VW: The Grandest, Most Ridiculous Short Squeeze of All?
October 28th, 2008Priceless.
Via: Portfolio:
A short squeeze makes the automaker the most valuable company and the market a farce.
Automakers everywhere are getting battered by an economic slowdown, but today Europe’s top carmaker is the biggest company in the world.
Because of a freak event, shares of Volkswagen have spiked, giving it a market value of $370 billion, surpassing that of Exxon Mobil, at $343 billion.
On Sunday, Porsche unexpectedly disclosed that it had raised its stake in Volkswagen to 74.1 percent from 35 percent, through the use of derivatives.
At a time when much of the world is looking at the markets for signs of whether we can weather a financial crisis, an episode like this makes the volatility in stocks look like slapstick comedy. It is baffling how something so basic as a major shareholder doubling its stake could cause so much turmoil in a market. Yet somehow the acquisition came as a complete surprise. Where was the transparency here?
The price spike resulted from a squeeze. A number of hedge funds had shorted VW shares, betting that the company, like other automakers, would fall in the market as consumers cut back spending. In short sales, investors borrow shares and sell them, betting that the stock price will fall and that they can buy them back at a lower price and profit from the difference.
But the move by Porsche meant that there were very few shares of VW available. The German state of Lower Saxony, where Volkswagen is based, owns 20 percent. That means only about 5 percent of VW shares were on the market.
That scarcity drove up the stock price of Volkswagen. Its shares surged 150 percent on Monday and 93 percent today as hedge funds scrambled to buy shares and cover their positions.
“Each and any short-seller in the world is trying to close up their position, and there is no way they can do it except for trying to buy like mad,” Heino Ruland, an analyst with FrankfurtFinanz, told Reuters. “Someone is selling it at a rather interesting and rich price: It is about 10 times as much as it should trade.”
The VW squeeze play may well generate sympathy for short-sellers after months of vilification from politicians and executives who should know better. Shorts have been accused of manipulating stock prices through secretive means. Now they have been the victims of similar force.
“I have hedge fund managers literally in tears on the phone,” one London-based auto analyst told the Financial Times.
When kids ask teachers what the real-world significance of algebra is, they should say: “stock scams.”