The 2008 Volkswagen Short Squeeze

Volkswagen – The Company overview

Volkswagen began in the 1930s with the goal of providing a pleasant car for Germany’s middle class. Despite the fact that conflicts hampered efforts to attain its goals, the company remained operational after 1945, when the occupation ended and operations restarted.

In truth, Volkswagen is the world’s third biggest automaker, with annual sales over €200 billion and about nine million vehicles sold.

Volkswagen owns some of the world’s most desirable automobiles. By November 2021, about 200 manufacturing units will be operational. Volkswagen employs around 300.000 people throughout the world.

Why Volkswagen’s short squeeze happened and how it unfolded

A weird event happened during the 2008 global financial meltdown. Volkswagen was once the most valuable firm in history for a brief period of time. Volkswagen became a target for short sellers at the time because it had amassed massive debt and was significantly sensitive to credit and economic cycles.

Volkswagen’s revenue deficit was caused by a number of issues. Volkswagen holds a sizable portion of the company, with Porsche SE and German authorities controlling a sizable portion as well. As a result, a relatively modest portion may be exchanged on the Frankfurt stock markets.

What is a short squeeze?

A short squeeze is when short sellers engage in unusual activity that forces them to acquire security in order to reduce their own risk and boost its value. Short squeezes need a low short interest in the company, which means retail traders must borrow considerable shares to believe their values will decrease.

To settle the trade, short sellers must buy the asset when it unexpectedly increases. The rise in insider trading account volumes raises stock prices.

Short squeezes are short-term trading scenarios in which traders with short positions are compelled to close positions and incur big losses owing to abrupt and unexpected spikes in stock price.

The most prevalent meaning is that someone is deleting their accounts. However, short-sale losses are frequently compared exclusively to purchase losses, with the difference ranging between 0 and 0%.

Short squeezes occur when stocks begin to rise rapidly, pushing sellers to buy them fast in order to avoid incurring more losses. When a seller sells a short position, a loop is initiated. A growing supply-demand imbalance draws purchasers and drives up prices.

As a result, short bets must be covered or they will be sold. It’s difficult to go back to that amazing brief squeeze.

Not all stocks will respond effectively to short squeeze methods. Please keep in mind that short squeezes are extremely sensitive when volatility rises. Here’s some investing ideas for finding stocks that are good for short squeezes:

Most corporations have undergone short-cutting, with GME (NASDAQ: GE) and Tesla being the most recent examples (TSLA). In this article, we will also look at the famous Volkswagen Short Squeeze from October 2008.

How long did the 2008 VW Short Squeeze last?

As you can see, the brief squeezes are only temporary. It was hardly a shocking occurrence. In just four days, the stock sank 58% and the price fell 70% from its peak on October 28. Lindsey Bell is Ally Investments’ senior strategist.

With each short squeeze, the price has risen swiftly, while the market has fallen rapidly. Eventually, everyone sells at once. Typically, all squeezes finish the same way; the equities frequently return just to where they started the flight. Almost all hedge fund managers understand this and use it to their advantage during stormy times.

Volkswagen’s short squeeze of 2008

The Volkswagen short squeeze of 2008 began in 2006, when Porsche SE began purchasing a major stake in the German carmaker. As a result, the price gradually escalated in the months that followed.

The history of the Volkswagen short squeeze of 2008 may be traced in Porsche SE’s 2006 decision to begin buying a major portion of the German carmaker. As a result, the price progressively climbed over the next few months.

Porsche, on the other hand, did not stop buying VW stock at a higher price than market participants expected. The corporation revealed in March of that year that it had expanded its ownership to more than 40% and that it also controlled around 31.5% of its shares through cash-settled options.

When paired with the German government’s 20% stake at the time, it meant that less than 10% of the company’s float was actually available and accessible to day traders and investors in the reopened open market.

What is short selling?

Is there any way to profit if your stock drops and you lose it? That is something that a short sale can do. Assume you believe your company’s profitability will fall.

Apparently, rumors regarding low income are circulating. Perhaps the airline will have to cancel its flights since the illness has spread globally? This may justify the choice to reduce stock levels.

When shorting stocks, you do not own them outright but rather borrow them from your broker. It’s like purchasing anything – you only have a limited time to grab it. Keep an eye out for the VW short squeeze.

Who are the short sellers?

Short selling is a financial technique in which an investor, sometimes known as a short-seller, borrows and sells shares immediately in the expectation of subsequently acquiring them (“covering”) at a lower price.

Because the shares were borrowed and must be returned to the lender, the short-seller earns money if they make more money selling them than they lose buying them back (plus interest and dividend, if any).

A rapid surge of positive news, on the other hand, might result in a loss rather than a gain in the stock’s share price. Short-sellers may be forced to repurchase the shares they borrowed at a higher price in order to limit their losses if the share price continues to rise.

Short squeezes occur when stock short sellers acquire a large number of shares in comparison to market volume to cover their holdings, also known as short sellers. When short sellers buy the stock to cover their short positions, the stock’s price rises, enticing other short sellers to do the same, raising demand. This dynamic might result in a chain reaction of stock purchases and an increase in the share price.

The timing of borrowing, buying, and selling can result in more than 100% of a company’s shares being sold short. Shorted stocks are relisted on the market response and may be borrowed many times, although this does not always imply naked short trading.

Short squeezes are common in stocks with high borrowing costs. Due to rising borrowing rates, the pressure on sellers to cover their short positions may increase, intensifying the reflexive nature of this event.

Can a Volkswagen short squeeze happen again?

During the notorious Meme Stock Short Squeeze in 2021, Volkswagen stock rose roughly 4%. Volkswagen has had to lower prices in recent days to keep up with Europe’s brisk demand for diesel.

VW shares have achieved $357.50 per share as of February 18, 2019. Since then, higher prices have steadily decreased and remain reversible, since the decline failed throughout this time and the price has not risen over the previous peak level. It’s also a good idea to think about the distinctions between VW shares and preferred shares.

Short selling examples

The examples below best describe trade techniques. If you’ve done your homework and feel Delta Airlines’ traffic is decreasing and oil prices are rising, it may continue to lose value at least until 2020. Frenzy: If one buys DAL stock for $20, it will take 20 shares to sell.

If required, your stockbroker may lend you your shares for your advantage. Your cash balance will grow by $2000, while your share price will decrease by $2000. The brokerage will now get 100 DAL shares.

VW Short squeeze schedule

Rewind to 2006, when Porsche revealed its intention to increase its share in Volkswagen. Volkswagen made significant expenditures in this area and bought VW’s stake in boats. Stock prices have consistently climbed in recent months, as expected.

Hedge funds saw that stock prices were overvalued and shorted equities in anticipation of their future decline. The short position expanded in late 2009. Porsche’s stock price increased by 44% to 31% in option ownership and 20.2% in government ownership.

Many hedge funds and short-sellers who were betting on a lower price for shorted VW shares were caught off guard by the news. Porsche had the upper hand since hedge funds had borrowed 13% of VW shares and sold them short. With fewer than 6% of the shares available, the hedge funds were forced to repurchase 13% of the shares.

A short squeeze happens when the price of a stock increases and short sellers opt to close out their short positions or are forced to do so by margin calls.

As these short sellers buy the stock, the price rises, perhaps driving more shorts to cover. This sets up a vicious cycle in which the stock climbs even more. A stock may theoretically rise as high as it wishes.

How long did the Volkswagen short squeeze last?

The 2008 short squeeze began on October 28, 2008, when Porsche disclosed a new interest in Volkswagen. Worse, they only lasted a few days. Only 6% of Volkswagen shares were traded shortly after Porsche purchased the company, despite a desire for about 12% to settle existing short bets.

Porsche sold around 5% of its Volkswagen assets at an exorbitant price, allowing sellers to quit the largest firm. Stock prices plunged 58% in the first 10 hours after August 28. Stocks fell 70% in one month.

What happened in the Volkswagen short squeeze?

The German automaker took an early knock in 2009 when Porsche was compelled to trim expenses. The market was already hurting from the bankruptcy of US bank Lehman Brothers and other financial catastrophes.

Volkswagen shares began to rise fast as Porsche increased its stake in Volkswagen. Even after incurring significant debt and experiencing financial difficulties, the stock continued to rise. It was further harmed by the 2008 financial crisis, which resulted in a drop in automobile sales.

How high did Volkswagen go in the short squeeze?

Volkswagen’s stock rose 41% in two days, hitting more than 22,000 euros. The unexpected surge of the Volkswagen stock market momentarily made Volkswagen the most valuable business, surpassing ExxonMobil with a market capitalization of almost $370 billion.

Despite their high valuation, the financial institutions concluded that Volkswagen shares were undervalued and so unsustainable. Citing the accused seller, Porsche denied any involvement in stock market manipulation.

Volkswagen, Europe’s largest carmaker, reported a first-half net profit of 494 million euros despite the global crisis. However, management warned that this year’s “extremely challenging business” will have a negative impact on future earnings.

Volkswagen of Germany, Europe’s largest carmaker, said on Thursday that it was still profitable despite the present global crisis. It did, however, voice reservations about its chances.

VW recorded a first-half net profit of 494 million euros (695 million dollars), considerably below analyst projections of around 524 million euros and 81 percent lower than the 2.57 billion euros posted the previous year.

Based on the previous six-month performance, revenues fell 9.4% to 51.2 billion euros. The group delivered 3.1 vehicles in total, a 5% reduction. The global financial crisis, according to the corporation, “significantly harmed” business. The group’s cash reserves have climbed by 53.1 percent since the end of 2008, to 12.3 billion euros.

Volkswagen stock predictions: Analyst sentiments

Piero Cingari told Capital.com that Volkswagen shares had slumped 32% year on year. During the previous European recession, it fell by 76% to 76%.

How much did VW stock rise during the short squeeze in 2008?

Volkswagen shares increased by more than 50% between October 24 and August 28. On its first day, October 28.

FAQs

How far did the VW stock price rise during the squeeze?

Volkswagen’s stock increased by about 45% to 517 euros on October 27, 2008. The stock price has risen to 9999 euros per share in recent days, with short-selling costs estimated to be in the billions.

How long did VW’s squeeze last?

Is Volkswagen a victim since 2007, or is this a repeat? It was around 60% lower than the maximum market cap in the previous four days. Reinvestment took many weeks to get back on track.

How much did VW short squeeze?

According to estimates, VW’s short squeeze cost short sellers between $30 and $34 billion USD.

Between its starting price of €348 and its closing price of €517 on October 27, 2008, Volkswagen’s shares increased by over 150%. The stock hit an all-time high of €999 a share on Tuesday, with short-selling losses estimated to be in the tens of billions of dollars.

Porsche CEO Wendelin Wiedeking was eventually charged with share price manipulation for his role in the short squeeze, but the charges were later dismissed.

What is the most extreme short squeeze ever?

VW’s share price fell from 210.80 to 1.000 on the Xetra DAX in less than two hours in August 2008, momentarily establishing the company as the most valuable on the market.

The shares increased by 3.79% from the previous week’s finish of €210.85 per share.