Engineering a TSLA Short SqueezeJanuary 7th, 2020
I actually did read Jim Cramers Mad Money book. One of the few books I have read. Doesn’t make me an expert, but he described how he himself was short squeezed and since it is way worse than everybody is talking about for TSLA, I feel like it is a good thing to write about in light of recent events.
A “Short Position” is a bet against the stock. Buy low sell high is the general advice in trading stock. But with selling short, the same advice works in the different order. That is, sell high buy low. While many feel short selling should be illegal, I find it can bring balance to the market. After all, if your only option is to buy shares you don’t have and sell shares you do, then the supply demand constraint can force the stock upward. I do think it is more balanced to have the option to sell and bet against it.
It can upset me when I hear wrong people talk negatively about Tesla, but I also find this to bring balance to the market as well.
Bulls talk a lot about the FUD, and it is a tool that Bears use to drive down the stock. But with TSLA on a huge rally lately, I don’t really see the Bulls as any better.
Anytime anybody makes a claim as if it will happen is speculation and uncertain. And are Bulls not right now driving fear of a Short Squeeze?
Anyways... when you buy stock, you can do that with your own money, but when you sell stock you don’t have you have to do it through borrowing. So the banks can get their paws in on the deal with some margin.
This can lead to something labelled “margin calls” which is where the banks decide that the risk is too great and the credit has run dry. So if the stock goes way up, it can max out people’s margin limits and the banks have to call it in. The amount of money people have in margin depends on the size of their banks.
I don’t know if all the banks are the same, but my bank appears to let me margin about 66% of my portfolio value.
So what happens now? Well, now that TSLA is so high, I will tell you what happened to Jim Cramer in his short squeeze. I cannot recall the exact stock, but it definitely was before TSLA’s IPO. Basically, he was so sure that some stock was going to fail, that when the stock price increased he saw it as a way to make even more money. So he doubled down. Shorted twice as much. And the stock rallied. So he doubled down again and the stock rallied. Finally somebody on the street told him that there was a huge opportunity in buying this stock that he was shorting because some nincompoop was getting short squeezed.
At which point Jim realized he was the nincompoop and took his losses exiting his position.
It is very dangerous for shorts shorting TSLA right now. Not because of Tesla’s imminent success but also because the number of shares that got sold in covering shorts has made available more shares to short.
Shorts that are so convinced that Tesla is fraud and will go to $0 are in a position where they could very well be tempted to double down.
They may see it as too risky if they pay attention to indicators such as production doubling or more every 2 years. If they are smart, they will get out. But these Bears are not that smart with engineering, viral marketing, and technological advantages. They go on TV and state their claims. They are provably wrong about everything, but they stick to their instincts. And their instincts don’t like Elon. They hate him. And the more they lose, the more they hate him because he is such a public figure and constantly in everybody’s line of sight.
How do you think it feels to see the guy you hate most every day beating you?
“I’ll show you...” says the shorts.
So with the hate brewing and the shares to short freeing up, there will be people who will see this massive rise in stock as an opportunity to make even more money.
Even Citron Research seems to be getting back in on the short thesis.
Shorting TSLA is a dangerous move right now. Still. As I pointed out back in December, it is dumb to bet against any company opening a new Gigafactory in the biggest EV market where the government appears to be pulling favours for you. There is a tonne of great news about production, deliveries, products, batteries, increase in deliveries, increase in production and on and on.
You see, Elon is smart. He learns. He sees patterns and the entire world has been rewarding him with TSLA rally cookies every time he nails and tazes Elon with stock drops every time he “fails”.
Looking back on it, how crazy is it that Elon tweeted about deliveries reaching 500K in 2019 following it with a clarification tweet? Stock drop for you.
Do shorts not see that Tesla increased production all along and had the stock cut in half in the process initiated by a questionable tweet. The sentiment turns and it gives Bears the ability to turn the negative sentiment into a story of it’s own. Then the stock drop becomes a story. Then the fabricated FUD that speculates poor results, no demand, fraudulent behaviour and shitty quality to drive the share price down as much as they can.
Anyways, the immensity good news just from GF3 alone is going to cause stock bumps galore. On top of that, Starlink looks like it is headed for success with several near-term launches coming. It helps TSLA stock because it convinces more people to believe in Elon. When people learn about great projects, they look to invest. Since SpaceX isn’t publicly traded, Tesla is the best way to invest in Elon. Battery day will be very interesting. I expect an announcement of a non-combustible battery and the crowd to go crazy because they know that that FUD will never work again. THAT FUD WILL NEVER WORK AGAIN!!!!
Elon has been slowly crushing the FUD. Because he can. His latest brilliant move? Tesla is driving up demand by delivering more cars overseas. This is creating a shortage of vehicles in the USA. Shortages drive up the value of the products. And the price might go up a little to keep things under control. But the point is, as long as all the cars keep being sold out, Shorts have no argument that Tesla has a demand problem. And the scarcity increases demand even more due to human tendency to want what we can’t have.
With Tesla showing good quality in their products, and if the cars are no longer even capable of combusting unless they get in an accident with a gas truck, and if Tesla continues to be profitable, and if demand is provably high, then the Short’s arguments are really wearing thin to the point of non-existent.
It is no coincidence that the massive TSLA rally began just after the EPA rating for Porsche came out. If you don't know, Porsche’s $200K car has the same range as Tesla’s $35K model. $39K now maybe because they had to increase the price a couple times to stabilize demand.
Another FUD argument bites the dust. So if the competition isn’t coming.... what is left? Suspected fraud? Really? The guy who lands rockets and sells out the best EVs in the world that owners absolutely love is cooking the books? Unlikely. With every squashed FUD argument, the fraud FUD gets harder and harder to believe.
I have to hand it to Elon and Tesla. One of the biggest accomplishments they have had as a company is single handedly (or with 50,000 hands) dismantled all the FUD arguments one by one to put them in a position where people have to get out of the stock or risk losing everything.
I know what it is. The next wave of FUD will come from Elon having not delivered FSD. I shall call it the FSD FUD.
They may try to convince us later that other products aren’t coming. Maybe they will be right because I really can’t fathom how Tesla will pull off a slate roof. There I go, spreading some uncertainty and doubt.
I am long TSLA and TSLA options. I am not a financial advisor. Investing in anything comes with inherent risk. This is not financial advice.
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