Tesla
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Special Episode
Featuring Ed McCabe
We discuss the latest woes plaguing Tesla after the SEC’s recent allegation that Elon Musk, violated a settlement with the agency when he tweeted about the company’s 2019 production targets. Ed McCabe and Demetri are joined midway through by Montana Skeptic and continue their conversation into the overtime segment.

In this Special Episode of Hidden Forces, Demetri Kofinas speaks with Ed McCabe about the latest woes plaguing Tesla after the Securities and Exchange Commission (SEC) recently alleged in a federal filing that its CEO Elon Musk, violated a settlement with the agency when he tweeted in February about the electric carmaker's 2019 production targets. Midway through the episode, the two are joined by Lawrence Fossi, known by his pen name Montana Skeptic, and the three continue their conversation for the rest of the episode and into the overtime segment.

 

When considering the performance of Tesla’s stock in the face of sober calculations, one cannot help but be reminded of Benjamin Graham’s famous quote: "In the short run, the market is a voting machine but in the long run it is a weighing machine.” For anyone looking to weigh the merits of Tesla’s valuation, he or she would be best served by obtaining a degree in forensic accounting. For anyone looking to understand how or why the stock has remained as high as it has while the company has been busy liquidating assets, shutting down distribution points, and restructuring operations in order to keep the electricity running, he or she will likely need to rely upon the expertise of cultural anthropologists and theologians.

 

The immediate danger for Elon and Tesla is one of insolvency and lifeless demand. On a personal level, it was recently reported that Musk’s banker, Morgan Stanley, who likely holds most or all of his margin debt, extended itself further last December by making mortgage loans on five of Musk’s California mansions. Elon took out $61 million in mortgages: four in the Bel Air neighborhood of Los Angeles and one in the Bay Area. The loans, signed in the final days of 2018, represent about $50 million in new borrowing. Considering Tesla’s deteriorating financial position in the face of cratering demand, massive mismanagement, and continued disarray in its manufacturing and logistics operations, it is instructive to know that the CEO may conduct his personal finances with comparable degrees of recklessness and malpractice. If Tesla’s share price continues to decline, Musk will eventually need to post more collateral, which means approaching the Tesla board and asking it to waive its pledging limits of company stock. Assuming the board gives him the waiver and the stock continues to drop, Morgan Stanley will be forced to begin selling collateral to recoup some of the outstanding loan. This could cause the bottom to fall out very quickly, for both Tesla, as well as Elon Musk.

 

As far as demand is concerned, the picture has gone from alarming (going off a publicly available spreadsheet that tracks VIN numbers) to downright nightmarish (the rushed slashing of the Model 3 price). Pictures of lots stacked with ownerless Model 3’s have been circulating on the Internet for months. There is also a theory that the number of Model 3’s being returned to Tesla is much higher than is being reported and that this helps to explain the persistent gap seen since September between the number of Model 3’s Tesla claims to have delivered and the number showing up as registered. The theory is that this is the result of a strategic decision on the part of Tesla to delay registering newly sold cars for 3-4 weeks in order to provide an opportunity to resell the car with a “clean” title to unsuspecting new buyers. On top of all this, Tesla’s list of executive departures continues to grow by the day with the VP of Engineering, the General Counsel, the VP of Global Recruiting, and the Chief Financial Officer among the company’s latest casualties.

 

In short, Tesla appears to be in the midst of an informal restructuring and liquidation process being driven on the fly by a Shakespearean CEO whose personal finances and singularly large ego are so fragile that nothing seems capable of standing in his way.

 

As always, this episode of Hidden Forces is for informational purposes only and should not be relied upon as the basis for financial decisions. All views expressed by Demetri Kofinas and podcast guests are solely their own opinions and should not be construed as financial advice.

 

Producer & Host: Demetri Kofinas

Editor & Engineer: Stylianos Nicolaou

Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

Ed McCabe has over 20 years of experience in research and portfolio management, working on both the buyside and sell-side. Following positions of increasing responsibility on the sell-side at CIBC (formerly Oppenheimer & Company) and Merrill Lynch, which included lead research coverage of several technology and internet/media sectors, Ed has worked at several hedge funds generating investment ideas across a variety of industries.

In 2007 Ed co-founded Clean Value Partners, where he was COO and co-portfolio manager of the Clean Value Fund, a long/short equity hedge fund focused on energy and related industries. Clean Value Fund was ranked the #1 and #5 energy hedge fund for calendar-year 2012 and the three years ended December 2012, respectively, by Barclay Managed Funds Report.

On March 28, 2013 Clean Value Partners was acquired by Longbow Capital Advisors.

Most recently, Ed worked as an analyst for TLF Capital, a concentrated long/short equity strategy focused on investments across various industries.

Ed’s most impactful (and satisfying) investment ideas have been those differentiated by information gathered through primary sources where investigative work produced elements of value or risk unappreciated by investors.

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