There’s not been this much fun in the financial markets since Porsche owned more than all of VW. Or, actually, more than the free float which meant that there was a certain undersupply to those trying to short VW:
Prior to October 2008, Porsche alone had already controlled 30% of VWs shares. Next, the government fund of Lower Saxony (the home province of VW in Germany) owned an additional 20% of VW as a strategic stake.
In addition, various index funds owned around 5% of VW due to VWs large weighting in the DAX index. These index funds were required to hold VW in proportion to its weight in the DAX, such that they would not be able to sell simply due to changes in the price of VW. Volkswagen alone made up 17% of the DAX index at the time.
Looking at the above, it is clear that heading into October of 2008, around 55% of VW shares were already unavailable in the market for any realistic purposes. As a result, when Porsche increased its stake by an additional 44%, it meant that the true available float went down from 45% of outstanding shares to around just 1% of outstanding shares. Suddenly the seemingly “low” short interest of 12.8% turned in to a massive supply and demand imbalance. Millions of shares needed to be bought immediately even though there were simply no shares available to be sold.
VW’s stock went over €1,000. Which, for a company that was actually at risk of bankruptcy (recall, GM and Chrysler both did around this time), was pretty good really.
Which brings us to today:
Sure, different stock and all that. But look at that short interest there. Over 150% of the share issue is now sold short. Which means that if the price starts rising then an awful lot of people have to scramble to buy in order to limit their losses.
As FT Alphaville puts it:
On Friday, a hoard of retail traders who seem to often congregate on Reddit forum r/wallstreetbets managed to cause the stock of video gaming retailer GameStop to rocket 50 per cent in a day up to $65.01, giving it a market value of $4.5bn. On January 4, the stock had been worth just $17.25.
Much has been made of these retail-driven squeezes, which usually involve buying large volumes of out-of-the-money call options in a single name with a high short interest. The option gives the buyer the right to purchase a share at a higher price (say $100 versus a share trading at $50), which the broker then hedges by passing on the risk to a counter-party, or by buying the underlying shares themselves.
In shares with thin liquidity, the latter causes the share price to rise as brokers scramble to purchase shares on the open market to hedge their exposure. In turn, this causes the share price to rise again, forcing brokers to buy even more shares as the value of their exposure grows larger as the share price gets closer to the call options strike price (this non-linear relationship is the “gamma” in the so-called “gamma squeeze”).
All most fun really. One can almost hear the Scooby Doo line – I’d have got away for it if it wasn’t for those darn kids on Reddit.
There will be those who tell us that this shows up the problem with financialised capitalism. All this speculation and no real investment going on. And yet that’s not really the whole story.
What is GameStop worth? If we don’t know, don;t have some subjective truth, then we need to ask the opinions of the people out there. Or, more realistically, GameStop is worth to human beings what human beings say GameStop is worth. There are differences of opinion about this. So, we desire a system to work out what that average, market clearing, value is. Which is exactly what is happening.
We can even go another route. Yes, markets are efficient at processing information – the efficient markets hypothesis. But this above is how they do that, how the information is processed. It’ll last a few days, a week or two, and that will be that.
All of which will leave the truly interesting question. Are we going to see – to use the old language about such things – a sub-Reddit being dealt with as a concert party or not?