Moderators' Choice: Posts of Particular Merit

[StealthP3D]

Replace Y with 3 and you have this board in 2016. The stock will take off when it takes off. No one here knows when that'll happen.

I agree, but only to a point. Here's what's going on broadly with regard to when we will see more profitability/recognition and appreciation:

Many years ago Musk saw that the declining cost curves of batteries and associated components was going to intersect and pass the cost curves of ICE cars but that no ICE manufacturer was going to be prepared to hit the ground running with EV's (for numerous reasons). Not only would this be bad for AGW, but it also spelled opportunity. So Tesla has now positioned itself exceedingly well and the cost curves are just now starting to come into line.

However, Musk was a little too optimistic with regard to the kind of production efficiency he could achieve with the Model 3. The fact that they spent extra money making the car extra good didn't help. Specifically, the super safe and highly engineered chassis, the glass roof that improves safety, interior volume and aerodynamics (as well as making the cabin feel light and airy), the responsive suspension and electric steering with redundant power feeds, the low rolling friction Brembo brakes, the spun-cast and roll-forged 18" wheels, the durable, comfy seats engineered and produced in-house, the the durable and highly reliable powertrain, the high-tech silicon carbide power inverters, etc., etc. etc. It's really too "nice", too well equipped with high-quality components and too durable and long-lasting for a true mass-market car. But they knew they were going to disrupt some of the richest and most powerful people in the world so they couldn't show up to a gunfight with only a knife. The FUD was going to be running thick and strong and they needed to be ready for it. They needed a car beyond reproach. I think they made the safe choice although it definitely delayed the milestone of large and sustained profitability.

But remember the declining cost curves of BEV's. It's just a matter of time. And Tesla's position in the BEV space is basically beyond reproach based on the strength of its products to date. As long as Tesla keeps its development efforts of its core technologies and software ahead of the game and continues to increase manufacturing volumes and efficiencies, they will be able to offer more compelling BEV's than the competition which will make them untouchable for the foreseeable future. The declining cost curves will drop Tesla into a very enviable position. It didn't happen with Model 3 because Tesla played the safe side of the cost/quality curve because they knew their products would be under a microscope.

Wall Steet wants to see the money, not next year, right now. That's all they care about. They have no vision and no soul. They think EV's are just electric motors hooked up to a bunch of batteries (everyone knows the red wire goes to "+" and the black wire goes to "-"). How hard can it be, right? Didn't everyone play with electric motors as a kid?

So, I agree, no one knows exactly when the future value of Tesla will be fully recognized in the share price but you can bet it's a lot closer than it was in 2014. It's completely normal for speculative stocks like TSLA to not appreciate steadily and gradually but instead to do it in fits and spurts of 5 or 10 years, especially when you are not selling the latest fashions or the coolest new widget but, are building a global heavy manufacturing capability to take on established multi-billion dollar companies and deeply entrenched oil and gas interests. What Amazon has done is incredible. This is orders of magnitude more difficult. The really difficult part has been accomplished (technological lead and volume manufacturing with good gross margins). It's really just a matter of continuing to expand, release new models and watching the battery/motor/controller cost curve continue to decline. Wall Street won't come around until it's so obvious even Homer Simpson can see it.

 

[Curt Renz]

The difference between maxpain at 235 and 230 is just ~ $2M. I'm surprised so much effort is spent in bringing the SP to maxpain in the previous weeks.

That's a reasonable observation. However, it must be understood that options expire while the shares do not. The shares bought or shorted on Friday can be sold or covered on Monday. So the manipulators accept a calculated risk that they may profit more by shifting the options prices than they might lose in their trading of the shares.

Mod: original is Tesla, TSLA & the Investment World: the 2019 Investors' Roundtable --ggr

 

[Fact Checking]

I see what you mean but they are still taking a decent amount of risk doing that. I often change/cancel my limit orders and if I change my order after they bought ahead of me, they are fully exposed to what they bought.

For example, if I put in a limit order at $230 and they buy when the price is $232 hoping they will just unload to me at $230, they are hoping I don't cancel that order.

I assume it averages out to where they still make money on it but they are still taking that risk.

They don’t buy at $232, they buy at $230.01. And this happens at a very short time scale.

It's even better than giving an opportunity of buying at $230.01: basically a retail customer placing a limit order of buying 100 shares for $230.00 gives middlemen the opportunity to go long 100 shares between $230.00 and the current market price, with a guaranteed stop order at $230.00, for whatever order delay the customer is accepting.

For example if there's a big cluster of buy orders at $230.20 from institutional investors protecting an options strike price, the front running algo will have a few seconds of opportunity to place a buy limit order at $230.21 in the hope of a bounce from $231.20 - and worst case they'd get a guaranteed exit price of $230.00 from you. Without your buy limit order no such price guarantee exists: when breaking through resistance the price can and often will drop to $229.50 or lower without filling the algo's $230.00 exit price sell order.

So your "pending" order gives them a guaranteed exit price, which is very valuable: half of the highly leveraged margin-trading HFT shops on Wall Street went bankrupt during the infamous "Flash Crash of 2010", because they underestimated that a "no guaranteed exit price" low liquidity event isn't a joke and might be 10% below the current price:

Few retail customers will question 1-2 seconds of delay after clicking "BUY", and I've seen retail platforms with 10+ second delays in "processing" new orders...

Even 1-2 seconds of delay is an eternity of opportunity in the HFT world: it's 1,000,000-2,000,000 nanoseconds.

Retail limit orders are particularly lucrative if your new limit order is just below the current market price and the price happens to drop below $230.00 in the 1-2 seconds after you placed the order (or shortly before it). In that case instant profits are guaranteed: they'll buy for $229.90 or $229.73, or whatever lowest price they manage to hit (via buy limit orders, so they never risk getting a higher than $229.99 price), and if they cannot get 100 shares in that 1-2 seconds time window they simply place your limit order in the NASDAQ order book and call it a day: "heads I win, tails you lose".

Note that "cancellation" or modification of your limit orders doesn't change any of this, in fact it increases the opportunity to front-run your order: the primary time window is the few seconds between your click and the notification of your new, cancelled or updated order. The time window between you clicking and them actually performing a legally binding order on your behalf on the NASDAQ trading system (aggregated with other orders), which cannot be front-run anymore.

This all is possible because technically the retail broker is not bound by SEC "best national price" regulations and guarantees until your order has been "processed" - and the SEC is very careful to not require brokers from having a fiduciary duty to get best possible order execution for clients.

Your own broker, or third parties your broker is selling your "retail flow" to are free to trade against you, using the temporary knowledge of your guaranteed purchase price of $230.00 of 100 shares.

Sometimes they'll also give a few crumbs back to you and give the shares for $230.01 and advertise it as a "price improvement", which also gives them plausible deniability for more egregious cases of front-running...

That blinking "order being verified" status feedback of your order? The weirdly slow placement of new orders, while we can do online gaming with <50 msec latencies that perform much more complex algorithms than simple order book management?

That delay is the sign of you getting scammed.

 

[KarenRei]

Hi, I'm a "short" (a student with only peanuts I can afford to lose at stake, a very small fraction of the position size most of you likely have).

I come in peace! I'd like to have respectful conversations, ask questions about the current bull line of thinking, and provide answers about the current bear line of thinking if anyone would like to know. I hope that's OK.

More specifically, I had one question in mind about revenues. Since deliveries are up YoY, do bulls generally expect revenue also to be up? I've seen some chatter and modeling suggesting revenues to be around $6.5B, which would be below 2018 Q3. I have no idea if this is going to be correct or not; just offering what I'm reading on my feed. Any thoughs on whether this is possible, expected, or unlikely would be appreciated.

Hi MFranc. Thanks for the respectful intro, and welcome from the other side of the pond.

First off, I think you seem to have a misconception on hand: that the reaction to a quarterly report should be based on whether it's good or bad news. That's not how it works. The reaction to any news is (at least in theory) based on whether it's worse or better than what people already expect. Now, that's theory at least, and reality can differ. But, at least in theory, if bad news is expected, it should already be factored in. Your investment choices should be relative to how much better or worse you think it's going to be than what's expected.

The big money already expects a revenue drop YoY, and generally a lot more concerned with QoQ regardless. And they're always much more focused on profits than revenue. The focus on profit is IMHO is rather silly; its FCF that determines Tesla's ability to keep the lights on as it grows production, release new products and expands into new markets, which in the long-term outgrows the liabilities side of the profit equation). And it's cash on hand that determines their ability to weather adverse events. Tesla can at any point cut growth to boost profit, but investors prefer the opposite - drowning the liabilities side of the profit equation by growing future revenue. But I digress.

Most people aren't dumb enough to not understand why revenues are down YoY. A year ago Tesla was almost exclusively burning off years of accumulated reservations; today it's almost entirely new reservations. A year ago Tesla had a $7500 tax credit in its largest market; today it's $1875. Price cuts were obviously essential - and indeed, the very goal (I find it amusing to see the same shorts criticize Tesla for cutting prices, who previously were condemning them for not having released the $35k Model 3). Additionally, a year ago Tesla didn't have Model 3 competing with S&X in most of the world; now it self-competes almost everywhere.

The key figure to watch is COGS. Because the simple fact is that COGS has been declining rapidly every quarter, which is how margins are almost as high today - despite the price cuts - as they were in Q3, with its much higher prices. The COGS reductions are virtually inherent with Tesla expanding its production. Do you see any new buildings at GF1? There've been no new cell lines for quite a while. At Fremont, there's no new stamping lines. No new body lines. No new paint shops. No new GA lines. Only minimal hiring. Yet they're making far more vehicles now, with a given amount of infrastructure. This means an inherent reduction in COGS.

Now even if production ceases scaling at Fremont (news flash: it won't, and the trend and permit filings should make that clear), Tesla now has a brand new Gigafactory coming online. It contributed zero in Q3 - just a money sink. How much it contributes in Q4 is up in the air. But soon it's going to be producing 3k vehicles per week. What do you think that's going to do to revenue, FCF and profits? And if you think that the markets are blind to this fact, think again; they simply time-discount it relative to their assessments of timing and risk. The more progress they see, the more they adjust their revenue estimates up, and the higher they value the company.

Thus we invariably circle back to demand. Tesla shorts always predict "demand peaks", and they've done it every single quarter of Tesla's history. Which - spoiler alert - not only hasn't happened, but the opposite keeps happening. They'll obsess over any given market, without looking at the bigger picture, which is that "good market changes" are just as likely as "bad market changes", the overall global EV market grows dramatically every year, and even still, despite expanding into new markets each quarter, Tesla still hasn't moved into a number of the world's largest auto markets (Russia, Saudi Arabia, Brazil, India, etc etc). Until you hear something like "Tesla expanded into Rwanda this quarter", the expansion is still continuing unabated. FYI, you're talking to a person who's still sitting on a years-old reservation waiting for Tesla to expand into my market.

Markets go through phases.

1) Backlog builds
2) Tesla starts delivering, and there's a flood of deliveries
3) Tesla fills the backlog, and the market becomes weak
4) New demand starts to build, and deliveries increase again - not up to flood levels, but to sustained levels (which A) will still show seasonal variations, will B) on average grow YoY alongside the overall global EV market, but C) respond highly positively or negatively to government policies - which again, may be more pro-EV or more anti-EV than previous policies).

On that last point, let me remark that some of the largest potential EV markets - US, Germany, I'm looking at you - have rather weak incentives for Tesla at present, so there's a lot of potential upside from future policy changes.

The various markets that Tesla operates in are in various phases. For example, the US is in stage #4 - backlog built, got filled, fell weak, then recovered - and now will fluctuate seasonally and follow the overall EV growth trend. Some markets like the UK and Australia went into #2 last quarter (still in #2, but should be filled by the end of this quarter). Some new large EV markets, like South Korea, are going into #2 this quarter, and will probably continue suchly into Q1. Norway could be argued to be in #3; we'll have to see how it evolves next quarter. And so on. But it's never a story of an individual market - it's the overall global picture that matters.

Do realize that the overall picture for Tesla is inherently noisy. Tesla does not maintain significant amounts of inventory (vs. traditional automakers which have months of inventory). Tesla has to forecast every single quarter how much demand will show up in that quarter, for each model and each configuration, because of how long shipping takes. It has to then decide on which markets to expand into that quarter and what pricing to set on each market (a complex optimization problem, balancing out the one-time and ongoing costs of expansion vs. potential reduced revenue from lower pricing in existing markets). If any part of Tesla's forecasting is wrong, it can totally mess over the company's numbers for that quarter (Q1 is a great example of this). Tesla's sensitivity to forecast accuracy will decline significantly once it has a Gigafactory in each market, as shipping times will be greatly reduced. We'll be seeing one level of this soon with the opening of GF3.

Note that we're only talking about the basic aspects of the company and discounting the potential value of FSD, grid-scale storage, solar roofs, etc - each one of which, if it were to become widespread, could justify a market cap of hundreds of billions to trillions of dollars on their own. Also keep in mind exactly how expansive Tesla's scale goals are for vehicle production: they're working toward the production of 2TWh/yr. Try running some numbers on how many vehicles that works out to. And remember that Tesla is, unlike most automakers, highly vertically integrated (and becoming moreso) - e.g. it keeps much more of the profit from a sale for itself.

Tesla is a growth company. These inherently mean high long-term revenue projections, but high discounting for risk. Their valuation thus changes dramatically and rapidly as the risk picture changes. When you take a long or short position, remember this fact. Even mostly "bad news" can actually increase the value of the company simply by retiring downside risk - for example, 97k deliveries this quarter was below "average" market projections, and there was a short-term selloff, but it also eliminated the fear of demand weakness. And now look at the stock price vs. before the deliveries report.

One final thing. And I know you'll be tempted to discount this, but beware of the "TSLAQ Bubble". They love blocklists (their Twitter blocklist blocks out almost all bull accounts) and insulating themselves from contrary information in general. Always look out contrary information that questions your views (I always try to), and look for your own blind spots.

Happy shorting. We'll be here on the other side of the pond.

 

[StealthP3D]

With a record number of TSLA investors "learning their" lesson and de-risking themselves at ER time, seems like there is a real good chance that the stock is going to soar. Not a prediction, just sayin'.

Whenever I hear a new investor say "they have learned their lesson" and they are speaking of a single experience (or even a handful of experiences) I feel this:



Statements like this make me wonder if they appreciate the complexities and nuances of the markets. It makes me wonder if they understand the concept of "statistically significant" and how their experience is just one of many possibilities in the intricate fabric of market reactions. It makes me wonder if they understand the theory of the Butterfly Effect and how everything is simultaneously connected, yet disconnected.

In short, it's absurdism to think a few experiences can be reduced to a simple rule. Investing is more art than science - and especially when considering high growth, unprofitable companies. It kills me to see people trying to value such companies using the same techniques applicable to large lumbering and established companies with small growth rates. Determining the value of a company like Tesla is not a linear exercise with numbers and growth rates - at any point in time, it's worth whatever people think it's worth. Its valuation is much more a social science or art than an accounting game. Because people have biases and prejudices, they have emotions and peculiarities. This is what is valuing Tesla. All the numbers of each quarterly report need to play through these filters. The $TSLAQ crowd knows this which is why they spend so much energy trying to discredit TSLA and take the luster off their image.

Unless you are simply playing the volatility of Tesla like a casino, it is wise to step back from these quarterly and even annual fluctuations. A "long-term view" does not mean a week, a month or even a year or two. Look at the broad trends. Think like Elon, in terms of 5 years at a time. Don't compare Q3 2019 and its global distribution with Q3 2018 when pent up demand and domestic deliveries of high margin variants were in full swing (without recognizing the two periods are NOT directly comparable). This is a technique better suited to a company like Proctor and Gamble. Look at the bigger picture, the trends surrounding the cost of goods sold, the volume of production, the consumer response to Tesla's products over time. Look at the direction the company is taking with internal initiatives to affect this bigger picture.

A really important factor in my analysis is whether or not I think Tesla will be able to obtain enough batteries to feed assumed growth rates. Also, cost of batteries going forward. And I think other investors and sincere analysts are starting to see this as the most important thing. News and forward guidance on batteries will likely drive the share price reaction to Q3 which is why I'm looking forward to the conference call more than the exact results of last quarter. Because the share price will be more driven by how investors THINK the future will unfold than by last quarters' results. Those aligned with $TSLAQ will attempt to focus the narrative on the past while the future is staring them in the face. They are not going away but I definitely think they are a dying breed.

Mod: Original post. --ggr

 

[Prunesquallor]

Interesting blog from Casey Handmer on everything Starlink. A long read, but informative.
https://caseyhandmer.wordpress.com/2019/11/02/starlink-is-a-very-big-deal/
Starlink is a very big deal


MODERATOR EDIT:
A quick discussion amongst the Mods - unanimous agreement of the quality and scope of that blog post means that @prunesquallor’s post gets planted in the “Merit” thread.
So a big “thanks” for finding it and showing it...even if ever so tenuously related to TSLA etc.

 

[ReflexFunds]

A replaceable electrolyte design is a very interesting idea. Remember several months ago Dahn’s group published research on a lithium metal anode cell design (this is the key benefit of solid state batteries) but with a liquid electrolyte.
The key problem with the early iteration of this R&D was that the cell could get to around 90 cycles before the dual lithium salts in the electrolyte began to be depleted.

Tesla could potentially create very high energy density cells (perhaps supporting 500 mile+ range cars in a model 3 LR sized pack), then with some limited improvements to cycle life of Dahn’s lithium metal anode cell (perhaps to 200-300) Tesla could create a car battery pack which just needs to have a simple electrolyte replacement every 100-200,000 miles.
Of course it’s questionable how simple electrolyte replacement could ever really be in practice.
Perhaps the best application of this could be in electric planes where higher energy density is so critical. Here the cost of electrolyte replacement is likely to be much less of a barrier to adoption.

A few thoughts on how the pieces of Tesla’s future battery strategy will come together (based on acquisitions, press leaks, published scientific papers, patents and speculation):

• Use relatively short term contracts for cell supply from CATL/LG/Panasonic to bridge to ramp of in-house cell production.
• Tesla builds a huge factory to build Grohmann/Maxwells/Hibar/in-house manufacturing equipment at scale - bringing down equipment capex cost.
  
• Maxwell dry electrode tech to reduce manufacturing cost and footprint.
• Maxwell dry electrode tech leads to better physical properties, in particular allowing thicker cathodes.
• Hibar designs systems for their electrolyte insertion IP during the cell manufacturing process.
• Build single crystal cathodes - possibly helped by Maxwell process/other in-house R&D. This was a big part of the 1 million mile cells tested by Dahn.
• Use very carefully selected electrolyte additives following Dahn research.
• Highly automated manufacturing process to reduce staffing bottlenecks to production ramp.
• Integrated cell, module, pack design and manufacturing process to simplify production, reduce footprint and reduce cost.
• Dahn lithium metal anode allows for much thinner anode, higher energy densities and longer cathode/anode life, but at the expense of shorter electrolyte life.
• Replaceable electrolyte design allows to replace the electrolyte and extend lithium metal anode battery life.
• Develop Hibar machines to allow easy electrolyte replacement in service centres.
• Dahn research is used to eliminate cobalt from the cathode leaving just Nickel Aliminium or Nickel Manganese.

Missing pieces (presumably many are happening behind the scenes):

• Reveal other in-house cell manufacturing processes which have been developed in-house over the past 10 years.
  
• Buy Panasonic’s GF1 business for cell manufacturing employee experience and other cell IP.
  
• Buy out other GF1 suppliers.
  
• Buy/build Cathode powder manufacturing expertise. Nanoone could be a good target if their process will help make single crystal cathodes.
• Buy Nickel processor expertise - this will be a huge % of cell cost.
• Buy lithium carbonate/hydroxide integrated mine/processing expertise.
• Reduce cathode kg per kWh to reduce raw material cost

I'll note that none of this will happen at the same time. These are various steps and incremental improvements that may or may not be introduced once they have been proven ready for affordable mass manufacturing.

Mod: Original post. --ggr

 

[ReflexFunds]

I'd like to make a post about the kind of short Chanos is. I see him mentioned at lot here, and often in a very negative way, so I'd like to share my perspective as someone who likes the kind of investing he does.

If anyone has access to an hedge fund database and could provide actual perfomance numbers for his three funds - short only, long short, 190/90 - that'd make things more clear/interesting. Unfortunately I don't have that kind of access.

I realize this post is kind of misorganized; sorry. But I think it's helpful to understand what actually happens at a fund like his. I think this is the reason it's unlikely there's any sort of short conspiracy to make the stock go down. Very few people are as concentrated as someone like Spiegel, which manages a very very small fund.

Many already know what Chanos' business model is, but some don't - not the least because promoting your hedge fund to the general public is actually illegal.

Kynikos main product is a short only fund, that typically doesn't really make any money. Making money is not actually the purpose of this fund. The purpose of this fund is to not make money while being short. This short only fund typically has a max position of 2-3% per stock. What this means is that tesla going up or down by even 30% like it has recently occurred is not actually a big deal for a fund like this. That's less than 1% up or down for the whole short portfolio.

Making no money being short only is actually a lofty goal when you consider that picking 20 stocks by throwing darts at a list and equal weighting them, you will probably do about as well as the benchmark. If you were to do that as a short seller, you'd have made -20% in 2017, -12% in 2016, -23% 2019 YTD... the list goes on.

The product that is actually designed to make money is, like many other hedge funds, a 190/90 long/short fund. That means, roughly, that if you give chanos $1M, he will short $900K worth of stuff, and go long $1.9M worth of stuff. This product is actually 100% net long, like a typical mutual fund might be - but it has 280% gross leverage. The $1.9M worth of long stuff is usually just the US market; something like just buying $1.9M worth of SPY. The short book is the aforementioned short only fund.

You can't just go long the market with a 2x leverage, because events like the great financial crisis or the dotcom bubble are going to potentially wipe your fund completely. It doesn't matter how well you do in the rest of your investing career if you have a -90% year.

But if you have a short book, what happens with events like the great financial crisis? Well, you lose a ton of money on your long side, but you also make a ton of money on your short side. You might actually have your short book perform better than just shorting the market during these periods - after all, if your short book is about breakeven when everything else goes up, when everything else goes down your short book is probably going to perform very, very well. While you're exposed about 2x to the general trend of equities going up, you're still losing around the same amount of money (or less) during these events where equities go sharply down.

Finally, what would happen if 100% of Chanos' short book was Tesla (remember, Tesla is actually a small portion of that portfolio), and as we said he was 1.9x long SPY?

View attachment 474848

He'd still be doing just slightly less well than holding the market. (For what is worth, the same backtest started from 2016 has him about breakeven, but again it's not representative of his actual short book).

I hope this kind of post is OK and cleared up some confusion.

Long short makes sense as a de-risked investment strategy. Shorting stocks isn't inherently bad, however in practice it has become largely damaging to the global economy and short investors now often employ immoral or outright illegal methods. I know because I have met short hedge funds PMs who have actively bankrupted many companies using these methods.

In theory short investors should focus on shorting overvalued companies or fraudulent companies and this shorting will act towards correcting the valuation and/or raising awareness of the fraud.
However in practice many shorts have discovered it is easiest to make money by trying to actively bankrupt companies rather than just taking a view on valuation or independent facts. This is completely unrelated to their view of the company's true valuation and whether or not it is overvalued.
Liquidity crisis and bankruptcy is very often self fulfilling. People get worried that a company might go bankrupt so suppliers accelerate payment terms, customers fear to buy the products, banks stop rolling financing etc. This can make any company go bankrupt even if the only thing which makes them bankrupt is the fear of bankruptcy itself. There are very few companies in the world which couldn't go bankrupt within 6 months if many people started fearing it was possible.

Hence, the easiest way for short investors to make money is to create fear about a potential bankruptcy and hence cause a real bankruptcy. In terms of the supply demand balance of a traded stock, the act of shorting is equivalent to a capital raise which does not give a company any capital - this virtual share dilution (with virtual shares created as some shares are now owned by two people) acts to crash the stock price. This can cause a panic and the lower stock price can also make it more and more difficult to raise new capital. Shorts also often have close relationships with financial journalists who they use to spread fear and misinformation. They often combine this with unfounded accusations of fraud and use regulatory contacts (or pressure in the media) to encourage preliminary investigations to add legitimacy to these accusations.

The capital markets were invented to provide capital to companies who have potential to make positive long term cash flow (and hence have a positive valuation) but need more short term cash. This is where capital markets can add most value to the global economy. It can enable companies with opportunity for growth with a good return on investment to grow faster than they otherwise could do. This leads to increased job creation in the economy and reallocation of capital to companies that can spend it most efficiently. This access to capital can also allow stable or declining companies who still have long term value potential to bridge short term liquidity issues and hence prevent unnecessary bankruptcy and destruction of value and jobs.

Unfortunately it is these companies that can make the most use out of the capital markets that are the best targets for Shorts who are employing the confidence crisis strategy. Hence this massively disincentivises using capital markets where they are most useful. Cue the growth of private equity rather than public capital raises to turnaround companies in temporary difficultly plus venture capital rather than public markets funding companies that have growth opportunities beyond their cash flow.

In this interview Jim Cramer describes some of the short and distort methods he used to use:

Mod: original post. --ggr

 

[ReflexFunds]

Further to the talk on Tesla options and short interest earlier, I thought I'd add a comment on how this can drive the high volatility in Tesla stock price.

Due to the very high option open interest and very high short interest in Tesla, stock prices moves can be very self fulfilling.

For example, the high open interest in call options will be mostly delta hedged by market makers – requiring them to buy stock to hedge the call options they’ve sold. But as the stock goes up and more call options get closer to the money, delta increases and market makers have to buy more shares to maintain the hedge on their options – and these purchases act to drive the price up further.

At the same time, the higher share prices increase the $ size of the Tesla short position – therefore they need to invest more capital to maintain the same number of shares short. Many will not choose or be able to do this, so they will reduce the number of shares they are short to keep the same $ size of the position. To do this they need to buy Tesla shares – and these purchases act to drive the price up further.

Also, if a market maker has sold puts, these will be mostly delta hedged by shorting stock. But when the stock goes up delta on the put options reduces and market makers can reduce the size of the hedge - to do this they reduce the size of their short stock position and buy shares – and these purchases act to drive the price up further.

A higher share price can also attract new investors who now have more confidence in Tesla’s future - leading to share purchases which will drive the price up further.

Higher share prices also increase staff compensation and can increase staff incentives, moral and productivity – leading to better results – which in the long run will lead to a higher share price. It can also give customers more confidence in the company’s future and make them more likely to buy the car – leading to better results – which again leads to a higher share price. A higher share price also makes it easier to raise more capital with lower dilution.

Of course, this can also all work in reverse when the share price is going down. Which is why Tesla’s enemies have been so intent on producing FUD and employing the confidence crisis short and distort strategy to damage the company.

The feedback loop between market prices and company fundamentals is called Reflexivity by the way.

Similar self fulfilling feedback loops act with Wright's Law/Moore's Law/Experience curves. Wright's Law works because companies believe it is going to work so they invest in the growth that is needed to drive the mechanisms that lead to the learning rates. This increased cumulative production volume leads to lower production costs which leads to lower prices which creates the higher demand the volume was built for which leads to investment in further growth etc.

Given this is such a powerful driver of Tesla stock price, I thought it worth trying to quantify all of these options delta hedging and short stock feedback mechanisms. The result is larger than i expected. I believe a +$10 increase in share price would require the purchase of 4.7 million Tesla shares worth $1.6bn. I think much of all stock volume every day is delta hedging related.

Full detail on all Tesla options value and delta exposure from calls, puts and converts below. These are approximations, but I think close enough.

Tesla Calls open interest:
There are call options on 69 million shares outstanding.
The current market value of all call options is $3.3bn with $0.8bn expiring this week and $2.1bn expiring within the next 3 months. $2.8bn of the calls are in the money and $0.5bn out of the money.
It will be interesting to see what call holders do with their profits. Take profit, buy stock or buy OTM calls?
Delta hedge requirement for these call options is 38 million Tesla shares, worth $13bn. So if all Tesla call were sold by market makers (most likely were) and are 100% delta hedged (market makers should be), then 38 million shares would have to be held to hedge the option position. In reality some of this is cancelled by Put options.

Tesla Puts:
There are put options on 144 million shares outstanding.
These have collapsed in price and current market value of all put options is now only $0.4bn with $0.1bn expiring within the next 3 months.
Delta hedge requirement for these put options is 5.5 million Tesla shares sold short, worth $1.9bn.

Convert hedges owned by Tesla:
Tesla bought call options and sold warrants to limit potential dilution from its 2021, 2022 and 2024 convert issuance. The value of the Tesla calls Tesla owns are currently worth $1.4bn and the Warrants it sold worth $0.6bn. For banks to delta hedge their net option exposure to Tesla from the calls & warrants would require purchasing 4 million Tesla shares.

Net delta exposure from options market.
The gross delta exposure from Calls, Puts and Convert Hedges can all be netted out – they are all likely held by the same market makers. So this is 38 million long from Call open interest, 5.5 million short from Put open interest and 4 million long from Tesla’s convert hedging transactions. This nets out at 36.6 million Tesla share long, currently worth $12.6bn.
Note that while individual market makers can delta hedge with other options rather than shares (but they mostly do shares), this is only passing on delta exposure to a different exposure. So this 37 million shares overall options market delta exposure is what is needed if everybody is 100% delta hedged. Some calls will be sold unhedged by people like Mark Spiegel etc, and some puts likely sold by Tesla retail longs, but I expect the vast majority of the market is delta hedged most of the time. So these means delta hedging accounts for ownership of towards 37 million Tesla shares currently. This is relative to 212 million total Tesla shares (180 million real shares outstanding, 32 million virtual/duplicated shares sold by shorts). Many of these market makers likely loan their long shares to shorts so they may not disclose ownership anywhere close to their real economic ownership of stock.

Convertible bonds:
Most convertible bonds will be held by funds who will delta hedge their exposure to Tesla equity. At current prices this would require selling 8.7 million Tesla shares short. So this is a large chunk of the 30 million Tesla short interest. These are held by different investors to the options open interest so can not be netted out.

Outright short equity:
Short interest is currently 32 million shares sold short or c.$11bn. About 23 million of these shares of c.$8bn are likely sold by real shorts and not from convert hedging. These 32 million short shares are shares that are now owned by 2 different long investors. The short borrowed a share from one long, promised to give it back eventually, then sold it to a new long. Two different long investors now have economic ownership of the same share so in effect the share has been duplicated, with a virtual share or repayment obligation now also trading in the market. This means there are now really 180 million real shares outstanding plus 32 million virtual shares owned by Tesla longs, or a total of 212 million shares.

What is the exposure of all of these positions to a +$10 move in Tesla share price?
For +$10 the net change in delta hedging requirement from the whole options market and from the convertible notes hedging is + 4.0 million shares or $1.4bn of Tesla stock purchases. This is an incredibly powerful feedback mechanism to drive the stock higher.
For +$10 share price the size of the Tesla short owned by real shorts will increase in $ terms. To maintain the same $ size of position Tesla short will have to buy Tesla shares to reduce the number of shares short. For $10 this would have to be 0.7 million shares.
So between the two, this is buying pressure for 4.7 million shares due to a $10 increase in share price.

What is the exposure of all of these positions to a -$10 move in Tesla share price?
For $10 the net change in delta hedging requirement from the whole options market and from the convertible notes hedging is - 4.7 million shares or $1.6bn of Tesla stock sales. This is again a powerful feedback mechanism to drive the stock lower. At the moment the mechanism is slightly more powerful in the downward direction – this is because the recent price increase has moved so many Tesla calls into the money and delta to its maximum of 1. There is more room for changing in delta with downward movements currently. This will likely even out as calls mature and people roll calls into more out of the money strikes.
For -$10 share price the size of the Tesla short owned by real shorts will reduced in $ terms. To maintain the same $ value, Tesla shorts will sell a further 0.7 million shares short.
So between the two, this is selling pressure for 5.4 million shares from a -$10 move in stock price.

Note: All these numbers are approximations and use a $345 share price and a fixed 45% volatility for all options/strikes/maturities. I don’t have a data source with volatility or option price for every option matched to open interest, and these approximations makes it much easier to make quick options pricing calculations.

@Fact Checking @hacer @Zhelko Dimic @EVNow @MFranc123 @Doggydogworld

Mod: Original post here. --ggr

 

[Papafox]

Papafox, thank you for another interesting analysis. Question (if you have time): you are making a connection between hedge funds and the large number of calls that have to be delta-hedged or, if they are not being hedged, have to be ‘dismantled’ through downward manipulation of the SP. I always thought it was market makers who have to cover or hedge for the calls (and puts) they sell? And I believe they do so immediately. How are hedge funds also involved?

My views on manipulations have evolved over time from a general view of short-sellers being the culprit to hedge funds being the primary drivers of manipulations. @Sancho suggested hedge funds specifically, and as I looked at the evidence, day after day, his explanation fit the market's behavior the best. I noticed that in typical manipulations, the frequently bought puts seldom were manipulated into the money, and so I dismissed the manipulators as being the type of shorts who would buy puts (we also know that some puts are bought by longs for the purpose of hedging).

Certain hedge fund sellers of the call options are a different matter, though. Regular market-makers tend to delta-hedge (through buying or shorting shares) in order to stay somewhat neutral regarding sold options and they make their money primarily from the decay of time value. Hedge funds sometimes hold net short positions in TSLA, however, and if they're big enough they can exert market-moving influence on the stock. Instead of delta-hedging as TSLA rises, my theory is that some hedge funds manipulate to prevent the rise above the strike price of heavily sold calls that are about to expire. After all, delta-hedging tends to enhance the prevailing stock trend, and that's not what the hedge funds want. The more frequently the theory can predict what will happen, the more likely the theory is true. I have so far found no better explanation of the manipulative behaviors we see when TSLA's rise threatens the most popular call strike prices that expire in any given week.

So often, the apparent manipulations are MMDs, near-linear walk-downs in the stock price that take place in low volume trading hours, capping, whack-the-mole, or deep push-downs in the final 45 minutes of market trading. I believe the linear push-downs like we saw yesterday morning are the work of hedge fund operated algobots that are referencing the available data in the order book and methodically selling and rebuying as necessary to achieve the push-down without substantially increasing net short position by day's end. They also pulled off a late-after push-down into close. I look at these push-downs and late-afternoon plunges which are not macro or news supported, and they make no sense from the standpoint of a long investor trimming shares.

The problem for the hedge funds right now is that TSLA investors are not as skittish as before. It's much harder to get a downtrend started and make it continue. Last week the appetite for buying dips was immense. I suspect any hedge funds involved in manipulating TSLA rather than delta-hedging its sold calls has taken big losses these past two months.

Mod: original post from "Papafox's thread": Papafox's Daily TSLA Trading Charts --ggr

 

[KarenRei]

Newb here. Would someone explain this ?

I'm having trouble understanding puts and calls options lingo. Are they from the perspective of the person holding the stock, or does a person e.g. either buy or sell a CALL (or PUT) ?

Let's start at the beginning: leverage.

Leverage is how much the value of your assets moves in relation to the value of an underlying asset (for example, TSLA stock). If you want to profit more, you increase your leverage, but this comes with the downside that if the stock moves down, you lose correspondingly more. Increasing leverage also comes with costs that accrue over time. Note that you can also decrease leverage which has the reverse effect.

The most straightforward way to increase leverage is to buy stock on margin. Buy twice as much stock as you put in money for it, you double your leverage. The time-costs on margin are in the form of paying interest on your borrowed shares.

Options trading is a more nuanced form of managing leverage. Owning a call option gives you the right (but not obligation) to buy 100 shares of stock from the person who sold the option, at a given price (the "strike price"), at or before a given date (the "expiration date"). Owning a put option is just the opposite - it gives you the right (but not obligation) to sell 100 shares stock to the person, at a given price (the strike price), at or before a given date.

Let's say that TSLA is at $350 and you buy a June $420 call for $2000 (note: options prices are listed per-share, not per-100 shares, so the sale price would list as "$20"). Now let's say that it's June or earlier and Tesla's stock is at $500, and you exercise the call. You can buy 100 shares of stock for $420, which you can immediately sell for $500, earning you $80 per share, or $8000. Minus the $2000 you paid for the option, you've earned $6000 on your investment - e.g. tripling your money on a $150 / 43% rise.

On the other hand, if you never get the chance to exercise the option with TSLA above $420, then you earn absolutely nothing on it, and it's $2000 down the hole.

Puts are just the opposite. Shorts buy puts with low strike prices. If they exercise below the strike price, they can force someone else to buy stock at the strike price which they're buying at the current, lower price - and thus they profit. But if they never exercise above the strike price, then the puts expire worthless.

You can as an investor also take the other side of the bet - selling calls and puts. A bull who sells, say, a $250 PUT, thinks that the stock is going to be above $250 at expiration (and not get dramatically below $250 in the interim). A bear who sells a $420 call is making the opposite bet - that the stock won't be above $420 at expiry.

Buying calls at puts has a maximum liability as the premium you pay to purchase them. Selling puts has the maximum liability of the strike price times $100, which an be a lot (for example, sell a $250 put, the company goes bankrupt, they exercise and force you to buy 100 shares of stock at $250 which they can buy for $0, you're out $25k). Max liability on sold calls is even worse - it's effectively unlimited, since the stock can just keep going up.

Generally sellers of puts and calls cover them, to limit their max risk. A sold put can be covered by having 100 shares of stock short, or by buying a put at a lower strike (buying one put and selling one at a different strike for the same date is known as a sold "put spread"). A sold call can be covered by having 100 shares of stock, or by buying a call at a higher strike (a sold call spread).

A common strategy is the opposite - buying call (or put) spreads. This means that you think the stock will go up (or down), but not by an unlimited amount. By selling off the less likely possibilities, you can buy spreads cheaper than you can buying pure calls or puts. A nice thing about this is that assuming the less likely possibilities don't pan out, you get to watch your obligations on the upper end decline to nothing - and indeed, if you want, repeatedly resell at lower strike prices On the other hand, if you're wrong, and the price does zoom up past the upper end of your spreads - hey, you've made so much money on the lower ends, it probably won't bother you much. It just means that you could have made more by choosing a higher strike or not using a spread.

Terminology:
* Out of the money (OTM): The option hasn't hit its strike price yet, and still isn't that close.
* Near the money (NTM): The option is right around its strike price.
* In the money (ITM): The option has already exceeded its strike price.

Most people don't exercise options themselves. The risk/benefit reward changes over time, and so over time it's generally a different type of buyer who'd rather own a given option, with only the most short-term traders and MMs being the ones to actually execute them (word of warning: one can execute an option well before the expiry if they want. This generally only happens for options that are way in the money). Options have a mix of intrinsic value - e.g. "I could exercise this right now and earn $X" - and time value - e.g. "the market would like to buy this option to bet on the stock price moving between now and the expiry date". Time value declines over time (this is known as theta, and the process known as theta decay), increasingly fast as you near expiry; like interest on margin-purchased stock, this is the penalty you pay for increasing your leverage with options. It you sell options, theta works in the opposite direction, as the time value of the options you sold steadily declines to zero.

The other important greek letter apart from theta (although there's a bunch of them) is delta. Delta is very simple: this is how much the value of your option will increase or decrease as the stock price rises or falls. It ranges from 0 to 1. A delta of 1 means that the value of the option goes up by $1 per share (e.g. $100 per options contract, since each contract is for 100 shares) for every dollar the stock price rises. A delta of 0,5 means that it goes up by $0,50 per share ($50 per contract) for every dollar the stock price rises, and so on. Delta is near zero for far-OTM options and near one for far- ITM options.

There's also an important parameter in the background called IV (Implied Volatility). High IV (like we have now) means that options traders expect big movements in the stock price (up or down) before the expiry period. This pushes the value of options up, often significantly. Low IV does just the opposite - it means that traders expect relatively flat stock movement, so options aren't as valuable. IV tends to rise before major news events and drop after them. Right now IV is rather high because a lot of people think Tesla could be ready to spike big over the next year (showing sustained profitability, producing from GF3, S&P inclusion, etc, plus the imminent pickup launch). This means you pay a premium for buying options, and earn a premium for selling them. IV changes can do weird things - for exampple, after Tesla Q3 deliveries missed Musk's 100k figure, the stock plunged... and while short term option values fell as well, long-term option values actually increased, due to IV rising as options traders saw even the lower 97k figure as being proof that Tesla was on the road to recovery.

Some people love options trading, and some people are terrified of it. It's a great way to balance your risk/reward ratio and fine-tune things (including for reducing leverage - for example, by buying 1 put for every 100 shares of stock you have, you can guarantee that your investment never drops below a given level... e.g. a "protective put" hedge). But you need to understand that if you significantly increase your leverage, your total assets can swing wildly. Like, by orders of magnitude. If in buying stock, you're wrong about timing... well, you just sit it out, and so long as the company eventually recovers, you're fine. With options, being wrong about timing can be crushing. And note that you can be right about a given hypothesis (for example, "Tesla will turn a profit next quarter") and still be wrong about the stock price due to macro effects, changes in outlook, unexpected departures, catastrophic events, a major investor bailing, etc. Keep this in mind if you mess with options, and be willing to accept the consequences. Increasing leverage can both make and lose fortunes.

Mod: Original post here. --ggr

 

[ReflexFunds]

6 months ago the consensus was that Pickup would be a Model S/X equivalent $90k+ car.
Elon adjusted expectations that he was aiming for below $50k but few people believed him.
Tesla just announced it will start at $40k, with better specs than Model Y for lower base price.

How is some people's main takeaway here that they broke some glass?

The unusual looks are because of first principles engineering led decisions to dramatically reduce production cost while increasing functionality. Even ignoring these constraints, I think Franz did a great job, it looks amazing and it will grow on people!

After more time for this to sink in, I'm growing more and more confident in my first impression that CyberTruck is Tesla's boldest move yet and has blown away all my expectations.

CyberTruck is a paradigm shift in:

• Vehicle production processes
• Vehicle structural design
• Vehicle aesthetics
• Vehicle materials
• Crash Safety
• Durability and toughness (almost certainly designed for 1 million miles with limited scratches or body repair work required)
• Capital efficiency (has removed all the most expensive parts of the production line)
• Production cost (likely huge savings relative to a traditional Pickup)
• Pickup functionality
• EV range

I do wonder how quickly the CyberTruck can be brought to market. The strong reservation count should give Elon confidence that CyberTruck is a hit and he should get fully behind mass production. I would guess 300-600k annual production capacity. The key reason for the CyberTruck design decisions and consequent aesthetics were to dramatically reduce production cost so it can be priced competitively with the cheapest F-150 and sell in huge volumes and actually make a difference to carbon emissions. I don't get how some people here can think Tesla designed this to be a niche product. Elon and Franz didn't just randomly decide to make a CyberPunk themed truck, they decided to make as cheap a Pickup truck as possible using first principles physics based engineering so as to sell in the highest possible volumes. The CyberPunk aesthetics were just a result of this cost optimisation.

I hope the mass production timeline can now be accelerated to early 2021. Lead times on the limited vehicle production equipment shouldn't be long, particularly if mostly made by Tesla. I think the limitation is likely how quickly Tesla can ramp up its in-house next generation battery chemistry/cells/pack. But if they can invest more to accelerate this, I think they should. After all, as Elon has said:

Elon: “If the schedule is long, it's wrong; if it's tight, it's right.”

Motortrend: "After all, as one of the Cybertruck's engineers whispered to me, "Like Elon says, 'It only takes nine months to make a baby."


Mod - Originel post here: Tesla, TSLA & the Investment World: the 2019 Investors' Roundtable - RSF

 

[ReflexFunds]

Do you have a source for that? I don't recall Musk ever hinting at getting into the mining of lithium! Not even once. Lithium is not much of a potential price or supply bottleneck.

Also, a surplus of lithium raw product is a good thing. Mining company managements are not stupid, they know why there is currently a surplus of supply and want to make money as much as anyone when demand starts growing again.

In my opinion Lithium Carbonate/Hydroxide and Nickel Sulphate supply are by far the largest potential bottleneck to the EV transition. The price isn't really an issue (likely $500 lithium hydroxide and $900 Nickel sulphate per SR+ pack currently), but in the future actual availability could be. Not this year, but during the period 4-10 years from now when EV penetration really does takeover. Lithium and Nickel sulphate are the slowest moving part of the EV production capex chain (Tesla can build a car factory in 1 year, likely it can build & ramp its own cell and pack factory in 1-3 years, but new Lithium plants take 5+ years to ramp). Elon has said Tesla should get into Nickel and Lithium processing. He is right and I really hope they will.

None of the leading Lithium and Nickel companies believe in an EV transition anywhere near as aggressive as Tesla, so they are not investing in the 2025-2030 capacity required to meet Tesla's goals. For example ALB is expecting demand from EVs of 700kt LCE (lithium carbonate equivalent) in 2025 (which is equivalent to a 4x increase in Lithium market size from 2018 levels). This is enough for 13 million EVs at a 56kwh average pack size (size of the SR+ pack) and market average 0.93kg LCE /kwh (I think Tesla's is closer to 0.7kg/kwh as it has more advanced chemistry). This is what the industry is building towards, but it is not enough. Tesla alone will need around 10x the current Lithium market to supply its 2TWh cell production target, or c.2x more than the entire global lithium capacity targeted by the industry by 2025.

There is no lack of actual resources in the ground, but there will be a lack of mines and processed high purity metals unless capex is quickly ramped.

I think average Lithium capex of around $700-1,400m per 1 million EV capacity will be required. Likely less than 20% of capex is used for buying the resources in the ground plus buying the equipment to dig it up (or pump it up for Lithium brines). Nearly all the capex is for highly complex processing - crushing equipment, processing, refining or electrochemical plants etc. For example, look at Nemaska Lithium's project (https://www.nemaskalithium.com/assets/documents/NMX_NI4301_20190809.pdf) Page 394 shows pure mine capex at just CAD$28.5m (total mine site CAD447m) vs total capex of CAD1.27bn including the electrochemical plant.

These are highly complicated value add processes and it takes 5-6 years to ramp up a new lithium plant. The purity and consistency of the metal (particularly lithium carbonate/hydroxide) is also critical to battery energy density, cycle life, power density and safety. So it is not easy to substitute new lithium producers into your cell supply.

There has been one main reason for Lithium Prices crashing the past 18 months.

China EV sales are far far below plans this year following the economic downturn and huge subsidy cuts. Battery metal capacity had been built for a supply ramp which didn't happen and this supply is now flooding the market. The price impact of this has been exacerbated by two factors:

• Lithium Supply had been built for low quality low range batteries with low tech cell chemistries. The Chinese subsidy change means there is very little demand for these low range subsidy driven cars anymore. The Lithium purity ordered for these cars is not good enough to build high quality high energy density cells, so this low grade product is finding no buyers any more. Hence the price of low grade lithium products finding no floor, while at the same time cell supply for high quality battery cells is still limited.
• Lithium Carbonate and Hydroxide cannot be stored and stockpiled for long. The product quickly spoils, so unlike most commodities, a producer cannot simply stockpile when the price is low - they have to sell quickly no matter the price. This means prices are always going to be volatile and will always be driven by very short term supply and demand dynamics rather than longer term considerations. To some extent this is more similar to the volatility you see in short shelf life agricultural commodities.

So Lithium Prices have crashed due to a short term subsidy adjustment in China, not due to a long term setback to the EV transition story. However, the lower prices have caused lots of lithium companies to fail to raise financing and cancel production plans that would have brought on new capacity after 5-6 years in the 2025+ timescale. So I think it is important for companies like Tesla that actually do still believe in the EV transition, and have the cash to finance it, to step in to fund the capacity required to match their battery cell production ambitions.

Its a very big mistake to take a short term lithium price correction the past 18 months to mean there is no need to bother helping to build future capacity.

Note my argument is utterly different to the false FUD narrative that there are not enough lithium, cobalt and nickel resources for the EV transition. There are plenty of resources. And it is relatively easy to build the new capacity to get to a 100% Clean Energy society. But this takes time and cash. I'm just saying Tesla needs to be masters of their own destiny and not rely on an array of half incompetent junior metals startups and conservative larger metals corporations who believe in a slow EV transition to deliver on a product so critical to Tesla's own extremely aggressive battery production targets.

Nickel Sulphate is a similar story, but I'll discuss that another time .

 

[ReflexFunds]

View attachment 488438

Karpathy is actually making an extremely important point here. Andrej and Elon’s shared views on this topic are a key driver of why Tesla’s Robotaxi AI strategy is so different from the competition.
Andrej and Elon acknowledge just how difficult it is to solve driving with AI and how much of a head-start human drivers have. In contrast Waymo and everyone else going with their Data Light, Hardware Heavy strategy are instead trivialising just how much learning it takes to become competent at driving and how much data it will take to catch up with humans.

Views on exactly how human and animal learning work still vary greatly, but i’d say most common in the AI community is Yan Lecun’s view: “If intelligence is a cake, the bulk of the cake is unsupervised learning, the icing on the cake is supervised learning, and the cherry on the cake is reinforcement learning.”

Where broadly:

• Unsupervised Learning - Learning patterns and correlations between actions and consequences as you begin to interact with the world.
• Supervised Learning - Children asking questions and getting answers about the world.
• Reinforcement learning - Rewards for good behaviour or correct answers.

However this is only part of the story and potentially only a relatively small part.

A large amount of the behaviour of animals is not actually learned during the animal’s life but is driven by behaviour algorithms present at birth. For example animals are born with innate abilities such as Spiders ability to hunt from birth, or mice's inherited burrowing techniques. Many animals are also born with extremely effective unsupervised learning algorithms that allow them to learn specific tasks very quickly with only a few unsupervised examples.
There is obvious evolutionary pressure for animals to be born with abilities that aid survival or an ability to learn to recognise food and predators quickly.

These innate behaviours and learning abilities are learned via hundreds of millions of years of training via natural selection. Natural selection is effectively a reinforcement learning algorithm which is rewarded when an animal produces offspring. However, learning via natural selection is very inefficient and is limited by 1) Very little useful information is transmitted from animals life - we only know whether or not the animal survived long enough to produce offspring, 2) Very little information can be stored in the genome.

Reinforcement learning via natural selection takes place via genes that encode particular circuits and connections of neurons corresponding to particular innate behaviours plus architectures for extremely effective learning algorithms to allow continued learning through the animals life. However the human genome only contains 1 GB of data and there is not enough storage capacity for the exact weights and wiring of a brain’s neurons to be specified in the genome. Instead the genome has to specify a set of rules for how to wire the brain as it develops. This is possibly one of the key reasons humans have developed relatively general intelligence. Given the limited amount of information that can be stored in the genome, there is pressure to develop very general patterns and algorithms which can be used for multiple applications. https://www.nature.com/articles/s41467-019-11786-6.pdf This is called the “genomic bottleneck” and potentially the very small size of the human genome has been a key driver of human intelligence - relative to for example the lungfish with a 40x larger genome and much less pressure to develop generalised algorithms.

To some extent this learning via natural selection can be thought of analogous to a more powerful form of pre-training or transfer learning used in many machine learning applications today.
It is important to note though that natural selection develops strong neural network architectures and wiring rules rather than optimising neural network weights.
There is some very interesting recent work on “weight agnostic” artificial neural networks, showing that if you carefully select the network architecture for a particular task, the neural network can actually perform some reinforcement learning tasks with fully randomised weights. https://arxiv.org/pdf/1906.04358.pdf This shows just how powerful the network architecture can be itself even before you start training on data.


So back to Robotiaxis - when we are trying to teach a car how to drive, in reality we are competing with a human who already has 100s of millions of years of data and reinforcement learning via natural selection and 20+ years of Unsupervised Learning, Supervised Learning and Reinforcement Learning via interaction with the world and teachers.

This is why a Robotaxi will need 10s of billions of miles of real world driving experience vs a human who can learn to drive with 1,000 miles of real world driving lessons. And this is why Waymo and every other potential Robotaxi competitor is wrong when they assume they can learn enough just from a few hundred extremely expensive test vehicles and 10 million+ miles of real world

So Tesla's Robotaxi strategy is built from the assumptions:
1. We cannot solve Robotaxis without 10 billion+ miles of real world experience.
2. We cannot get 10 billion+ miles of real world experience without a hardware suite affordable to install in a normal consumer owned car.
3. We cannot get Lidar this cheap in a reasonable timeframe and without the economies of scale of first having a functioning Robotaxi business.
4. Therefore we cannot use Lidar.
5. Hence we have to solve distance and velocity estimates using machine learning with Cameras and Radar data. If we can do this, Lidar has no extra value anyway as its capabilities will only be a subset of what we can already do with Machine Vision.

Mod: Original post here. --ggr

 

[StealthP3D]

Thanks for correcting my flaky memory. But my point about many of the serious traders being away remains true. Note too that QCOM has never regained that nearly-20-years-ago high. Moral: remember to cash in on the short squeeze!

I didn't sell a single share until December 31st, 1999. I wanted to sell all of it in one fell swoop that morning but my wife objected that the tax bill would be huge. I couldn't change her mind so I settled for selling a portion of it that morning and most of the rest the following January. I sold the final shares that March when it was within 10% of it's December. 31st price. Yes, the tax bill was huge but I've never been so pleased to pay taxes!

I re-entered Qualcomm in 2016 at around $48 mostly for its dividend but it has nearly doubled in value in the last 5 years. There are a myriad of reasons why QCOM basically didn't appreciate at all from 2000 to 2016 but it wasn't because the 2000 price was driven by a short-squeeze. The high price was caused by over-hyping of QCOM by analysts (all of whom had been very bearish on QCOM entering 1999) and they had plenty of help from the media. I knew it was grossly over-valued going into the fall of 1999 but I figured it might still double or triple in price based on all the hype. So I followed my instinct to ride the best wave I had ever caught to the sweet end. By fall my portfolio was over 90% QCOM and was well into 7 figures. It tripled from there. Had I sold early, or done "profit-taking" on the way up as was so commonly announced with glee on the QCOM forums, I would have left millions on the table.

Most of my initial investments in QCOM came from riding the MSFT wave in the 1990's. By 1998 I had done very well by being overweight MSFT for years (kept adding to my position) so I rolled all of it over into QCOM by the fall of 1998.

As I recall, Qualcomm didn't have a large short interest as 1999 came to a close. Remember, it had been the best performer of the year in NASDAQ's best year in history. Every magazine, newspaper and Internet article was glowing, people were celebrating and even the short-sellers didn't have the balls to short it because no one knew when the madness would end.

I don't remember people attributing the rise of QCOM to a short squeeze either. It was a growth story due to their patented intellectual property and projected (over-hyped) licensing revenues. They said Qualcomm had a money printing press. Everybody wanted some. It was the darling stock of the new Millenium.

It doesn't mean that the investment won't still be good for buy and hold... just that the squeeze won't last forever. Personally I still don't think this is true squeeze yet.

We may or may not get a true short-squeeze. Most fast appreciation is not due to short-squeezes and we are definitely not in one now.

I don't trust Ihor's short-interest numbers any more than most people here do. I do think short-covering has contributed to the dynamics (speed and strength) of this run. But the rise from $180 is primarily driven by the narrowing of the gap between Tesla's perceived prospects vs. their actual prospects. When I see a disparity between people's perceptions and reality, I see profit. As the disparity between people's perceptions and reality equalizes, you will see that share prices have momentum (obviously not in the physics sense but it looks similar). This "momentum" derives from human nature. That's why "people" are sometimes called "sheeple". They tend to only do something if others are doing it. If it's "normal". Tesla is transitioning from a "do not touch stock" to a "must own stock". It will take time.

Another human factor is that people's perceptions change at different rates. Some people have an "aha" moment and change almost instantly. But most people need time to digest new information and have it change their perceptions. Some people will never change, once they believe something. The net effect of this adds "momentum" to the share price. Momentum can persist for many weeks, even months depending on the specific circumstances. Momentum does not protect much against news-driven price volatility (up or down), it continues to act in the background.

I'll illustrate this with multiple charts from QCOM's 1999 rise to the stratosphere. Note: In the beginning of 1999 QCOM was trading around $50-$60 if I recall. The prices in the chart have been adjusted for all the times the stock has split. I've used a 1000X multiplier (a fictitious 1000 share investment) to get the dollar amounts into a territory that will be easier to relate to. First, an overview chart from Jan 1999 to the end of the first quarter of 2000:

This overview looks pretty easy, right? Just ride it up to the crazy top and sell. But things are more complicated than that. Let's say you bought 1000 shares at the beginning of the year for $3600. It was pretty boring at first. But then...

Your $3600 gradually rose to $5400 over the first three months of the year before gapping up to $6000 where they continued to climb to $11,000. You're feeling pretty good as your original $3600 has more than tripled. Tripled! Maybe it's time to sell! But then they start dropping down, your $11,000 has turned into $9800. Earnings are coming up. Last time that happened the stock dropped. Maybe you should sell and lock in your gains before it goes lower? They drop in value for four days in a row until they close only worth $7900 and you are kicking yourself for not selling at $11,000 (because who can argue with tripling your money?). It COULDN'T be wrong to sell with that kind of incredible performance, right?

But you wake up the day before earnings are released and they are on the rise again. Is it a head fake? Maybe this is a good selling opportunity before earnings come out at the end of the day? Because they sure ran up hard into earnings. They climb up to $8900 again and you almost sell but decide to hold on. That evening earnings come out and the next day they gap back up to $11,000. You're glad you held on. They continue to rise over the next three weeks to $15,000! That's incredible! You have more than quadrupled your money! But then they start declining to close at the low of the day $14,400. Maybe it's time to lock in some gains? The next day they open at only $13,900 as you watch your gains evaporate. By the time they are trading at only $11,500 you are really kicking yourself! You are almost back to where you were 4 weeks ago. Maybe you should sell now before it goes lower.

But you hold on into June and after a week of bouncing around and going mostly sideways, your shares start to climb again. All the way to $28,000 by the end of October! You are ecstatic because that's almost eight times what you started with! Certainly, the share price must be peaking. I mean, the p/e ratio is insane! Maybe you should take some off the table. After all, you started with only $3600! And this rise was in anticipation of good earnings, it might drop sharply when earnings are released tomorrow. But there is a family emergency and you don't sell.

After earnings come out, you are totally psyched when your shares gap up and climb through the day, all the way to $35,000! Is it real? You ponder how it could go up in one day more than your entire cost basis! Unreal. Can it maintain this insanity? But in the following days it continues to rise, often gapping up on open. In less than two weeks your shares climb to over $50,000 mid-day before starting a steep decline in the afternoon. The urge to sell is strong. Is it topping out? It couldn't possibly go higher and it will probably go a lot lower. Is it a short-squeeze that will dry up and then the stock will come back to reality? You watch as your almost $51,000 sinks to only $44,000 and you kick yourself for not selling. Maybe it's going lower? But you hold on and it recovers a bit to $46,000 by the end of the day. But you are still down more than $5000 from your best opportunity to sell. That's more than your entire initial investment!

The next day when you wake up there is unexpected good news and your shares have gapped up to an incredible $70,000 and you watch them climb through the day to over $80,000. You are really glad you didn't take anything off the table in the months leading up to this.

Even though those shares would rise to briefly touch almost $100,000, the amazing thing is, over the next three months there were plenty of opportunities to sell them off for between $70,000 and $80,000.

This is a fictitious story with approximate numbers used to illustrate a point about not selling just because the value of a stock has climbed above its intrinsic value. Because the intrinsic value of those shares was probably only about $25,000 at the end of 1999. The stock's momentum kept it valued sky-high for months afterward. The story also illustrates the value of compound growth. At the beginning of 1999, there is no way those shares costing only $3600 would move $10,000 or more in a single day! That illustrates the power of compound growth. If you are jumping in/out of a stock growing as fast as Tesla, chances are you will miss most of that compound growth.

The reason I sold all my QCOM shares at the end of December to the end of March was that I could see there was no more growth possible in the foreseeable future. Yet the analysts had strong buy ratings, every article, every interview, was glowingly positive, Qualcomm could do no wrong. Tesla is nowhere near that point and it will take them a lot longer to get there. Tesla makes cars and energy solutions, Qualcomm licenses technology and designs and sells chips. I doubt Tesla will be fully valued for at least 3 years (but crazier things have happened).

I'm not saying I won't sell TSLA before it has reached it's full potential - if I see something I really don't like, I'll sell it all in a heartbeat. I just think it's penny-wise and pound-foolish to try to play the volatility as long as Tesla's growth prospects are strong. Tesla in 2020 is not Tesla in 2017-2019!

 

[jbcarioca]

...

S&P membership is ... possibly even a fund mandate requirement for many active investors to be able to purchase Tesla.
...

I agree with most of your post but for the quoted part above. This might conflate another very important issue that the conditions leading to S&P inclusion could also affect. That is that many institutional debt buyers (principally pension funds, insurance companies and various governmental investors) are required to meet some specific interpretations of what is called a "prudent man 'sic' rule". ['sic' because this will become 'person' sometime.] Those interpretations and/or rules usually require some period of profitable operation and also an investment-grade rating. Tesla could well achieve an investment grade rating if continuous profitability and positive cash flow coincide for some time with obvious positive outlook. If THAT happens we will see major share price escalation and more boradly based institutional holdings.

Almost all the discussion here and elsewhere is about S&P. That is indeed important. However, the catalyst for broad secular short-defying institutional holdings will be positive cash flow and positive earnings.

Ancillary but crucial points will be proof that Tesla can thrive without direct government intervention and proof that Tesla Energy has substantial broad customer appeal for residential, commercial and utility customers. These ancillary points are necessary in my opinion because the auto industry has repeatedly burned institutional investors. Huge though it is, worldwide auto industries have repeatedly been bailed out by governments trying to protect jobs, which increases risk to institutional investors.

Just consider these when thinking of how much negative institutional sentiment is driven when considering direct government intervention staving off rational business decisions for; (GM, Ford, Renault,FCA, DB, VAG etc). Then consider the effective control of; (Nissan, Toyota, Mitsubishi, Hyundai). I exclude the Chinese because their positions are generally explicit and their business models are built almost entirely on official Chinese government support.

When considering the auto industry and the public utility industry globally we see Tesla truly disrupting both. Apologies to the Christensen Disruption theorists but they really do not understand that their own auto industry analogy proves Tesla. The Models 3, Y and Cybertruck are mass market by their definitions, even though they aren't the absolute bottom of their markets in initial price but they ARE on Total Cost of Ownership. Still, Tesla Energy is absolutely the cheapest and best option for "peaker" power plants which are a much bigger market than are cars.

As that last paragraph becomes more broadly known and Tesla has consistent positive cash flow and GAAP profitability S&P inclusion will be good but dwarfed by comparison with the virtuous cycle commencing with investment grade.

Anybody wanting a long LEAP should forecast when investment grade will happen!

What will happen then? Tesla debt will suddenly become appealing to gigantic pools of funds so cost of funds will decline by probably >100 bp and inventory carrying cost will decline similarly. Thus, GAAP will rocket upwards.

 

[The Accountant]

I want to add some of my thoughts on the accounting for GF3. First some background on me: I have held CFO roles at 2 Fortune 50 companies in my career (now retired). Not the top CFO role but CFO of divisions/regions in these organizations. I also ran a manufacturing facility at one of these companies (not the finance role ....the GM). I am pretty well versed in manufacturing Cost Accounting.

Having also worked in Public Accounting for one of the Big Accounting firms for 10 years, I can tell you that even though there are Generally Accepted Accounting Principles (GAAP) for cost accounting, companies often have slight variations in how they apply and interpret GAAP. So my comments below may not be consistent with what Tesla is doing but it should be very close.

I could write pages and pages but let me hit on some of the areas that I see sometimes misunderstood by some members.

GF3 Costs are all Inventory/COGS: If a facility is dedicated to production, all costs at that facility will go to Inventory/Cost of Goods sold. None of the costs will go to SG&A. That means that general management, finance, HR, security, IT personnel in Shanghai will be part of overhead applied to production costs. Telsa has its China corporate office in Beijing....these costs go to SG&A. Tesla Sales Locations costs go to SG&A. All costs at Shanghai will go to Inventory/COGS. The only situation I have seen where costs do not go to COGS at a facility is the gain or loss on sale of equipment which is recorded in Other Income/Expense on the income statement. But we should not see any of this at Tesla at this moment.

Inventory vs COGS: Cost at the factory are classified as Material, Labor and Overhead (some fixed, some variable) and they all get capitalized to Inventory as the car is being produced. So all these costs sit on the balance sheet as Inventory until the moment the car is sold (ownership transfers to customer) and then at that point the Inventory gets released to Cost of Goods Sold (COGS). This allows for the matching of Revenues with COGS at the moment of sale.

So all of the GF3 costs thus far in 2019 are either on the balance sheet as Equipment or Inventory. There is one exception: The costs to train production workers (including their payroll) go straight to expense (does not get capitalized to inventory). So even it GF3 had no sales in 2019 (no revenue) they might still have slight COGS for training. But most likely no more than $2m.

Stat-Up Facility impact on Margins: When a new facility begins to ramp up, costs are typically higher. Material costs can be higher due to higher waste or rework of errors, Labor may be higher as new workers are not at top efficiency (taking more hours to complete a car as they get up the learning curve) and Overhead costs get spread over less units. For example Fixed Overhead cost in a month of $10m spread over 4,000 cars is $2,500 per car. But if you were to produce 12,000 cars, the $10m in Overhead would only be $833 per car. So the margins will be lower during the factory's start-up phase.

On this last point, my opinion is that although margins at Shanghai will be lower at start-up, they will still be positive. Meaning that if at full capacity the facility delivers $5,000 in gross profit per car, it is possible that at Start-up it is about $3,000 per car. The point I want to make here is that even if Tesla ships vehicles in December, it will not hurt financials. Margins are lower but they still make a profit.

Anyway - sorry for the long post - but I hope it helped.

Mod: original here. --ggr

 

[ReflexFunds]

This is not scientific. There are a lot of studies on the topic of S&P inclusion.

This is the list of articles which I skimmed in my last hour reading about it.

https://www.tandfonline.com/doi/abs/10.2469/faj.v64.n5.7?journalCode=ufaj20

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.192.7439&rep=rep1&type=pdf

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr484.pdf

What Drives the S&P 500 Inclusion Effect? An Analytical Survey on JSTOR

https://www.nber.org/digest/nov13/w19290.html

What Drives the S&P 500 Inclusion Effect? An Analytical Survey | Semantic Scholar

They cover ideas of increased arbitrage and volatility. Correlation vs causation of the inclusion effect. How much of the inclusion effect would have happen anyway because the company was going well enough to get included. How much is due to increased awareness of the company? The historical SP inclusion effect (which from my reading is about 5%). Whether the effect is permanent or not.

I am in the Valley of Despair on the Dunning Kruger Effect on this topic. Of course no-one knows how it is going to affect TSLA but personally I am putting a lot more value to the research on this topic, and less on what happened with the Saudi PIF, which I think had a lot of other factors at play. Also I am not sure the effect is permanent as per the research. Also I would call <5% insignificant, in a non-mathematical sense of the word.

So personally I am expecting anywhere from 0-10% bump with a likely 5% bump. Outside this range I will be surprised.

Feel free to reply with your reasoned out estimate... we will know soon enough the actual figure for TSLA and see who is closer then, although even then it is hard to tease out the effect from S&P inclusion from the sustained profits which got them included in the first place.

Thanks for sharing these links. It’s always worth reading the literature and I agree there is no way of knowing for certain how S&P 500 addition will impact the stock price, but it is possible to form a much more Tesla specific view than these generic studies. There are a number of omissions in all these studies and also reasons why these are not directly applicable to the situation at Tesla

Here I’d first recommend reading my recent post about what share prices actually are and how they work price because it will make it easier to understand the following explanation for the impact of S&P 500 addition to Tesla share price.

Given it’s a Sunday and Tesla share price is at new highs, I thought it worth elaborating on my prior post and explaining more about my views of what a share price actually is and what needs to happen to drive a share price on to a new level.

I generally find theory, papers and studies in finance are of a far lower quality than those I read in Science or Machine Learning. Nearly always I can almost immediately find absurd assumptions or failure to account for or isolate key variables which make most of the conclusions largely meaningless. In particular I find many of these papers start with the ridiculous assumption that the efficient market hypothesis is correct and this leads them to make big mistakes when setting up their analysis.

Even outside of the financial academic community and their efficient market dream world, I find very few people actually working in financial markets ever take a moment to think from first principles what is actually happening and what terms in finance actually mean.

For example many Short Investors and market makers seem to have never considered what shorting actually is. In my previous post I talked about this process and described Shorts creating new synthetic shares when they short a stock, but that is a term I made up because I don’t even know if finance has a word for it.

Similarly, few people in finance seem to have actually thought about what a Share Price actually is. And I can’t even find a reasonable answer for it when googling.

Wikipedia’s first sentence includes the obviously false: “In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.” Yes it is the lowest amount it can currently be bought for, but it is not the highest amount someone would be willing to pay.
Investopedia tells you: “Most people believe a stock's value is determined by its price. That's only true to a certain extent. But there is a real big difference between the two. The stock's price only tells you a company's current value or its market value.” Yes this is true, but it is not a functionally useful definition when considering what will actually drive changes in the price.​

A company’s stock price is not the true value of a company’s equity. Nobody knows the true value of a company’s equity, not an individual investor, not company management and not the market as a whole. A company’s true value is the discounted value of its real future cash flows. We can make educated guesses what these future cash flows will be, but we cannot know for certain, and hence it is impossible to know a company’s true value.

On my definition, a share price is:
The equilibrium point where the available capital owned by Active Investors with a company valuation estimate greater than the current share price is equal to the number of shares (plus synthetic shares) available for active investors to purchase.

Hence a share price is changed by 3 key things:

• Changes in fair value estimates of individual investors that are currently invested in or valuing the company. These valuation estimates/share price targets do not have to be rational, analytical or even conscious. This could be investors that think that a stock is currently undervalued based on gut feel, it could be people that bought because they see upcoming positive catalysts which they think will increase the price (such as S&P 500 inclusion or M&A), it could be people buying based on signals from technical analysis. For people that do build a firm valuation model, there is still huge disagreement on which valuation methodologies to use and which fundamental assumptions to make about future cash flow. Some investors may make all their investment decisions based on multiples of historic financials. Some may make a single base case model and perform a discounted cash flow analysis. Some may make many or even hundreds of different models for future results and take a probability weighted average valuation. These valuations or gut feels will mostly be changed by changes to a company’s fundamentals, technicals or upcoming catalysts. Often there is a strong correlation between an investor's valuation and the actual stock price. For example at any moment the investor may always think the stock should be worth 30% more, and as the stock goes up they subtly tweak their models to justify this higher valuation. This is because emotion and gut feel is a far larger driver of investment decisions than investors like to admit (even to themselves).
• Increased or decreased pool of capital considering the stock & making fair value estimates. The pool of investors may increase because people simply had not heard about the stock before. It could increase because some investors had previously dismissed the stock based off a media narrative or equity analyst reports without ever forming their own valuation opinion, but when the narrative changed they decided to do some work. It could increase because investors had previously been unable to invest based on fund mandate requirements such as only profitable companies or only companies in the S&P or only dividend paying companies etc, and one of these factors now changed. The pool of investors may decrease because a fund decided to cut all exposure to a particular sector, or because the stock was too volatile and they decided it wasn’t worth the stress etc. Note that each individual investor only has a certain amount of their wealth or fund available to invest in a particular stock. So the pool of capital considering a particular stock is also constrained by position or risk limits, but these could also change up and down, particularly if a stock starts to be considered less risky.
• Changes to number of shares available for active investors to purchase.This can change due to share buybacks, changes in short interest, share issuance, purchases by passive index funds (which reduce the share pool available for active investors to use for their valuation based investments), share lock up expiry, changes in shares held by Options or Convert Delta Hedging etc. A reduction in these shares reduces the pool of shares that active investors are competing to buy and hence lowers the threshold of investor capital needed for the company to reach a particular share price.

To illustrate this with regards to Tesla.

• There is a certain pool of available capital available (for a single stock) controlled by Active Investors who have considered a Tesla investment and have formed their own view of valuation. Perhaps this is $150bn, perhaps $200bn, we don’t know. But each of these investors will have a view on whether Tesla is under or over-valued based off a financial model, technicals or gut feel etc.
• Currently there are 206m Tesla shares available for longs to buy – 180m real shares and 26m synthetic shares created by shorts. In reality Elon’s 34m shares are not available for active investors to purchase, so this leaves just 172m shares worth ~$69bn. Again, some of these shares are already held by passive funds tracking an index such as Russell, Nasdaq or MSCI, perhaps this is 10m shares, so again these are not available for Active investors to purchase. This leaves $65bn of Tesla long exposure available for Active investors to purchase.
• Of the say $200bn available capital controlled by Active Investors who have considered a Tesla investment, $65bn need to think Tesla is undervalued for us to achieve the current share price. Within the $200bn of potentially Tesla friendly capital there will be a wide distribution of views on valuation. $135bn thinks Tesla is worth less than $400 so would only invest if the share price fell below this level. Maybe $25bn thinks it is worth more than $600 so would only begin to sell if the share price rises above $600. $40bn have valuations between $400-600 and each would sell when share price rises above their valuation (unless they have changed their view on valuation in the meantime). These numbers are not estimates by the way, they are completely made up just for illustration.

So from here share price can change for 3 reasons:

• Change to the valuations made by this current $200bn pool of capital. This could be due to company specific or market wide reasons. For simplicity, if some event caused every single investor to increase their valuation by the same amount, say $50, then investors that were previously uninvested because they thought Tesla was worth $350-400, now think Tesla is undervalued (with valuations now ranging from $400-450. So these investors will now buy shares until a new equilibrium price is found. What exact price this moves to will depend on the distribution of different investor’s value estimates, but it will not likely be as high as $450.
• New investors considering a Tesla investment and adding to the $200bn pool of capital. This will change the whole distribution of valuations and will change the equilibrium point where the value of available Tesla shares is equal to the amount of capital valuing the company above the current share price. So this can change the share price even if no individual ever changed their Tesla valuation.
• Changes to the pool of shares available for active investors to purchase. For example since May the number of synthetic shares created by shorts has reduced by around 17 million. This has reduced the pool of shares available for active investors to purchase, and hence reduced the amount of Active investor capital needed to reach a particular share price. Similarly, if 20 million shares get bought by passive S&P 500 trackers, these shares will be removed from the pool of shares available for Active investors to compete over. These passive funds effectively have an infinite price target on Tesla because nothing will cause them to sell aside from changes in the size of their funds. So these things can permanently change the share price even if no investor changed their valuation and even if no new investor started considering an investment.

Just as a note. Instead, on the efficient market definition, which forms the foundation for much of financial theory and models, a share price is:
The true value of the company given all available information (presumably where the market has magically arrived at the correct answer because it is an infallible and emotion free superintelligence).

Hence a share price is changed by 1 thing: New information which changes the fundamental value of the company and is immediately perfectly reflected in the share price.
So on this definition a share price cannot be impacted by supply and demand. The change in available shares driven by changes in short interest, share buybacks, purchases by index funds, new investors, share lock up expiry etc cannot change the share price.

So back to S&P 500 membership

The main problems with these studies on share price impact of S&P 500 addition are:

• These studies are on share price changes after the official S&P announcement and during later months and so misses share price changes driven by anticipation of the announcement. So these studies do not take account of the fact that many investors will anticipate S&P addition (particularly if it is driven by meeting the profit criteria) and this will have increased their valuations or gut feel conviction (or brought in new short term traders betting on a S&P bump). So share price will be boosted ahead of an S&P addition, not only after the official announcement and it is not only driven directly by passive fund buying.
• There is a huge difference between companies being promoted from the S&P400 to the S&P 500 vs companies going straight into the S&P 500 index and this is not accounted for in these studies. S&P 400 is broadly the 500-900 largest profitable US companies with liquid equity. Many passive funds already own S&P 400 companies and transition to S&P 400 to 500 is mostly just transferring shares between funds so you shouldn't expect a large share price change. These are by far the most common transitions and they are most often due to meeting market cap thresholds or S&P500 exits due to M&A (and I think for these S&P500 addition is relatively hard to predict in advance). However, If a company moves straight into the S&P500 from outside the S&P universe (most likely because it has now met the S&P profitability criteria), this forces far higher incremental buying from passive funds and a far higher change in the share price. This study shows the importance of prior S&P400 membership but the study still has many shortcomings - http://janschnitzler.com/wp-content/uploads/2016/12/sp500.pdf
• Nearly all of these S&P 500 studies use pre-crisis data which is over 10 years old. This is a very significant flaw given close to doubling of the % of US stocks held by passive investing and index tracking funds during these 10-12 years. This clearly increases share price leverage to index additions. This is partially offset by increased market liquidity due to reduced transaction costs the past 10 years.
• The more difficult a company is to value and the more divergent the investment narratives, then the larger distribution of share price valuations (whether explicit or sub-consciousness gut-feel) within the current investor base. This makes a stock price much more sensitive to changes in supply and demand of shares. If 90% of investors have a valuation within +-10% of the current share price, then changes in shares available to active investors will not cause a dramatic change in share price. However if only 5% investors have a valuation within +-10% of the current share price, it is very easy for changes in availability of shares (in this case due to shares locked up by passive investors) to cause significant changes in the share price.

So all of these factors point to S&P 500 membership being far more significant to Tesla share price than the market averages measured by these studies: 1) Passive Investors now own a far higher % of US market caps, 2) Tesla will be promoted from outside the current S&P index universe, 3) Tesla is very hard to value and investors have a very wide range of valuations and 4) Tesla will see a significant run up in share price ahead of official S&P announcement because profitability driven S&P 500 additions are easier to predict than market cap based ones. This S&P share price bump is likely already happening to some extent, and if Tesla does enter the S&P 500 after Q120 or Q220 it will be sustained, and if it does not and Tesla no longer looks likely to meet last twelve months profitability in the near future, then this S&P bump is likely to reverse.

But how many new shares will actually be bought (and effectively taken out of circulation) by passive investors?

It is important to note Tesla shares are already held by many passive funds. In particular indexes which do not have a profitability criteria such as Russell, MSCI or Nasdaq indices. However S&P indices have the largest market share of passive investment for US companies.

The S&P 500 is market cap weighted and float adjusted, so in Tesla’s case Elon’s 34 million shares and the ~29 million synthetic shares created by shorts are excluded from share count. This means at current share price Tesla would be rated at a $64.5bn market cap, even though in reality investors and Elon are long $91.6bn Tesla equity equivalent.

The market cap of all S&P 500 companies is currently $28.7 trillion. The total market cap of all US equities is currently $36.1 trillion (the closest index to tracking all of this is the Russell 3000 which covers 98% of this market cap). This means Tesla would take 0.22% of all investment in S&P 500 passive tracker funds.

Passive investment consists of passive ETFs, passive Index Mutual Funds and passive Index Institutional funds. It is amazing how difficult it is to find good estimates on how much equity is held by passive funds, and how much of this is tracking the S&P vs Russell vs MSCI vs Others etc. The most detailed information I can find is in The Economist - According to its estimates these passive funds together held 29.8% of the market cap of the entire US listed equity universe, or ~$10.7 trillion at current levels.

What % of this $10.7trn is tracking the S&P 500, I don’t know.
When Twitter was added to the S&P 500 one investor estimated 78 million shares would be bought by passive funds following S&P inclusion, or 10-11% of the free float. Twitter shares jump 5 percent as they win new follower: The S&P 500 If this is accurate it would mean ~$3.6trillion is held directly by S&P passive funds and ~15.5-16 million Tesla shares would be bought by passive S&P funds when Tesla is added to the index.

Another way to look at it is to look at ETF ownership of Tesla relative to S&P companies as a proxy for the broader passive investment market. Looking at some high profile S&P companies – these are the % of outstanding shares held by ETFs: Apple 6.2%, Netflix 6.2%, Google 5.0%, Amazon 5.2%, Nvidia 7.0%, GM 6.2%, Twitter 8.5%. This compares to Tesla at 3.2% currently. I would guess the variation between ETF ownership % in these various S&P companies is driven by inclusion in thematic or sector specific ETFs. Maybe it would make sense that Tesla would land somewhere between GM and Nvidia once it is in the S&P 500, or more than double the current ETF ownership. If this trend in ETF inclusion is a good proxy for Index institutional and Mutual Funds, then passive ownership in Tesla could double upon S&P 500 inclusion.

Overall I’d guess around 15-20 million additional Tesla shares will be bought by passive funds when Tesla is added to the S&P 500. If 20-25 million Tesla shares are already owned by passive Russell, Nasdaq or MSCI funds, then 35-45 million Tesla shares could be out of circulation due to passive fund ownership.

However, this is not the full picture…

Even within the Active Investor universe, fund performance is generally benchmarked to an equity index to track the fund’s performance relative to the market.

When an investor is benchmarked to an index, every variation between their own stock positions and the overall index is an active investment decision. Often it is easiest to mostly hold the same shares as the index, but to overweight or underweight certain shares that you think will give you an edge vs passive investment. So when a new company is added to the S&P, over time funds benchmarked to the S&P will look at that company to decide how they should be positioned in that company relative to the market cap weighted index.

Most US equity investors have so far avoided looking at Tesla, partly because it is complicated and takes a lot of work, partly because they have immediately dismissed it based off the media and equity auto analyst narrative. However many will be forced to start looking at Tesla because if they are benchmarked to the S&P then not owning Tesla will become an active investment decision. Many of these new potential investors will look at research from the Equity Auto analysts and uncritically buy into Tesla is just another ICE Auto company narrative, however many will have experience investing in tech companies and will see the fallacy of allowing a group of analysts with narrow expertise valuing mature, conservative and anti-innovation ICE companies to value a rapidly growing innovation machine.

I can’t see a current estimate, but this article says that in 2016 $2.9 trillion was invested in S&P 500 passive funds while another $5.7 trillion was benchmarked to the S&P 500. S&P 500 evolves to reflect makeup of the economy - InvestmentNews So these active benchmarked investor’s capital is potentially twice as large as the passive investment capital.

So over time I’d expect S&P 500 membership to bring far more than just the 15-20 million direct forced passive fund Tesla share purchases. S&P 500 membership is a huge, huge catalyst for bringing new active shareholders on board and increasing the pool of active investment capital valuing or making gut feel investment decisions on Tesla stock.

The stockmarket is now run by computers, algorithms and passive managers

What will S&P 500 membership do for share volatility and beta?

It may be counterintuitive, but S&P 500 membership will actually increase volatility and increase beta. With more shares locked away by passive investors, it takes less to move the share price.

When the market is strong, passive funds will likely be buying which will tie Tesla stock price closer to the market direction (so increasing beta). But because Tesla is far harder to value than most companies, there is far less consensus on the correct valuation and a far broader range of valuation estimates relative to most stocks in the market. This means it takes less share purchases to move the stock price and beta will be higher than the market (so above 1) on days where there is no company specific news. Overall measured stock price beta will be lower than this because there is still going to be a lot more company specific news and catalysts (relative to most shares in the market) which can sometimes move Tesla in opposite directions to the market on days when this information is released.

Its also worth noting that S&P 500 membership provides yet another reinforcing feedback loop to stock price changes (in addition to the options delta hedging and short collateral calls I’ve discussed before). Because S&P 500 is market cap weighted, an increasing market cap (relative to the index) will mean S&P passive funds have to increase their shareholding in line with Tesla’s increased share of the index. This share buying will drive the share price higher which in turn drives more share buying to keep the market cap weighting. Much of this will be reflected automatically by the increased value of the existing shareholding, and the true effect of this feedback will depend on things such as stock issuance, share buybacks of other companies and rebalancing procedures etc.

What about debt and bond ratings?

I think @jbcarioca mentioned a few weeks ago how debt ratings are also very significant. This is not connected to S&P stock inclusion, but bond upgrades are indeed going to be additional key positive milestones for the company, particularly when it reaches investment grade. I don't think its common for equity funds to be tied to debt ratings or investment grade, but it is very common for debt funds to be tied to specific ratings by their mandates and this can drive a powerful technical which reduces cost of funding as a company gets upgraded.

At Moodys Tesla as a whole is rated at B3 but its bonds are rated one notch lower at Caa1 because the bonds are subordinated to bank debt. These bonds would require 7 upgrades to get investment grade (or 21 upgrades if you include negative, neutral and positive outlooks for each level as separate rating levels). S&P rates both Tesla and its bonds at B- positive. So the bonds are already one level higher than Moodys but still 6 notches from investment grade (or 17 levels including outlooks).

So it still looks a long way away from investment grade, but every upgrade can reduce Tesla's cost of debt and multi level upgrades can happen very quickly if Tesla delivers a step change in profitability and EBITDA.

In July total outstanding debt of large US companies was $10 trillion while total corporate debt (including small medium sized enterprises, family businesses, & other non listed companies) was $15.5 trillion. Of this ~2/3rd was Investment Grade. U.S. Corporate Debt Continues To Rise As Do Problem Leveraged Loans

So there is huge potential for Tesla to increase its debt as it increases its profits and increases its market cap. It can use this debt to fund accelerated capex, to fund acquisitions or to fund building its portfolio of solar and car lease assets. This is in contrast to most US companies that mostly issue debt to fund unproductive share buybacks, dividends or acquisitions rather than organic growth. So as Tesla increases its rating it will become more and more attractive to issue debt to accelerate capex and accelerate expansion and build out of a global renewable energy grid and electric car fleet.

Mod: original here. --ggr

 

[Fact Checking]

I love how people are already filling in the details of a car that we know literally nothing about, apart from the fact that it'll be designed in China (because Musk feels "China has some of the best art in the world") and be Cybertruck-level unconventional.

We can certainly talk about the prospect of Tesla designing a lower-end car without declaring it to be "Chinese made" and attributing all sorts of things to Musk's announcement the other day. AFAIK, Musk has only talked about such a vehicle once - on MKBHD, in fall of 2018. Briefly, when prompted, and said that they could "maybe" do it, saying it would take a minimum of 3 years, but did not commit to it.

Of course, lower-priced vehicles do have to come eventually.

While you are right that they didn't share any specifics, it doesn't take a great leap of faith to come to the obvious conclusion:

• "Model 2" is thought to be Tesla's lower end car, although I think they'll call it the "Model 4".
• China EV policies are shaping up to be like Norway was 10 years ago: exceedingly advantageous EV-friendly policies pushed by the government. Only that Norway's annual car sales are 0.15m, while China's is 25.7m, or 170 times larger (in units).
• The main problem with China is that due to the lower purchase power of Chinese citizens the average new car price is a fraction of that of western car ASPs.
• A smaller Tesla in the $20k-$30k price range (below 150,000¥ is ~$21k USD, 200,000¥ is ~$29k) would address a far larger portion of the Chinese market: with a "Tesla stretch" about a third of all Chinese car buyers could afford a Tesla Model 4, and in 5 years that might be 50% of the market or higher if China continues to increase in the purchase power of their citizens.
• The numbers: average Chinese worker income was around 90,000¥ in 2019, but there was an about 10% growth in recent years - so annual income might be above 200,000¥ for families by the time the Model 4 arrives. Most middle class people buy cars where the ASP is about equal to their annual family income - that's a big psychological barrier to cross. So an entry price for the Model 4 of 150,000¥ would be able to capture close to half of all Chinese consumers, in about 3 years from now.
  
• China is IMO the natural market to prototype the Model 4 in. They might even end up exporting it to Europe and to the U.S. - just like "Made in Japan" became a seal of quality, an "iPhone made in China" was accepted by consumers and a "Tesla made in China" will be accepted as well IMO.
• Elon wanted to signal it to China that Tesla is treating their China factory not as a carbon-copy, work-for-hire assembly factory location like most of the German carmakers are doing, but as a prime location that is a peer of Fremont and GF4, with R&D and original product development as well. This attracts talent and helps China's long term policy goals.
  
• Finally, this is exactly what the Chinese political leadership wanted to see happen when they invited Tesla to China: to create an Apple-alike phenomenon and to pull up their automotive sector. The "Tesla Effect", imported into China. Cleaner air, dominance in yet another industry and detaching themselves from crude oil suppliers are the icing on the cake.

So yes, I think Model 4 development will be done in China and for China, but the 3 years time frame Elon mentioned is probably true as well. You are also right that much of this is conjecture - but IMO it's pretty much the only conclusion one can arrive at.

Mod: Original article here. --ggr

 

[KarenRei]

1. Projections for energy storage growth by 2040 show that it's not going to be nearly as big of a market opportunity as EVs. 3TWh per year for storage, vs say 100KWh per vehicle per 50M vehicles (conservative) is 5TWh per year for EVs. Furthermore, energy storage are basically just batteries with some inverters and software, whereas EVs are much more than just batteries and sell for much more $/KWh than energy storage does.

I'm automatically highly skeptical of any energy-related forecast that shows only a shallow change over multi-decadal timecales. It reminds me of the terrible IEA wind and solar forecasts:

The world is expected to need nearly $50T in new energy investment by 2035. The notion that storage isn't going to be a major part of this is frankly nonsense.

The biggest problem is that most forecasters have repeatedly failed to understand how fast storage will drop in price - to the point that they even get it wrong in realtime. The notion that Tesla could do the Hornsdale battery for $387/kWh installed was laughed at by many supposed experts. Yet they did so, and without blowing their margins. Yet this is still very early in terms of large-scale storage products for Tesla. Tesla is at ~$100/kWh at the cell level, and 5 years from now I wouldn't be surprised to see them pushing ~$50/kWh cell cost (assuming mining tech cooperates in terms of supply pricing). Certainly well under $100/kWh at the very least. And meanwhile, manufacturing improvements will continue to push the total hardware cost down closer to the cell cost . This will radically alter the economic picture for mass storage projects.

Indeed, even the demand for mass storage is thrown off by the continual failure to predict how quickly wind and solar production would grow. They're now getting to the point where the cost of building new wind and solar projects is lower than the cost of just keeping existing coal plants running.

Storage, even with major price drops, won't entirely eliminate the need for backup power. But there's no shortage of plants that will be driven out of the baseload market that can transition to a peaking / load-following / backup role... so long as they're given sufficient time to ramp. And in terms of rapid-response peaking, nothing competes with battery storage - even today.

Additionally, once you start getting grid-scale storage costs low enough, you're no longer just looking at just a market for rapid-response peaking (and voltage/frequency maintenance on remote lines); you're now starting to make overnight battery storage practical in increasingly large markets.

Mod: Original post here. --ggr