The shell of the future battery factory on the Tesla Gigafactory construction site east of Berlin is very busy.
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David Neuhauser, chief investment officer at Chicago-based hedge fund Livermore Partners, has defended his short position in Tesla, Facebook and Cathie Wood’s Ark Innovation ETF, arguing that all could be vulnerable in the event of a market downturn.
As of Wednesday’s close, Tesla is up more than 54% in 2021 while Facebook, which recently rebranded as Meta, has climbed almost 25%. The Ark Innovation ETF is down 6.24% year-to-date and famed “The Big Short” investor Michael Burry recently exited short positions on both Tesla and Ark.
But speaking to CNBC’s “Squawk Box Europe” on Thursday, when asked whether he felt there was still money to be made in these short positions, Neuhauser said: “I do.”
Investors who short a stock believe it is going to fall; they sell borrowed shares with the aim of repurchasing them at a lower price, returning the borrowed shares and making money on top.
Neuhauser argued that although Tesla is the market leader in electric vehicles and its production in recent years has been “spectacular,” competitors such as Rivian are beginning to amass multi-billion dollar valuations despite producing relatively few vehicles.
“It reminds me that there is massive frothiness in the market, and in specific areas, in specific sectors like EV, I think at some point in time you are going to see more of a downturn, and people are going to start to feel some of that pain,” Neuhauser said.
“Historically, when you look at bubbles and speculation, there always seems to be a sector or a class that tends to be sort of the poster child, and it seems like EV to me is one of them.”
He added that the broader tech sector contains companies that are seeing valuations at 15 times sales without a “plan to even get into profitability.”
These historically high valuations in the tech sector render it uniquely vulnerable in the event of a “washout or a black swan type event,” Neuhauser said, caused by a policy error in the face of persistently high inflation.
Policy error?
Neuhauser, whose fund is up more than 20% this year, suggested that this “frothiness” in the stock market could be derailed by a “disastrous policy mistake” from the Federal Reserve.
He argued that inflation is worsening and the Fed is “behind the curve,” while stock markets are being lulled into believing that they are in a “goldilocks” environment with low interest rates and moderate inflation.
Neuhauser’s outlook is not shared by all, however. Economist Carl Weinberg told CNBC on Wednesday that those forecasting runaway inflation were “hysterical.” He argued that a breakdown of October’s CPI (consumer price index) figures showed price rises were not expanding beyond select sectors and did not constitute systemic inflation.
The U.S. CPI came in at 6.2% in October on an annual basis, the sharpest surge in yearly inflation for more than thirty years.
Fed Chair Jerome Powell has also insisted that pulling the trigger on monetary policy tightening too soon would be counter-productive, and maintained that the current spike in inflation is transitory.
“The early days of stabilization policy in the 1950s taught monetary policymakers not to attempt to offset what are likely to be temporary fluctuations in inflation,” Powell said at the Fed’s Jackson Hole symposium earlier this year.
“Indeed, responding may do more harm than good, particularly in an era where policy rates are much closer to the effective lower bound even in good times.”
Neuhauser’s view on Tesla is also contrarian. The stock took a hit early in November after CEO Elon Musk began selling billions of dollars’ worth of shares, but has since rebounded, with many analysts remaining bullish.
“In a nutshell, we would rather Musk rip the band-aid off now and sell this portion of stock quickly rather than it lingering over the next year and feeding into any non- fundamental bear thesis on the story,” Dan Ives, managing director of equity research at Wedbush Securities, said in a note last week.
“Fundamentally speaking, Tesla remains in pole position to drive this EV adoption curve to the next level both domestically and globally with Musk & Co. leading the way in this $5 trillion green tidal wave over the next decade.”
Wedbush maintains an “outperform” rating and $1,100 base case for Tesla stock, with a bull price target of $1,800.