Following Tesla's tanking junk bond late last week, one macro strategist is pointing to the detachment between the company's stock price and bond performance as a warning sign.
Larry McDonald, editor and founder of the Bear Traps Report, told CNBC's "Trading Nation" that a "disconnect" between the stock's massive market capitalization and the company's withering bond price is concerning. Here are his reasons why.
• There is a clear disconnect between Tesla's sizable $45 billion market cap and the company's bonds, yielding around 7 percent after Moody's downgraded the credit rating late last week.
• Even as the stock has seen a bit of a rebound since hitting a year-to-date low of $244.59 per share earlier this week, its debt has not made the same rebound; this is a serious disconnect, and it's likely that the stock is "wrong" and the bonds are "correct."
• The central concern for the market is Tesla's immense cash burn; Tesla last quarter reported negative free cash flow of $276.7 million, and negative $1.4 billion the previous quarter.
• It is plausible Tesla could turn to convertible bonds to raise fresh capital. Such a move could pose a risk for equity shareholders.
Bottom line: The disconnect between Tesla shares and the company's corporate bonds could be signaling trouble ahead.
