ERICOPOLY

Some interesting things I learned reading today on the Tesla website: 1) never servicing the car does not void the warranty 2) they will soon offer a battery replacement after 8 years for $12,000 paid today 3) if you do take your car into service, they give you a fully loaded performance edition car as a loaner. You can keep the loaner if you like it more (you pay some discount for it based on how old it is versus your car that you don't want back from the service center). This keeps the loaner car fleet refreshed they claim. 4) you don't void the battery warranty even if you neglect to keep the battery regularly fully charged

Congratulations and thanks for the best investing resource available anywhere.

valuecfa, Given that you are comfortable with the downside of MBI below a given point, I think you could do well writing out-of-the-money MBI puts and using the proceeds to purchase at-the-money index puts. I mention MBI because of your background with the company, as well as it's very high volatility premium relative to what the premium is for the index. Worst case, no gain/no loss. Best case, market drops and you make money. I'm assuming you wouldn't care that much about the risk of getting assigned MBI at $10 or $8. Plus, it seems likely that MBI's premium will continue to decline in this post-uncertainty world for MBI. Right after the pop, I wrote $8 MBI 2014 puts for $1.15. Already they're down to about 70 cents. It should continue to suffer rapid premium decay.

The at-the-money may seem like you are throwing away the premium, but if you are truly hedging and not speculating then you will recover that premium after writing covered at-the-money puts after the market drops. Then the premium on your covered put decays by expiry. Now, if the market rallies once again by expiry you might end up with no profit from the short position. But again, was this for hedging or for speculation? If for hedging, then you should be happy that if the index stays down your profit is intact. And if the index rises, your other positions do too. Volatility rises as the market crashes, so don't worry about being able to recover your premium.

I started to feel better when Mr. Shilling said he expects no US recession, continued 2% growth, stronger US dollar, and that a 27% correction in the stock market would bring stocks back to the appropriate levels. A 27% correction doesn't set some of us back very far (unless of course we do worse than the market) -- about 1,200 on the S&P500 (well above the level that some started hedging). And wow, Roubini sure thinks things are pretty darn good: Regarding the US economy, Roubini was somewhat more optimistic. He feels that the housing recovery is legitimate. He does believe that there will be a manufacturing revival in the US due to lower energy costs and that the shale gas boom will be a massive tailwind for the US for many years to come. All of these together will lead to solid employment growth and should continue to strengthen the US recovery.

I pay less than 1% margin borrowing cost with them, vs 4+% for Fidelity. Using the money saved, I can purchase puts that completely eliminate the "one bad tick" risk. The account is configured for "portfolio margin" (as opposed to "Reg-T Margin"). You see, under the rules of Portfolio Margin, if I buy $5 puts on BAC then my account in effect has $5 of uninvested cash sitting in it (from their point of view). The rules for portfolio margining are simply different -- they look at only your net exposures, and puts effectively free up your invested dollars (below the strike price).

Unless its floating rate debt, I don't get the logic of #1. Why don't you get the logic of #1? Given that defaults are low because of low interest rates, it naturally follows that continued low interest rates lead to continued low defaults. The low rates have been low for years now. The loan portfolio is seasoned such that the remaining credits in the aggregate loan portfolio is either of low rate or they are hardy seasoned credits at higher rates (the weaker credits having already defaulted). I don't understand why there is a correlation between low rates and defaults? Is it because debt service would be low? Weren't rates considered low during 2007? I'm not arguing for low rates as the cause of the low defaults. That was another poster's reply: Defaults are low because interest rates have been low for a prolonged period of time, and corporations, individuals, etc have been able to restructure their debt profile. I'm just aggregating the two replies I got and putting them together. My original remark was whether the economy is really as bad as people say if the rate of defaults is this low. I mean, people argue that if jobs are coming back it's only because they are really shitty jobs, or they argue that young people have no hope, etc... etc... So that all sounds really bad! Except the defaults are really low which indicates a low level of distress out there, not a high level.

Unless its floating rate debt, I don't get the logic of #1. Why don't you get the logic of #1? Given that defaults are low because of low interest rates, it naturally follows that continued low interest rates lead to continued low defaults. The low rates have been low for years now. The loan portfolio is seasoned such that the remaining credits in the aggregate loan portfolio is either of low rate or they are hardy seasoned credits at higher rates (the weaker credits having already defaulted).

A couple of comments based on those replies, and then a question... 1) defaults will remain low because because interest rates will remain low for a long time 2) defaults will remain low because underwriting standards have improved and the weak credits in legacy books have been culled What constitutes a long-time? The earnings yield on S&P500 is 7% annually and the thing that threatens it (higher rates) is a long ways off according to Watsa (and the bond market seems to agree with Watsa, so he's not exactly contrarian in saying this). The trouble I see in using the Schiller P/E over the next few years is that if rates stay this low (as Watsa forecasts) for years and years going forward, then the Schiller P/E10 will begin to look a lot more benign even without a market drop. You will then need a Schiller P/E13, then a P/E 15, etc...

Just a general question... Why are defaults low? People have been saying that the stock market is out of sync with the real economy. However, is it really tough out there in the real economy? Is following default trends on outstanding debt an outmoded means of measuring the real economy? I've heard people say that nothing is really improving out there (except for stock prices and home prices) -- real incomes aren't rising, jobs added are all low quality, etc... etc... Okay, then where are the defaults?

Here are some lyrics that speak to the siren song of the markets: Dear Prudence, won't you come out to play Dear Prudence, greet the brand new day The sun is up, the sky is blue It's beautiful and so are you Dear Prudence won't you come out to play Dear Prudence open up your eyes Dear Prudence see the sunny skies The wind is low the birds will sing That you are part of everything Dear Prudence won't you open up your eyes? Look around round round Look around round round Oh look around Dear Prudence let me see you smile Dear Prudence like a little child The clouds will be a daisy chain So let me see you smile again Dear Prudence won't you let me see you smile? Dear Prudence, won't you come out to play Dear Prudence, greet the brand new day The sun is up, the sky is blue It's beautiful and so are you Dear Prudence won't you come out to play

Maybe he shouldn't have sold his BAC when everyone panicked.

Constructive, How did you arrive at 4% IRR? They paid $29,205 for their system in October 2011. They reap $4,900 per year from the system (excluding financing costs). The free cash yield (tax free) is 16.77% for 30 years (assumption is that it lasts 30 years, and assuming no financing expenses). They can use this positive cash flow to pay down their highest interest debts, so that free cash flow is reinvested at a risk-free high rate (paying down debts you've already incurred is risk-free). EDIT: It does seem like the article embellishes their savings by ignoring that the electricity to charge the Volt (were they to purchase the electricity) would be cheaper than the gas to fuel their prior car. So that delta is the embellishment.

I saw the mention of 4% IRR in your post and that's what I was responding to.

$2500 annual savings x 125% oversized x 30 years / $29200 installed cost = 4% IRR Cost of capital is at least 4%, so their solar panels are a bad investment. The 4% is extremely low risk, and it's after-tax. At a 35% tax rate you need something like 6.15% pre-tax yield from a Treasury to get close to the same risk-adjusted return. There might also be a lot of inflation in electricity rates which would boost returns.

They should have listened to Elon Musk who practically handed their current sales numbers on a silver platter to them. He warned them about the cash flow positive tipping point, he warned them about the sales numbers, who were they listening to? "Why is it the people who need the most help... won't take it?" - A River Runs Through It

I'm already doing that now -- I'm leasing/financing/renting the system from Southern California Edison, except that "system" probably consists of a mix of natural gas burn, petroleum burn, coal burn, wind, solar, hydro, other stuff... SolarCity merely has a cheaper system than Southern California Edison. And you are right, if you have liquidity and want to tie it up, then it's cheaper to just buy the system. Their program seems aimed at people who don't have $10,000 in liquid cash, or don't want to tie up their debt/income ratio, or don't have home equity, etc... etc... Yet they want lower payments so that they can improve their liquidity situation. Anyhow, the program is not directed at people who want to buy their own systems.

How do you mean "overpriced" if we're talking about just buying the electricity only? It's cheaper than what you currently pay your electric utility company, so many people will find it underpriced relative to what they pay already. I think it makes sense to buy your own system if you have the cash, but if you are hoarding your cash (or paying down debt) and you merely just want to lower your utility bill so that you can have lower monthly expenses, then there is nothing to lose by having SolarCity provide you with discounted electricity for the next five years.

On a high level it seems hard to lose money at this game with current economics (including incentives). Why do the short sellers believe SolarCity can't buy/install systems that pays themselves off and then generate a profit long term? That's what seems crazy to me. If the typical homeowner can have a system built that pays for itself, SolarCity somehow can't be at least as capable of doing so?

It sounds like SCTY gets repaid over 5 years if they are selling you electricity. Then they get paid a second time if you buy the equipment from them at that point, or else they just continue to milk you for cash flow as you continue to buy only the electricity. This sort of model would create a lot of depreciation expenses in the beginning even though they would be hugely cash flow positive (given enough scale and high installed base of customers). Similarly, if you build a hydro dam I doubt you look like an economic actor until it is built and operating. OK. Throw out depreciation, cut SG&A in half, still negative. Sure, because you are still constructing the dam. There is a point where you have a large enough install base throwing off cash that it overwhelms the expenses associated with having the guys running around town installing new systems. These systems could have a 30 year life. It really isn't interesting to say that after the first year or two the company is not making a profit. The hydro dam is a project that over several years produces only losses. Just because SolarCity can begin grabbing cash flow on each cubic yard of concrete added to the dam, it doesn't mean it's not a dam. In other words, don't hate the playa' hate the game :D

It sounds like SCTY gets repaid over 5 years if they are selling you electricity. Then they get paid a second time if you buy the equipment from them at that point, or else they just continue to milk you for cash flow as you continue to buy only the electricity. This sort of model would create a lot of depreciation expenses in the beginning even though they would be hugely cash flow positive (given enough scale and high installed base of customers). Similarly, if you build a hydro dam I doubt you look like an economic actor until it is built and operating.

Dang it, I really should have followed through.

I don't know where you live Eric, but here in California you can find statistics for all solar installations and Solar City is consistently above $5000/ installed kw. I haven't done this myself but if you split the project up, you can have a solar engineer design the system for less than $300, hire a top rated company to install and help you register all the permits/rebates for the system for about $1.25/watt and then buy the panels/inverters /racking yourself for under $1.25/watt bringing your all in cost easily under $3000/kw before rebates. Depending on the amount of Sunlight, your savings yield on the system before rebates can easily be north 20%. It costs nothing (SolarPPA from SolarCity). The difference is that you are now buying electricity from SolarCity instead of Southern California Edison (I'm in Santa Barbara region). No money down, no installation fee, no obligation to purchase their equipment. But the monthly electricity bill goes down because you are getting charged less by SolarCity compared to your electric utility company. So SolarCity is effectively a distributed electric utility company -- they are using your real estate to hang the equipment, you are their energy customer, and there is no transmission lines loss.

These shares have done even better than TSLA shares since IPO. I spent some time on their website last night -- interesting way to get solar panels on your roof. You only pay for the electricity it produces, and get the option to buy the installation after 5 years. Aside from the actual electricity generated, you have no obligation to pay for anything else. No installation charge, no equipment charge, no maintenance charges. SolarPPA is their product name for that: http://www.solarcity.com/residential/solar-ppa.aspx

The cool thing is that I can keep on tweaking my order because it doesn't go to manufacturing until the 20th. I decided to lose the spoiler -- looks cleaner without it and I can't imagine it has much useful purpose.