The Short Report

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By Chris Shaw

With the Easter break impacting on trading the week from April 3 was relatively quiet in terms of changes in short positions on the Australian market. Few stocks saw changes of more than one percentage point, with an increase to total shorts of 5.75% from 3.75% for SingTel ((SGT)) the largest change for the period and the only increase of more than one percentage point. The increase came despite little recent news from the company, other than a structural streamlining of the international divisions.

On the side of decreases in short positions for the week from April 3, David Jones ((DJS)) topped the list with total shorts declining to 9.63% from 10.82% previously. This change has come as the market has had time to digest the group's interim earnings result from late March.

David Jones was not the only stock exposed to the consumer discretionary sector where short positions fell, as shorts in Myer ((MYR)) for the week declined to 11.57% from 12.39% and for Specialty Fashion Group ((SFH)) to 0.56% from 1.09% previously.

Consumer discretionary stocks continue to dominate the top 20 list of short positions, led by JB Hi-Fi ((JBH)) at 22.3%, followed by Myer, Carsales.com ((CRZ)) at 11.48%, Flight Centre ((FLT)) at 9.9%, David Jones, and Billabong ((BBG)) at 9.4%.

Aside from consumer discretionary stocks, short positions remain elevated across a number of sectors as the top 20 includes the likes of Fairfax ((FXJ)), Gunns ((GNS)), Iluka ((ILU)) Beach Energy ((BPT) and CSR ((CSR)). Note that CSR is one of the worst performers in the Australian share market this calendar year.

Bank of Queensland ((BOQ)) also saw shorts decline to 3.4% from 4.56% the previous week as the market has now factored in the capital raising announced by the bank in late March. The raising has improved the bank's balance sheet, which supports some Buy ratings among brokers in the FNArena database.

Monthly changes in short positions from March 9 have highlighted some more significant changes, the largest on the increase side being an jump in shorts for Carsales.com to 11.48% from 6.31% previously. Deutsche Bank recently noted total inventory growth for Carsales.com remains subdued, while brokers continue to reassess the outlook for the company post a move away from its traditional classifieds business via an investment in Torpedo7.

Shorts also increased by more than three percentage points for both Bathurst Resources ((BTU) and Cochlear ((COH)), the former as a market update indicated delays to the Escarpement appeals process and the latter as the recall process has meant the market no longer sees Cochlear as more reliable than its peers.

With respect to monthly declines in short positions the largest was a fall to 0.49% from 3.55% for Rialto Energy ((RIA)), which comes as the company is in the early stages of a three well drilling program.

Shorts in Alkane Resources ((ALK)) fell to 2.09% from 4.24% for the month from March 9, this as the market factored in both an increase in resource at the Tomingly gold project and a entitlement offer to shareholders to raise additional funds.

Elsewhere, shorts in Nufarm ((NUF)) have risen over the past month and now stand at a little above 2.2%. In the view of RBS this increase reflects the fact while earnings upgrades are needed to generate a share price re-rating this is unlikely given current market conditions. With pricing pressures still in place, RBS recommends investors reduce their exposure to Nufarm, rating the stock as a Hold.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	22050937	98850643	22.30
2	ISO	708915	5703165	12.43
3	MYR	67569627	583384551	11.57
4	CRZ	26850070	233684223	11.48
5	COH	6460956	56929432	11.33
6	FXJ	255882163	2351955725	10.90
7	FLT	9903258	100024697	9.90
8	LYC	169429683	1714496913	9.90
9	DJS	50636631	524940325	9.63
10	BBG	23994166	255102103	9.39
11	EGP	54003153	688019737	7.83
12	GNS	61543147	848401559	7.24
13	HVN	76887590	1062316784	7.22
14	WTF	14314910	211736244	6.75
15	ILU	27218206	418700517	6.50
16	BPT	72923928	1199253779	6.11
17	CSR	30579008	506000315	6.04
18	TRS	1563710	26071170	6.01
19	TEN	61329693	1045236720	5.86
20	SGT	9486159	165074137	5.75

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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