Isegoria

In Squeezy money, The Economist explains how Porsche fleeced some hedge funds and made €6 billion-12 billion ($7.5 billion-15 billion) on Volkswagen shares, all in a few days:

Porsche’s gambit was as old as finance itself. For about three years it had been steadily increasing its stake in VW, a much larger yet less profitable carmaker with which it shares a little production. Its buying had driven up the price of VW’s shares to above the level at which it would make any economic sense for Porsche to buy VW. Seeing this, hedge funds sold shares in VW that they did not own. One strategy was a bet that VW’s share price would fall. Some also bought shares in Porsche, in a wager that shares of both would converge.

The risks of short selling should have been apparent to the brightest hedge-fund managers in Mayfair and Greenwich because of widespread suspicion that Porsche, a dab hand in currency-derivatives markets, was also mucking about with options on VW stock. Adam Jonas of Morgan Stanley warned clients on October 8th of the danger of playing “billionaire’s poker” by betting against Porsche. Max Warburton of Alliance Bernstein said Porsche could make billions by squeezing short-sellers of VW’s shares.

At the time Porsche dismissed these musings as a “fairy-tale”. But on October 26th it executed a handbrake turn, saying that it owned nearly 43% of VW’s shares outright and had derivative contracts on nearly 32% more. That meant it had tied up almost all of the freely available shares (the rest are held by the state government and index funds). Hedge funds quickly did the maths, concluding that they could be caught in an “infinite squeeze” in which they were forced to buy shares at any price.

Their frenzied buying sent VW’s share price soaring (see chart). After languishing below €200 last year, it jumped to more than €1,005 at one point on October 28th, briefly making VW the world’s most valuable company. Porsche may have made paper gains of €30 billion-40 billion in what one analyst described as “one of the most brilliantly conceived wealth transfers ever.” Porsche says it never intended to make money on derivatives and only bought them to protect its planned purchases of VW stock. On October 29th it said that it would settle up to 5% of its VW options, freeing up a similar portion of stock and sending the price down again.

Savvier airline schedules should lead to fewer cheap fares, as airlines stop flying low-demand routes just to keep the schedule the same from Monday through Friday:

No airline has a more complex schedule than Southwest. The low-cost carrier now has more daily flights than any other airline, and it runs a frenetic operation with planes hop-scotching across the country and spending only 20 or 30 minutes on the ground. With more than 500 airplanes and 60 cities to link together, there are literally billions of different ways to set the airline’s schedule.

As a result, Southwest made fewer schedule changes historically than other airlines, and for most of its history was writing schedules by hand. Each new schedule was simply a copy of the previous, with a few changes here and there. But all that has changed.

Southwest’s November schedule was developed with an upgraded version of its in-house schedule-optimization system that reworked the airline’s entire 3,400 daily departures. The airline now flies a completely different schedule on Saturdays — in the past it just erased some flights here and there from the regular schedule on Saturdays. Now some cities like Omaha, Neb.; Salt Lake City; Oklahoma City; and Tulsa, Okla., get nonstop flights to Orlando only on Saturdays.

In January, Southwest will cut 190 flights, reducing its capacity by 6% in the slower winter travel season. That’s more schedule jockeying than the airline has ever done before. And next year, it will add Minneapolis-St. Paul to its route network without increasing its capacity. The scheduling system trimmed flights here and there and improved efficiency, freeing up airplanes to fly to and from Minneapolis.

I think the Wall Street Journal buried the lede on this one:

Southwest’s computer reworked a flight from Austin, Texas, to Orlando because it figured out that the departure around 8 p.m. wasn’t desirable for leisure customers because they’d arrive after 11 p.m. in Florida. Moving the departure to 2 p.m. boosted demand for that flight.

In the past, Southwest’s schedule planners penciled out routes for each aircraft for a seven-day week, with Monday-Friday usually identical, and some changes on the weekend. Schedules were hand-written on sheets of paper that were taped together in scrolls reaching as long as 30 feet.

Southwest tried to hire consulting firms or software providers to devise a system for its unique way of operating. But most airline scheduling systems are geared to long-haul, hub-and-spoke carriers where planes fly into and out of the same city over and over again and airlines want to maximize flight connections. None of the 20 companies Southwest talked to could produce a scheduling system to do the whole job.

Then a Southwest employee, Alex Heinold, came up with a breakthrough on his home computer, devising a formula to match the airline’s unique operation.

It took several years, but the company built the idea into a home-grown schedule “optimizer,” and used it on real schedules for the first time in 2004. The computer took six airplanes out of Southwest’s schedule without cutting any flights, a saving of $180 million in aircraft purchases. The schedule was run through the system again in 2006, and earlier this year, a more advanced system was put into regular use. “We’ve been able to decrease almost every devil that plagued us,” said John Jamotta, senior director of schedule planning at Southwest.

Optimizing the schedule has a benefit for travelers — flights timed when people most want them, going to the places they most want to go, Southwest says.

There is a potential downside — fewer bargain-basement prices.

(Hat tip à mon père.)

Jennifer Levitz notes that when stocks tank, some investors atampede to alpacas and turn to drink, “investing” in bottles of champagne, parking spaces in major cities, condos in Peru or Croatia, cypress farms in Costa Rica, odd farm animals like alpacas and emus, and bags of pre-1965 U.S dimes and quarters, which are 90% silver and in limited supply.

I found this bit slightly disingenuous:

Gold coins also are in great demand. Last week, the mint suspended sales of American Buffalo 24-karat gold coins because it can’t keep up with soaring sales. Last month, a record 14,000 bidders — 17% more than the previous high — turned out for a coin-and-currency auction in Long Beach, Calif., that generated $35 million in sales.

A real business does not suspend sales when it can’t keep up with demand. You’d think the Wall Street Journal would comment on that.

Entrepreneurs Scramble for Financing as banks cut them off:

Small businesses are turning to angel investors, suppliers and personal credit cards as the financial crisis spreads to Main Street and access to commercial bank loans becomes more restricted.

After being rejected last month at two commercial banks, Education 4 Kids Inc. owner J.M. Ivler is back to financing his 5-year-old online retailer with personal credit cards. “I can’t get the banks to give me a loan,” complains Mr. Ivler, whose Las Vegas company is profitable and produced $350,000 in sales last year.

Brian Moran, president of magazine publisher Moran Media Group LLC, decided to sell $125,000 in accounts receivables and incur a 3%, 30-day rate on outstanding balances to finance his Paramus, N.J. company after a bank credit line wasn’t renewed. The bank told him it was cutting back on small business lending to minimize risk.

I smell a business opportunity…

The Solution to Hunting’s Woes? Setting Sights on Women:

As the number of male hunters has declined, the sport has targeted women with everything from pink guns to gender-specific hunting courses. Now, they’re seeking out spokesmodels and pushing weapons tailored for women, such as lighter crossbows. Television shows starring women shooters include “American Huntress” and “Family Traditions with Haley Heath,” chronicling the hunting adventures of a young woman and her tag-along husband and children.

The campaign received a boost in recent weeks from the Republican Party’s vice presidential nomination of Alaska Gov. Sarah Palin. Photographs have since emerged of the governor posing beside a caribou she’d shot, and supporters boasted that she knew how to field-dress a moose. Gov. Palin is an ideal role model, say some women hunters, because she defies the masculine image of the sport. “She’s a babe,” says Linda Burch, a bear-hunting Minnesota accounting executive who applies lipstick before posing for kill shots.

Gov. Palin also counters the stereotype of the woman hunter as poor, rural and uneducated. A 2003 survey of Texans who had attended a state hunting-and-outdoors training program for women found that 82% lived in cities, 79% had graduated from college and 39% had household incomes above $80,000 a year. They spent a mean of $3,250 a year on outdoor recreational pursuits, said the state wildlife agency, which conducted the survey.

The initial go-to strategy? Pink it and shrink it!

About five years ago, the outdoor-equipment industry began slapping pink paint on weapons, including handguns, and downsizing camouflage. “Initially their attitude was, ‘Pink it and shrink it’ and women will buy,” says Beth Ann Amico, an Oklahoma hunter and dog trainer who notes that pink defeats the purpose of camouflage. “We’re savvier than that.”

Now, arms makers are offering shorter gun stocks and barrels for women and crossbows requiring less upper-body strength. Apparel makers such as SHE Safari and Foxy Huntress LLC are marketing camouflage expressly to women. “The Foxy Huntress knows she’s dressed to kill in more ways than one,” says that three-year-old company’s Web site, touting “well-designed pieces cut with a female’s unique form and needs in mind.”