If Elon Musk takes Tesla private, that’ll mark the top of the market

The top of the market is often heralded by a high-profile, complex and controversial deal. Elon Musk taking Tesla private could just be it, says John Stepek.


Elon Musk is the zeitgeist
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If one entrepreneur sums up the spirit of the age, it's Elon Musk.

He's a social crusader. Tesla's business was built on a form of consumerist "virtue signalling" early adopters making the sacrifice of buying sleekly expensive cars with limited ranges to show both how wealthy and how ethical they were.

He is polarising. Tesla is the most-shorted stock in the US for a reason. It's basically a divide between Musk believers and Musk sceptics. Both parties are heavily invested in their view of Musk being the right one, and they want to collect their just rewards when they are proved right.

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He has an intriguing relationship with the truth, and with the media. Oh, and he loves Twitter.

In short, Elon Musk is the zeitgeist. And when everything about our current gilded age goes pear-shaped, I expect him to be right at the heart of it.

Some of the big themes driving markets right now

I've talked about this before here, so forgive me if I'm going over old ground.

And I want to make one thing clear before I start again: timing the market is largely a mug's game. The stockmarket saying goes that "no one rings a bell at the top". And it's true.

Sort of.

I say sort of, because when I look back at every major market turning point that I can remember (and going back further than that as well), there's always been some epic, headline-grabbing deal that marks the end of that era with an almost-elegant flourish.

RBS and Barclays squabbling over ABN Amro at the top of the banking bubble in 2007; Glencore going public at the top of the commodities bubble in 2011; AOL merging with Time Warner at the top of the tech and media bubble in 2000.

I haven't done exhaustive scientific research into this. It feels like one of those indicators like the "cover story" indicator. It's part art, part science, and there's a bit of "eye of the beholder" interpretation in there it's always hard to account for "false positives" deals that look like "the one" but aren't.

But there's definitely a logic to it. You tend to get big deals happening towards the end of bull markets. That's just the nature of them. More and more money becomes available to undertake increasingly rash projects. There's a sense of panic as everyone wants a piece of whatever is the next big thing. So we should expect to see extreme stories occurring at market extremes.

As George Soros puts it, markets are reflexive. Soros has written whole books about this (and it's certainly worth reading his stuff), but the basic concept is pretty easy to grasp. In essence, markets don't just measure reality they help to shape it.

High prices encourage different sorts of behaviour to low prices, and the behaviour then feeds back into the market.

So what have been the big themes of this bull market? The most obvious one has been the zero-interest-rate world. This has enabled many industries that would not have survived in harsher times to get off the ground and keep going, despite demonstrating a consistent inability to fund themselves.

The shale oil industry is a good example of this. Which leads onto one of the other big "flavours" of our current era the energy revolution. America has become one of the world's biggest oil producers again. Renewables have gone from being the flaky fringe of energy production to being seen as the future. Battery technology and a breakthrough there is the key to a glorious new world.

Finally, I'd say another theme is visionary founders being given the freedom to act. Most of the big tech companies have shareholder structures that have allowed the founders to maintain complete control, despite owning a minority of the shares. Others haven't bothered going to the market at all instead, if you want a piece of the hottest companies around, you have to go through other routes venture capital, private equity and the like.

Fundamentally, all of this is backed by cheap debt. People can afford to chuck money at talented "visionaries" when it doesn't cost much. Take a room full of vaguely photogenic young people with a uniform of black turtlenecks or hoodies, wild-eyed stares, and ridiculous mission statements. Hose them down with cheap money. Some of them might build something useful and/or profitable.

The perfect top-of-the-market deal

I've wondered frequently about what deal could mark the top of this particular bull market. I imagine that the end deal will involve a remarkably complex debt structure that has never been attempted before. Something so "cov-lite" that it will astonish all who see it.

It would also have to involve some big names. I joked to someone in the office a while ago that it should ideally be something like Softbank (a wildly extravagant tech investment fund led by a visionary Japanese entrepreneur) buying a big name company like Tesla (which we already know about) in a deal funded with some sort of cryptocurrency.

I'm not sure about the cryptocurrency bit, but earlier this week, Musk tweeted something that might just might, assuming it's not yet another twisted fantasy of his, which it might well be have fired the starting gun on the dream deal to end this particular cycle.

First, the FT learned that Saudi Arabia's sovereign wealth fund has bought up a stake (no more than 5%) in Tesla over the last few months. It's now one of the company's biggest shareholders.

In the wake of that particular scoop, Musk dropped a bombshell tweet, followed up by a brief note to staff. In short, Musk argued that he is a bit fed up with running Tesla as a public company because it means he gasp needs to be accountable to the outside world. Visionary founders don't like that one little bit.

So, he tweeted that he's got plans to take Tesla private at $420 a share.

Now, Musk could be just mouthing off, having spotted a chance to try to stir up trouble for Tesla's legions of short sellers. Trouble is, mouthing off like that is a pretty serious offence if you do it as a public company, because Musk said that he had the funding secured for the deal, and if it's not true then that's arguably price manipulation.

So let's say that there's something to this deal. The FT has a rundown of potential funders. SoftBank is one but apparently it reckons Tesla is overvalued already. Chinese tech giant Tencent is another.

The Saudi sovereign wealth fund is an interesting one. If it's worried about the end of oil, then buying Tesla has a sort-of "statement of intent" logic to it (although only conceptually it's still nuts to buy an electric-car maker at this price when you could buy any other car manufacturer and have change left over).

The problems for everyone else is that Tesla just doesn't throw off the cash to justify the sort of leveraged buyout that you'd need.

In other words, if this deal to take Tesla private actually gets off the ground, it would require extraordinary ingenuity, unheard-of levels of financial engineering, and absolutely incredible levels of irrational exuberance.

Put another way, it would be the epitome of the absolutely perfect top-of-the-market deal.

Look, this is all speculation. And it's great fun to pontificate. And it may never happen.

But in my view, if this deal gets done and it actually goes through, then that's the top. From that point, it's all over bar the big bear market.

We'll revisit when and if it happens.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.