Tuesday, January 6, 2009

A Story That Caught My Eye Today

Remember this post by Karl Denninger on October 28th?
Heh Merkel: Bite me!

Before you start lecturing people over on this side of the pond regarding transparency and open markets, you might want to take a look in your own back yard.

See, it appears that Volkswagen had a little short squeeze.

Well, maybe not so little.

See, Porsche has held a stake in the company for quite some time to protect a supply of parts that it gets from VW. All fine and good.

But apparently unlike in the United States, there is no requirement that they be transparent with their intentions or timing.

Or, for that matter, to be able to finance what they claim to intend to do.

So when Porsche announced its intention to raise its stake to 75% from 42.6% it set off an insane short squeeze, as the announced intended stake exceeded the firm's float.

This caused VW's stock to rise by eight hundred percent in the space of two days.

Volkswagen has been a favorite short of hedge funds. And why not? Automakers into an economic downturn? An obvious short, right? Car deliveries slowing, automaker profits under pressure. Looks obvious to me, and did to them too.

The body count of hedgies being carried out on their shields should be most impressive over the next few days.

Two problems are immediately apparent with Porsche's announcement and give rise to questions about whether this was an intentionally-engineered event and not a legitimate business transaction:

**Their "stake" Porsche claims to intend to accumulate appears to exceed both their market cap and any ability to finance the transaction, especially in today's environment.
**There are cash-settled option positions outstanding which are not required to be disclosed under German law.

Transparent markets eh? Hmmmm....

Looks to me like someone decided to manufacture a short squeeze, which by the way, is illegal in the United States. Of course without full transparency its rather difficult to know exactly what was really going on, isn't it?

I have no idea if this was an intentionally engineered squeeze or whether such things are illegal in Germany or not, but this little episode does demonstrate that market manipulation, legal or not, is alive and well in Germany, and that before Merkel and others start throwing stones at the United States in regards to this little banking crisis and transparent markets, not to mention regulation and inappropriate (if not felonious) game-playing they may want to look around and insure they're not living in a glass house.

Perhaps we could start that inquiry with a discussion of Deutche Bank's leverage ratios and the transparency of their balance sheet.....

I remember it well. It was at a time when nothing in the markets seemed real. There was a lot of talk (in certain groups) about the PPT "fixing" markets. I remember posting about how people making correct bets get hurt when the PPT makes a 27 offsuit the winning hand. It even seemed to be happening over in Europe. I mean, try to comprehend this: In the middle of a recession, with auto sales plummeting and General Motors just weeks away from bankruptcy, Volkswagen briefly became the worlds MOST VALUABLE COMPANY! Even exceeding Exxon Mobil in total market value. Something is just not right about that.

Two weeks later on Nov. 12th, the PPT was caught in Poland "in what newspapers dubbed a "miracle" fixing session". See my post on Goldforum titled PPT EXPOSED!.

The market manipulators may think they are doing everyone a favor by propping up a failing system. But they are clearly not doing EVERYONE a favor...

Yesterday, the 94th richest man in the world, a multi-billionaire in Germany committed suicide by train. See the story here and here.

The tracks where Adolf Merckle died yesterday

Evidently he lost a good portion of his net worth, perhaps a loss of $2 billion, on that Volkswagen surge. He had been shorting Volkswagen. In fact, he was the biggest short seller of Volkswagen stock.
His fortunes worsened dramatically last year after he was caught on the wrong side of trades in Volkswagen shares, whose price spiked when Porsche revealed it controlled more of VW than had been thought. Merckle had borrowed VW shares to sell them short in expectation of their price falling, while other trades also went against him.

Could that Volkswagen short squeeze have been aimed intentionally at this man? Look back at the news stories on October 30th. Porsche denied insider trading or manipulation, and instead, blamed the pop on the short sellers. I ask now... who profited? This question raises all kinds of thoughts in my mind regarding market manipulators the likes of JPMorgan, Goldman Sachs, Hank Paulson and Ben Bernanke. All I can say is, keep an eye out for these kinds of stories.

Postscript: I do understand that short covering often causes a spike in price. I am simply connecting a few dots and noticing that a billionaire was taken out (literally) by a suspicious market move. Perhaps he just wasn't part of the "in crowd" of billionaires.

Jan. 7, 2009 - Wife of China's wealthiest billionaire who disappeared in November is now under police guard to prevent her from leaving the country.

Jan. 7, 2009 - CEO in India admits to fraud which created "50.4 billion rupees ($1 billion) worth of "fictitious” cash on the company’s balance sheet at the end of September... Mr Raju insisted that he did not take "even one rupee/dollar from [Satyam] ... on account of the inflated results. However, analysts quickly dubbed the fraud he created "India's Enron" and suggested the fallout out would take months to settle."

Jan. 7, 2009 - Real Estate mogul "found dead of an apparently self-inflicted gunshot wound Monday in his Jaguar in a forest preserve outside Chicago".

Jan. 7, 2009 - The woman once known here as "Austria’s woman on Wall Street" has disappeared. Kohn collected more than $2 billion from rich investors in Russia and across Europe for Bernard Madoff through her firm, Bank Medici. Touting her connections, she promised investors entrée to bigger fish in the finance world, including Madoff. Some say it’s not out of the question that she’s hiding from Russian clients (do we dare say, perhaps, the Russian mob?)

The Shrinking Bezzle - Eric Janszen


FOFOA said...

And while I'm on the subject of market manipulation, Steve Hickel made a nice post on USAGOLD today:

The ridiculousness of gold analysis…

Hello out there in the real world of gold analysis.

First we have heavyweight giants of finance predicting this price or that trend in gold. Then we have the lightweights (present company included) betting that gold can only go up because everything else is going down and a dozen other very good reasons (none of which have ever come to pass — mind you). Yet, the reality of prognosis is a fruitless exercise unless one simply factors in the role that Central Banks and their cohort agent banks play in the gold markets. The international gold market is simply NOT a free market. No way, no how.

Thus, if one accepts that premise: that the international gold market is simply NOT a free market, then any time one reads, hears, gets wind of a gold market analysis or prediction, repeat after me: the international gold market is simply NOT a free market. Then ask yourself, does the analyist make the prediction or comment subscribe to gold being a free market or a controlled market. If they are making a prediction without mentioning that the “international gold market is simply NOT a free market…” then the merit of their prediction or analysis only weighs in as good as their insider knowledge of those behind the pricing influence of gold. In other words, it is simply worth “less” or points to their role in the controlled market place that gold has become.

In either case, we must now break down the gold prognosticators into two camps: those who know it is being controlled and those who believe it is a free market. Simply toss any opinion that pretends gold is freely traded. That leaves only analysis from those who know it is being controlled. Now we need to determine to what extent they know it is being controlled and how they know it. Take for example a prediction by a bullion bank working behind the scenes for the Fed. Such an analysis is coming straight from the mouth of a gold “controllee.” Any credence put to such an analysis must ascertain the motive behind said analysis (before one could benefit from it). In most cases, such an analysis would be a counter-indicator of gold. If they said gold is going to go up, it will go down, etc. Now, take a prediction or analysis of gold from GATA, such a prediction would be a good indicator of gold’s long term potential price movement but may not have positive short-term relevance due to the outsider nature of said analysis. So here are three rules for all gold analysis and predictions:

Source Action
Gold Insider Believe the opposite
Gold outsider Believe long term, disregard short term
Gold Freemarketer Disregard

Optional Rule:
Government Source Roll your eyes back in disbelief and ignore.

From the above action chart, we can see that the best short term trend to monitor is any analysis from the FED or Bullion bank whereby we take whatever it is that they say, and believe the opposite as being the most likely best predictor of gold and its future.

FOFOA said...

This is a good read. 2009 The Train Wreck by Darryl Robert Schoon

Here's an excerpt:

In November 2006, Professor Antal Fekete addressed the 2007 class of MBA students at the University of Chicago, the then bailiwick of Milton Friedman, the well-known academic apologist for fiat currencies.

Professor Fekete was to deliver a scathing rebuttal of Friedman’s theories. The professor, a long-time proponent of the gold standard and its role in monetary affairs, believed that John Maynard Keynes on the left and Milton Friedman on the right had given intellectual comfort to policies responsible for today’s monetary problems—the elimination of gold from the international monetary system.

But Professor Fekete did not deliver his address criticizing Friedman. The day before he was to speak, Milton Friedman passed away. Instead of criticizing Friedman, Professor Fekete instead warned the students about the fragility of today’s paper markets, markets that had become an extraordinary inverse pyramid of derivatives (then $480 trillion, now $668 trillion) and potential defaults built on irredeemable promises.

The students gave little thought to the Professor’s warnings. They had prepared too long for their chance at the brass ring offered by Wall Street investment banks, the wealthy moneychangers in the temple of fiat currencies.

As about-to-be graduates of the prestigious MBA program at the University of Chicago, the students had much to expect upon graduation. When the Professor delivered his remarks, the August 2007 credit contraction was still nine months in the future; close, but still well outside the world of possibilities the students believed real.

One student asked:

“Even if you’re right, won’t the markets self-correct?”

To the true-believers in paper money, paper markets and paper profits, self-correction was the accepted ideological panacea to whatever the markets would do.

That student never expected that the coming self-correction would wipe away his expected future. That instead of a large starting salary with significant bonuses at Lehman’s, Bear Stearns, Merrill Lynch, or Morgan Stanley, he instead would be wondering how he could repay his student loans when the bank he believed would be his future home had collapsed or merged with another institution to avoid insolvency.

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