2017 Investor Roundtable: TSLA Market Action

[Rarity]

Overnight, a large portion of my shares were lent out by Fidelity paying 0.75%, so perhaps the lending market is tightening up somewhat. Like @adiggs, my shares had not been lent out for months.

I am a little surprised. TSLA has a very large market cap for such a large short interest.

 

[Sanny]

I know very little about the market mechanics, watched 2013 impressive run in my TSLA holdings with admiration and greed but without too much understanding.

Today I just tried to apply information about 2008 VW squeeze to the current TSLA situation based on my common sense.

My understanding is that to squeeze VW so hard there were several conditions met

1) very limited free float (TSLA - check)

2) large short position (check)

3) extremely high concentration in one hand – Porsche in particular (not sure TSLA has a similar level of concentration).

And the most important is 4) the largest shareholder (Porsche) willing to play dangerous speculative games.

This last one I think is the most important and is not the case with TSLA.

I believe EM or other large TSLA shareholders would do everything to avoid the squeeze and the following turbulence (and potential scandal, SEC investigation, and stock toxic status).

Even as a minority shareholder I would choose a steady rise in the share price over 1-2 years over a short turbulent squeeze, and I expect large shareholders share the same attitude.

So my thoughts are, if you can manage the speed of the squeeze with your large holding, I would try to avoid the squeeze and let off the steam by managing the shares available to cover. In the aftermath – maybe that’s exactly what happened in 2013? Maybe that is something more likely sometime in the future – slowly and managed unwinding of the short position and a steady price rise instead of a violent squeeze?

Again just common logic, with little understanding of market mechanics, so I might be (and probably is) wrong.

 

[Paracelsus]

I know very little about the market mechanics, watched 2013 impressive run in my TSLA holdings with admiration and greed but without too much understanding.

Today I just tried to apply information about 2008 VW squeeze to the current TSLA situation based on my common sense.

My understanding is that to squeeze VW so hard there were several conditions met

1) very limited free float (TSLA - check)

2) large short position (check)

3) extremely high concentration in one hand – Porsche in particular (not sure TSLA has a similar level of concentration).

And the most important is 4) the largest shareholder (Porsche) willing to play dangerous speculative games.

This last one I think is the most important and is not the case with TSLA.

I believe EM or other large TSLA shareholders would do everything to avoid the squeeze and the following turbulence (and potential scandal, SEC investigation, and stock toxic status).

Even as a minority shareholder I would choose a steady rise in the share price over 1-2 years over a short turbulent squeeze, and I expect large shareholders share the same attitude.

So my thoughts are, if you can manage the speed of the squeeze with your large holding, I would try to avoid the squeeze and let off the steam by managing the shares available to cover. In the aftermath – maybe that’s exactly what happened in 2013? Maybe that is something more likely sometime in the future – slowly and managed unwinding of the short position and a steady price rise instead of a violent squeeze?

Again just common logic, with little understanding of market mechanics, so I might be (and probably is) wrong.

Thanks Sanny - This is a very informative and timely post to help compare/contrast a squeeze scenario for VW and Tesla. I agree with your first two points regarding free float and large short position. And when I initially began to look deeper into the VW squeeze to learn more about the role that Porsche played, I would have confidently agreed with your third point. But since that time, Tencent has announced a 5% or greater accumulation of Tesla shares, and buying of rather large quantities by Tencent and others has seemed to continue. This is taking a big chunk out of the free float. Would Tencent or others play recklessly to achieve a similar squeeze? I don't know. But perhaps the scenario is much more similar behind the curtain with that news.

I also agree with your point about a 'managed squeeze'. I have posted several times regarding a belief that there is a potential to see a a fast run up due to the shorts getting intentionally squeezed by the institutions that continued to lend them a huge inventory of shares at very low interest rates while they are (were) selling a very large number of shares to big individual investors such as Tencent. That still seems odd to me that lending rates can be so low while really big investors continue to diminish the free float with really big bites. So if we do have a controlled short squeeze - perhaps simply to shoot the prices to the 400-500 range as AustinEV has predicted which would relax the trading and let the institutions make some money with less pressure to be right every day, then I think it is fair to say this run was reverse engineered by the lending institutions. Those institutions were aware of the huge Tencent buying position long before the shorts learned of it.

 

[esk8mw]

Wow, my IB news feed is chock full of TSLA negativity lately. GS reiterating a bonkers PT. Bogus lawsuit.

Everything is being thrown at this stock and they can't keep a lid on it. Shorts are going to get FRIED if Q1 results are positive.

 

[kenliles]

short squeezes take many forms and dynamics interacting with surrounding financial environments and macros conditions-
Regardless- my life-long experience with these:
spiked squeeze sours -
slow squeeze makes the sweetest juice

Correlations to VW-squeeze are currently even farther apart than the 2 companies are in EV;
Don't bite IMO- [This was a mistake some made in the 2013 squeeze as well]
TSLA is in a position for some very impressive gains over the next many months and years-
If you invest to Bite on the fast squeeze, you are by definition reducing your chances to see the size this Python will become.
Given current TSLA conditions and surrounding, I would STRONGLY advise investing for the longer squeeze-play

just my 2 pennies

 

[Paracelsus]

slow squeeze makes the sweetest juice

That is fantastic line and I am sure it will be repeated here many times. And I agree with your thoughts of holding as much Tesla for the longer haul as possible. Even if some of the fibonacci retracement calcs of a run to the mid 600's before falling back to the 400-500 channel holds true, there will come a time when the 600's would be a 'buy on the dip' as AustinEV coined yesterday.

 

[Rarity]

A big difference between Tesla and VW is that it would be in Tesla's interest to issue shares to relieve the squeeze. Tesla has insatiable ambition -- many more gigafactories to build.

 

[The Blue Owl]

Since VW squeeze references are so popular at the moment, here is an in-depth recounting of that story: Porsche: The Hedge Fund that Also Made Cars.

I think the chances of a similar scenario playing out with TSLA are near-zero, although a slow squeeze like 2013 is certainly possible (even likely).

 

[adiggs]

I agree. And I like the way you put it: functional float on a continuum. You may have opened the doors for a finance phd.
...

You're welcome to that finance phd, and the work that'll go into doing it But I'd love to read the dissertation when you get it done!

 

[adiggs]

Overnight, a large portion of my shares were lent out by Fidelity paying 0.75%, so perhaps the lending market is tightening up somewhat. Like @adiggs, my shares had not been lent out for months.

I am a little surprised. TSLA has a very large market cap for such a large short interest.

Ah heck - they haven't lent mine out yet.

 

[ValueAnalyst]

You're welcome to that finance phd, and the work that'll go into doing it But I'd love to read the dissertation when you get it done!

Although I respect those who choose to expand human knowledge through a PhD, I personally don't think it's the right path for me (although I have explored it in the past). If anything I'm over-educated with two Bachelor's degrees, a Master's degree, two professional certifications, countless hours of continuing education credits etc., and I think I can be more helpful to the world by putting those to work now in a more practical sense. So I quit Corporate America, started my SeekingAlpha service, invested in real estate, founded an investment management company which is now growing, and also help retail investors/friends avoid some common pitfalls around high fees and scams, and finally volunteer with helping college students think about their future career. My education has helped with all of these, but my time is better spent I think advancing these new ventures.

So being an entrepreneur as well as an investor, I see TSLA as a very important long-term investment opportunity. I think Tesla as a company has some qualities to it that are not apparent at its competitors. Learning more about Tesla has been a very enjoyable experience for me.

 

[MitchJi]

OK here are my hypothetical longer-term projections for tesla it is likely to run up between now and earnings at a steady pace and then we are likely to have a bullish gap up after earnings and then there is the real risk for shorts that at some point we may have A Porsche Volkswagen like squeeze that happened in 2008 October I believe in Porsche Volkswagen squeeze only 13% of the float was sold short here it is 27% of the float sold short as the bullish momentum gather steam longs are going to be more reluctant to part with their shares and at some point there may be a parabolic short squeeze with an unsustainable stock movement and that would be the time to sell tesla that squeeze may occur within a very short period of time So it will be extremely important to watch day today stock movement of Tesla for the next several months to take full advantage of that short squeeze because if Tesla is not sold into that parabolic unsustainable more than lot of profit may be left on the table now this is entirely a hypothetical scenario and I could be totally wrong but I'm watching Tesla minute by minute every day.
After that parabolic move and unsustainable stock price movement is exhausted stock may sharply correct over a period of several weeks to couple of months and that would be the time to buy it again and make another 50 to hundred percent profit so this is an eminently trade able stock long-term holders just buy-and-hold will do just fine but this great opportunity and tremendous traffic profit potential for swing traders like me and especially for those traders like me who are holding tons of call options it would be a great opportunity to make tremendous profits.
Now my usual caveat that this is entirely my hypothetical personal opinion and NOT an advice or trading recommendation and I'm more likely to be wrong than right and lose my shirt

Hope that if that happens that @jesselivenomore will inform us that it's a good time to bail.

If you only do what you described you will be leaving a ton of money on the table.

You believe that you, an uber bull will be so sure that Tesla will plummet that you will decide to sell. If that time comes you will have an excellent idea of the timing and possibly the magnitude of that correction. If you believe that a stock will plummet, and you believe that you know when, that's a perfect time to load up on short or medium term otm puts.

 

[neroden]

Does anyone know which banks wrote the call options on Tesla? If those banks aren't hedged with long stock, they may be in big trouble.

The big calls owned by Tesla related to the convertibles? The *same* banks also have the warrants, remember, so they have limited exposure.

Oh wait, you mean the ordinary options-market calls? Oh, those market makers always hedge their options trades, they never want an exposed position. The open interest isn't really that large by their standards. I mean, they can definitely screw up the hedging, I've read about this on other stocks in the past, but it doesn't happen that often. Counterparty risk is eliminated on standards options because your trade is guaranteed by *the Options Clearing Corporation*. If some of the guys on the other side default, the OCC itself makes up the difference and then charges all its members higher fees over the next several years to cover the default. Those members are the exchanges like CBOE, and the exchanges proceed to pass their OCC fees on to their member brokers. (Meaning that the other brokers will be really mad at you if you cause a big default.)

 

[ValueAnalyst]

Overnight, a large portion of my shares were lent out by Fidelity paying 0.75%, so perhaps the lending market is tightening up somewhat. Like @adiggs, my shares had not been lent out for months.

I am a little surprised. TSLA has a very large market cap for such a large short interest.

I think, and this is just speculation, the short interest remains high because the shorts are stuck. Any attempt to cover in large would trigger their own death at this point, so why not wait for some possibility that Grohmann situation may blow up or some other black swan event?

By the way, here are my thoughts on the Grohmann situation. Below is the conclusion of the article for your reference.

"This is an important issue, with implications both in the shorter and longer terms. My general sense at this point is that it does not pose a major threat to the Model 3 timeline, but it may affect the scale of the rollout in 2H17 and in 2018. I will keep an eye on further developments. I do not expect the stock to make a major move to the upside before this issue is resolved to the investors' satisfaction, but I also do not expect a major move to the downside if a strike happens as I believe the stock is already undervalued."

Moderator-deleted marketing material

 

[neroden]

I think, and this is just speculation, the short interest remains high because the shorts are stuck. Any attempt to cover in large would trigger their own death at this point, so why not wait for some possibility that Grohmann situation may blow up or some other black swan event?

This isn't usually how short-covering rallies work. They usually get started when the shorts get margin-called. Right now, short sellers could ease their way slowly out of the market, with a slowly reducing short interest. If they wait until it goes too high, brokers will be closing them out involuntarily.

 

[MitchJi]

While the M3 is designed for a highly automated production in mind, the S and the X are not as much. It will take a redesign of the S and the X to allow for a less labor-intensive production process for this to occur, or for production to expand outside of the Fremont facility. I know that Tesla is pretty iterative in its changes to the Model S and X, but I think a complete model redesign will likely need to take place in order to utilize automation on the same scale as the Model 3, but given that the S and the X are a different level of luxury than the 3, I don't think it will be able to be automated to the same level at least for a while.

They don't need to completely redo the MS-MX to substantially increase their production. One example is the robotically installed wiring harness that Peter Hochholdinger said that they are working on.

Thank you for your response. My prediction relies on demand for Model 3 proving significantly more than expected, assuming Level 5 autonomy is announced in July.

They are behind schedule with AP2. What could possibly lead you to believe that they will deliver full autonomy in July? They might be ready to seek approval for full autonomy by July of 2018.

Elon is itching to nail the M3 and move on to the next thing. Other factories, the semi, the truck, roofs etc. They need credibility. That is the one asset that they are in short supply. Too many people roll their eyes (hell even us fans do often) about his pie-in-the-sky plans. They need to do this to keep being able to raise capital and get favorable deals for land, big energy contracts, and supplier deals. They CANNOT mess this up. They CANNOT confirm the "Tesla can't execute" narrative.

I agree with your belief that Tesla is going to either hit their target, or be pretty close. But I emphatically disagree with the reasoning that they will make it because they need to. The world doesn't work that way.

Since VW squeeze references are so popular at the moment, here is an in-depth recounting of that story: Porsche: The Hedge Fund that Also Made Cars.

I think the chances of a similar scenario playing out with TSLA are near-zero,
although a slow squeeze like 2013 is certainly possible (even likely).

I agree with your reasoning, but I think that the best strategy is to watch what actually happens, keeping the various possibilities in mind..

 

[geneclean55]

Market back in bull-mode?

 

[adiggs]

I think, and this is just speculation, the short interest remains high because the shorts are stuck. Any attempt to cover in large would trigger their own death at this point, so why not wait for some possibility that Grohmann situation may blow up or some other black swan event?...

Certainly could be true (shorts are stuck). They have apparently not learned the first rule of hole digging... when you find yourself at the bottom of a hole, step 1: stop digging.

 

[ValueAnalyst]

They are behind schedule with AP2. What could possibly lead you to believe that they will deliver full autonomy in July? They might be ready to seek approval for full autonomy by July of 2018.

My primary reason to believe that it is more likely than not that Tesla will announce Level 5 autonomy in Model 3 final reveal in July is that seven months ago Tesla began installing Level 5-capable hardware on new cars. If your estimate of July of 2018 permission for approval is correct, assuming it would take at least another 6 months for approval, three years would be a very very long time to incur additional costs without corresponding revenue.

My base case assumes Level 5 announcement in July, with six month to a year skepticism from some consumers while Tesla meets demand from early adopters in 2017, followed by one year of slowly expanding consumer adoption despite no regulatory approval throughout 2018, followed by regulatory approval from some states by the end of 2018, followed by federal approval in 2019.

As optimistic as that sounds, one year ago I had predicted 2021, and continuously had to revise my prediction to sooner.

Other reasons include commentary from Elon: "sooner than most people expect" "we will do the obvious thing" "why would you buy any other car" "AP is top priority" etc.

 

[Paracelsus]

Market back in bull-mode?

I want to believe that reaching cost parity between solar and fossil fuels and the discovery of 'vast reserves of sunshine everywhere' is contributing to a long-term bull market. The tensions in the Middle East and elsewhere over oil reserves and natural gas have kept a finger on the panic button for many for over 50 years. The US is viewed by many at home and abroad as an oil company with an army whether we like it or not. The world is not just about to become a hell of a lot cleaner. It should become a lot more stable and safer, too.