General Discussion: 2018 Investor Roundtable

[hobbes]

So, if Tesla actually properly goes "private", it would have to have fewer than 2000 stockholders.

I'm not OK with that.

If Tesla remains "public" in the sense of having to file SEC reports, but delists from the stock market and eliminates trading (only having liquidity like SpaceX), *that* I am totally OK with. This is also a *lot* easier to accomplish.

I am also starting to feel that what Elon has planned (really going private) might not work out - the article below explains the different possibilities pretty well and why they might not work, also for people without a serious financial background like me:
There’s a big problem with Elon Musk’s plan to take Tesla private

This leads me to believe that the delisting while staying public would be the more likely option, which if I get it right would meet Elon´s goal to get rid of short selling etc. but not of the need for quarterly reports.

 

[neroden]

I am also starting to feel that what Elon has planned (really going private) might not work out - the article below explains the different possibilities pretty well and why they might not work, also for people without a serious financial background like me:
There’s a big problem with Elon Musk’s plan to take Tesla private

This leads me to believe that the delisting while staying public would be the more likely option, which if I get it right would meet Elon´s goal to get rid of short selling etc. but not of the need for quarterly reports.

I agree. I hope that Musk was simply a bit vague about the meaning of "private".

Most people don't think about the "unlisted public company" category, shares in an "unlisted public company" (particularly one with trading restrictions) are considered private equity, and financial engineering isn't Musk's area of engineering. I could easily imagine him being imprecise about that.

If that's not what he was thinking, we should petition him to consider it. Unlisted public company solves his problems and is better for us.

 

[AWDtsla]

Would efficient market theory apply in this case when shorts must buy, but everyone else knows the stock is valued at 420? No longs will be picking it up much above 420.

It does. If a long knows it's priced way too high, they are likely to sell. I'm in that group as well. Never sold a share, but if the thing jumps to multiple's of 1000 (in the next few months), yeah I would consider getting out. I have high limit orders that were placed months ago.

 

[Oil4AsphaultOnly]

Not if they expire worthless. You can execute the call options or let them expire. Its a right to purchase not a mandate to purchase.

The shorts dont own call options. They borrow the stock and sell it at todays price and hope to buy it back to replace the loaned shares at a lower price. That price is now capped at 420. If they borrow at 380, their downside risk is 40$ per share + interest for borrowing the stock. They can then buy long dated calls to protect against a squeeze that wont happen because the price is capped at 420 by institutions that need to sell upwards of 60M shares. Shorts could take out 35M and there still be 25M to keep the stock price bellow 421. But lets go into fantasy world and say a squeeze is possible. Because Elon nuked the long dated calls and they are worth nearly nothing now, shorts can buy them for pennys on the dollar and use them as squeeze insurance. The added benefit to them is if the deal falls through, the long calls can still give them profits as the prices return to pre 420 cap levels. They have burn protection if the stock price spikes and they win if the Elon is in trouble with the SEC with their short position. Basically, Elon handed shorts a Win, Win, Win while completely screwing the people with long dated calls. Also screws anyone who cannot convert to private equity and limits them to gains of just 8% over the prior years high. This is a bad deal for a lot of people including long time supporters. 420 is to damn low.

I don't know what we're failing to see to here?

Yes, call's are options to buy [ or more accurately _rights_ to buy ] shares at a fixed price. Holding the options doesn't automatically negate the need to return the borrowed shares, that debt is still outstanding until the options are exercised.

I agree that having the options caps the potential short loss, but the cap is whatever the strike price is plus the option premium paid, which are currently still higher than $420 per share. That's why the price is NOT capped at 420, but instead sets a floor (from the call-options-as-protection point of view).

As others have noted, why would any bull institution sell at less than $420 per share if they're guaranteed that price for the buyout? So any shorting at $380 is automatically a losing proposition (assuming the buy-out goes through).

If the deal doesn't go through, then the shorts gain whatever the difference was between $380 (high on monday) and whatever the stock drops to (we'd go back to the profitable Q3 support level). Not much of an upside.

I think you're conflating the loss of option premium (due to the potential of the stock going private) to an automatic gain of price protection from the shorts. It's only a reduction in the value of the options with no change in the value of the shorts holdings (their risk is capped, but so is their gain).

 

[mongo]

It does. If a long knows it's priced way too high, they are likely to sell. I'm in that group as well. Never sold a share, but if the thing jumps to multiple's of 1000 (in the next few months), yeah I would consider getting out. I have high limit orders that were placed months ago.

Tl;dr; post short coverage I envision super high ask, ~430 bid, and low volume all of which is sell driven.

Right, I have GTCs set up also. But the volume will dry up once the shorts cover thus allowing a rapid price collapse to near 420. There will not be much purchasing to acquire above 420 other than people that realize they want to own TeslaP.

All it takes is one sell at market order to move the price from the last 2k short purchase to the 435 buy limit order of a late comer. No one ever bought above 420, so they have no vested interest in being made whole above it either. Those than want to get in are doing so now.

 

[Reciprocity]

Right, so in that case, 420 is the floor and the fund ask price is the cap?



Would efficient market theory apply in this case when shorts must buy, but everyone else knows the stock is valued at 420? No longs will be picking it up much above 420.

You are forgetting time. 420 today is worth more than 420 in a month. Institutions that must sell will sell just over 420 or wait for the deal to close and get bought out. So any squeeze will be blunted in place by this selling. Is it 421, 423, who knows. anything above 420 is a sell and another bellow is a hold. Shorts would need to buy to close their positions, but they could easily do that from 420-421. The price is capped.

Again, the idea is also that shorts can buy insurance buy purchasing 500+ long calls for $2 vs $14 just before the 420 tweet. If there is a squeeze these will be $15 - $30.. who knows.. 100's maybe if its a real squeeze. This will limit shorts losses in a the squeeze scenario, which is highly unlikely due to massive supply and limited demand.

Lets say the deal gets cancelled. those same long calls will return to normal and be priced easily above $10. so shorts are in a Win, Win, Win and long call holders who bought high because they believed in Tesla are busted ass broke unless there is a squeeze.

Lastly, there is no benefit to Elon for a squeeze. He has lined up investors at 420. He wants the price to stay at or bellow that level until its done. He wants to be private more then he wants some short term squeeze.

 

[mongo]

You are forgetting time. 420 today is worth more than 420 in a month. Institutions that must sell will sell just over 420 or wait for the deal to close and get bought out. So any squeeze will be blunted in place by this selling. Is it 421, 423, who knows. anything above 420 is a sell and another bellow is a hold. Shorts would need to buy to close their positions, but they could easily do that from 420-421. The price is capped.

Again, the idea is also that shorts can buy insurance buy purchasing 500+ long calls for $2 vs $14 just before the 420 tweet. If there is a squeeze these will be $15 - $30.. who knows.. 100's maybe if its a real squeeze. This will limit shorts losses in a the squeeze scenario, which is highly unlikely due to massive supply and limited demand.

Lets say the deal gets cancelled. those same long calls will return to normal and be priced easily above $10. so shorts are in a Win, Win, Win and long call holders who bought high because they believed in Tesla are busted ass broke unless there is a squeeze.

Lastly, there is no benefit to Elon for a squeeze. He has lined up investors at 420. He wants the price to stay at or bellow that level until its done. He wants to be private more then he wants some short term squeeze.

I'm with you on the option side of things and that the funds may not go sky high on their ask.

It seems like a squeeze would help new Tesla if either the backers provide cover for a gain or new shares are printed at massive profit.
It will be interesting to see if the funds directly convert removing that liquidity and what the option to short share count is.

 

[ggr]

I think a trust might need 5 million. An individual with a million can invest in a private company. Look up the "accredited investor" definition.

My (not completely uninformed) belief is that a trust somewhat like the SpaceX Employees Trust is the way this will be accomplished.

 

[Starno]

My (not completely uninformed) belief is that a trust somewhat like the SpaceX Employees Trust is the way this will be accomplished.

And do you know how will we have access to it ? Will we need to sign papers or it's done automatically ? Will it be like a special website to access it, or from the website of the brokerage account it'll be accessible ?

 

[ggr]

And do you know how will we have access to it ? Will we need to sign papers or it's done automatically ? Will it be like a special website to access it, or from the website of the brokerage account it'll be accessible ?

Yes, you would certainly need to sign some sort of agreement (and if you don't sign, you get bought out instead), but I don't have a clue what that would look like... paper, electronic, whatever.

 

[ChrisA]

Looking back, this private/no private drama will be considered a side show.

The Bloomberg model 3 tracker indicates 5500 per week. If Tesla keeps this up -- and there does not seem to be a reason why it will not -- the company is truly crossing the rubicon.

The model 3 is a better car because it is electric, not in spite of being electric. That was Elon's long-held -- and widely doubted -- vision.

And, the 3 is on its way to mass appeal as one of the better selling cars in the U.S. this fall.

Operating margins are set to expand in the coming year (in my view an overwhelmingly important variable for stock price appreciation and important whether the company is public or private).

BNEF sees an annual decrease in battery prices in the high teens over the next decade.

It's not like there won't be drama and hurdles going forward. But in between the private/no private drama, take a moment to reflect on what an important moment this is for Tesla and for vehicle electrification.

We Set Out to Crack Tesla's Biggest Mystery: How Many Model 3s It's Making

 

[ZsoZso]

You are forgetting time. 420 today is worth more than 420 in a month. Institutions that must sell will sell just over 420 or wait for the deal to close and get bought out. So any squeeze will be blunted in place by this selling. Is it 421, 423, who knows. anything above 420 is a sell and another bellow is a hold. Shorts would need to buy to close their positions, but they could easily do that from 420-421. The price is capped.

Again, the idea is also that shorts can buy insurance buy purchasing 500+ long calls for $2 vs $14 just before the 420 tweet. If there is a squeeze these will be $15 - $30.. who knows.. 100's maybe if its a real squeeze. This will limit shorts losses in a the squeeze scenario, which is highly unlikely due to massive supply and limited demand.

In all of this, you are assuming that the amount of shares in the hands of people who want to cash out is greater than the number of shares shorted, which is not guaranteed at all. Currently, we have 127% shares long and 27% short that must cover. If the number of shares in the hands who wants to go private is >100% of float, i.e. less than 27% wants to cash out, then the situation is totally different. You have more demand than #of shares on sale => simple market mechanics dictates skyrocketing price.

 

[bluetrue]

I agree. I hope that Musk was simply a bit vague about the meaning of "private".

Most people don't think about the "unlisted public company" category, shares in an "unlisted public company" (particularly one with trading restrictions) are considered private equity, and financial engineering isn't Musk's area of engineering. I could easily imagine him being imprecise about that.

If that's not what he was thinking, we should petition him to consider it. Unlisted public company solves his problems and is better for us.

Since an unlised public company would be considered private equity, would it still require a separate fund for retail investors? It seems like funds that are open to retail investors can' have more than 15% of the money in illiquid assets:
The SEC tries to protect against these issue, by saying that only 15 percent of a fund's total assets can be in illiquid investments.
(This is the secret on how mutual funds are juicing their returns you should know about)

 

[Oil4AsphaultOnly]

In all of this, you are assuming that the amount of shares in the hands of people who want to cash out is greater than the number of shares shorted, which is not guaranteed at all. Currently, we have 127% shares long and 27% short that must cover. If the number of shares in the hands who wants to go private is >100% of float, i.e. less than 27% wants to cash out, then the situation is totally different. You have more demand than #of shares on sale => simple market mechanics dictates skyrocketing price.

What repriocity is advocating is that the call options pretty much guarantees against a short squeeze. Although close, there are indeed enough call options to allow the shorts to exercise and cover ~35 million shares. Those shareholders (most likely funds) who sold the covered calls will lose their shares in exchange for a limited premium above the buyout price. It's not a win for the shorts like what repriocity is describing.

 

[Rarity]

This is a pretty wild ride. Mostly, I love the process because it is winnowing out shareholders who don't trust Elon.

My sympathies to those with long-dated OTM calls. They might be valuable yet...

 

[uselesslogin]

Since an unlised public company would be considered private equity, would it still require a separate fund for retail investors? It seems like funds that are open to retail investors can' have more than 15% of the money in illiquid assets:
The SEC tries to protect against these issue, by saying that only 15 percent of a fund's total assets can be in illiquid investments.
(This is the secret on how mutual funds are juicing their returns you should know about)

Thanks for that. I was wondering. I guess the only thing that might be possible is the de-listing idea.

 

[Reciprocity]

In all of this, you are assuming that the amount of shares in the hands of people who want to cash out is greater than the number of shares shorted, which is not guaranteed at all. Currently, we have 127% shares long and 27% short that must cover. If the number of shares in the hands who wants to go private is >100% of float, i.e. less than 27% wants to cash out, then the situation is totally different. You have more demand than #of shares on sale => simple market mechanics dictates skyrocketing price.

I totally get that. That's the easy part. The hard part is figuring out how many of the institutional holders MUST sell because they cannot participate in private equity. For example, let's say Fidelity owns 2M share in it's contradund, which is a major mutual fund that holds a lot of Tesla. If they cannot hold private equity, then they must sell. There are dozens of funds like this. All index funds must hold until being bought out after the deal closes, so that actually takes supply off the table, which is good but funds that can't hold and must sell will add a ton of supply and will do so the instant the price goes above 420. This will work to suppress the price gains above 420. Once this supply is exhausted, then it can break out, but no one knows for sure how much selling will occur. Heck there could even be legit buyers, not shorts, above 420. Right now, until someone proves to me that only 20M in funds must sell, and few if any other holders want out. Then I'm feeling it's not enough to create a VW like squeeze.

Edit: to be clear, I want to be wrong more than anything. I'm pissed that the price seems capped at 420 and helps the shorts.

 

[mongo]

I totally get that. That's the easy part. The hard part is figuring out how many of the institutional holders MUST sell because they cannot participate in private equity. For example, let's say Fidelity owns 2M share in it's contradund, which is a major mutual fund that holds a lot of Tesla. If they cannot hold private equity, then they must sell. There are dozens of funds like this. All index funds must hold until being bought out after the deal closes, so that actually takes supply off the table, which is good but funds that can't hold and must sell will add a ton of supply and will do so the instant the price goes above 420. This will work to suppress the price gains above 420. Once this supply is exhausted, then it can break out, but no one knows for sure how much selling will occur. Heck there could even be legit buyers, not shorts, above 420. Right now, until someone proves to me that only 20M in funds must sell, and few if any other holders want out. Then I'm feeling it's not enough to create a VW like squeeze.

Edit: to be clear, I want to be wrong more than anything. I'm pissed that the price seems capped at 420 and helps the shorts.

Never before have I wanted to set a bid price above market, but draining the pool would be great. (Not that I have anywhere close to the funds).
But this senario doesn't help the shorts during a recall before the vote, correct?
Tesla’s (TSLA) stock could actually benefit from recalls, but not the ones you are thinking

 

[ZsoZso]

I totally get that. That's the easy part. The hard part is figuring out how many of the institutional holders MUST sell because they cannot participate in private equity. For example, let's say Fidelity owns 2M share in it's contradund, which is a major mutual fund that holds a lot of Tesla. If they cannot hold private equity, then they must sell. There are dozens of funds like this. All index funds must hold until being bought out after the deal closes, so that actually takes supply off the table, which is good but funds that can't hold and must sell will add a ton of supply and will do so the instant the price goes above 420. This will work to suppress the price gains above 420. Once this supply is exhausted, then it can break out, but no one knows for sure how much selling will occur. Heck there could even be legit buyers, not shorts, above 420. Right now, until someone proves to me that only 20M in funds must sell, and few if any other holders want out. Then I'm feeling it's not enough to create a VW like squeeze.

Edit: to be clear, I want to be wrong more than anything. I'm pissed that the price seems capped at 420 and helps the shorts.

You raise some good points, However, this battle will be fought in two rounds:

1. Once the board is happy with the proposal and they set a proxy date for the vote, round-1 starts, because shareholders will recall their shares lended out for the voting rights. Fidelity and all others who cannot go private must hold onto their shares, call them back and vote NO in order to best serve their client's interest trying to keep TSLA public. At this stage their shares will not be in the selling pool.

2. When the vote passes (which probably will), the final de-listing date is set and round-2 starts. Fidelity and similar funds who must sell will start to look for the most favorable exit point here.

While retail investors with restricted tax-sheltered accounts may exit during round-1 if the price goes significantly higher than 420, I would not expect large funds to exit there before the vote happens.

 

[ggr]

Never before have I wanted to set a bid price above market, but draining the pool would be great. (Not that I have anywhere close to the funds).
But this senario doesn't help the shorts during a recall before the vote, correct?
Tesla’s (TSLA) stock could actually benefit from recalls, but not the ones you are thinking

Tesla peaked in July 2016 at around $234 (slightly less than its highs before that month, the date of the article). It went up 50% in the following 8 months.