Monday, February 8, 2021

Elon Musk got what he really wanted out of the GameStop bubble and he didn't have to invest a penny


The practice of shorting stocks has been getting a lot of heat recently from across the political spectrum, much of it revealing a profound misunderstanding of how betting against the market works and why it's not a bad thing. Here Michael Hiltzik covers the basics.

How short selling works

A quick primer on short selling is perhaps in order here.

Short sellers honor the Wall Street mantra to buy low and sell high, but they do so in reverse order. First, they sell high, by borrowing stock from shareholders and selling it. Second, they buy low, by picking up shares at a lower price and returning them to the lenders.

Obviously, for this method to work, the shares must decline in price. That’s what short sellers are betting on. So they’re constantly searching for companies that are overvalued, whether because their business models have flaws unsuspected by investors, or they’re havens for fraud (think Enron), or any other reason.

This makes shorts very unpopular among corporate managements, which prefer that the investment community focus on their upside and swallow their optimistic press releases uncritically, rather than pointing out the downside.

Some executives get downright childish about it, such as Elon Musk, who revels in how shares in his Tesla electric car company have remained buoyant despite short sellers pointing out that it makes money not by selling cars but by trading auto emission credits.

Musk and other executives love to portray short selling as almost un-American.

I’ve taken it upon myself to defend them on numerous occasions, including back in 2014 when a respected Washington financial columnist joined a biotech company named Northwest Biotherapeutics in accusing, without a shred of evidence, a very good financial writer of conniving with short sellers to drive the company down.

Northwest was trading above $5 a share then; it’s now at $1.40 and its future was still in doubt a few months ago, so the short sellers were right to be skeptical.

In truth, short selling is not only proper but also essential for the smooth functioning of the financial markets. As I’ve explained before, although corporate managements believe that unalloyed investor optimism is nirvana, it’s unhealthy for capitalism, just as living on a diet exclusively of Twinkies would be for human beings.

Short sellers counteract this tendency. Shorts sounded early alarms about Enron and many other companies destined for collapse in ways that the investment world didn’t expect. Without shorts, not a few frauds would have continued, costing investors millions more than they did.

Musk has been relentless and (by proxy) vicious not just with investors who short his stock but with anyone he considers their allies.

Here's Felix Salmon:

With more than 22 million followers, Elon Musk knows exactly what happens when he uses his enormous Twitter bully pulpit to bully female journalists. Science writer Erin Biba, for one, has made that abundantly clear, with the story of what happened when he merely replied to one of her tweets.

Which is to say: If you don’t have a strong stomach, don’t look at Business Insider reporter Linette Lopez’s @-replies right now. Musk did much more than just reply to one of her tweets: He has gone on a veritable Twitter rampage aimed at her. A smattering:

This is worse than just stalking: Musk is setting his army of fanboys loose on Lopez, he’s retweeting stuff they find, and he’s encouraging them every step of the way. Milo Yiannopoulos was banned from Twitter for setting mobs upon his enemies; Musk should be banned too, but won’t be.

Musk’s harassment of Lopez is obsessive and deranged, to the point at which it should worry every shareholder of any company where he serves as CEO. But since even former journalists seem to think that somewhere in the madness there’s a legitimate beef, let’s put that idea to rest. Lopez has been reporting aggressively on Tesla for a while; her sources include Tesla whistleblower Martin Tripp, whom Musk considers a saboteur for talking to the press. Lopez has also, in the past, written about Jim Chanos, a dogged investor who is shorting Tesla stock.

Chanos talks to many financial journalists—he was famously a key source for Bethany McLean when she was writing the story that brought down Enron—and sometimes he even hires them to leave journalism and make more money doing private research into companies.. Financial journalists and short sellers are in many ways kindred spirits; they both like uncovering companies’ dirty secrets. And here we get to Musk’s beef with Lopez: He’s accusing her as “serving as an inside trading source” for Chanos. This makes no sense.


The weirdest part of all this is that Musk is on an anti-short-selling rampage at all. Tesla is one of the most-shorted stocks in America, and that’s great for Tesla’s share price: The more shorts there are, the more upward pressure there is on the stock. Shorts only depress a share price when they sell; once you’ve gone public as having a substantial short position, the rest of the market will try to make your life as painful as possible by bidding the stock up. Whatever damage that Chanos has done to Tesla’s share price is in the past; at some point, he will have to exit his position by buying back Tesla stock, and that’s going to help drive the price upwards. Musk should be ecstatic!

It's entirely possible that Musk simply doesn't understand how shorting works -- his appearance of expertise in fields like engineering, AI, manufacturing, and recently medicine and epidemiology has a long history of dissipating the moment he goes off script -- or he might believe, quite reasonably that increased scrutiny of Tesla is not in his best interest.

Whatever his motivation, Musk has spent years mocking and demonizing shorting of Tesla in particular and of stocks in general. He's been remarkably successful persuading his followers, but the GameStop bubble has taken things much further, badly burning investors who shorted this and other stocks and convincing a large part of the public that there's something evil about the very idea of shorting.

 Side note: Tesla routinely makes sales then informs buyers that their car isn't ready. We won't even get into the practice of taking deposits on products that don't exist.

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