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Comment by simias | Hacker News Reader

I'm not super knowledgeable in the stock market, what would he have gained from destroying the shorts? I understand that shorts are effectively a bet that the stock will go down but do they actually damage the company in any way? At a glance it sounds like trying to break the thermometer because you think it's too cold out there, the stock wasn't at risk because of the shorts, instead there were shorts because some investors though that the stock was at risk. What am I missing?

Also even if destroying the shorts was a positive outcome for Must and Tesla how does that excuse his behaviour? Isn't that textbook market manipulation?

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Tesla's stock price is very high right now, largely on the basis that many investors expect it to do well in the future. This high valuation makes it easier for Tesla to raise more money to fund its future ambitions. The short sellers are promoting a story that Tesla will not do well in the future, and is overvalued today. If they manage to convince other investors of this story, the stock price may decline and hinder both Musk's personal wealth and prestige, and Tesla's ability to fund its future operations.

So it's somewhat understandable that Musk doesn't look kindly on the short sellers - he would prefer that skeptics stay quiet and stop trying to ruin his company's valuation. You are correct, however, that acting in a deceiving manner to make the shorts lose money is not an acceptable retaliation.

> "he would prefer that skeptics stay quiet and stop trying to ruin his company's valuation."

Yes, as would any company. He went public. He should have known better. If he looking for unconditional love then the stock market is not the place.

I don't think Musk is a bad guy. Torn, tired and confused ATM but not a bad guy. Unconventional thinkers + doers always come with some baggage. It's part of the profile. However, in this case, he should have kept his mouth shut and channeled that energy into proving the nay-sayers wrong.

In addition to what other replies have said, Elon also has pledged some of his stock in order to secure personal loans. He will have to fund margin calls or sell his stock if the stock falls below a certain price.

THIS. Elon is the largest Tesla stockholder, but he has taken out huge loans against that stock. If the stock price of TSLA falls below about $230/share (there is some confusion about the exact price, but it's widely believed to be somewhere around there) his stock could all be sold to cover the loan, which would suddenly dump the stock price even further, or he could be forced to post more of his stock as collateral for the loan. Either way, it's not good for him OR for the company.

Elon has used those loans to finance a rather extravagant lifestyle. He own FIVE mansions in Bel Air, all right next to or near each other. He owns a $70,000,000 private jet, a top-of-the-line Gulstream G650 ER, and flies everywhere with it, burning immense amounts of fuel sometimes just commuting within Los Angeles (between Hawthorne and Van Nuys airports, for example). Because his unusual compensation arrangement at Tesla is contingent on the company's increasing market value or maybe someday turning a profit (which has never ever happened), these loans against his Tesla stock are his main bread-and-butter.

In other words, Tesla's fate as a company and its stock price are intimately tied to Elon's personal financial solvency. That's gotta create some conflicts of interest between his various jobs as CEO, head of the Board of Directors, and a person who doesn't want to be personally financially wiped out.

What should we believe? This, or Elon claiming that shorts are evil, and are done by bad people who hate the climate?

Wow! I Googled and there it is: *"At the end of 2016, Musk had 11,420,723 shares pledged as collateral. At the end of 2015, it was "4,000,000 shares of which are pledged as collateral to secure certain personal indebtedness owed to Morgan Stanley."" https://www.inc.com/erik-sherman/1-reason-why-elon-musk-migh...

His lifestyle isn't the big problem, IMO. He's not Johnny Depp, he's way richer. That money most be going somewhere else...

Does that mean his debt increased by 7M shares? At ~250 a piece? Almost 2B$? Is that what he actually owes or is it more like a line-of-credit up to 2B$ He's burning money faster than Tesla!

There's a current tax dodge where high net worth people get pledged asset loans and spend that, because loan proceeds aren't taxable, but selling stock is. Selling stock in a company you're the CEO of also can be bad PR, but pledging it might be less bad.

OTOH, selling stock to redeem a pledge could be scrutinized for insider trading, and such a large amount could move the stock, so if I were loaning the money, I would require some large multiple of the loan in pledges -- enough so that I would expect not to have to call the pledge, because I know it will be a disaster if I do.

https://www.forbes.com/sites/jimcollins/2018/05/18/musk-has-...

It's close to 13.775M, and growing. The worrying sign is that the company is losing tons of money at the same time. As the author of that article writes:

> So, Musk has steadily increased his personal leverage to a company that has been steadily increasing its financial leverage. That's a double whammy. It's too much financial engineering. In following other companies I have experienced situations in which a CEO faced margin calls as his company's share price dropped. It is not pretty, and obviously adds incremental selling pressure to an existing decline.

It just seems inevitable that the colliding forces of an overleveraged CEO running into an overleveraged company will create some kind of financial implosion.

> Elon has used those loans to finance a rather extravagant lifestyle.

How does this actually work? His stock is just his collateral for those loans, which can be transferred if he defaults on payments?

Owning mansions is an investment in real estate. Vehicles are the assets that aren't a store of value

> turning a profit (which has never ever happened)

"Never ever" as in two profitable quarters? https://www.cnbc.com/2018/06/29/tesla-still-isnt-profitable-...

Shorts drive the price down, making it more expensive for the company to borrow from the market by selling stock. They have to sell more shares to receive a similar amount.

I obviously lack a piece of the puzzle here, let me see if I get this right: a short means borrowing stock, selling it then rebuying it later (betting that the price would have fallen in order to turn a profit) before giving it back to its original owner.

I suppose if everybody shorts at the same time the huge amount of stock being sold could drive the price momentarily down, but then again the opposite happens when the stock is re-bought. So in the end it should be effectively zero-sum? Or is it just that a huge amount of people started shorting the stock at the same time which made it a sort of self-fulfilling prophecy?

Hopefully, the sale to start the position and the purchase to close it do not move the market themselves. People do long positions without moving the market (affecting the price). Sorry if I explained anything to anyone who already knew it.

They wouldn't have to buy it back immediately. Short sellers would borrow the stock from a long and pay a predetermined interest rate for however long they're borrowing it. They technically don't have to rebuy the stock unless they get margin called (if the collateral posted is no longer deemed sufficient for the counterparty to allow the borrowing position) or need to close out positions because of some risk tolerance threshold being met. Usually when this happens to a bunch of shorts at the same time they must all rebuy, driving prices higher, which is called a short squeeze, but it is usually determined by someone cutting losses on a short position or positive news coming out driving prices up.

That's equivalent to saying that buying a stock doesn't move the price up because you'll have to sell it eventually. A lot of people in long positions means a lot of buys that haven't been re-sold. A lot of people in short positions means a lot of sells that haven't been re-bought.

Actually, short selling has another nasty sting in the tail.

If there are few willing sellers out there when everybody goes to cover their short, you get a short squeeze - a feedback loop where the price increases, so people need to buy to cover shorts to avoid losses, which pushes the price up, which means more people need to buy to avoid further losses as the price rises and so on.

The original owner who lent the stock can also ask for it back on relatively short notice (say, because they are long and want to sell). Usually this isn't a problem because the short finds someone else to borrow from and uses that to cover - but if enough people do that then it can trigger a short squeeze even without significant price movement at the beginning, as happened rather dramatically in Porsche shares in 2008.

Shorting a stock is like renting a car for a year, and selling it - because you think you can buy another car in a year, and still make money after paying the rental company. This is possible in this example because all cars are identical.

Also the shorts try to push the stock down via endless false rumors (there are real challenges to tesla of course) about bad cars, crashes, fires, etc, and those false rumors must prevent some people who just don't have time for so much drama from looking into them.

That's a realllly simplistic and one-sided view of short sellers.

They aren't all trying to do that of course, a lot of people are just trying to make money and look at a stock and think it will go one way or another. But I don't like the people that push false narratives and convince people of things that aren't related to reality.

> They aren't all trying to do that of course

The vast majority of them aren't trying to do that, similar to how the vast majority of longs aren't trying to P&D.

> But I don't like the people that push false narratives and convince people of things that aren't related to reality.

I hope you see the irony in saying that: This is almost word-for-word what Tesla shorts accuse Tesla of.

And shorts I guess keep down voting my comments but I hate that musk posted that, and he better be able to document why he felt that was true.

Nah, what really happens is that there are so many short positions that the stock is notable for just how many people are shorting it, and that itself becomes the negative news. You don't have to write a single 'fake news' story to get that effect.

Haters gonna hate. A lot of that news is just to sell clicks and has nothing to do with short selling. Other people hate Musk for reasons not having anything to do with self-interest in the stock price and want to bad mouth him. And the only way to do with those rumors is to be successful. Going to war with people bad mouthing you never works.

Shorts drive the price down

Not on their own they don't. You can go and short Facebook right now and it won't move the price at all.

Not individually, but if enough people short it, then that becomes a signal to other investors that maybe there's something they don't know about, which will push the price down.

And other investors see that short interest piling into an otherwise healthy (hypothetical) stock and they buy in anticipation of a short squeeze. And when the stock pops due to good news, those shorts become rocket fuel for the stock going up.

No single action in the stock market happens in a vacuum, and longs will absolutely react to what the shorts are doing. And a high short interest is often viewed as a contrarian indicator that dumb short money has piled into the stock and that its actually due for a pop. You often see that at bottoms in the stock.

Sure it does short 20% of FB float it will sure move

I'm not so sure. What direction will it "sure move" if you short 20% of FB float? You have to borrow a stock to short it from someone, so the stock that you short is not actually sold just lent.

It's lent but you just artificially increased the volume because otherwise someone would have to sell actual shares.

The price would definitely move down if you sold 20% of facebook's float. The market doesn't care that you borrowed and are the one selling (as opposed to the party you borrowed it from selling them), all that matters is that 20% of the shares are being sold.

Hedge funds, which can turn huge sums into market swings often use this technique to drop the price, creating additional drops from panic sell offs, allowing them to make a margin on it from the bottom.

Is that legal?

It doesn't make it "more expensive" for the Company (as opposed to its existing shareholders) raising equity capital unless the stock pays a dividend and the only way they can sell more stock is to promise buyers they won't reduce the dividend per share to compensate for the increased number of shares in issue. Tesla doesn't pay a dividend, so that isn't the case here.

In extremis, a falling/low price could limit the size of a potential new equity fundraising because the resulting dilution is too much for existing shareholders to take, but Tesla's price/valuation would appear to put it quite far from this being an issue.

Key point: I was trying to explain this to someone who had no idea of what a short is. I didn't want to muddy the issue with complex descriptions of equity, dividends etc.

But if you think of equity as having a value other than derived from the market, then 'expensive' might still have applicability here.

It's been a long time since I've used this though.

If you short a stock, you profit when that company does poorly; since Tesla is one of the most shorted stocks out there, we have many people trying to spread FUD via blog posts/tweets/etc in hopes that they can drive the stock price down. (Or in some cases even going to extremes like fraudulently submitting reports to the NHTSA claiming design flaws and problems with Tesla cars.) This has the side effect of damaging public perception of Tesla.

I don't know why I'm getting downvoted. The parent post asked why short sellers harm companies, and I gave a legitimate answer, and that answer is also exactly one of the reasons Musk cited for wanting to take Tesla private.

Maybe folks are skeptical about the fraudulent NHTSA complaints? If so, here's a source: https://electrek.co/2016/06/13/tesla-fale-complaints-suspens...

It's because you're answering the wrong question. It isn't how short sellers overtly try to lower the stock price, it's how they inherently lower it just by shorting the stock.

The answer is that a short sale is borrowing a share and then selling it, which increases the number of shares available for sale and by supply and demand reduces the price (until the short seller eventually buys back the stock to return it to the person they borrowed it from). In the meantime, which can be as long as the short seller is willing to pay interest, the stock trades lower because the extra share is on the market. It's essentially the same principle as the way banks lending money to people causes inflation because it increases the money supply and so lowers the value of the dollar.

Seeing a lot of existing shorts also tends to spook buyers, which also lowers the price, though it also attracts buyers hoping for a "short squeeze" that raises the price when the short sellers eventually have to buy back the stock.

Your answer is correct too, but the question originally asked was "what would he have gained from destroying the shorts? I understand that shorts are effectively a bet that the stock will go down but do they actually damage the company in any way?" The answer is yes, short sellers do damage the company for a variety of reasons, some reasons relating directly to stuff like stock price, and other reasons being more indirect like the one I cited.

I saw that other answers had already explained how shorts lower the stock price, but nobody had pointed out the other ways in which they "damage the company", as the original post put it.

I guess we're just interpreting the question differently.

I don’t think Musk needs any help in driving Tesla stock down ;)

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