Keep shorting Tesla
CEO Elon Musk is shouting at sceptics. Call his bluff and keep shorting Tesla, says Matthew Partridge.
A fortnight ago, I suggested that you should sell Tesla short. I'm clearly far from alone: the company is now the most-shorted stock in the US, with short demand equal to 20% of the shares. But in the past few days Tesla's CEO Elon Musk has grabbed the headlines by issuing a public challenge to short-sellers, tweeting that "the sheer magnitude of short carnage will be unreal" and suggesting they should be "tiptoeing quietly to the exit". At the same time he further increased his stake in the car company. So were we premature to bet against Tesla, and should we reconsider our position?
In a word, no. While it is usually a good sign when the CEO buys shares in his own company, Musk's purchase needs to be put into context. While $9m may be a huge amount of money for most people, it is the equivalent of loose change down the back of the sofa for someone with a net worth estimated at $19bn. For instance, he recently invested $100m in a new company designed to dig underground tunnels for his "hyperloop" project. The relative sums involved suggest that his Tesla investment is no more than a publicity stunt.
At the same time, Musk is renowned for bluster and braggadocio. His Twitter barrage suggests the short-sellers have unnerved him more than he'd care to admit. Indeed, he has attacked short sellers on several occasions over the past year. He even verbally lashed out at analysts during a conference call that followed the latest earnings announcement, triggering a 5% drop in Tesla's share price. Needled after several probing questions, he suddenly said: "Boring bonehead questions are not cool." I can't help feeling that he's rattled because much of the criticism he has incurred is valid. If it weren't, he wouldn't be so defensive and could just calmly concentrate on keeping the firm running.
Getting on with everyday business is less straightforward than it sounds, however, as Tesla faces a wide range of problems. One of the most pressing is its continued difficulty meeting production targets for its latest model. This will have a knock-on impact on its ability to improve its cashflow position enough both to convince creditors to lend it more money, and in the longer run to fund its expansion through profits, rather than though debt. Indeed, despite Musk's denials, the company has discreetly indicated in filings that it may need to raise additional funds, with ratings agencies suggesting it may need another $2bn.
The upshot? I'm confident Tesla will drop significantly although you should be prepared for some volatility in the short term if some short sellers lose confidence and close their positions.
Trading techniques follow the smart money
Sentiment trading usually involves either following the crowd in the hope that it will push an asset even higher (or lower), or going against the herd, hoping it will be proven wrong. Both approaches tend to view the market as a homogenous block.
The Smart Money Flow Index (SMI), however, attempts to divide the crowd into "smart money" and "dumb money".It is based on the view that those who invest in the morning tend to be less sophisticated investors, while professionals tend to buy (and sell) just before the market closes.
The SMI is calculated by taking the previous day's SMI, adding the performance of the Dow Jones during the final hour and subtracting the performance during the opening half-hour. For example, say the previous day's SMI was 2,000 and the market lost 100 in the early morning but gained 50 points during the afternoon. This would produce an SMI of 2150. Followers of the SMI tend to look for divergence between it and market prices, so if the market is falling but the SMI is rising they buy, and if the SMI is falling and the market is rising they sell.
The SMI is fiddly to calculate, as you need to keep track of price changes over a period of time. What's more, passive investors, especially exchange-traded funds adjusting their weights to reflect price changes in the portfolios, now dominate late trading. This distorts the signal and makes it hard to argue that it represents the "smart" money. Most importantly, it has a mixed record. It correctly called the market top in 2000, but suggested investors bail out in 2006 a year before the crash.
How my tips have fared
I may be advising you to keep shorting Tesla, but Musk's purchase means that the price has gone up to $306 over the past fortnight, which is leaving us with a small loss of £92 on that bet.
By contrast, the long position in rival car firm Renault fell below the €90 level I had established as the adjusted stop-loss. This automatically closed the position we took out last July (Issue 854). Still, we ended up doing well from the trade, leaving us with a profit of £355.
Three of our other four positions slipped, with Greene King falling to 540p, Petrobras to $13.83 (from $14.09) and Micron declining slightly to $48.45 (it was $49.02 a fortnight ago). IG Group, on the other hand, went up by just over 5% to 842p. Overall, Petrobras is making us £770, while IG Group is £526 in the black. Even Micron is ahead though only by the tiny margin of £5. This means all our remaining open long positions are making a total profit of £1,621.
Excluding Tesla, our other two short positions are essentially unchanged. Bitcoin is now $9,146, down slightly from $9,200, increasing our profits to £520. The S&P 500 has fallen to 2,667, which pushes our profit up to a grand total of £60.
If you add in Tesla, we're making a net total of £488 in profits. This means that we're making an overall profit of £2,108 from our open positions and a loss of £481 from our closed positions.
Having held our positions in Petrobras and IG Group for nearly a year, it would be a good idea to look at them closely to check whether the rationale for holding them still exists, or whether we should close them to focus on new opportunities.
There is no mad rush, however, and since they are still making large profits, and we haven't got many open positions at the moment, I'm inclined to hold onto them for now.