Monday, September 28, 2015

Top Money Trades: Volkswagen=> How Hedge Funds Think! フォルクスワーゲンのヘッジファンドのアイデア!

The biggest business story last week after the US Fed's non-move on rates, has been Volkswagen. Within every great crisis is an opportunity, and many hedge funds around the world are figuring it out, fast. Profits await!

It has been a full week since the first news broke on the diesel scandal, and a new CEO has already left and been replaced. This is fast paced work, often seen within German factories, but less so within the executive suite. 

Hedge funds in the US, Europe and Asia, have all taken notice along with internal prop teams that still exist. Time is now ticking to find the right trade to make money from this major event. It is not only the large cap Volkswagen stock, but many more interesting auto parts suppliers. 

Indeed many stocks will be impacted by the Volkswagen scandal, yet few have figured out the P/L yet with any financial precision. There is money to be made in small & mid caps within the auto parts sector perhaps.

There seem to be 3 main paths to expect, with a wide variety of profits to be made. Various analysts this week have discussed how they may play out. Let's start with the main equity in play, and the first 3 paths of possibility. What are they exactly?

A) The stock will rebound quickly and recoup losses within 6-12 months and follow in the steps of Toyota after it own recent scandal.
B) The stock will find itself in US bankruptcy or worse, and follow the experience of GM after the Lehman crisis.
C) The stock will flounder for 5+ years like BP after its own oil spill scandal, and not recover in the short term leaving investors with "Dead Money" to deal with in many portfolios.

The possibility for A or B now seem most likely, as the new CEO from Porsche, Matthias Mueller, has now been put in place. It happened in a very clear smooth fashion that Japanese corporates in particular, could never match. 

The next phase seems to be the follow up trades once a CEO is in place. A number of hedge fund and sell-side analysts seems to be focusing on 3 key areas next.

D) What auto parts manufacturers in Asia, US or Europe may suffer losses or delayed orders from diesel vehicles. Any catalytic converter impact will dominate this space.
E) Which commodities like palladium used for diesel catalytic converters,will be impacted with price falls due to less activity within the diesel space. They are often trades via ETFs.
F) Which US legal firm will be hired to defend Volkswagen as many top legal firms are listed. This new client could pay large legal costs that would positively impact the law firm's P/L for 2-3 years.

Please note that the testing equipment maker sued to catch Volkswagen was made in Japan by Horiba TSE code 6856. The stock peaked on July 6 at 5250, fell to 3940 on Sept 4, and recovered to 4580 as of intraday Oct 2. This is one of many long and short ideas that many hedge funds are looking at right now.

Very curious to see how a major buyer has seen value in the ordinary shares last week ending the Oct 9 price up some 8%. As the shares include voting rights, not just dividends, the most likely suspects seem to be influential investors. It may even be the two private families of Porsche and Piech, as they may be doing the additional buying. They are already two major shareholders. Confirmation details will confirm the holdings in time.

There will be other Volkswagen trade twists to come, but these seem to be at the forefront right now!

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