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

[Artful Dodger]

Also, how has this not been announced yet?

Elon Musk on Twitter

Do they call it Gigafactory Moon?

Wot, this ol' thing?

 

[Johan]

Seems like Tesla is on a real roll right now, with one good news item after the other lined up. Announcement of GF4 in Berlin - in a ballsy way in front of all the big German auto execs at the ceremony where Model 3 beat them for car of the year, now the formal permission from China to produce M3 domestically (this never in question, so in a way not really a big news item but an important milestone), then the pickup reveal Nov 21 st. I think we're looking at another nice gap up day today. I wouldn't want to be clinging on to a short position right now hoping for the stock to come down...

 

[CorneliusXX]

Do you have a link to this market so I may also stalk it?

You have to go to the hotel it's staying at.

 

[ReflexFunds]

Fantastic write-up, but I'd like to quibble with this part.

Convertible bonds have reduced yields, in exchange for the conversion option: above $250 or $360 (depending on which bond we are talking about) they can be converted into TSLA stock. I.e. above their conversion price they have 1:1 equity returns, dollar for dollar.

With that in mind it makes little sense to "hedge" anything IMHO: the unlimited equity upside, while having a 100% face value payment guarantee if the stock price is too low is the whole point of convertible bonds.

Some funds might use the convertibles to short against the box, or to take profits once the equity returns are satisfactory, but I believe the typical Tesla convertible bond holder is more like George Soros (who never shorts manufacturing companies) or Chamath Palihapitiya (Facebook angel investor and former derivatives trader and software developer - he has a colorful CV) - who in this CNBC interview explains why he invested in Tesla's convertible bonds.

Most of the convertible bonds are still below the conversion price - so I think only a minority of them are shorted against.

"Convertible bonds:
Most convertible bonds will be held by funds who will delta hedge their exposure to Tesla equity. "

This part may not be true. Tesla's convertible bonds are most attractive to two groups of market participants.

Group A: those investors who like the potential large upside of the stock but are worried about volatility. Social Capital falls into this group. They used to own a lot of the convertibles which were paid off in March. I wouldn't be surprised if majority of the $310 convertibles are owned by this type of investors. If some of them really worry about bankruptcy, the sensible thing to do is to buy CDS at peaceful time, which costs very little. Only GS and MS have been issuing TSLA CDS. I don't know what do they do after they issue the CDS. I guess the most profitable approach is to sell a lot of shares, give terrible price targets, drive down stock, then accumulate Calls, accumulate shares, in the end screw the CDS buyers, screw Put buyers, screw the Call sellers, make a lot of profit.

Group B: those swing traders who use the converts as a protection, they can short a lot of shares at a perfect time (the large amount of selling usually can push the stock lower), they can buy back at a lower price. Then repeat the operation later. TSLA used to have a strong resistance at $360, I think this is part of the reason ($359.87 convertible bonds). This group don't need to cover their short positions. They are overall neutral in case the stock runs sky high.

My point is the need to buy shares from converts holders is smaller than your estimates.

On the bright side, as stock goes up, existing investors and new investors will be buying shares and Calls. It's a positive feedback loop. This combined with short covering makes it difficult to stop the move.

In the capital markets generally most convertible bonds are sold to debt funds who delta hedge. I agree about the attractive features of Tesla converts and I think in Tesla's case a larger number of hedge funds and retail investors would hold the instruments for both their debt and call option features, however I do expect most are still held by delta hedged debt funds.

Convertible features are principally for the benefit of the company and not the investor. By bundling a call option with the bond, it allows the company to pay a reduced interest rate with less of a drag on profit.
For the debt investors, they mostly just want to buy a normal bond. They cannot deal with the volatility of the attached call option so they delta hedge. Just look at the 2022 converts. They fell c.40pts to 90pts this year before recovering to c.120pts. This volatility kills debt funds, debt returns are so low they can't risk one convert blowing up their portfolio.
When converts are issued they are effectively sold as a discounted bond with a yield to maturity similar to a normal bond (so despite the lower interest/coupon than a normal bond, this is compensated because they are bought below par) + a call option, with both of these adding up to the par price of the bond.
The call option component can be delta hedged by selling calls or shorting stock.

 

[MikeAtkinson]

Tesla Gigafactory Europe to be built in Germany, not UK, as Elon Musk blames Brexit uncertainty

However, speaking exclusively to Auto Express after making the announcement, Musk blamed Brexit uncertainty on why the UK wasn’t considered for the new site: “Brexit [uncertainty] made it too risky to put a Gigafactory in the UK,” Musk said.

Brexit might have something to do with Musk’s change of heart over the R&D centre, too. Back in 2014, he told Auto Express that he planned to build an R&D base in the UK. Those plans have since been shelved.

Also picked up by The Guardian Tesla cites Brexit as Germany chosen over UK for European plant

 

[Thekiwi]

Tesla Snags Permit to Start Mass Production in China

Bloomberg - Are you a robot?

Tesla Inc. won permission to start mass production at its China factory, clearing one of the last hurdles to begin selling locally built cars in the world’s largest electric-vehicle market.

The clearance was disclosed by China’s Ministry of Industry and Information Technology on its website Wednesday.

“Clearing one of the last hurdles”

So is it THE last hurdle? There is nothing else needed to start deliveries?

 

[LN1_Casey]

“Clearing one of the last hurdles”

So is it THE last hurdle? There is nothing else needed to start deliveries?

Well, there may be slight bumps as the shorts throw themselves bodily in front of the production line to try and stop cars from rolling off the line.

 

[Fact Checking]

The call option component can be delta hedged by selling calls or shorting stock.

Yes, but I'd argue that any such shorting would probably happen at a good clip above the conversion price - because otherwise they basically just lock in a loss for a substandard yield bond, plus whatever maintenance overhead from holding the short position years until maturity, right?

Writing calls indeed looks more attractive, to capture the premium from an equity that has elevated levels of implied volatility. But this would not increase the short interest: if the share price pops and the calls get exercised the bond holder simply sells the bonds and buys shares from the market - the value of the bonds will track the value of the underlying options, with a time value difference and a maturity mismatch. I.e. the bond holders are basically call option market makers writing calls, where their delta hedge are the bonds - with no other delta hedging required.

So I don't think the converts result in higher short interest. They at most might result in a higher call open interest - but without the delta hedging component.

 

[Dan Detweiler]

Seems like Tesla is on a real roll right now, with one good news item after the other lined up. Announcement of GF4 in Berlin - in a ballsy way in front of all the big German auto execs at the ceremony where Model 3 beat them for car of the year, now the formal permission from China to produce M3 domestically (this never in question, so in a way not really a big news item but an important milestone), then the pickup reveal Nov 21 st. I think we're looking at another nice gap up day today. I wouldn't want to be clinging on to a short position right now hoping for the stock to come down...
View attachment 476451

More like "treesiddy" I think!

Dan

 

[ReflexFunds]

great information.
i’m not following a couple things tho.

this i dont understand. just because a long (margin or cash-segged) loans their shares doesn’t mean that they’re “off the books”

i’m thinking in terms of the rights of the shareholder.
scenario 1 - proxy vote - i loan my long shred out as of record date, i dont get a vote. but i still ‘own’ the shares.

2- my shares are lent as a cash merger goes effective.
i still get the cash proceeds. because i own the shares in the end.

what am i missing?

sounds like fractional reserve banking, but not quite following when it comes to the shares.

i’m short 1 share of tesla. in us market i either must borrow shares from a long
- broker using excess shares it’s customers bought on margin
- customer who paid cash but participating in fully paid lending

or expect to be ‘bought in’ which essentially punts my short sale to another short seller or a long closing 1 long share.

in either scenario, the short share is offset by a long share

thanks!

Many people active with shorts in the financial markets don't seem to get this either. Ihor Dusaniwsky doesn't seem to understand the supply demand impact of shorting for example.

When a short seller opens a position they borrow a share from a long. This long did not close his economic exposure - he still wants to be long - but he doesn't have a share any more. Instead he has collateral from a short + a contract obligating the return of the share upon request + borrow fees + mirroring any dividends etc paid on the shares while it was borrowed. This contract is now a synthetic Tesla share. It has the exact same economic exposure as a Tesla share, but it cannot vote and when it receives dividends they are paid by the short and not by the company.

After borrowing this Tesla share, the short seller now sells the share to a new long. This new long actually owns a real Tesla share. They can vote and dividends are actually paid by Tesla and not just mirrored by a short.

So initially we had one Tesla investor long one share. Now we have two Tesla investors long one share and one synthetic share, together with one short seller short one synthetic share. Nothing else happened, no other market participants, but now we have two people long Tesla for just one real share. This demand for being long Tesla which was satisfied with the synthetic share detracted from demand for real shares - hence there has been effective dilution to the share count with regards to supply and demand (but not with regards to the earnings or dividend per share).

So while the short holds an open position, they have effectively added synthetic Tesla shares to the trading pool. This only disappears when a short actually close their position - there is no offset until they actually do this. So the total trading pool of shares with the exact same economic exposure as real Tesla shares is = Real Tesla shares outstanding + Current short interest.

 

[WarpedOne]

This only disappears when a short actually close their position -

In short: short can only disappear (close) if he finds a long that is willing to stop being long.

 

[RobStark]

Tesla Gigafactory Europe to be built in Germany, not UK, as Elon Musk blames Brexit uncertainty


Also picked up by The Guardian Tesla cites Brexit as Germany chosen over UK for European plant

Yeah, Brexit is the reason Musk put European Headquarters and assembly facility in The Netherlands.

 

[Right_Said_Fred]

Look at this TSLA chart.

Oh wait, it isn't. It's the AMZN chart between 2005 and 2009. The resemblance is uncanny. We all know what happened in the 10 years since then.



Here's the actual TSLA chart:

 

[Mike Smith]

Wow, already 1,740 Model 3s delivered in the Netherlands this month.

Elektrische auto verkoop statistieken

 

[jeewee3000]

In short: short can only disappear (close) if he finds a long that is willing to stop being long.

If you're talking generally yes: short positions can only diminish by longs no longer being long.

But a specific short can close his position by buying a share from another (new) short opening his short position. I guess this happens all the time.

 

[Right_Said_Fred]

Wow, already 1,740 Model 3s delivered in the Netherlands this month.

Elektrische auto verkoop statistieken

Outdated info Another 231 were delivered yesterday.

 

[Fact Checking]

Look at this TSLA chart.

View attachment 476454


Oh wait, it isn't. It's the AMZN chart between 2005 and 2009. The resemblance is uncanny. We all know what happened in the 10 years since then.



Here's the actual TSLA chart:

View attachment 476456

Wow, nice find!

For reference here's what happened to AMZN over the next 10 years:

​

The violet rectangle marks the first AMZN chart you posted.

 

[Tslynk67]

So, how come we're not at $360 in pre-market? Well, macros looking really bad this morning with Nasdaq futures currently down over 0.5%, all the other stocks on my watchist are in the red.

Seems there's more trade uncertainty ongoing plus the FED's Powell will be testifying in Congress later. Hong Kong still a worry. US inflation data due too.

I'd expect a difficult openning, with things easing later in the day.

Some official press report from Tesla on GF3 and 4 would be welcome to help things along.

 

[Cobbler]

Wow, nice find!

For reference here's what happened to AMZN over the next 10 years:

View attachment 476464
​

The violet rectangle marks the first AMZN chart you posted.

That chart screams:
NEVER SELL!! BUY & HOLD!!

 

[Fact Checking]

Some official press report from Tesla on GF3 and 4 would be welcome to help things along.

Yeah, if there's one thing I'd love to see Tesla integrate vertically: Tesla should release their own damn news and set the narrative, instead of outsourcing it to the shorts and their media allies!