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That SolarCity Spread Spells Trouble For Tesla

This is what disbelief looks like:

The question is: Disbelief in what, exactly?

The straightforward explanation for a chart like this is that investors are losing faith in Tesla actually acquiring SolarCity. Why else would you be unwilling to pay more than $18.06 for shares that are, under the terms of the all-stock offer, nominally valued at $22.19 by Tesla?

But then nothing about the Tesla-SolarCity deal -- with its family ties centered on Elon Musk, dubious industrial logic, and interesting timeline -- is that straightforward.

Normally, when a deal like this gets announced, merger arbitrageurs take positions in the two stocks. A typical trade is to buy the shares of the target and sell the acquirer's shares short in order to lock in the spread between them. That's tricky in this case because almost a quarter of Tesla's float is sold short already, so borrowing the stock is expensive.

Yet, as Louis Meyer, Director of Event Driven Research at Oscar Gruss, points out, short interest at Tesla has actually been coming down in recent weeks, even as the discount in SolarCity's stock has widened. You can see this in the data:

Similarly, while short interest in SolarCity remains high -- about 29 percent of its float according to data compiled by Bloomberg -- it...