From FT Alphaville:
Engineering cult value, Elon Musk edition
Elon Musk isn’t just an eccentric visionary with a penchant for Bond-villain scale thinking, he’s a branded cult phenomenon. The man is known for thinking absolutely anything is possible provided enough hard work and belief are thrown at it.
Hyper loops? Check. Manned missions to Mars? Check. AI annihilation? Check. If Elon can dream it, he can make it happen.
But there are those who never bought the Musk hype.
Take Craig Pirrong, the Streetise Prof, as an example. He questions the entrepreneur’s visionary credentials on the grounds that so much of his wealth is derived from government handouts or old-school rent seeking models.
As recently as June, Pirrong noted:
Elon Musk is a rent seeker masquerading as a visionary. If he is one-tenth the innovator and genius his fawning fans believe him to be he wouldn’t need any subsidies. We should give him the chance to prove it.Pirrong really knows his stuff when it comes to market structure and price manipulation. He literally wrote the book about it. So when the Streetwise Prof questions the legitimacy of Musk-associated company stock price runs, it pays to listen.
Readers will recall that the price of Tesla stock experienced an almost bitcoin-esque explosion a few years back for no openly explainable reason.
One morning Tesla stock was worth sub $50, the next morning it was worth $100. Even today one consistent characteristic of the stock is that it remains hugely volatile:
But as the Prof noted in May 2013, there is a helluva lot to be concerned about when it comes to Tesla’s valuation. Not just the now 85x forward earnings valuation or enterprise value to EBITDA ratio of 1770x (!), but the degree to which a literal bonfire of Tesla shorts accompanied the stock explosion.....MUCH MORE
Pirrong suspected the mother of all short squeezes may have been responsible. And to prove his point he’d crunched the numbers too:
In the absence of manipulation, the forward price of a stock should be the current spot price plus the cost of financing the position at the prevailing interest rate until the delivery date on the forward. In the absence of a squeeze, the cost/fee to borrow the stock should be small.
However, in a squeeze, it is costly to borrow the stock: the bigger the squeeze, the bigger the cost of borrowing. This borrowing cost depresses the forward price. Thus, during a squeeze, the forward price is below the spot price plus financing costs. The differential between these is a measure of the severity of the squeeze. I can’t observe borrowing costs directly, and there is no explicit forward market for Tesla stock. But there is an options market that trades fairly actively.
Given put and call prices, and the associated strike prices, I can use put call parity to estimate an implied forward price: F=(1+rT)(c-p)+K where c is the call price, p is the put price, K is the strike price, r is the interest rate (I use Libor), and T is the fraction of a year to expiration of the option....
And from February 24, 2014's "Shorting Tesla: Is Seabreeze Partners' Doug Kass a Genius? (The Key to Understanding Market Anomalies) TSLA":
Quick answer: No....
...From the Social Science Research Network:
The Shorting Premium and Asset Pricing Anomalies
Abstract:
Short-rebate fees are a strong predictor of the cross-section of stock returns, both gross and net of fees. We document a large "shorting premium"; the cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha. We show that short fees also interact strongly with the returns to seven of the most well-known and large cross-sectional anomalies. These anomalies disappear among the 80% of stocks with low short fees, but are greatly amplified among those with high fees. We propose a joint explanation for these findings wherein the shorting premium is compensation for the short-side risk borne by the small minority of investors who do most shorting. It therefore raises prices rather than lowers them. We use the CME portfolio return as a proxy for this short risk and demonstrate that a Fama-French CME factor model largely captures the returns to all seven anomalies within both high- and low-fee stocks.
1 Introduction
Asset pricing theory has long recognized that if an asset cannot be sold short then it may
become overpriced, because investors who think it is overvalued are prevented from selling
it (Miller, 1977). However, in practice U.S. equities are not typically subject to short-sales
prohibitions. Arbitrageurs can sell shares short by borrowing them in the stock loan market.
The price for doing so is a fee, or rebate, paid by the borrower to the lender (henceforth
the \shorting fee"). There are at least two reasons why the shorting fee should contain
information about the returns on the stock. The fi rst is straightforward: the fee represents a
payment stream that the stock owner can earn by lending the stock. The second is indirect:
the shorting fee embeds information about the underlying demand to short the stock, a
potentially important determinant of the stock's expected return.
In this paper, we demonstrate that shorting fees are highly predictive of the cross-section
of stock returns. Our analysis is presented in two parts. In the rst part, we show that
low short-fee stocks earn much higher returns than high short-fee stocks. This is true for
returns measured both gross and net of shorting fees. Moreover, the di fference in returns is
not explained by exposures to conventional risk factors. We call this di fference in average
returns the \shorting premium", because it represents the extra return earned by investors
who short high-fee stocks.
In the second part of the paper we show that there is a strong interaction between shorting
fees and the returns to seven well-known, large cross-sectional return anomalies. Speci fically,
we show that these anomalies e ffectively disappear, or are at least dramatically weakened,
among low-fee stocks, which represent 80% of all stocks and an even higher fraction of
total market capitalization. In contrast, the anomalies are highly ampli fied among high-fee
stocks, generating long-short portfolio returns that are very large even by the standards of the
anomaly literature. Our ndings show that shorting fees are instrumental to understanding
the structure of these anomalies' pro ts....MUCH MORE
HT: Victor Niederhofer's Daily Speculations:
Shorting Fees Are Inversely Proportional to Forward Returns? from Kora Reddy
I'm not sure which prof (Charles or Alex) was mentioning shorting the cost of certain stock at 60% ++ in one of the posts, but I found this interesting paper on the subject: "The Shorting Premium and Asset Pricing Anomalies".
Here is a two line summary of the paper:
1. The cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha
2. Top decile stocks by shorting premium (cheap to short) returned an average of 0.75% (gross) and 0.11 % (net) in the next one month, while bottom decile (expensive to short) returned -0.71% (gross) and -0.17% (net).
The rebate on Tesla has at times hit 90% and it has frequently been above 50% per annum so you see my interest in such things, eh?
