Streetwise Professor

About the Author Streetwise Professor

“Streetwise Professor” is the web persona of me, who happens to be Craig Pirrong.* My day job (to the extent that I have a real job) is as Professor of Finance and Energy Markets Director of the Global Energy Management Institute at the Bauer College of Business, University of Houston. I have been in academia since 1989–shortly before the Ferruzzi soybean squeeze on the Chicago Board of Trade in July of that year, which was quite propitious and which had a big impact on the trajectory of my career. I have a PhD in Business Economics from the Graduate School of Business at the University of Chicago. - See more at: http://streetwiseprofessor.com/?page_id=8#sthash.DTdhDre1.dpuf

Staying Cautious on Tesla (TSLA) Stock


Like a thief in the night, Tesla’s (NASDAQ:TSLA) controversial CEO disclosed that he was not proceeding with his brilliant plan in a blog post that was posted at 11ET last night–Friday night.

Quite the weasel move.  I say when you screw up, man up.  But not our Elon.  He took the coward’s way out with a Friday night–late night–news dump.  Hell, he didn’t even Tweet it.

Of course, the statement is filled with argle-bargle rationalizing the decision, and the previous big announcement about funding secured, $420/share, and all that.

He is sticking with the story that there was plenty of funding available.  Really?  Plenty of funding to take out shareholders at $420/share, and allow most of the existing shareholders to remain owners of the private firm in a magical structure never seen before, and almost surely a violation of the securities laws, and allow access to continued funds to fuel Tesla’s cash burn?

Musk of course had an alternative explanation for his U-turn: going private on the terms he had envisioned (or hallucinated) would be “even more time-consuming and distracting than initially anticipated.”

Yes, attempting the impossible usually is pretty time-consuming.

What next? Well, Tesla’s structural financial problems remain.  The company is facing the daunting challenge of navigating between the Scylla of Musk’s promise of no new capital raise and the Charybdis of the incessant cash burn.  Not to mention the problem of a delusional megalomaniac CEO.

Charley Grant of the WSJ has been skeptical of Musk–well, by journalist standards anyways–but he misdiagnoses his and the company’s current predicament.  Grant says that Musk made two mistakes in 2016–buying Solar City, and plunging ahead with the Model 3.  But Musk really had no choice on either: letting SCTY fail or ditching the everyman’s EV would have undermined Musk’s aura in 2016–and that aura is what has kept the capital flowing since.  If he had not done these things, Musk would have faced two years ago the problems he does now.

The other night I watched a BBC documentary about the Wars of the Roses, in which narrator (and historian) Dan Jones argued that Richard III wasn’t evil–the choices he made (killing Lord Rivers, kidnapping and then likely killing the princes in the Tower) weren’t really choices.  If he hadn’t done those things he would have faced immediate doom.  By doing them he bought some time–and delayed his doom.  Richard did what was necessary to survive to fight again another day.

Methinks Musk’s situation is similar.

I was amused that Morgan Stanley had announced Thursday that it was advising Musk on the going private plan, and then Musk pulls the plug about 40 hours later.  Does it really take that long to say “are you out of your fucking mind?”  Or did it take them that long to recover from the giggles? Or maybe Elon just sat on the bad news from MS until he could release it with the least attention possible.

The only real questions remaining are: (a) what caused Elon’s synapses to conceive of this brilliant plan?, and (b) will there be legal consequences?

Insofar as (a) is concerned: LSD? Lack of sleep? Impending mental breakdown? Or was there something more desperately Machiavellian about it?  Regardless, I can’t think of an explanation that bodes well for Tesla.

With regards to (b).  It is so blindingly obvious now (and should have been from word one) that his announcement Tweets were materially false.  They had large impacts on the price of Tesla stock.  They followed years of other dubious announcements, both on Twitter and in SEC filings and investor disclosures. If the SEC lets this slide it will make a mockery of the securities laws, and suggest that there are different standards for some people.

Some have suggested that the SEC is reluctant to take actions that will kill Tesla, or crater its stock price.  Well, why should Tesla be any different than other companies?  SEC actions have cratered other firms. (Dynegy is an example that comes to mind.)   The stock price falls were features, not bugs.  The SEC actions cratered these other firms because they revealed widespread wrongdoing and material falsity in corporate disclosures that had caused stock prices to be greatly inflated.  Why would the SEC want to perpetuate inflation in Tesla’s stock price?  If the stock price can’t handle the truth, well, that would be the problem that the SEC is supposed to be addressing, wouldn’t it?

 

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