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

[Cherry Wine]

Oh, you don't have to tell me about the "more is better" mentality, I learned that at an early age. Four years old to be exact.

I used to go next door to my 4 year old friends house for graham crackers. His mom would set up a card table in the garage so we could eat them with a small glass of milk. Why in the garage? Because Timmy would break his in half and tell me he "had more" than I did. But not for long - I would break mine into 4 sections and say "not any more". It didn't take long before Timmy's cracker was just a pulverized pile of powder that ended up on the garage floor as he always ended in an excited tantrum pulverizing them with his fists as he declared himself the winner while spreading the powder left and right off the table saying he had "millions" of crackers. But I was a smart kid who stopped before the powder stage so I could still eat mine. I could never figure out why Timmy seemed so intent on making powder and why his mom seemed unconcerned about this odd behavior. I just liked the crackers and milk.

So is Timmy the stand-in for shortsellers in this story?

 

[MC3OZ]

What happens between Aug 21 and Aug 28 is going to be interesting.

I wonder if they could just suspend trading for a week... rationale being, it gives everyone time to sort out the paperwork..

I used to work at a stock exchange... i remember individual stocks being suspended from trading for a period of time, but I can't remember an instance of it happening for this reason.

 

[Runarbt]

From whom and where is Person A getting his extra 4 shares from? He doesn't own a real share, he owns a synthetic share that's basically an IOU from B. The only person holding a real TSLA share on 8/28 is person C

Person A get the 4 shares from the short who borrowed vis share.

 

[StealthP3D]

Respectfully, I don't think you're correct, and by being so certain, you are misleading a bunch of shareholders.

And disrupting the smooth flow of the forum.

Again.

 

[StealthP3D]

My question is will our investment accounts look like they got killed during that period when the price drops one fifth but the 4 new shares haven’t come in yet?

No!

 

[StealthP3D]

Lots of Canadians here.

Wonder what the tax impact of this split will be to shares held in TFSA’s and in cash accounts?

would they be taxable as dividends in the cash ( non registered ) accounts right away ?

the ideal setup would be if they are taxed as dividends but only upon disposal of ( sale ) of the shares.

You are dreaming. It's just a stock split.

 

[StealthP3D]

Good analysis! Coincidentally, TSLA was up 6.46% at the end of the After-hrs session.

So, short covering until Aug 31, when retail buying pressure increases. That ol' S&P Committee better catch this train before it leaves the station!

EDIT: As of July 31, 2020 TSLA Short Interest (reported by NASDAQ) is at 6.41% that can't be a conincidence!

Cheers!

Why can't that be a coincidence?

 

[StealthP3D]

So is Timmy the stand-in for shortsellers in this story?

No. Timmy wasn't particularly predictable and he was actually pretty intelligent.

 

[StealthP3D]

I wonder if they could just suspend trading for a week... rationale being, it gives everyone time to sort out the paperwork..

I used to work at a stock exchange... i remember individual stocks being suspended from trading for a period of time, but I can't remember an instance of it happening for this reason.

Stock splits went off without a hitch back when they actually had to do paperwork. Now it's all done by software.

 

[saniflash]

Instant 1: person A has lent out 1 share and person B has borrowed 1 share
Magic happens in the brokers books
Instant 2: person A has lent out 5 share and person B has borrowed 5 shares. (at 1/5 price the per share)

I don’t think anyone ever said person A was not owed their 4 shares-just that they don’t have to be physical shares just like the original one was not a physical share. It was 1 ‘virtual’ share before and 5 after

That doesn’t mean there won’t be some covering by shorts (there will be some) and the price will likely rise as most do when a split is announced.

Not that I'm an expert, but I agree with this analysis. The short will be short 5 shares instead of one. Value-wise (considering Value at Risk), there won't be any difference if the share price falls accordingly (e.g. from $1,500 to $300). However, I believe the demand elasticity for TSLA stock to be lower than 1 (Understanding Price Elasticity of Demand) on the upside, i.e., it is rather unelastic, i.e. if the price increases by 1%, demand does not decrease by 1%, but rather decreases by a infinitesimally smaller number which most likely fluctuates wildly all the time based on macros etc. Ironically, after a certain threshold, the delta hedging kicking in results in the paradoxical situation that the higher the price, the more demand for TSLA there is, similar to a Giffen good (Giffen good - Wikipedia).

I assume demand elasticity for TSLA to the upside after the split will continue to be lower than 1, i.e., as more shares are demanded, the price is driven up. With the psychological effects of a split increasing demand (before and after the split) -- this effect seems to have been confirmed by multiple case studies --, it is reasonable to assume that the price will continue go up.

Based on this, my assumption is that shorts, if they want to cover (or are forced to), will need to cover at a higher price, such price driven higher by the increased demand for shares. Thus, the Value at Risk will increase for each short, but not based on some kungfu split skillz on the side of Tesla, but based on the price per share that has been bid higher in the meanwhile.

Once the price increase effected by the split blows over, TSLA might very well fall to a price below the split-adjusted pre-split price, in this example, below $300. In this case, the Value at Risk will be lower and thus it will be cheaper for shorts to cover.

So the question is really, do they have the staying power for a temporarily increased price due to the split, and do they continue to bet that the price will go down, even factoring in the catalyst events of S&P inclusion, battery day, etc.? I.e., will there be some forced or intended covering due to the higher volatility to the upside? Not so sure about that.

What about the people who buy the stock on Aug 24, 25, 26, 27, or 28?

The way I understand it is that, if you hold shares with a broker (e.g. IB or Etrade), the shares are not held in your name but in the broker's name. So it shouldn't really matter since the broker will take care of the share count accounting on the backend, and I _think_ you should get the additional shares even if you trade in the middle of the dates. They will trade at the market-determined price; however, since every share then comes with the "right to 4 additional shares", there shouldn't be a free lunch on either side.

In that way, I assume it's similar to a cash dividend, where the shares trade with the right to the cash dividend during the ex-date and the payment date, and once the dividend has been paid out, the value of a share (!= price) falls by the dividend paid.

Note that the last two paragraphs are pure speculation.

 

[Quesder]

I panicked. Sold all my shares @ 557 (cost price was around $200, accumulated since 2012). I trust that Tesla will be reinforced by the recession (being far better position for the future than its competitor) but I fear that the financial market can't correctly assess how much trouble the Western countries will fare in a lock down situation. I intend to fully repurchase my share as soon as I think the governments get a good grasp on the situation. Sorry for the anecdote but had to share my (bearish) opinion as I did comment bullishly in the past. And good luck to all my friends here who bought my shares at a good price. Peace.

Hi man, just curious, did you buy back your shares at a price lower than $557 and saved some tax payment?

 

[Mokuzai]

Based on this, my assumption is that shorts, if they want to cover (or are forced to), will need to cover at a higher price, such price driven higher by the increased demand for shares.

So you’re saying shorts will face a TSLA demand problem?

 

[PeterJA]

My first and last post on the question of "Will this stock split 'dividend' force short covering?":

1) Someone asked for an example of such forced covering happening before. The Yes team failed to provide any.

2) Someone posted an FAQ from a corporation doing a 2:1 split using the same "dividend" language. Nothing was said about shorts being forced to cover.

3) Someone stated that Overstock tried a complicated strategy to force short covering -- a strategy that would be unnecessary if a simple stock split with "dividend" language would do it. The Yes team failed to address this statement.

4) Rob Mauer just did a video on the stock split, which he had started researching before today. As usual, his analysis seems quite well-researched and thorough, but said nothing about shorts being forced to cover.

Those four observations settle the debate for me.

 

[StealthP3D]

Those four observations settle the debate for me.

Good analysis - but you forgot #5:

Elon didn't offer short shorts in men's sizes.

 

[Runarbt]

No, the stock is still trading at pre-split price until 8/28. 8/31 is the 1/5th post split price.
If you sell your stock after record day, you forfeit the right to the additional 4 shares. There's no free lunch on Wall Street.




No, the stock is still trading at pre-split price until 8/28. 8/31 is the 1/5th post split price.

Ehrm.. NO.

Noone will pay 1400-1500 a stock, if they only get 1/5th the value. People are not that stupid.

After 21.aug, the stock does not give you 4 extra dividend stock, it will trade at 1/5th. RIGHT AWAY.

 

[tlo]

Please stop asking stupid questions. What do you not understand about "nothing will happen".

It's not a dumb question. The question is due to the wording from Tesla: "Each stockholder of record on August 21, 2020 will receive a dividend of four additional shares of common stock for each then-held share, to be distributed after close of trading on August 28, 2020."

Hence, the question is regarding what happens to shares traded from Aug 24-28. Thus far, I haven't seen a very good answer to this other than insisting that nothing happens. If that is the case, why is Aug 21 even mentioned? Why not just have Aug 28 be both the "stockholder of record" date as well as the distribution date?

 

[WarpedOne]

If shorts are not forced to cover and are able to handle their situation throug pure book-keeping how is that not naked shorting? They did not receive nor lend those additional short they now owe.

If that is the case, why is Aug 21 even mentioned?

I have a snagging feeling SPD inclusion will announced on evening of 21 and trading will be suspended the next weak for all the heads to have some time to reason and cool.

 

[Papafox]

@Papafox Always love to hear your thoughts on everything TSLA. Everybody is saying that because we can trade fractional shares already on most trading platforms that this won’t make any difference.…

I’d love to hear your thoughts on the Chinese investment market. I think that Tesla is borderline more popular in China than it is here; could this be a partial play towards that?

also I read that maybe this could affect the shorts during that one week training. thoughts?

I apologize if this is not in the right forum feel free to move my comments to another forum.

Why will the stock price increase with the split?
If the ability to trade fractional shares prevented a stock split from elevating the stock price, then how does one explain the 14% increase in Apple since the split was announced? Sure, maybe the company fundamentally became 14% more valuable during those weeks, but I doubt it.

Apple's trading since the July 30 announcement of a stock split to be effective Aug 31.

Rather, I see two issues at work:
1) Since not all brokerage houses and not all countries allow fractional ownership of shares, small retail investors do indeed benefit from the change. That effect is even more noticeable with options trading. A near the money leap that used to cost $6K when TSLA was trading in the 300s now costs around $50K. Not many people can afford this type of bet. A $10K bet becomes a whole lot more affordable, however.

In his podcast today, Rob Maurer said that if nobody bought stock and everybody bought options, the stock would trade at zero. Nope. Market makers would still need to buy and sell the stock to hedge their sold options, and so the price would be determined by the market as these market makers competed against one another to buy and sell shares to do their delta-hedging.

2) The second effect could be called "Voodoo" or any word suggesting magical powers. Someone who is unwilling to buy 1 share of Tesla at $1500 might be willing to buy 5 shares at $300 apiece, simply because the former looked "overpriced", but in reality they would own the same exact portion of the company at the same exact price.

The mere expectation that a stock will likely rise in value during the split process can by itself cause the stock price to increase. All that buying of TSLA after hours today had to do with only one thing: the expectation that the stock price likely will rise over the next couple weeks because it's received this Voodoo kiss. Sometimes expectations generate results. I look at technical analysis this way. I'd agree with many advocates of technical trading that the rules have evolved after careful study of repeating patterns that are linked to human psychology. That said, I think an even bigger component of Technical analysis is expectations. So many traders are using it that if a perfect cup and handle has formed, chances are we're going to see a breakout, particularly if traders are tweeting about the perfect cup and handle. The breakout might actually be caused by many traders with itchy trigger fingers waiting for that breakout, and when a mole hill appears they bid it into a mountain. Sometimes it works this way.

Regarding the Chinese Market
I agree with you that we no doubt have plenty of Chinese investing in Tesla. I get this feeling when there's a story that is popular in China, not in the U.S., and TSLA starts running higher all the same. That said, I don't know about the availability of fractional trading in China, and if it is not a thing, a split would certainly help TSLA become more affordable to a larger segment.

Effect on shorts
I agree with @ggr and others that forcing a short seller to come up with shares by a certain date to pay to the original owner of the borrowed shares is going to bid up the price of TSLA. It's all about the demand for buying vs. the supply of sellers. When the number of buyers increases, the stock price has to go up to bring the supply of sellers back into equilibrium. Keep in mind when looking at the AAPL chart above that AAPL has few shorts. TSLA gets an extra kick because of the shorts.

 

[RobStark]

Meanwhile in California

California 2020 Q2 Sales.

Tesla sales fell from 19,393 in Q2 2019 to 9,833 in Q2 2020 but overall market share is up .4% for 1st half of 2020 vs first half of 2019.

You don't need to be Nostradamus to predict Tesla will overtake Nissan after 2020 is complete.

Brand..................CA 2020 YTD.................................... % Share

1. Toyota........130,344 ...........,..........................16.6
2. Honda........89,969.........................................11.4
3. Ford...........73,946..........................................9.4
4. Chevrolet...61,399..........................................7.8
5. Nissan........41,937..........................................5.3
6. Tesla.........33,083......................................4.2
7. Subaru......31,564............................................4.0
8. Merc Benz..28,813..........................................3.7
   
9. KIA.............28,299............................................3.6
10. BMW..........26,493............................................3.4
11. Hyundai......26,491...........................................3.4
12. Jeep............25,664..........................................3.3
    
13. Lexus..........23,279..........................................3.0
14. RAM.............21,230.........................................2.7
15. Mazda..........18,487.........................................2.4
16. Volkswagen..16,831........................................2.1
17. GMC.............16,428..........................................2.1
    
18. Audi..............15,838.........................................2.0
    
19. Dodge..........13,590.........................................1.7
20. Acura ...........7,615.........................................1.0
    
21. Land Rover ..7,251.........................................0.9
    
22. Chrysler........6,384..........................................0.8
23. Infiniti............5,913..........................................0.8
24. Porsche........5,723...........................................0.7
    
25. Volvo.............5,150..........................................0.7
    
26. Cadillac.........4,754..........................................0.6
27. Mitsubishi.....4,068..........................................0.5
28. Lincoln..........3,047..........................................0.4
29. Buick.............2,973..........................................0.4
30. Mini...............2,293.........................................0.3
    
31. Jaguar...........2,038.........................................0.3
32. Alfa Romeo....1,783........................................0.2
33. Genesis.........1,130.........................................0.1
    
34. FIAT................241...........................................0

Total.........................278,537 ..................................100

https://www.cncda.org/wp-content/uploads/Cal-Covering-2Q-20.pdf

 

[Artful Dodger]

I think this boils down to... because the order is date of record (21st), dividend date (after close on the 28th), ex date (open on the 31st), what this effectively means is that Tesla keeps track of who's owed dividend on the date of record, and any sales after that, brokers have to keep track of who gets the resulting dividend, but anyone who's holding shares at the dividend issuing should get the dividend.

Note that it is also exactly 13 trading days from this announcement by Tesla until the enforced delivery date for those shares (Aug 28, 2020). It is no accident that these specific dates were chosen for the 5:1 split.

There are implications for the 'Failed-to-Deliver' (FTD) reports which legally must be filed by Brokers within 13 days, in order to comply with SEC reporting requirements. There will be no dodging this bullet, and its coming right soon.

BTW, I calculate that roughly 2.2M shares will need to be purchased by shortzes just to maintain their current short positions: 6.41% (SI as of 31 Jul) / 5 = 1.2% * 186 M outstanding TSLA shares, or about 2.23 M shares.

That is forced buying, all due by Aug 28 and yes, the Cops are watching... Well done Hiro, well done.

Cheers!