Making The Tesla Stock’s Market (NASDAQ:TSLA)

Eufemia Didonato

Market Disruption? These and other questions are explored here, not completely or perfectly, in an attempt to see how the intrusion of Tesla, Inc. (NASDAQ:TSLA) may be disrupting established markets. Investment Thesis Equity investment markets in developed world economies now have a two-fold nature, one which began in the 3rd […]

Market Disruption?

These and other questions are explored here, not completely or perfectly, in an attempt to see how the intrusion of Tesla, Inc. (NASDAQ:TSLA) may be disrupting established markets.

Investment Thesis

Equity investment markets in developed world economies now have a two-fold nature, one which began in the 3rd quarter of the 20th century as 1) market-making partnerships found the competitive need to become publicly-owned equities themselves and 2) as data management by electronic devices advanced, so did evaluation practices.

The advancing economics of record-keeping forced the automated systematization of small-volume/value trades. That finally reached the point where now, at the start of the third decade of this 21st century, costs are so minimized that transactions which can be forced into standardized treatment are being conducted without trade “commissions”.

But that can’t work for “institutions” running multi-billion-dollar equity portfolios. They need to move volumes of shares held (or desired to be held) in magnitudes beyond what are regularly posted as “open offers” or bids. So, these trades must be negotiated between big participants, often in groups. Most of the time, incomplete efforts between buyers and sellers to reach a supply-demand balance require the MM to make up the difference.

Nearly all players in this serious “game” are anticipators, and knowledge of the degree of intent among the participants has important potential price impact in itself. So, market-makers who will maintain the anonymity of their clients are important. It is as essential as conserving the time it takes to assemble the “other side of the trade” to meet the clients’ desires.

Thus, the market-maker [MM] typically is drawn into the trade as a principal, a part-owner of the transaction’s imbalance, rather than merely as an agent introducing buyer and seller to act between themselves.

That won’t be done without price-change protection insurance for the MM, paid for by the client, as part of the “liquidity cost” of the transaction. Such protection is provided for by hedging deals in “derivatives” markets where legal contracts involving price and time constraints provide economic leverages.

The hedges provide forecasts of price extremes as seen by hedge buyers and sellers, and the trade-ordering client. This is what makes their forecasts so valuable. Instead of aiming at some single-point price target to be hoped for, we now have a sense of what are likely limits of price movement, within reasonable future periods of time. When desired upside price objectives are approached, the investor has a sense of both the remaining potential payoff and the building risk of price drawdown loss.

Experience has shown that the odds for the direction of price movement are influenced by the proportions of likely upside and of downside in the range of price uncertainty now present. To clarify those proportions for comparability between various securities, we use the current market price as the dividing point. The percentage of the whole range of low to high price extremes which lies below the current market is the indicated value of the Range Index [RI].

For example, an RI of 25 offers three times (100 – 25 = 75) as much upside as downside, as seen by the real money participants in the (often highly leveraged) hedging markets. Using the RI to segregate prior market experiences by their ex-ante outcome expectations, it is possible to build archive records against which present forecasts may be compared. The historic RI measure, while often different between securities, when compared with its own history can provide profitability odds and characteristic sizes of profit and loss exposures, measures which then may be compared when contemplating investment selections.

What Makes TSLA’s Markets Different?

They share a competitive market arena driven by institutional investors with many alternative investment securities from which to select capital commitment candidates. Let’s look at how some notable ones of those appear.

Figure 1

Source: Yahoo Finance

These securities are ranked in [B] by size, with Xerox (NYSE:XRX) and HollyFrontier Corporation (NYSE:HFC), the smallest of the S&P 500 Index names for comparison at their size extreme. The ETFs did not make available data in some cases and represent special types of securities.

Many investors may lose sight of the enormous value volume handled ($1 trillion a day) by equities markets in the US. These volumes would not be possible without the dominant role played by major institutions which pool holdings in Pension, Mutual, non-Profit, Hedge, Insurance and other funds. Their roles are indicated in columns [F] and [G].

The liquidity of the markets supporting these transaction volumes makes the US a dominant economic and commercial force in world politics. That is a responsibility not lost on Market-Making professionals and government regulators.

The four [B] trillion-dollar stocks plus others like Johnson & Johnson (NYSE:JNJ) are driven in these markets by “institutional” trades at a turnover pace [E] not yet matched by TSLA. In terms of number of institutional holders [F], TSLA has not yet attained a “must own” status. It is as big a [G] “share-of” owner as Amazon (NASDAQ:AMZN) and AT&T (NYSE:T), but apparently has not yet convinced many funds that cars running on batteries are other than toys.

The one distinction separating TSLA from nearly all these others is in [H] where more than a token percentage of shares are involved with bets against, (shorts) rather than for, the stock’s present price in comparison with its future prospects. They are a sign that a significant portion of the investing public has not yet accepted the notion that electrically-driven transportation will become the norm.

Instead of this being a problem, it may be viewed as an opportunity. In contrast to the minimal proportion of fringe objector shorts among the other securities being compared, in TSLA, there is still contra-capital to be converted into profit by enthusiasts of the present trend.

But the major profit potential for most investors lays in the increase in the [B] overall value surges likely to continue in their irregular appearance. Those are illustrated best as a condition common to most equity investments, including the large ones we see in both Figures 1 & 2.

Near and Longer-Term “Street” Stock Price Expectations

Figure 2

Source: Yahoo Finance

Column [I] contains average coming 5-year “growth” expectations by Wall Street research analysts. No calibration is presented as to the accuracy of like prior forecasts.

But comparisons of these estimates with market prices of the just-past year in [J] to [L] reveal great safety from error for the forecasters in column [M] which compares [I] with [L].

More importantly, it shows enormous capital gain advantage opportunities available to those able to identify where each stock’s “today price” is, in relation to near-term coming prices. Street analysts attempt to do something like that with one-year-from-now “target price” estimates, averaged for each stock in [N].

Not having their expectations of [J] – [L] for the coming year, the best that can be done is to make comparisons in [O] and [P] with actual prices in the year just past. The [P] column is a “poor investor” proxy for a measure of potential risk and at the other extreme may be suggestion of current investment “favorites”. Draw your own conclusions.

Market-Maker Forecasts of Coming Price Potentials

Figure 3

Source: Author

As indicated earlier in this article, contemporary equity markets require (and permit) market participants to offer self-protective behaviors which are in fact forecasts of coming stock prices. Forecasts, which at their limits, also indicate balances between prospective risks and rewards. In this Figure 3, see [B], [C] and [G].

When those balances are used to segregate prior market outcomes from a standardized portfolio risk-managed discipline [TERMD] the odds [H] for profitable outcomes appear along with their realized payoffs net of losses [I] in holding periods [J] at annual rates of CAGR [K].

As a means of selecting promising capital-gain equity investments in a strategy of active investment, CAGR can be of considerable help. But the available data allows (encourages) even more productive selectivity when identifying reinvestment candidates and making choices.

The use of [H] Win-odds and their 100-H complement as weighting factors for [I] rewards and [F] price drawdown risks in [O] and [P] to produce the [Q] net selection figure of merit [fom]. This helps to rank larger numbers of investment candidates. Using [J] to turn [Q] into a more precise fom [R] can be even more helpful in maintaining a more effective capital-gain productive strategy where time has become a pressing element.

To illustrate with specifics: AAPL’s CAGR of +150% is impressive. But it can need further examination, since it comes from a [L] prior sample of only 2 experiences, not statistically convincing. If found valid, its [R] fom puts it at the top-rank (37 bpd), quite competitive with the (bottom-row) 20 best-ranked prospective situations (at 33.6 bpd) out of the MM-forecast population of 2,700+ other stocks and ETFs.

Second-ranked TSLA’s CAGR of 131% is also impressive, as is its [R] fom of 20 bpd. But there are possibly many other more attractive investment candidates among that group of 20 Best-Odds issues.

Other surprises appear among the “defensive” big-cap stocks JNJ and T. Their Range Index [RI] risk-reward balances of 18 and 25 should offer price decline reassurance, but very adequate (in number) historical experiences come up with Win odds of only 62 for JNJ and a horrible 36 for T. CAGRs of +11% and -16% are not competitive with most other big-cap alternative stocks or index-tracking ETFs. This may just be price circumstances of the day, but the indications are that today is not their time. Generally, any Win odds under 75-80 out of 100 should be avoided.

TSLA’s Recent MM Price Range Forecast Trend

TSLA’s strengthening profit picture and continuing product demand picture has provided more active market appraisals in the past few months.

Figure 4

(used with permission)

The small lower picture of Figure 4 is the past 5 years’ distribution of daily Range Indexes. Clearly, higher market prices will need the support of higher Market-Maker price-range forecasts. They have recently appeared as the stock’s price rose to $500 and may well again appear in a positive economic, virus health, and political market environment. Current 3-month MM forecasts extend to year-end.


Present MM price range TSLA forecasts allow for substantial downside exposure. Prior forecasts as extreme as today’s have encountered maximum price drawdowns of only -11%, with recoveries to profitable outcomes in better than 75 out of 100 (6 out of 8). Now is not an opportunity for enthusiastic investment in Tesla, Inc., expecting them to be absent of near-term price drawdowns. Its longer-term prospects continue to have MM strong support.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So, our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. We daily identify their view of best payoff equities, 20 each day. First months of 2020 to date have produced over 3100 profitable position closeouts at over +50% annual rates. Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name.

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