
Elon Musk vs. Short sellers - lazydon
https://teslamotorsclub.com/tmc/threads/elon-musk-vs-short-sellers.118431/
======
DiabloD3
I'm surprised this guy didn't bring up the famous story of Overstock.com
around 2005-2006, where at one point there were more shorts in existence than
actual shares. The CEO of the company sued a bunch of large investment banks
(who all heavily shorted his company).

For those that don't understand, that is called "naked shorting", and that
constitutes fraud by NASDAQ and the major investment banks.

In the end, all of the investment banks that he sued, except for two (Goldman
Sachs and Merrill Lynch) settled. The banks that did settle? Ended up getting
their junk kicked in when their shorting scheme failed to work, and they lost
a lot of money because the suit against them signaled there was no truth to
their claims and the Overstock.com price went back up.

I have no reason to believe that is not what is happening to Tesla currently.
Given that this example and the example given on the forum post are very
similar, and both turned out appropriately, maybe Elon Musk should consider
suing the largest firms shorting his company.

~~~
koliber
Shorting a stock involves first borrowing it from someone, and them
immediately selling it. Everyone who is short stock does not own it!

Naked shorting is selling stock you have not even borrowed to create a short
position. The scenario you describe did not require naked shorting in order to
exist.

To keep things simple, imagine a corporation that has 100 outstanding shares
on the public market. Bob owns them all. Mark wants to short them, so he
borrows all 100 from Bob and sells them to Mary.

At this point, Bob is "owed" stock from Mark, and Mark owes Bob stock. Mary
owns all 100 shares of stock. No one shorted anything naked.

Now say that Craig wants to short this company as well. He borrows 100 shares
from Mary, and sells them to Sally.

At this point, in addition to the above positions of Bob and Mark, Craig is
short 100 shares of stock, which he owes to Mary. Sally owns all 100 shares of
stock.

Looking from the perspective of any one person, they are not short more shares
than there exist in the company. No one shorted anything naked. And yet, on
the macro level, there are 200 short positions, and one person owns the 100
shares of the company.

No one shorted anything naked. And yet, the situation you described arose.

Should the need arise for Craig and Mark to return the stock they borrowed
(someone calls in their shorts), they will probably need to pay a lot to
convince the people who own the actual stock to sell to them, especially if
the owners are aware of the macro situation.

~~~
dhimes
So are you disputing the claim that there was in fact naked shorting of
Overstock? Or just that having more short positions than stocks existing
requires naked shorting?

~~~
jessaustin
Obviously, it's a general point about the nature of short selling. However,
since thread parent made such a big deal out of it, which is analogous to
breathlessly informing us that "banks don't keep all deposits in their
vaults!", it does somewhat undercut thread parent's entire comment.

Even though lots of people like Tesla, it's not an injustice for other people
(or the same people, I guess?) to short it.

~~~
dhimes
It wasn't at all obvious to me that koliber knew that naked shorting was, in
fact, suspected (at least initially) in the Overstock situation. Documents
were sealed, but partially leaked, which is why I asked. And while I enjoyed
reading koliber's very clear explanation, I am confused as to whether or not
it applies specifically to Overstock, which is what the thread parent was
addressing.

~~~
koliber
I am not aware of the Overstock case in detail. I was making a point that just
because the short position is larger than outstanding stock does not mean the
naked shorting was taking place. It is entirely possible, but we can no make
that conclusion based on the fact that there were more shorts than longs.

~~~
dhimes
Thanks for following up here.

------
anonu
Lengthy article. But good review of how we got here.

Shorting is as natural as going long... It's an important characteristic of
any market. But the articles point is that the shorts might be clustered in
the hands of some influential hedge fund guys... Who basically wage an
information campaign to crush the stock... Whether they're right or wrong.

In that sense, I disagree with the articles premise that Musk should ignore
the short sellers. Fight fire with fire... Or a flame thrower. Musk's company
is a super speculative one at this stage. So a lot of it runs on gut feelings
and perspective. Not actual fundamentals.

~~~
ricw
It’s actually not that speculative. Model x and a have 25% profit margins,
unheard of in an industry that typically has mid single digit margins. It’s
something only Porsche is able to achieve. They’ve announced that they Yer
aiming for similar margins for the model 3. In short, the core business is
extremely profitable.

What is “speculative” is the aggressive expansion tesla is engaging in. It’s
why they need cash and what is making them a target.

~~~
thomaskcr
> Model x and a have 25% profit margins

Part of the short thesis is that they are hiding warranty repairs in "Services
and Other" \- underreserving for warranty would make those margins
artificially high. They reserve $3000/car - considering that just the 3 people
I know with Model S's have all had a drive unit replaced, one had a battery
replaced, between them I have lost count of the number of door handle
replacements - I think there is something to that.

Even if their per car margins are high, they still have a negative operating
margin. If you can't make money selling cars, does it really matter what your
automotive gross margin is? I think the focus on those margins is a major
misdirect away from the fact that the capital they've been raising has been
used for operational costs as well as capex - which implies that they aren't
"reinvesting profits in growth" but dependent on cash infusions for survival.
And it seems to have worked based on the TMC and Reddit TeslaMotors threads -
people think that the gross margins on the cars means they are making money if
you ignore their investing in the future, which just isn't true.

Aside: My favorite bull response while sharing this information so far was
"source" on my claim they had negative operating profit from someone who was
"heavily invested in the stock" \-- it's those stripey pages at the beginning
of those reports you should be reading as an investor. I try to follow the
bull reasoning as much as possible but it's really hard when a lot of it is
just based on faith in Elon - I don't really know how to model that.

~~~
thomaskcr
Here's an example customer receipt from Model 3 service posted today - the
fact that the "Services and Other" costs have been rising combined with the
differing pay types on customer receipts is what really gives me pause

[https://twitter.com/kkandyrocks/status/1014812194297573376](https://twitter.com/kkandyrocks/status/1014812194297573376)
"Pay type: Warranty"

[https://twitter.com/kkandyrocks/status/1017651046376706048](https://twitter.com/kkandyrocks/status/1017651046376706048)
"Pay Type: Goodwill - Service"

I think that a blown pyro fuse within the first couple months of ownership
should be a warranty cost.

------
ckastner
The article makes an interesting case for the influence of short sellers on
Tesla's stock and calls out some specific hedge fund managers.

However, even if these "bad actors" (as the article calls them) do indeed
influence the stock price: missing goals by a year, dwindling cash reserves,
etc. are valid reasons for concern, but the article only mentions them for
context, without addressing them.

~~~
forkerenok
I think the author closer to the end makes it clear that the short sellers
ride on real problems with the company.

And he doesn't label all short sellers as "bad actors", but only those that
engage in opinion manipulations at scale.

------
21
Overall short sellers are a good thing. They have skin in the game.

They are like the people searching for software vulnerabilities motivated by
big bounties.

~~~
Robotbeat
Very good of short sellers have good ethics. But what if they don’t? What if
they start INTRODUCING bugs to collect the bounties?

~~~
21
Wouldn't that mean that you have bad security anyway, since you were easy to
infiltrate (it cost less than the bounty)?

~~~
freerobby
This analogy only works if you view the economics through the singular, zero-
sum lens of Tesla. Imagine you have billions of dollars in big oil, or
traditional auto manufacturing. If you can take a few percent of your net
worth to establish a short position on Tesla, and in so doing create market
weariness that could help bring down the company, then that would be a good
investment for you overall even if you are unable to recover any of it
(because your external holdings stand to benefit or be harmed accordingly).
The fact that you stand to benefit directly on the short if you succeed is
just icing on the cake.

~~~
21
This works both ways.

Your short position depresses prices below "value", which means that for
example an eco-friendly sovereign fund could move in and buy the shorted stock
with a discount, if they believe that it's unfairly targeted.

~~~
jessaustin
Why would the hypothesized petroleum/automotive tycoon care about that? She
doesn't care if a sovereign fund prospers. She just wants to hurt Tesla.

~~~
21
Because in this case there is no hurt towards Tesla. She literally transfers
money from her pocket to the sovereign fund pocket with zero hurt on Tesla.

~~~
jessaustin
Well yes that's how stocks work: the firm is not involved directly when they
change hands. (Although you have it backwards here: the sovereign fund is
buying so the money leaves its "pocket".) However, a firm like Tesla (and
really, most corporations are like this) is still dependent on capital
markets. They might want to issue stock in future, and they definitely need a
steady stream of short- and medium-term loans to keep operating. A lowered
stock price makes that more difficult. Short selling is still perfectly legal,
but it does seem a bit sketchier if the tycoon is selling short not to make
money from that investment but to protect other investments...

~~~
21
No, I got it right.

Price was 50, tycoon shorts it down to 45, sovereign fund starts buying until
it's back to 50 (let's say they got average price 48), now price is back to
50, yet tycoon is short and if he wants to exit his buying will push price to
52.

So he literally allowed the sovereign fund to buy the shares cheaper, and he
paid the delta.

Of course, now price might go up or down, we don't know who ultimately wins.

~~~
jessaustin
The thread hypothesis is that the tycoon is selling short. Full stop. You
suggested that a sovereign fund might also buy long, which would entail the
fund paying money and receiving stock. Full stop. All of this feel-good
narrative about what happens next is merely imaginative supposition, unrelated
to the discussion.

~~~
21
I don't think you quite understand how financial markets work and how P/L
(profit and loss) is computed.

You should read about how the Hunt Brothers tried to do a thing like this to
silver (artificially depress it's price) and how they got burned really hard
because smart people saw through it and got on to the other side of the trade.

[https://en.wikipedia.org/wiki/Silver_Thursday](https://en.wikipedia.org/wiki/Silver_Thursday)

~~~
jessaustin
Oh good grief. The fact that some short-sellers, sometimes, lose money (just
like long-buyers!) has fuck-all to do with "how P/L (profit and loss) is
computed". As you've got it all figured out, by all means go long on Tesla.
Apparently it's free money...

'freerobby had a good point, somewhere up the thread. I regret taking part in
your inane and patronizing distraction from that.

~~~
21
If it were so easy to short your competition into the ground you would see
Coca Cola short Pepsi, IBM short Microsoft, Adidas short Nike and so on.

The fact that it doesn't happen should tell you that it's not such a clever
idea as it might naively seem. And I just gave one example of how such a
strategy could back-fire, by attracting long term investors who like to buy at
discounted prices.

~~~
freerobby
It's not "easy" (or common) because a lot of unusual things need to line up
for it to work. You need an established company with big pockets, a new
company that poses an existential threat but which also desperately needs
cash, and a credible enough narrative that you can push to the financial
markets, to get picked up by the business markets, and create a feedback loop.

The examples you gave don't fit the model. They are all profitable, they do
not constitute an existential threat as Tesla does to big oil, and the
relative differences in market cap is nowhere near as big between the parties.
It's hard to overstate the proportions here -- the entire $12B of short
interest in Tesla represents less than 2% of the Big Oil market cap. And
that's without touching Aerospace/foreign governments that might want to
starve SpaceX by way of Tesla.

------
fhood
Hell of an article, I think it is clear that Tesla _has_ had serious
production problems with the model 3, but, then again, Tesla has never met
their production goals on time, and only recently(ish) are we seeing shorts at
the magnitude.

------
calyth2018
I take exception to the part about how the crashes and the fires are trying to
stoke up some kind of self-fulfilling short sentiment.

The majority of the article is backed with references and evidence, but
there's no escaping of the reality that a lane-keeping cruise control being
marketed as autopilot has and will take lives. That's not just some negative
sentiments being drummed up, it's reality and human beings that are being
harmed or killed.

And all of that is very much on Tesla.

------
addicted
The best reason to short Tesla would be that it has the same Market Cap as GM
and a larger one than Ford.

Or they have a history of missing production and profit targets.

Or that you believe that the existing car industry can learn to make electric
cars faster than Tesla can learn to scale profitably and consistently.

Or that you believe that Tesla will be unable to maintain its premium pricing
once it has luxury competitors who take EVs seriously, because their actual QC
is pretty poor.

~~~
freerobby
I think the last two are good reasons to short Tesla. I wouldn't touch those
bets with a ten foot pole, but they are entirely rational depending on what
you believe.

If you don't believe those things, then Tesla having a greater market cap than
GM or Ford makes sense, because Tesla's future cashflows would be greater than
GM's or Ford's.

Production deadlines aren't very compelling to me except to the extent that
they starve a company of its operating budget. Heck, other car companies
routinely show off concept cars that aren't only late but in fact never ship.
It's not a big deal though, because those companies aren't betting the farm on
those cars, whereas Tesla has needed the Roadster, S, and 3 to be successful
to continue operating. That will be less the case on future cars though. So it
may have been a reason to short up until now, but not so moving forward.

------
tim333
I held Fairfax shares through much of the shorting incident the article
mentions and there are significant differences - Fairfax was a basically
profitable company and the shorts were arguing that their accounting was
fraudulent which turned out not to be.

In the case of Tesla the arguments are different - that it won't make much
money because model 3 production is delayed and Porsche and BMW are launching
competing products. Time will tell I guess. I haven't seen them do anything
outrageous like sending a private investigator to harass Prem Watsa's pastor.
Prem sued them for $8bn after that and quite rightly I think. While he lost,
it probably gave the shorts second thoughts about those kind of tactics
[https://www.vccircle.com/prem-watsa-led-fairfax-
loses-8-bn-l...](https://www.vccircle.com/prem-watsa-led-fairfax-loses-8-bn-
lawsuit-filed-against-us-hedge-fund-billionaire/)

------
spookybones
Is there any concrete evidence of this, and, if so, shouldn't this be big
news? I guess we would need leaked emails.

------
tw1010
TLDR?

~~~
faitswulff
The argument goes that bad actors are trying to tank TSLA by using massive
short sales as a signal to the rest of the market that Tesla is a bad
investment. That's not entirely a surprise. The surprise is that there's a
historical precedence for it, from the very same bad actor investors. This
pattern has played out with a company in the early 2000's called Fairfax, and
then with SolarCity a decade later. The same thing is happening to Tesla - the
graphs are striking. Tesla's response is to cut costs and become self-
sustaining, wean itself from dependency on investors, and break the short-
sellers' strategy.

~~~
ringshall
Why are they trying to tank it? Short term profit or some conspiracy theory?

~~~
Robotbeat
Because short sellers profit when the stock price goes down.

~~~
superhuzza
And they stand to lose money if the prices go up.

