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.
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.
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?
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.
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.
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.
Shorting is like - renting a $30,000 car from a rental company, and then selling it on the open market, because you expect that the price for that car will drop by more than $14,600 next year.
During the year, you have to pay $40/day, so you pay the rental company $14,600 to rent the car for the year. At the end of the year, you buy an identical car and return it to the rental company. This is possible because cars are fungible in this example.
If the car's market price goes down to $10,000, then $30,000 profit less $24,600 costs gives $5600 in revenue for the short.
If the car's market price goes down only to $20,000, then $30,000 profit less $34,600 costs gives $4600 in loss for the short.
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Naked shorting sounds like gaslighting - putting lots of ads in the paper that advertise this car for $5000, hoping to lower the price...and answering the phone that it's definitely available, even though someone already put a deposit down on it.
> 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.
In your scenario there are only 100 shares available! If Craig and Mark get margin called, how are Sally and Bob each going to end up with 100 shares?
The price will rise until Bob or Sally is willing to sell their shares, meaning they don't end up with shares; they end up with cash.
There exists a price for which Sally or Bob are willing to sell their shares. If Craig needs to offer $100K per share, Bob or Sally is likely to take it.
Interesting. It seems like there should be a cool name for this (ala pump and dump) where you take a short position and then bad mouth a company until it self fulfills and then flip your shares. Maybe clip and flip?
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.
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.
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.
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
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.
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.
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.
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.
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...
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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...
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.
Largely, afiact, they're trapped between their shorts and a hard place. They can't buy shares back at or below what they sold the shorts for, so unless they can manipulate the media, they will surely go bankrupt.
SolarCity failed because it was a bad business. Shorts believe the same about Tesla, which may or may not be true. Do you think short-sellers randomly choose companies to sell, or do they look at fundamentals and decide the company isn't viable?
This idea that you can simply short a company until goes out of business is asinine. It's far riskier. The downside of shorting is unlimited. Fairfax still exists.
People like to bring up Chanos and Farifax when talking about Tesla, but they rarely mention he was also early on Enron.
Did you read the post? He mentions Chanos was early on Enron right away, as part of his bio, and goes into SolarCity in some depth. I didn't invest in SolarCity, and don't know the specifics of what made it a bad company. Most of the news I read a few years ago was about how solar itself as well as their model specifically was failing, and that clearly hasn't happened.
>I didn't invest in SolarCity, and don't know the specifics of what made it a bad company.
My evidence is that it had to be bailed out by Tesla, then wound down. They spent vast amounts of money to grow; you know the old selling a dollar for $0.80. Borrowing short, lending long. Most of the time, that doesn't work. Solar power is a commodity, and prices are rapidly falling. I think the onus is on others to prove that it was a good business that couldn't handle short-sellers.
Again, if it was so simple to destroy a company through shorting, why isn't it happening everywhere, all the time?
Furthermore, who is "they"?:
>They are not shorting because they think Tesla will go bankrupt. They are shorting during specific periods when Tesla is most vulnerable, and covering when they fail to achieve their targeted goal. They are shorting to bankrupt Tesla.
I've been short TSLA twice (but net long through ETFs). The first time was early, and I lost money. The second time was in the recent run up after the 5k/week news, when I made a few bucks.
>Again, if it was so simple to destroy a company through shorting, why isn't it happening everywhere, all the time?
I don't think it's simple - on the contrary if the writer is correct, it seems to require a great degree of organized and concerted effort. It's probably not something that would normally be worth it, but it used to happen in the Chicago futures markets and early NYSE all the time. It's pretty well known now that the rating agencies are not disinterested third parties, and none of this is all that outlandish, really.
>Furthermore, who is "they"?:
the author alleges a group of hedge fund managers led by Jim Chanos, presumably including Stamford Capital's Steve Cohen.
The article draws a parallel between what Chanos (or the guy who worked for Chanos) did to Fairfax and what Chanos is doing now i.e. trying to tank the stock with unethically:
”Incredibly, over the next three years was stories of harassment of Fairfax workers, the CEO Prem Watsa, his wife, even his pastor. While this was happening Fairfax was besieged by accusations of fraud sent to rating agencies, regulators, even Fairfax's own business partners. Nearly all of these troubles could be traced back to Spyro Contogouris, a man hired by Chanos, Loeb, and Sender to "bring down Fairfax". Contogouris’s strategy would be to sink Fairfax by “closing access to the capital markets”—cutting off its access to funding by undermining its reputation. This was old-school Sun Tzu stuff, isolate-and-destroy tactics, “attacking by stratagem”: General Contogouris would cut off his enemy’s supply lines by, among other things, sullying the firm’s standing with ratings agencies and shareholders and others in a group he termed “FoF,” for “Friends of Fairfax.” He wanted to “get them where they eat,” cutting off their credit lines, particularly going after their ratings by agencies like A. M. Best. All this Contogouris promised to Chanos, Loeb, Sender, and others from the start. He pledged to “get the message of what I think is a massive fraud to these long term value holders” by creating a “crisis of confidence” that would frighten investors and “shake them out of the stock.”
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.