Grow Your Portfolio the Intelligent Way

Cannot Stop the Battery

By Jim Woods

Pounding out aggression

Turns into obsession

Cannot kill the battery

–Metallica, “Battery”

Elon Musk. The name is synonymous with eccentric genius. When it comes to his electric car company, the mighty Tesla, Inc. (TSLA), well, that stock has been an investor juggernaut that’s up some 370% year to date. Yes, you read that number correctly. Yet today, TSLA shares were down (about 7.5% midway through Wednesday’s session). One reason why was a sell-the-news reaction to the company’s “Battery Day” on Tuesday.

Yet that selling aside, the big picture indicates that, when it comes to the electric car and the technology that is destined to exponentially improve in the coming years, well, to borrow a verse from the great Metallica, you “cannot kill the battery.”

Think of Tesla’s Battery Day as a sort of PR event/shareholder meeting. And in inimitable style, Musk and key executives conducted the outdoor event, not just to a crowd of socially distanced people, but to a parking lot of socially distanced Tesla automobiles with their shareholder drivers inside. The drivers even honked their horns in what was presumably mass approval at what they heard.

Musk and his executives discussed the current state of Tesla, and consistent with his tendency to make new model news, Musk announced a yet-to-be-named $25,000 Tesla vehicle that is in the works. That reduced price will be offered thanks to what he said would be cost savings in battery production that will touch all of the company’s products.

Courtesy of Stockcharts.com

And it is about that battery technology that this Battery Day was focused on. Specifically, Musk said that there are three key components to a future world of sustainable energy: sustainable-energy generation, storage and electric vehicles. “So, we intend to play a significant role in all three,” stated Musk. Hey, would we expect Elon Musk to play anything but a significant role in whatever he does?

To get there, Musk and team theorized that the world needs to produce 10 terawatt-hours’ worth of energy per year. To give you an idea of how much energy that is, Musk said that that amount was more than 100 times Tesla’s current terawatt hours’ production level.

“Today’s batteries can’t scale fast enough. They’re just too small,” Musk said. In order to have electric cars continue their growth against their fossil fuel-powered rivals, they’ll need to continue to get cheaper. To achieve that cost savings, Tesla plans to halve the cost of producing every kilowatt-hour with what are known as continuous cylindrical cells.

These continuous cylindrical cells represent a new battery architecture that Musk says will result in five times more energy production and a 16% increase in vehicle battery range that also comes with six times the power output. Musk also said that the production of this new technology was already beginning at a pilot plant.

“It will take about a year to reach the 10-gigawatt-hour capacity,” according to Musk, who added that by 2030 he expects Tesla would be able to produce three terawatt-hours of energy every year.

Musk also mentioned another development that actually had wider implications for the lithium industry, particularly companies such as leading lithium producer Albemarle (ALB). Tesla executives said that the company acquired a 10,000-acre mining site to produce even more of its lithium battery components in-house.

“There really is enough lithium in Nevada alone to electrify the entire U.S. fleet,” said Tesla executive Drew Baglino, senior vice president of power train and energy engineering.

The combination of new technologies that use less lithium, yet deliver more power at a lower cost to Tesla via its entry into the mining space, created a sell-off in ALB as well as big-name lithium stock Sociedad Química y Minera de Chile S.A. (SQM). Yet, despite the double-digit-percentage selling in ALB and SQM today, I think it behooves us to remember Metallica here, because even Tesla “cannot kill the battery” — either the existing battery technology or the companies that produce the lithium which goes into all sorts of batteries, not just Tesla automobiles.

So, while the long-term trend in lithium is for new and better technology to continue making lithium batteries more efficient (and therefore require less lithium), the counterbalancing trend is a world increasingly looking to add electric vehicles of all sorts to the global transportation grid.

This electrification of transportation will mean more aggregate lithium demand and the need to make more and more batteries — and that means long-term opportunity for investors in both Tesla and in lithium manufacturers.

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ETF Talk: Shield Yourself From Risk with the Low-Volatility Fund DMRL

(Note: first in a series on hedged-equity, low-volatility ETFs)

Volatility is a familiar and unavoidable reality in today’s market.

As any seasoned investor understands, market volatility can send a portfolio into a tailspin, as breaking even requires a market surge and restoring a portfolio’s original value takes an even bigger market boost. To combat volatility attacks, a handful of low-volatility portfolios have been popping up in the exchange-traded fund (ETF) space.

Their appeal has continued to grow as market fear has increased. However, while there is proof that a low-volatility portfolio can and will outperform conventional index products through keeping fund declines in check, that strategy requires patience and well-timed investments.

So, the problem becomes how can an investor capitalize on reward produced by a low-volatility ETF, while avoiding potentially major risks of such a fund strategy?

Transamerica Asset Management, along with Milliman Financial Risk Management, have partnered up to sub-advise the DeltaShares S&P 500 Managed Risk ETF (NYSEARCA:DMRL). The ETF is made up of a fleet of portfolios that adjusts equity exposure based on realized market volatility, as opposed to future or potential market volatility.

DMRL uses a rules-based index methodology, created by Milliman, to lower each of its fund’s exposure to the relevant S&P 500 index portfolio, whenever annualized volatility spikes above 22%. The index portfolio is made up of three subcomponents: equity, fixed income and cash.

The targeted equity component tracks the S&P 500 index, the fixed income component is comprised of the most recent five-year Treasury note and short-term Treasury bills and the cash component follows the zero-to-three-month Treasury bill index. In short, when the 22% spike is hit, it triggers a reallocation of funds from stocks, into the reserve assets made up of the three subcomponents above.

The ETF has an expense ratio of 0.35% and $369.41 million in assets under management. The open-ended fund has a distribution yield of 1.25%, and its next distribution date is Sept. 23. The fairly new fund, created in 2017, has a 6.66% three-year daily total return, a 3.78% one-year daily total return and a lagging year-to-date loss of 4.08%, which is not a complete surprise as the market has been fraught with volatility lately.

As can be seen from the chart below, DMRL has a relatively steady 50-day moving average (MA). Similar to many other funds, DMRL felt the March lows but has recovered substantially. As of Sept. 22, its weekly moving average has surpassed its 50-day MA.

Courtesy of Stockcharts.com

While the majority of the fund’s composition of is made up of bonds, at 71.14%, the remaining 26.96% of its weight is in stocks primarily in the technology sector. Aside from United States Treasury Notes 0.25%, which makes up 71.15% of the ETF’s top 10 holdings, its top five holdings include Microsoft Corp. (MSFT), 1.47%; Apple Inc. (AAPL), 1.39%; Amazon Inc. (AMZN), 1.07%; Facebook Inc. A (FB), 0.57% and Alphabet Inc. A (GOOGL), 0.45%.

Ultimately, DeltaShares S&P 500 Managed Risk ETF (NYSEArca:DMRL) is an ingenious model, which is designed to simulate the dynamic allocations made in a volatility-managed portfolio. The goal of this particular ETF is to balance the risk and reward that investors face when investing in low-volatility portfolios.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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In case you missed it…

Burning Down the House, Volume II

“My home state is in a stranglehold of flames.”

That’s how I described the fires raging in the Golden State, not last week, but some 11 months ago in this column. And if you’ve been following the news over the past several weeks, you know that the raging wildfires aren’t just in California, but also in Oregon and Washington, where dozens have died and where tens of thousands of acres have burned.

Now, the blue skies of my beloved Southern California have taken on an eerie, jack-o’-lantern-like glow that not only can be seen, but that also can be felt with every deep breath.

Yet, why does this keep happening, and what is the reason for these increasingly devastating disasters?

Unfortunately, the situation less than a year ago is basically the same as it is today, with the exception of the fact that COVID-19 is compounding the overall ability for our first-responders to do what they do best in battling these blazes.

As I thought about this issue once again, I realized that what I wrote 11 months ago was still applicable today. In the article “Burning Down the House,” I wrote the following:

The latest round of fires this season have come after last year’s disastrous fire season, which included the Woolsey fire, one of the most destructive blazes in the state’s history and one that caused devastating damage to property in and around the Malibu area.

Well, add yet another year to that tally, only this one will undoubtedly be much worse. But again, why are the fires getting increasingly worse? I continue:

According to scientists, the main answer is that California is just hotter and drier than it’s ever been. “The temperatures have just been almost inexorably warmer all the time,” said UCLA climate scientist Daniel Swain in a Los Angeles Times interview last year. Fires “burn more intensely if the fuels are extremely dry,” added Swain. The logical combination of hotter and drier weather with fast-moving winds is a prescription for fire danger. Hence, the state is literally burning down.

Now, the hotter climate is one thing, and it certainly has been a very hot summer this year, particularly over the past couple of weeks. Yet, what continues to inflame me is the dysfunctional political climate in the state that has really failed to address this situation properly.

Last year, the political climate was fleshed out beautifully in an op-ed in the Wall Street Journal by Holman Jenkins, titled, “Revolutionary California.”

According to Jenkins, “The wildfire crisis is ultimately the product of state politics controlled by interest groups whose agenda has drifted out of any cognizable relationship with the daily well-being of the state’s average citizen.”

In support of his thesis, Jenkins offers up the following assessment:

“Because California accounts for less than 1% of global emissions, nothing it does will make a difference to climate, but its ratepayers shell out billions for wind and solar that might be better spent on fireproofing. A generation of ill-judged environmental activism has all but ended forest management in favor of letting dead trees and underbrush build up because it’s more ‘natural.’ At the same time, residents resist any natural or planned fires that would consume this tinder before it gives rise to conflagrations…”

As I wrote last year:

I am not surprised that poor government policy is partially responsible for exacerbating the damage caused by the fires. Government nearly always makes things worse. Yet I am also aware that when you add hotter temperatures, drier vegetation and high winds into a biome, well, nature gives you fires — and nature really doesn’t care about government policies.

In my opinion, if we want to ameliorate the destructive damage done by the increasingly devastating seasonal fires in California, Oregon, Washington, Utah and other western states, we must approach the situation with reason applied to reality. We certainly cannot ignore the reality of hotter temperatures, and the pernicious effects that come with it, on our environment.

Does this mean we have to take action to fight climate change?

I am no expert on that complex issue, and it is an issue where, unfortunately, politics render one’s rational vision opaque. Yet, what is all too apparent is we need to better manage fire-prone areas and make sure we remove dry foliage and excess fire fuel. We also need to be more mindful of overbuilding homes and commercial properties that lie in the most dangerous fire areas.

Finally, I think what I wrote on this situation last year as a possible beginning of a resolution to this massive problem is even more applicable right now:

I think that a great way to start tackling this issue is to employ some rational political courage by the state’s citizenry by demanding smarter action. Even better, if that action can be undertaken by private enterprise and not impeded by government, it will likely have a more impactful outcome.

I know that this issue is far bigger than just voicing an opinion about the need for more courage and smarter action. However, it only takes a spark to set a wildfire raging — and it only takes the spark of a rational voice to set aflame societal solutions.

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Be Careful With Your Head

“Be very, very careful what you put into that head, because you’ll never, ever, get it out.”

–Cardinal Thomas Wolsey

In computer science, they call it “GIGO,” which means “garbage in, garbage out.” This is the principle that says if you input flawed, or nonsensical, data into a program, you will get flawed, nonsensical output. This same principle applies to that grey matter computer program inside your skull. So, as Cardinal Wolsey tells us, we had better be very careful about what we input into with our heads — because we want to avoid any flawed, nonsensical output in our lives.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods

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