Tuesday, October 28, 2008 4 comments ++[ CLICK TO COMMENT ]++

Talk About Short-Covering

Want to see short-covering taken to the extreme? Check out what happened to Volkswagen, a German automobile manufacturer:

Volkswagen briefly became the world's biggest company by market value on Tuesday, as short sellers continued to pile into the stock on weekend news Porsche had bought up much of VW's remaining free float.

Shares in the German car maker hit an intraday high of €1,005.01, valuing the company at €296.06-billion euros ($370.4-billion) based on ordinary stock, more than that of world number one company Exxon Mobil Corp's $343-billion market value at Monday's closing price.

The shares later eased back to stand 25.4 per cent higher at €652.00 at 1103 GMT, after tripling in the previous session.

Porsche said on Sunday it held over 74 per cent of VW, prompting a panic among short sellers who had sold VW shares in the hope of buying them back at lower prices.


Here is the chart of the action:



What just happened is unbelievable. Stuff like this happens all the time but is rare for large-cap stocks. Every single European hedge fund must have had the same shorting strategy. I guess now we know why relative value arbitrage funds have done so badly. The short Volkswagen & long Porche strategy has completely backfired.

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4 Response to Talk About Short-Covering

contrariandutch
October 28, 2008 at 3:50 PM

What appears to have happened in VW stock is that Porsche LLC secretly build a 75% stake leaving only about 5% of free float, the remaining 20% being held by the state of Niedersachsen. Porsche then happily lend out the stock to hedgies thinking VW was an easy mark to short. Short interest ended up at over 2x the free float and in the end Porsche must have been buying the same shares it was lending out.

On monday Porsche revealed that it had the 75% stake (after an analysts blew the whistle on them last week) sending the shorts scrambling for cover and the stock taking of like a rocketship.

Talk about killing the shorts...

Looks like blatant market manipulation of the kind that would make Jay Gould proud. Should be illegal but under German law apparently isn't. (Porsche massively abused a ruling that cash-settled options need not be reported as part of one's interest in a company)

The kicker? Porsche also seems to have sold shiploads of put options that they -knew- would expire worthless. Porsche milked this for all it was worth and looks set to get VW for free.

With such deviousness in their Treasury department Porsche should probably consider becoming a hedge fund, it makes them more money then carmaking.

contrariandutch
October 28, 2008 at 3:51 PM

One more thought:

Porsche should have fixed the VW share price at E 911,- just because it can and it would look utterly cool on the ticker...

October 28, 2008 at 7:20 PM

Assuming it's all legal and ethical (question mark here it seems,) you have to hand it to Porche's team. Not only can they build cars (not that I will ever be able to afford one) but they have outsmarted the smartest on the Street: the hedge funds. I say we crown them as investor of the year ;)

JK
October 28, 2008 at 7:45 PM

I agree, it was a work of genius. lol. Hats off to them.

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