I've copied two posts into this one, together they allow anyone not familiar with the systemic character of markets to be understood with respect to disconnected supply and demand....note who is whining, threatening, and outright chagrined by this outcome.....Supply is the underlying arbiter of stock markets.....unless and until its suspended by systemic collaboration.....Congrats to Porshce for its enlightened actions demonstrating understanding of what should be well known.
Porsche apparently understood Supply and Demand.....and the importance of characterizing Free Floats.
Squeezy money
Oct 30th 2008
From The Economist print edition
How Porsche fleeced hedge funds and roiled the world’s financial markets
GREAT cornering and eye-popping acceleration make Porsche’s cars popular among thrill-seeking bankers and hedge-fund managers. Now its clients are discovering that the carmaker itself has an unexpected talent for cornering markets. In a few tumultuous days it is thought to have made a cool €6 billion-12 billion ($7.5 billion-15 billion) on the share price of Volkswagen (VW)—a coup that has roiled the world’s financial markets.
Porsche’s gambit was as old as finance itself. For about three years it had been steadily increasing its stake in VW, a much larger yet less profitable carmaker with which it shares a little production. Its buying had driven up the price of VW’s shares to above the level at which it would make any economic sense for Porsche to buy VW. Seeing this, hedge funds sold shares in VW that they did not own. One strategy was a bet that VW’s share price would fall. Some also bought shares in Porsche, in a wager that shares of both would converge.
The risks of short selling should have been apparent to the brightest hedge-fund managers in Mayfair and Greenwich because of widespread suspicion that Porsche, a dab hand in currency-derivatives markets, was also mucking about with options on VW stock. Adam Jonas of Morgan Stanley warned clients on October 8th of the danger of playing “billionaire’s poker” by betting against Porsche. Max Warburton of Alliance Bernstein said Porsche could make billions by squeezing short-sellers of VW’s shares.
At the time Porsche dismissed these musings as a “fairy-tale”. But on October 26th it executed a handbrake turn, saying that it owned nearly 43% of VW’s shares outright and had derivative contracts on nearly 32% more. That meant it had tied up almost all of the freely available shares (the rest are held by the state government and index funds). Hedge funds quickly did the maths, concluding that they could be caught in an “infinite squeeze” in which they were forced to buy shares at any price.
Their frenzied buying sent VW’s share price soaring (see chart). After languishing below €200 last year, it jumped to more than €1,005 at one point on October 28th, briefly making VW the world’s most valuable company. Porsche may have made paper gains of €30 billion-40 billion in what one analyst described as “one of the most brilliantly conceived wealth transfers ever.” Porsche says it never intended to make money on derivatives and only bought them to protect its planned purchases of VW stock. On October 29th it said that it would settle up to 5% of its VW options, freeing up a similar portion of stock and sending the price down again.
Hedge funds that take bad bets may garner little sympathy, but the VW saga does more than punish a few “locusts”. On October 28th shares in Morgan Stanley, Goldman Sachs and Société Générale wobbled on worries (denied by all) that they might also be exposed to VW. If the losses are big enough to cause the failure of even a few hedge funds, that would spell more pain for the battered banking system. Other casualties include buyers of passive funds that track the German market who will end up with a disproportionate stake in VW within their portfolios. With VW’s share price falling again, those who sell now will lock in a loss.
The greatest damage is to the reputation of Germany’s capital markets, where regulators are now belatedly investigating what went on. Allowing acquirers to build large secret stakes in bid targets does nothing for confidence. Even Porsche may come to rue its coup. “They may struggle to sell 911s to hedge-fund managers for years and years to come,” says one investor.
economist.com
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From The TimesOctober 30, 2008
Hedge funds fear bankruptcy after Porsche squeezeHelen Power, Tom Bawden and Christine Seib
Hedge funds were heading for a full-blown row with the German Government last night as it emerged that funds sitting on tens of billions of euro losses after short-selling Volkswagen could go bankrupt.
Porsche, VW's biggest shareholder, stands to pocket a quick €6billion (£4.7billion) profit from the short-selling.
The London-based Alternative Investment Management Association (Aima), the hedge fund trade body, said yesterday that it planned to ask the European Union to clamp down on a controversial German legal loophole that allowed Porsche secretly to take its VW stake to almost 75 per cent.
Andrew Baker, Aima deputy chief executive, said: “This sounds somewhat irregular. If you tried that in this country, there would be a number of questions to be answered.”
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He said losses for hedge funds were likely to be less than a tenth of the forecast €20billion. “There are funds hanging on by their fingertips because of redemptions for whom this could be the last straw,” he said.
The casualty list of hedge funds hit by the Porsche squeeze on VW grew yesterday as it emerged that Steven Cohen's SAC Capital and Perry Capital, a key financier in Malcolm Glazer's takeover of Manchester United, were among the losers. Greenlight Capital, run by David Eindhorn, Marshall Wace, York Capital and Glenview Capital are also among about a hundred hedge funds thought to have made losses.
London-based Marshall Wace is understood to have incurred relatively small losses, of £5million, and Odey Asset Management - one of the capital's oldest hedge funds - warned investors it had lost out, although the fund is understood to believe it can claw back most of the losses.
One senior London-based hedge fund manager said: “This was just old style-cornering. Nothing like this has happened in Britain since the railway scams of the 1890s and it gives Germany a Wild West feel. If you did that here, you would never be able to trade with banks again,” he added.
The hedge fund manager said the biggest losses have been incurred by the proprietary trading desks of investment banks.
Deutsche Bank and Commerzbank have seen their shares plunge this week on claims they are exposed to the Porsche fallout. French bank Société Générale is also said to have held short positions.
BaFin, the German financial regulator, yesterday opened an investigation into recent VW trading to determine whether there was market manipulation.
A spokesman for Porsche denied any wrongdoing. Mr Baker said Aima is taking advice on whether German rules breach European Union law and may also lodge complaints with BaFin.
Porsche has said it will sell about 5per cent of its VW stake to help ease the shortage of stock. That would make it a profit of €6billion, more than the €4billion value of Porsche on the stock market.
The carmaker said the option sale was designed to avoid further market distortions. Porsche will have control of 69.1 per cent of VW as a result of the options sale.
However, hedge fund sources said Porsche may be forced to sell much more than this to cover the tax bill on its paper profit, which would drive down VW's share price farther.
business.timesonline.co.uk |
