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Peak short balance for Tesla just over $13bn on August
7th
Other US equities with higher short balances all corporate
action related
Many stocks have had higher short interest as a percentage of
free float
Total US equity short positions now stand at $811bn
In a letter to employees dated August 7th − and
published that same day to Tesla's blog − Elon Musk claimed
that Tesla is the most shorted stock in the history of the stock
market. He cited this as part of the motivation to go private,
stating that: "being public means that there are large numbers of
people who have the incentive to attack the company."
While Elon is certainly correct that there is a significant bet
against the firm, and those short bettors have been far from quiet,
the claim of "most shorted stock ever" is worthy of further
scrutiny.
The peak short balance in Tesla, just over $13bn, was observed
on August 7th, the same day as the blog post, and
equates to just over 20% of the firm's market cap. Since then the
declining share price and a 2m share reduction in shorts have taken
the position down to $11.4bn on 32.8m shares. That is certainly an
extreme reading in dollar terms, as the next largest US equity
short position is $AMZN at $8.8bn, which is less than 1% of the
firm's market cap. Of the 44 US equities with over $2bn short,
MCHP, AMD, OMC & KSS are the only stocks where the short
position is greater than 10% of market cap.
Looking back to the start of 2008, we could only find four
examples of US equities which had more than $13bn short, all of
which were related to short term corporate action events. Tesla is
easily the most shorted US equity in dollar terms currently, but it
is not, in the most literal sense, the most shorted stock in the
history of the stock market. With that being said, the duration of
the these positions was in each case less than a month and centered
around a specific arbitrage opportunity, so while Tesla isn't the
most shorted ever, it is being denied that dubious title more by
technicality than by another firm having a greater negative
sentiment expressed via short positions.
At present, the most shorted stock globally is Alibaba, whose
over $25bn short balance dwarfs that of Tesla; however, a portion
of that short position results from an arbitrage relating to the
legacy Yahoo business, now renamed Altaba. While it may be unfair
to compare the short position in Tesla to these corporate action
related shorts, it's worth noting that part of Tesla's short
position is motivated by hedges to convertible arbitrage positions.
With $3.8bn in convertible debt outstanding, it's possible that a
significant percentage of that value could be short the equity as a
hedge.
Depending on how many of the convertible notes are hedged with
equity short positions, Tesla may be closer in its short position
to the 2nd highest US Equity, Amazon, which has $8.8bn
in short balances. It's important to note, however, that the AMZN
short is likely a hedge for many short sellers, rather than an
outright bet against the firm's prospects. One way to analyze that
impact is to look at the difference between a given firm's
percentage of total market cap and percentage of total short
interest.
Through this lens we see that Tesla's $60bn market cap is 0.2%
of the total US equity capitalization of $32T, but it's current
short balance of $11.4bn is 2.9% of the $840bn in total US equity
shorts. Next up on that list is Netflix, which represents 1.4% of
the total US equity short position, but only 0.4% of total market
cap, so a significant short beyond what would be justified as a
part of a general market hedge. Coming back to Amazon, while it's
short position is equal to 2.2% of all US equity shorts, it's
market cap is 2.7% of the total, so the firm is less shorted than
would be implied by shorting the broad market as a hedge. There is
also an interesting comparison in the 0.3% YTD growth of the total
short position, from $808bn to $811bn, with the 5% increase in
market cap from $30.6T to $32.2T.
Shifting to another popular measure of short interest, there are
26 US stocks which have had a greater percent float short in 2018
than Tesla's peak of 33% (observed in May), filtering to only look
at stocks with $500m+ short positions. There are currently 42 US
equities with > 33% float short overall. As a ratio to it's own
float, shares outstanding or market capitalization Tesla is not the
most shorted US equity.
Taken together, the claim of "most shorted stock in the history
of the stock market" is not literally true in dollar terms, though
it's fair in the sense that there has not been another US equity
short position greater than $10bn which lasted for more than a
quarter.
As Tesla and Elon Musk steadfastly remain in news headlines, IHS
Markit will continue to keep a close eye on short sellers.
Posted 16 August 2018 by Sam Pierson, Director, Securities Finance
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