Sorry there’s so much Tesla in the March edition of Ask Kuppy, but that’s all readers seem to care about…
Long time reader but I disagree with what you’re doing with the Koch bros and big oil to hurt Tesla. You’re trying to stop the big deposit money with the Model Y, so that they can’t complete all the Model 3 orders they have!! Its because of you guys that they’re so far behind on the Tesla Semi and other projects to save humanity. Please stop calling Kochs and big oil!! They need those deposits to go on.
(from a VERY smart friend with a minor edit to remove a reference as to how DB wants to put the onus on Tesla to continue to selling defective products that kill consumers so that they don’t have to after BK, as it is somewhat subjective that DB would act in this way)
Think you’re right. This is a real-life bankruptcy liquidation without a filing. The best clue was that DB extended the ABL facility by $500m. They probably figured they’d prime other lenders and potential DIP players (think of the ABL increase as DIP funding). They likely looked at the collateral, which is a bunch of mid-2018 vintage tent-produced lemons and realized that they’d get a better recovery if they re-opened the stores and forced Musk to dump this inventory on an unsuspecting public vs. trying to do it after a BK. Everything here looks like a way to liquidate inventory and set things up for a cleaner BK with DB in the lead.
Figured I’d share this.
In light of all the Tesla Shenanigans — Do you think it is a zero? I own a bunch of put spreads on it expiring 3Q and beyond. But have been thinking this might be one of those situations where buying even $10 strike puts would offer really attractive asymmetry that will eventually pay off. Please tell me where I am wrong.
Barring something dramatic happening, it’s a zero. Timing is the difficult part. I am doing 200/100 put spreads for Jan 2020. They pay off $85 from my cost basis of $15, meaning I can reload next year if my timing is wrong and I still net huge gains. While I think it’s game time here, Elon has an amazing ability to stay irrational for longer than you can stay solvent. Choose strikes/expirations accordingly.
I’m trying to calculate the Tesla Q1 ending cash balance. Tell me where you disagree.
$3.8b Starting Cash
-$.9b Convert Payment
-$.5b Unwind of EOQ Cash Games
-$.3b Mandatory Cap-Ex
-$.2b Operating Losses
-$.3b Inventory Build (slow boat to Europe/China and production over sales)
$.-5b Working Capital Unwind
$1.1b Cash Balance EOQ
-$.6b Allocated to China Giga-project (not spent but collateralized by Chinese bank loans)
-$.2b April $180m Solar City Bond Payment Escrowed
$.3b Functional Cash Balance EOQ
I am not sure if I disagree with any one number and they’re certainly under a lot of cash strain as they’re trying all sorts of cash grabs (M-Y, M-3 Europe, Tesla Semi, etc.). I would note that they increased their ABL so they have some extra liquidity and once you start massaging numbers, the propensity is to continue massaging numbers, so the March 31 number could be damn near anything. However, the March 30 number is likely pretty close to what you’re describing. I suspect they hit zero sometime early this summer barring a miracle (though they do still have various lines of credit they can potentially draw upon in theory).
When you look at Tesla, on a fraud scale of 1 to 10 where 1 was GE massaging the numbers to hit quarterly targets and 10 is a China fraud where the factory doesn’t even exist, where would you put Tesla? Enron is right in the middle. They had a real business, the numbers weren’t real.
Good thought-provoking question. Thanks.
I would say Tesla is potentially in the same category as Enron, so a 5. They produce real cars. The numbers probably aren’t right. The big difference is that Enron didn’t kill customers on purpose, whereas Tesla is faking safety data so they can sell death-mobiles that they know to be some of the most dangerous cars on the road. So, maybe it’s a 7.
First off, thanks for sharing what you do at your site. Very interesting.
Second – and my question – how do you structure a put spread? I did a quick internet search, but if there are any specifics you’re will to share, please let me know.
A put spread involves buying a put and selling a put at a lower price to help fund the put you are long. Most of my position is the Jan 200 put funded with a short Jan 100 put. All of it is 2020 paper and it was about a $15 net debit to me. If this sounds complicated to you, you probably shouldn’t be playing in put spreads (though this isn’t meant to be investment advice).
Kuppy. You’re wrong. I keep writing 1 week puts. They’re the cash cow that keeps on giving. Elon always saves when the share price dips.
Until he doesn’t. Be careful with that strategy.
Kuppy, why use a put spread where your gain is capped when you can buy the $200 put for 24 instead? When TSLAQ goes to zero, you make 176 or 7.3X your money.
Every situation is different. While a bankruptcy seems like the ultimate outcome, if they can raise capital on the way down, this may limp along a lot longer than logic would dictate. I don’t mind giving up the last 100 points as they may be the hardest ones.
Besides, I paid $15 for my 200/100 put spread, so while the most I can make is $85, that is 5.7 times upside. The difference is that I only tie up $15 in capital instead of $24, so I can do it 60% bigger for the same dollar amount. Hence while my upside is still 5.7 times, I can now make $136 (1.6 X $85) and I make almost the same and don’t need the stock to drop to zero–$100 will do. Finally, if the stock drops under $100, I can always roll the short put down as the implied volatility will be unusually high during the crash. This allows me to capture some extra upside as I’ll always have my long puts covering me as I roll down. This is why I prefer put spreads. You actually get MORE leverage, you don’t need a complete washout to zero to get your maximum gain and you have the most optionality to add upside to your spread if it declines below your short put floor.
You haven’t talked about Scorpio lately. Are you still in?
I write when I have free time. I have other obligations that take up most of my time. If a position changes, I try to note it within a few days of the change. If I haven’t written about it, nothing has changed (though I do trade around positions from time to time).
Hello Kuppy – thank you for the great content. I’m learning a lot! What are some good ways to find potential investments? Do you “start with the A’s” with small cap companies? Do you have any favorite screens that you start with? What happens when you run out of ideas?
I usually find ideas from scanning what’s down a lot, talking with friends, reading blogs run by smart people and scanning places like SeekingAlpha and VIC. I’ve also become a bigger fan of investment conferences lately. You never know who or what you’ll run into there.
There’s a lot of great ways to find ideas. The problem is usually too many ideas and not enough time to learn about them all.
Seen you refer to them as DeathMobiles and FraudMobiles. Which is it?
haha depends on what Musk is tweeting about that day.
Why do you think so many smart people (ie. Chanos, Einhorn, You) are so obsessed with Tesla? There’s thousands on message boards talking about this as a fraud and those people clearly put most of their waking time into following this including staking out delivery centers for days at a time. Seems like a giant waste of time to me. I get the thesis, but why fixate so much? Plenty of scams out there. Why is this so special?
In my whole career, I have never seen anything as fundamentally insane. You have an auto OEM which is a terrible business, hitting a demand wall at a time when competing products that are better are hitting the market. Meanwhile, the company is broke, the CEO is a compulsive liar who can’t stay sober and the numbers are likely fake. Finally, it seems that every govt regulator is about to pounce (SEC/DOJ/FBI/DEA) and they cannot raise money from the capital markets.
All of this is about to hit the fan and when it does, there’s a VERY deep and liquid options market to express that trade. While I’m not recommending anyone do this, there are highly liquid monthly and even weekly puts that are deep OTM. If you can guess when it all detonates, there’s actually the potential to make hundreds of times your money on a 7 or 8-figure bet. You don’t often get those sorts of chances in the market (especially where you can play it with huge size) and that’s why everyone is fixated on it. It’s a once in a life-time opportunity for most funds. It’s like buying CDS on housing in 2007.
Finally, you have the fact that the product seems to kill a few people a month and is likely to ramp its pace of fatal product failure in a stepped exponential as it is a fundamentally flawed product that deteriorates rapidly with age and corrosion. There’s so many ways to win here and the only question is timing. That’s why we’re all so focused on it, if you get a sense of the exact timing, you can win bigger on Tesla than any other trade globally.
It’s also the best soap opera in finance. Billion times better than Billions…