[mikeyouse]

A good article to help understand the massive afterhours movement: http://www.reuters.com/article/2013/05/08/autos-tesla-idUSL2...

High-Level Summary:

There was a ton of short-selling interest on TSLA (due to expectations of a big earnings miss). Almost 27% of the 115mm shares outstanding are currently being borrowed by short sellers. TSLA has more short interest by percentage than 98% of US stocks. Everyone was really expecting the price to go down.

Tesla reported earnings today at $.12/share, and upped their forward guidance. The consensus earnings estimates were $.04/share, so TSLA greatly surpassed expectations.

To short a stock, you have to borrow a share from someone else, and then return that stock to them at a later date. Returning the stock is called 'Covering a short'. All those people who were betting against TSLA are now forced to pile back into the market to cover, but since so many shares were short to begin with, the number of people who have stock to sell is much lower than typical.

This results in a 'short covering rally' where there is a lot of demand to buy shares and a small supply. Econ. 101 takes over and you see a big spike in the price.

[toomuchtodo]

Elon Musk several days ago:

EDIT: My mistake, this was said much longer ago (September 2012). I just read it recently. Thanks to batbomb for pointing this out. My apologies.

“It’s doing pretty well actually given that we’re such a huge short position. In fact I think the short position may be as high as one can actually go. They literally hit the ceiling on the short position. The shorts are in it to the hills. I think it is very unwise to be shorting Tesla, it’s very unwise. There is a tsunami of hurt coming for the short."

http://www.siliconbeat.com/2012/09/13/video-elon-musk-tells-...

[Osmium]

This quote makes me very happy :) There's nothing better than proving naysayers wrong. As if it isn't hard enough making something useful as it is without people betting actual money that you're not going to succeed...

[rz2k]

Shorting is great because it helps minimize how out of control bubbles get. Yet, it isn't free money, because you actually have to be right about a stock being overvalued, as the case seems not to have been here.

Being an underinformed naysayer isn't any worse than being an underinformed cheerleader. The only difference is that the naysayers appear to have been wrong in this case for this earnings period. I wouldn't be surprised if many were over influenced by skepticism about a company run by a large personality. It is easy to err in the other direction, too.

[JPKab]

I'm not thrilled to bring politics into it, but I have to. A ton of the naysaying on Tesla is influenced by the conservative media's hate affair with anything viewed as environmentally friendly. There are a lot of older Americans with tons of money in the market who watch nothing but Fox News, combined with the relatively politically conservative CNBC (not saying they are partisan, but they are hostile to "green" companies, and take a look at their Keystone XL coverage....). These older Americans who probably never would have bought Tesla stock when ahead and shorted it, waiting for the next Solyndra to unfold.

Solyndra sold a highly fungible commodity in a saturated market. Tesla is selling a machine that, when any skeptic sees it in a showroom, starts to impress in a way that is visceral. My conservative, rural father got in one at a showroom I took him to. He was blown away by the build quality. He knows cars, he knows metal, and he knows engineering. He told me that, mechanically, it is the best built car he has ever seen. He is a car guy, and used to drag me to car shows constantly as a kid.

His only objection was that he couldn't use one where he lives because of the two miles of dirt road he has to traverse to get to his home. I told him they were coming out with an SUV. He now owns stock.

[mikeyouse]

Up 26% after-hours almost certainly qualifies as a 'Tsunami of Hurt.'

Some quick math for fun's sake:

If the TechCrunch[1] article is still accurate, Musk owns 28.4% of TSLA. His paper-worth on this ownership this morning was $1.8B. If things stabilize at $70/share, his paper-worth tomorrow morning will be $2.3B.

A notional profit of $500 million in 24 hours isn't too shabby.

[1]http://techcrunch.com/2010/06/28/tesla-ipo-musk-shares/

[adventured]

Not sure I understand what you're referring to.

0.284 * $7.5 billion = $2.13 billion

His gain, assuming a 20% jump, is about $300 million.

At market close TSLA's market cap was $6.39 billion.

[mikeyouse]

Weird, I must've had a different Google Finance tab open at the time? Thanks for the correction.

[mapleoin]

> A notional profit of $500 million in 24 hours isn't too shabby.

It's not a 24 hours profit. He didn't buy that stock yesterday, nor could he have without making the price go a lot higher than 70$. You can't judge his profit on the short term.

[mikeyouse]

That's why I called it a notional profit and repeatedly referred to his net worth as 'on-paper'. Was that not obvious?

It's clear he doesn't have an extra $500mm in a checking account.

[mapleoin]

Yeah, sorry, I skipped over the 'notional' in your comment.

[ankitml]

Yeah, thats correct. I dont know why he misread "notional"

[batbomb]

That's several months ago. If it was a few days ago he'd probably be hearing from the SEC soon.

[MichaelApproved]

Why, is there a quiet period just before the release of earnings?

[tedreed]

I can't find a news story about the incident I'm thinking of, but there are SEC regulations about the release of information to investors. You basically have to try to ensure that they all get the same data at the same time.

[MichaelApproved]

There was a case where material news was released on Twitter. It lead to SEC adjusting their regulation to allow for social media to be an official news outlet for material information so long as the company discloses that it is a source of information ahead of time.

Edit: here's an article referring to the change http://www.lexology.com/library/detail.aspx?g=f8c96f0e-832c-...

[MichaelApproved]

One other point is that what you were referring to is not related to what OP was suggesting. You're talking about how the information is distributed. oP was referring to when it is distributed (too close to earnings).

I believe OP was wrong with regards to a restriction on when information can be released relative to earnings. Elon could have tweeted it a few days ago and it wouldn't have made a difference to the SEC in regards to the timing of the release.

[vxNsr]

I wonder, INAL but if he says something like that publicly then it's not insider trading to act on it, I would think anyway.

[MichaelApproved]

But OP isn't referring to insider trading. The comment was in regards to the timing of the information. The only time that I believe executives are restricted is during/after an IPO.

Another issue is making sure that material information is disclosed properly. Elon was essentially hinting that they were going to have a really good quarter. That kind of information is material and would likely need to be disclosed properly to all investors at once. However, I believe disclosing that information has nothing to do with the timing of earnings release. A company can disclose any information it would like at anytime, so long as it does so properly.

If I'm wrong, please let me know in reply. I'm very curious about whether I am making a mistake.

[vxNsr]

I didn't know that, how does it work with interviews then? Do they like disclose all info that will be said in the interview beforehand? I don't know much about this either, I'm also incredibly curious...

[JoeH]

I purchased a fair number of TSLA when they IPO'd, for a bit lower than the actual IPO price of $17. A little over a year ago, my brokerage offered to borrow my shares at 4% annual interest (paid on a monthly basis). I was told that I would retain the ability to trade the stock at any time, but I gave up my shareholder voting rights while the stock was "loaned" out.

I had never heard of that happening to small individual investors like me, and at that time I looked into it and learned that this was typically done because there was a lot of interest in short sales for the stock and there wasn't enough borrowable stock to cover demands.

I renew the loan agreement on a monthly basis and in March 2013 I was offered an increase from 4% to 6% interest for the loan of my shares, indicating that short-sellers were very eager to get their hands on TSLA stock.

I'm curious to see if today's activities cause my June offer to drop my interest rate or if the offer just expires altogether. I would guess that at minimum I'll see a lower interest rate.

[revelation]

Just to offer perspective, the interest to borrow shares of Tesla as of 2nd May was 46.10%. It was 85% as of 26th March.

[pyoung]

What?!!! Just so I get this straight. In order to short the stock you have to pay an annual interest rate of 46% of the stock value? I realize most shorts are probably only in it for short term, but that is still pretty insane.

[olympus]

Not sure if you're joking or not, but I'll offer a quick explanation. Interest in this context does not mean interest on a loan, but rather how many people are interested in shorting the stock. The 46% short interest meant that almost half of Tesla's stock was shorted. To put it another way, 46% of Tesla's stock was loaned out from various parties to sell to other various parties. This is a bad thing for the short sellers because they now have to pay more for their borrowed stock than they got for selling it in the first place. It's like owing more for your car than the car itself is worth.

[jamesaguilar]

Probably isn't joking. That is also the claim I initially thought was being made.

[pyoung]

Got it, thanks. Do brokerages charge interest rates for allowing shorts to borrow the stock?

[revelation]

olympus actually misunderstood me, and you were spot on :)

Brokers do charge interest rates and the rates for TESLA really were 45% (current) and 85% (once upon a time) annualized, mostly because of a deficiency in available shares. At that point it was costing 60c per share a week just to keep your short position.

Theres plenty of discussion here: http://www.teslamotorsclub.com/showthread.php/15183-Cost-to-...

[mynameishere]

If you sell puts against a short position from May 8 to May 17 (strike: 55.00, price: ~3.40), you can make >5 percent in 9 days. I'm guessing that most of the people borrowing shares at that rate are selling straddles to retail that make the overall position look less crazy.

http://finance.yahoo.com/q/op?s=TSLA+Options

...the implication is that unhedged longs are carrying the real risk.

[pyoung]

So you are saying that a lot of the short interest is coming from people hedging their long bets?

I can somewhat relate to why one would take this strategy, as Tesla is getting a lot of hype, implying that the stock might break out (or already did, currently at $71), but they are also in a fairly precarious financial situation, with a ton of debt. Elon himself warned that if the company didn't get to positive cash flow it was likely they would go under. Still it seems like a high price to pay for a hedge, wouldn't it be simpler (and possibly cheaper) just to reduce your long position?

[JPKab]

Do you have a recommendation for a good reference to learn all this lingo? I understand what a short is, but WTF is a 'put'? 'Straddles'??? 'Unhedged longs'?

[paddy_m]

A put is an option that gives you the right to sell a stock to someone by a specified date at a specified price. If you buy a put, you are betting the stock price will go down.

A straddle involves buying both a call and a put. If a stock is trading at 10, and you buy a PUT at 8 and a call at 12, you make money if the stock goes above 12 or below 8, between that, you eat the option price. Basically a straddle is betting on volatility.

You can also sell a straddle, sell a put and sell a call, and bet that stock will remain at the same price.

[mynewwork]

http://www.investopedia.com/ is a decent resource for the beginner to understand terminology.

[revelation]

Short levels have been that high for much of the existence of TSLA. Noone was expecting the price to go down with this announcement specifically.

What you are describing is a short squeeze, and it's still unclear if that is indeed what we are seeing. Many shorts have been unwilling to cover, even when having to pay up to 85% lending rates for stock. A proper short squeeze would not only spike the price, it will make it explode; Volkswagen became the most valuable company in the world at a share price of 1k$ through a short squeeze (even if only for a short time).

Remember also that a short squeeze depends on long investors not taking profit. It only worked in VW because the majority of shares were held by institutions unwilling to reduce their stake and of course Porsche, who manufactured the squeeze.

[mikeyouse]

The straddle on May 10 announcement was something like 15%.. people were definitely expecting some movement.

[ncavig]

This might be a stupid question, but as a Tesla stock owner, and (becoming more apparent ever day) naive investor, how do you find out this information and/or digest it so well? I'm mainly a google finance guy and had no idea so much of the stock was being shorted.

[mikeyouse]

I own ~95% index funds, which makes most of my research pretty easy. For the individual stocks I do own, I like to follow the analysis on Reuters. Even just spending an hour/week reading the latest news does wonders.

For Tesla: http://www.reuters.com/finance/stocks/companyNews?symbol=TSL...

Investing around a short squeeze is out of your control, and I would argue, not worth worrying about. The price will bounce around like crazy and some people will make 30% in a day while others lose much more than that, but in the end, Tesla's price will reflect their ability to turn a profit in the future.

If you feel like the future market cap of Tesla is larger than it is today (with all the usual time-value-of-money caveats), keep your money invested and don't waste your time fretting over the mayhem on Wall St.

[damoncali]

Forgive the unsolicited advice, but I think that's the wrong question. First ask yourself what you'd do with that information. Then think long and hard about indexing your money.

Read up on portfolio theory and you will see that it's incredibly difficult (some say impossible) to beat the risk adjusted return of the market (at least not on purpose). It turns out if you are not in many stocks - 40+ (the exact number depends on who you ask), then you are taking more risk than you are being compensated for.

[ncavig]

FWIW I do have a strong majority of portfolio dedicated to index funds, and have automatic investing set up for those funds biweekly. But there do come times where I see a company, and after some due diligence I do see as a company I believe in and see prospering in the long. Tesla is one of those companies so I bought a fair amount 2 months ago.

Regardless of solicited or not, I do agree with your advice and if nothing else, hopefully readers who fear to ask such questions gain from friendly advice such as yours

EDIT: grammar

[Shebanator]

I do the same thing in my IRA. Right now TSLA is the only individual stock I own, and it is a bit less than 10% of my account value. I bought it at $29 per share 9 months ago or so, knowing I might take a bath, but I believed in the company's long term business model then and I still do. I feel that this kind of investing minimizes the risk factor.

[Retric]

The only theoretically better option than an index fund is to go fully random assuming a low enough transaction costs.

[3am]

http://finance.yahoo.com/q/ks?s=TSLA+Key+Statistics

Usually data from there is just parsed from the variety of forms that a public company has to file with the SEC, all/most of which are available to the public via a tool they have called EDGAR. Here's Tesla's filings: http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&#3...

EDIT: also, congratulations :) ask a real professional, but if you're tempted to sell be aware your holding period and of the tax difference between long and short term capital gains. Also, if you want to sell tomorrow and re-buy, be aware of wash sale rules.

[epoxyhockey]

I am also a novice investor, but the # of shares that are short are actually listed on the details pages of many online stock sites, for example: http://finance.yahoo.com/q/ks?s=TSLA+Key+Statistics

Shares Short (as of Apr 15, 2013): 30.70M

Shares Outstanding: 114.52M

EDIT - I guess this is more relevant:

Short % of Float (as of Apr 15, 2013)3: 49.20%

EDIT #2: Congrats on the gains today! :-)

[ajross]

The cynical answer is that you specialize in post-hoc analysis like this. Predictions, after all, can be wrong. :)

This is true in general obviously, but investing specifically is filled with explanations like this that make sense only in hindsight.

[mikeyouse]

I completely agree in most cases, however the Reuters article I linked was written earlier this week. Some market conditions necessitate a big swing in prices -- though guessing which direction prices will swing can be tricky.

If you wanted de-risk your position, you could set up an option straddle or just sell your shares before the announcement and then buy them again next week.

[munger]

Also don't forget - by the time you read the news about a company, the news has already affected the stock price (in the short term).

So in other words if you read big news the minute it comes out about a company, automated systems and institutional traders have already made their moves based on the news before retail investors have a chance.

[rdl]

TSLA options are also super weird and sketchy; around the expiration of the long-dated calls in January each year, there seems to be some magical push to drive the stock price lower for 1-2 days; then after the expiration, when I've been pushed out of the money, the price rebounds substantially. I gave up on TSLA options and am sticking to being long the stock.

[dojomouse]

You don't need to wait until expiry to sell. There is a lot to be said for options if you use them carefully. Yes, risk is higher with high leverage and a narrow portfolio. But returns can be also. I think the line about risk adjusted returns being higher in index funds is 3 parts inexperienced investors trying to pick stocks without doing their homework and 7 parts experienced investors trying to convince inexperienced investors to provide mindless liquidity for them to work against. I prefer to make my own buy/sell decisions, and so far it's given me a FAR higher average return than any index fund.

[pyoung]

Without quantifying the risks involved with your trading strategies, it is impossible to say whether you are beating the risk-adjusted returns of an index fund. Additionally, I am pretty sure index funds, even without risk adjustments, have been proven to be better investments in the long term than any actively managed strategy. And this holds regardless of the experience of the investors. There are always going to be a few exceptions to the rule, but most of the people getting rich in wall street are doing so because they are taking a cut of other peoples money (management fees), not because they are genius investors.

Also, with actively managed strategies, it only takes one or two bad bets to wipe out years of gains, and due to natural biases, individual investors tend to under-report/weight losses and over-report/weight the gains. As such, we always tend to hear how other investors are making a killing on a certain stock or trade, but we rarely hear from the losers, which distorts our perceptions of risk and returns (so far, I have seen a handful of people talk about their Tesla stock holdings on this thread, but I have yet to see a single person talk about haw bad they are getting cleaned out because they shorted the stock).

[btilly]

There are always going to be a few exceptions to the rule...

Back when I lived in NY and worked in bond markets, an interesting study came out evaluating active mutual fund managers. A chance distribution was able to account for all but 2 at a 95% confidence level. Those two exceptions were named Peter Lynch and Warren Buffett.

Peter Lynch unfortunately retired from active investing, and his advice is that people should invest in indexed mutual funds. He also is not unexplainable by chance - the chance of someone having done that well by chance was under 5%, but it was still possible.

At a 99% confidence level, only Warren Buffett was left.

Warren Buffett is unquestionably knowledgeable. But his returns have been boosted over the long term by a couple of major investing advantages. The first is that he likes to buy whole companies, and is reportedly a stellar manager. His management expertise then turns into improved returns for that company, which becomes a good investment. Thus the cause/effect relationship is not clear. The second advantage is that when a company has problems (eg Goldman Sachs in 2008) they tend to call Warren, because they know that if they get him on board then they will restore confidence. But the deal that he gets is significantly better than what anyone else can get from that company.

The study did not include hedge funds like the one George Soros ran because their complex trading strategies can't readily be compared.

Anyways, the professionals can't run funds which beat chance returns. Why do you think will be able to?

(Technical detail. It is possible to beat the averages, and my understanding is that the professionals do on average tend to do so. The problem is that their cost of beating the average is sufficiently high that their funds don't come out ahead. And the results of their research get reflected in the stock price, which is available for everyone to look at.)

[eru]

Warren Buffett has another advantage: He realized the value of financing his investments with insurance floats earlier than the rest of the world did.

[btilly]

And another. His performance was measured over a very long time period, including a period where the market was likely much less competitive than it is now.

[rdl]

Well, it was also around earnings, so I wanted to wait for earnings (which turned out good) and the pop from that.

[changdizzle]

Great explanation - I (sheepishly) have invested a lot of money in $TSLA and have heard about the short squeeze but don't necessarily understand it, and this explains the movement - thanks!

[jcnnghm]

I can't imagine this not squeezing. The short interest would take 7 days at 4 million shares a day to cover [1], and is about 45% of the float, assuming people haven't been covering for the last couple of weeks. Many of the shorts were opened when Tesla was trading around $40. I am really interested in seeing the updated short interest data from Nasdaq, which will be released tomorrow. If those numbers still show big short interests, expect big banks to hammer the stock up. I sold some shares for a little over $70 after-hours.

[1]: http://www.nasdaq.com/symbol/tsla/short-interest

[pfortuny]

Hedge fund managers and traders will try time and again to convince people that their job is not 'gambling'. They are having a tough time, though.

Some of them are really not gamblers but man, there are so many many of them willing to play with other people's money.

As long as they have zero-risk (zero responsibility, that is), they will gamble on.

[steveplace]

Sweet, I was quoted in that article.

Seeing short squeezes in TSLA and GMCR aftermarket.