Wednesday, October 29, 2008

So how many hedgies did Porsche really kill?

It was a classic corner. My first thought was Northern Pacific 1901 where the stock went from under $100 to $1000 during the squeeze. Although the VW squeeze was only half the magnitude it had the same effect, the speculators sell everything else as they desperately try to locate stock to cover. First up, the headline story from FT Alphaville:
Difficult to say, of course, but we’d be sellers of the €30bn figure being banded about by newspapers as they struggle to explain how speculators borrowed shares in Volkswagen, not knowing they belonged to Porsche, sold them, and then seemingly had to buy them back (from Porsche) at five times the price, before giving them to Porsche. (We won’t address the pref side of the trade!)>>>MORE
Next, some truly pathetic whining from the hedge funds via the Telegraph:

How Porsche took the wind out of the hedge funds' sails

Shortly after 3pm on Sunday, Porsche slipped out its bombshell – in German. So it took a while for hedge fund managers to comprehend the significance....
...With Porsche already owning 42.6pc of VW and Lower Saxony 20pc, this additional 31.5pc left little more than 5pc of shares free to cover short positions that amounted to nearly 13pc of the company's stock.

Porsche said it was letting the market know "to give short-sellers the opportunity to close their positions unhurriedly and without bigger risk''....

...As the losses have grown, so has the indignation. The hedge funds feel unfairly caught out. VW has been a popular "short"....

...Porsche's movement has sparked calls of foul play. "The regulator needs to investigate,'' Piers Hillier, head of European equities at WestLB Mellon Asset Management, told Bloomberg. "The bigger question has to be why they have not done so already. Porsche's stake-building process is at best obscure."

Porsche vehemently rejects the accusations. "The ones responsible are those that speculated with huge sums of money on a falling Volkswagen share price," said a spokesman...

Somebody running money at the fruit of the merger of Rheinische Girozentrale und Provinzialbank, Düsseldorf, and Landesbank für Westfalen Girozentrale, Münster (West Landesbank) should know the place that Porsche and VW hold in the German business universe contra the hedgies:

...German regulator Bafin has announced that it is looking at the VW share movement to see if any insider trading or market manipulation had taken place, but has not yet launched an official investigation.

Hedge funds are not holding out any hope. The German establishment has made little secret of its contempt for the high-rolling industry, with one senior politician referring to the sector as "locusts"....MORE

During the '01 squeeze a few lousy NP shares were rushed from London to New York to settle the short and they were the most valuable cargo on the ocean because the sellers are at the mercy of the folks to whom they sold the stock. The Morgan/Hill and Harriman/Rockefeller buyers let the sellers off the hook for $250 if memory serves. Porsche is going to do something similar. From the Wall Street Journal:

Porsche to Settle VW's Hedged Shares

Porsche Automobil Holding SE said Wednesday it is taking steps to smooth over volatility that saw Volkswagen AG shares soar more than four times in value in recent days, selling up to 5% of its own stock in the auto maker.

"Porsche SE intends -- depending on the state of the market -- to settle hedging transactions in the amount of up to 5% of the Volkswagen ordinary shares," the Stuttgart-based maker of the 911 said. "This may result in an increase in the liquidity of the Volkswagen ordinary shares."

Volkswagen's shares jumped 82% on Tuesday after a similar surge Monday. Speculation on the reason for the rise centered on a reduced number of shares available and hedge funds needing to unwind bad bets on the share's direction. The surge came amid reports that big investors had been forced to buy scarce shares to get out of mistaken bets the shares would fall. (See related article.)...MORE

I had a comment on MarketBeat's post "Bug Crushes Exxon":

Too funny.

On page 400 of Edwards and Magee’s “Technical Analysis of Stock Trends” 8th ed., is the line:
“Such situations as the famous 1901 corner in Northern Pacific are not likely to ever occur again under present regulations…”

Comment by Climateer - October 28, 2008 at 10:41 am