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Streetwise Professor

October 29, 2008

Now That’s What I Call Fahrfignugen!

Filed under: Derivatives,Economics — The Professor @ 7:20 pm

For a brief, not-so-shining moment, Volkswagen became the largest company by market capitalization in the world. How, you might ask, in the face of a crashing car market, could that be possible? In a word: SQUEEZE.

Numerous hedge funds went short VW shares, only to find out to their dismay on Sunday that Porsche had acquired a far larger long position than anyone expected. The scramble to cover short positions caused the price to rise from about 300 Euros to 1275 Euros. Just like the crude oil episode a little over a month ago, this bears all the hallmarks of a squeeze.

Porsche claims no responsibility, and in a statement that echoes many others that manipulators have made over the years, blames the shorts: “It added that it ‘denies all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves.’” It further said, “Short sellers [are] responsible for extreme price movements in Volkswagen.”

Sorry, kameraden, but (a) you are the large long, and (b) such price movements occur only if the large long inefficiently restricts liquidations of its outstanding positions in the underlying and derivatives. Note that the price came down substantially–but not to their pre-squeeze levels–when the company announced it would sell 5 percent of VW shares, doubling the float in the stock. This indicates that the company’s liquidation decisions affect prices–that it is a price maker, not a price taker.

The German regulator, Bafin, is investigating. It will be interesting to see how this turns out.

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1 Comment »

  1. [...] About 10 months ago I wrote about a massive squeeze on VW stock, associated with the revelation that…. For a brief time, the squeeze made VW the largest capitalization firm in the world.  The only comparable event in historical record that I am aware of is the Northern Pacific corner of 1901. [...]

    Pingback by Streetwise Professor » Sergeant Schultz Sees Something! — August 22, 2009 @ 5:35 pm

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