I’ll give the global/macro approach to the markets a rest today. In today’s discussion, I’d like to talk about Elon Musk and Tesla.
In the first chart below we can see that there was a massive move lower; a gap down, followed by strong add-on selling. What happened? Was Elon Musk smoking pot again on television? No, not this time. As it turns out, Mr. Musk turned down a settlement with the SEC because, as he believes, he’s the smartest guy in the room and can beat the government in a securities lawsuit. Well… not so much!
According to CNBC: “Tesla CEO Elon Musk has been sued by the Securities and Exchange Commission for fraud, according to court documents filed Thursday. Sources close to the company told CNBC the company was also expecting to be sued, though Tesla was not named as a defendant in the complaint.
The SEC complaint alleges that Musk issued “false and misleading” statements and failed to properly notify regulators of material company events. The SEC held a press conference Thursday evening regarding the complaint.”
If that news wasn’t bad enough, the debt of the company may be worse. Its CDS rate ramped today because the default rate is now at 48%. From ZeroHedge: Tesla currently has $11.5 billion in outstanding debt, of which European insurance giant Allianz is the biggest holder. At the end of February, $920 million in convertible debt matures with a convert price of $360. Tesla is currently trading 30% below that price, so it will come due as cash instead of equity for holders of those notes unless the stock somehow surges by $90 in the next 4 months.
Making matters worse for Tesla is that the company will now, with the SEC lawsuit in play, almost certainly require another cash infusion before it reaches profitability, and the new capital would be far harder to come and be more expensive after SEC lawsuit, especially if Musk is forced to step down.
Once the market opened, it balanced for a long time, but the selling pressure was too much. The next 5-minute charts how the sellers took over.
Although this will certainly prove to be a difficult short going forward, there is room for TSLA to drop to $180.00 per share… maybe lower.