The Short Report

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ERA

By Chris Shaw

On face value the second week of the FNArena Short Report looks very similar to last week, as eight of the top 10 securities are the same and the top seven are in the same order as the week before. But as with last week, the significance comes in identifying changes to short positions rather than the actual percentage of a particular security that has been sold short.

The top 10 short positions over the past week on the ASX have been JB Hi Fi ((JBH)), ISO, the Small Ordinaries index tracker, Fairfax Media ((FXJ)), Billabong ((BBG)), Myer ((MYR)), David Jones ((DJS)), Flight Centre ((FLT)), Gunns ((GNS)), Perpetual Trustees ((PPT)) and Lynas Corporation ((LYC)).

Shorts in Gunns have increased significantly to nearly 8% from just over 5% the previous week, this adjustment occurring in the lead-in to the company's annual general meeting. In contrast, most of the rest of the top 10 have seen little change, the likes of Myer, JB Hi Fi, Fairfax and Flight Centre all recording only minor adjustments in total short positions in the past week.

Numbers have risen slightly for Billabong, which coincides with share price weakness last week some in the market attributed to investors selling given potential for the stock to be removed from the ASX100 index. Removal from such an index would cause some fund selling given the mandates fund mangers have in place in regards to what stocks they can hold in their portfolios.

Outside the top 10, short positions have increased for the likes of Resolute Mining ((RSG)) to more than 2.6% from less than 1.0% previously, this coming after the issue of more than 5.6 million new shares following the exercise of some listed and unlisted options.

Shorts have also increased in Cochlear ((COH)) to more than 6% from around 5% previously, the general uncertainty of the company's product recall being added to by a report from Credit Suisse of market share in bone conduction devices coming under pressure from competitor Med-E1.

Steel plays remain out of favour as short positions in both BlueScope ((BSL)) and OneSteel ((OST)) have risen over the past week, this on the back of BlueScope's move to raise equity to address balance sheet concerns.

Aston Resources ((AZT)) announced changes to its board earlier this month and the market has responded by an increase in short positions, while shorts in Goodman Fielder ((GFF)) also rose leading into the group's annual general meeting.

Bathurst Resources ((BTU)) also saw an increase in short positions leading into the announcement of first coal exports from the Buller project, while investors took the opportunity to increase shorts in Beach Energy ((BPT)) prior to that company's annual general meeting.

On the other side of the market, shorts fell in Energy Resources of Australia ((ERA)) as the company completed a bookbuild for the retail shortfall of a recent equity raising. There are no signs of any major shift in preferences in the uranium sector, as the level of shorts in Paladin are largely unchanged.

Santos ((STO)) has enjoyed a reduction in short selling positions since the last FNArena Short Report, which comes just prior to what was a disappointing update from rival Woodside ((WPL)) in terms of production guidance for the coming year.

While White Energy ((WEC)) has yet to fully resolve its feed coal supply issues, the market has reduced short positions in the stock from more than 2.8% to less than 1.4%, while the market also lowered total shorts in Western Areas ((WSA)) from about 6.3% to less than 5.5% leading into the company's annual general meeting. 

Top Ten Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20294875	98833643	20.53
2	ISO	885115	5401916	16.39
3	FXJ	289084551	2351955725	12.30
4	BBG	28575703	255102103	11.19
5	MYR	62657295	583384551	10.71
6	DJS	52701616	524940325	10.02
7	FLT	8507685	99990391	8.50
8	GNS	66008241	848401559	7.77
9	PPT	2890642	41342420	7.01
10	LYC	110615212	1713846913	6.41

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position “naked” given offsetting positions held elsewhere. Whatever balance of percentages truly is a “short” position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, “short covering” may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to “strip out” the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option (“buy-write”) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a “long” position in that stock.

Another popular trading strategy is that of “pairs trading” in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a “net neutral” market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are “short”. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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