41–50 of 54 posts
Just shows how out of whack the whole economy is in that Porsche could make more money for their shareholders by playing financial games then actually manufacturing products.
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I think he's making a distinction between "classical" investment and Wall Street-style investment (for lack of better terms). There's an ideal that an investor puts money into a business that he thinks has potential to succeed (e.g. VC funding), and reaps his rewards through the success of the business. Then there are others who invest purely as stock price speculation, and is generally disinterested in the actual go…
I see what you're saying, but I don't perceive a meaningful difference between those two classes beyond, perhaps, what's in the investor's head. In both cases you're investing money in a company because you think the value of that company is likely to rise in the future. And in both cases the company benefits from that investment. I agree that many investors are too focused on the short-term... but if they think they…
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Why would the German government care about what happens to hedge funds who get screwed by speculating with stupid unhedged short bets in the secondary market? That has no relationship to actual investing in German companies.
I am not sure you understand how hedging works. You don't go short and long on the same stock to hedge. You generally take one position (long or short) on the stock you are speculating on, and you take the opposite position with stocks in its peer group to protect against swings in the industry. The basis of the hedge is that stock performance is correlated within sub-industry. With a short squeeze like the one of VW…
How can you ignore the possibility that having a derivatives market that is ten (10) times the size of the global GDP, might be an issue?
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I see what you're saying, but I don't perceive a meaningful difference between those two classes beyond, perhaps, what's in the investor's head. In both cases you're investing money in a company because you think the value of that company is likely to rise in the future. And in both cases the company benefits from that investment. I agree that many investors are too focused on the short-term... but if they think they…
A company sells 1000 shares. All get sold. Any further rrselling of those shares aka the stock market does not benefit the company.
Viewed another way, the stock _is_ the company.
"On paper, Porsche made between €30-40 billion in the affair. Once all is said and done, the actual profit is closer to some €6-12 billion. To put those numbers in perspective, Porsche’s revenue for the whole year of 2006 was a bit over €7 billion." Just shows how out of whack the whole economy is in that Porsche could make more money for their shareholders by playing financial games then actually manufacturing produ…
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Not every trader could have just hedged out the risk of a blowup. that is becuase derivatives are a zero sum game. For every trader who purchased the out of the money call, someone sold it. Therefore that person is now responsible for unlimited downside.
Exactly. And if you can't hedge at a reasonable price then you shouldn't make the trade in the first place. Also, if the call seller is covered then he only has a small downside.
The point is that in any situation where shorting occurs, and therefore an excess amount of stock is floating, there is a non hedgeable unlimited downside risk that SOMEONE has to bear. Whether you pass it off in option or stock form is not relevant. Not everyone can hedge unlimited downside. Proper rules try to make sure these artificial squeezes do not happen, so as not to discourage short sellers (who are extremely, extremely important).
Now, that isn't to say that VW should be forced to reveal their position. It is not a trivial question what is the optimal way to stop this kind of thing. But it's important to discourage this activity where people deliberately accumulate shares to squeeze shorts. No economic value is created in this type of activity, just a transfer of wealth, whereas shorting serves a very important economic function.
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Perhaps the author should also made it clear that Porsche took advantage of poor securities laws in Germany rather than showed any 'financial genius'. In US and UK there are explicit regulations forbidding secretly building a stake in a company. This 'hack' is illegal here just like insider trading is.
Indeed - and it should be illegal. The lack of transparency means that hedge funds will now think twice before investing in a company that's based in that jurisdiction.
"On paper, Porsche made between €30-40 billion in the affair. Once all is said and done, the actual profit is closer to some €6-12 billion. To put those numbers in perspective, Porsche’s revenue for the whole year of 2006 was a bit over €7 billion." Just shows how out of whack the whole economy is in that Porsche could make more money for their shareholders by playing financial games then actually manufacturing produ…
It came at a risk, though.
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Exactly. And if you can't hedge at a reasonable price then you shouldn't make the trade in the first place. Also, if the call seller is covered then he only has a small downside.
Exactly. But let's take it a step further. Once the call seller covers himself (by buying stock in proportion to the delta of the option), he is essentially causing someone else to be short it as well. The unlimited downside is now passed to him. You can see how this just continues to propagate. The point is that in any situation where shorting occurs, and therefore an excess amount of stock is floating, there is a n…
I still fail to see the problem with discouraging short sellers from making stupid unhedged speculative bets.