Hydrogen fueled truck designer\manufacturer Nikola Corp and its Chairman\Founder Trevor Milton have been responding to Hindenberg Research’s scathing report which calls the firm an “intricate” and “massive fraud”. NKLA’s stock price fell just over -10% in the first fifteen minutes of today’s trading but has since rallied back to up +11.3% by the end of the day. NKLA short interest is $352 million; 10.94 million shares shorted; 8.05% of its float. It is the 9th largest short in the Auto Manufacturing and Construction Machinery & Heavy Trucks sectors.
NKLA shares shorted have decreased by -1.96 million shares, worth $61 million, over the last month but recently we have seen an increase of short selling in the name in response to the Hindenberg report. Shares shorted have increased by 1.34 million shares, worth $43 million, over the last week. Almost 263 million NKLA shares traded last week versus an average of 46.2 million traded on a weekly basis from January 1st and September 4th. There were 106 million shares traded today.
While trading was very heavy in NKLA, this has not been a short side led market with just 1.3 million of shares shorted added to NKLA’s short exposure over the last week. Trading was overwhelmingly due to long sided activity – existing longs selling to lock in whatever is left of their mark-to-market profits, new longs getting into the name at “cheap” levels and day traders moving in and out of the name in response to price volatility.
In fact, NKLA short selling can not be a driver of price movement in the near future due to a severe lack of stock loan availability. Because non-insider NKLA holders are predominantly retail based who are not active lenders of stock nor in margin accounts and there are not many institutional or hedge fund holders who actively lend stock or whose stock is rehypothicated and lent out the overall lendable supply of NKLA stock is very small.
Most of NKLA’s small pool of lendable stock has already been lent out and short sellers are not going to able to get any locates in size to put on new or additional short exposure. Over the last two weeks we saw NKLA stock loan rates decline along with its Short Interest % Float and rates dipping below 1.50% fee since early March. But recently we have seen both Short Interest % of Float and stock borrow rates climb. The lack of supply and an increase in short selling demand is illustrated by the fact that new stock borrows are going at the 25% to 30% fee level today.
We will probably see a short squeeze in NKLA very soon if its stock price continues to shrug off bad news and climb on good news but at the moment the short squeeze is just sitting at the top of the hill and building up potential energy. Shorts were down -$37 million in mark-to-market losses today but are still up +$58 million in mark-to-market profits in September. Even though NKLA shorts are down -$229 million in mark-to-market losses for the year their recent September profits are providing them a short-term cushion to cling to until their Profit\Loss numbers turn red for the month.
A NKLA short squeeze will be augmented by high stock borrow costs especially if rates climb anywhere near the +600% fee levels we saw in the first two weeks of July. But at the moment, short sellers are scrambling to find stock even at levels over 25% fee. Stock borrows returned by shorts squeezed out at these stock price levels will be immediately replaced by new short sellers looking to get into the name. Until the music stops and the conga line of potential short sellers returns to their seats total shares shorted should remain constant. Only when stock borrow rates get exorbitant and\or mark-to-market losses become too large will net short covering aid long buyers in pushing up NKLA’s stock price. In the meantime, the longs are standing alone in determining NKLA’s short term price moves.
NKLA shorts are walking a tightrope, they are going to be subject to high stock borrow rates which will be eating into their profits at an alarming rate but if they get a tailwind of price weakness they may be able to cross over to safety and generate net-of-financing mark-to-market profits. But of they get a strong crosswind of price strength, the added weight of high stock borrow costs will make them plummet deep into the abyss of net-of-financing mark-to-market losses.
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