For those who are interested in financial markets, the recent rally Volkswagen shares is a study of the sublime and absurd. Porsche has historically had a large minority stake in the company, totaling about 25%. In the last few months, Porsche via options has accumulated a nearly 76% stake in the company. Apparently all of this caught investors unaware, especially hedge fund short seller. Porsche’s desire to buy Volkswagon has been no secret, however. As a result the float (actual circulated shares) of the company dwindled to less than 5%.

Between October 25th and 29th, Volkswagon share rose nearly 600% in the span of days. At one point it’s market capitalization exceeded Exxon Mobile, making it the largest company in the world. That fact highlights how illusory market capitalization actually is. Share price times total outstanding shares is not a particularly good measure at times of what company is really worth. In the case of Volkswagen because Porsche was not selling, the price only reflected an artificial supply and demand imbalance. In actuality if all the shares could transact, they would not transact at the high of 968 Euros. The shares only traded at that level because people who were short were forced to buy. These people/hedge funds effectively had to buy at any cost, and the limited number of sellers knew this. Basically the small set of actual VW shareholders besides Porsche were able to place the hedge funds over a barrel.

Porsche recently let out some of the steam out and Volkswagen shares have tumbled 50% as a result. The irony of all this is Porsche is now able to fund it’s purchase of Volkswagen by the profits it’s earning by selling elevated shares of Volkswagen. It’s not often you get paid to buy a company…