Elon Musk should email easy money Federal Reserve chief Jerome Powell a gift card to a local Tesla store. Because the provocative Musk’s already big wallet has gotten much fatter probably due to Powell’s three rate cuts in 2019 and recent liquidity injections into repo markets.
“Absolutely,” Invesco strategist Tim Horsburgh said on Yahoo Finance’s The First Trade when asked if rampant liquidity in the system is helping a high-flying tech stock like Tesla (TSLA). “When you are in this type of environment where you have a lot of liquidity out there, especially with the Fed’s action in the fall you have the right conditions that when you have a good story it gives it [a stock like Tesla] a lot of momentum.”
Increasingly easy financial conditions — spurred by the Fed’s actions — often help a momentum stock such as Tesla in several ways. Taken together with a few favorable company-specific factors, the action morphs into a domino effect or as traders call it, a self-fulfilling prophecy.
Here are the very basic mechanics.
Speculators and traders are able to borrow money on the cheap and employ strategies that would generate amplified returns on that investment. In turn that creates momentum in the stock that at least when it comes to Tesla, burns intense short-sellers. The shorts race to cover their positions, which only fuels more momentum in the stock.
As this is happening, investors are watching closely and decide to finally get into the mix amid the fear of missing out syndrome.
At the core of this is the Fed’s easy money. And at the moment, so are numerous positives to the Tesla story including another quarterly profit, stabilizing cash flows, quick production ramp at a new facility in China and a rush of bullish analyst upgrades.
For instance Wednesday morning, Piper Sandler lifted its price target to $928 on Tesla shares from $740 on a more optimistic outlook for Tesla. The analyst is not only bullish on the auto business, but thinks Tesla’s solar business could get hot soon and hit a $165 billion U.S. market potential over time.
“It's easy to forget that TSLA sells batteries and solar power products; after all, the segment was only 6% of sales in 2019. But management says that the solar+storage business will one day rival the Automotive segment, and if this is true, then investors will eventually need to pay attention,” the Piper Sandler note said, pointing out that solar is a $165 billion annual market opportunity for the company.
“I think Tesla is more of an idiosyncratic case, where you have such high short interest and just generally wildly pessimistic sentiment,” Horsburgh explains. “And then there is this real change in fortunes overnight of the company and the perception of the company.”
That rapid shift in sentiment has sent Tesla’s stock surging 116% this year. Well that and the Fed’s magic wand.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.