“The Rum Tum Tugger is a Curious Cat:
If you offer him pheasant he would rather have grouse.
If you put him in a house he would much prefer a flat,
If you put him in a flat then he'd rather have a house.”
- T.S. Eliot
Professional short sellers are curious cats. Not only are they typically cool characters, they are also genuinely curious. Betting against consensus story stocks or a stock market that tends to go up isn’t so easy, which is why short work is typically so deep and thorough.
This isn’t to say the shorts are always right. But if you’ve spoken at length with a professional short seller, it’s very obvious they’ve “done the work”.
Hedgeye is one of few research firms that routinely produces short ideas. In most years, we produce more shorts than longs. We’ve been doing this over 11 years and yesterday had the pleasure of hosting one of the legends of short selling, Jim Chanos, on HedgeyeTV. He's been at it for over 30 years.
Incidentally, Jim is a big fan of Yale hockey (so we might be a bit biased!) but we think you will really enjoy his hour-long conversation with Keith. The most fascinating takeaway from the interview was the scholarly and academic approach from which Jim approaches markets.
This makes sense as he remains an avid student of financial fraud history. Currently, Jim teaches a course on the subject at both Yale and University of Wisconsin. Aside from discussing his approach, Jim also touched upon some of his recent short ideas - TSLA, NFLX, and DVA.
Companies, of course, don’t appreciate short sellers and Elon Musk (a noted critic of Chanos) hasn’t been shy about going after investors that have publicly acknowledged being short his stock. When asked about the barbs that Mr. Musk has tossed his way, Chanos appropriately responded:
“I’ve been called worse by better.”
Many investors, including CEOs like Mr. Musk, consider short selling one of the dark arts of Wall Street. In practice, it is anything but sketchy. In reality, short research is fundamental to making the market efficient, uncovering frauds, and ultimately saving unsuspecting investors from suffering meaningful losses.
Back to the Global Macro Grind…
In the interview yesterday, Chanos reiterated, despite some false manic media reports to the otherwise, that he is still short TSLA. Our own Jay Van Sciver also recently reiterated his short call on TSLA in a deck on Nov 14th titled, “Quid Pro Quotidian”. While it’s possible that the electric truck release from yesterday will drive TSLA stock even higher, the short case continues to rest on a few key tenets:
- Competition - Despite the fact that electric vehicles lose money, so many OEMs opted not to sell them, the first salvo of EVs is set to enter the market in 2020 – Ford, GM, VW, Renault, BMW, Toyota, Daimler and Mazda to name a few will be entering the market next year or in the near future.
- No more tax credits – Demand for Tesla cars on a rate of change basis slowed in Q3 2019, this is before tax credits for their cars fully roll off in 2020. Meanwhile, many of Tesla competitors will have the lower price advantage of tax credits in 2020 and beyond.
- Last quarter – The shorts got squeezed last quarter, there is no denying that. But the question to ask yourself, if you are long the stock, is how can quarterly production go up and gross margin per car decline? This doesn’t exactly denote a manufacturer (which is what Tesla is) that can scale.
- Test drives in decline – A proxy for future demand, our proprietary analysis continues to show test drives for Tesla Model S & X is in free fall. We’ve included this analysis in our Chart of the Day and, as always, a picture is worth a thousand words.
But enough about Tesla! Before signing off for the weekend, we also wanted to flag a few important confirmatory macro points from the last 24-hours:
- NOV flash PMI data out this morning and, on balance, the data is positive. The sequential upticks in Manufacturing PMI data in Germany (43.8 = 5-month high), France (51.6 = 5-month high), and the Eurozone (46.6 = 3-month high) were positive contributions to each economy’s nowcast for Real GDP growth here in 4Q19E. We continue to like EWG as a long.
- Mixed signals as it pertains to Chinese demand: Australia’s NOV flash Manufacturing PMI ticked down -0.1pt to 49.9, while Japan’s ticked up +0.2pts to 48.6. China is slowing, trade deal or not.
- US housing continues to be one of the best fundamental stories in all of global macro and the +110bps acceleration in Existing Home Sales to 4.6% YoY in OCT is the latest data point to prove that out. Long Housing!
Our immediate-term Global Macro Risk Ranges (with immediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.71-1.93% (bearish)
SPX 3069-3130 (bullish)
RUT 1 (bearish)
NASDAQ 8 (bullish)
Utilities (XLU) 61.20-63.79 (bullish)
USD 97.50-98.35 (bullish)
Nat Gas 2.46-2.81 (bullish)
Gold 1 (bullish)
Copper 2.61-2.71 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
