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It was a difficult week for the price of the action of Tesla. After a sharp fall, the Securities and Exchange Commission threatened to sue the CEO, Elon Musk, who then agreed to settle, but the situation has declined further. And that seems to be due to Musk's tweets, as usual. This time, he seems to be attacking the SEC (calling it the short seller's enrichment commission) and reserving his real anger to the short sellers of Telsa's stock themselves, as usual.
Musk called the short sellers "destructive worth" and said that this practice should be illegal. He expressed how he hated them and warned they would lose if they bet against his car manufacturer since 2012, including announcing a "brief fire of the century" in May this year.
Before Musk dragged them into the twitterverse, short sellers were not something most potential electric car buyers had heard about. So, what are the short sellers, why do they musc-so much and can they have an impact on Tesla's future?
Traditional investment is all about low buying and high selling. It's a safe bet that the value of a business will increase over time, so the value of an action from that company will also increase. If the company goes bankrupt, investors risk losing all the money they have spent on their shares.
Short selling is the opposite. Short sellers (or shorts) believe that the value of a company, and therefore its price, will fall. They borrow or rent shares – usually from large companies, such as 401K managers – and sell them immediately. Then they wait, hoping that the price will go down so they can be bought back, returned and pocketed.
Here is a hypothesis. A short seller would borrow 10 shares of an electric car company, valued at $ 420, for a total cost of $ 4,200, which they would then resell. If this company is having trouble producing its new product and is getting a ton of bad press, or if the CEO of this company is beginning to denigrate regulators on Twitter, exposing the company to lawsuits, the stock could fall to, say, $ 300. Then, the short seller redeems the 10 shares for $ 3,000 and returns them to the owner. The short seller pockets $ 1,200 less the rent they paid while holding the shares. (Investment plans pay a lot of money by renting shares like this.)
The main risk for the short seller is that the price may increase. The company's CEO could settle a lawsuit and the company could post good production numbers for its new product. If stock prices continue to rise, the cost of buying the 10 shares potentially increases significantly. This makes short selling too risky for most traditional investors because they can lose a lot more than the money that they have invested.
Companies and their leaders hate short selling. The mere fact of having shares sold short devalues them. This is because they are more likely to be sold – more supply – but at the same level of demand. Which can bring down prices. And even though a company can carefully control the offer by determining the number of shares it issues, it can not control the number of shares that hit the market after being borrowed and then sold by short sellers.
"This puts downward pressure on the stock, and it's not good, when your daily report is the price of the stock," says James Cox, a professor of corporate and securities law at the Duke University.
This problem is not unique to Tesla. Apple and Amazon are also highly short-circuited stocks. Their CEOs are just less forthright about it.
But what makes Elon Musk so crazy, is that short sellers are motivated to find and disseminate negative information about the company. The worse the business performance, the more short sellers earn money. "They have a strong incentive to see the stock price go down," says Cox.
But short sellers do not do anything illegal. They think they are pointing out real problems with a company. Bloomberg announced on Friday that David Einhorn, a leading hedge fund manager and famous short seller of Tesla, was now comparing the company to Lehman Brothers Bank in a letter that was the subject of a leak.
He told Lehman Brothers that the leaders had threatened short sellers and publicly suggested moving to the private sector. The bank closed in 2008, the biggest bankruptcy in the history of the United States and a catalyst for the global financial crisis. (The guys from Lehman would say that it was the short sellers who provoked it.)
"Like Lehman, we think that deception is about to catch up with TSLA," Einhorn was quoted as saying. (Einhorn turned down the WIRED interview request.)
Amateur investors would also say that they simply expose the problems of society. They retweet what Musk would describe as negative stories, but that they consider revealing (as a New York Times enter the parking lots full of Tesla inventory cars).
"The cult of Elon's personality has attracted thousands of people who simply can not believe that it could ever fail or be wrong," says an amateur investor on Twitter DM. He goes through @PlugInFUD and asks that his real name be protected given Mr. Musk's history of criticism. "These are the same people who hurt themselves when Elon tweets fake buy deals, goes on Twitter unleashes late into the night, etc. We, the shorts, really want to see the end of this joke, of 39 one way or another. " without complaining of being negative towards a company, believing that they help to denounce and resolve frauds. But they will also make profits, which blurs the grounds.
The typical Musk attitude on Twitter, attacking not only short sellers, but also the SEC, does no favor to Tesla. He points to what he sees as a problem, but he does not look like the traditional executive gear of CEOs.
"The more he gets bored, the more questions he has about keeping his hand on the bar," says Cox.
It's a feeling that resonates even among Musk's most loyal fans, responding to his tweets, wondering if he's doing the right thing. This reduces the confidence in Musk, and therefore in Tesla, the society to which he is inextricably linked, and lowers the course of action – exactly what shorts want. The best advice for him is the same one he's still unaware of. Stay out of Twitter.
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