JOHN HEMPTON: Can he get his manufacturing costs and manufacturing quality to match Toyota or Volkswagen before Toyota and Volkswagen manage to match his technology in cars? An airline has about 300 red flags. This is a company full of red flags.
You showed me 15 red flags of certain types. And I'm short it. Now, I don't get out of bed for 2% per year. But it does allow us to be 120% or 130% long, have a beta of that 0.4. If you think that a judge is going to do something that causes the imminent collapse of Tesla, you haven't watched the way that judges behave.
MATT MILSOM: Morning John, and welcome back to Real Vision.
JOHN HEMPTON: Thank you.
MATT MILSOM: I want to start off with everyone's favorite topic.
JOHN HEMPTON: And we know that is Tesla.
MATT MILSOM: Absolutely.
JOHN HEMPTON: It's like the most controversial stock in the world. And it's my-- we have a tiny position short. And there's a big picture and a small picture. But the big picture is simply, this is the best example, at the moment, of turds mixed with raisins on the stock market.
That's not my line. It's an old Charlie Munger line. But if you mix turds with raisins, they're still turds.
MATT MILSOM: [LAUGHS] All right.
JOHN HEMPTON: And Elon is-- the good things you can say about Elon are at least partly true. The car is wonderful.
MATT MILSOM: Incredible.
JOHN HEMPTON: Nobody who's driven it doesn't get it, it's like. And moreover, electric cars are, in lots of ways, going to be superior to internal combustion engines in ways you haven't thought through clearly. In the end game, an electric car should have the maintenance profile of an egg beater, an electric egg beater. In other words, it just won't need much maintenance.
And I remember my old Toyota Corolla '73 model used to have had the oil changed every 5,000 kilometers. In my current car, it's every 20,000 kilometers. And the maintenance man used to be a serious mechanic. And now he just plugs a computer in. And it tells him what part he needs to bolt off and bolt on again. And it doesn't need maintenance anyway. It's just flawless. But we're going to get that step of improvement again. So that's the good bit.
The bad bit is that Tesla's manufacturing quality is kind of awful, right? And you hear case after case after case of it. And that reflects in both warranty costs. It reflects in a few unhappy customers. And it also reflects in just his manufacturing costs being way, way, way too high.
And there's a sort of big picture question here, which is, can he get his manufacturing costs and manufacturing quality to match Toyota or Volkswagen before Toyota and Volkswagen manage to match his technology in cars? And so far, I hate to say it, both Toyota and Tesla have surprised me to the downside.
It's sort of annoying that Toyota or Volkswagen haven't achieved it yet. The new Jaguar I-Pace is, in every sense, as good as a Tesla. And the manufacturing quality is probably a bit better twice.
MATT MILSOM: The price at least, though.
JOHN HEMPTON: Yes, but Volkswagen and Toyota, when they do it, it will not be twice the price. That manufacturing quality will be astonishing when they get there. And then there's the series of it doesn't add up. And you could look at this 100 different ways. And it's not going to add up, the idea that solar roof tiles were going to be as cheap as asphalt.
MATT MILSOM: [LAUGHS]
JOHN HEMPTON: Sort of bizarre. The weird manufacturing ups and downs, the rush to deliver on the final day, and then there's the wacky conspiracy theories like, where all the VIN numbers? And the conspiracy theory about the VIN numbers-- and it's completely untestable-- is that the VIN numbers don't match because Tesla is doing a Heilig-Meyers.
And I've heard this conspiracy theory from the Twitter-ati 50 times. So I'm going to spell it out and tell you there ain't no evidence. Right, no evidence that's convincing. Heilig-Meyers was the first AAA securitization to default. It defaulted in the early 90s. And it's hard to work out what went wrong. But I'm going to give you the bare thesis.
Heilig-Meyers was a junk furniture shop selling subprime furniture on installments. And the AAA strip was 55% overcollateralized. So in order to lose money on the AAA's 55% of the loans plus the spread, it needed to default. And as it turned out, about 65% or 70% of the loans defaulted. And you end up with the AAA stripping impaired. And after the event, it was discovered that only 25% of the loans corresponded to real addresses.
Now, it's actually hard to work out what happened because the documents are terrible. And it went through bankruptcy court and litigation. And no one ever went to prison. So but the absolute hyper bear case was that they were selling furniture to fictional people. And then they would fill out a fictional loan. And they put the furniture back on the store. And they're sell it to another fictional person.
And they keep repeating. And they put these fictional loans into a securitization, sell the securitization to the market. Some of the cash that they got was used to pay on the interest on the past fictional loans. And some went into their South American bank accounts. And at the end of the day, they left. And there's a giant shortfall. And all the loans of fictional people. So they're, by definition, uncollectable.
Now, the wackiest conspiracy theory I've heard--
MATT MILSOM: On the VINs.
JOHN HEMPTON: --is that the VIN numbers don't work because of that. So at one end, you have these Elon being a complete innovator.
MATT MILSOM: But the cars have to end up somewhere physically.
JOHN HEMPTON: Who knows? In the Heilig-Meyers case, no furniture ever moved. You just had furniture that didn't match reality.
MATT MILSOM: Well, I saw these tweets where the guy had tracked the car once he gave it back to them and they'd bought it back at the wrong price sort of thing. He tracked the car on his app as to where it was in the battery level, what the level of the battery was. And it just parked. They hadn't tried to do anything with it. Battery died, it had been there for six months without being tried to be resolved.
JOHN HEMPTON: So the question is, well, has it been resolved to a securitization vehicle?
MATT MILSOM: Right.
JOHN HEMPTON: You can't see. This is some bad asset backed paper out there. Now, I only point this out because I actually think Elon's an amazing guy.
MATT MILSOM: Right.
JOHN HEMPTON: The car really is amazing. And there are bits that don't make sense to me like solar roof tiles. There are bits in the short seller conspiracy that are off-the-planet wacky, the idea that Elon is pulling a giant Heilig-Meyers is a pretty large stretch.
And there are bits out there, this guy really has changed the world, right? I mean, don't kid yourself. Launching a rocket is hard. And there are a lot of hedge fund managers who are nowhere near that competent.
I'm fascinated because it's really good stuff mixed with really bad stuff. And really good stuff mixed with really bad stuff is fun to watch. We are short. We're short about that much.
If the stock goes to 400, I won't be very unhappy. I still wish I'd never heard of the company. I've been short for a few years. And I've paid a few years of borrowed cost. I've had a small number of options expire worthless. If the stock goes to zero, I'll have a drink at Elon's expense. And I'll actually be sad for the world.
MATT MILSOM: But this is a philosophical thing between your shorts and your longs. Are you doing on a forward basis or a value basis? In general, it's forward.
JOHN HEMPTON: Generally, we're short forwards. And Elon has about 300 red flags. This is a company full of red flags. You've shown me 15 red flags of certain types, and I'm shorted. And every now and again, I get stuffed by that.
MATT MILSOM: Not just accounting things, but--
JOHN HEMPTON: Not just accounting things. I'll give you an example. There was a company called Amarin last year, which was a biotech testing high purity fish oil for cardiovascular disease. It had associated with it a single person who I am not going to name who wasn't a director but it had done business with the company. And to my knowledge, that single person had never been associated with a company that didn't go to zero.
And so we were shorted. We weren't shorted because we had any view on the science. We weren't shorted because we know a lot about cardiovascular disease. We don't.
We were shorted because it had a red flag. And the red flag is fairly good. And over the history of Bronte, we've run 1,000 shorts. And we've managed to run shorts through the bull market profitably. And almost all of them are chosen just because there's a red flag. And the red flag indicates that there might be fraud.
MATT MILSOM: One?
JOHN HEMPTON: Well, in this case, it was one red flag. But it was a really good one. And it was a really good one in the sense that there were 15 previous examples that this person had been associated with that had gone to zero. And if you're involved in fraud A, fraud B, fraud C, fraud D, fraud E, and you're now involved in stock F.
MATT MILSOM: And never been to prison.
JOHN HEMPTON: And you've never been to prison, I'm going to guess that stock F is a fraud.
MATT MILSOM: Reasonable.
JOHN HEMPTON: And in this case, I was wrong.
MATT MILSOM: Ah.
JOHN HEMPTON: And I wasn't wrong a little bit. I was wrong spectacularly. So it turns out that, in the double blind study, high purity fish oil looks better than statins at reducing heart attack to the point that I think pretty well every adult over 50 is going to be on high purity fish oil at some stage in their lives. And they have a registered version that's going to get FDA approval as a drug. And the market is potentially huge because it's taken as a prophylactic effect.
The stock was trading at about $3 the day before the results came out. And it's trading at $19 now. We covered it at $14 on the way up. I'm just reading the results and thinking, oh Jesus. Now, there's a fund run by a friend of mine who didn't tell me he was long to the eyeballs. But he was long to the eyeballs. And he was long on the science.
Now, as I said, we've run 1,000 shorts over the history of Bronte. We currently have 200 on the books. We've managed to run 1,000 shorts and not lose money. In fact, we've made a double digit percentage in aggregate over 10 years of the bull market.
Now, I don't get out of bed for 2% per year. But it does allow us to be 120% or 130% percent long and have a beta at that 0.4. It's a lot of effort in the short book. But it's chosen on red flags.
And some red flags, they're so good that just one red flag will be enough. We thought that with Amarin. Sometimes you need five red flags. Tesla has like 25.
There's no way that I'm not going to be short Tesla. But I'm short this much, just like I was with Amarin. And if I'm wrong, which I doubt in this case, but if I'm wrong, it's not going to worry me.
Now, the other thing about Tesla is it doesn't look like the penalty for being wrong on the common is very large. Tesla has a market cap north of $50 billion most of the time. The market cap looks roughly like a completely unimpaired GM. That's a half a Toyota.
And even if they get there, they're going to be copied. There's a large amount of capital needed to ramp up their production. It doesn't just-- even if the current production were entirely salable, which may not be, it's not big enough to justify the current market cap.
In order to get there, they need sort of $15 or $20 billion of capital for expansion plus, of course, the shortfalls in the current book which are not-- But I don't know how large they are. They're probably 3 to 15. If they're 3, Elon will raise it. And if they're 15, we'll be pushing up daisies at some point or other.
MATT MILSOM: But they can't cover you think because of the margin or not with the market alone--
JOHN HEMPTON: Well, we don't know-- look, the business was profitable in the fourth quarter, probably and legitimately. And I do say probably and legitimately because I don't trust the accounts. There is absolutely no way it's profitable in the first quarter with the deliveries that they've done. Absolutely no way. Elon's admitted that it's going to draw a lot of cash.
It's drawn down cash almost every quarter of its existence. The first quarter is evidence that the turnaround is not today or tomorrow. when Between now and the turnaround, if the turnaround ever happens, it's going to need a lot of cash.
If that lot of cash is $5 billion, the bit in the stock is sufficient to pay for it. If that cash is $15 billion, then he probably needs to raise so much stock that the stock price will go down low enough to trigger his own margin loans. And that's a sort of catastrophe version for the longs.
I don't want to express really strong opinions on this because I actually like the guy. I think the world could do with a few more Elon Musk's. Elon Musk could do with a bit of adult supervision.
MATT MILSOM: Thoughts on the SEC? A bit toothless.
JOHN HEMPTON: It's hard. Look at-- Elon Musk clearly and flagrantly breached his court orders.
MATT MILSOM: He's doing it now.
JOHN HEMPTON: Yes, clearly and flagrantly breached his court orders. It wasn't even close. The penalty for a normal person for doing that is actually to be locked up. If you do that, Tesla collapses instantly.
There is no judge. And there is no SEC that wants to be responsible with their paw prints over the collapse. The SEC will investigate after the event. They're archeologists, not investigators.
MATT MILSOM: I guess they're coming to the end of a two week period now, aren't they? They have to try and sort it out between them. Yeah
JOHN HEMPTON: They're, going to sort it. There'll be some kind of rap over the knuckles again. If you think that a judge is going to do something that causes the imminent collapse of Tesla, you haven't watched the way that judges behave.
Now, if Tesla were to collapse, he might wind up in prison as well for just breaching court orders. Contempt of court is imprisonable in most parts of the world. But as long as Tesla's alive and dependent on him, no judge is going to call it.
And I don't know anything about this judge. I suspect he's like every other judge-- competent and methodical and cautious. And the end cautious is the reason nothing's ever going to happen there. I can't understand why you would own it. But can understand why you would own it is a common phenomenon in this market. Things are expensive.
MATT MILSOM: Why? T Rowe Price are beginning to agree with you. It seems like it's been taken up by retail from--
JOHN HEMPTON: Did T Rowe Price own a lot? I really don't--
MATT MILSOM: They just announced they just slashed it. They cut the whole thing massively earlier today.
JOHN HEMPTON: I'm sorry. I don't follow other people's 13x.
MATT MILSOM: But I think Robinhood has taken it unfortunately.
JOHN HEMPTON: Yeah, that Robinhood data. We're short Sellers and the classic thing we short is promoted fraud. We short whatever the hot stuff that can be sold to retailers.
And the Robinhood data is somewhat useful. When you see vast accumulations of crap in Robinhood accounts, it's probably somewhere near the end of the line. And Robinhood have an open API that releases vast amounts of the data about their holdings. It's bizarre.
To give Interactive Brokers a plug, there's no question that paying a little bit of fees at Interactive Brokers produces better trading results than Robinhood. The Robinhood people sign a contract that allow them to buy several percentage points higher than the current market.
The Robinhood thing is, let's give our data to hedge funds who know we're retail. And hence, they can guarantee-- the usual problem with a market maker is you're trying to cross the spread, ding, ding, ding, ding, ding, ding, ding. And the problem is that somebody off wants to buy $1,000 worth of stock.
And you'll automatically sell them. Then they want to buy 5,000 more. And that's within your lumber. You want to sell them. And then you want to buy 20,000 more, and you might sell them.
But now you're 30,000 short the stock. And then you discover that they want to buy 10 million. And the market maker loses money on those transactions. But they make money on the small ones. That person buys 5,000. And that's it there. And somebody else sells 5,000. As long as they're crossing spreads on small amounts, they will.
The Robinhood is all small amounts. So the guys that are doing market making know that they're never going to get hit by that $20 million order. And they never going to be on the wrong side of it. It's just an invitation.
Hey, you know, I'm a small investor, right? It's like, I've never seen-- the idea that this is actually something that retail investors do astonishes me.
MATT MILSOM: You use Interactive for execution? Or no, your investor--
JOHN HEMPTON: I used to. And I'm an investor. And I miss them. We had--
MATT MILSOM: Yeah.
JOHN HEMPTON: No, I missed them for our fund. We actually had $100 million sitting in interactive as a prime at one stage. And we were shorting stuff that was sold to retail. And so they had a really, really good borrow book. If you wanted to borrow $200,000 worth of some particularly crappy AMES stock, Interactive Brokers usually had it.
MATT MILSOM: At GC?
JOHN HEMPTON: Sometimes at GC, sometimes not. I'm going to give you a pluses and minuses. It turns out that their execution is extremely cheap. And we've measured it extremely good.
But their borrows outside the US are somewhat expensive. And inside the US, we did some price comparisons on borrows with Fidelity of all people.
MATT MILSOM: As a broker?
JOHN HEMPTON: As broker. Fidelity has a prime brokerage service, which has a really, really good borrow book in the