Euro car companies come under short selling pressure

14th August 2012

Alternatively, it is the work of evil hedge fund managers and manipulators making a killing at the expense of others. Some have pointed to short sellers being the only market participants cheering each time Facebook falls

More generally, the negative views on this activity have led to bans on shorting banks and other financial groups – some have blamed the ability to bet on a share falling for much of the financial instability of recent years. There have been a number of bans on short selling banks. Whether these regulator inspired moves protect the targets or simply delay the inevitable is always a matter of conjecture.

Now, however, the shorting phenomenon seems to have four wheels. Investors, according to the Financial Times, have started to bet on European car manufacturers falling out of grace.

China and currency pressures

The line is that shorting car stocks is at its highest since mid 2010 as investors bet that a combination of currency difficulties, falling demand, especially in China, and a feeling that the companies' equities are currently overvalued, will push share prices down. This will present short sellers with a cash bonanza. And as this shorting would appear to be motivated by genuine reasons rather than automated trading systems, investors need to take notice.

Few investors these days participate in naked or uncovered shorts – illegal in most jurisdictions. Instead, they borrow the stock for a fee from an institution. This stock lending is controversial – some fund managers keep the charges for themselves rather than giving them to ultimate investor, a practice to be outlawed by new European rules.

Once a company has more than three per cent of its stock lent out in this way, market participants can consider that it is susceptible to shorting. Last week, an average of 3.8 per cent of shares in carmakers on the Stoxx Europe 600 index were out on loan last week, compared with 2.7 percent across the Europe-wide index, according to Markit.

A year ago, the figure was closer to 2.5 per cent – the increase has highlighted fears of overvalue in a manufacturing sector where the European presence remains significant.

Peugeot out of favour

Peugeot, the French mass market maker, and Fiat are most under shorting pressure. Peugeot has seen its share price fall by half over the past year while short interest, measured by the proportion of stock out on loan has doubled to nearly 15 per cent.

European consumers cannot afford so many new cars, which in any case have a longer shelf life due to increased reliability. Fiat chief executive Sergio Marchionne has called the competition from Japan as well as lower cost Far East makers which has led to price cuts, the auto equivalent of a "bloodbath".

The share price crash in the mass auto sector is made worse because makers of luxury cars such BMW and Porsche have so far evaded the carnage. Their equities may even have received a boost as investors shorting Fiat, and Peugeot are hedging their exposure to the auto industry in Europe with long positions in the upmarket sector.

Volkswagen, with a portfolio of brands ranging from Bentley to Skoda, is the latest to come under the attention of short sellers as investors fear that financial forecasts could be revised downwards – even in the luxury sector as any Chinese slowdown will impact hard.

To ban or not to ban – that is the question

It is unlikely that regulators will ban short selling in a sector such as motor manufacturers. But if they did, what might happen?

The New York Federal Reserve thinks it might be very little. It says: "Bans on short-selling imposed during the financial crisis in the belief that short sales were driving United States stock prices below fundamental values did little to stabilize those prices.  In addition, the bans had the unwanted effects of lowering market liquidity and boosting trading costs."

In a study for the NY Fed "Market Declines: What Is Accomplished by Banning Short-Selling?" New York Fed economist Hamid Mehran and Notre Dame finance professors Robert Battalio and Paul Schultz looked at the link between short-selling and market downturns.

They found in a statistical exercise conducted to determine the relationship between short-selling and stock returns, "the two variables are minimally correlated."

The academics add: "The 2008 restrictions [on short selling] did little to slow the decline in the prices of financial stocks; in fact, prices fell more than 12 per cent over the fourteen days in which the ban was in effect. In addition, the bans increased trading costs in the equity and options markets by more than $1 billion. Moreover, there is no evidence that stock prices declined following the downgrade of the U.S. credit rating as a result of short-selling."

Investors can conclude that bans may delay an asset price fall but not prevent it.


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18 thoughts on “Euro car companies come under short selling pressure”

  1. James says:

    Fine analysis Shaun. I must say that you just have to feel very sorry for the Portuguese citizen. Just what have they got out of the Euro, which is of course the one thing that will never be blamed for the mess by the politicians?
    It would be very interesting to show a chart for each country in the Eurozone showing the movement in natinal output since the Euro was formed. I suspect that it will not be a pretty picture unless you are german!

    1. Anonymous says:

      Don’t forget the massive subsidies (for a small country) that the EU has lavished on Portugal. They are easily forgotten, being things from the past, but they are set to continue while Portugal ‘behaves’ and remains in the EZ. Yes, there was a lot of corruption but nonetheless, they were a big help. Once outside, I suspect the handouts would become rather less generous. Portugal’s recovery from the Salazar era has been underwritten by the EU and though things look bad now, they are a lot better than they were in the early 1990’s.

      1. Anonymous says:

        True, but Portugal could have had these subsidies without joining the Euro. I frequently hear similar comments in Greece where the man in the street confuses the EU with the Eurozone. Greece enjoyed huge transfers from the EU long before they joined the Euro.

    2. Anonymous says:

      While charting Eurozone nations, we also want charts for national output for European nations with their own currencies.

      Good science could use a comparison between eurozone and non-eurozone countries – curious to see if the data fits the theory that “the eurozone has reduced/harmed national output in member states”

      I suggest using Britain, Norway, Denmark, Finland, Poland, Estonia,
      Latvia, Lithuania, Czech R.,Hungary,Romania, Bulgaria, Croatia,
      Switzerland & Iceland

      1. Anonymous says:

        Hi ExpatInBG

        As this is not a test tube type situation we will never know what the purist answer would be as in what some of these countries would have done with their own currencies is unknowable.

        However now is one of the better times for international comparisons as a factor which normally spoils things (exchange rates) is not in general one now as the ECB Euro trade weighted exchange rate is at 100.43 compared to 100 for Euro entry…

        1. Anonymous says:

          Hi Shaun,

          Yes economics cannot do hard science with alternate history. Iceland and Latvia have seen big falls in output, and the UK GDP seems to shrinking in real terms. Hungary with many CHF loans has been hard hit by a falling HUF.

          Can I suggest a future blog tries to assess the benefits and drawbacks of eurozone membership.

  2. Joe L says:

    This is getting unsustainable and not just in the southern EZ. Even Germany looks to get into chronic deflation! This won’t end up well and I’m afraid that we are slowly moving towards a decadent situation and it will lead to an abrupt EZ fallout and, even worse, social unrest without any containment and smoothness from the institutions. This slow degradation is even worse since the majorarity is not being told of what is eventually coming. “In ignorance we control despair”. Not this time.

    1. Andy Zarse says:

      According to someone in Ireland, they heard a great ad on Irish radio…

      “Troika looking to tax your
      deposit account?”

      “Aaaah gimme a break.”

      “We’ve just what you
      need. Great deals with

      “Spend your hard earned on a
      great value break, before they spend it for you.”
      Very funny and quite true. I’m not sure the ignorance of “austerity” extands quite as far as they’d hoped if it’s being punted as a reason to spend before the Troika steals it…

    2. Anonymous says:

      Hi Joe

      I wrote last week on the 24th that if Germany had its monetary policy being run by the Bundesbank then it would be considering an easing of policy. So a likely opponent disappeared and after Euro area inflation at 1.2% today and unemployment at 12.1% we might even get a unanimous vote at the ECB for easing!

      The harder bit is what to so as I do not believe that an interest-rate cut from 0.75% to 0.5% would make much difference. It would please the media but as we approach zero the effect of rate cuts disappears in my opinion.

      As longer-term interest rates have fallen too ( and don’t seem to have helped much either) the ECB has a genuinely difficult job as the interest-rate weapon may already be maxxed out…

  3. Andy Zarse says:

    “By ‘eck, t’Portugese are proper on t’rack lad, ah reckon t’Barroso will be in a reet ould pickle abaaht it. Mister van Rumpuy just sits there like flamin’ Piffy on a rock cake! Sithee Strauss-Kahn, ee were a spawney-eyed, parrot-faced wazzock, my granny coulda come aht wi’it better predictions than that wi’ a sticka rhooobarb” etc etc
    If only the EU was run by Yorkshiremen. We might not be able to properly understand what they say, but at least they’d call it as it really is, hyperbole being an anathema to them. I’ve been to more believable pantomimes than the drivel the Troika have come out with above.

    1. james says:

      Thank you very much for reminding me that one of the great leaders of our time, Mr Van Rompuy, still exists.
      Just remind me what he does and who voted for him?

    2. Anonymous says:

      Hi Andy

      I am reminded of around this time last year when Presidents Barosso and Van Rompuy put on a press conference to tell us that their priority was “growth,growth,growth”. If we review what happened next then everyone will hope that they never prioritise an area they are in!

  4. Justathought says:

    Hi Shaun,

    Excellent analysis….

    The EU/EZ is a market state. It is not a nation state and will never become a nation state. You cannot run an entire continent as if it were a dynamic port sucking in the riches from the new world and expressing extractive profits. The more nation state a country is – the more it must depend on its own hinterland for wealth flows…..

    We’ve gone through a cycle of globalization and dying nationalism. Most countries are being led by money printers. Our elites, in their 40-60s have spent their entire careers in this frame of mind. They believe in the power of the printing machine plus that’s what they know how to do. But their blunders will regrettably indicate that only an actual “revolution” can return some power back to the commons, particularly given the fact that present money concentrations suggest we are moving back to a medieval system, with “corporations” taking the place of Guilds.

    Uprisings might come which will lead to coups or new leaders. Nationalism ill probably
    resurface… new ideologies will surface but it will take time.

  5. JW says:

    Hi Shaun

    I hope the Portugese ( and the rest of club Med) have a happy glow of satisfaction knowing they are doing their bit to protect the most exposed bank in the world , Deutsche Bank ( over $70tn). No wonder Angie ‘is not for turning’.

    1. Anonymous says:

      Hi JW

      Quite a lot of exposure for a past employer (1990-95) of mine! Actually such numbers can be massively misleading but I have had my worries about the German banks since the credit crunch began.

      Deutsche thinks it is always safe on the logic that there will always be at least 2 German banks one of which will be it….

      Also have you just taken the prize for the largest number mentioned on this blog? One area where there has been no shortage of inflation is the numbers.Who has any real idea of what 70 trillion is?

      1. forbin says:

        not quite – a while back I posted I think 72-75 trillion is the world GDP


  6. DaveS says:

    Its a real mess for sure and perhaps unsustainable although I think it will be sustained by massive money printing after the German elections. I doubt the Germans will bail, partly because of fear of their own losses.

    We are watching the great globalisation bust after the globalisation boom, The bust is happening here but we are already monetising our deficits. Our GDP/employment look better but we are just kicking the painful can down the bumpy road. Where would we be if Mervyn hadn’t intervened and our property market had crashed 50% ? – where Portugal is now.

    But there are no free lunches – we will pay later.

    1. Anonymous says:

      Hi DaveS

      One of the things which has most troubled me as the credit crunch develops is what happens when pretty much everybody prints?!

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