THE DAILYALTS PLAYBOOK

April 22, 2020

The DailyAlts Playbook Talks About The Madness of Shorting Tesla, Expedia’s Capital Raise, the Belt Road Initiative, and “Gooooooold.”

PRIME OVERVIEW

Good morning,

Yesterday, I received a text from a close friend who had an idea.

He wanted to short a stock that was trading at nosebleed levels, had a history of mixed earnings results, and had several recent embarrassing news developments during COVID-19.

The July $500 put contract traded around $36. He called it a “lottery ticket.”

The company in question might not be obvious.

But it’s Tesla (NASDAQ: TSLA).

Tesla needed the profit margins of Apple (NASDAQ: AAPL) and the production of Volkswagen to justify trading at $900 per share earlier this year.

But investors simply don’t care.

When it came to Tesla, I explained one obvious thing.

David Einhorn is a person far smarter than I am. That’s why he runs Greenlight Capital, and I write knock-knock jokes beside the pool in Southwestern Florida.

Yet Einhorn – who earned his fame shorting mortgage-backed securities and ultimately banks during the financial crisis – has lost a fortune trying to short Tesla.

I have called Tesla a cult stock in the past. Having studied it immensely and following insight from the great Twitter account @TeslaCharts for years, I don’t understand how or why people invest in Tesla other than a love for Elon Musk or herd behavior.

It’s a trader’s stock – institutions hold just 51.5% of the stock.

Short interest sits around 13.5%. So, you know that a lot of people see the same issues.

But there’s something about Elon Musk that makes people believe that we’re really going to Mars (even though he’s suggested it might not happen in his lifetime.)

He also has a masterful understanding of how to use distraction from bad news.

Miss delivery numbers? Well, look over here retail investor – I’m building flame throwers…

Miss earnings? Well, let’s dig tunnels in a state that sits along the Pacific Rim of Fire.

Have a balance sheet that makes no logical sense? We’re going to Mars… and we love the number 420.

Musk also throws himself into every crisis in the world, and shareholders reward him. No one seems to care when the results don’t go well.

Remember when he was testing a submarine to rescue kids stuck in a Thai cave? Then he got sued by a British diver after Musk lobbed an ugly accusation at the man.

Recently, he promised ventilators to hospitals on the East Coast that were really BPAP machines.

He did the same in California, and CNN reported that the ventilators didn’t arrive as promised.

Yet after all this, the stock rises.

Bank of America just cut its outlook on valuation concerns. I’m not really sure that anyone cares.

To me, shorting Tesla is a siren’s trade – and the carnage of that effort extends beyond the trades of David Einhorn.

Is Einhorn right? In the long run, I think he is.

But I think that this will remain one of those massively irrational stocks that frustrate and enrage a lot of people trying to time its decline.

My advice: Forget it’s there. There are a million other trades.

If Tesla does eventually experience its reckoning, just say you called it like half of the people who pay to appear on television claiming they called 2008.

MORNING MOMENTUM

CRUDE ALERT: This morning, oil prices stabilized after a tumultuous two days that saw the May WTI contract shoot into negative territory for the first time in history. Producers and contract holders effectively had to pay traders to take their crude off their hands at the delivery point in Cushing, Oklahoma by the end of the month. Crude prices stabilized following the suspension of the world’s largest oil ETF, the United States Oil Fund LP (NYSEARCA: USO). That fund owned roughly 25% of all May contracts and was rolling over into June. Given that the fund doesn’t really have the capacity to take delivery – it has proven the dangers of its strategy during a demand shock. Today, the WTI June contract sat at $11.28 per barrel, while Brent crude traded at $19.35.

STIMULATE: The U.S. Senate passed another coronavirus bill to provide aid for small businesses, hospitals, and capital for testing. The tab: $484 billion. The House of Representatives will now take up the bill and probably spend a few days filling it with pet projects and more pork items. Roughly $310 billion has been allocated for SMB loans for the Paycheck Protection Program, which already dried up last week. Across the United States, the number of official COVID-19 cases surpassed 825,300, while the number of deaths hit 45,000, according to Johns Hopkins University.

DON’T WORRY ABOUT THE AIR: Finally, the World Meteorology Organization projects that the coronavirus pandemic will drive down global carbon emissions by a staggering 6% this year. That is the largest single yearly decline since World War II. “This crisis has had an impact on the emissions of greenhouse gases,” WMO Secretary-General Petteri Taalas said during a briefing in Geneva, Switzerland. “We estimate that there is going to be a 6% drop in carbon emissions this year because of the lack of emissions from transportation and industrial energy production.” This will likely become a big topic of discussion among ESG proponents at a time that the carbon energy industry struggles.

ACCRUED INTEREST

DEALMAKING: Private equity firms Apollo Global Management and Silver Lake Partners are looking at a stake in Expedia (NASDAQ: EXPE). The company has struggled in the wake of COVID-19 as travel bookings have plunged around the globe. According to reports, a deal would be in the range of about $1 billion and set up the PE shops for a big win when travel demand rebounds.

REBUILD: Ray Dalio said in a LinkedIn interview that he expects that global restructuring from the COVID-19 crisis will take three to five years. That sounds about right. Dalio focused on the importance of self-sufficiency for nations, as COVID-19 has exposed vulnerabilities. In the Middle East, food security remains a major problem. In the United States, production of medical supplies and other key products.

I LOVE GOOOOOLD – Bank of America expects that gold is going to rally by 80% over the next 18 months. Yesterday, the bank released a not called “The Fed Can’t Print Gold” and said that the unprecedented money printing and stimulus will lead to massive pressures on currencies. Here’s the question: What if gold doesn’t go up? What if inflation doesn’t rise? What would that mean about the state of the economy and the leverage we saw in recent years? I personally believe that gold HAS to go up. But we’ve heard this narrative before, and we didn’t see the rapid rush to gold that so many had predicted.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• • VC: The number of venture capital deals during the first quarter plunged.
  • Hedge Funds: Anthony Scaramucci denies that SkyBridge is losing Citi
  • Alternative Investments: Bottom feeding in the ugly oil patch.
  • AI: MIT cuts ties with a Chinese firm over human rights.
  • Fintech: Worries about SMB loans in Alt-Fi

QUOTES OF THE DAY

“Alternatives managers, from a fiduciary standpoint, should be exploring federal assistance for portfolio companies where it is needed to preserve value and help employees.”

That’s Marcus Frampton, CIO of the Alaska Permanent Fund. The $60 billion sovereign fund said that it would look “quite negatively” on any hedge fund or asset manager that tries to tap into small business funding from the U.S. government.

“I think I should be hoping for more than just a pause in tensions, but really a serious rethinking of the very foundations of this important relationship.”

That’s Cui Tiankai, Chinese ambassador to the U.S., weaving a careful narrative about how the two countries need to freeze tensions and work together during this pandemic. Agreed, start by unfreezing our manufacturing and allowing us to ship our medical supplies back. Or we can just do the smart thing and move our manufacturing to Latin America, South America, and North America. The world is about to learn a few really ugly lessons on the other side of this – particularly when China owns half of Africa and Central Asia in the pursuit of the Belt and Road Initiative – which some claim to be a massive experiment in financial colonialism.

CANNABIS AND REAL ESTATE

The USO Fund LP has halted trading.

On Monday, the fund was largely responsible for pushing WTI May crude prices into negative territory. Crude prices effectively collapsed by 300%.

The United States Oil Fund LP (NYSEARCA: USO) said in a regulatory filing today that it would suspend buying of crude. This action suspends USO Authorized Purchasers from buying new creating new baskets. The WTI May contract expires today.

Last week, the USO fund owned 25% of all outstanding shares of the Many 2020 WTI oil futures, according to Bloomberg. Owners of this contract either had to take physical delivery of crude in Cushing, Oklahoma later this month or sell those contracts. The ETF – which really just trades speculative paper barrel contracts – isn’t in the business of taking physical delivery.

Even if it wanted to take delivery, storage in Cushing is effectively tapped out. In a situation where oil prices are negative, producers are effectively paying traders to take crude off their hands at the delivery point. This was the first time that this has happened in the U.S. oil markets.

Yesterday, hedge fund manager and oil trader Pierre Andurand warned that the ETF would suffer massive losses. As it rolled over contracts, the USO fund lost 20% before market open Tuesday.

“I think the CME might have no other choice but to close out the ETFs positions. It cannot take the risk to have negative prices before the roll and be on the hook. This shock is real. Be very careful out there. We are going to hear about crazy losses in the days and weeks to come,” Andurand said on Twitter.

For more ETF coverage, visit DailyAlts.com.

Check out the DailyAlts Playbook again tomorrow.

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.