Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[Lessmog]

Please forgive my ignorance. How do deaf people drive?

VERY carefully around blind corners?

 

[KarenRei]

Indeed.

Most of the damage inflicted upon my home infrastructure by the lightning strike on my neighbor's house was consisted of blown above-ground ethernet ports where the UTP funneled that energy in to them. Second most common were some cheaper electronics where the power cord channeled the energy in to an unsuspecting power supply.

One ethernet switch (the concentration point for lots of that UTP) literally got smoked... I could smell it. Another lost about 2/3rds the ports.

When I was a teenager, I knew a guy who had a lightning strike affect their house. His computer was on a surge protector, but his stereo wasn't, and he had an audio cable connecting the two so that he could play music on his stereo. The strike managed to fry his computer via a surge on the audio connector, yet the stereo itself remained fine. Well, mostly. On rare occasions, if the sound got too loud, the stereo would shut off But otherwise, no symptoms, despite the fact that a computer-frying surge flowed through it.

Surges from the grid itself are the real permanent threat to electronics in an EMP attack.

It's nice that the fuses in the Model 3 are almost all solid-state. Virtually instant response to surges, and reset without requiring service. AFAIK, the only ones that aren't are the pack's pyro fuse, and the wire bonds that connect the individual cells to the controller.

 

[Antares Nebula]

Honestly, I'm actually rather annoyed. I've optimized myself for only a slow climb - sold off my 18 Apr $300s and $320s that were devalued by the deliveries report and bought 17 May calls, then used them to cover sold 12 Apr calls ($300 and $310). This is going to cost me; I'm probably going to have to raise the strike on the $300 calls as a precaution. Will probably pay for it by rolling a 17 May to a higher strike as well. Would have been far better off sticking with my 18 Apr calls... but almost nobody expected the sort of strong price support we've been getting, and now this... Come on, couldn't this news have broken a couple weeks from now?

At least I'll get to raise the strike on a sold put spread as well. But I keep put spreads far OTM, as they're harder for me to cover.

You have some crazy options strategies. One thing I've learned trading TSLA is that it is mostly unpredictable in the short term. I, in fact, warned folks here Wed night to not necessarily assume that the pps is going to crash. That is what everybody and their mother was expecting, but it is never that easy to make money in the market. We fell from 380 to 250 already on the weak quarter warning. Weak hands were already shaken out. And so I thought that there was a decent chance that support at 250-260 would hold. Of course, one never knows. But I was not going to sell, buy puts or sell calls. Nada. I wanted to wait and see what happened. There was also the SEC news. And also you never know with Tesla and Musk. Some crazy partnership announcement or something else could have came out. Remember that weekend when the SEC dropped the stock 40 points, and then Musk settled on Saturday, and we were back up 40 points. With Tesla, you never know. So for me, I only deal with shares and six month to one and two year calls/leaps. But I don't know, some folks are pros and can trade in and out on shorter time frames profitably. Not me, I've tried it and suck at it.

 

[Fact Checking]

but almost nobody expected the sort of strong price support we've been getting, and now this... Come on, couldn't this news have broken a couple weeks from now?

BTW., I'm ... 60% sure the FCA news leaked and provided the price support at 260-270. It's just too big a news not to leak, and the secret was held by entities who'd normally not deal with Tesla secrets overly carefully: EU officials and various FCA executives and their staff.

Remember the recent tweets showing Elon in a good mood, to not panic, tweeting about "stay positive" and green frogs? That mood persisted after the Q1 delivery report as well and it reminded me of his "mood" tweets before the Q3 results, about red turning into black, etc.

Also, remember the "Elon Tusk" jokes he made around elephants? Maybe the "elephant in the room" were FCA's CO₂ emissions? He started making those jokes right around the time the FCA deal was closed, apparently.

I'm really curious how the deal is structured and whether those 'hundreds of millions of euros' are upfront payments or total payments over several years? Since the fines FCA was facing was in the billions of euros range I'd expect Tesla to insist on a front payment as well, and a steady trickle of payments contingent on how much of a benefit Tesla is to FCA. I.e. the FCA deal could be a long term support to European margins - a powerful replacement for the ZEV credits on the U.S. side.

The FCA deal also potentially resolves another mystery: why was Tesla setting European Model 3 prices about ~$2k-$3k lower than 25% margins would suggest? Maybe they already included the FCA deal benefit in their margin calculations?

(I'm also a bit embarrassed that I missed the pooling property of the EU fines and the large fines FCA was facing - it was all public news and in hindsight the trade opportunity to Tesla was obvious.)

 

[KarenRei]

BTW., I'm ... 60% sure the FCA news leaked and provided the price support at 260-270. It's just too big a news not to leak.

Remember the various tweets Elon showed in a good mood, to not panic, tweeting about "stay positive" and green frogs? That reminded me of his "mood" tweets at around the Q3 results, about red turning into black, etc.

I'm really curious how the deal is structured and whether those 'hundreds of millions of euros' are upfront payments or total payments over several years? Since the fines FCA was facing was in the billions of euros range I'd expect Tesla to insist on a front payment as well, and a steady trickle of payments contingent on how much of a benefit Tesla is to FCA.

Could potentially be the reason. Will be interesting to see whether the price support keeps going. That said, let's not forget that we were seeing suspiciously strong price support even before the deliveries report. Nearly took us into Sparta. Had all the characteristics of a big institutional for the couple days before the report, e.g. a solid, daily-increasing "floor" that prices only wobbled a few dollars around. This support wasn't a one-or-two day thing. Could have been someone preparing for the Fiat announcement further in advance, of course.

As for how the money is structured, given Tesla's focus on shoring up its cash position, my inclination would be to suspect that they'd negotiate for less money sooner rather than more money later.

 

[Fact Checking]

That said, let's not forget that we were seeing suspiciously strong price support even before the deliveries report. Nearly took us into Sparta

Well, if the FCA deal is big, really big, then it could simply have been systematic dip-buying on the SEC pressure, which continued after the Q1 negative surprise as well?

Note that the FCA deal and one or two 'piggy bank' effects could bring Q1 profits over ~$265m, for S&P 500 inclusion. That would create sustained buying pressure too. But we need to see more details about the FCA deal and how much of that cash is recognized in Q1 to be able to estimate S&P 500 inclusion probabilities. Too many discretionary wildcards...

If Elon really wanted to screw the shorts they could perhaps bring Q1 GAAP profits above $265m and trigger mandatory passive index fund buying in the 5-10 million shares range, which is on the level of the Tencent or the Saudi PIF investment rally.

Also, even with Q1 results TSLA fair value is robustly above $400 based on pretty much every financial multiple. If a big fish decided to buy dips up to $350 then $290 or $260 are both good deals.

 

[KarenRei]

Well, if the FCA deal is big, really big, then it could simply have been systematic dip-buying on the SEC pressure, which continued after the Q1 negative surprise as well?

Note that the FCA deal and one or two 'piggy bank' effects could bring Q1 profits over ~$265m, for S&P 500 inclusion. That would create sustained buying pressure too. But we need to see more details about the FCA deal and how much of that cash is recognized in Q1 to be able to estimate S&P 500 inclusion probabilities. Too many discretionary wildcards...

If Elon really wanted to screw the shorts they could perhaps bring Q1 GAAP profits above $265m and trigger mandatory passive index fund buying in the 5-10 million shares range, which is on the level of the Tencent or the Saudi PIF investment rally.

Also, even with Q1 results TSLA fair value is robustly above $400 based on pretty much every financial multiple. If a big fish decided to buy dips up to $350 then $290 or $260 are both good deals.

Would the money from the deal be immediately recognized under GAAP?

And yeah, the impact of a totally unexpected S&P inclusion on the shorts would be utterly hilarious. Highly unlikely, but still..

 

[Fact Checking]

If you put in a bid over the ask, you get matched with the person offering the ask.

Important boundary condition: if you put in a bid equal to or over the ask, you get matched with the person offering the ask.

Posting limit orders at the ask is actually pretty common in illiquid instruments, or if you have no access to the full book where you can view the liquidity. It will also protect you against algos baiting via large orders which get moved away from your desired price based on retail order flow sniffing.

Also, posting limit orders 'into the spread' (between the bid and ask) is highly recommended for far-out-of-the-money options for TSLA, you almost always can get a good price improvement over what is visible in the order book, especially when there's a strong price movement ongoing that day against those options.

 

[Causalien]

The tamed Model Y performance. The sucky P&D report... It was all a bear trap.

 

[Fact Checking]

Would the money from the deal be immediately recognized under GAAP?

If there was an upfront payment from FCA for Tesla to enter the pool and commit themselves to the pool for a few years then easily so: it's a contractual obligation entered, a right traded, for immediate money and future money. Tesla cannot enter into a similar agreement with other manufacturers anymore - so Tesla performed and FCA benefited.

Any immediate money gets recognized as 100% margin and GAAP income.

Tesla could also have negotiated for larger payments more spread out. It all depends on the negotiated construct: are the hundreds of millions of euros upfront or spread out? Since Elon is a very good negotiator I'd expect both, and the payments will go up as Tesla reduces FCA's fines.

I.e. it could be a permanent per unit income in Europe for every Tesla sold...

But right now we don't know, it could be anything on a large scale of possibilities.

 

[Causalien]

Someone correct me if I'm wrong, but options don't trade in extended hours, except for options on SPY, and some other big index ETFs. And again, I think only for 15 more minutes after market close.

Re stocks, almost all brokers allow you to trade the full after hours, but only few allow the full premarket hours (I think interactive brokers is one), most start at 7am eastern.

Also some brokers (like TDameritrade) allow you to trade some big index ETFs, like SPY, 24 hours -- but I don't think that goes through an exchange, it's within TDameritrade exclusively. They are also considering extending this 24 hour period to some other big volume blue chip stocks, like Apple.

With HSBC you can basically trade the whole world, but you need to have a good relationship with them. I am guessing being a private banking client of any major bank should open up doors to their brokerage that allows you to do the same.

Same with IB maybe. Oh wait, ya, I managed to buy some Danish stock... Comission was waaay too much though so. In a sense, it was tradable, but the cost makes any trade almost a guaranteed loss.

 

[Johann Koeber]

RE Issueing new stock via subscription rights; this is how it (usually) works in Germany

The subscription right is nothing other than a right of the existing shareholders to subscribe to the new shares at the issue price. The subscription rights have their own value because they entitle the shareholders to subscribe to new shares at an issue price that is generally lower than the current share price of the company. In principle, a subscription right corresponds to a call option on the new shares. Since the subscription right allows the subscription of shares below the current share price, the subscription right has an intrinsic value.

The subscription rights are booked into the securities account of the existing shareholders if a capital increase is carried out with subscription rights of the existing shareholders. The investor can then either exercise or sell the subscription rights.

By issuing the subscription rights, the value of the existing shares is reduced and they are traded "ex subscription right". The subscription right is to some extent separated from the shares and booked to the shareholders' securities account as a separate item. The investor can then either exercise or sell the subscription rights. So one (old) stock is split into a (new) stock plus the right.

How much is such a subscription right worth?

The value of a subscription right results from the price of the old shares, the issue price of the new shares and the subscription ratio, i.e. the ratio between old and new shares.

The value of a subscription right is calculated according to the following formula:

Subscription right = (old share price - issue price of new shares) / (subscription ratio+1)

Example: TSLA at 275, new shares offered at 250, ratio 50:1
The shareholders can acquire a new share for every 50 shares they own.

Value of the subscription right = (275 - 250)/(50 + 1) = 0.49.

The subscription right issue reduces the theoretical value of a share by this amount. The share price therefore usually falls by this amount on the day of the rights issue, but other effects can of course also affect the price on the same day, so that the price can also fall less strongly or more strongly. While the value of the share is reduced by the value of the subscription right, the shareholder receives his subscription rights booked into the securities account.

The shareholder usually has two options for using these subscription rights:

They can exercise their subscription rights and purchase new shares at the issue price. In this way, the shareholder prevents his share in the company from being diluted.

If someone owns a number of shares not divisible by 50, she can either buy or sell rights to make the number divisible by 50.

If the shareholder does not wish to acquire new shares, he can often sell the subscription right via the stock exchange to another investor willing to buy. The value of a subscription right was calculated above. Like the value of shares, however, subscription rights are also subject to fluctuations in supply and demand.
If an investor does not choose either of the two options, the broker usually sells the subscription rights at the end of the subscription period. This is because the subscription rights lose any value after the subscription period.

 

[Fact Checking]

Here’s a link bypassing the FT paywall

Fiat Chrysler pools fleet with Tesla to avoid EU emissions fines - Phoneweek

And here's key figures from the FT article from 4 days ago:

EU emissions regulations set to knock carmaker profits by €7.4bn — UBS

'Europe’s largest carmakers face a €7.4bn hit to profits from the costs of meeting the EU’s CO2 regulations, UBS warned on Wednesday, as it cautioned the implications of the bloc’s emissions rules were being underestimated. In order to meet European targets of 95 grammes CO2 per kilometre by 2021, carmakers will have to reduce emissions by around a fifth in just two years, the report said.'

'“All European carmakers are still well above where they need to be in 2021,” wrote analyst Patrick Hummel. Complying with regulations will knock earnings before interest by around €7.4bn across the industry, with Peugeot expected to take the biggest hit, at around 25 per cent of earnings per share, because of its high EU focus, followed by Fiat Chrysler at 20 per cent and Volkswagen at 13 per cent.'

[...]

'Fiat Chrysler was the only company UBS assumed would be fined, forecasting that it will not have enough electrified cars in its mix by 2021. The chief executive of FCA recently told the Financial Times the company may rescind on its pledge to eradicate diesel from its fleet in order to meet the targets, as well as potentially stopping the sale of some of its most polluting vehicles.'​

It's unclear to me how large the fines would be, but note that FCA benefits from the deal with Tesla beyond the avoidance of EU fines: by lowering their EU emissions they can more freely phase in or out various vehicle models, avoiding much of the profit hit that UBS has estimated.

If the ~$8b hit to profits estimated by UBS is accurate, and FCA's share is 20% of profit reduction, that means an annual cost of $2b. That's worth quite a bit - hopefully Tesla ran the numbers like UBS did, before entering into the deal on February 25.

 

[uselesslogin]

So, FCA is the furthest behind so they have to suck up their pride and ask Tesla for help. They then discover that Tesla actually wants to do what their mission statement says and will help them with their own electric vehicles. Will the furthest behind end up surviving while market leaders wait until it is too late?

 

[Antares Nebula]

BTW., I'm ... 60% sure the FCA news leaked and provided the price support at 260-270. It's just too big a news not to leak, and the secret was held by entities who'd normally not deal with Tesla secrets overly carefully: EU officials and various FCA executives and their staff.

Remember the recent tweets showing Elon in a good mood, to not panic, tweeting about "stay positive" and green frogs? That mood persisted after the Q1 delivery report as well and it reminded me of his "mood" tweets before the Q3 results, about red turning into black, etc.

Also, remember the "Elon Tusk" jokes he made around elephants? Maybe the "elephant in the room" were FCA's CO₂ emissions? He started making those jokes right around the time the FCA deal was closed, apparently.

I'm really curious how the deal is structured and whether those 'hundreds of millions of euros' are upfront payments or total payments over several years? Since the fines FCA was facing was in the billions of euros range I'd expect Tesla to insist on a front payment as well, and a steady trickle of payments contingent on how much of a benefit Tesla is to FCA. I.e. the FCA deal could be a long term support to European margins - a powerful replacement for the ZEV credits on the U.S. side.

The FCA deal also potentially resolves another mystery: why was Tesla setting European Model 3 prices about ~$2k-$3k lower than 25% margins would suggest? Maybe they already included the FCA deal benefit in their margin calculations?

(I'm also a bit embarrassed that I missed the pooling property of the EU fines and the large fines FCA was facing - it was all public news and in hindsight the trade opportunity to Tesla was obvious.)

Damn @Fact Checking !! When you gonna finally construct that Elon twitter decoder?

 

[Antares Nebula]

Also, posting limit orders 'into the spread' (between the bid and ask) is highly recommended for far-out-of-the-money options for TSLA, you almost always can get a good price improvement over what is visible in the order book, especially when there's a strong price movement ongoing that day against those options.

Yes! This is absolutely true. You never put in the bid or ask on options. I find that you gotta go a little bit more than 50% between bid and ask, but not much -- 60% or so will do it. And if it's really moving fast in one direction or another, then a limit order very close to the bid or ask will also work. Just keeping changing the limit order in increments until it fills, you've got nothing to lose.

 

[Antares Nebula]

And here's key figures from the FT article from 4 days ago:

EU emissions regulations set to knock carmaker profits by €7.4bn — UBS

'Europe’s largest carmakers face a €7.4bn hit to profits from the costs of meeting the EU’s CO2 regulations, UBS warned on Wednesday, as it cautioned the implications of the bloc’s emissions rules were being underestimated. In order to meet European targets of 95 grammes CO2 per kilometre by 2021, carmakers will have to reduce emissions by around a fifth in just two years, the report said.'

'“All European carmakers are still well above where they need to be in 2021,” wrote analyst Patrick Hummel. Complying with regulations will knock earnings before interest by around €7.4bn across the industry, with Peugeot expected to take the biggest hit, at around 25 per cent of earnings per share, because of its high EU focus, followed by Fiat Chrysler at 20 per cent and Volkswagen at 13 per cent.'

[...]

'Fiat Chrysler was the only company UBS assumed would be fined, forecasting that it will not have enough electrified cars in its mix by 2021. The chief executive of FCA recently told the Financial Times the company may rescind on its pledge to eradicate diesel from its fleet in order to meet the targets, as well as potentially stopping the sale of some of its most polluting vehicles.'​

It's unclear to me how large the fines would be, but note that FCA benefits from the deal with Tesla beyond the avoidance of EU fines: by lowering their EU emissions they can more freely phase in or out various vehicle models, avoiding much of the profit hit that UBS has estimated.

If the ~$8b hit to profits estimated by UBS is accurate, and FCA's share is 20% of profit reduction, that means an annual cost of $2b. That's worth quite a bit - hopefully Tesla ran the numbers like UBS did, before entering into the deal on February 25.

But the question is also what are the scope and limits of such deals. Is it completely free market? Is there a certain max per car? How does the math work on the emissions. Do you just continue to add the other company's cars to your fleet until your average emissions is below the limit, and then negotiate a payment per car? Also I don't know how many cars Fiat sells in EU, but can Tesla's relatively small sales numbers really help Fiat (obviously it does)? etc....

 

[Antares Nebula]

Don't want to jump to any conclusions, but the below link seems to suggest that this contract is just for 2019, and so that the hundreds of millions is per (this) year. That would be excellent if true (and the stock will very likely spike on Monday), but I'm going to be cautious for now. Also seems to suggest contracts are set up on a yearly basis or maybe longer if the parties agree??

Patrick McGee on Twitter

 

[mrdoubleb]

I think we may want to be careful until we know what "hundreds of millions" means exactly and what the payment terms and schedule is.

However this is a positive surprise even this board hasn't seen coming so next week should be interesting for the SP.

 

[Antares Nebula]

I think we may want to be careful until we know what "hundreds of millions" means exactly and what the payment terms and schedule is.

However this is a positive surprise even this board hasn't seen coming so next week should be interesting for the SP.

And that's why I was serious when I said earlier:

People, I say next week that we go over to the shorts frat house and paint it red and TP it. Give Messrs. Spiegel and Chanos a taste of their own medicine. Who's with me?!!

I got the red paint. Who's bringing the toilet paper?