Short-Term TSLA Price Movements - 2016

[MitchJi]

This bet is far from certain, especially given that the vote will most likely happen in Q4, after the Q3 ER... My bet is that there will be a wholesale market adjustment (up) of TSLA given a demonstrable ability to be profitable and ability to self finance huge expansion of the company's future revenues.

In other words the SP should increase whether there's a squeeze or not? That's a surprisingly bullish sentiment!

 

[neroden]

Well, so they did lower the offer. Go figure. I am surprised. I guess the Tesla board are tough negotiators, and the SolarCity board doesn't think they're gonna get a better offer. My own merger-arbitrage-based trades on SCTY had a high enough spread that I'm still ahead of where I would have been by buying TSLA, assuming the merger goes through.

I think the lesson I personally take from this (this is not investment advice) is that it's not worth trying to do merger arbitrage trades for a small spread; as I did this time, I will make sure I'm looking at a *big* spread, which hedges against any cuts in the offer. I'm not going to pick up the current 3% arbitrage difference. When it appeared to be in excess of 15%, and I picked it up, well, it got cut due to the reduction in the offer, but it still left me with a profit.

 

[neroden]

Or a little earlier.

I've have been focused on the the shares held by the institutions that directly loan shares, who have conflicting interests. They want to vote, to maximize their income from interest payments in the short term (collect the payments as long as possible before calling in their shares), and not antagonizing their short customers, a longer term interest. I think either way they wait unti near the deadline to call in their shares.

Another group are funds like pension funds that vote. I assume that they are collecting interest and will want to maximize that income? Again wait.

So the time available for shorts to cover is now until the voting date, minus a few days for share ownership to clear.

Others have said that the recalls will be staged, because the pension funds and big mutual funds don't want to screw up the market by recalling them all at once. So they'll be pulling their shares in steadily over time. Shorts have the same time period to unwind their short interest, but if they all wait until the end, they'll be in big trouble.

So I believe that the squeeze will probably be gradual. But I don't think it's possible to unwind all of the current short interest without putting upward pressure on the SP.

It also occurred to me that if I held a substantial number of shares that instead of trying to prevent them being loaned out it might be a better strategy to find the broker who would pay the most to loan my shares. If you can get 5-8% risk free profit from shorts borrowing your shares it seems kind of compelling to me.

It's not quite risk free. Nothing in investing is risk-free...

 

[MitchJi]

Lots of good info in this morning's conference call on the board approval of the merger. Did not have time to digest but these stood out:
- Customer acquisition of solar panels will focus on ownership (outright purchase or rolled over with house mortgage (shift the risk to banks!), lease will still be there just to be consistent with the car model, giving that option to the customer if they so choose).

Elon pointed out that mortgage financing is available for less money than it costs SCTY to obtain financing.

So you'd need to be an idiot to pay more to lease.

- On collaborating on an in-house inverter, Elon did not specifically answer but glad JB chimed in highlighting Tesla's core competency in power electronics, specifically their charging technology and built in inverters in the motors which they hope to leverage.

Elon basically said that they have already started working on that "on the come".

 

[vgrinshpun]

In other words the SP should increase whether there's a squeeze or not? That's a surprisingly bullish sentiment!

I think that these two things: the recall of the shares of both TSLA and SCTY going into the shareholders vote, and Tesla finally proving their ability to be non-GAAP profitable on the nominal run of just 100K units per year, combined with the realization that 150K of MX and MS and 500K of M3 is NOT the limit of the company's ambitions, will drive SP to the next level.

 

[neroden]

So, do I have this correct?

1). Stock swap ratio is locked. SCTY offer price will float based on TSLA price until the deal is completed in Q4

2). There's a 45 day "go shop" window till Sep 15th

3). Shareholder vote will happen sometime in Q4 (for SCTY and TSLA shareholders)

I dunno, but this *sounds* right. The end of the go-shop period is inconvenient because options expire on September 16th!!! I might expect some wild trading swings on the 16th.

The third quarter ends on September 30th. We don't know when the record date is going to be but the more conservative investors may recall their loaned shares in Q3 -- or indeed before the go-shop period ends -- to make sure that they are recalled before the record date (although they could set the record date to ANY time, even as far back as last January, with a deal closing in Q4 it doesn't seem very likely to be too early). Sjhould be a wild September. And *then* earnings come out.

 

[Johan]

The question becomes did the primarily offer an exchange ratio (TSLA shares per SCTY) or a $$$ offer (with TSLA shares as the "currency")?

Well I guess got its answer in no unclear terms today...

 

[woof]

Solar shingles aren't a new idea...so far they haven't faired too well in the market. Dow stopped their shingle program (Dow Chemical Sheds Its Solar Shingle Business) Hopefully TeslaCity has a better plan.

 

[MitchJi]

I think the lesson I personally take from this (this is not investment advice) is that it's not worth trying to do merger arbitrage trades for a small spread; as I did this time, I will make sure I'm looking at a *big* spread, which hedges against any cuts in the offer. I'm not going to pick up the current 3% arbitrage difference. When it appeared to be in excess of 15%, and I picked it up, well, it got cut due to the reduction in the offer, but it still left me with a profit.

You might also want to consider that this was not a "normal" merger acquisition situation. Between now and the finalization of the deal is normal. The reason that they announced it before it was a final offer is because of potential conflicts of interest. Maybe the lesson is that you should wait for the terms of the deal to be finalized, or its not actually arbitrage.

Others have said that the recalls will be staged, because the pension funds and big mutual funds don't want to screw up the market by recalling them all at once. So they'll be pulling their shares in steadily over time. Shorts have the same time period to unwind their short interest, but if they all wait until the end, they'll be in big trouble.

Which is what I said would happen. Which means that the impact will be spread out. The question is is it possible for all of the shorts to unwind their positions without pushing the SP up substantially?

It's not quite risk free. Nothing in investing is risk-free...

Please explain the risk in collecting the interest from loaning out your shares, through a broker.

 

[neroden]

Listening to the call this morning, the other thing they said that stuck out to me was that they had every intention of announcing the record date well in advance of voting.

Well, you have to *announce* the record date well in advance of voting -- it determines who's allowed to vote! The question is *when the record date will be*.

 

[racer26]

Well, you have to *announce* the record date well in advance of voting -- it determines who's allowed to vote! The question is *when the record date will be*.

The way it was said sure sounded to me as though they're more than aware of the situation. Probably their discussions with Fidelity told them they need to give Fidelity (and by extension everyone else) a chance to recall their shares.

 

[neroden]

You might also want to consider that this was not a "normal" merger acquisition situation. Between now and the finalization of the deal is normal. The reason that they announced it before it was a final offer is because of potential conflicts of interest. Maybe the lesson is that you should wait for the terms of the deal to be finalized, or its not actually arbitrage.

This isn't my first go-round with holding stock in companies doing mergers; even after a "final offer" is announced, I have seen the deal change. Not to mention the one where the merger of the operating subsidiaries got rejected by regulators *after* the holding companies had been merged; that was a trip and quite the learning experience (turned out profitable, but what a *mess*).

Please explain the risk in collecting the interest from loaning out your shares, through a broker.

Failure to return the shares -- default risk.

In a very severe short squeeze, short-sellers could be unable to buy their shares back and could default on their loans. The broker could also be unable to buy the shares back. In this case, Schwab will provide me with collateral equal to 102% of the share price the day *before* the default, but I could lose out on the upside after that. Unlikely scenario, but it's a real possibility, and it constitutes risk. SCTY and TSLA have both had significant, reportable failure-to-deliver (settlement failure) events as recently as February, and short interest is so high that some people are wondering how they're going to cover.

 

[Papafox]

Lots of good info in this morning's conference call on the board approval of the merger. Did not have time to digest but these stood out:
- Customer acquisition of solar panels will focus on ownership (outright purchase or rolled over with house mortgage (shift the risk to banks!), lease will still be there just to be consistent with the car model, giving that option to the customer if they so choose)
- On collaborating on an in-house inverter, Elon did not specifically answer but glad JB chimed in highlighting Tesla's core competency in power electronics, specifically their charging technology and built in inverters in the motors which they hope to leverage.

Slowing down the PPA activity at SCTY while shifting resources to owner or bank financed installations is the quickest way to turn SCTY into cash-flow positive and is something I have been advocating and I cheer. The broader market doesn't understand the impact of less PPA and more owner (or bank) financed activities, and Elon will need to explain at Q2 ER for the positives to be brought out. It's all about adjusting SCTY's up-front costs to be less than the PPA revenue stream. Selling solar from Tesla stores will also lower Tesla up-front (sales) expenses for solar.

 

[neroden]

563 x 0.110 = 61.93 rounded cruelly down to 61 shares of TSLA

Now that the .110 ratio is set, you might consider buying or selling enough shares to have an even multiple of 10 shares. Just saying. This is not investment advice.

 

[MitchJi]

The third quarter ends on September 30th. We don't know when the record date is going to be but the more conservative investors may recall their loaned shares in Q3 -- or indeed before the go-shop period ends -- to make sure that they are recalled before the record date (although they could set the record date to ANY time, even as far back as last January, with a deal closing in Q4 it doesn't seem very likely to be too early). Sjhould be a wild September. And *then* earnings come out.

We can count on the fact that unless Elon and the rest of the Tesla team are idiots that they will make sure that the big institutions that are in favor of this have sufficient time recall their shares. Probably they will do it in the way that's in the best interests of the institutions. If the institutions want it done as quickly as possible Tesla will probably accommodate that, or if they prefer a few weeks Tesla will probably accomplished that as well.

They said that the votes would happen shareholders meetings. When do you normally need to own your shares in order to vote at the shareholders meetings?

Will this be different?

 

[Ulmo]

Listening to the call, Elon is a great presenter, but that Solar City guy is awful. Erggggg ooof. This gives me some confidence that when Elon takes over Solar City, it will have at LEAST a better presenter, if not a better CEO.

 

[DrJohnM]

Solar shingles aren't a new idea...so far they haven't faired too well in the market. Dow stopped their shingle program (Dow Chemical Sheds Its Solar Shingle Business) Hopefully TeslaCity has a better plan.

An example of what I would consider as something more elegant than solar panels stuck onto a roof. German company Huf Haus. Also contains water heating (panels at the top of the roof)

 

[Johan]

Slowing down the PPA activity at SCTY while shifting resources to owner or bank financed installations is the quickest way to turn SCTY into cash-flow positive and is something I have been advocating and I cheer. The broader market doesn't understand the impact of less PPA and more owner (or bank) financed activities, and Elon will need to explain at Q2 ER for the positives to be brought out. It's all about adjusting SCTY's up-front costs to be less than the PPA revenue stream. Selling solar from Tesla stores will also lower Tesla up-front (sales) expenses for solar.

I think Elon, Wheeler and c/o have a very specifyplan on how to make SCTY in to a cash cow (cash-flow positive is what matters for further expansion, don't worry about actually profitable for now) very soon after being ingested through osmosis in to Tesla. And they have the freedom to do this as SCTY merges with TSLA, as opposed to when SCTY is an independent company with separate share holders to consider.

 

[Johan]

Listening to the call, Elon is a great presenter, but that Solar City guy is awful. Erggggg ooof. This gives me some confidence that when Elon takes over Solar City, it will have at LEAST a better presenter, if not a better CEO.

It's Elon's cousin Rive, dontcha know? He's smart but awful at public speaking (too "brainy"). Elon at least has found a way to talk to the public: being 100% honest yet "dumbing it down", playing on cultural trends and simplifying a lot.

 

[farzyness]

Q2 ER is going to be a bottom for the stock. Quarters moving forward will start to show Tesla's ability to generate cash like a madman thru Model S, X, and TE.

FYI in case anyone is interested, I have created a thread in the 'Future Cars' section of the form discussion my guess at the Tesla Bus concept.

Way too early guess at the Tesla Urban Transporter (Spacebus)