FYI | Oct 29 2008
By Greg Peel
It proved only fleeting in the end, but for one brief, bizarre moment overnight the largest public company in the world was not US oil giant Exxon. It was the humble pin-up of entomologists across the globe – Volkswagen.
Herbie was thrilled!
Perhaps the irony here is that Adolf Hitler always cited world domination as a five-year target on his CV, and it was he who commissioned the original “people’s car”. Also ironic under the circumstances is that Hitler retained Ferdinand Porsche to come up with a design. For VW’s brief domination is all about a significant stake held by top-end carmaker Porsche.
Shares in Volkswagen jumped close to 100% on the German exchange last night having done the same on Monday. Remember that two consecutive 100% jumps is a total of 400% over two days. Two weeks ago Volkswagen was the world’s third largest car manufacturer behind Toyota and GM and its stock price was around US$400. In the carnage that has ensued, which has included fears that GM might go under and a big profit warning from Toyota, VW shares had fallen to almost US$200 on Friday. Last night they closed at US$945, making the company larger by market capitalisation then Exxon. It was only the late Dow rally that put Exxon back on top.
So what on earth is going on? Market capitalisation only reflects “size” on paper, and is not a direct measure of sales or earnings. In fact, last night VW hit a PE of 100x. The reason for the move is quite simply an old-fashioned style short squeeze.
As the world has stared down the barrel of recession, it has been carmakers that have been hardest hit on the retail front. US leader General Motors is still appealing to the US government for a possible bail-out. Ford is not in a much better position. Chrysler is looking to perhaps merge with GM. Toyota is now the world’s largest seller of cars but it, too, has been hit, suggesting this week that profits ahead will be much diminished. For hedge funds across the globe, carmakers have been easy fodder for those who can still short-sell.
But in VW’s case, perhaps the hedge funds should have done a bit more homework. For starters, the German state of Lower Saxony owns 20% of VW. It was always appreciated that Porsche also had a stake, but until Monday no one had been paying enough attention to just how much. Thus when Porsche publicly announced on Monday that it now owned a 43% stake, which it was looking to push to 50%, along with options to reach 75% ownership in 2009, the usual take-over speculation buyers moved in. But who was going to sell? Closer analysis suggested that there was only some 6-7% of the company’s capital left freely floating on the market.
If that was not enough to spark a big rally, the fact that hedge funds had shorted VW stock was. They had to buy back, and a scramble ensued. Shorts are margin-called too, and stock-lenders have to get their stock back from borrowers. With no long-sellers to speak of, short-covering pushed the share price to last night’s level.
In the wash-up, it is roughly calculated hedge funds have so far lost US$30bn in two days on being short VW.
The appropriate regulators are obviously going to make the appropriate investigation into the stock price move. We are not talking a penny dreadful here – this is not Centro Property flying around like a bogon moth or even AIG doubling and redoubling its price one day, only to lose it the next. In the past year, the high face-value VW stock has been trading at levels which have been steady to higher before the recent general sell-off. This move would draw an exchange “speeding ticket” to beat all speeding tickets. Again, ironic for the humble beetle.
For those who find reason to despise short-selling, no matter how misguided their opinion, it’s been a great couple of days. Oh – and if you own VW shares, get out now!
