With his tweet about his taking Tesla private for $420 per share Tesla CEO Elon Musk may have unwittingly given Tesla his kiss of death.  If Musk is serious about taking the company private it will soon lose its most valuable asset which is its loyal shareholder base.  If Musk was bluffing he and Tesla have a serious stock manipulation problem with the SEC.   Tesla’s existing shareholders would be wise to take profits.

Mr. Musk’s tweet resulted in the shares climbing above the $359.87 price that Tesla’s shares need to be above for it to not have to repay $920 million of loans in February 2019.   However, the company has an uphill battle.  It’s because Tesla has been reclassified from being a growth stock to becoming an arbitrage play.  For this reason, a good portion of Tesla’s 996 institutional investors who hold 65% of its shares will have no choice but to sell before any deal might close.   This will make it very difficult for Tesla’s shares to remain above the minimum bond conversion price.

When a buyout offer is made institutional holders are forced to sell the shares of a company in play for two reasons:

• Mutual funds have mandates that require them to sell the shares they hold of a company that is subject to being acquired since it no longer meets their investment objectives. For example, a growth stock mutual fund is obligated to sell investments that are no longer growth oriented.  Also, a mutual fund can not hold shares in a private company.
• Institutions and money managers are fiduciaries. This requires them to sell the shares of a company that is to be acquired to avoid the risk of a deal falling through.

Another issue that hurts Tesla and Mr. Musk by the company going private is that Tesla is no longer a dream stock for its shareholder followers.  The majority of all investors who purchase shares of visionary companies do so for the purpose of making substantial long-term gains in the future.  Now that the upside for Tesla has been maxed out most will throw in the towel and take their profits.  It’s especially since the close of Tesla’s share price on August 7^th was within 2% of its June 2017 all-time high.

Finally, I envision a trench warfare battle raging on between Tesla and the short sellers at $359.87 per share for the foreseeable future.  It will be very difficult for Tesla to overcome the short sellers.  The institutional investors and mutual funds selling their Tesla shares will make it much easier for short sellers to borrow and sell more shares.

After most of its long term and loyal shareholders have long gone Tesla will become defenseless.  Should the deal to take the company private fall through Tesla will fall like a house of cards.   It’s especially since Tesla’s business model is suspect.  See my August 2, 2018, article “Tesla’s Unproven Business Model is its Next Big Risk”.

Subscribe to BullsnBear’s FREE ALERTS for my continuing live coverage on Tesla and the other dozen subjects that are covered.  Below are a few of my recent key articles:

• Tesla’s Unproven Business Model is Next Big RISK, August 2, 2018
• Bull & Bear Tracker’s signal back to GREEN, August 1, 2018
• Tech Stock Armageddon to Begin, July 25, 2018
• Crypto Security Tokens of Overstock.com subsidiary, tZERO should be aggressively purchased NOW!, July 28, 2018
• Who is benefitting and who is losing from New Digital Sales Tax, July 20, 2018

With his tweet about his taking Tesla private for $420 per share Tesla CEO Elon Musk may have unwittingly given Tesla his kiss of death.  If Musk is serious about taking the company private it will soon lose its most valuable asset which is its loyal shareholder base.  If Musk was bluffing he and Tesla have a serious stock manipulation problem with the SEC.   Tesla’s existing shareholders would be wise to take profits.

Mr. Musk’s tweet resulted in the shares climbing above the $359.87 price that Tesla’s shares need to be above for it to not have to repay $920 million of loans in February 2019.   However, the company has an uphill battle.  It’s because Tesla has been reclassified from being a growth stock to becoming an arbitrage play.  For this reason, a good portion of Tesla’s 996 institutional investors who hold 65% of its shares will have no choice but to sell before any deal might close.   This will make it very difficult for Tesla’s shares to remain above the minimum bond conversion price.

When a buyout offer is made institutional holders are forced to sell the shares of a company in play for two reasons:

• Mutual funds have mandates that require them to sell the shares they hold of a company that is subject to being acquired since it no longer meets their investment objectives. For example, a growth stock mutual fund is obligated to sell investments that are no longer growth oriented.  Also, a mutual fund can not hold shares in a private company.
• Institutions and money managers are fiduciaries. This requires them to sell the shares of a company that is to be acquired to avoid the risk of a deal falling through.

Another issue that hurts Tesla and Mr. Musk by the company going private is that Tesla is no longer a dream stock for its shareholder followers.  The majority of all investors who purchase shares of visionary companies do so for the purpose of making substantial long-term gains in the future.  Now that the upside for Tesla has been maxed out most will throw in the towel and take their profits.  It’s especially since the close of Tesla’s share price on August 7^th was within 2% of its June 2017 all-time high.

Finally, I envision a trench warfare battle raging on between Tesla and the short sellers at $359.87 per share for the foreseeable future.  It will be very difficult for Tesla to overcome the short sellers.  The institutional investors and mutual funds selling their Tesla shares will make it much easier for short sellers to borrow and sell more shares.

After most of its long term and loyal shareholders have long gone Tesla will become defenseless.  Should the deal to take the company private fall through Tesla will fall like a house of cards.   It’s especially since Tesla’s business model is suspect.  See my August 2, 2018, article “Tesla’s Unproven Business Model is its Next Big Risk”.

Subscribe to BullsnBear’s FREE ALERTS for continuing coverage on Tesla and the other dozen subjects that are covered:

• Crashes
• Crypto Infrastructure
• Secular Bull & Bear Markets
• Tesla
• Markets & Economy
• Tariffs
• Negative Cash Flow Research
• $Yen Indicator
• Digital Economy
• Startups & Microcaps
• Non-Public Markets
• Digital Tax Impact

Last night (08/01/18) Tesla reported its financials for its quarter and six months ended June 30, 2018.   Short sellers had been hoping that Tesla’s negative cash flow and cash position would come in below analyst’s expectations.  That did not happen. Tesla’s burn rate was lower and its cash position was higher than analysts had been projecting for its quarter ended June 30, 2018.   Short sellers paid a heavy price. Tesla shares closed up on the day by $48.70 per share and at $349.54, representing an increase of 16.2%.

Since there had been stories circulated about Tesla asking its suppliers for refunds I conducted my preliminary analysis of Tesla’s Financial Statements.   I checked their Balance Sheet and Cash Flow Statement to see if there were any accounting tricks that have been utilized to reduce the burn rate and increase the cash position.  I did not find any. I did notice that Tesla’s gross profit margin for the June 30 quarter was 15.5% versus 23.9% for its June 2017 quarter.

Its clear to me that for the foreseeable future that Tesla’s burn rate and cash position is no longer a catalyst for the share price to go lower.  My biggest issue with Tesla had been its negative free cash flow due to its massive and ongoing capital expenditures budget. This issue for me has been at least temporarily alleviated due Tesla providing guidance that its capex for 2018 capex is expected to be slightly below $2.5 billion, which is significantly below the total 2017 level of $3.4 billion.   

My question of scalability that I brought up in a previous article entitled ​Tesla’s Unscalable Quality Control Revelation Cause of Extreme Share Price Decline about Tesla remains.  However, it will require a significant increase in Tesla’s volume for this to become a bigger risk.

A recent issue that was recently surfaced by a ZeroHedge author in their article SolarCity Booked “Millions in Phantom Revenue”, Created “Bogus Accounts” Ex-Employee Claims was disconcerting.    And even though, Solar City was the worst possible acquisition to make based on my previous experience with the solar industry stocks and most specifically AstroPower and Sun Power it does not contribute enough revenue to Tesla for it to become a big risk the new short seller catalyst.  See “SunPower’s Future Not So Bright”.  

I believe that what will bring Tesla down more than anything else is its revolutionary business model.  It’s CEO Elon Musk has gone to great lengths to differentiate Tesla’s manufacturing, sales and customer service models as compared to Ford and General Motors and the rest of the world’s automobile manufacturers.   From the preliminary research that I have conducted on Tesla’s model and the disadvantages that it has my prediction is that it’s going to be very difficult for Tesla to escape anything more than a mild recession. Tesla which manufactured its first automobile in June of 2008, has not yet had to undergo a recession.   

I am presently in the process of producing an extensive report about the flaws that I see in Tesla’s business model.  This report will be available to the subscribers of Perfect Shorts. To sign up go to https://shinypennystocks.com/perfect-short/.      

In 2002, I developed an algorithm which was successful to predict the bankruptcies of several high profile and seemingly healthy public companies who were highly recommended by Wall Street analysts.  This includes The Fleming Companies, which had been NYSE listed and paying a dividend for many years in 2002 and Lehman Brothers in 2007. See “Have Wall Street’s Brokers been Pigging Out”, September 2007.

My conducting post mortems on these companies enabled me to identify the common thread among them.  It was that they had untested business models that had not been through a recession or a secular bear market.  Since my finding them and predicting their demises was like shooting fish in a barrel I named them “Perfect Shorts”.  The definition of perfect short is a company that has a share price that has the potential to go to zero. Lehman and the four other broker dealers that I had named in my September 2007 were good examples of having untested business models.  It’s because all of them went into a new and unproven business after the dotcom crash which generated cashless profits; subprime loans. View Perfect Shorts video below. For more information on a Perfect Short and to be alerted about the Perfect Shorts when they are identified go to https://shinypennystocks.com/perfect-short/.  

On Friday July 13, 2018, Stuart Meissner, an attorney representing a Tesla whistle blower put out the following tweet about Tesla.

When Mr. Meissner was asked as to whether he was short Tesla’s shares he stated that he did not but should based on what he and everyone else now knows.

According to an article by Tyler Durden entitled “Tesla Whistleblower Attorney Says ‘I Would Short Tesla Based On What I Know”  that was published by Zero Hedge on Friday July 13, 2018, Meissner Associates, a law firm representing Martin Tripp, the former Tesla employee who had been accused of sabotaging the company and who Tesla had filed a lawsuit against on June 20, 2018, filed a SEC whistleblower claim against Tesla.  In his article Mr. Durden further stated that from his sleuthing of the claims that were included in the whistleblower filing that Mr. Tripp had alleged that Tesla had:

• Placed batteries containing dangerous puncture holes in vehicles which proceeded to the end of the assembly line in a process known internally at Tesla as “Containment AR622” and which input into vehicles was tracked until the end of the assembly line process;
• Overstated to investors the number of Model 3 vehicles being produced each week by as much as 44%. The whistleblower alleges that the famed factory board which reflects a daily Model 3 production count and often referred to by Tesla is inflated;
• Lowered vehicle specifications impacting upon safety such as placing battery cells too close to one another and which were not properly affixed, risking future combustion; and
• Systematically reused parts already deemed scrap/waste in vehicles without regard to safety.

Above bullet points above excerpted from Zero Hedge article

The events and drama including the allegations of sabotage and the filing of a lawsuit against a former employee are in further support of my thesis that Tesla does not have a scalable manufacturing process and that its founder Elon Musk has become fanatical about maintaining Tesla’s share price and valuation.   See my two recent articles about Tesla:

• Unscalable manufacturing process Revelation causes Tesla share sell off, July 6, 2018
• Tesla China Announcement and Timing Suspect, July 12, 2018

The filing of the whistleblower claim against Tesla should be taken very seriously.   Meissner & Associates is a law firm which specializes in Whistleblower cases. Further, since Musk has been an aggressive promoter of his company if there is any truth to Mr. Tripp’s claims both Tesla and Mr. Musk could be charged with serious allegations by the SEC.  The result could be Mr. Musk having to step down as CEO and Chairman of Tesla. Should this happen it would be devastating for Tesla and Musk.

Tesla is the most overvalued company that I have come across in my 42 years that I have been in the capital markets.  Based on its most recent valuation of more than $50 billion it has the highest risk and lowest reward ratio of any investment opportunity that I have ever come across.   Holders of Tesla shares should either sell them or purchase put options to protect themselves against significant downside risk.

Tesla’s share price increased by $4.00 and by approximately 1% on Tuesday July 10, 2018, after the company announced that it had entered into a memo of understanding with the Shanghai government to build a factory to produce 500,000 autos per year in China by the 2022 or 2023.  The timing of the announcement was suspect for three reasons:

• There was no material information in the announcement.  Tesla did not provide details about how much the factory would cost or how it was going to raise the capital to pay for the factory.   
• Tesla’s share price had been under pressure for all of last week and had declined by 17% from its high for the week that it made after it announced that it had made its goal of producing 5,000 autos per week by June 30th.  See my June 6th article “Unscalable Manufacturing Process Revelation causes Tesla’s share sell-off”.
• Tesla’s sales have recently dropped and it accounted for only 14,000 of the 500,000 electric cars which were purchased in China in 2017.   

What is very disconcerting is that Tesla’s founder and CEO Elon Musk has been increasingly fanatical about Tesla’s share price throughout June and July of 2018.  From my 40 plus years of experience a CEO’s becoming obsessed with a company’s share price is a bad omen. It generally means that the CEO is not paying attention to the business and that the shares are headed to a 52-week low instead of a high.  Below are the recent two instances of Mr. Musk’s fanaticism:

• Prior to Tesla’s making its production goal of 5,000 autos he called out a Goldman Sachs analyst who had been negative about the company.  See June 27, 2018, Bloomberg article “Musk Says ‘Rude Awakening’ Awaits Bearish Goldman Sachs Analyst”.
• Musk attacked Linette Lopez, a reporter for Business Insider who broke the story about the company ceasing its testing of the brakes for the cars that it produced.  See July 6, 2018, Newsweek “Elon Musk Attacks Media for ‘Relentlessly Negative’ Tesla Coverage”.  

The reason why Mr. Musk is sensitive about the share price is because Tesla has generated negative operating and free cash flow for it last four consecutive fiscal years.  It has also generated negative free cash flow for its last four consecutive quarters. The probability is high that the company will soon have to sell shares to raise capital.  Mr. Musk needs Tesla’s share price to be as high as possible to minimize dilution. It’s because part of his compensation is based on share price performance. The simple conclusion is that Tesla’s China announcement and its timing was to prop up Tesla’s shares.  

Tesla shares traded as high as $361.50 on July 2, 2018.  This was after its founder Elon Musk declared that Tesla was finally a “real car company”.  The declaration was prompted by Tesla’s meeting its goal to produce 5,000 Model 3 sedans per week for the quarter ended June 30, 2018.  Since then most of Tesla’s fans and shareholders have been perplexed. The share price did an about face and closed for the week ended July 7 at $308.91 representing a price reversal of more than $52 per share from the week’s high.

Tesla’s shares selling off on the good news did not surprise me.  The explanation that Tesla gave to USA Today for its July 3, 2018 article entitled “Tesla dropped new car braking test in final days of production goal” about Tesla’s ceasing its quality control for brakes on the assembly line was telling.   The company explained that the brakes did not require assembly line testing since Tesla has had a policy of in place that every car that it manufactures be test driven.  Upon any savvy investor learning about the policy they would have sold shares. It speaks volumes about Tesla’s manufacturing process not being scalable. Assuming that Tesla can eventually produce the same annual volume of vehicles as Ford or General Motors which produced 6.6 million and 9.6 million vehicles respectively in 2017, it will need to do the following:

• Hire drivers to test drive the 38,000 cars manufactured every day.
• Purchase real estate to build hundreds of race tracks near its factory to test its cars.

Tesla’s not having a scalable manufacturing process is a big issue for any investor.  It’s especially since Tesla’s market cap is in between the market caps of Ford and General Motors.

Tesla’s test-driving-of-all-new-cars policy begs two questions:

• What other quality control issues does the test drive address?
• Is the cost of test driving the vehicles and fixing the problems accounted for in its Cost of Goods (CGS) or Sales, General and Administrative (SGA) expenses?

Yesterday, Moody’s downgraded Tesla’s debt to B3 from B2.  Moody’s also changed its outlook for Tesla to negative from stable.  Because of the downgrade Tesla has been named the eighth nail in the 2009 Bull’s coffin.

On yesterday’s news Tesla’s share price declined by 10% and to a new 52 week low.  The downgrade also impacted Tesla’s junk bond that it had issued in August of 2017.  The bond has declined by 10% from its original offering price.

The reasons why Tesla was named as the eighth nail:

• Share price will likely never eclipse its June 2017 all-time of $389.00. At its all-time high its market capitalization was $65.3 billion which was higher than GM or Ford.
• Share price will continue to decline since Tesla will have to sell shares and will dilute existing shareholders for it to cover its massive negative cash flow. Tesla has produced negative cash flow for every year since inception.  Tesla’s negative free cash flow for its latest 12 months was $4 billion.
• Tesla is the darling of the secular bull market which has been underway since 2009. Elon Musk and Tesla have millions of individuals who are rooting for the company to become successful.  The share price remaining depressed for an extended period would weaken investor confidence.

The seventh nail was intense volatility.  See “Chart Depicts Fierce Bull & Bear Battle; Intense Volatility Seventh Nail in Bull’s Coffin”. Each additional nail increases the probability that the market will not get back to its January 2018 all-time high for at least eight years.  This is because it’s likely the new secular bear market was born in January 2018.  The table below which includes the eight secular bulls and bears since 1802.

The chart below which depicts the stock market’s bubbles since 2007 is based on the price history of the S&P 500 versus long-term US government bonds for the period of 2003 through February 2018.  The large bubble which had been in place prior to the election of Donald Trump as U.S. President has expanded significantly.

I have been monitoring this bubble since 2016. It was originally discovered from my crash research that I have been conducting since the Bank of Japan (BOJ) instituted a Negative Interest Rate Policy (NIRP) in February 2016. My research enabled me to find the bubble and other historical anomalies or distortions in the capital markets that have been present for the last several years. Watch the video below to view the charts and graphs for the anomalies and distortions which have put the markets on the precipice of a crash.

I am recommending the deployment of a 90/10 Crash Protection Strategy. For information on the strategy which is the only fail-safe strategy that one can utilize to protect their liquid assets from crashes, recessions and depressions view video below entitled “Crash! & 90/10 Crash Protection Strategy”.

My crash research that I began to conduct in 2016, resulted in my developing an algorithm that I utilized to issue market crash warnings during 2016 when negative interest rates posed great risks to the global economy. See equities.com article “NIRP Crash Indicator Signals Very Reliable for 2016”. Due to the ebbing of negative rates in 2017, after Mr. Trump’s election as President and the unprecedented low stock market and especially currency volatility, the NIRP Crash Indicator was disengaged in March of 2017. See equities.com article “No Longer a Need for NIRP Crash Indicator Signals”. Upon currencies volatility picking up the NIRP Crash Indicator will be re-engaged. Its warnings will be available to Trophy Investing’s members.

Disclaimer. Mr. Markowski’s predictions are frequently ahead of the curve. The September 2007 predictionsthat appeared in his EquitiesMagazine.com column stated that share-price collapses of the five major brokers, including Lehman and Bear Stearns, were imminent. While accurate, they proved to be premature. For this reason he had to advise readers to get out a second time in his January 2008 column entitled“Brokerages and the Sub-Prime Crash”. His third and final warning to get out, and stay out, occurred in October of 2008 after Lehman had filed for bankruptcy. In that article “The Carnage for Financials Isn’t Over”he reiterated that share prices for Goldman and Morgan Stanley were too high. By the end of November 2008, the share prices of both had fallen by an additional 60% and 70%, respectively — new all-time lows.