Short Tesla? Yep. Plus Long & Short Convexity (July 11, 2017)

Today I’m going to break down the one and only Telsa. However, be sure not to skip over this week’s ‘Must Reads & Ask Dave Highlights’…

While the story of Tesla needs no introduction to most market participants, I think it is fair to say that there are 2 types of TSLA followers:

  • Those possessing logic and critical thought (shorts or those looking to get short)
  • Those relying on hope and relatively hollow arguments (longs)

Make no mistake, the second group can claim victory for the time being. But what they fail to realize is that they are in a short convexity trade. As long as there is no disruption or dislocation, those long TSLA will grind out gains.

Sadly, those short convexity trades inevitably take a massive loss.

TSLA simply cannot deliver what is priced in presently…..the shit will hit the fan at some point.

Has it started to do so already?

The big move lower in the last week certainly bears watching. At Aspen, it may be the opportunity to start building shorts. But there are of course risks:

  • The tenured professors at the world’s Central Banks have essentially ensured all the little snowflakes of the money management industry that they will ride to the rescue if a market crisis develops.
  • Indexation seems likely to keep a bid in stocks
  • There is no catalyst at this time that appears ready to let the air out of the market


However, when the market returns to a phase where there is price discovery, TSLA has a lot of baggage hanging over it.

  • It loses roughly $4710 per car sold….yet essentially has ZERO competition presently. However competition IS coming from the major automakers which will only exacerbate the situation.
  • It has no meaningful proprietary technology.
  • It has $7 billion in debt.
  • It’s gross margins are inflated since they do not include re-investment in R&D….as does every other automaker.
    • Side note: Elon Musk gets a bonus when gross margins rise – maybe the R&D omission was clever in the short-term but it won’t be in the long run.

Source: Mark Spiegel

  • Current TSLA models cost roughly $81,000 to build. So how on Earth will they make the Model S for $35,000 as they claim?
    • There are no higher volume per-car savings in engineering or R&D costs because Tesla expenses those– they’re not part of COGS. I estimate the base Model 3 will cost Tesla at least in the high $40,000’s to build, so it can either sell them at a gigantic loss starting @ $35,000 or price them into a much smaller market segment. Neither choice validates the hype.   Source: Mark Spiegel


Another technical perspective comes from Michael Oliver over at Momentum Structural Analysis MSA.

Michael Oliver will be presenting at the 2017 Trader’s Round Table in October.


So, you can decide. Timing a short will be VERY challenging, but if you get that part right, it will be a solid winner (long convexity).

Further Insights on TSLA:

Tesla Is A Zero

RealVision Interview with Mark Spiegel

Must Reads, Listens and Watches

  • Bob Rodriguez – We are Witnessing the Development of a “Perfect Storm”

Why on Earth should I allocate capital into a system where the scales are completely manipulated, price discovery is distorted, and the Fed doesn’t have a clue what’s going on? They’ve missed every economic forecast for the last nine years straight. Why would anybody pay any attention to what those people are doing?

I have confidence in one thing. The Fed will blow it.

  • Additionally, I found the following critique (below) worth one big chuckle in describing TSLA as a “glorified golf cart maker”.

I have noted on several occasions that the current “market” is in the hands of relative amateurs. Idiots getting all lathered up fantasizing over whether AMZN or GOOG stock price would reach $1000 first. Nowhere is that “amateur” notion more apparent than my favorite “poster child” for insanity — TSLA.Only a nut job with partially formed intelligence would chase TSLA to almost $400 – especially someone running OPM with so-called “fiduciary” responsibilities. Take away OBAMA’s “green energy” subsidies, erase fantasies of $200 oil, replace “Musk Hype” with five minutes of critical thinking, and all we get is a glorified golf cart maker with grossly overpriced toys, making a battery that creates more pollution in its manufacture than a few years of driving a single diesel truck. AND, recharging that same battery requires some sort of “conventional” power plant that burns fossil fuel.

It would seem that the new administration in Washington is hell bent on erasing a lot of the “climate change” policies of the previous eight years and in that environment, I would think logic alone would stick a pin in the “green energy” bubble. If that notion takes hold, then a money losing, glorified golf cart maker with very limited market might ultimately trade close to a “hat size”.

Market history is filled with exalted stocks with triple digit price tags, fading away to a hat size or even zero (think Xerox, Polaroid, Eastman Kodak, RCA, King Resources, WorldCom, Enron, etc.). Before this market completes a normal cycle, there will be some truly “surprising” names making the full trip from fantasy to reality. That process NEVER changes. The only variable is the timing. Source: Fleckenstein Capital via Mr. Skin

Ask Dave

This weeks questions ranged from our recently closed short position in USD/CAD to using moving averages and DeMark indicators for trade selection.

Enjoy and feel free to send me your questions.



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