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Aug 23, 2016

S3 BLACKLIGHT: When Elon Musk Speaks, Tesla Shorts Buy To Cover

Elon Musk, CEO of Tesla Motors Inc. (TSLA US) tweeted that he would have a product announcement today and Tesla’s stock price responded with a 2.1% jump. Tesla stock is still down 3.1% in August and 5.2% year to date.

Tesla short interest has been declining in the 2nd and 3rd quarters and is down 26% from its year to date high of $7.4 billion at the end of March. August has seen an acceleration of buy to covers as traders closed down $831 million of their shorts in August alone. Short interest is now down to $5.5 billion, the lowest level since February.

Tesla’s borrow cost has been dropping along with its short balances, spot levels were above 60% fee at the end of June but quickly dropped below 20% fee by the end of July as borrow demand started to drop and Tesla’s stock price hit an interim high of $234.79. We’ve seen a more gradual but steady cheapening of Tesla’s borrow cost since July with spot borrow rates trading around 11% fee today. Borrow cost on existing positions remains higher than spot rates at 15.5% fee as it takes time for the $5.5 billion existing borrows to be rate changed down by the prime brokers.

We expect borrow levels to continue their slow march downward with rates dropping to the low teens next week if short interest continues to fall. The last time Tesla’s short interest was below $6 billion stock borrow rates were slightly below 5% but because if the SolarCity acquisition and added volatility in the stock there is an added borrow premium in Tesla. As un-lent borrow inventories grow, rates should drop below a 10% fee.

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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