• MLT

Inside Job

Updated: Jul 17

We regularly receive direct messages and emails from people after advice for long term profitability - it is always warming to know that people take 'gambling on horses' as a serious business. It should be treated no differently than any other investment. Turn over and return on investment are the two main (not only) numbers that you should all be recording.

However, there is another element that should be absolutely vital to understanding what is real and what is not. Your own eyes.

On March 5th 2001, something completely out the blue happened that changed the way thousands view financial markets, but it should be referred to when betting on horse racing or buying into multi billion dollar companies.

On that day almost 20 years ago, a relatively unknown reporter wrote an article on the 'then' 7th biggest company in the USA, Enron, entitled 'Is Enron Overpriced'. The article was by Bethany McLean after a chat with market analyst Jim Chanos, who advised her to take closer look at the Enron books. Bethany did just that, meeting with the Enron board and trying to understand why the balance sheet, sales, and profits made no sense at all.

The Enron executives tried desperatly to palm her off (one of the worlds biggest accountancy firms at the time, Arthur Anderson, had already signed off the accounts), but Bethany saw straight through it.

What she uncovered would blow the lid on one of the biggest financial scandals ever known to rock Wall Street, and yet the worlds sharpest traders, accountants, lawyers, etc., couldn't see what was right in front of them: Enron was a house of cards. Enron had become the masters of deceit, hiding the true losses from the world, using bullying tactics and a 'pump and dump' of the shares to ensure they netted approximately 45 billion dollars between them.

A short time after the article was published, the wheels came off and Enron was exposed as a naked swimmer when the tide rolled out. The company folded and surrendered its license on August 31st 2002; 85,000 employees lost their jobs. Enron's shareholders lost $74 billion in the four years before the company's bankruptcy ($40 to $45 billion was attributed to fraud). Prison sentences and huge fines were imposed, but it was all too late to save their investors. Enron was not the first, and certainly will not be the last, to deceive everyone.

Jim and Bethany have recently turned their attentions to Tesla, the manufacturer of electric cars. Leading the charge for Tesla is founder Elon Musk, who also founded another less known company called Solar City. Not far short of a billion dollars of public funds has been used to build and employ staff at his Solar City factory, supposedly employing several thousand people. The only problem is they manufacture hardly anything, have a few hundred staff, and nobody outside the company is allowed into the factory unless they are believers. Staff that leave the company reveal that not much happens inside it and the Tesla dream of solar panelled houses giving free power to Tesla cars is hanging on a knife edge. Serious investors from massive funds have given it the thumbs up, but under cross examination they reveal they have been 'told' everything is ok by a certain Mr Musk in meetings. It has all the hall marks of the Enron scandal. Share prices have soared amidst various publicity stunts of new cars and factories (Enron also unveiled a new power plant in Dabhol that they used to book future profits using mark to market accounting, the plant never actually produced any power as they never finished building it) but the balance sheets are not fully in the public domain as such, and the mounting debt pile is showing no signs of slowing. Short sellers are highlighting the 'pump and dump' theory on the same basis as Enron.

If you watch back some of the footage of Enron board members flapping (before they were exposed) when put under pressure by investors' questions (Jeff Skilling actually audibly heard calling one investor, who had asked him why Enron couldn't produce a balance sheet, an 'arsehole') you will notice an uncanny similarity with how Tesla deal with similar questions.

Reasonable questions regarding the $13 billion debt repayment structure, expected future income and loan repayment dates, the missing solar panels Solar City promised, the strength of the glass window on the new 'armoured' truck, the missing one million Tesla Robotaxis, etc., are met with a near brick wall.

Share prices had been steadily climbing from $200-300 in 2016 to 2019 to a staggering $900 in February 2020. "Elon has said....Elon told us that" investors bragged after helicopter rides and plush lunches, but with the global virus attacking companies with huge debts in the past fortnight means the share price has collapsed back down to $360 at time of writing, two thirds of its value wiped out in just 4 weeks; with massive repayments due shortly, things may get a whole lot worse.

Just as Enron president Jeff Skilling and CEO Ken Lay told everyone everything was ok over and over again, while they were secretly selling off millions of their own shares, Elon Musk is pointing everyone to an 'E'Truck' while in private we can only guess what he is doing.

This may seem a million miles from UK horse racing but there are parts of the above that are extremely similar in terms of who has something to gain by leading you down a certain route. Believe your eyes over and above what someone is telling you, they do not lie.

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