This is Precisely Why I’ve Been Saying: Don’t Short Tesla or Anything in This Crazy Market

Wolf Richter,

CEO goes nuts, spaghetti-code algos & consensually hallucinating humans lap it up.

“Am considering taking Tesla private at $420. Funding secured,” tweeted Tesla CEO Elon Musk this morning.

Anyone can tweet anything, as we have seen. Even Musk. Two days ago, as part of his personal battle with short sellers, he’d tweeted, “Dang, turns out even Hitler was shorting Tesla stock.”

Tesla has lost money every single year over its decade-plus existence. The more it sells, the more money it loses. It has successfully proven this maxim over and over again. In Q2, total revenues surged 43% from a year ago, but the net loss skyrocketed 113% to an all-time record of $718 million.

Tesla’s global market share in Q2 was 0.2%. This is practically nothing. It gets lost as a rounding error. Tesla is a niche manufacturer that is trying to elbow its way into mass-market manufacturing, with cars that cost over $50,000, hahaha. But it cannot get its manufacturing operation and supply chain to function properly.

Tesla will need huge amounts of money – billions a year – to keep up this charade. As in the past, it will have to ask investors for more money, either by selling more shares or by issuing more debt, plus asking its customers for free unsecured loans (deposits, of which it now owes nearly $1 billion).

Asking for money by selling shares and issuing debt is a heck of a lot easier if the company has grossly over-valued publicly traded shares – than as a private company. By going private, Tesla, which is junk rated, would have a harder time to access the large amounts of cheap capital needed for it stay alive.

And yet, its going-private market cap, at $420 a share, would be about $72 billion. A buyout at this price would be nuts. If Musk wants to buy out all shareholders other than himself (he owns about 20%), Tesla would have to borrow somewhere near $57 billion, on top of the $14 billion in debt that the company already has. It would be the largest leveraged buyout ever. It would beat Dell’s LBO, and the prior record holder, TXU, which went bankrupt. With this amount of debt, and with its losses and perennially negative cash-flows, Tesla would head into bankruptcy court in “ludicrous” mode acceleration.

It’s OK for Musk to invoke Hitler and going-private in his tweets. He can tweet whatever he wants to. But here is how a rational market would react: a hard sell-off because a crazed CEO is a scary prospect for rational shareholders. And they’d pressure the board to scramble him out of there.

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But this is not what happened. What happened is that shares (TSLA) soared $25, or over 7%, before trading in them was halted. And when trading resumed, shares jumped further, and closed up $37.91 or 11% for the day, after having been up 12%.

This confirms that the market and its participants – algos or humans – are eager to be led around by their collective noses with the hope that this will make them money. Nothing else matters. It’s a form of consensual hallucination – the belief that if everyone does the same thing together, it’s going to work out.

With this utterly irrational behavior by spaghetti-code algos or consensually hallucinating humans, any vague notion of fundamentals has been completely abandoned, years ago.

That’s why for quite a while now, I’ve warned readers not to short these shares – or any of the other ludicrously overpriced shares. Because when something is idiotically and irrationally overpriced, there is by definition no longer a rational limit of how much further the shares can rise.

With Tesla, there is an additional factor: The unpredictable and often silly personality cult around Musk and his efforts at share-price manipulations via Twitter and other venues that spaghetti-code algos and consensually hallucinating humans lap up and use as fuel. By definition, once a CEO goes this far to say crazy manipulative things, and the market goes this far to eat up this stuff, there is no telling what the next crazy thing will be.

And this was proven this morning with Musk’s going-private tweet.

Tesla’s market cap has completely disconnected from any sense of reality years ago – whether $30 billion or $72 billion makes no difference. On a fundamental basis, compared to market cap, Tesla is the most obvious short out there. But that makes it the most dangerous short.

Short sellers are betting against an entire market that has gone nuts. And there is no telling how much longer this market will be nuts, and how much nuttier, so to speak, it will still get. Eventually, some short sellers will be right, but until then, this irrational market will crush their analyses and logical thinking with even more irrationality.


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