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Just as were finishing our morning coffee at 5:46 a.m. this morning Keith fired the Macro Team a question, “What is going in Germany?”. After a few minutes of digging, the answer was fairly obvious, Volkswagen was up 93% and Volkswagen is the largest component of the DAX. These gains came on the back of Porsche’s Oct.26th announcement that is plans to increase its stake in Volkswagen to 75%.

Going into this “event”, as the butterfly wing nut “event driven” hedgies like to call such things, Volkswagen was the most heavily shorted mega cap stock on the DAX. As of October 23rd almost 12.9% of Volkswagen common stock was shorted. Porsche owned 42.6% prior to its announcement and 75% as of its announcement Sunday night, the implied short interest was more than 50% of free float as of Monday morning.

Ironically, the shorts initially focused on Volkswagen because of its relative strength. Unlike the Japanese and Korean auto manufacturers that are grappling with heavy dependence on a single slowing market (and unlike the toxic sludge that is all that’s left of the major Detroit companies), Volkswagen had a comparatively robust balance sheet and franchise. In the minds of the “event driven” club, this meant that the stock price had further to fall, so… they ingeniously all piled in together hoping to ride it down on the “macro” story.

The average European market “event driven” hedge fund that is still bothering to report to the service we subscribe to was down -16% for the year last week. This one short squeeze “event” should “drive” that number a few points lower.

Keith and I learned a lesson early in our careers, beware the short squeeze. Indeed.

Daryl G. Jones
Managing Director