The Most Expensive Tweet of All Time

He finally done did it this time – this is to say, he did himself in. It was already widely known that Elon Musk sent out one tweet too many in early August. But it seems now that what he posted on that fateful day may well end up as the most expensive sequence of nine words ever blasted over the intertubes. For those who haven’t followed the story, this is the tweet in question:

 

Elon Musk’s fateful tweet – here is a link to the thread on Twitter:  Taking TSLA private fantasy.

 

When this tweet was published, TSLA’s stock price rallied by more than 10% on the day to more than $380, up almost $40 from the previous day’s close. Not surprisingly, numerous people immediately complained about Musk’s Twitter ambush. Since around one third of the stock’s free float is sold short, there was no shortage of victims. The legality of making such an announcement over Twitter out of the blue was widely questioned (rightly so, as it turned out).

The POTUS may one day well declare war over Twitter, but he is not subject to SEC oversight. As the CEO of a listed company, Elon Musk definitely is subject to said oversight. At the time we thought that it was probably not going to be a major problem if it turned out that the tweet involved no factual inaccuracies (i.e.,  if he wasn’t fibbing).

Under pressure to clarify this slightly cryptic tweet – which was obviously bereft of details – it turned out that what Musk had blurted out was not exactly a fait accompli. While the notion of taking TSLA private was indeed briefly discussed with a representative of a Middle-Eastern investment fund, it never went beyond the stage of “this might be something worth thinking about one day”.

 

TSLA weekly since its IPO in 2010. Despite an income statement that is routinely drowning in buckets of red ink and a balance sheet that can be charitably called a financial time bomb, the stock of TSLA has held up quite well. Although it failed to follow other popular momentum stocks into the blue yonder by going sideways since mid-2017, it never relinquished much of its earlier gains. The company’s bonds have performed a lot worse.

 

It became very likely at that point that the SEC would become involved, and indeed, it soon did. After a few weeks of ominous silence it has now launched what is best described as a decapitation strike. Here is a link to the SEC’s complaint (PDF), which is a surprisingly harsh full-frontal attack squarely aimed at dethroning Musk.

He stands accused of securities fraud and if he gets convicted on all counts, he won’t be able to continue as the CEO of Tesla, at least not as long as the stock remains listed. The summary of the complaint first describes why the SEC considers Musk’s tweet to have been intentionally misleading and harmful, and then arrives at the decisive passages excerpted below:

 

“By engaging in the conduct alleged in this Complaint, Musk violated, and unless restrained and enjoined will violate again, Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.”

“The Commission brings this action against Musk pursuant to Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] to enjoin the transactions, acts, practices, and courses of business alleged in this Complaint and to seek orders of disgorgement, along with prejudgment interest, civil penalties, and an officer and director bar against Musk, and such further relief as the Court may deem appropriate.”

 

(emphasis added)

We have highlighted the important bits. Allow us to point out that the first excerpt has us scratching our head. “Musk violated, and unless restrained and enjoined will violate again…” ? Say what? It seems quite likely that he did violate the regulation cited by the bureaucrats. But how on earth do they know that he “will violate again”? Has the mighty Zoltar joined them?

The notion that “unless restrained, he will violate again” is an important pillar of the relief sought by the SEC, which is detailed in the second excerpt. Disgorgement of ill-gotten profits (plus interest) and civil penalties are to be expected as punishments for the actual deed – even though we are slightly bothered by the fact that the State is the sole beneficiary of such shakedowns.*

Anyway, while the financial penalties will be painful, they will at most be seen as the price to be paid for a momentary lapse of reason. The threat of barring Musk from ever being an officer or director of a publicly listed company again is an entirely different cup of tea.

Such a ban would essentially destroy his career as an entrepreneur. In fact, the mere threat may well force him to step down from his post before the matter is even adjudicated. TSLA will eventually need more external funding and the board may now consider him a liability which the company cannot afford.

TSLA is not a bank that can simply shrug and pay a fine without having to admit guilt. As the HSBC case showed, even if a bank is accused of laundering money for drug cartels, there are no consequences whatsoever for any of its directors or indeed anyone remotely responsible – all that happens is that the government gets to shake down the bank’s shareholders! Alas, Tesla is not a big bank.

 

Tesla May Have A Big Problem Now

Below are two charts that illustrate why this recent development could become a quite a headache for TSLA. First of all, contrary to investors in TSLA’s equity, investors in the company’s bonds have become a lot more nervous about the outlook in recent months, as Tesla has continued to rapidly burn cash during the ramp-up phase for its new Model 3 car, while missing its production targets by a sizable margin several times.

Much hinges on getting production running smoothly at a minimum of around 5,000 to 6,000 cars per month. That would reportedly suffice to generate positive operating cash-flows. As long as this target cannot be reached and maintained, the company will continue to bleed cash, in which case new funding will be needed in the not-too-distant future.

New borrowings – if they can be obtained at all – will be quite expensive at this juncture:

 

TSLA 5.3% bond maturing in 2025 – price (left) and yield (right), as of 10 September.

 

The next chart shows the history of TSLA’s net cash and working capital according to the most recent earnings report (note: when positive net cash positions were reported in the past, the company had usually just raised capital by selling more equity):

 

TSLA, net cash and working capital as of Q2 2018 (h/t Bill Maurer)

 

Admittedly Elon Musk is a controversial figure and many people argue that he has become a liability for TSLA. Now that the SEC has filed its complaint, that may well be true. We believe though that despite his antics, Musk enjoys a lot of respect as a highly successful entrepreneur. We may be mistaken about this, but we believe that TSLA’s stock price contains a “Musk premium”.

If that is the case and the stock comes under pressure in the wake of the SEC complaint, raising capital by selling equity could become problematic as well. As long as TSLA trades at a very high valuation, selling more stock doesn’t overly dilute existing shareholders. That equation changes at lower stock prices.

 

A Social Mood Marker?

One aspect we find interesting about recent developments is that they may represent a powerful social mood signal. One has to be careful in assessing Elon Musk and his undertakings. Keep in mind that his competition is quite well-funded and is definitely interested in bringing this uppity upstart to heel.

We are therefore a bit wary of the many reports complaining about quality issues affecting TSLA cars, or telling us about the grave danger these cars supposedly represent because their batteries occasionally catch fire, or about accidents related to auto-pilot malfunctions, etc.

Mind, we are not saying that these things don’t happen – they certainly do. But we believe that they probably don’t happen very often. There are probably just as many problems with the products of competing manufacturers. On the other hand, there are also quite a few Tesla drivers who will swear the car is the best thing since sliced bread.

Joe Rogan recently interviewed Elon Musk at length, and the conversation is  quite interesting. At one point Musk inter alia smokes a joint, which is perfectly legal where the interview took place, but is not exactly what is generally expected of the CEO of a major car maker. Personally we couldn’t care less, but Musk’s occasionally eccentric behavior contributes to making him a controversial figure. Here is the interview in is entirety (there are also excerpts one can find on YouTube).

 

Joe Rogan’s famous interview with Elon Musk (here is the direct link to YouTube).

 

We believe that both the company’s product – the ostensibly environmentally friendly, but nevertheless fast and sportive electric car – and its slightly “out there” CEO are strongly associated with a bull market environment, this is to say with an era characterized by a positive social mood backdrop.

Viewed from this perspective we find the action taken by the SEC quite striking. Keep in mind that it is up to the agency what allegations it decides to make and what relief it seeks from the courts. In other words, the actual approach to the matter is to some extent discretionary and in many ways a “sign of the times”.

If the social mood were unequivocally bullish, the agency would probably not seek to bar Musk from holding a post as a director of a listed company. It would certainly impose a harsh fine to exact retribution and as a warning not to repeat such shenanigans; but the people making the decision would probably regard depriving the capital markets of such a successful and well-known entrepreneur as potentially wasteful.

Consider in this context that Musk almost certainly did not send his tweet out with the intention of enriching himself. Rather, he was under great pressure after the company missed its production targets several times in a row (he had tried to automate production to the greatest possible extent and in the process evidently got entangled in a plethora of unforeseen problems).

 

Assembly of the Model 3 was eventually moved into a tent adjacent to the main plant, as many of the processes that were supposed to be automated ultimately had to be done by hand.

Photo credit: Tesla

 

As the SEC complaint mentions, he was engaged in a battle against short sellers for some time and seemed quite eager to prove them wrong. To be sure, a number of short sellers talked their book at every opportunity and published very one-sided research reports that often exaggerated Tesla’s problems.  Of course, CEOs of major companies should not waste their time worrying about short sellers, but Musk seems to have enjoyed jousting with them – and he was surely aware that his tweet about going private would sting them.

However, anyone looking into the matter in detail must have realized that he had become prone to lashing out as pressure on him mounted in recent quarters (there was a very odd earnings call not too long ago which also documented that he was in urgent need of a vacation). The fact that this was not deemed a mitigating factor is telling – i.e., it very likely is an indication that the social mood is deteriorating.

Generally, heroes of the bull market get pushed off their pedestals once a bear market takes hold, but sometimes there are “early warning signals” near turning points. There is supposed to be a consistent quest for justice based on impartial law and its evenhanded application… alas, this is simply not the reality. For example, Henry Blodget would never have been indicted in a bull market.

 

There are books for children and comic books starring Musk, audio books, cartoons, memes… he even appeared on South Park, voicing himself…. and he wants to colonize Mars.

 

And so we wonder whether the SEC action against the bull market icon Elon Musk  is a sign that the social mood is getting closer to a serious turn for the worse. We should find out soon enough.

In the meantime, Musk is not only a successful serial entrepreneur at the leading edge of technology, but henceforth also the author of the most expensive tweet of all time.

 

Bonus chart: an up-to-date chart (as of Sept 28 afternoon) of the 2025 TSLA 5.3% bond, which trades inter alia at the Berlin Stock Exchange.

Footnote:

*Restitution for those who were actually harmed seems to be more important to us – but actual victims have to pursue the case on their own. This is no wonder, as e.g. insider trading cases are generally victimless crimes. Even in this particular case it will be very difficult to establish who was truly harmed, although it is easier to make the case that some people did in fact suffer losses as a direct result of Musk’s tweet.

Charts by: StockCharts, CNN, Bloomberg, Bill Maurer, Berlin Stock Exchange

 

 

 

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One Response to “Decapitation Strike –  Elon Musk in the Crosshairs of the Bureaucracy”

  • RedQueenRace:

    The SEC offered Musk a “no-guilt” settlement that involved a fine and being barred as chairman for 2 years. He turned it down. This arrogant so-called genius has made one stupid mistake after another and not just in this particular matter.

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