Porsche-Volkswagen: boomerang effect on short sellers

Since the beginning of the year, the Volkswagen Group has been the only player of its industry to register a substantial increase in the market capitalization. After all during past weeks Volkswagen experienced an inverse trend compared to the market, with daily fluctuations of up to 50%. The reason behind such events was Porsche's intention to increase its shareholding within the Group.

On the 27th of October,  Volkswagen shares registered a phenomenal increase (+146,62%) reaching 520 euros per share. The following day, the German car maker became for moments first worldwide in terms of market capitalization. In fact, the Group's shares continuously rose throughout the whole trading day recording an increase of 93%, at 1005 euros. 

It must be noted that the reasons behind such fluctuations weren't though linked with stock exchange speculations. Soon after Lehman Brothers declared bankruptcy in September, ignites a wave of short selling. Considering that Porsche announced that it owns, among shares and options, 74,1% of Volkswagen's shareholding and that  the State of Lower Saxony owns 20,1%, it means that the free-float amounts to just 5%. As a consequence, as investors firmly believed that a share price of 200 euros was already highly overvalued, starting therefore a short-selling wave, found themselves having to cover numerous short positions. 

During the day, the biggest names among investment banks, such as Goldman Sachs, Morgan Stanley and SocGen, reported sharp drops in share prices mainly due to this unpredicted announcement by Porsche.

Finally, BaFin, the German financial regulator, said it was monitoring VW's share price and was looking into trading patterns but had not opened a formal inquiry. 

"Big three" or "Big two"?

The global financial crisis is dangerously affecting the real economy: in this context, the major US car makers, or "the big three", are currently arranging partnerships and disposals of assets in order to cope with the slump in sales. Over the past week, two companies dominated the headlines worldwide: according to the Wall Street Journal and The New York Times, it appears that General Motors and Chrysler are currently talking about a possible merger.

According to The Wall Street Journal, Cerberus Capital Management, which owns 80.1% of Chrysler's outstanding shares and 51% of its financing arm GMAC, proposed to General Motors the exchange of the car division for the remaining stake in GMAC; whereas according to The New York Times the two companies will merge.

Moreover negotiators hope to finalize a merger agreement between General Motors and Chrysler before the presidential election and are lobbying for government financial assistance to secure the deal.

Lately GM, its lenders and Cerberus Capital Management have been trying to boost investors' confidence with a pitch about the transaction. It portrayed a GM-Chrysler with cost savings of up to $10 billion, an immediate boost in revenue and an increase in cash-flows
The risks of bankruptcy are so high for both of the companies that together they hope to get out of this black period with fewer wounds. "The combined market share (36%) would be too large for the Government to let go bankrupt" said David Cole, CEO of the Automotive Research centre for the USA. The importance of this industry has already been underlined by Bush's administration, which has recently assigned $25 bn to the automotive industry for the research and development of "greener” technologies.

Finally, according to the Financial Times, Ford and Chrysler are currently offering discounts on the newest models so as to boost sales of trucks in North of America. In fact Ford will sell its 2009 F-150 $2,500 below its starting price, whereas some of Chrysler's dealers are selling the Dodge Ram with a $2,000 discount. Sales of the F-150, Ford's most popular car since 31 years, plumbed 39% in September on an annual basis compared to "just" 28% registered for the Dodge Ram.

Only one question remains in our minds: will a merger be the correct move yo save two of the most powerful players in the car industry?

IMF: the crisis will cost $1400 bn

During the past weeks, markets experienced and are still experiencing what it could be called one of the toughest periods in the past decade. In fact, according to the IMF the crisis will cost $1400 bn, well above the figure of $945 estimated by the Fund earlier in April. Already in September losses amounted to $760 bn, out of which banks were responsible for $580 bn.     

"With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system" said the IMF in the Global Financial Stability Report. 

Finally, the IMF said that the worst affected economies were at the same time the most sophisticated ones. The explanation relies in the fact that the bigger and the more sophisticated a financial system is, the more money it can borrow, which represents at the same time an increase in the impact of the consequent credit crunch.

"Yet despite its predictions of a more protracted global economic slowdown, the IMF says that there is still the risk of inflation."

Hypo Real Estate: banks and government agreed on the rescue, but will it be enough?

The German government and several banks together agreed to rescue from bankruptcy the mortgage lender Hypo Real Estate. Jochen Sanio, President of the German Federal Financial Supervisory Authority (BaFin), announced it on the 5th of October explaining that the agreement consisted in a €50 bn credit line in order to avoid the collapse of the nation's second-biggest commercial-property lender.

The deal will be executed by the German government, the German Central Bank, The BaFin and by representatives of the banking and insurance sectors.

Nevertheless, despite the rescue package being approved the previous day, on the 6th of October HRE's shares tumbled 37%.  Looking at the broader picture, world stock markets have plunged as the Governments' bail-out plan failed to steam investor's fears. 

"The fact is people are scared and the only thing they're doing is selling" said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. " Investors are cleaning out portfolios and getting rid of everything because nothing seems to be working". In figures, this translates in a drop of 7.85%, 7.39%, 9.04% and 3.58% registered by FTSE 100, DAX, CAC40 and DOW JONES respectively.  

    

 

Who to work for?

"Google receives an average of 1300 resumes a day (up to 1.1 million a year)". Google is at the top of Fortune's "100 Best Companies To Work For";  but what makes it the company where everyone wants to work?

Google hires only the best and brightest, being one of the most selective firms on the market. Nonetheless, it attracts the largest amount of talent and retains it. Google created a great work environment, offers high pays and high incentives as well as a large number of perks. 

The company headquarters in MOuntain View, The Googleplex, expands over 26 acres of parks. It offers free on-site meals, fitness centers, salons, barbershops, a dog-friendly environment and childcare. Hobbies and other interests are a main factor that s taken in consideration in its candidates interviews. Google seeks to build an environment that attracts talent and keeps employees working hard.

This is part of a greater "Google Way". "Engineers are encouraged to take 20% of their time to work on something company-related that interests them personally"

Google's environment encourages continuous learning, reciprocal teaching and sharing of knowledge. Employees are encouraged to cooperate and work together in developing new products and activities. All of which is done through a platform that becomes a world that executives can manipulate. Employees can develop new tools, upload them on the system and receive immediate feedback from other employees. Furthermore, Google incentives the creation of new idea and products by awarding $1 million to the best new product idea and design. This system based on continuous improvement enables Google to be the leader in the market innovation. Google reads the market very well and delivers solutions very rapidly.

Why Bear Stearns and not Lehman Brothers?

It is interesting to see why regulators let Lehman Brothers file for bankruptcy. In the six months, Federal Reserve and the Treasury Department intervened to save Bear Stearns, Fannie Mae, Freddie Mac and AIG when they faced a similar situation.

In March, the Fed organized a sale of Bear Stearns to JP Morgan. This involved the Fed assuming up to $29 bn of risk losses going forward. 

A few weks ago the US government intervened again to bail out Fannie Mae and Freddie Mac. Through the treasury, it is expected to inject c. $15-20 bn. The two firms account for half of the outstanding $5 trillion of US mortgages.

Finally the Fed almost nationalzed the insurance giant AIG for $85 bn.

The explosion of any of these companies would have certainly had an enormous effect on the market. Bear Stearns would have hit the market severely in a moment of high uncertainty, where as in the other cases, a failure would have had strong effects on the real economy.

In March, "Bear Stearns had over $9 trillion worth of derivatives, most of which shared with other major banks. Lehman Brothers had less than a tenh much of that exposure" said Barry Ritholtz, CEO of Fusion IQ

"The system wasn't ready for Bear to fail in March" said Jaret Seiberg, financial services analyst, "it couldn't have been unwound in an orderly fashion"

"Lehman was only incompetent enough to blow up and destroy themselves, where as Bear's degree of incompetence was enough to threaten the entire financial system" Ritholtz said. 

It is clear that the market is nowadays more prepared to face the crisis. During these months, banks have adjusted their balance sheets and regulators have a better understanding of the credit crunch effects.

In any case it is too soon to say that this is over. The effects of the latest turmoil caused by the credit crunch might only become apparent in the next few weeks.