Volkswagen and the free market
Here’s something interesting. At an intraday high of 1,005€ (it was trading around 200 just a few days ago), Volkswagen has been for a few minutes the biggest company in the world for market capitalization. A whopping 380bn$. For a car-maker!!! Why this?
Pretty simple. The whole hedge fund world was short VW because it was considered overvalued, and long other car-makers. Then Porsche (which already owned something like 35% of the company I am not mistaken) decide to build a huge derivatives (long) position in VW. Guess how big? another 35/40%. through options and futures. Not Bad. Add to this 74% the 20% owned by a German lander, and you reach 94%.
Now it gets tricky for the shorts. Short open interest was about 20% when this started. That 35/40% in long derivatives that Porsche is holding is pretty sure going to delivery. The threat from Porsche is credible, at the end of the day, they are car-makers too, and can swallow VW if they want. What the shorts do have to do then? Simple, Cover. How much? 20%. How much is available? 5%. What’s gonna happen? The stock shoots from 200 to 1,000 in two days.
So much for free markets. A stock is free to shoot 500% in two days when the whole market has been clearly cornered, but is not free to fall 90% on bad economics without some intervention. Why somebody has always to intervene to stop falling markets, but never to stop raising ones?
Btw, well done to Porsche. A few tenths of billions in the bag by playing very smart. And blame to the hedge funds, that still play relative value trades in such markets. With such swings, it is a disaster waiting to happen.
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