Saturday, November 1, 2008

German Stock Exchange To VW: “One More, And You’re Toast”

Reacting to the recent dervish dance of the VW stock, Germany’s stock exchange put their foot down hard. Any more funny business, and VW will be kicked out of the DAX, Germany’s equivalent to the Dow Jones. As of Monday, if a stock reflects more than 10 percent of the index, and if its volatility did exceeded more than 250 percent in the preceding month, that stock will be a goner as far as the DAX is concerned.

To put things into perspective: Last Tuesday, the weight of the VW stock in the DAX was 27 percent, and the 30 day volatility had redlined to 388 percent. If the new rules had applied, VW would long be evicted by now. Come Monday, VW will be represented in the index with 10% (Achtung!) and if there’s any more hip-hop like last week, then it’s “raus, raus, mach schnell!”

The German Exchange sugar coats the new rules as “preventative measures.” Not a lot of people are buying the carbohydrate. “I think, they are setting the stage for kicking VW out of the DAX,” quoth an expert, who’s name Automobilwoche, wisely did not want to reveal.

The Handelsblatt, not quite Germany’s equivalent to the WSJ, doesn’t rule out further yo-yoing of the VW share. Demand is high, supply is limited, and the hedgies are still loaded with borrowed stock. The new rules may actually induce volatility. “If VW goes above 10 percent of the DAX, we must sell,” said Marc Brubeck of Barclays Global Investors. Their index fund alone holds €2b worth of VW stock.

If VW is out of the DAX, the price is set to collapse, and Porsche will be able to buy whatever shares they want at fire sale prices. At the time of this typing, on Friday evening, at 5:38pm Frankfurt time, the VW stock was well behaved. It stood at €504.99, a mere €4.89 higher than its previous day’s close. Good boy! Now sit.

(Photo courtesy kruhme. Thank you!)

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