Category Archives: Wealth Esteem

Practical advice and notes

Porsche Fleece Hedge Funds for 12 Billion Euro in Volkswagen Sting

Porsche There is No Substitute!

The background:

  • In September 2005 Porsche bought 20% of its larger but less profitable German rival Volkswagen.
  • In March 2007 Porsche bought another 19.9% (to 39.9%) and launched a takeover bid.
  • In October 2007 the law preventing the takeover of Volkswagen was scrapped.
  • On 20 October 2008 Volkswagen’s share price fell 23% on short selling by global hedge funds who bet the price of Volkswagen was too high and Porsche could not economically acquire more stock.
  • On 26 October 2008 Porsche announced it controlled Volkswagen through 42.6% direct holding and call options exercised over the another 32.4% (=75% !). As most of the balance is owned by the state or index funds, that left only about 5% on market to cover the shorts the hedge funds sold.
  • On Tuesday 28 October Volkwagen became the biggest company in the world momentarily when the hedge funds had to buy “at any cost” driving the price to €1,005 (from below €200 a year ago)
  • Late Tuesday Porsche agreed to release an addition 5% of stock to the market to maintain liquidity
  • The hedge funds then complained to the regulators that Porsche built a stake without their knowledge.

The sheer arrogance of Hedge Funds crying foul over this should offend me, but it’s their modus operandi to bully, lie and sneak around to make a buck. They have been accused for years of selling naked shorts. Normally you or I must first borrow the stock we plan to sell short before we are allowed to sell it. We’d pay a fee to the lender of the shares. If you sell without borrowing the shares first you are naked. It’s riskier but often more profitable if you can buy the stock on-market after sentiment has turned against a company. Nothing turns sentiment against a company like a huge overhang of stock on the offer line of the quote screen.

So if you can sell a naked short because you think German Automobile Manufacturers are in for a tough time in this economy, it is in your interests to get that story out after you’ve sold. Short sellers told everyone they could that Lehman Brothers was in trouble after they’d sold.

Now naked short sellers represent a counter-party risk of failure to deliver the stock at Trade plus 3 days (T+3).

Take a look at the failure to deliver reports produced by various exchanges. Some companies are consistently targeted by naked short sellers and the sellers regularly fail to deliver stock without serious penalty.

Finally someone with the clout to take on Hedge Funds called their bluff and made a bundle. So the hedge funds cried to the regulators.

These are the same hedge funds ignoring T+3 delivery dates on equities. Imagine what happens if you or I fail to deliver.

What makes me assert these were naked shorts? If the Volkswagen volume was mainly covered shorts it is unlikely the hedge funds would all need to return their borrowed shares on Tuesday 28 October. The borrowing would all be on a normal distribution. So there would not be a spike on 28 October intraday to €1,005. The price would be elevated but it would shake sellers out to the market.

Similarly any index funds or active investor should have been reweighing their portfolio, so the impact should be relatively minor compared to the recent overall market malaise.

Sadly there is a cost to the punters of this lesson. Most hedge funds do not take retail investments from small investors. Instead our retirement and superannuation funds place some of our pooled funds into them. So a hedge fund’s loss does come home to its small investors.

It still felt good to see hedge funds take a hit.

Warren Buffet: Buy American. I Am.

As part of my Corporate Finance class, Warren Buffet and Berkshire Hathaway came up. Nobody had checked its stock price recently so I volunteered to do it. In doing so I came across the following op-ed piece Warren Buffet wrote in the New York Times.

For the record BERKSHIRE HATH HLD A (NYSE: BRK-A) closed on 23 October 2008 at $115,100.00 USD per share with a 52 week range of $105,300.00 – $151,650.00 USD. The company does not pay dividends.

Anyway on to the Sage of Omaha’s words

Buy American. I Am.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month (or a year) from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Update 10:50am ET 24 October 2008 Of course just after I post this, the Dow takes a bath as Wall Street panics. BERKSHIRE HATH HLD A (NYSE: BRK-A) Real-time: 110,903.00 Down 4,197.00 (3.65%)

Tribute to a great man

Lars Hinrichs is a great entrepreneur and my friend. He’s also the founder of OpenBC the preeminent social networking platform in Europe, and the best of breed in the world (more on that in another post).

OpenBC now has a blog OpenBlog and I was saddened to read of the passing of Lars’ grandfather. While I never met the man, Bill Liao’s tribute to a great man touched me as did the WH Auden poem.

Many of us celebrate success carved from adversity by the mythical lone wolf entrepreneur. But a greater legacy is to succeed and then mentor and guide another generation.

Heinz Richard Böse was by all accounts such a man.

Vale.

Update alert email vs rss

My email notification service is not very popular. I’m glad of that as many of you follow this blog using RSS (thanks for watching). I don’t think email is a good medium for blog updates.

I want to quote skippy

Email notification is not the best use of resources for most blogs. I wrote my plugin because one site that I manage (but to which I do not contribute) is read primarily by people unfamiliar with content aggregation (RSS and ATOM). Content aggregation is a far better mechanism for update notification. It uses less resources on both the client and the server; it benefits from working in aggregate (sites likes bloglines fetch the latest update and then all bloglines subscribes for that site can read the update, representing massive savings in bandwidth); and subscribing to content is strictly a client-side operation: you don’t need to fork over your email to a potentially unscrupulous site looking to sell a subscriber list.

If my plugin works for some folks, I think that’s great. I think it’d be even better if everyone using my plugin would make modest efforts toward educating their subscribers about the wonder (and power) of content syndication.

There you have it.

Silktide SiteScore and others

I’ve been trying to evaluate this website to clarify my view of what it actually provides.

There were some interesting tools to help the technical side.

Silktide SiteScore for this website
Anybody know of others are out there?

Update 6 October 2005
I am proud of the high sitescore I get on that site. It’s currently 8.4 out of 10 and the only real negative is a low popularity score. I’m not sure how they measure that, but I don’t do this to be popular, except maybe I’d post more often.

Oh they also hate the number of links I have but I disagree with them there.

Live 8 banner

There’s even a cool techorati banner for live bloggers.

If you care please comment on any of the Live 8 posts and also add your name to the Live 8 List

TO:

The 8 most powerful leaders in the world

50,000 people are dying, needlessly, every day of extreme poverty.

At this year’s G8 summit meeting, it is within your power to put an end to this tragedy. It is an extraordinary opportunity which it would be shameful to ignore. We urge you to take these 3 steps to make extreme poverty history…

1. double the aid sent to the world’s poorest countries,
2. fully cancel their debts,
3. change the trade laws so that they can build their own future.

You just add your name and country to the bottom. If you want to receive more information, there’s a spot for your email address.

Live 8 is on now

For those lucky enough to subscribe to Foxtel, Live 8 is on Fox 8 right now. Even better for digital subscribers it is on the timeshifted Fox 8 +2 as well.

Thank god Molly Meldrum is finished for now. Does anybody in the key music demographic in Australia care bout Molly? Maybe their parents did… once upon a time… in a sunburned country far away.

You can also watch Live 8 live via the internet.

To try and keep this on topic seems gratuitious. Maybe after it wraps I’ll post about the implications of forgiving African debt and the financial impact on global growth, conservative financial management etc. For now I’m watching the concert, it is time do something different for the poorest nations in the world. If we keep doing what we’ve always done, we’ll get what we’ve always got.

Nasty Javascript loop

Today I also came across a nasty endless Javascript loop. This sucker can trap IE, Firefox and Opera in an endless loop requiring you to kill the application via task manager or kill the process if using one of the *nix.

Javascript is really useful on the sites I regularly visit. But I’d like to have it always on for those sites, and mostly off for just web surfing.

Go get the NoScript – Firefox Extension immediately.

From the description

NoScript allows JavaScript execution only for trusted domains of your choice (e.g. your home-banking web site). This whitelist based pre-emptive script blocking approach prevents exploitation of security vulnerabilities (known and even unknown!) with no loss of functionality… Experts will agree: Firefox is really safer with NoScript 😉

If you doubt the need for this I point you to the following site. I won’t link to it as it will kill 90% of my visitors’ browsers. Save your work first and copy the address and paste it into your address bar. It will kick off an endless loop javascript. Let me know if your browser is safe. Of course that applies only if you have javascript on.

unfix.org/~jeroen/archive/javascript_loop.html

Email update advice available

For a long time I thought RSS was the best and only way to notify readers of updates to the blog, especially in this world of ever rising spam. However I’ve changed my mind.

I believe in removing barriers to communication. I’ll occassionally rally against the dumbing down of modern life, but I value the dialogue.

If you want to receive an email every time I update the site, just click the link over on the right. The form will appear at the bottom of the next page (while I work out some layout issues). As usual I wont share your details nor send you bulk email (commercial or otherwise). Each email will have clear unsubscibe instructions.

Recently I’ve been posting about 4 times a month. That should rise to 8 times a month in busy months, and drop to twice a month in really busy months 😉 .