The Most Valuable Company in the World Today Is …

Who doesn’t like a day when stock markets around the world spike, including a U.S. jump of 10 percent?

Well, short sellers don’t like it, since they’re forced to buy back stock at a higher price than they planned. In fact, it was just such a short squeeze that produced one of the most extraordinary wrinkles of this truly extraordinary period of market activity.

From The Times:

And the DAX in Frankfurt was 11.2 percent higher. German shares were lifted by Volkswagen, which soared 95 percent, making the German automaker, with a market value of $367 billion, the most valuable company in the world — at least for Tuesday. The rise in the automaker’s shares appeared to result from a phenomenon known as a “short squeeze.”

Investors who had sold Volkswagen shares short were forced to hurriedly repurchase them after Porsche said Sunday that it had raised its stake in V.W. to 42.6 percent from 35 percent, and that it had options for another 31.5 percent.

Exercising those options would put Porsche near 75 percent ownership, a level at which it could control every major decision at Volkswagen.

In a short sale, an investor sells a borrowed stock with the hope of repurchasing it later at a lower price, pocketing the difference as profit. Volkswagen rose 123 percent on Monday.

So the next time someone tells you that the auto industry is going down the tubes, you can now present countervailing evidence. This might lead some to conclude that the auto industry, on balance, is perfectly healthy — just like the story about the two economists who go deer hunting:

They see a buck and the first economist shoots, missing by 10 yards to the left. The second economist shoots and misses 10 yards to the right. They shake hands in hearty congratulations.

“On average,” one says, “we got him right between the eyes.”


A E Pfeiffer

So the "locusts" have been squashed - that will please Franz Muntefering (Deputy Chancellor of Germany in 2005 when he controversially referred to certain financial speculators as "locusts").

Dwane

"The Times" is in London? I thought that was "The Thames".... ;)

Risma

“A company like Volkswagen should not have crazy changes in its value on a daily basis.”

I have two thoughts: (1) Stop thinking of the market capitalization (outstanding stock x current market price) as a direct valuation of the company. The two are certainly closely related but they aren't quite exactly the same thing. The primary difference is that it's not realistic to just go buy up all the stock at the current price in order to buy the company. In order to actually buy the company you'd have to do a large-scale offer which would inevitably be at some different (usually higher) price than the current stock price. So, I think of the daily stock price as the price that investors who CAN'T (or won't) buy the whole company are willing to pay for a SHARE of the company. Not quite the same thing as buying the company, so it's not a perfect way to get the value of the company as a whole. But perhaps more importantly...

(2) While I agree somewhat with #5 Andy's response, I think it's even one more step removed: The swings in the share price reflect these individual investors' buy and sell decisions on any particular day, which are often based on the factors Andy states, but certainly not exclusively. There's emotion and judgment and risk-taking involved; that's where a lot of the volatility comes from.

(in all the above I say "individual investors" although I know that many of the players are institutional. I'm just trying to distinguish from merger/acquisition deals etc.)

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Luis

sorry i dont get the joke, can someone please explain it to me...

dan

I agree with J. Harding. There is only one "The Times" and it is based in London not New York. Sort it out.

On the subject of the hedge funders they reap what they sow. Its quite funny they picked on a German company as its a German word that describes the emotion I'm feeling - schadenfreude.

Of course it means my pension continues to deteriorate, unless of course my fund manager invested in VW in which case I'm quids in.

JaneUK

According to the BBC morning news this is likely to bankrupt those hedge fund managers who were shorting this stock.

Conclusive proof imo that there IS a God.

silent_greg

As I understood the following was the case after the announcement of Porsche on Sunday:

+ Porsche (42.6% in "real" shares+ 31.5% from options = 74.1%)

+ Local Government (20.1%)

+ the remaining 5.8% as free-floating

but based on some statistics 13% of the stocks were in short positions.

Which means all the short-sellers wanted to close their position but there were not enough share on the market so the price rocketed up.

The funny side of the story is Porsche announced today that 5% of its shares will be put on market to ease the problem. But actually they bought these shares around 70-100 EUR and taking into account the current price around 400 EUR this is not a bad deal.

Bobby G

@ Nick K (#21)

"Bernard" huh? You guys must be pretty tight with your politicians.

Nick K

The following analysis is from "Yes Minister" a TV comedy. Bernard is the private secretary to a cabinet minster. He explains

"The Times is read by the people who run the country. The Daily Mirror is read by the people who think they run the country. The Guardian is read by the people who think they ought to run the country. The Morning Star is read by the people who think the country ought to be run by another country. The Independent is read by people who don't know who runs the country but are sure they're doing it wrong. The Daily Mail is read by the wives of the people who run the country. The Financial Times is read by the people who own the country. The Daily Express is read by the people who think the country ought to be run as it used to be run. The Daily Telegraph is read by the people who still think it is their country."

"And the Sun?"

"And the Sun's readers don't care who runs the country providing she has big tits."

For the US readers The Morning Star was the Communist Party's newspaper and the Sun has pictures of bare chested ladies on page 3, The Mail and Express are to the right and middlebrow, The Guardian serious and to the the Left, The Daily Mirror -a tabloid- supported the Labour Party, The Daily Telegraph stands squarely behind the Tories and Middle England, and The Independent was founded by refugees from the Telegraph.

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Andy

"A company like Volkswagen should not have crazy changes in its value on a daily basis."

Why not? A company's "value" primarily reflects the unknown amount of all its future earnings, discounted to the present at some unknown interest rate. It's certainly conceivable that large decisions, takeovers, or revelations of unknown information about their performance could change your expectations of their future success by -50% or +100%. Changes in your expectation of future inflation/interest rates could cause the whole market to shift. The price before and after today's 10% rise could both have been the overall expected present value of future earnings, where "overall" indicates the average opinion of people who are willing to put their money on the line.

I'm not saying stock markets aren't nuts, but dramatic price swings are not (a priori) evidence of that.

J. Harding

I wish you would stop referring to the New York Times as "The Times". If you ever read the latter, you might have noticed that they are different.

mfw13

I think that part of the problem with using market cap to value a company is that is doesn't account for investors' different time horizons. Therefore, instead of thinking of a company's market cap as being it's precise current value, you should instead think of it as being the aggregrate summary of all potential future values.

After all, while some people invest in stocks for only minutes, hours, or days (i.e. day-traders), other people invest in a stock for weeks, months, years, and even decades. So if I'm a day-trader I don't really care what the stock might be worth in a month or year. Conversely, if I'm a long-term investor, I don't really care about what it's worth tomorrow or next week.

The bottom line is that you have a bunch of shareholders in a company giving it very different valuations because of their different time horizons.

For what it's worth, while the current market is terrifying unpredictable for short-term investors, it probably represents the best buying opportunity in quite a while (at least since 2002-2003) for anybody with a time horizon of 3+ years.

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Martin

Things simply do not add up:

Porsche's options are supposedly cash settled. In any case they are mot exercised yet. So there should be still 40% of the outstanding shares available for shorting.

Also, who was so crazy to sell Porsche these options??? Either they would have to hedge them by buying over 30% of the outsctaning shares (was that the reason for the crazy rally?), or they sold them unhedged, which means they got obliterated by by the deal.

Mario

I wish you would disregard the comment post by J. Harding about referring to the New York Times as “The Times”. If you ever read the latter, you might have noticed that is a very generic name and we don't care.

Joe Smith

"is there a way to invest in the actual growth of a company (diversified across multiple companies) without exposing myself to volatility of a stock market"

No.

Joe Smith

The shorts should have known there was a very limited free float.

RobertSeattle

Stock Markets are nuts - are there any ideas out there to replace this insanely volatile systems? A company like Volkswagen should not have crazy changes in its value on a daily basis.

Alex

Part of the VW problem was a lack of sufficient supply for a properly fluid market. Something like just 5% of the shares were available for trading.

So, the was very high demand from the short sellers, and very low supply.

Brad H

#4 and #8- This blog is on "The New York Times" website. If you can't do the mental gymnastics necessary to accept a logically abbreviated link, then a blog may be a bit too laid back of a format for you. The only name that could be more generic than "The Times" is "The Paper" or "The News." I'm sure it was not meant as a slight to The Right Honourable "The Times" (of London).

A E Pfeiffer

To matt # 12:

What you're looking for is what used to be called "social market capitalism", where investors in a company actually felt some responsibility for the future growth and secutity of that company, rather than just looking for a quick profit. It used to be the prevailing system in Germany.