Monday Recap: It’s $420 for Tesla

12/23/2019

Bye Bye Boeing CEO

I mean, for better or for worse, the CEO had this one coming. Boeing’s growing list of worries regarding the 737 Max’s fiasco meant someone had to take responsibility for the negligence. In this instance, it was CEO Dennis Muilenburg.

David Calhoun, a longtime director of Boeing will be replacing Dennis. Mr. Calhoun is a corporate veteran and is a senior executive at Private Equity Giant Blackstone, a role from which he will be stepping down. Mr. Calhoun will take over the new role as CEO on January 13.

“A change in leadership was necessary to restore confidence in the company moving forward as it works to repair relationships with regulators, customers, and all other stakeholders,” Boeing’s board said in a statement Monday.

The new CEO is likely to have his hands full in terms of the work that needs to be done to save the firm. Luckily, he’s spent over 26 years at GE running their aircraft engine business. Couple that with his experience as a private equity portfolio manager, you have a CEO who not only knows the business but the business of business.

Mr. Calhoun is to rescue Boeing from its fair share of troubles: rescuing the 737 Max, fixing the firm’s relationship with US regulators, bringing the production of the 777x jetliner back on track, and amending the troubles regarding the supply chain stumbles with the production of the KC-46 tanker.

The firm has lost about $50 billion in market value since the Max crisis, and the stock has been down over 24% since March. The stock closed today at $337.55, up 2.5%.


Tesla hits $420

I’m not kidding. The market delivered the rally Musk seems to have wanted ever since he tweeted about the possibility of taking Tesla private at $420. The number is significant because said that this was the price at which he would consider taking the company private.

Is this a resurgence of investor confidence in the firm? Or merely a short squeeze that has decided to go the extra mile? I think it’s a combination of both. You might argue that saying it’s both is the equivalent of saying “I don’t know”, but hear me out.

Tesla unveiled a surprising third-quarter profit, revealed a new pickup truck, and is believed to have made some progress on the new Model 3 in China. Couple that with the new gigafactory that is about to open in China, the firm’s production capabilities at least seem to have expanded. Whether or not this will successfully happen in the future is an entirely different question.

As of now, the hypothetical promise of good news has been backed by the surprise third-quarter results. Investors have reason to believe that the stock will do well, and hence the appreciation in price.

Now, add to that the fact that this was one of wall street’s most famously, and most heavily shorted stocks. For those who don’t know, in betting against, or going on short on a stock, one essentially borrows stock from a broker to sell, with the hopes to buy it back in the future at a cheaper date.

But wait! What happens when the stock price begins to appreciate? You begin to accrue losses. So your choice is now to either have the risk appetite to avoid a margin call or, buy back the stock to cover your short.

And when you do buy back to cover, it creates excess demand for the stock, pushing the price up even higher. A combination of these two things together is what’s happening to Tesla right now.

Musk flirting with the stock price of the company (and hence its future) on twitter cost him nearly $20 million to settle charges against securities fraud with the SEC. This time, he seems to be rather happy that the appreciation was “organic”. No wonder then, that he tweeted: “Whoa … the stock is so high lol.”

The stock closed at $419.19, up over 98% from its price of $211.10 on August 23.


Sometimes You Don’t Get Your Money Back

Here’s an interesting story about two hedge funds what will not return their clients their own money. You read that right. If you were an investor in the hedge funds York Capital Management, or Southpaw Asset Management, this is how I imagine the conversation would go:

You(an investor): Hey, so thanks for X returns your made for me. But I think the S&P is booming, and that Tesla stock also looks nice.

Hedge Fund: So?

You: So I want to pull out of the fund, and reinvest my capital elsewhere.

HF: Umm. Okay. But no.

You: What do you mean no? It’s literally my money!

HF: Yeah, but No.

Both funds are distressed debt firms, and in York’s case, the goal is to liquidate the fund entirely in the future, which is why one can’t get out now. If the S&P is up over 23% in the year, and the hedge fund is down 8%, one can see why investors would want out. It’s harder to be a hedge fund now more than ever, and Bloomberg will soon release data about who won (or lost) the most this year.

In a bull market like this, Hedge Funds have the added pressure of generating even higher returns than your average index. The industry seems to be in a decline, and many have even called it quits.

Needless to say, this is a hard business.

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