The TSLA Saga Jan 18

The infinite short condition has been corrected since I last mentioned it. Thank you to whoever it is that abused the hell out of it so that the options skew would correct. Anyway, we no longer have that to worry about.

On Short Interest

That said, I must correct a misconception about short interest that people seem to rely on. There are a lot of reasons to short a stock and the most common reason is that it is part of a broader strategic placement. A high short interest usually grows and shrink along with how active its stocks are. The only time I’d really say it is significant, is if the short interest is bigger than 50% of the shares float.

Even I short the stock sometimes as a broader strategy. You can short the stock as an employee as a way to cash out your employee stock options. The director can use shorting as a way to access illiquid stock option that won’t vest for another 3 years to pay bills. Or they can short to hedge their exposure to their own company. Market makers can short a stock to balance the books because an insane amount of call options have been bought. Whatever the case, unless it is more than 50% of the float, a cornering of the market condition is not really likely to happen hence the short interest is not an indication of a short squeeze. Unless you know exactly how much margin the big short have and when they shorted (Which by the way, is impossible to know since funds are not required to disclose their short positions), it is impossible to force a short squeeze.

What I think could also be happening is that Goldman Sachs’s book balancing act since Elon is borrowing from his own stocks that’s locked up.

On a bottoming market

All indicators points to a bottoming process forming unless Saudis decide to shit more on the market. If you really think about it. This current fiasco is an artificial construct created by Saudi Arabia alone. Whose stock market is also suffering from its own hubris. The only time where I can see this type of inventory liquidation make sense, is if the seller of the asset sees a future where its wares are no longer in demand. The green energy movement is still in its infancy when you compare all the market cap of old oil and new energy. The last time I checked, the Saudi princes still walks with a swagger as if they are the king of the world. So when I tried to decide whether or not the current oil situation is caused by misjudgment based on an inflated ego or an actual liquidation because of the clarity of a green future. I believe an inflated ego is in play.

An artificially created situation, will eventually correct because of normal market forces. It’s taken longer because so far, nobody dared to take the opposite side bet against the Saudi’s war chest and their war chest is shrinking faster than what they led people to believe as the other 50% of their economy (mostly oil support) have just lost 20% of its net worth. This will have to be made up by government spending which increases the decline of their foreign reserves. Shorting Saud’s market and currency, is probably the most profitable trade this year and should continue to be so even as oil price goes back up the pain in the real economy will continue for some more time as layoffs already happened so you have time to cover.

China’s economy is still growing. Its residents still sending waves of tourists and children out to the world to spend money. The conversion to a consumer based economy is still on going. The USA is still recovering and its consumer spending. If big oil wants to commit seppuku and give the rest of the world free oil, let them.

Canada is going through a lot of pain, but I’d rather see this, than have oil take over its economy. Seriously I fail to see the need to get an education, if a high school grad can go to Calgary and get an unskilled job for 100k/year. This pain, will make high tech job in Canada great again. Maybe we’ll see a revival of the tech industry here.

On 8 ball

8 ball is no longer a good 1 day leading indicator now. Still, I took notice when it went up 11% compared to Friday. Compared to TSLA’s stock, the indicator reacts more on news as they are being released rather than forward looking sentiment. If you look at a time span of 8 ball’s absolute number vs that of TSLA, you can say that 8 ball have finally caught up to TSLA in absolute value terms. I have begun the post-mortem analysis of 8 ball indicator and have been quite astounded by how accurately it jumped a day or two before major movements in TSLA stocks itself. I did not believe the accuracy rate would be this high either. Will post more once I finish with this.

How a market crashes

So what are the things to come. Well, since rate has started rising, I think things will finally start to happen. After having been through two crisis, this are probably the series of event to follow within one year’s time frame as usually 1 year is how long people have cash reserve for after the rate increase.

1. Mergers will happen first as big swallows small.
2. Smaller oil related company will start declaring bankruptcy.
3. Some mergers will start to stall
4. One or two of the big company in #1 will declare bankruptcy as the mergers were a way to cover their own bad books
5. Contagion spread
6. Loan loss declared by Big banks.
7. Big bank failure
8. Contagion spread through big banks.
9. Another huge recession.

You can check out my log of the timeline and series of events for the 2008 crisis here. If we are to compare where we are right now, we are year 2007. Of course at anytime, the current crisis can end if the Saudis decide not to or if either Russia or Iran gets fed up with Saudi Arabia and just nukes them. The fact that they haven’t means that the Saudis got the full blessing of USA to do this. Like I said, this crisis is an artificial construct unlike that of the 2008 crisis which is an entity born out of greed. We do not have “Oil backed security” or derivatives running rampant throughout the general population. Which is why I believe the current crisis will stop at #6. At most 20% drop from peak to trough of S&P. So I would reserve 25% cash for the apocalypse trade. What is the apocalypse trade? Well I’ll have a separate post for it.

No graphs today. I am a bit tired after several full days of work. While most of you are enjoying a long weekend, I’ve been a busy bee. You can check the previous posts as most of the TA are still the same. I do recommend reading Paul Graham’s post about life is short if you having need something else to do. It’ll cut away all the bullshit.