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The Real World and the Tesla World

As hard as it is to believe, there are other carmakers in the world outside of Tesla.
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I love to apply the "In Soviet Russia stocks buy you" meme to the U.S equity markets. That has certainly been the case at the beginning of 2020. In the midst of a Minsky Market it is always difficult to see the darkness at the end of the tunnel. There are pockets of weakness in the global economy, though, and we saw yet another data point to that end yesterday.

In (formerly) Communist China cars do NOT buy you. You have to buy them, and in December, for the 18th month out of the last 19, consumers bought fewer cars. According to data from the China Passenger Car Association (which tracks purchases of domestically-produced vehicles) sales in the Middle Kingdom fell 3.4% in December capping off a terrible year for auto sales in China. The 20.1 million units sold represented a 7.1% decline from 2018's figure. Sales of new energy vehicles (composed of plug-in hybrids and BEVs) fell 15.1% in December.

That market subsequently has plummeted after a halving in Chinese federal EV subsidies in July. Thus, it's a perfect time for Elon Musk to open a new factory outside Shanghai. Not. I have learned that there is the real world and the Tesla (TSLA) world, and only occasionally do those two spheres overlap. The Chinese consumer is spooked right now, though, and many of the electric cars sold in China's "EV revolution" of 2018 and early-2019 were actually sold to governments. Bernstein's Robin Zhu estimates that government demand made up 50% of Chinese EV sales in 2019.

So, we all know Musk is up for any challenge, but he faces a Herculean one now in China. At a 300,000RMB post-subsidy price, the Model 3 costs more than 4x the average annual disposable income in Shanghai and Beijing. That figure is many, many times the earnings of the average Chinese worker outside those East Coast metropolises. It's expensive, and as 2019's sales figures show, car sales can be delayed.

As hard as it is to believe, there are other carmakers in the world outside of Tesla. I have spent my entire professional career following this sector in some way shape or form, and this is just a dreadful time for car stocks. I have seen Detroit -- was born there, actually -- in the midst of hard economic times, but we are coming off an unprecedented fifth consecutive year of 17 million unit sales in the U.S....and nobody gives a damn. Can you imagine being GM's (GM) Mary Barra right now and seeing Elon Musk and his $86 billion market cap dancing on your computer screen while GM just posted a 15% decline in sales in China for 2019, and GM's share price seems permanently stuck in the mid-$30's?

It's ugly for GM in China and only less so for Ford (F) because that company has so epically failed in every attempt to enter the Middle Kingdom, that they have very little to lose in China. So, where's the growth?

The high-end is always attractive and Tesla shares are not the only ones that have touched an all-time high this week. Ferrari shares have lived up to their ticker of late, and with (RACE) trading at about $170 per share, the company is worth nearly $30 billion. Ford is worth $36.7 billion and GM is worth $50 billion at today's prices. Yes, as I have read about 2,842 times this week, Tesla's valuation eclipsed the combined value of those two Wednesday, although that is no longer the case after Thursday's pullback.

But what of the electric revolution and autonomous vehicles? Well, Tesla's lack of sales growth in the U.S. (I believe Tesla's sales fell in the fourth quarter; the company does not report sales by region) and the epic fails of the Nissan (NSANY) Leaf and Chevy Bolt show that BEVs are years away from mainstreaming here. Musk's "1 million robotaxis on the road by the end of 2020" is so laughably untrue that it is given zero credence by my friends in the industry, but the chest-thumping over driverless cars from Uber (UBER) and Alphabet's (GOOGL) Waymo has ground to a near-halt in recent months.

AVs are a half-decade away from any commercial adoption and a full decade away for consumer use. Mark it down.

So, I will stay away from car stocks and (hopefully) continue to make money tactically buying puts on TSLA, as I did Wednesday. This is not a buy-and-hold industry, and if takes reticent Chinese consumers to convince potential investors of that fact, then so be it.

(Alphabet is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells GOOGL? Learn more now.)

At the time of publication, Jim Collins' firm was long TSLA puts.