Trouble in Cyprus
10 Stocks to Hold Forever - Tesla Motors
With Cyprus in the news today, I'm reprinting today's update
from Cabot Options Trader Editor Jacob Mintz to his subscribers.
I think you'll like it.
"Over the weekend, the finance ministers of the eurozone
decided on a bailout package for Cyprus. The small country of
about a million people has an unusually large banking sector that
is in near ruin and in desperate need of a bailout.
"While Cyprus is a small economy (around 0.2% of the
eurozone), what has shocked the markets is the unprecedented
structure of the bailout.
"The terms of the bailout are that ALL funds in Cyprus banks
will be hit with a one-time tax of 6.75% on accounts holding less
than 100,000 euros, and 9.9% on accounts of greater than 100,000
Euros. This tax will be withdrawn immediately from every bank
account. So if you have money in a bank in Cyprus, you will have
"Predictably, a bank run has begun. People are lined up
outside ATMs trying to get their money out. Bank runs are the
great fears of every economist and policymaker because they can
VERY quickly lead to the fall of a financial institution and
"Imagine if you were driving by your local bank and you saw 50
people lined up at the ATM. The first thing you would ask is "why
are they lined up like that, and is my money safe?" Then you
would get in line and try to get your money out as well.
"So why does this matter to us? There are many reasons; here
are a few in no particular order:
1.There is the potential for a bank run in any economically
troubled country. If I had money in another troubled European
country, I would pull my money out fast, thinking that if the tax
could happen in Cyprus, it could happen in Greece, Spain, Italy
2.Who has money in the Cypriot banks? Does Goldman Sachs have
a couple of billion dollars resting in a bank there? Does a large
hedge fund? Large Russian oligarchs? We won't know for some time
which big players will get hurt by this. But if they just lost
10% of their money, they may start selling assets elsewhere to
3.This is absolutely unprecedented. Therefore, it's anyone's
guess as to its full ramifications. Markets love certainty and
despise uncertainty. They sell first and ask questions later.
"Just last Monday I said the following in my Cabot Options
Trader Update. "So when will fear and the VIX pop back to life? I
honestly don't see a lot of catalysts for this. Every market dip
has been bought this year, and the bulls have extreme confidence.
That being said, it will happen. I don't know when, and I don't
know why, but the VIX will rise up. Few people expected the
Italian elections a couple of weeks ago to be a major event, yet
the market dropped dramatically and the VIX exploded. As the old
saying goes, "It's always calm before the storm."
"I followed up a couple days later with an article named
"Using Options to Hedge a Portfolio." In the article, I outlined
several ways to hedge a portfolio and mitigate risk.
"By NO means am I saying I saw this unprecedented action by
the eurozone finance ministers coming. But time after time in my
trading career, I've found that when everyone on the Street is
turning bullish, you should be turning bearish, or at least
hedging your positions.
"As yet another old trading saying goes, "Buy puts when you
can … not when you have to."
Today is the anniversary of the day that Studebaker went into
receivership, in 1933, and here's my Studebaker story.
My grandmother's last car was a Studebaker Lark. It was light
blue. As people tend to do with their last car, she kept it a
long time, in the final years driving no further than half a mile
to her daughter's house. The car barely got warmed up before she
turned it off.
So as teenagers, my brothers and cousins told ourselves we
were doing her a service by borrowing the car to take on ski
trips, where we'd get on the highway and "open it up" to burn off
the carbon. It's nice when being "helpful" is also fun. But she
was no fool; she knew what we were doing.
Eventually the Lark's paint faded, so one day, she took the
car to the nearby body shop to get it repainted. Referring to the
paint chart, she pointed to the color she wanted them to use. But
when she returned to pick up the car, it wasn't blue, it was
orange! Either her finger or the auto body guy's eye wasn't quite
as accurate as it should have been! She wouldn't tolerate orange,
so they painted it again, blue.
But back in 1933, when Studebaker went into receivership, the
Lark was decades away. In 1933, the Depression was the big
problem, and it didn't help that Studebaker had acquired
Pierce-Arrow in the late 1920s and then 95% of White Motor
Company at prices that quickly appeared extravagant. In July
1933, overwhelmed by both corporate troubles and personal debt,
the company's president, Albert Erskine, committed suicide.
Stepping in to help with the reorganization was a company
named Lehman Brothers. The government didn't help.
But by the mid-1950s, Studebaker was lagging again, plagued by
higher wages at its South Bend, Indiana, plant and a narrower
range of models than Ford, Chrysler and GM. The launch of the
compact Lark in 1959 proved a brief tonic, but it didn't last
long, and in 1963, Studebaker closed its Indiana plant, and three
years later shut down completely with the closing of its
Hamilton, Ontario, plant. But remnants of Studebaker remain, not
least in a grove of 5,000 pine trees planted in 1937 at the
company's proving grounds outside New Carlisle, Indiana. In the
photo below, taken in the 1960s, the letters are quite clear. If
you go on Google Maps today, you can still see the letters, but
they're less well defined.
Still, you can say that Studebaker lives on!
In recent weeks, I've been writing a series called "10 Stocks
to Hold Forever," featuring ten stocks, selected by Cabot
editors, that you might choose to, well, "hold
The tenth and final stock is
Tesla Motors (
, and it was selected by me. In fact, though I work very hard to
avoid falling in love with stocks, I will confess that TSLA is my
Tesla Motors was founded 10 years ago by Elon Musk, who made a
small fortune selling PayPal to eBay, and it's different from
traditional automobile companies in five big ways.
First, its cars use no gasoline. They're all-electric,
recharged primarily by plugging in and secondarily by
Second, its cars are made in California, guided by a business
plan generally used for technology companies.
Third, its cars are not sold by dealers; they're sold directly
by the company, either in showrooms (like Apple) or remotely.
Fourth, Tesla carries no inventory. It has a backlog of
orders, so each car is manufactured for a specific customer.
Fifth, Tesla offers no financing; it takes deposits when
taking reservations, and is paid in full upon delivery.
In short, the Tesla buyer gets a much cleaner experience than
what most of us are accustomed to when buying a car. And
maintenance of the cars is simpler, too, with only tires, brake
pads and windshield wipers needing regular attention.
But here's the best part. In addition to all the above, the
company's first high-volume car, the Model S, is simply a joy to
It can go from 0-60 MPH in 4.1 seconds (with the biggest
battery pack); that's quicker than a Porsche 911. Or it can go
300 miles on a single charge. Its center of gravity is so low
(the battery is the floor) that it corners like a go-kart. And it
seats five adults, with room for luggage in both the back and in
the front (where the engine is in most cars).
(Note: I'm not buying one until I can get two features I've
grow accustomed to in my Audi: all-wheel drive and a back-up
The Tesla Model S has won:
Motor Trend's Car of the Year Award, with the first-ever
Automobile Magazine's Automobile of the Year Award.
Yahoo Autos' Car of the Year Award.
In short, the car is wonderful. And the engineering has been
Contrast that with competitor Fisker Automotive, born soon
after Tesla and competing for the same market with a hybrid
powertrain. Fiskers have had numerous technical troubles. Battery
supplier A123 went bankrupt. 300 cars were ruined by Hurricane
Sandy. And founder Henrik Fisker recently resigned, reportedly as
the Chinese firm Geely (which now owns Volvo) discussed a
Tesla, meanwhile, is on target to turn a profit in the first
quarter of this year, and to deliver 20,000 cars this year. And
the Model S has been so well received that the company is
delaying the production of its lower-priced SUV (Model X), so it
can manufacture more Model S sedans.
Now, investing in automobile companies is always challenging,
mainly because this is a mature industry. And investing in
automobile startups has traditionally been an excellent way to
lose money. But I think Tesla is going to succeed in a big way
precisely because it is doing so much differently, because Elon
Musk is an exceptionally capable leader, and because the world
(this is a global story) is ready for a car that frees its users
from the tyranny of the gas pump.
I first recommended TSLA in Cabot Stock of the Month on
December 28, 2011, when the company's fortunes were far shakier.
But I had a lot of confidence in Elon Musk, and I had a lot of
confidence in what the stock chart was telling me.
This is what I wrote back then:
"Tesla came public in June 2010 at 17, and peaked at 36 that
November, before retreating to a low of 21 in February of this
year. And the big market selloff this August pulled it down to 21
again, establishing a double bottom. It pushed up to 35 in
November and December, but selling pressures (sparked by a
negative Morgan Stanley opinion on electric cars in general)
pushed it down to touch 26 last week … and that leaves it sitting
right on its 200-day moving average, which we view as a buying
opportunity." (Subscribers who followed my advice bought at 29,
and they should still be holding.)
And luckily for you, the timing of today's recommendation (the
last of my 10 stocks to hold forever) coincides with another
In short, TSLA's main trend remains up. But it's a volatile
stock, not least because there are short-term traders in the
stock, many of whom sell the stock short to make money on the
downside. The stock hit a high of 40 in February before falling
to 34. Two weeks ago it was back up at 39.5, but last week
sellers took over, and sent it back down to 35, where it's found
renewed support. I'm not saying you should bet the lunch money,
but from a long-term perspective, this looks like a decent entry
Yours in pursuit of wisdom and wealth,
Cabot Stock of the Month