Strange things happened during the 2008 global financial crisis. Volkswagen experienced a brief period of pressure and briefly surpassed all other businesses in the world.
Because of its heavy debt burden and exposure to the credit and economic cycles back then, when the majority of the world was still suffering from the great recession, Volkswagen became a target for short-sellers.
The Volkswagen short squeeze was caused by a number of events. Porsche SE, a holding company, owned a sizable portion of Volkswagen shares, and the German government also owned a sizable portion.
As a result, there weren’t many shares available for trading on the Frankfurt stock markets (free float).
As soon as there were rumors that Porsche intended to increase its ownership of VW, traders flocked to the stock.
Porsche denied the allegations, saying that in addition to its existing 44% interest in Volkswagen, it had also purchased a 31% holding through the use of cash-settled call options.
Since the German state of Lower Saxony owned the remaining 20% of the stock, there were barely fewer than 6% of VW shares accessible for trading on the market.
Many hedge funds and short-sellers speculating on a lower price for VW stock were taken off guard by the revelation. Since the hedge funds had borrowed 13% of the shares of VW and sold them short, Porsche had the upper hand. With only less than 6% of the shares available, this means the hedge funds had to repurchase 13% of the shares.
The stock rose from 210 to more than 1,000 in just two days as a result of their race for the few remaining VW shares. The intense pressure compelled short-sellers who had bet that VW would decline to purchase the shares at steadily rising prices in an effort to cover their short holdings.
As a result, Volkswagen’s market value increased to $370 billion in just two days, making it the most valuable company in the world.
ExxonMobil (NYSE: XOM), the then-number one business in the world, had a market worth of $343 billion at the time, but VW’s hefty valuation was higher.
In This Article...
What caused the Volkswagen financial squeeze?
In 2008, when Porsche launched an unanticipated sequence of operations that resulted in it controlling a sizeable portion of Volkswagen’s (VW) stock, the largest short squeeze in history occurred. VW momentarily became the most valuable publicly traded corporation in the world as a result.
What was the final price of the Volkswagen squeeze?
Short sellers started to panic, and the massive short squeeze caused by the mismatch in supply and demand caused its share price to increase from 210.85 to more than 1,000 in less than two days.
The VW short squeeze lasted for how long?
J. Hill and James J. Hill in May 1901. P. Morgan and E. fought. Control of the Northern Pacific Railway was transferred to H. Harriman. By the close of business on May 7, 1901, the two parties held over 94% of the shares of Northern Pacific that were still in circulation. Third parties shorted Northern Pacific in a frenzied manner as a result of the subsequent runup in share price. On May 8, it became clear that NP shares that had not been committed would not be enough to cover the open short bets, and neither Hill/Morgan nor Harriman would be ready to sell. As NP “shorts” sold off holdings to obtain money to buy NP shares to fulfill their obligations, this caused a sell-off in the rest of the market. A truce between Hill/Morgan and Harriman prevented the subsequent stock market meltdown, known as the Panic of 1901, to some extent .[10]
The shares of Volkswagen AG on the Xetra DAX rose from 210.85 to over 1000 in less than two days in October 2008 as a result of a short squeeze brought on by an attempted takeover by Porsche. [11][12] At the time, Porsche CEO Wendelin Wiedeking was accused of market manipulation but was found not guilty by a Stuttgart court. [13][14]
2012 saw the U.S. In connection with a short squeeze on a number of high-yield bonds issued by MAAX Holdings, the Securities and Exchange Commission filed a market manipulation charge against Philip Falcone. Falcone bought the whole bond issue after learning that a company was shorting the bonds. He also extended a loan to the short-sellers of the bonds, and upon their sale, he later purchased them back. Because of this, his overall exposure was greater than the value of the entire MAAX bond offering. Falcone immediately stopped lending the bonds, making it impossible for short-sellers to cover their bets. Bond prices spiked sharply. The short sellers could only cover their positions by getting in touch with Falcone directly .[16]
In November 2015, bankrupt biotech KaloBios (KBIO) experienced a short squeeze that increased the share price by 10,000% in just five trading days. Short sellers had viewed KBIO as a “no-brainer near-term zero” .[17]
Beginning in January 2021, a short squeeze on GameStop shares occurred[18][19] that was primarily sparked by the Reddit forum WallStreetBets.[20][21] As a result of this squeeze, the share price on the NYSE reached an all-time intraday high of US$483 on January 28, 2021.[22][23] This squeeze attracted the attention of numerous news outlets and social media platforms .[24]
When did Volkswagen experience a brief squeeze?
In the midst of the 2008 recession, one business defied the norm. The Volkswagen case demonstrates that market manipulation may occur on both sides of the negotiation table. It’s not simply coming from institutions and huge money.
The shares of Frankfurt-based Volkswagon (VW) briefly increased by more than four times in just two days on October 28, 2008. With that massive move, VW briefly overtook all other businesses as the largest in the world. The world, indeed!
What was the peak of the VW stock during the squeeze?
With a share price of over 1000 in October 2008, Volkswagen briefly held the title of most valuable corporation in the world. And it all began with a shocking declaration by competing automaker Porsche.
What happened?
Volkswagen and Porsche have a long history of collaboration, and Porsche has constantly had a small interest in Volkswagen. However, Porsche disclosed on October 26, 2008, that it had acquired control of 74% of Volkswagen’s voting shares by purchasing nearly all of the company’s outstanding shares.
Of fact, the global financial crisis had already taken hold by October 2008, and short selling was rife. Only because so much Volkswagen stock (about 12.5%) was lent to short sellers at the time of the Porsche announcement was the Volkswagen short squeeze enabled. These short sellers rushed to close out their positions when the market opened the next day in an effort to limit their losses, which resulted in the purchase of more stock and an increase in the share price.
Volkswagen’s stock rose about 150% on October 27 from its opening price of 348 to its closing price of 517. By Tuesday, the stock had reached its all-time high of $999 per share, with short-selling losses pegged at tens of billions of dollars. Wendelin Wiedeking, the CEO of Porsche, was eventually prosecuted with market manipulation for his involvement in the short squeeze, but the accusations were later dropped.
What is the tightest ever short squeeze?
Volkswagen shares saw the largest short squeeze in history in 2008. Although the auto maker’s prospects were grim, the company’s perspective unexpectedly turned when Porsche announced a majority ownership. The share price spiked as short sellers rushed to close out their holdings, making VW temporarily the largest business in the world.
How high can you squeeze a short one?
If you short a stock at $10, it cannot fall below zero, so your profit on the trade is limited to $10 per share. However, there is no cap on the stock. You might be required to buy it back at $20, $200, or $2 million after selling it for $10. A stock’s potential height is unbounded theoretically.
How long is a brief squeeze possible?
Once the short squeeze has started, you can trade on it using our derivative products on our Next-Generation trading platform, including spread bets and CFDs. With derivatives, you merely speculate on the underlying share’s price swings rather than really owning it. Unlike leveraged products, which allow traders to place a small deposit of the full value and receive full exposure to the market, traditional share trading requires you to buy and assume ownership of the stock. Keep in mind that trading on leverage carries a significant risk, and losses can quickly outpace gains.
You should look at the short interest ratio of a security to discover if it is extensively shorted. Various websites offer this kind of information, and a short interest of above 20% signals that it is favorable to stock shorts and may soon result in a short squeeze.
If they can anticipate market moves and open reactive buy and sell positions, retail traders can profit from a short squeeze. Another way to put it is that the company whose stock is being shorted might gain since investor interest raises the share price. It can be extremely harmful and result in significant losses for institutional traders and hedge funds that have a significant amount of cash invested in a stock, as was the case with the GameStop [GME] short squeeze.
A short squeeze may last a few days or several months, depending on how much stock was shorted. This can be calculated, for example, by dividing the average daily trading volume of a company by the short interest ratio of its shorted stocks. This offers you an estimate of how many days it might take sellers to cover their short positions, however it might be less time if the squeeze is more aggressive than initially thought.
When in a short squeeze should you sell?
Understanding daily moving average charts, figuring out the short interest percentage, and short interest ratio are necessary for predicting a short squeeze.
Short interest percentage
The short interest percentagethe quantity of shorted shares divided by the total quantity of shares outstandingshould be considered as the first predictor. The short interest percentage, for instance, would be 10% if 20,000 of Company A’s 200,000 outstanding shares were sold by short sellers. More short sellers will be vying with one another to buy the stock back if its price starts to climb, therefore the greater this percentage, the more short selling there will be. (See What Short Interest Tells Us for additional information.)
Short interest ratio
The short interest ratio is calculated by dividing the short interest by the stock’s average daily trading volume (ADTV). For instance, it would take the short sellers five days to buy back their shares if you divided 200,000 shares of shorted stock by an ADTV of 40,000 shares.
The risk that short sellers will contribute to price inflation increases with the ratio. It may be a good idea to try trading a potential short squeeze at a short interest ratio of five or higher, which is a sign that short sellers might panic.
Daily moving average charts
The movement of a stock over a specified time period is displayed on daily moving average charts. A 50-day (or longer) moving average chart will demonstrate whether a stock’s price has experienced peaks. Check out one of the many charting software tools available to view moving average charts. These will enable you to plot this on the stock chart of your choice.
Keep abreast of developments in the industry that affects your stock because news headlines can potentially start a short squeeze.
Why is the VW stock falling?
The company’s 2022 vision, which includes a crucial shift to electric vehicles, was clouded by the war Russia is waging in Ukraine, according to a warning made by Volkswagen on Tuesday.
The warning from Volkswagen (VWAGY) follows the German automaker’s announcement on Friday that sales of battery electric cars (BEVs) will nearly treble to 452,900 in 2021. However, that was considerably short of the approximately 1 million electric vehicles that Tesla (TSLA) sold last year as well as its goal of 500,000. The auto industry behemoth with its headquarters in Wolfsburg is on a mission to dethrone Tesla as the pioneer of electric transportation.
Tuesday, management cited a scarcity of cable harnesses from Ukraine as the reason why the firm had to stop producing important electric vehicles like the ID.3 and ID.4, among other things.
Volkswagen has demonstrated its resiliency over the years, and CEO Herbert Diess assured the media at a news conference in Wolfsburg that the company will handle the issue as well.
Diess expanded on a warning he had issued on Friday about the threat the conflict and supply chain bottlenecks posed to the company’s operations. “The crisis in Ukraine has called our current outlook into question,” he said. According to reports, 380 businesses have left Russia because of the conflict, but others are still there and still doing business. Nickel, which is frequently utilized in EV batteries, is mostly supplied by Russia.
Volkswagen is giving China, where it has a 16% market share and where EV sales increased by more than fourfold in 2021, a higher priority in the midst of the turmoil in Europe.
The company anticipates growing sales by 8%-13% and deliveries by 5%10% in 2022. In the second part of the year, it anticipates an improvement in the supply of semiconductors.
According to management, pricing for both internal combustion engine automobiles and electric vehicles would increase as a result of rising raw material costs. It issued a warning that commodities volatility might last into 2026.