Tesla stock rises
Emailed on February 14th 2020 in The Friday Forward
As of January, Tesla was the most shorted stock in the US. Basically, that means it had more people betting against it than any other business.
The stock has been on an absolute tear since, jumping as much as 19% in one day weeks ago. It's up 87% from it's Jan 2nd price as of this writing. Much of this has come after the company announced strong earnings back in January. This is what you call a "short squeeze," and something Elon Musk very much enjoys. More on that in a second.
However, the price is too volatile to be explained by strong earnings alone. A group of high-profile hedge-fund managers — most notably David Einhorn and Jim Chanos — have conspicuously bet against Tesla stock. It hasn't gone well for them as of recent. Back in November Elon Musk offered to send a pair of 'short shorts' to Einhorn.
After two positive earnings reports, some Tesla bears have had to exit their positions as losses were piling up (this is called "covering" a short position). Steve Eisman (of The Big Short) covered his short position last week, saying in a Bloomberg interview: “When a stock becomes unmoored from valuation …you just have to walk away.”
"Short covering" refers to buying back borrowed securities in order to close open short positions at a profit or loss. So as the stock price soars, many investors who hold short positions buy their borrowed securities to avoid further losses. More buying leads to rising prices.
But as an IHS Markit report points out, short interest in Tesla has declined much less than one would expect in recent months. Many investors bullish on Tesla hold bonds that are convertible to equity, and when the stock performs well, they hedge their convertible positions by selling the stock short. This dampens the effect of “short squeezes,” whereby short sellers are forced out of their positions.
So...