S&P Rips The Tesla Band-Aid. What To Expect Next.

Bear in mind that the amount of money indexed or benchmarked to SPX is enormous. Estimates are that about $5 trillion is explicitly indexed to SPX (via index funds or ETFs like SPY) and that another $7 trillion is benchmarked to the index. The former class of funds must replicate the index perfectly, while the latter have some discretion about how to go about meeting or exceeding their benchmark. The explicit indexers would need to buy about $60 billion worth of TSLA (and sell that amount of other shares) to meet their obligations. With that sort of demand – and potentially another $85 billion if we include those who benchmark to the index – it is not at all surprising that TSLA’s stock jumped in response to the news of the index addition. The company is getting a new class of investors – and a necessarily price-insensitive set at that.

This raises an interesting question about whether the market has already priced in the addition. The market capitalization of TSLA has risen by about $170 billion since S&P made its initial announcement. Speculators and various other investors are anticipating unprecedented demand for TSLA shares on December 18th. But they have already boosted the value of the stock by more than its potential demand on that date. Sharp-eyed readers will notice that sum of the figures in the paragraph above is $145 billion, which is less than the total potential demand from index investors. Could this be one of the ultimate “Buy the Rumor, Sell the News” events?

There is one more potential complication that could upend the speculative case for TSLA shares. It is not unprecedented for companies or their insiders to sell shares into index announcements. It would not surprise me in the least if there is a tacit arrangement for either Tesla to issue new shares or for Elon Musk to sell some of his holdings on December 18th (or both).TSLA has continual cash flow needs and selling new shares into fresh demand at or near all-time highs would be a very inexpensive way to fund them. Mr. Musk has famously avoided selling his immense personal company shareholdings, but could an event like SPX index addition be the catalyst that persuades him to change his mind on that topic?

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