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Sep 28, 2018

S3 Analytics: Tesla Shorts Up Over $1.2 Billion on Musk\SEC Lawsuit

On Thursday the Securities and Exchange Commission filed a lawsuit against Elon Musk (CEO, Chairman and Co-Founder of Tesla Inc) charging him with misleading investors with his August 7th tweet which “caused significant confusion and disruption in the market for Tesla’s stock.” The “funding secured” tweet may ultimately lead to the SEC banning Musk from holding C-Suite and director status and imposing fines on both Musk and Tesla (TSLA). The chance of more onerous SEC penalties increased when Musk backed out of not-guilty settlement plea with the SEC which would have resulted in fines, a two year ban as Chairman of the company and the appointment of two new directors to the Tesla board, according to CNBC’s David Faber.

Tesla regained the top spot on the U.S. most shorted equity leaderboard as short selling in the stock has grown slowly but steadily over the last two weeks and Apple’s (AAPL) short interest took a dramatic hit when the iPhone XS/XS Max went on sale last week. Tesla short interest is $10.19 billion, 33.13 million shares shorted, 25.98% of its float.

Tesla and the FAANG stocks continue to dominate the list of Top Ten shorts in the U.S. market with Qualcomm (QCOM), Fortive Corp (FTV) and CVS Corp (CVS) springing into the Top Ten on profitability, spin-off and merger news.

Tesla’s stock price is down 13% in mid-morning trading as some long shareholders begin closing out their positions to lock in whatever long term gains are left in their trades while short sellers are adding to their positions in anticipation of further price weakness. Short sellers are up $1.27 billion in mark-to-market gains this morning, totally offsetting their earlier year-to-date losses and are now up $643 million for the year. Short sellers took a $1.3 billion mark-to-market hit on August 7th, the day after The Tweet, but those that hung on to their positions or jumped into the deep end of the pool and shorted stock are now up $2.3 billion in mark-to-market profits, making $3.6 billion in mark-to-market profits since August 8th.

Tesla’s stock borrow is going at a 2.05% fee and short sellers are paying almost $600k/day in financing costs. With General Collateral stock borrows (the easiest to borrow stocks at the cheapest rates) going at 0.30% fee, Tesla’s stock borrow costs are seven time the norm. There are nearly 10 million shares available to borrow so there is plenty of room for more short sellers to get into the trade and stock borrow rates should not get much more expensive in the near term unless shares shorted increases by more than 3-4 million shares.

Short sellers are now profitable for the year and are chipping away at their historical mark-to-market losses. The conviction that longer term Tesla short sellers had in their thesis is finally paying off for them and may embolden those with excess capital and risk limits to increase their bets. We expect shares shorted to increase in the near term and if Tesla’s stock price continues to drop we could see shares shorted climb towards the 39-41 million share levels we saw in May.

Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 Managing Director Predictive Analytics, S3 Partners, LLC
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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