Tag Archives: Tesla

Tesla: Lies And Fraud Engulfed In Elon Musk’s Hubris

Elon Musk should have considered a career as a children’s fairytale author. He would have made multiples of his current net worth selling his amazing fantasies and optioning the movie and tv series rights. He’s spent the better part of the last few years spinning fantasies as a means of addressing the growing army of analysts and truthseekers who report the facts about Tesla. He’ll say anything in an attempt to drive the stock price higher. The “funding secured” $420 buyout fraud is just the tip of the iceberg, if not wholly emblematic of Musk’s desperation to succeed.

At the shareholder’s meeting on Tuesday Musk referenced an alleged shortage of batteries that was constraining the ability to make deliveries and to bolster his claim that demand is strong.  Of course, the facts say otherwise about demand (see this, for instance:  Q1, April, May EU deliveries) . The battery claim will serve the purpose of Musk’s excuse for falling short of his assertion last week that Tesla “might” set a record in deliveries.

As his remedy to the battery shortage lie, Musk said “We might get into the mining business, I don’t know, maybe a little bit at least.” In some ways, that statement is just as shocking as the “funding secured” tweet. Mining companies spend years and millions looking for mineable deposits of cobalt and lithium. Then if a company is lucky enough to find a deposit, there’s several more difficulties to overcome in order to get a mine operating. Musk’s assertion minimized the cost and effort required to “get into the mining business.” He made it sound like anyone can make it happen. It’s the definition of hubris.

The “mining business” pronouncement typifies the degree to which Musk will say anything to fortify his lies – his fraudulent narrative – surrounding Tesla’s inability to execute a business model successfully. The fact that journalists, the financial media and Wall Street analysts refuse to hold Musk accountable for his chicanery enable its perpetuation. The victims are the people who die in car accidents connected to the unregulated mechanical failures with Musk’s products and the investors who are blind to his deceit.

It’s mind-blowing to me that the Musk/Tesla faithful continue to follow him off the cliff. His track record of failure to deliver on promises is unparalleled in history. In truth, beneath the facade of fraud and fairytales, is a poorly run business operation that bleeds billions in cash and will never achieve true profitability. The Model 3 is produced in a glorified Coleman tent, for god sakes. Make no mistake, the GAAP “profits” reported in 2018 were nothing short of outright and blatant accounting deception. Anyone who still believes those numbers is living with their eyes wide shut. Anyone who takes Elon Musk at face value is either tragically naive or catastrophically stupid.

But then again, Tesla and Elon Musk is the poster-child for the degree to which the U.S. economic and political system has gone down the rabbit hole and has become an empty shell of greed-driven fraud and corruption…

Is Musk Trying To Sell Tesla’s Stock Price Or Automobiles?

TSLA had yet another bad week, closing down $19 (9%) from the previous Friday’s close. Last week every attempted bounce in the stock was shortable on a daytrading basis. Currently Tesla’s shares are trading at $188. It would likely be a lot lower if it weren’t for Musk’s repeated “leaked” emails loaded with dubious production and delivery claims, with both barrels pointed directly at short-sellers.

A second “leaked” email appeared on Wednesday, as the stock was getting ready to take another deep plunge, in which Musk asserts that the employees need to “catch up on deliveries” in order to have a “successful quarter.” Speaking of catching up on deliveries, whatever happened with the 10,000 vehicles that Musk claimed were “in transit” at the end of Q1…? This analysis posted by @boriqato is a priceless “de-coding” of the Musk emails.

In between Musk released a report that he was gearing up to start producing the chimerical Model Y in the Fremont facility, in addition to consolidating the production of the S and X onto one production line.  Nothwithstanding the complications involved with reconfiguring the factor floor to produce 2 models on one line,  hidden behind the concept is that fact that the move would be cutting in half the production rate of each model.  Why would he do this if he’s running behind on deliveries?

Curiously absent from the news release was any estimates of the cost to retool the factory, purchase the equipment required to produce the Model Y and the manner in which the expense – which is enormous  – would be funded. Given that there’s currently 20 lawsuits outstanding filed by vendors and service providers against Tesla seeking several million dollars in claims against unpaid invoices for services provided, it would appear that the Company is cash-strapped despite the recent capital raise.  (Note: I sifted through several of the filings  – many are honest mom and pop businesses trying to make a living – it’s quite sad that Musk feels entitled to stiff the businesses which are helping him proliferate his fraud)

Regardless of the veracity of the production numbers in the “leaked” emails to employees, the new order and Q2 delivery assertions are likely Musk’s standard fraudulent misrepresentations. In fact, on Saturday I saw a report from one of the analysts who posts his research on Twitter (@fly4dat). The data he tracks for Model 3 deliveries in Norway, Netherlands and Spain – three of Tesla’s largest European markets – show a stunning decline in deliveries (the data comes from official sources which track VIN registrations).

Based on his extrapolation of Q1 and April deliveries plus the plunge in deliveries across all models globally, it looks like Tesla will be lucky to reach Q1’s 63,000 deliveries. Certainly we would have to suspect fraudulent reporting if deliveries come anywhere near Musk’s claim that Q2 deliveries could reach 90,000. Furthermore, Tesla’s Models S and X are now getting crushed in Europe by sales and deliveries (VIN registrations) of the Audi e-tron and Jaguar IPace.

Tesla was forced to slash the price of both the S and X this past week for the third time in three months. Unquestionably, the price cuts reflect the collapsing demand. More likely, Musk scripted the email and its “leaks” for the purpose of juicing the stock price in pre-market trading in an attempt to stimulate hedge fund and retail daytrader momentum chasers and trigger a short-squeeze.

The leaked email on Friday had the intended effect – for about an hour – as the stock shot up to as high as $199.60 from $181. The stock closed at $195.46. The second leaked email on Wednesday – not so much. The stock opened briefly higher but is now down over $2 from Wednesday’s close. It’s trading at a level not seen since the end of November 2017. The Musk/Tesla mystique is unraveling.

The email events, along with all of Musk’s circus acts, begs one simple question: Is Musk trying to produce and sell automobiles or is he simply attempting to pump the stock price of a failed business model?

Every Bounce In Tesla Stock Can Be Fearlessly Shorted

Elon Musk sent out an internal email to employees on Thursday in which he makes the highly dubious claims that the Company has 50,000 new orders for the Model  3,  the Company has a “good chance” of exceeding Q4’s record deliveries and the production of the Model 3 is close to 1,000 per week.

Regardless of the veracity of the production numbers, the new orders and Q2 deliveries assertions are likely Musk’s standard fraudulent misrepresentations.  From all of the data that can be gathered from official sources which track deliveries and VIN registrations globally, sales of all three Tesla models are falling off a cliff.  The recent price-cuts announced confirm the sales reports (eventually the Law of supply/demand/price prevails).

More likely, Musk scripted the email and its “leak” for the purpose of juicing the stock price in pre-market trading trading on Thursday morning in an attempt to stimulate hedge fund and retail daytrader momentum chasers and trigger a short-squeeze.

The leaked email had the intended effect – for about an hour – as the stock shot up to as high as $199.60 from $181.  The stock closed at $195.46.  This morning, the bubble-promoting financial media transformed lies embedded in the email into reports that Tesla was on track for record deliveries in Q2.  The stock ran up in pre-market from $196 to as high as $203.71.  As I write this the stock is trading below $191.

Elon Musk is obsessed with fighting the shorts rather than running a business and proving the shorts wrong. The funding secured debacle was more than a mistake – 1) it reflected desperation 2) it was highly illegal but our Government no longer prosecutes the crimes committed by billionaires.

The “leaked” email is another example of Musk using social media in an attempt to manipulate the stock price and punish short-sellers.  He’s emboldened by the fact that SEC has made it clear that it has no interest enforcing securities laws on Musk.  The public is on its own –  those for whom the laws are meant to protect (unsophisticated daytraders and the investors in  recklessly managed public mutual funds like ARK) are the ones who get hurt the most.

The problem faced by Tesla is that, in order to generate sales, Musk is unable to charge a high enough price to cover the all-in cost of designing, producing and delivering his cars to the end user. That’s why TSLA bleeds so much cash – it’s that simple.  Furthermore, he should have never issued debt to bridge the funding gap until it was guaranteed that the business model was truly profitable. It’s the same problem all these unicorn businesses face (NFLX, W, CVNA, LYFT, UBER, etc ad nauseum).

Tesla is now headed toward “zombie” status as both its business and its stock price limps toward and off the cliff.  As evidence, all of the stock analysts at firms involved with helping the Company raise $2.7 billion ($2.4 billion net) just two weeks ago  have suddenly become bearish on the story. Morgan Stanley’s Andrew Jonas – snake oil salesman extraordinaire – has publicly set a “downside” price of $10.  However, in a non-public conference call with clients, Morgan Stanley’s cross-asset trading group has made the case that the stock is worthless.

That the stock is worthless has never been an issue for me.  The more interesting question regards the ultimate value of the junk bonds, which are currently “priced” in the low $80’s. But this is based on small trades –  $1mm-2mm face value crosses and investment advisors at boiler room operations like Wedbush dumping 10 bond lots into client accounts. We used to play this game with ill-fated junk bonds that were artificially priced to high until a big seller capitulated when I traded junk bonds in the 1990’s.  More likely the  ultimate chapter 7 liquidation value of the unsecured debt on Telsa’s balance sheet is  well below 20 cents on the dollar.  In other words, short away every time the stock price spikes up on rumors or on desperate attempts by Musk to squeeze the shorts.

More Evidence Tesla Is In A Death Spiral

Reuters  report in which the news service discovered that almost all of the solar cell production at Tesla’s solar factory in Buffalo, New York is being sold overseas, primarily to a large Asian buyer.  Tesla’s Solar City business was given $750 million in State subsidies to build the plant in NY in exchange for employing at least 1,460 people and spending $500 million per yer in the State over 10 years.

The factory employs far less than the 1,460 required and the State has no hope of ever seeing the $500 million per year. The factory has become little more than a solar cell production facility for Panasonic paid for by U.S. taxpayers.

Panasonic produces the solar cells in the factory that were supposed to be used in Solar City’s solar panels.  The problem is that Solar City’s sales are approaching zero.  In California only 21 Solar City roof systems are connected to the State’s three investor-owned utilities as the end of February.  Panasonic is seeking to use the Buffalo plant to fulfill demand for U.S. made solar sales from foreign buyers (foreign solar manufactures can then export the solar panels back the use duty-free).

Earlier this year Panasonic announced that it was suspending plans to expand capacity at Tesla’s Gigafactory. It also suspended planned investment in Tesla’s Shanghai Gigafactory. The decision to curtail investment in Tesla’s U.S. Gigafactory was based on declining sales in the Models S and X and on Model 3 sales which are running below plan.   Panasonic’s Tesla EV battery business had losses exceeding $181  million in its fiscal year that ended in March.  Panasonic was likely not interested in repeating that experience as a “partner” in Tesla’s Shanghai operations.

What’s interesting about the two situations described above is that, more than anyone outside of Tesla’s corporate suite, Panasonic has an up close inside look at the truth behind Tesla’s operations and financials.  It’s quite clear that Panasonic is in financial loss containment mode with respect to its relationship with Tesla.  In this regard, Panasonic is signaling that Tesla is in deep trouble operationally and financially.

Panasonic’s withdrawal from its relationship with Tesla reflects the same critical information about Telsa as the steady stream of high level executive departures over the last year, the rate of which accelerated over the last 4-6 months.  Clearly the message is that Tesla is now in an irreversible death spiral.

Just for the record, I believe that Goldman Sachs and Morgan Stanley used the recent stock and convertible bond offering to suck fees out the deal that would help offset the likely losses the two banks will incur when Musk inevitably defaults on loans he owes to both firms.  It cost Tesla $300 million to purchase derivative protection against the potential shareholder dilution affect if Tesla’s stock were to rise the conversion price of $309 in the new converts.

But those two firms know that Tesla is going to hit the wall and that the stock has no chance of sniffing anywhere close to $309 from now to eternity. It’s highly likely that Goldman and Morgan Stanley forced this hedge structure on Tesla to rake in the $10 to $20 million in fees skimmed on the derivatives used for the hedge.  It was nothing more than vultures who are closest to the carcass grabbing the choicest cuts of meat.

Ironically, Morgan Stanley’s analyst issued a ”worst case” $10 valuation on Tesla. Unless the analyst is a complete idiot with little experience in distressed situations – which is possible – the $10 dollar valuation is Morgan Stanley’s “code” for, “the stock is worthless if Tesla has to file” (which it will sooner or later).

Put A Fork In Tesla – It’s Done

Tesla has been “done” for awhile but many of the Wall Street and investor “uber” bulls are finally starting to see this reality.  Amusingly, Wedbush’s Dan Ives issued a report in which he lowered his price target on Tesla stock from $270 to $235.   He refers to Tesla’s situation as a “code red situation.”  Quite frankly, a “code red situation” with regard to a company and its stock price should be regarded as, “sell your shares if you’re long and get out of the way.”

How someone with the credentials to occupy a stock analyst’s seat at a stock brokerage – even if it is just Wedbush, a retail pump and dump mill – can truly believe that Tesla stock is worth the $40 billion market cap at $230/share is truly mind-blowing.  As an example, consider just a basic valuation metric.  The average automotive car OEM trades at an enterprise to revenue ratio of 0.2x revenues.  At the high-end Toyota trades at 0.6x revenues. That’s because Toyota sports a 7.5% operating margin.  Tesla’s market cap plus debt is 2.6x revenues, or 13x greater than the industry mean.

It would be useful to use other valuation metrics but Tesla does not generate any profits beyond its highly suspicious gross profit as shown in its SEC filings. It would also be useful to know if Dan Ives owns any Tesla shares. Does he really put his money where is mouth is?

That aside, Tesla shares are going to zero. Tesla stock broke down last week, closing at its lowest price since December 21, 2016. The stock is down $44 (17.5%) since May 6th, when it closed at $255 after completing the stock/convertible deal. It’s down 43% from its $370 close after the “funding secured” incident (August 8, 2018). Today the shares traded as low as $195 before a dead-cat short-cover bounce that has lifted the shares back over $200.

Tesla has likely entered into an irreversible death spiral. The only question at this point is how long it will take for the stock to head below $10 and how long the Company can stay solvent. There are scattered reports that the latest price cuts have stimulated a brief increase in sales of the Model S and X, but nothing has been verified. To be sure, sales of the Model 3 have fallen off a cliff in Europe and China, as an increasing number of potential buyers are made aware of the poor quality and follow-up service of this vehicle.

At TSLA’s current cash-burn rate, it won’t make it until the end of the year without a sales turnaround miracle on par with Moses seeing God in a burning bush. I doubt the Company will ever be able to raise money again. The stock does not have value as an acquisition because I highly doubt any potential acquirer would pay an amount that would cover Tesla’s debt load plus other fixed obligations.

In my 34+ years of experience in the financial markets, I’ve witnessed several Pied Piper types who have led their faithful  off the cliff.  Elon Musk for my money is the greatest purveyor of cult of personality that I’ve observed in my lifetime.  I don’t know how else to explain, at least for myself, how so many seemingly intelligent people continue to support Musk’s glaringly indisputable fraud.

The Wheels Are Coming Off Musk And Tesla

Literally, the wheels are coming off. Panasonic, which supplies batteries that it manufactures for Tesla at the Gigafactory in Nevada announced that it was cutting back on its plans to expand production capacity at the plant. It also announced that it was suspending plans to produce batteries at Tesla’s planned Shanghai Gigafactory. In an article in a Japanese business publication, Panasonic had less than flattering things to say about working with Tesla. The move by Panasonic at the Nevada Gigafactory likely reflects concern over the falling demand for Teslas.

Tesla is sticking by its guidance to produce and deliver 360-400k vehicles in 2019. In Q1, Tesla delivered 63k vehicles – a 252k annualized rate. David Einhorn, the proprietor of the high profile Greenlight Capital hedge fund, is vocally short Tesla. His team believes Tesla will deliver less than 250k vehicles in 2019. Q1 and Q2 will likely have higher deliveries than Q3 and Q4 because of the temporary “bump” in demand from rolling out the Model 3 in Europe and China in Q1. I believe there’s a chance that deliveries in 2019 are closer to 200k than 250k.

This graphic shows the demand drop for the Models S&X combined in, Norway, one of Tesla’s largest markets (visit @teslacharts to see more well-produced analytic charts like this):

That chart looks similar or worse in all of Tesla’s markets, including the U.S. After a brief bump in deliveries from the effect from the start of delivering the Model 3 to Europe’s and China’s “must-have the latest tech device” crowd, the Model 3 chart will soon look like the delivery chart for the S/X. European’s are already complaining about the poor reliability and service on the Model 3.

Tesla also rolled out its leasing program, which left most analysts, including me, thoroughly baffled. The lease program ostensibly is primarily to boost demand for the Model 3. But Tesla does not offer a lease for the basic $35,000 Model 3. It also announced that the basic Model 3 would only be offered for online purchase. The lease for the Standard Range-plus Model 3 is structured such that the lessee will need to put down roughly $4k upfront. The lowest monthly payment option is $504 and there’s no purchase option at the end of the lease. I won’t go into Musk’s rationale for this because it would be a waste of your time to read about it. In short, the ill-conceived lease program will likely have a minimal effect on unit deliveries.

There’s three primary reasons Tesla’s sales are falling rapidly: 1) the 50% drop in the tax credit (which drops even lower to $1875 starting July 1st this year and goes away completely after December 31st);   2) Tesla’s growing reputation for poor reliability and even worse service;   3) Growing competition in the luxury EV space.

With each passing week, the operational decisions and musings of Musk become more bizarre. The growth narrative is over. The Company is shrinking its service centers and delivery infrastructure in order to cut costs. Senior employees are leaving pretty much on a weekly basis. In fact, last week the senior manager who was responsible for building Tesla’s lithium ion battery supply chain from May 2017 to April 2019 left the Company. Perhaps more troubling, Tesla’s Director of Global Treasury also left recently. This function of this position is to oversee the Company’s worldwide cash management and liquidity activities. It’s likely this person, Pedro Glaser, was not interested in sticking around until the cash runs out.

The Company continues to spiral downward in a toxic cloud of operational dysfunction, financial deterioration, decaying auto industry fundamentals and growing fraud. It remains a mystery to anyone who examines Tesla closely how the stock manages to remain at a level that assigns a $47 billion market cap to the Company. I suspect there’s a continuous short squeeze on the shares because the short-interest is quiet high and the “free” float of shares is low relative to the overall short-interest. Ultimately the shorts will prevail – of that I’m 100% confident.

In my view, Tesla continues to circle the drain. The stock is down nearly 20% YTD in the context of one of the most torrid upside moves in the overall stock market in history. The stock appears ready to test the $250 level again. If it drops below that, it could fall below $200 quickly.

Tesla: Enron Status Secured

Elon Musk a has long track record of being long on promises and short on deliveries – literally and figuratively.  His motive, as has been self-professed repeatedly on Twitter,  is to torment short-sellers by driving the stock higher with fraudulent tweets.  But underlying Musk’s garish bravado and overtly fraudulent financial reports is a business operation that, by all indications, is slowly disintegrating.

Musk has ushered in the long-awaited introduction of the $35,000 Model 3 with a tweet two days earlier aimed at pushing the stock higher to squeeze short-sellers. Musk’s highly questionable tweet tactic drove the stock price up $21 over two days. The stock did a $10 belly-flop when the Model 3 announcement hit the tape, accompanied by an announcement that Tesla was cutting the size of the workforce for the 3rd time this year and would transition the sales operation to online-only.

While Musk spends an inordinate amount of time scheming to squeeze short-sellers, Tesla’s business operations and financial flexibility is getting squeezed by reality. All Ponzi scheme’s eventually fall prey to the laws of economics. Musk’s Ponzi has been proliferated by a financial system flooded with printed money  and by a Government that no longer applies the Rule of Law to billionaires with the ability to buy protection from regulatory enforcement.

Arcadia Economics‘ Chris Marcus and I spent some time on Wednesday discussing the similarities between Tesla and Enron and Elon Musk and Bernie Madoff:

Just How Indebted Is Elon Musk?

Tesla continues to head south since hitting its post-earnings high of $321. It’s down nearly $100 from the $380 post “funding secured” tweet all-time high close on August 7th. The stock has diverged negatively from the SPX since mid-January. By all accounts the order-rate and delivery rate of Tesla’s 3 models is dropping quickly. While there may be a brief boost in sales from  Model 3 deliveries into Europe and China in Q1, it looks like Model 3 orders and deliveries in North America have slowed to a trickle. Complaints about the poor quality of the Model and poor service from Tesla are already populating European automobile forums.

There have been wide-spread reports from people who are having trouble getting canceled $1,000 reservation deposits on Model 3’s refunded. Several have reported receiving the refund only to have the check bounce after it’s deposited. Consumer Reports removed its highly sought recommendation rating from the Model 3 after citing poor quality control and reliabity. This past Wednesday Tesla’s General Counsel, who left his Washington, DC law practice and took the job two months ago, announced he was leaving the Company. The stream of high-level c-suite departures has been nearly continuous over the last year.

Tesla is staring at the $920 million convertible bond maturity due next Friday (March 1st). I have no idea how Tesla will address this, as it seems by many indicators that the $3.9 billion in cash Tesla posted on its year-end balance sheet may not be accurate, in addition to showing negative working capital of $1.7 billion. That said, I would not bet that Tesla will default this soon on its debt.

On Friday it was reported that Elon Musk took out $61 million in mortgages on his five California mansions, $50 million of which was new funding and $11 million was refinancing (note:  rumor of this deal was in the market a week earlier). Morgan Stanley underwrote the mortgages. I would suggest that Musk possibly needed the money to meet margin calls on his stock-holdings, against which Musk has borrowed heavily. Otherwise it makes no sense to me why an alleged billionaire would need to trifle with $61 million in mortgages. Morgan Stanley is one of Musk’s primary stock custodians. In that regard, I’m wondering if Morgan Stanley forced the issue.  It’s a good bet that Musk has pledged and hypothecated most of his assets as collateral against indebtedness. I have no doubt that when Tesla hits the wall, Musk’s wealth will largely vanish.

Elon Musk’s Legacy Of Unchecked Fraud Continues

At 5:15 p.m. on February 19th, Elon Musk tweeted that Tesla would produce 500,000 cars on 2019.  The headline hit news terminals globally. The stock jumped over $1 in after hours trading.  Four hours later Musk tweeted that he meant Tesla would be producing cars at an annualized rate of 500,000 by the end of 2019.  After-hours trading was closed when that “correction” hit Twitter.

The next morning the Wall Journal reports that Tesla’s General Counsel, Dane Butswinkas, is quitting Tesla to return to his law practice in DC – two months after he took the job. Butswinkas’ role at  was widely regarded to be Musk’s highly compensated Twitter babysitter per the terms of Musk’s SEC settlement related to Musk’s securities fraud “420 secured” tweet.

Tesla will rival Enron as the biggest stock fraud in this century, if not U.S. financial history.  To be sure it sells cars that generate revenues.  But the alleged profitability shown in Q3 and Q4 financials is likely nothing more that the product of GAAP accounting manipulation.  Elon Musk has been making promises and performance projections which fall miserably short of reality for several years.  He overtly violated securities laws with the $420 secured” tweet, which cost investors $10’s of millions of dollars – longs and shorts.

Tesla stock jumped on Monday, February 11th after analysts from Canaccord and Wedbush issued strong buys based on “strong demand for the Model 3,” putting absurd price targets on the stock. While both analysts’ analysis and opinions can be summarily dismissed based on gross negligence in presenting facts, you should be aware that the Canaccord analyst had a buy recommendation on Solar City stock from $53 in February 2015 all the way down to down $19.60 in May 2016. Tesla acquired Solar City in the summer of 2016 in a highly controversial deal,  likely fraudulent,  that has turned out to be an unmitigated  disaster.

I suspect the motive for both analysts’ arguably fraudulent stock reports is to generate demand for Telsa shares that can be used to unload shares on behalf of a large seller through both brokerage firms’ retail stock distribution network (brokers and investment advisors). T Rowe Price, formerly the largest shareholder outside of Musk,  cut its position in half during Q4, unloading 8.4 million shares. Insiders have been unloading shares non-stop, with not one insider purchase in the last 3 months.  Two of the most respected investors on Wall Street – Stanley Drukenmiller and Jim Chanos – are short Tesla.

With the tax credit cut in half January 1st and a growing reputation for poor quality control and even worse service, Tesla’s deliveries of all three models have literally plunged off a cliff since Q4. Officially Model 3 sales have dropped 60% for Q4. But sources that keep track of the numbers separately from the Company show a steeper drop-off in sales. As an example, the Marina Del Rey service center previously had been Tesla’s premier delivery center. But deliveries have dropped from average of 16 deliveries per day in Q4 to less than 1 per day in February through February 11th (2.1 deliveries per day in January). Sales in China and Europe have also fallen off a cliff, as superior competing EVs are becoming available.

The latest “500,000 production in 2019” tweet is the just latest in a long list of stunts pulled by Musk in an attempt to pump up the stock price. The departure of the General Counsel is one of many high level executive departures to leave in the last two years after spending just a brief tenure at the Company. Remarkably, the main stream financial media has little to no interest in investigating the nature of the circumstances of the executive departures or the unwillingness of regulators to keep Musk in check.

Tesla is perhaps the most egregious fraud in U.S. financial history.  It has been allowed to unfold out in the open, enabled by the complete lack of regulatory enforcement. Tesla and Elon Musk are emblematic of the unmitigated corruption that has engulfed the U.S. political, financial and economic system. Tesla’s saga represents the Government’s total disregard for Rule of Law. The message sent is that it is now open season for any person or entity with enough money to buy political protection to grab as much wealth as possible before the system collapses

Tesla: Can You Smell The Blood In The Water?

“The demand for – the demand for Model 3 is insanely high. The inhibitor is affordability. It’s just like people literally don’t have the money to buy the car. It’s got nothing to do with desire. They just don’t have enough money in their bank account.” – Elon Musk on the Q4 earnings conference call

The following commentary/analysis is from the February 3rd issue of the Short Seller’s Journal.

Tesla’s Failed Business Model – The statement above is an actual comment from Elon Musk on the earnings call. I literally had to ask a couple of people who were on the call if I had misread the transcript or if it was a mistake in transcription. I’m not sure if Elon erringly thought he was sharing profound insight into the laws of economics or if the relationship between price and demand eludes his understanding.

It was announced in late January, before Tesla posted earnings, that the Saudi Public Investment Fund had hedged its 4.9% investment in Tesla’s stock (8.33 million shares). It accomplished this via a structured note (OTC derivative) created by JP Morgan. In exchange for downside price protection, the Saudis gave up participation in any gains should Tesla’s shares rise in price. My guess is that the Saudis also paid a hefty transaction fee to JP Morgan on the order of 3-4% on the market value of the shares hedged.

It did not take long for the Saudi fund to abandon its investment in Tesla. The Saudi stake in Tesla was announced shortly after Tesla’s Q3 2018 earnings release. Musk’s infamous “funding secured” tweet was issued right after the Saudi stake was revealed to the public.

My best guess is that the 8.3 million shares where accumulated during July around an average price in the low $300’s. It’s also possible that one of the large U.S. fund holders sold a big block of shares that was crossed into the Saudi fund. Hard to say for sure but I would surmise that JP Morgan and/or Goldman Sachs (Tesla’s primary investment banks) know the truth.

If the hedging derivative was structured during the month before it was announced, the average price of the hedge is likely $320. Let’s assume the Saudis locked in a $20/share profit – $166 million. Netting out all trading and transaction fees (at a 3.5% fee, the derivative hedge would cost $93 million) the Saudi fund maybe netted about $60 million on the trade. But why did the Saudis bail on the investment after less than six months?

For me the demand/price comment exemplifies the Tesla tragicomedy. The Company reported its Q4 on Thursday after the market closed. Until the 10-K is release (40-60 days), I can not layout a detailed dissection of Tesla’s accounting games. But needless to say it appears as if Tesla’s CFO employed all of the same accounting schemes as were used in Q3 in order to manufacture a GAAP “net profit.” Notwithstanding this, the Company “missed” the Wall St consensus estimate and warned that it may or may not generate a profit in Q1 2019.

Speaking of the CFO, it was announced at the end of call – literally before the Company hung up the phone in order to avoid questions on the matter – that the CFO would be leaving the Company sometime in early 2019 though no specific date was set. He is to be replaced by a little-known 34-year old VP in the finance department, Zach Kirkhorn. Kirkhorn prior to Tesla was a “business analyst” McKinsey & Co. This is a fancy term for someone who helps design computerized enterprise applications for McKinsey clients. Prior to McKinsey, Kirkhorn worked at Microsoft.

Kirkhorn was a curious choice becasue he stunningly has little apparent experience in accounting and finance. Typically CFO’s have either worked their way up the accounting/controller side of a company or are hired from a similar role from the outside. This move left everyone scratching their head but reflects the general dysfunctionality that pervades the Company.

Telsa has experienced a stunning drop-off in orders since the end of 2018 that appears to have begun during late December. The $7500 tax credit was cut in half starting January 1st. Data from Europe show that EV sales fall off a cliff when the tax credit disappears. The chart to the right illustrates this by showing Tesla’s Model 3 sales over the last 12 months (from @TeslaCharts).

The jump in December M3 sales is a product of huge incentive programs Tesla implemented to stimulate sales ahead of the cut in the tax credit. As you can see, since July TSLA has averaged 20,000 unit sales per month. The January number is largely the expected cliff dive related to the drop in the tax credit. However, the large drop-off is also likely attributable to potential EV buyers waiting for the spring roll-out of the Audi E-Tron and Porsche Taycan. Porsche announced in January that it was doubling production in response to demand.

Briefly on Tesla’s numbers. Taking $139 million of net income attributable to stockholders at face value – i.e. assuming the accounting is 100% clean – nearly $100 million of that is from Tesla’s sale of greenhouse gas and zero emission vehicle credits. If we assume just $39 million worth of GAAP manipulation used to generate “income” (the real number is multiples of $39 milion) small amount of accounting games were used to generate GAAP “income,” reversing out the GHG/ZEV credits takes Tesla’s actual net income to zero. This means that the ability of Tesla’s business model to generate actual cash income is based solely energy credit sales. This is not a valid sustainable business model.

In the short term, the next big event is the maturity of the $920 million convertible bond due in March. It looks like Tesla’s stock price will be below the price at which bondholders will want to convert. Additionally, the deadline to reset the conversion price lower has passed. This suggests that Tesla will use cash to pay off the converts.

But here’s the problem:  At quarter end, Tesla’s balance sheet showed a working capital deficit (current assets minus current liabilities) of $1.7 billion.  Of the $8.3 billion in current assets, $3.6 billion is cash. However, of the $9.99 billion in current liabilities, $3.4 billion is accounts payable. It would appear that Tesla will be stiffing its suppliers, vendors and service providers if it uses the cash, as reported, to pay the converts.

I don’t know how Tesla will resolve this issue but I suspect the maturing bond will paid. Otherwise the Company will be forced to file for bankruptcy of some flavor. I don’t see this event happening until at least the end of 2019. This is why I moved my long-dated Tesla OTM puts out to June 2020.

Regardless of this immediate issue, I expect to see continued deterioration in Tesla sales across all three of its models. Snapshots from around the country from major metropolitan areas show lots full of unsold Teslas – all three models – with the inventory stored in these lots growing by the week.

Since I wrote the above analysis for the Short Seller’s Journal issue released this past Sunday, it was reported that Tesla has not received EU approval to sell Model 3’s with autopilot installed. Most of the Model 3’s pre-ordered in Europe were for the Model 3 with autopilot. This little factoid was in direct contradiction to the Company’s announcement, reiterated by Musk in the earnings letter to shareholders, that the Model 3 was fully approved in Europe.

There’s clearly something amiss with Tesla’s liquidity. It’s been reported by customers in Germany that Tesla is demanding full payment for Model 3’s ordered before the Company will deliver the vehicle. Perhaps a tempest in a teapot? A Model S owner who had canceled his Model 3 order and requested a refund of the $1000 deposit posted a copy of the refund check on Twitter – only Tesla had placed a “stop payment” on the check:  LINK

Meanwhile the Company has been laying of workers and cutting prices on feverishly on the Model 3. This is in response to a cliff-dive in demand since January 1st, especially in China. Based on this new evidence, I don’t know if Tesla will be able to make the $920 million convertible bond payment. I would seem possible, given the anecdotal evidence, that Tesla has misrepresented the cash balance on its year-end financials (unaudited as of December 31st). No one knows the answer to that question right now except the banks holding the alleged cash as shown on Tesla’s year-end balance sheet.

Whether or not Tesla can complete a financial hail Mary and address the convertible bond repayment, this company is circling the drain. As far superior competitive models hit the market, demand for Teslas could possibly disappear completely. The stock will drop to zero and the creditors will be left to fight for standing and priority in bankruptcy. I can smell that blood in the water.

In the Short Seller’s Journal I cover economic analysis combined with ideas for shorting the stock market, including market timing, capital management and the use of options.  In the latest issue I presented ideas for using puts to short Tesla, including full disclosure of my trades in the name.  You can learn more about this newsletter here:  Short Seller’s Journal.