Volkswagen’s Frankfurt-traded shares soared as high as $1,258 (1,005 euros) before closing at $1,186 (918 euros) yesterday.

On Monday, Porsche SE (PINK: POAHF) announced it had acquired options on 31.5% of Volkswagen’s stock, in addition to the 42.6% direct stake it already controlled. With the German state of Lower Saxony controlling another 20.2% of Volkswagen stock, that left a very small amount of shares available for short-sellers who had bet on a decline in Volkswagen’s share price – given the poor outlook for the global auto industry – to cover their “short” positions.

“We’re getting a sense of the Sturm und Drang in the markets now,” Michael Holland, the manager of Holland & Co., an investment management firm, told the International Herald Tribune. “When you get into panicked markets as we’ve had in the past few months, you get these vicious moves which happen on the downside and then to the opposite direction. It’s incredible to watch.”

The result was a zooming share price for Volkswagen as hedge funds and other institutional investors bought up shares to cover shorted positions.

Porsche announced today (Wednesday) that it would settle as much as 5% of the derivative contract that make up its indirect stake to increase the supply of VW shares in the marketplace and alleviate some of the pressure on short-sellers. That 5% stake has increased in value by $13.8 billion in the first two days of trading this week, Bloomberg reported.

“Porsche SE intends – depending on the state of the market – to settle hedging transactions in the amount of up to 5.0% of the Volkswagen ordinary shares,” the company said in a statement.

The move sent Porsche shares up as much as 43%, as it investors began to realize that the Stuttgart-based luxury carmaker stands to make a sizable profit from Volkswagen’s recent share movements.

“Porsche has many opportunities with their options,” Robert Heberger, an analyst with Merck Finck, told Forbes. “They could just cash in the money without buying the shares, and this would give them billions of gains with their options, which they can hold in cash.”

But some analysts have accused Porsche of manipulating the market to its advantage.

“Porsche has acted irresponsibly and that has damaged capital markets considerably,” Henning Gebhardt, who helps manage the equivalent of $220 billion at DWS Investment GmbH in Frankfurt, told Bloomberg News. “Porsche snuck up on Volkswagen. They knew about the short sellers, and it must have been clear to them that there would be a massive short squeeze.”

The volatile price swings caused the Frankfurt Stock Exchange to reduce Volkswagen’s weighting in the German blue-chip stock DAX Index to 10% from 27%. That move caused the share price to drop, as asset managers sell Volkswagen shares to rebalance indexed-portfolios.

Volkswagen shares closed Friday at $271.21 (210.52 euros).

Volkswagen is best-known as the producer of the hugely successful VW Beetle – which was a huge commercial winner, with more than 20 million vehicles sold, and which also became a cultural icon during the Flower-Power era of the 1960s and the gas-line-era of the 1970s. Porsche has developed such winning sports cars as the 356, the 911 and the Turbo Carrera.

The 356 hasn’t been built for more than four decades and yet still has an international following spearheaded by a special club.

Source: Volkswagen’s Racing Shares Fueled by Porsche Investment

• Crude oil for December delivery declined 1.4% yesterday (Monday) with a 93-cent drop to close at $63.22 a barrel on the New York Mercantile Exchange. Oil futures are down 57% from the July 11 record of $147.27 and 31% down from a year ago, Bloomberg News reported.  “With all of the stock markets going down, there’s going to continue to be downward pressure,” said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. (MF) in New York. “There’s not a lot that can be done to stop this downward spiral right now.”

• Shares of German automaker Volkswagen AG (ADR OTC: VLKAY) skyrocketed over 120% yesterday (Monday) with a gain of $64.75 to close at $118.00. Porche SE (PINK: POAHF) announced late Sunday that it would increase its stake in Volkswagen to 75% in 2009, The Wall Street Journal reported. The sudden price spike was due in part to Volkswagen’s relatively small free float, as Porche is just shy of a 75% ownership stake and the German state of Lower Saxony controls 20%.

• The Japanese yen hit a 13-year high versus the dollar yesterday (Monday), trading at just under 94 yen to the dollar. Fear of the effect the strong yen would have on exports sent the Nikkei 225 to a 26-year low of 7,162.90 after losing 6.4% for the day. The key Japanese benchmark is down 53% year-to-date, BusinessWeek reported.

• Verizon Communications Inc. (VZ) announced yesterday (Monday) third-quarter earnings were $1.67 billion, or 59 cents per share, up from $1.27 billion, or 44 cents a share, for the same period the year prior. But Chief Executive Ivan Seidenberg cautioned that economic weakness and poor consumer demand would have an effect in the fourth quarter. “For the Christmas season, consumer spending will be somewhat lighter, and business spending will be somewhat curtailed,” Seidenberg said in a conference call, The Associated Press reported.

• New home sales posted an unexpected increase in September, the Commerce Department reported yesterday (Monday). New, single-family home sales rose 2.7% in September to a seasonally adjusted annual rate of 464,000 homes. Sales were still down 33% from a year ago and off almost 68% from the peak reached July 2005.

• Wal-Mart Stores Inc. (WMT) said yesterday (Monday) that it is slowing the pace of U.S. store openings and cutting back on capital spending in the face of economic headwinds, The Associated Press reported. The company plans to open 191 stores in the current fiscal year and between 142 and 157 stores in the next fiscal year. Wal-Mart opened 218 U.S. stores in fiscal 2008. Wal-Mart also plans $5.8 billion to $6.4 billion in capital expenditures this fiscal year for its U.S. division, down from $9.1 billion last year.

• Goldman Sachs Group Inc. (GS) Chief Executive Lloyd Blankfein called Citigroup Inc.’s (C) Vikram Pandit last month about a possible merger, but Pandit rejected the proposal, a source familiar with the situation told Reuters yesterday (Monday). Blankfein’s call was made shortly after Goldman got the approval to become a commercial bank on September 21 and with the knowledge of regulators, the source said.

Source: Global Investing Roundups Tuesday, October 28th, 2008