Short selling is a simple technique that enables traders to make profit on down trends. The underlying process involves borrowing shares, selling them instantly, rebuying the same number of shares at a later point and returning them to the lender. The lender makes their profit from a small interest paid for the privilege of borrowing shares and of course in their best interest hopes for share prices to go up.
I came across the VW/Porshe - Hedge Funds story on BBC today, see http://news.bbc.co.uk/1/hi/business/7697082.stm. Share prices VW have soared by over 300% in the past 3 business days. Many Hedge Funds found themselves in lossy short positions after Porshe anounced that it owns over 70% of VW. These short positions got cornered, not enough shares on the free market as most are owned by Porshe.
"'Each and any short-seller in the world is trying to close up their position and there is no way they can do it, except for trying to buy like mad,' said Heino Ruland, an analyst at FrankfurtFinanz. What is upsetting the hedge funds is that if between 10% and 15% of VW shares were on loan to be shorted and only just over 5% were available in the market, it is likely that many of the funds that shorted VW had borrowed the shares from Porsche." [source: BBC article]
VW is now clearly overvalued, so what does this mean?!! I wonder at what point the shares start falling? "VW's shares peaked on Tuesday at 1,005 euros, valuing the company at 296bn euros ($370bn; £237bn), which is well over the $343bn value of Exxon Mobil - previously the world's most valuable company. Last Friday, VW's shares closed below 200 euros. As an indication of how extreme the market valuation is, last year Exxon made profits of $41bn on sales of $390bn while Volkswagen managed profits of about $8bn on sales of $136bn." [source: BBC article]
This is a stock to watch, maybe once the lossy short positions are accounted for the stock will plummet down?!!
Wednesday, October 29, 2008
Big price rises!!
Hehe, no chance... what we are seing in the market for past 2 days (28th-29th October) is overvalued madness. Apparently the 10% up on the US markets was beeing credited to planned US interest rate cuts expected later today, however financial commentators lacked enough factual explanation to justify current market behaviour. Recession is underway with a lot of bad quarterly reports and it is pretty clear that whatever interest rate cuts will be, tomorrow (very latest by friday) we will see more strong drops on markets!
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