Tesla and the USO Oil ETF Are Starring in a Theatre of the Absurd

Absurdity is everywhere. Take advantage of it.

That's absurd. That should be the secondary motto of my firm, Excelsior Capital Partners, to augment the main credo, "cash flow never lies."

I formed ExCap last summer to exploit absurdities in the market, and the run to 3,300 on the S&P 500, the Covid-19 crash, and then the run back to (almost) 3,000 in the midst of continuing Covid lockdowns have certainly provided opportunities.

At this point, our portfolio is concentrated in the following absurdities.

With so many layers of absurdity around Tesla (TSLA) , it is hard to quantify, but that I even pay attention to anything on Twitter is absurd, let alone an argument between two billionaires, Elon Musk and David Einhorn.

While Einhorn noted Tesla's jump in receivables in a Thursday tweet questioning Tesla's earnings, Musk's only retort was a Friday morning post that, "Tesla stock price is too high (in my opinion)." The CEO -- and largest shareholder - -just said his own stock was too high? As Musk said on his call Wednesday (he used the actual profanity) WTF?

At this point the market should fear any and all proclamations emanating from the boiling volcano that is Mount Musk. It seems Elon is once again in Beast Mode. Who knows what's coming next, but a simple analysis would have shown Tesla's first quarter "profit," which was much heralded by the financial media Wednesday night, was a sham.

Anyone participating in the TheStreet's live blog on Tesla earnings Wednesday night hosted by yours truly, would have read a stream of posts from me railing against the absurdity of Tesla recognizing $354 million of revenue from the sale of regulatory credits in the quarter. Tesla recognized an average of $126 million per quarter in revenues from the sale of regulatory credits in the final three quarters of 2019. So that's how Tesla made a profit in the first quarter of 2020, and, absurdly, no analysts asked on the conference call about the derivation of the regulatory credits figure or the potential recognition of credits in future quarters.

Tesla is using these credits to smooth earnings. Even Tesla's myopic analysts -- I followed autos on the sell-side for 11 years, I know good analysis from bad; the coverage on Tesla is for the most part atrocious -- must be able to see that.

CFO Zach Kirkhorn noted on Tesla's conference call that, in relation to first quarter 2020 financials, those credits became receivables, but not yet cash as of March 31. So, that explains the jump in receivables pointed out by David Einhorn. But one question went unasked. If global auto sales are plummeting in 2020 (Morgan Stanley's Adam Jonas estimates a 17% global decline), won't the legacy automakers, the net purchasers of credits, have lower demand for those credits since they are applied to cars sold...and they are selling fewer cars?

Who cares about the details? Twitter is so much more fun.

Even less fun than Twitter is the SEC's database of corporate filings. The sponsor of the U.S. Oil ETF (USO) , USCF, has littered the SEC's page with no fewer than 13 filings in the past two weeks. I have covered the disaster that is USO in my writings for Real Money. Suffice it to say, USCF can now buy virtually anything that they want for USO. This has become an actively managed ETF.

The massive issuance of USO shares (from 156 million outstanding a year ago to 1.482 billion outstanding as of Thursday night) has created a bloated monster of a security that cannot possibly achieve its original goal of mirroring the moves in near-term oil futures contracts. USCF has noted that it has received "letters" from the CME advising it to lower its concentration of holdings in oil futures contracts, and the list of what USO could own (see end of column for details) is so broad and vague as to be worthless.

So, I am short USO and long the oil tanker owners -- Nordic American Tankers Limited (NAT) , as I mentioned in my Monday Real Money column, and DHT Holdings (DHT) , as I highlighted here -- which are the true beneficiaries of low oil prices and strong contango. The before-our-eyes implosion of USO, the largest holder of WTI futures contracts, will only pressure both those trends. Low oil prices also make EVs even more expensive relative to cars with internal combustion engines, and that informs my bearish position on Tesla.

Absurdity is everywhere. Make sure you are exploiting it for your portfolio.

USO intends to buy or sell the following permitted investments...

1. The current or front month ("first month") Oil Futures Contracts based on the price of the light, sweet crude oil known as West Texas Intermediate ("WTI) or, which are priced off of the oil futures contracts based on WTI as traded on the NYMEX including the Benchmark Oil Futures Contracts and the ICE WTI Contract ("WTI Oil Futures Contracts"); then

2. The first month, the next or following month ("second month", with months thereafter being numerically designated, i.e., the third month, the fourth month, the fifth month, etc.) and the third month WTI Oil Futures Contracts; then

3. The first through the fifth month WTI Oil Futures Contracts, plus the next nearest June WTI Oil Futures Contracts, plus the next nearest December WTI Oil Futures Contracts; then

4. The first through the twelfth month WTI Oil Futures Contracts; then

5. The first through the twelfth month WTI Oil Futures Contracts plus the second through thirteenth month Oil Futures Contracts based on Brent Crude Oil traded on ICE Futures ("Brent Oil Futures Contracts"); then

6. The first through the twelfth month WTI Oil Futures Contracts Months plus the second through thirteenth month Brent Oil Futures Contracts plus the first through the twelfth month Oil Futures Contracts based on Ultra Low Sulfur Diesel Oil Futures Contract traded on NYMEX ("USDL Oil Futures Contract"); then

7. The first through the twelfth month WTI Oil Futures Contracts plus the second through thirteenth month Brent Oil Futures Contracts plus the first through the twelfth month USDL Oil Futures Contracts plus the first through the twelfth month RBOB Gasoline Oil Futures Contracts ("Gasoline Futures Contract"); then

8. USO may also utilize the Oil Futures Contracts based on WTI, WTI Oil Futures Contacts or other types of crude oil traded on the Dubai, Singapore, and Houston exchanges, if and when these contracts reach sufficient scale and liquidity to meaningfully contribute to USO's investment objective, in addition to the foregoing investments; then, finally,

9. Other Oil-Related Investments, in addition to the foregoing investments.

At the time of publication, Collins' firm was short USO and TSLA, and long NAT and DHT.