(Adds detail, quotes, background)
By Peter Starck
FRANKFURT, Oct 7 (Reuters) - Volkswagen shares (VOWG.DE) soared as much as 55 percent to a record high on Tuesday, driven by frantic short-covering, traders and analysts said.
Long a staid constituent of Frankfurt's blue-chip DAX index .GDAXI, Europe's biggest carmaker became the focus of intense speculative dealing this year after German sports car maker Porsche's (PSHG_p.DE) unsolicited move to acquire a majority.
Porsche plans to increase its 35 percent stake to a majority by next month and has said it has the options contracts needed to do so. It said it bought a small stake on Tuesday in an off-bourse transaction, paying far less than peak prices.
Volkswagen’s market capitalisation exploded to an all-time high of 140 billion euros ($190 billion), three times the combined market value of domestic rivals Daimler (DAIGn.DE) — parent of up-market brand Mercedes-Benz — and BMW (BMWG.DE).
“It must be an immense short-squeeze. It can’t be anything else,” one trader said.
Short-covering occurs when market participants borrow a stock and sell it, betting on a profit when buying it back later at a lower price before returning it to the original holder.
Such bets can fall foul if the share price, as has been the case with Volkswagen lately, instead rises — forcing a rush of short-sellers to cover their positions in a “squeeze”.
Some analysts and traders said it looked like hedge funds, many of which deploy such strategies, were caught in this trap on Tuesday and that it was the aggregate impact that propelled Volkswagen’s share price to an all-time high of 452 euros.
At Tuesday’s peak, Volkswagen was valued at more than 37-times projected 2009 earnings per share compared with an average price-to-earnings (P/E) multiple of 9.3-times for the European autos and automobiles parts sector.
“The rumour is circulating that some certificate issuer or perhaps hedge fund has ended up with a short position, which they had trouble covering,” one of the traders said.
Investment certificates based on underlying instruments such as a single stock, a basket of stocks or an index are popular among many German retail investors.
Other explanations offered for the rise in VW’s share price included that counterparties to Porsche’s options contracts were scrambling to buy the stock in order to meet their commitments or that so-called long-short pair trades were unwinding.
One analyst said some hedge funds may have put on long-short strategies involving VW’s ordinary and preferred shares (VOWG_p.DE) and were now unwinding them to meet redemptions.
VW’s preferred shares were down 0.1 percent by 1445 GMT.
As of Oct. 3, 13.5 percent of available Volkswagen shares were on loan, more than for any other DAX stock, according to dataexplorers.com, a financial market data consultancy.
The cost of borrowing VW shares for short-selling was about five times the average for DAX stocks, broker data showed.
Volkswagen’s ordinary shares were up 11.2 percent at 325 euros by 1440 GMT, up 57 percent since the middle of September and 108 percent so far this year. That compared with a 32 percent drop for the DJ Stoxx European auto index .SXAP.
Volkswagen’s stock has de-coupled not only from the broadly weaker stock market trend, but also from the auto industry’s deteriorating fundamentals reflected in the sector index trend.
As well as driving up financing costs in capital-intensive industries such as car manufacturing, the global credit crisis was also reducing disposable income for many consumers in Volkswagen’s main European markets, denting appetite for big-ticket items such as automobiles.
The Volkswagen group’s vehicle sales fell 3 percent year-on-year in August. (Additional reporting by Tyler Sitte, Hakan Ersen, Hendrik Sackmann and Michael Shields; Editing by Andrew Macdonald)