For Tesla Shorts, The Stock Price Is Just Part Of The Problem

May.15.13 | About: Tesla Motors (TSLA)

It's no news that Tesla (NASDAQ:TSLA) has been under a vicious short squeeze. Just 2 months ago, Tesla had a short interest of 32.2 million shares. That was 28% of all outstanding shares or around 51% of the free float.

Since then, the short squeeze has taken its toll. The last reported short interest was down to 27.5 million shares and Markit now pegs it at 19.7 million shares. 19.7 million shares is still 17.1% of all shares outstanding and around 37% of float, so it's still quite high.

But the shorts' worries don't end with how the share price has performed, or how many of them were forced to cover. There's yet another factor still weighting on short positions.

Enter the short rebate

When someone holds a short position, he has to pay to borrow the shares. Usually this payment is low if shares are readily available, but it can get high if the stock is hard to borrow.

Generally the lender of the shares will be paid what's called the "short rebate," and the borrower will hold a cash balance from selling the stock short. This cash balance can gain interest which will, for easy to borrow stocks, cover the short rebate.

Not so with Tesla. Tesla stock was hard to borrow given the huge short interest, and thus the cost to borrow it was high. How high? As recently as today it stood at 34.25% per year, and 10 days ago it was 43.6% (Source: Interactive Brokers). So while Tesla pays no dividend "per se," being long the stock and lending it was paying as much as 34%, and being short the stock meant one had to pay those 34%/year.

This is basically an untenable position. A short paying such a high cost to keep his position open needs an immediate catalyst or he won't survive or make money in the position under almost any circumstance.

An immediate catalyst did appear, but …

The odd thing is that an immediate catalyst did appear. In the latest earnings report Tesla basically conceded that demand for the Model S in the U.S. had already peaked. This was evident from multiple angles:

  • Production stagnated and was predicted to stagnate in Q2 as well (at 5k autos);
  • Reservation data stopped being disclosed after weakening in Q1 and, presumably, weakening further in Q2;
  • Delivery times fell (and were given as a reason why reservation data was no longer relevant). This means that deliveries were outpacing orders;
  • Elon Musk predicted 15000 deliveries in the U.S. over 2013. With Q1 at 4900 deliveries and Q2 at 4500 deliveries, basic math says that deliveries in Q3, Q4 in the U.S. will be lower than Q1, Q2.

But the immediate catalyst came and went, and with it there was no effect. So shorts basically lost their best chance for the stock to give them some breathing space. And now what they have is a stock with no immediate catalysts for a deep-enough plunge and a 34% borrow rate while the clock ticks. As I said, it's an untenable position, so it's likely that shorts erode further over time.

Conclusion

The high short interest and the resulting short squeeze and ever-higher share price are just part of the Tesla shorts' problems. The other large problem is that simply holding a short position in Tesla presently costs 34% per annum.

Given this reality and a lack of immediate downside catalysts, it's likely that Tesla's short position will erode over time. Tesla shorts are stuck between a rock and a hard place. This dynamic, along with the continued high short interest, is the reason why I cannot contemplate shorting Tesla even if I believe that U.S. demand has shown clear signs of peaking.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.