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How the New York Hedge Funds Lost Their Shirts on Tesla

NEW YORK ( TheStreet) -- We've all seen how Tesla (TSLA - Get Report) shares more than doubled in just a few days or weeks. I'm probably not alone in having asked myself: "How did all of those shorts get it so spectacularly wrong?"

I think I have figured it out. What the Tesla shorts seem to have in common are:

1. They're almost all New Yorkers.

Aside from the fact that most of the big hedgies in general are in and around New York City, why does this matter, you ask? In Tesla's case, it's actually important.

Much of what I hear from that corner of the world is that they are skeptic of Tesla because they never see Tesla cars on the street. You can walk around Manhattan or tool around Stamford, Conn., for hours not seeing a single Tesla.

Therefore, their argument goes, Tesla may not be selling as much as the numbers seem to suggest. In any case, there is something suspect here.

This is very similar to the situation in July 2007 when it was the earliest days for the first iPhone. This product hit close to 5% market share quickly in Silicon Valley, but only much later in most other cities, including New York.

So why is that important? Well, customer adoption is not uniform across geographies. "The tip of the spear" tells you today where the rest of the world is going tomorrow. It's the canary in the coal mine.

In the case of the iPhone, as well as with Tesla, this canary resides in Silicon Valley -- not New York City. The point is this: If product X (iPhone or Tesla or whatever) can get to 5% or some relevant respectable number in almost zero time in Silicon Valley, it is likely to get there in the rest of the country -- and the rest of the world -- also, at some time a couple of years down the road.

I have written multiple articles earlier this year about how Tesla gathered 100% or close to 100% market share in the luxury sedan market in Silicon Valley almost overnight. There is nary a brand new Mercedes S class or BMW 7 series to be seen so far this year on the streets of Silicon Valley. Everyone is buying a Tesla. Take a drive through some neighborhoods and you will see one in a large percentage of the driveways.
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