conferences and equivalent, hosted by most major automakers.