Tesla: Back in pole position
17 September 2019
The ride seemed to be over for Tesla鈥檚 short sellers by the end of 2018, but, thanks to Tesla鈥檚 eccentric CEO, it seems the stock has plenty more energy in the battery
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When you hear the word 鈥淭esla鈥�, what springs to mind? Beautiful, electric driverless cars, rockets and spacecraft, or perhaps if you鈥檙e in the securities finance industry, volatile stocks and short selling opportunities galore.
Thanks to a laundry list of headline-grabbing affairs in 2018, ranging from controversial production targets to Tesla鈥檚 eccentric CEO Elon Musk who is willing to risk his company鈥檚 share price by smoking cannabis during a live podcast, to tweeting out plans to take the whole business private, Tesla has never failed to feature among the hottest shorting stocks around.
In fact, a year of turmoil led Tesla to rank as one of the top five earners for short sellers in 2018, according to DataLend. The data provider found that Tesla, along with the other top earners in 2018 (Celltrion, Ubiquiti Networks, Sharp and Sirius XM) short sellers banked $482 million in revenue.
For Tesla, the extreme volatility was particularly ramped up from May through to August 2018, which was partly down to Tesla鈥檚 earnings report and Musk鈥檚 provocative statements on Twitter.
Sam Pierson, director at IHS Markit, noted that Tesla saw shares end flat for the first week in May (2018), and the much-discussed Tesla earnings report and conference call certainly added to the volatility.
Following this, in early August 2018 Tesla鈥檚 equity short position was above $13 billion for the first time, which compared to the previous peak of $12.8 billion in June. This came after Saudi Arabia鈥檚 sovereign wealth fund took a $2 billion stake in Tesla shares.
Then, on 7 August 2018, Musk posted a message on the social media website Twitter claiming that he would take Tesla private and that the funding for doing so had been secured. He wrote: 鈥淎m considering taking Tesla private at $420. Funding secured鈥�.
Shareholders responded by saying that this was an attempt to manipulate Tesla鈥檚 stock price and ruin plans for short-sellers. Following this, shareholders filed a class-action lawsuit, claiming Musk鈥檚 tweet represented false and misleading information.
The US Securities and Exchange Commission (SEC) went on to charge Musk with a securities fraud charge and charged Tesla with failing to have required disclosure controls and procedures relating to Musk鈥檚 tweets. This saga caused Tesla shares to drop 3.4 percent to $284.96, down about 8.5 percent for the year (as of 18 September 2018), according to Bloomberg.
Musk and Tesla agreed to settle seperate charges against them and were slapped with a $20 million fine each by the SEC. As well as this, Musk was required to step down as the company鈥檚 chairman and agree to have statements on social media pre-approved.
After this however, around the end of the year, the ride finally seemed over for Tesla鈥檚 short sellers. At the start of November, the number of Tesla shares borrowed declined by 6.9 million to a year-to-date low of 22.4 million, according to IHS Markit.
The total short interest fell a further 1.5 million over the last two weeks of November to 27.9 million, the lowest level since March. At the time, IHS Markit suggested that lenders were reporting 16 million shares as available to borrow, equating to $5.4 billion.
The total lendable pool, including shares already lent out, had been consistently in the range of 30 to 31 million shares since the start of November, IHS Markit explained that recent securities lending availability increase is purely the result of existing borrows being returned.
Encore!
But, as it turned out, the party wasn鈥檛 over. Today, the electric car manufacturer has reclaimed pole position as the second-largest short target in the US market, behind Apple (see figure 1).
Tesla comes in at $9.14 billion compared to Apple鈥檚 $10 billion while the third largest short in the US, Microsoft, comes in at $6.4 billion, significantly lower than Tesla鈥檚.
For Musk, the trouble started again in February when he defied the courts with an unvetted tweet claiming that Tesla would produce about 500,000 cars this year. This led the SEC requesting a court to hold Musk in contempt.
Following this, the law firm Grant & Eisenhofer brought suit on behalf of institutional investors against Musk and the board Tesla asserting that the CEO鈥檚 ongoing unchecked misstatements on Twitter have continued to harm the company and its shareholders. According to Grant & Eisenhofer, shareholders were asking for injunctive relief and monetary damages with respect to Tesla鈥檚 use of Musk鈥檚 personal Twitter account to make statements concerning the company.
Speaking in March, Michael Barry, Grant & Eisenhofer director, stated: 鈥淢r Musk has continually disregarded all efforts to rein in his material misstatements on social media. He has ignored federal court orders, a settlement with the SEC, and even his company鈥檚 own corporate policies expressly requiring that any of his tweets regarding Tesla be pre-screened. His conduct has not only cost Tesla shareholders dearly but threatens to expose the company to even greater liability and litigation in the future.鈥�
Several months on and Tesla short sellers are refusing to let this particular golden goose go. At the time of writing, Data from S3 Partners shows that Tesla short interest is $9.11 billion (with a 0.73 percent stock borrow fee), representing 39.32 million shares shorted; 29.63 percent of its float.
鈥淭esla short sellers have reversed course after covering 4.86 million shares of their short book in 2018, a decrease of 16 percent, they have been in short selling mode for most of 2019 (see figure 2),鈥� explains Ihor Dusaniwsky, managing director of predictive analytics, S3 Partners.
Over the past month Tesla shares shorted have increased by 13.75 million shares ($3.19 billion), 53.77 percent in 2019 as its stock price fell 30.35 percent, according to Dusaniwsky (see figure 3).
鈥淭esla short sellers have been selling into price weakness for most of the year and are up $2.85 billion in year-to-date mark-to-market profits (32.37 percent). Over the past month, with Tesla鈥檚 stock price rallying a bit, short have given back $245 million in mark-to-market losses, 2.73 percent,鈥� he notes.
He concludes: 鈥淭esla continues to be an active and vigorously defended short, as I can attest from my Twitter feed, and even though short sellers are down $2.49 billion in mark-to-market losses since 2016, this year鈥檚 $2.85 billion in mark-to-market profits and relatively cheap financing rates (73bps fee) will not be a reason for Tesla shorts to close out their positions.鈥�
鈥淭heir recent profitability has in fact given them a profit/loss cushion that makes the chances of a Tesla short squeeze even more improbable.鈥�
Figure 1
Figure 2
Figure 3
Thanks to a laundry list of headline-grabbing affairs in 2018, ranging from controversial production targets to Tesla鈥檚 eccentric CEO Elon Musk who is willing to risk his company鈥檚 share price by smoking cannabis during a live podcast, to tweeting out plans to take the whole business private, Tesla has never failed to feature among the hottest shorting stocks around.
In fact, a year of turmoil led Tesla to rank as one of the top five earners for short sellers in 2018, according to DataLend. The data provider found that Tesla, along with the other top earners in 2018 (Celltrion, Ubiquiti Networks, Sharp and Sirius XM) short sellers banked $482 million in revenue.
For Tesla, the extreme volatility was particularly ramped up from May through to August 2018, which was partly down to Tesla鈥檚 earnings report and Musk鈥檚 provocative statements on Twitter.
Sam Pierson, director at IHS Markit, noted that Tesla saw shares end flat for the first week in May (2018), and the much-discussed Tesla earnings report and conference call certainly added to the volatility.
Following this, in early August 2018 Tesla鈥檚 equity short position was above $13 billion for the first time, which compared to the previous peak of $12.8 billion in June. This came after Saudi Arabia鈥檚 sovereign wealth fund took a $2 billion stake in Tesla shares.
Then, on 7 August 2018, Musk posted a message on the social media website Twitter claiming that he would take Tesla private and that the funding for doing so had been secured. He wrote: 鈥淎m considering taking Tesla private at $420. Funding secured鈥�.
Shareholders responded by saying that this was an attempt to manipulate Tesla鈥檚 stock price and ruin plans for short-sellers. Following this, shareholders filed a class-action lawsuit, claiming Musk鈥檚 tweet represented false and misleading information.
The US Securities and Exchange Commission (SEC) went on to charge Musk with a securities fraud charge and charged Tesla with failing to have required disclosure controls and procedures relating to Musk鈥檚 tweets. This saga caused Tesla shares to drop 3.4 percent to $284.96, down about 8.5 percent for the year (as of 18 September 2018), according to Bloomberg.
Musk and Tesla agreed to settle seperate charges against them and were slapped with a $20 million fine each by the SEC. As well as this, Musk was required to step down as the company鈥檚 chairman and agree to have statements on social media pre-approved.
After this however, around the end of the year, the ride finally seemed over for Tesla鈥檚 short sellers. At the start of November, the number of Tesla shares borrowed declined by 6.9 million to a year-to-date low of 22.4 million, according to IHS Markit.
The total short interest fell a further 1.5 million over the last two weeks of November to 27.9 million, the lowest level since March. At the time, IHS Markit suggested that lenders were reporting 16 million shares as available to borrow, equating to $5.4 billion.
The total lendable pool, including shares already lent out, had been consistently in the range of 30 to 31 million shares since the start of November, IHS Markit explained that recent securities lending availability increase is purely the result of existing borrows being returned.
Encore!
But, as it turned out, the party wasn鈥檛 over. Today, the electric car manufacturer has reclaimed pole position as the second-largest short target in the US market, behind Apple (see figure 1).
Tesla comes in at $9.14 billion compared to Apple鈥檚 $10 billion while the third largest short in the US, Microsoft, comes in at $6.4 billion, significantly lower than Tesla鈥檚.
For Musk, the trouble started again in February when he defied the courts with an unvetted tweet claiming that Tesla would produce about 500,000 cars this year. This led the SEC requesting a court to hold Musk in contempt.
Following this, the law firm Grant & Eisenhofer brought suit on behalf of institutional investors against Musk and the board Tesla asserting that the CEO鈥檚 ongoing unchecked misstatements on Twitter have continued to harm the company and its shareholders. According to Grant & Eisenhofer, shareholders were asking for injunctive relief and monetary damages with respect to Tesla鈥檚 use of Musk鈥檚 personal Twitter account to make statements concerning the company.
Speaking in March, Michael Barry, Grant & Eisenhofer director, stated: 鈥淢r Musk has continually disregarded all efforts to rein in his material misstatements on social media. He has ignored federal court orders, a settlement with the SEC, and even his company鈥檚 own corporate policies expressly requiring that any of his tweets regarding Tesla be pre-screened. His conduct has not only cost Tesla shareholders dearly but threatens to expose the company to even greater liability and litigation in the future.鈥�
Several months on and Tesla short sellers are refusing to let this particular golden goose go. At the time of writing, Data from S3 Partners shows that Tesla short interest is $9.11 billion (with a 0.73 percent stock borrow fee), representing 39.32 million shares shorted; 29.63 percent of its float.
鈥淭esla short sellers have reversed course after covering 4.86 million shares of their short book in 2018, a decrease of 16 percent, they have been in short selling mode for most of 2019 (see figure 2),鈥� explains Ihor Dusaniwsky, managing director of predictive analytics, S3 Partners.
Over the past month Tesla shares shorted have increased by 13.75 million shares ($3.19 billion), 53.77 percent in 2019 as its stock price fell 30.35 percent, according to Dusaniwsky (see figure 3).
鈥淭esla short sellers have been selling into price weakness for most of the year and are up $2.85 billion in year-to-date mark-to-market profits (32.37 percent). Over the past month, with Tesla鈥檚 stock price rallying a bit, short have given back $245 million in mark-to-market losses, 2.73 percent,鈥� he notes.
He concludes: 鈥淭esla continues to be an active and vigorously defended short, as I can attest from my Twitter feed, and even though short sellers are down $2.49 billion in mark-to-market losses since 2016, this year鈥檚 $2.85 billion in mark-to-market profits and relatively cheap financing rates (73bps fee) will not be a reason for Tesla shorts to close out their positions.鈥�
鈥淭heir recent profitability has in fact given them a profit/loss cushion that makes the chances of a Tesla short squeeze even more improbable.鈥�
Figure 1
Figure 2
Figure 3
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