Published on August 10th, 2018 | by Zachary Shahan0
The Big Short Burn … Er, Explosion
August 10th, 2018 by Zachary Shahan
You don’t get much props for predicting something after it happened. This is sort of lame: “I knew that would happen. I didn’t say it, but I knew it.” So, I’m going out on a short limb and am making a prediction here in the open while the market remains irrational.
Well, to be honest, you don’t get much props for predicting something that someone else already predicted either. I’m just going on some simple, direct statements from a person who has shown for years that he’s exceedingly honest and often provides hints of things he knows are coming months in advance. He has also accomplished — several times — things that experts said were “impossible.” The task at hand here is not at all impossible.
That said, the stock market is acting as though Tesla CEO Elon Musk is either an idiot or a liar. In the age of a reality TV president, I guess this is par for the course, but it is shocking me yet again. If you’re just skimming the headlines and major media commentary about Tesla this week, you may well think Musk’s plan to take Tesla private is a dishonest, impractical, highly unlikely scheme. Perhaps you even think Musk is going to jail, just because the SEC is doing one of its basic jobs — very likely nothing more than some simple due diligence. Headline after headline makes it seem like a serious SEC investigation is growing and growing, but then I look into the details and nothing notable has changed. From what I have read, they are checking with Musk to make sure he does indeed have financing secured (as he tweeted) to take Tesla private. Given that he followed that up with the statement that all that was really a question mark at this point was whether shareholders voted for the plan — that doesn’t sound like someone I know to be honest fudging the facts.
So, no, I’m not concerned that Musk was serious. My first assumption isn’t that Musk was manipulating the market and has no one lined up to finance taking Tesla private. I don’t beat animals, dead or alive, but to further emphasize a point that I think doesn’t need to be emphasized: Musk has said for years that Tesla would probably be better as a private company, and he reportedly tried to convince Japan’s SoftBank last year about helping to make this happen. In other words, the man has been working on this for a while. This is not a joke. The chance that he did indeed get enough of a financial commitment to bring this proposal to the Tesla board of directors and the public is close to 100%, in my humble opinion. If you absolutely think that’s not true, you may as well skip the rest of this article.
I’ll get to Tesla short sellers in a moment, but first, let’s have a look at who owns Tesla. Thanks to some research and calculation work from Maarten Vinkhuyzen, this is how Tesla ownership breaks down (known, non-institutional shareholders are in red):
|PRICE T ROWE ASSOCIATES INC /MD/||03/31/2018||
|BAILLIE GIFFORD & CO||06/30/2018||
|VANGUARD GROUP INC||03/31/2018||
|CAPITAL WORLD INVESTORS||03/31/2018||
|JENNISON ASSOCIATES LLC||06/30/2018||
|SAUDI ARABIA Wealth Fund||
|BANK OF MONTREAL /CAN/||06/30/2018||
|STATE STREET CORP||03/31/2018||
|BAMCO INC /NY/||03/31/2018||
|SUSQUEHANNA INTERNATIONAL GROUP, LLP||03/31/2018||
|PRIMECAP MANAGEMENT CO/CA/||03/31/2018||
|GOLDMAN SACHS GROUP INC||03/31/2018||
|GEODE CAPITAL MANAGEMENT, LLC||03/31/2018||
|BANK OF NEW YORK MELLON CORP||06/30/2018||
|DEUTSCHE BANK AG\||03/31/2018||
|NORTHERN TRUST CORP||03/31/2018||
|ALLIANZ ASSET MANAGEMENT GMBH||03/31/2018||
|J&P(CHINA)CAPITAL MANAGEMENT CO.,LTD||09/30/2017||
|JPMORGAN CHASE & CO||03/31/2018||
|MITSUBISHI UFJ TRUST & BANKING CORP||03/31/2018||
|AMERICAN CENTURY COMPANIES INC||06/30/2018||
|SUMITOMO MITSUI ASSET MANAGEMENT COMPANY, LTD||06/30/2018||
|CREDIT SUISSE AG/||03/31/2018||
|LEGAL & GENERAL GROUP PLC||03/31/2018||
|GILDER GAGNON HOWE & CO LLC||06/30/2018||
Now, let me be clear — there’s very little info out there about how these institutional investors view the offer. Even for large shareholders, like Baillie Gifford, that think Tesla is worth far more than $420, it’s unclear if they have limitations that would prevent them from carrying over a large portion of their shares in a private Tesla. Furthermore, some may simply prefer the public accountability and stock market pricing system — even if that means a lot of FUD bringing the brand down.
As it goes, experts in the field who I respect seem to be throwing their hands up and just guesstimating that 50% of those institutional shares would transfer over to private shares. If you add that onto Elon Musk’s 20%, Tencent’s 5%, and the Saudi Arabia Wealth Fund’s 2%, you’re at about 54% of the shares. If you cautiously (I’d say pessimistically) consider that half of the remaining retail investors are interested in going private, that’s 64%.
Now, this is not an evaluation of whether shareholders will vote for Tesla to go private. Again, perhaps many of those institutional investors would rather Tesla stay public. However, if you assume that the shareholders do vote to go private, there’s another very interesting matter to consider here. Actually, this is a matter that could be highly relevant even before the vote.
As it stands, there is an enormous short position on Tesla. Approximately 35 million Tesla shares are “loaned” out to shorts/short sellers. Basically, shorts have “borrowed” the stock from a shareholder and then loaned it out to someone else, with a commitment to buy it back at some undetermined point in the future in order to give it back to its rightful owner. (See our extensive articles on short selling and Tesla shorts on the bottom of this article for more info on this topic.)
A “short squeeze” is sort of, kind of like a “run on the bank” (which you’ve probably learned about from It’s a Wonderful Life). Basically, if a company you’re shorting has strongly positive news, it would be smart of you to immediately buy back the share you borrowed and lent out. The stock price is likely to jump up, and if you wait too long, you’re going to have to buy that share back for much more than you lent it out.
The Tesla [TSLA] stock price jumped up rapidly earlier this week when there was news of the Saudi Arabia wealth fund investment and then more so when Musk tweeted about potentially taking Tesla private at $420/share. But a couple of interesting things happened. First, trading was halted for a couple of hours. This is standard in the situation we were in, but the point is that it gave everyone some time to think about the news and decide what to do. The much more interesting thing is that by and large short sellers by and large didn’t cover — they didn’t start buying back shares they loaned out.
This gets us back to the top of this article. Short sellers didn’t buy the news. They seemingly didn’t believe that Musk would take Tesla private and that he had financing lined up (they’ve been claiming he lied about that). Some others seemed to think $420 was a ceiling for their losses anyway, but that theory doesn’t appear to be grounded in reality from what I’ve read. We’ll get to that in a second.
Some longs have added onto their holdings as well. (Full disclosure: With my meager opportunity for this, I was one of them.) However, many longs also seem skeptical that the deal is going through. They want more evidence before buying in at $350–370. Given that there have likely been hundreds of mainstream media articles and TV talking heads scaring people about a potential SEC violation and ruminating on the slim possibility (which they consider not so slim) that Elon Musk lied about securing financing and there’s no way that Tesla is going private, I can’t say I’m all that surprised. (Even normally pro-Tesla tech sites like ArsTechnica — an early inspiration for CleanTechnica — have been spreading the fear, uncertainty, and doubt.)
So, now we get to predictions. Here’s the thing I think is going to happen (but am not providing as investment advice!):
I, like Gene Munster, think that shareholders will vote to take Tesla private (or delist it if that’s what we’re actually talking about). Since some major shareholders think Tesla is worth far more than $420/share and since this will be the last chance for many people to buy into Tesla — for a long time at least (since it is going to be much, much harder to buy shares in private Tesla than in public Tesla) — I think the share price will jump. People who don’t plan to hold onto the stock would hold at least until $420 since Tesla would cash out their shares at that price.
Meanwhile, short sellers will finally get the message: Yes, Tesla is going off the market, and they need to buy back the shares they loaned out in order to return them to their rightful owners. Furthermore, they should finally understand that $420 is not a cap on the buyback price for them. If the stock price jumps to $1000 because people value private shares in Tesla that high, then they still need to buy back the shares they don’t really own in order to return them to owners. Furthermore, if the price gets up that high, the privatization deal may get dropped or have to be revised. $420 is not a ceiling. In fact, it’s more of a floor for short sellers if the deal moves forward.
So, we are back to the point that approximately 35 million TSLA shares are shorted right now. If there’s a sprint for the door, those short sellers will be fighting to buy shares back — and shareholders can wait as long as they like to sell them back. If they think the share price will go up to $500, they can wait till then. Furthermore, if they value the private shares at $2000 each, they may have no interest in playing games and selling to shorts until the price is $2001. Institutional investors surely understand this. Many of the retail investors understand this. Who the heck is going to sell a short a share for $420? You must be high to think that’s going to happen in a large volume.
The most epic short squeeze in history seems to be a Volkswagen short squeeze that happened in 2008. The short interest in the stock before this happened was approximately 13%. The short squeeze resulted in the stock price increasing multiple times over at its peak (see that link above for details). Approximately 20% of Tesla shares are shorted right now.
Perhaps the shorts with billions and billions on the line don’t want to believe the possibility of a short squeeze. Perhaps they are so obsessed with the idea that Elon Musk is a liar and a fraud that they can’t believe the simple tweets he sent earlier this week represent exactly what they say. If they are wrong, holy hell in a hot air ballon — this is going to be the most epic short squeeze in history.
I watched that video after writing this article. Even if you read the full piece above, I recommend watching it. A tip of the hat to JRP3 for sharing it.
Update: This article was updated shortly after publishing to fix a couple of errors.
- Our Tesla Bankwuptcy archives
- The Tesla Short Thesis Just Collapsed — CNN, CNBC, Forbes, & Business Insider Are Still Lost In Shortsville
- Tesla Model 3 — 7th/8th Best Selling Car In USA — In A Class Of Its Own
- Tesla Executes
- How I Learned To Stop Worrying About My Tesla Shares & Love The Short Sellers (Part 1)
- How I Learned To Stop Worrying About My Tesla Shares & Love The Short Sellers (Part 2)
- The Fascinating Tesla Short Story
- Stormy Weather In Shortville Will Soon Look Like A Day On The Beach — Epic TSLA Tsunami Coming
- Coming Tesla Short Squeeze? Will Stock Go “Supernova” In 3 Weeks? Elon Implies It Will
- A Sinister Cellar Of The TSLA Short Story?
- Jim Chanos’s Anti-Tesla Short Seller Arguments Debunked (Video)
- Is The Possibility Of Perception Perversion The Real Reason Jim Chanos Is Short Tesla?
- Elon Musk vs TSLA Shorts Is Personal, Not Business
- Tesla [TSLA] Short Sellers Have Lost $1 Billion In 2018
Full disclosure: I am long TSLA. Because, duh.