Sunday 24 June 2018

Paul Sommerville: Will Musk Tesla tweet make April fools out of investors?

'Elon Musk himself has reportedly taken over production of Tesla’s troubled Model 3, a potential sign of desperation.' Photo: Bloomberg
'Elon Musk himself has reportedly taken over production of Tesla’s troubled Model 3, a potential sign of desperation.' Photo: Bloomberg

Paul Sommerville

Elon Musk, the CEO of Tesla motors was trying to be humorous. He failed miserably. The eccentric CEO of the electric car company tweeted on April 1st: "Despite intense efforts to raise money, including a last-ditch mass sale of Easter Eggs, we are sad to report that Tesla has gone completely and totally bankrupt. So bankrupt, you can't believe it."

He continued: "Elon was found passed out against a Tesla Model 3, surrounded by 'Teslaquila' bottles, the tracks of dried tears still visible on his cheeks."

This was just a week after a Tesla owner died while using the autopilot function on his Tesla car.

The incident occurred days after a more widely reported death by an Uber Technologies self-driving test vehicle which killed a pedestrian in Arizona.

Musk may believe Tesla's bankruptcy is a laughing matter; others do not and have taken sizeable bets that it will occur.

An incredible 25pc of Tesla shares are "borrowed" meaning hedge funds have taken massive bets against the company. Short-sellers aim to profit by selling borrowed shares in the hope of buying them back later at a lower price.

"This is a once-in-a-lifetime short," Peter DeCaprio, partner at Crow Point Partners said this week: "It's like the perfect storm of elements that you need in a short thesis. "Usually you try to find three or four good ones, this has got 15," he continued.

Jim Chanos the legendary fund manager, said last December: "We think Tesla is worth zero" and has also bet heavily on its demise.

"Let's just say Tesla and Mr Musk have a broad interpretation of the truth," Chanos told CNBC.

"There have been all kinds of announcements that this company has made that turned out not to be true."

Musk is aware of the bets against his company and has even goaded these hedge funds on occasion.

"Seems to be some stormy weather over in Shortville these days" he tweeted some years ago as his share price rose and the hedge funds were taking losses.

The latest April fool tweet is another attempt to ridicule those betting against his company.

Tesla's problems are mounting.

Last week Moody's downgraded the company on capital concerns. They believe it will need a huge capital raise soon.

The company immediately responded declaring it does not need any more capital. This statement does not mean much, in my view. In early 2017 Musk said the same thing but went on to raise over $3bn that year. The company already has a $10bn debt load.

Also this week, Matthew Renna, the programme manager for the model S and model X, resigned to join Volkswagen.

Elon Musk himself has reportedly taken over production of Tesla's troubled Model 3, a potential sign of desperation.

The company is burning cash at an extraordinary rate and the figure is set to rise to $2.5bn this year.

It is widely reported that Tesla ended 2017 with $3.4bn in cash, the true figure is estimated nearer $1bn.

The company has $1.2bn of debt maturing in the next 12 months. The production numbers of cars produced and quality of those cars are a continuing concern.

The stock had fallen 37pc from its recent all-time high of $385 to $250 before bouncing back towards $300 late this week. This is turning into an epic battle and one that anybody with a general interest in the financial markets should follow.

You will learn more regarding investing from this situation than any economics book.

Firstly, taking on a bet 'short' in any company with a 25pc short position is an extremely risky move and not to be recommended in any circumstance.

The chance of a rumour or 'short squeeze' occurring is too large.

However buying shares in this company currently requires an investor to suspend his disbelief and any numerical learning he may have previously obtained.

The numbers simply do not add up.

This company is a poster child for the negative implications of quantitative easing and the malinvestment that it encourages. Tesla only exists because of the generosity of strangers to lend it money.

With interest rates around the world rising it is only a matter of time before that generosity evaporates.

The company's current corporate bonds are already showing signs of strain.

To paraphrase Humphrey Bogart, my interest in whether Elon Musk stays or goes is purely a sporting one but investors should be aware some of the smartest traders are quite convinced that this share price will implode - I would wager this thesis will prove correct.

It is only a matter of time.

This story is not about electric cars, it is about alchemy and investor gullibility.

I would consider his tweet a prediction rather than a joke. But do not be surprised to see the stock price rally further first before the inevitable demise.

Global Equity Markets

Recent volatility in global stock markets has been extraordinary.

We have moved from 2017, the quietest year in the history of equities, to extreme moves on a daily basis. From December 8 2017 to January 25, we did not get a 1pc move - 38pc of all trading days over the past three months have been 1pc+ moves. The S&P has moved 1pc+ on every trading day so far in April and on 10 of the last 11 trading days.

This is bringing some nervousness but tremendous opportunities.

The markets took a severe plunge in early February then regained some poise only to revisit those February lows again this week. The difference this time is the most widely held and adored 'star' stocks are leading the retreat. From their recent highs Facebook is -20pc, Amazon -15pc, Netflix -16pc, Google -15pc.

In the short-term, investors need to keep a close eye on these February low levels. It was no coincidence that Larry Kudlow (Trump's new economic adviser) picked Wednesday, just as those lows were breached, to make a statement suggesting the announced China sanctions were merely proposals and were not likely to take effect. His comments caused a sharp rally.

Regardless, I expect these levels to be breached once more but the next leg lower if it occurs should afford medium- and longer-term investors a very good opportunity to pick up stocks at more appealing prices for a tradeable bounce. Patience is key.

Earnings season starts this week in the USA and good results are expected.

Any disappointments I expect to be severely punished. It will be these results and not any comments by Kudlow that determine the next moves in equity markets.

"Larry Kudlow is not an economist he just plays one on TV," is how he was once described.

His appointment is a further deterioration in the credibility of the Trump administration - if that was possible.

Paul Sommerville is the CEO and head of Advisory of Sommerville Advisory Markets (SAM) Paul.sommerville@sam.ie

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