On Sept. 2 we explained why Tesla is not only a bubble, but likely a hyper-bubble.
We also explained why, even with four quarters of consecutive profit on the books, Tesla was not likely to make it into the S&P 500 — even though bulls considered that a sure thing.
As it turns out, our Sept. 2 piece was one day removed from the all-time high.
And on Sept. 4, just 48 hours later, the S&P 500 announced three new additions, and none of them were Tesla. This sent the TSLA share price into freefall.
On the first trading day after the long weekend, Tesla fell more than 21% in a single session, for a loss of roughly $80 billion in market cap (more than the value of GM and Ford combined).
How much further could Tesla fall? We have no idea, but a fair answer is “quite a lot.”
True bubble stocks, as we also explained in the Tesla piece, have neither a ceiling nor a floor. On the way up, it is nothing but blue sky. On the way down, it is Wile E. Coyote after leaving the cliff edge.
It would not surprise us one bit to see Tesla shares lose 70 to 80% of their value over the next few years — and that is if the company succeeds in ramping production by a factor of 10X or more.
If Tesla fails to pull off a production ramp-up, or gets waylaid by an accounting scandal, the company may not survive, or wind up in a fire sale at pennies on the dollar. It isn’t even clear, at this point, that a standalone EV company is a viable proposition in the first place, unless backed by a national government with endlessly deep pockets; the trouble is all the capital it will take to scale up production in the first place.
Meanwhile the boring-but-experienced legacy players, like General Motors and Ford, have figured out the smart play is to partner with sexy EV newcomers, like Nikola and Rivian, by way of joint production agreements and multi-billion ownership stakes.
This creates a win-win relationship: Nikola and Rivian are the hot new names with new-generation technology, and the ability to attract EV investment dollars, while General Motors and Ford help them scale to mass-production levels in the background.
And then you have behemoths like Volkswagen, who are forging ahead with their plan to capture a major chunk of global EV market share and are likely to plow tens of billions into their efforts (starting from an already formidable production base) when all is said and done.
And so, again, we look at Tesla’s valuation — even after the past few days of carnage — and can’t help but laugh. Tesla is a flow story, not a fundamentals story, because the fundamentals are laughable to the degree they make no sense.
But this leads to another question: How did the Tesla bubble grow so large in the first place? Who was out there bidding up Tesla shares to the sky — along with many other tech high-flyers, for that matter?
Some traders think a “Nasdaq Whale” is to blame. For a while now, observers had noticed heavy call-option buying from a mysterious player, who appeared to be a huge bull on technology stocks.
And then, on Friday, Sept. 4 — the same day the S&P 500 rejected Tesla — the Financial Times reported the following scoop:
SoftBank is the “Nasdaq whale” that has bought billions of dollars’ worth of U.S. equity derivatives in a series of trades that stoked the fevered rally in big tech stocks before a sharp pullback on Thursday and Friday, according to people familiar with the matter.
The Japanese conglomerate had been snapping up options in tech stocks during the past month in huge amounts, fueling the largest-ever trading volumes in contracts linked to individual companies, these people said. One banker described it as a “dangerous” bet.
The aggressive move into the options market marks a new chapter for the investment powerhouse, which in recent years has made huge bets on privately held technology start-ups through its $100bn Vision Fund. After the coronavirus market tumult hit those bets, the company established an asset management unit for public investments using capital contributed by its founder, Masayoshi Son.
Masayoshi Son, known as “Masa,” is a multi-billionaire Japanese investor with a reputation somewhere between tech visionary and riverboat gambler.
His firm, SoftBank, is known for taking huge stakes in Silicon Valley companies through its $100 billion Vision Fund, which represents the largest pool of venture capital ever assembled. SoftBank has made huge bets on Uber, WeWork, Oyo, and many others.
Some — us included — have long wondered whether Masa’s main strategy was an attempt to buy success by spending huge amounts of money. In Silicon Valley circles, this technique is sometimes referred to as “spray and pay.”
For years the SoftBank theory of venture capital investment seemed to be, if you invest cartoonishly gigantic sums almost on a whim, and scare off competitors in doing so, your portfolio of companies can win by owning the niches they dominate with the help of your cash.
With the revelation that SoftBank has been buying billions of dollars’ worth of call options on technology stocks, it seems that Masa’s “spray and pay” strategy has migrated to the public markets.
The goal may have been to push the value of tech stocks higher by way of deploying a leveraged wall of cash — with the concentrated leverage of call options, a few billion dollars in premium can create tens of billions’ worth of stock exposure — in order to help the initial public offering (IPO) market remain attractive for SoftBank’s portfolio of companies. (The stronger the Nasdaq, the easier it is to go public.)
And yet, shortly after the Financial Times revealed SoftBank to be the mysterious “Nasdaq Whale” buying call options at a multi-billion-dollar scale, a counterargument rose pointing to even larger forces at work.
In a counter to the SoftBank narrative, Sundial Capital Research revealed that “small day traders” had recently spent an incredible $40 billion on call option premiums in a single month, as determined by data compiled on small-scale options purchases.
The Sundial findings mesh with the views of Benn Eifert, the CIO of hedge fund QVR Advisors, who argues that options-buying day traders are the real power in the market.
Imagine a bunch of minnows who join up as a single school of fish, with the collective size of the school so large it dwarfs any single-entity whale (like SoftBank) by a factor of 10X or more.
This also confirms a TradeSmith Daily from July 13, when we explained “How Silicon Valley Engineered a Retail Mania.” Here is an excerpt of what we wrote on July 13:
When it comes to a retail mania driving markets higher, this isn’t just the power of bullish enthusiasm, in other words. It’s the power of a Silicon Valley smartphone app engineering rapid-fire addictive behavior.
Then, too, we have clear evidence that mania-like behavior from retail investors, again driven by Robinhood users, has had an outsized impact on market activity.
This comes from both the volume and rapidity of turnover — the more shares that trade, the more impact it creates — and the concentrated leverage of call-option buying, which forces market makers to purchase underlying shares as a hedge when they write the options contracts.
So, which one was it driving tech stock prices higher, the “Nasdaq Whale” revealed to be SoftBank or a bunch of out-of-control Robinhood Traders?
Our answer is, why not both? The two are not mutually exclusive.
It is quite possible that SoftBank deliberately attempted to walk technology stocks higher, in an act of shady but legal market manipulation, even as hordes of newly minted investors on Robinhood (and other Online Trading Platforms, or OTPs for short) conspired via message boards and chat apps to load up en masse on call options on their favorite stocks.
Tesla was a major beneficiary of all this, which helps explain the insane run-up. Unfortunately, it all speaks to the real possibility of a horrific downward drop — and not just for Tesla, but for all wildly overbought tech names with grossly inflated valuations courtesy of the retail crowd.
“Retail investor activity is downright terrifying,” said noted bond investor Jeff Gundlach on an investor webcast on Tuesday. “This is a terrible sign for the condition of the market for anybody who’s experienced a significant number of cycles, which I’ve definitely experienced.”
Then, too, all three of these stories — the Tesla carnage, the “Nasdaq Whale” SoftBank reveal, and the eye-bulging scope of retail call-option buying — are related in a highly dangerous way.
With Tesla going into the tank, and the Nasdaq seeing a nasty correction in general, it is possible that scores of Robinhood traders are now being wiped out, or otherwise beating a hasty retreat, which means a substantial amount of leveraged buying power could be disappearing from the market.
A similar dynamic applies to SoftBank, as result of the firm’s share price shedding billions of dollars in market cap after the “Nasdaq Whale” news was revealed; as it turns out, SoftBank shareholders don’t like hearing that Masa is acting like a Robinhood cowboy with their money.
Making matters worse, we can look to Washington, D.C. and note that the next round of multi-trillion stimulus remains frozen in the halls of Congress, at a time when evictions loom and the real economy (Main Street rather than Wall Street) is gasping for breath.
As the stabilizing impact of the prior round of stimulus funds runs out, markets could grow increasingly nervous — and all of this is playing out in September, historically the worst month of the year for the market.