The Short Report

This story features WESFARMERS LIMITED. For more info SHARE ANALYSIS: WES

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By Chris Shaw

For the week from February 21 the most significant changes in short positions were reductions in total shorts, with five companies seeing reductions of more than 2.0 percentage points from the previous week.

The largest reduction in total shorts was in Gunns ((GNS)), where positions fell to 1.98% from 6.25% the week prior. The change in positions was prior to an interim profit result impacted by asset impairments and revaluations and followed a proposed capital raising that would strengthen the group's balance sheet. The share price rallied.

Shorts in retailer The Reject Shop ((TRS)) fell to 3.62% from 6.55%, the change again coming after interim earnings for the company that brokers viewed as solid and suggestive of reduced financial risks surrounding the company. Shares in The Reject Shop have since rallied strongly too.

Wesfarmers ((WES)) again saw a decline in shorts in its new securities ((WESN)) to a total position of just 0.11%, down from 2.44% the week before. This followed a solid interim, though Macquarie suggested some disappointment in that the company appears to have a focus on value creation while the market is looking for growth. Shorts in the regular Wesfarmers shares also declined during the week, to 2.53% from 3.39% previously. Shares in Wesfarmers have failed to rally, instead they discovered that trending south is the path of least resistance.

While still the number one stock for short positions on the market, total shorts in JB Hi-Fi ((JBH)) fell during the week from February 21 to 19.4% from 21.7%. While the company met guidance with its interim result, brokers remain cautious given a still tough consumer discretionary market. Shares in JB Hi-Fi have also failed to rally. Just like Wesfarmers, they have weakened instead.

Stocks exposed to the consumer discretionary sector continue to dominate the top short positions, as along with JB Hi-Fi the top 20 includes Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)), Harvey Norman ((HVN)) and Flight Centre ((FLT)).

Of these, Billabong also enjoyed a solid fall in total shorts for the week from February 21, positions declining to around 8.8% from nearly 11% the previous week as the company continues to look at restructuring options and remains of interest to private equity.

There were no increases in short positions of 1.0% or more in the week from February 21 but closest was Ten Network ((TEN)), where total shorts increased to 6.2% from 5.3% previously. Ten's latest guidance update was disappointing and left brokers with the expectation further cuts to consensus earnings numbers were likely. A similar increase in shorts was seen in Western Areas ((WSA)), which came after an interim report that fell a little short of expectations due to the timing of some ore shipments.

Among the monthly changes, Rialto Energy ((RIA)) saw shorts increase from 0.2% to around 5.0% and SingTel ((SGT)) to 5.4% from 3.1%, while shorts in Gunns, JB Hi-Fi and The Reject Shop all declined by 2.6% to 3.0%.

While Flight Centre remains among the top 20 short positions, BA Merrill Lynch is not sure the market's concerns over the outlook for consumer discretionary stocks is appropriate in this case. This is because Flight Centre has a more flexible business structure and a dominant market share and faces less short-term structural threats than others in the sector.

Tabcorp ((TAH)) remains well down the list in terms of total short positions, standing at just 1.31% for the week from February 21. But as RBS Australia notes, this has increased by almost double over the past few weeks, something RBS sees as a reflection of ongoing challenges including weak organic revenue growth and an expense base that is difficult to control. In RBS's view Tabcorp is a stock that will struggle to outperform the broader market given this issues.

Previous research conducted by RBS suggests increasing numbers in short positions are usually closely linked to share price underperformance in the following weeks, if not months.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	19175716	98840643	19.40
2	FXJ	269023275	2351955725	11.45
3	ISO	586412	5403165	10.85
4	MYR	61159541	583384551	10.46
5	DJS	52413224	524940325	9.96
6	FLT	9627616	100009946	9.59
7	BBG	22544808	255102103	8.82
8	COH	4990491	56922933	8.75
9	LYC	146148090	1714396913	8.53
10	WTF	14582724	211736244	6.87
11	HVN	70934517	1062316784	6.67
12	TEN	64765918	1045236720	6.19
13	SEK	19199119	337101307	5.69
14	PPT	2339462	41980678	5.57
15	CRZ	13024435	233264223	5.56
16	SGT	9943853	183608625	5.41
17	ILU	21922037	418700517	5.23
18	WSA	9352753	179735899	5.20
19	RIA	21505734	431256264	4.99
20	RIO	20840257	435758720	4.77

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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