Vladimir Lenin famously said: “The Capitalists will sell us the rope with which we will hang them.” I think the shorts have done something similar. They have hired the shares from us with which we will bankwupt them.
Shorts play a dangerous game. They hire institutional investors’ stock to sell it in the hope to buy it at a later date for a far lower price and make a financial killing that way. But when the price only goes up, then they have to buy those shares back at a loss, because at some time, they have to buy the shares to give them back to the original owner. The original owner might want to sell them, or might want to vote at a shareholders meeting, or the lease just expires. And if many owners do this at the same time, or the brokers start pushing the shorts to sell because they can not cover their losses anymore, we get a short squeeze. The price of the stock goes through the roof because the shorts have to buy at any price.
A short squeeze is the opposite of what we have seen every time the shorts started to sell many shares and pushed the price down by creating extra supply.
Their favorite target is Tesla (TSLA). There are about 170,000,000 shares issued by Tesla, and the shorts have hired 40,000,000 shares. We know these numbers because S3partners monitors the markets and publishes these numbers.
S3 Analytics: $TSLA Shorts Nearing the End of the Road. Lack of stock loan supply, increased stock loan costs and tapped out risk limits will eventually curtail short selling in #Tesla. https://t.co/We2OziLocH pic.twitter.com/SWzvqMHw13
— Ihor Dusaniwsky (@ihors3) May 4, 2018
The shorts sold these shares to regular investors, who have no way of knowing whether the shares they just bought come from someone else’s portfolio or were hired by a short. And it doesn’t really matter for the buyer, it is a legal buy — the stock exchange and the broker protect the buyer.
The 170,000,000 Tesla-issued shares combined with 40,000,000 short shares means there are 210,000,000 Tesla shares in investors’ portfolios.
Now, there are investors, and there are investors.
Shorts see themselves as investors, and that is an argument I am not going to engage in.
Than you have brokers involved in arbitration and day-traders. These groups hold stock for a few minutes to a few days. They are of no interest for this article.
The speculators, who try to ride the volatility of the market and hold stock for a few days to a few months, are important for this article and could save the shorts.
The average investors expect to hold the stock until there is a nice profit to be made or a better opportunity presents itself.
$TSLA rebounds 3.4% today. Short interest is $11.4 billion, 40 million shares short for their first time in #Tesla's history. Shorts were up $661 million in mark-to-market profits yesterday and gave back $398 million today. pic.twitter.com/KROsZyOBZz
— Ihor Dusaniwsky (@ihors3) May 4, 2018
(That’s a CleanTechnica picture in the tweet, by the way.)
And then there are those who count for this article — the long and institutional investors are the last group. They hope for an Apple- or Amazon-like development and expect to hold the stock for years. In this group are the institutions mentioned in a recent James Ayre article about Tesla stock ownership, the insiders of which Elon Musk is the largest (with about 20% of the stock), and the many retail investors who own the stock expecting to hold it for 10 years or more, like many of the regular readers of CleanTechnica. This group owns over 80% of the stock as long-term investment, but how much over 80%? That is the $$$Billion Dollar Question.
The question I am asking is, who owns the rest, up to 44%, of the Tesla stock? The total outstanding stock is about 124% of the issued stock. Thanks are owed to the shorts for providing these extra buying opportunities.
And now comes the shorts’ problem. If more than 100% of the Tesla stock is owned by the real long investors, especially guys that expect not to sell before the stock is over $1,000, for example, where are the shorts going to get the stocks they need to close their positions?
I remember a case on the stock exchange of Amsterdam. When you sell shares, you have three days to deliver (settle) the shares. Brokers sometimes use this to first sell a stock to buy it later for a lower price, they hope. It is called a naked short. In this case, a broker was short and did not want to buy at too high a price, and the days became weeks. The board of the exchange lost its patience with the guy and organized a reverse auction. Very slowly, his colleague brokers sold him the shares for increasing prices, just a few at a time. Until he was just 1 (one) share short. That last share did cost more in the end than all other shares combined. His colleagues did not bankwupt the guy, but they made him pay for a very expensive lesson.
Looks like sooner than expected. The sheer magnitude of short carnage will be unreal. If you’re short, I suggest tiptoeing quietly to the exit … https://t.co/A0Q90pSLKA
— Elon Musk (@elonmusk) May 5, 2018
This is different. This is a large group of people betting on the wrong horse. The first who see the writing on the wall can get out with modest losses. They can probably buy the shares from the speculators or regular investors. But it can get really nasty for the laggards, when the only shares left are held by the long long investors who have no intention of selling.
What we will see is a prisoner’s dilemma. Those who hold out for higher prices when the short squeeze hits risk not fully benefiting from the price explosion. Those who are too eager to sell to the shorts will miss a great opportunity for profit. With a large enough margin above the 100%, it is easier to keep your nerves and wait until the stock is $600 or more. That is why we need the shorts to sell more shares to the long long investors. But all the shares that are available are in use by the shorts. We need a very large shareholder to put an extra 10 or 20 million shares in the market that the shorts can hire. Preferably, at low cost, enticing the shorts to go all in and “hang themselves.”
But who has that many shares and hates shorts enough to do such a thing? But even without the help of such a Maecenas, I think the shorts have maneuvered themselves into a corner where they will get burned without a means of escape.
Editor’s note: This article and the one before it were already planned and in the works before Elon’s recent tweets about the coming short squeeze.