Tesla is on the brink of a major shift that will completely change how its stock trades

  • Tesla chief executive officer Elon Musk has long been an outspoken critic of short seller behavior that's made his company the most shorted in the US equity market.

  • Financial analytics firm S3 Partners has compiled data to suggest it's getting much more difficult to short Tesla, and it explains how this could permanently alter how the stock is traded.

If you pay attention to Elon Musk's public comments — or simply follow him on Twitter — then you know he loathes traders who short Tesla's stock.

Well, the outspoken chief executive may be in for a treat, at least if the latest findings from financial analytics firm S3 Partners are to be believed.

S3 finds that investors are quickly approaching the maximum number of shares able to be held short. On May 3, short interest in Tesla spiked to more than 40 million shares, moving closer to the cap of roughly 47 million, as estimated by S3.

"If short selling demand continues to grow at this pace, short sellers will feel the angst that Tesla Model 3 buyers are feeling — with demand outstripping supply," Ihor Dusaniwsky, S3's managing director of predictive analytics, wrote in a recent report.

Dusaniwsky also notes stock-borrow fees are rising, which could climb to more than 10% once short interest nears 45 million shares. For comparison, the fees were a meager 0.75% as recently as October 2017, S3 finds.

"If short selling continues to increase and rates hit the 10% fee level it will cost between $2-$4 million per day to finance the entire Tesla short book," Dusaniwsky said.

It's also possible that Tesla short sellers will soon bump up against the limit of shares they're allowed to hold in a stock, according to S3. These types of restrictions are designed to keep one bad trade from destroying an entire portfolio, and it could wind up benefiting Tesla's stock in the long run.

These limits also lead to increased covering of short positions when Tesla's stock rises, because investors have to reduce the dollar amount of their exposure. And that covering, in turn, pushes shares even higher, making life even more difficult for the remaining shorts.

Now time for the million-dollar question: What does this mean for the overall trading of Tesla's stock in the immediate term?

According to Dusaniwsky, it'll shift the onus towards long shareholders, who are more inclined to trade based on core company fundamentals — not on Musk's dreaded "short thesis."

"Lack of stock loan supply, increased stock loan costs and tapped out risk limits will eventually curtail short selling in Tesla," he said. "As we get closer to this happening, Tesla’s stock price will be more and more dependent on long shareholder buying and selling – the shorts will be on autopilot and the long’s will be in the driver’s seat."

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Musk's storied history of short seller hatred

To truly appreciate just how much Musk dislikes short sellers, look no further than his Twitter account.

He lobbed his latest grenade on Friday, capping off a tweetstorm that saw him double down on comments made during a contentious quarterly earnings call last Wednesday.

"Looks like sooner than expected," he tweeted in response to a story about time running out for short sellers. "The sheer magnitude of short carnage will be unreal. If you’re short, I suggest tiptoeing quietly to the exit …"

The comments were just the latest entry into Musk's grand anti-short seller crusade. Over the past year, he's forged a combative relationship with Tesla skeptics, calling them "jerks who want us to die" in a Rolling Stone profile last year, and describing their behavior as "hurtful."

Further, Musk fired off a tweet last June in which he said short sellers "want us to die so bad they can taste it." In early April, after a period of considerable stock strength, the CEO even went as far as to taunt Tesla's detractors, tweeting, "Stormy weather in Shortville."

And despite Musk's myriad efforts, Tesla remains the most popular short in the US equity market — a designation it has held for much of the past two years. Short interest, a measure of bets that a stock will drop, sits near $11 billion, outpacing the next-most-shorted company, Apple, by more than $1.5 billion, according to S3 data.

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Screen Shot 2018 05 04 at 7.37.38 AM

S3 Partners

While Tesla certainly has its share of skeptics, another explanation for the exorbitantly high level of shorting activity is that the company and its mega-cap tech peers are being used as proxies to hedge against the broader stock market, according to S3.

That includes the likes of Apple, Amazon, Netflix, Microsoft, Facebook, and Alphabet, which are all included in the most-shorted list above. The wisdom behind the hedging strategy is that as these huge, influential stocks go, so does the market — so taking a short position in them means protecting against an index drop.

In the end, it's a vast understatement to say short sellers have Musk's attention. And if the scenario laid out by S3 ends up coming to fruition, it looks like he'll have the last laugh.

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Screen Shot 2018 05 07 at 11.55.08 AM

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