Short-Term TSLA Price Movements - 2016

[Causalien]

Yes. These are called "variable interest entities". They are consolidated on the books as if they are 100% owned, and then the portion of profit or loss allocated to the other investors is subtracted later (on the appropriate line, "losses allocated to others" or something like that). It's very similar to the "minority interest" accounting treatment you'd use for a subsidiary which is 80% owned by SCTY, and 20% by random other people.

The VIEs are consolidated even though SolarCity has less than majority interest in them because SolarCity has substantive control over them and the other investors are essentially passive. There's a bunch of rules about this, some of which are old and some of which date from the 2008 crisis.

Prior to 2008, VIEs -- which are typically created by banks -- were typically "off the books" of banks. But when the VIEs went bust, the passive investors demanded that the banks make them whole, and (sometimes after being sued) the banks usually did. A consequence of this is that these types of structures are now deemed to belong on the books of the controlling entity.

Unfortunately, "minority interest" accounting is notoriously opaque, and always has been. It's not clear from the way it's done exactly *what* rights the minority interest has to the future income and cash flows of the business and *what* obligations they have for future losses, and it's especially unclear for SolarCity, which has hundreds of these things.

The minority-interest accounting convention works OK when it's an inconsequential part of the balance sheet, but when it dominates the balance sheet, it makes it unreadable, and requires additional reporting to explain what's *really* going on.

From my experience of the 2008 crisis. Assuming I can treat SCTY as a bank. I'd write off both minority interest as well as both loss/gain attributed to others. Then I'd take minority interest and reduce SCTY capital by 20% as reserve for lawsuit.

Bear sterns downfall, if I rember correctly, started with bailing out two of their off balance sheet hedge fund. SCTY's off balance sheet entity differs from these banks because they are smaller but more numerous. It'd be interesting to know if they concentrated the bigger commercial projects into 1~2 entities or hundreds of smaller ines.
But I think the biggest question is, whether ir not there's any common weakness to all the small entities. i.e. if they are all house owners, then housing market is their achilles heel and they might as well just be one entity.

One thing I do not understand. Back then, off balance sheet is a trick to increase income/asset. With the new rule, the balance has to be shown on the books, why would they need to do that? Or is this a practice that started before 2008, and just gets carried through cause it is too late to change?

 

[neroden]

From my experience of the 2008 crisis. Assuming I can treat SCTY as a bank. I'd write off both minority interest as well as both loss/gain attributed to others. Then I'd take minority interest and reduce SCTY capital by 20% as reserve for lawsuit.

Bear sterns downfall, if I rember correctly, started with bailing out two of their off balance sheet hedge fund. SCTY's off balance sheet entity differs from these banks because they are smaller but more numerous.

Yes, but I must clarify for other readers that the entities are in fact *on* the balance sheet (even though they are what we used to call off-balance-sheet entities). That's what we were discussing earlier.

It'd be interesting to know if they concentrated the bigger commercial projects into 1~2 entities or hundreds of smaller ines.
But I think the biggest question is, whether ir not there's any common weakness to all the small entities. i.e. if they are all house owners, then housing market is their achilles heel and they might as well just be one entity.

I haven't found the residential/commercial/utiltity-scale split anywhere in SCTY's documents, yet.

 

[Sancho]

Good news: my Model X is ready to be picked up.

But, I got the notice this afternoon, with a message they would like me to pick it up in the next two days (obviously to book this quarter). They are cutting things too close. A good number of these end-of-quarter deliveries are not going to close this quarter. Factor that into your calculations of Q2 deliveries.

 

[TMSE]

Good news: my Model X is ready to be picked up.

But, I got the notice this afternoon, with a message they would like me to pick it up in the next two days (obviously to book this quarter). They are cutting things too close. A good number of these end-of-quarter deliveries are not going to close this quarter. Factor that into your calculations of Q2 deliveries.

Sancho,
Can you share details on the configuration, confirmation dates vin range of your MX?

 

[GoTslaGo]

You may be onto something: About CtW Investment Group

Or maybe they want to be on the board....

 

[vgrinshpun]

So, a doji day today.

And it appears that SCTY and TSLA short sellers ramped up their efforts since the SolarCity offer announcement and are currently running out of shares to borrow, with short interest in TSLA up 16% in June, close to it's high in March:

"Bets against both Tesla Motors Inc and SolarCity Corp shares have risen after Elon Musk announced a proposed merger last week, but any further bets will be small as both stocks have few borrowable shares, said Ihor Dusaniwsky, head of research at financial analytics firm S3 Partners on Tuesday.

Short interest in Tesla has hit $7.3 billion, up 16 percent in June and now close to its high of $7.4 billion in March, Dusaniwsky said.

Investors who short Tesla and SolarCity, betting that shares will fall, raised financial concerns about uniting two money-losing companies which both regularly raise cash to support their expansion.

Dusaniwsky said borrowing rates on existing shorts are starting to increase sharply with most shorts now being charged a 4 percent to 9 percent fee.

"There is not much stock left to borrow and what is left is going out the door at premium levels with borrow rates of 45 percent to 75 percent fee today," he said. "There is virtually no stock left to borrow in SCTY which is reflected in the 100-percent-plus borrow cost of any scraps that have been traded today."

Overall, Dusaniwsky said SolarCity short sellers "may not be digging into their wallets as deep as Tesla short sellers, but are still paying (collectively) over $1 million a day to keep their shorts on their books."

Now is a good time to call the bluff, eh? And also a good time for largest institutional shareholders, like Fidelity, T. Rowe Price, Vanguard, Morgan Stanley, etc, to increase their positions...

May be that was one of the reasons for EM to call shorting "unwise"...

 

[CALGARYARSENAL]

Now is a good time to call the bluff, eh? And also a good time for largest institutional shareholders, like Fidelity, T. Rowe Price, Vanguard, Morgan Stanley, etc, to increase their positions...

May be that was one of the reasons for EM to call shorting "unwise"...[/QUOTE]

I think Elon is about to show us why they call him a genius. Get ready.........

 

[vgrinshpun]

Something got to give:

 

[FredTMC]

Good news: my Model X is ready to be picked up.

But, I got the notice this afternoon, with a message they would like me to pick it up in the next two days (obviously to book this quarter). They are cutting things too close. A good number of these end-of-quarter deliveries are not going to close this quarter. Factor that into your calculations of Q2 deliveries.

I don't mean to be rude, but... Tesla always delivers tons of U.S. cars at the end of quarter. This is how it works given transit times to overseas markets. Last cars coming out of the factory at end of quarter go to U.S,

I'm surprised you didn't get more notice (like a few days ago). Probably not your DSs fault.

Finally, last quarter there were over 1000 MXs not delivered by end of quarter mainly due to shortages of a few key parts

This quarter I highly doubt that will be the case.

 

[Yggdrasill]

The first few Model X are being delivered in Norway today. Looks like at least seven of them.

I don't think any more are right around the corner, so it looks like they've batched them so that most of the ones produced are delivered this quarter.

 

[Papafox]

Futures for DOW and NASDAQ looking slightly positive for Wednesday. That's a good environment for TSLA because when the broader indexes are galloping up, traders sometime switch money to stocks that more closely follow the pack. When the NASDAQ is slightly up and there's anticipation of good things ahead for TSLA, that's when we tend to do best. Traders moving money into TSLA for the 2Q delivery number release might be a sufficient catalyst to get nervous shorts covering.

 

[FredTMC]

Futures for DOW and NASDAQ looking slightly positive for Wednesday. That's a good environment for TSLA because when the broader indexes are galloping up, traders sometime switch money to stocks that more closely follow the pack. When the NASDAQ is slightly up and there's anticipation of good things ahead for TSLA, that's when we tend to do best. Traders moving money into TSLA for the 2Q delivery number release might be a sufficient catalyst to get nervous shorts covering.

Yes, and apparently short interest is near all time high and borrowing cost to sell short is very high again. Perfect setup for some squeeze on Q2 delivery beat

 

[TSLADream]

I think we have a good chance of a beat this quarter. It's time to load call options with Sept expiration as there are many drivers in the nest few weeks. Q2 delivery, Giga factory opening and Q2 earnings release. if the delivery numbers look good, they may break even on earnings this quarter as they are selling mostly higher priced model Xs.

 

[Papafox]

Yes, and apparently short interest is near all time high and borrowing cost to sell short is very high again. Perfect setup for some squeeze on Q2 delivery beat

Fred, one of the strange happenings recently is that as TSLA short interest has been increasing, you may simultaneously see the smarter shorts leaving. Il-informed shorts must be replacing them as shares come available. I base my "smart shorts will leave by Friday" theory on the likelihood of a 2Q delivery beat, word that Kass has covered and even Pablo has gone neutral on TSLA, and I do not see the type of manipulations of the stock that I saw up until a week or so ago. A bumper crop of rookie and uber-bear shorts may be just the perfect ingredient for panic buying sometime soon.

 

[GoTslaGo]

Has there also been less short/bear postings here recently as well? Maybe the smart shorts frequent TMC and thus know when to get out...

I guess perfectlogic is the exception, but he's talking scty.

 

[Johan]

Fred, one of the strange happenings recently is that as TSLA short interest has been increasing, you may simultaneously see the smarter shorts leaving. Il-informed shorts must be replacing them as shares come available. I base my "smart shorts will leave by Friday" theory on the likelihood of a 2Q delivery beat, word that Kass has covered and even Pablo has gone neutral on TSLA, and I do not see the type of manipulations of the stock that I saw up until a week or so ago. A bumper crop of rookie and uber-bear shorts may be just the perfect ingredient for panic buying sometime soon.

I think you're right. I like to think in this model: TSLA has been highly shorted for a long time. Assuming Tesla keep being successful this won't continue for ever, at some time the short interest will fall towards a more normal level. There are smart shorts and dumb shorts. The smart shorts are able to make money shorting TSLA simply thanks to the simple dynamic of them closing out their short positions at a lower price point than where the position was opened. When we get to the point where short interest starts dropping for real (the point of "peak shorting") it's going to be the smart shorts who cover first. The dumb shorts will get burned in the game of musical chairs (short squeeze) that will ensue to one degree or another. This shift will necessarily start occurring during a relative low, never near an ATH.

Now, what possible signs are there that the current time (mid 2016) might turn out to finally be the time of peak short interest (we'll only know looking back)? Well, prominent shorts are saying publicly that they are out, seemingly in a more definitive way than before. Not as in "I'm out for now, looking for a new entry" but as in "I'm done shorting TSLA".

And then of course you have the actual fundamental events taking place: Gigafactory coming online, Model X seemingly "out of the woods" and (still an assumption) Model 3 succeeding (the writing is on the wall). And possibly the holy grail: organic growth/becoming cash flow positive (possibly delayed by the SCTY merger, or if you're an optmist accelerated from SCTY cash flow).

Lastly there's the SCTY buy out offer. It is a fundamentally very aggressive, confident move by Elon. Yes, we can debate the timing, pricing and the fundamentals of SCTY but no one can deny that from a TSLA standpoint the move just exudes confidence. A Swedish article had the following headline: "Tesla offers to by Solarcity - Elon Musk is consolidating his empire". I would be scared if I were a smart short. If I were a dumb short my confirmation bias would cloud my judgement, as always.

 

[Papafox]

Johan, I think the reason we see a new breed of less-savy shorts is because the media is perpetuating myths about Tesla. You have people who think that Tesla MUST be overpriced at $200 if it is still losing money on every car it sells, 4 years into its modern history. They watch intelligent people like Cory Johnson of Bloomberg perpetuating that "losing money on every car they sell" myth, even though commentators such as Johnson well know that Tesla vehicles are being produced with attractive gross margins. In the end, the gullible are led to financially reckless positions and ultimately a fleecing because they serve a purpose in a fight to disrupt a disruptive company, Tesla.

 

[Johan]

Johan, I think the reason we see a new breed of less-savy shorts is because the media is perpetuating myths about Tesla. You have people who think that Tesla MUST be overpriced at $200 if it is still losing money on every car it sells, 4 years into its modern history. They watch intelligent people like Cory Johnson of Bloomberg perpetuating that "losing money on every car they sell" myth, even though commentators such as Johnson well know that Tesla vehicles are being produced with attractive gross margins. In the end, the gullible are led to financially reckless positions and ultimately a fleecing because they serve a greater purpose in a fight to stop Tesla.

Agree, it's very much so. This is the reason why I choose to stay the course as a long term investor nowadays rather than trying to trade, I add some on obvious dips when my personal finances allow me, but that's about it. I have friends who jump in and out of TSLA and they ask me: "is TSLA going up or down?". I usually answer "Yes" to that. And then I say that if you believe in the company long term and know the high short interest then it really is a no-brainer to just stay the course.

I have tried to diversify my portfolio somewhat, but it seems I'll have little success here since my second largest holding (SCTY) will probably become TSLA anyway.

As long as the pundits keep perpetuating the negative myths there will be a steady influx of new shorts, like flies on bull crap. Now if you, like me, still nurture that dream of the Mother of all short squeezes, one can only hope that what is going to take place now is dumb shorts taking the place of smart shorts, rather than short interest as a whole just gradually dropping. I would love to experience a squeeze situation with panicking shorts running for the crowded exits rather than a gradual unwinding of the short interest in an orderly fashion.

Like we discussed above; seemingly smart shorts starting to unwind their positions could be interpreted as an early sign of the above scenario playing out. Sort of like some dark clouds starting to appear as the first warning sign of a major storm inbound.

 

[brantse]

The first few Model X are being delivered in Norway today. Looks like at least seven of them.

I don't think any more are right around the corner, so it looks like they've batched them so that most of the ones produced are delivered this quarter.

I know it was mentioned a week or so ago that Tesla was actually air freighting these to ensure they made it by the end of June. This was supposedly done to avoid excess customer taxes that took effect in July.

 

[Yggdrasill]

I know it was mentioned a week or so ago that Tesla was actually air freighting these to ensure they made it by the end of June. This was supposedly done to avoid excess customer taxes that took effect in July.

I think that was only the Danish ones. They recieved approximately 18 Model X on June 15th. The Norwegian ones arrived by boat on thursday. (There are no changes in the taxes here in Norway at least until 2018.)