Faltering Friday – Tesla Tumbles, Takes Nasdaq With It


Well, that's a big "I told you so!"

Way back in our August 8th PSW Report (and in our Live Member Chat Room the day before) our reaction to the Elon Musk tweet that Tesla (TLSA) was considering going private at $420 with "funding secured" was to call BS and short the stock. The title of that particular report was: "Wednesday’s Whopper – Musk Claims Some Idiot Offered Him $420/share for Tesla!" in which I said:

> $420 per share?!?

> That's $72Bn for a car company that had to run production lines in tents to push out 5,000 cars in the last week of July and, aside from the high level of defects reported in the cars that have been delivered,word is that it's taking weeks to get even basic repairs done and MONTHS for replacement body parts to arrive. Not only that but the Model 3s that are being delivered are averaging $64,000, not $35,000 as promised and TSLA is going to run out of $7,500 EV credits this year – as well as cash*.* 

> The company lost $1.9Bn in 2017 on $11.7Bn in sales and, in Q1 and Q2 of 2018, they have lost $1.4Bn on $7.4Bn in sales so 58% more sales 47% more losses – I guess that COULD be called improvement, right?  Liabilities have "improved" from $21.9Bn to $22.6Bn but what's another $700M between friends, right? TSLA also "needs" to build a $2Bn factory in China and maybe put a roof on their new production lines in Freemont so that's what, about $100Bn to take over TSLA for the joy of losing another $1.5Bn for the rest of 2018?

Image placeholder title

I don't want to say FRAUD in regards to Elon Musk's claim that someone is offering to take Tesla private for $420/share as I don't know it's a FRAUD but it does sound kind of like a FRAUD – given what we know about the situation yet FRAUD is a word we don't toss around likely, even when dealing with known con men – not when there's no hard evidence of FRAUD – just a large amount of indicatators that point to FRAUD…

We took the opportunity, while TSLA was shooting for the moon yesterday afternoon, to set up a short position (we already had both longs and shorts in our Hedge Fund)as I said to our Members:

> Let's take Elon at his word and sell 2 TSLA Jan $420 calls for $23 ($4,600) in the STP and buy 3 Jan $450 ($100)/420 ($79) bear put spreads for $21 ($6,300).  That's net $1,700 on the $9,000 spread.

The way this spread works is that we bought the $450 puts and offset the cost of them by selling the $420 puts so anything below $420 net's us $30 per contract ($3,000) and we also sold the $420 calls, so anything under $420 casuses them to expire worthless.  If Elon is committing FRAUD and TSLA gets bougth for $420, the short calls are still worthless (as it's not over $420) and we win.  If Elon is committing FRAUD and TSLA drops lower – we win.  The stock has to go up over 20% by January expirations for us to lose and, even then, we can roll the short calls to a higher strike in a longer month.  So – many ways to win, not too many ways to lose, 417% upside potential return on cash.

While I strongly suspect Musk may have committed a FRAUD – I don't know for sure so I'll make my money betting against people who think they know for sure!

Image placeholder title

Fundamentals cut both ways and, in this case, we were able to call TSLA Funamentally NOT worth $420 per share – allowing us to short with confidence when Musk's comments spiked the stock higher.  Now the SEC is officially charging Musk with FRAUD and TLSA is down to $265 pre-market and our spread is looking very like it will collect the full $9,000 but Tesla is not out of the woods yet because the board of directors engaged in a cover-up in an attempt to paper over Musk's comments and make it look like there really was a buyer so they too may end up getting charged.

All that is just the cherry on top to the auto company that doesn't actually make a profit selling autos (or trucks or solar panels or batteries or rocket ships or underground tunnels or flame throwers…).  In fact the theory I developed to explain Musk's outrageous behavior recently is that he WANTS to be kicked out of the company – so that he can blame its downfall on someone else in an attempt to salvage his reputation as a visionary people can invest in. 

Image placeholder title

TSLA is an entity that bleeds a lot of cash and that cash is getting much harder to raise and Musk's little game of announcing stuff that's never going to happen is playing itself out as investors are no longer willing to hand him Billions of additional Dollars to watch them go up in smoke – even if it does benefit the traders who play with the stock.  Musk is simply spinning plates at the moment – trying to do anything he can to keep cash coming in before the company runs out of money.  Recently he talked about opening another GigaFactory in China but it's just another ruse to find an excuse to raise another round of capital to shore up the cash in the rest of the company. 

That was July 10th-12th and investors weren't biting so he began instead to create a fraud that would prop up the stock price – again to attract investors to a new capital raise and indeed, by the end of July, TSLA was already doing a "stealth capital raise" by adjusting the conversion rates on their bonds – something that's a short-term paper fix only.  Meanwhile, the wheels were falling off the bus Musk was driving and his actions got more and more desparate as he headed into Q3 without additional capital while buring about $750M per quarter:

Image placeholder title

I'm reviewing all this to remind people NOT to buy Tesla on the dip but to just stay away from the stock – which could go up or down $100 at this point.  Up $100 would be bringing in a big-boy executive to restructure and run the company but I can't imagine any serious auto executive looking at this balance sheet and wanting any part of the mess Elon is leaving behind.  Tesla is a company of smoke and mirrors and it's much more likely we'll find the mirror is broken once the smoke finally clears.

Image placeholder title

Meanwhile, in things we don't pay attention to, Italy is in turmoil as the new Government, rather than doing something about the deficit, has put forth a budget that's running a deficit of 2.4% of their GDP, which violates EU rules and has shot their 10-year bonds up 11.86% on the day to 3.21% vs. 2.77% for German notes.  Rome has to submit the budget to the EU next month and the EU may reject it, which would downgrade Italy's credit and send borrowing rates even higher. 

That's got EuroStocks down almost 2% this morning but don't worry as we're still doing our window-dressing in the US for the last day of the quarter so don't expect us to follow suit-yet.  In fact, this morning, in our Live Member Chat Room at 8:09, I said:

> Futures down but not out, good time to cash in those /NQ shorts if you still have them (7,620) for a nice $600/contract gain!

Image placeholder title

Looks like we nailed the bottom (for now) and we expect a bounce of 8 points (20%) off the 40-point fall, which would be weak at 7,628 and a strong bounce (40%) would be 7,636, above which we look for 7,650 as a short again but if those fail, the next good entry will be the cross back below 7,600, which could be a nice ride down next week.  

Fortunately, we added a lot of hedging trades in Wednesday's Live Trading Webinar, when we felt the Fed had said nothing supportive of the market highs.  You can see a replay of that here and we also were shorting the Nasdaq Futures live at the time, making our Members a quick $350 during the webinar – which is why you want to catch them live!

Notice on our Big Chart that the Russell has failed its 50-day moving average at 1,700.  There's nothing bullish about the market until it takes that back and watch out below if any of the others fail to confirm a new downtrend but, as I said, not today – today we have to make the quarter look pretty so we can bring some fresh retail suckers in to hold the bags next quarter

Image placeholder title

Have a great weekend,

  • Phil