The Short Report

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By Chris Shaw

Weekly changes in short positions for the week from May 28 were dominated by increases, with seven stocks seeing positions rise by more than one percentage point against just two declines of a similar magnitude.

The largest change in positions was in Mesoblast ((MSB)), where shorts jumped to 6.17% from 2.86% in the week prior to the company updating on its corporate strategy with respect to product development. Work continues on developing Mesenchymal Precursor Cells (MPCs) for treating diseases such as Parkinson's and Huntington's disease, but competition in the stem cell sector appears to be increasing.

Shorts in Paladin ((PDN)) rose to 9.03% from 7.43% for the week as the company updated on production and costs for the March quarter. Brokers expect cash flows will be the main point of focus for the market in coming months given upcoming refinancing commitments.

SingTel ((SGT)) experienced an increase in shorts to 4.28% from 2.71% as the market continues to see little in the way of positive drivers for earnings in coming months, especially given the operating environment for telcos in India continues to deteriorate.

For Myer ((MYR)) shorts jumped to 12.62% from 11.24% post an investor day update from the company that left brokers with the view driving sales growth would remain the retailer's biggest challenge in the shorter-term.

The increase has reinforced Myer's place among the top 20 short positions on the Australian market, a list which continues to be dominated by consumer discretionary stocks such as JB Hi-Fi ((JBH)), David Jones ((DLS)), Harvey Norman ((HVN)), Billabong ((BBG)) and Wotif.com ((WTF)). Paladin also makes the list along with Lynas ((LYC)) and Iluka ((ILU)) among resource plays and industrials such as CSR ((CSR)) and Echo Entertainment ((EGP)).

Despite indicating to the market targets for production and cash management for 2012 were still in line to be met, shorts in Linc Energy ((LNC)) increased for the week from May 28 to 6.73% from 5.41%. Shorts in Centro Retail ((CRF)) also increased to 2.28% from 1.15% the week before, this despite brokers turning more positive given some good news such as asset sale results and the settlement of a class action.

A recent trading update from Ten Network ((TEN)) indicated media market conditions remain difficult and this saw some minor cuts to earnings estimates for Seven West ((SWM)) as well. The market responded by lifting short positions in the stock to 3.3% from 2.26% previously.

Total shorts in Mirabela ((MBN)) declined for the week from May 28 to 3.1% from 4.46% as the market continues to adjust to the recent announcement of a capital raising. The raising should help reduce what had been some liquidity concerns surrounding the company.

The net largest decline in shorts was in Alesco ((ALS)), where positions fell to 2.11% from 3.16% previously. The change came prior to the pre-release of full year earnings, which the market generally viewed as solid given what remain difficult operating conditions, and a public offer by DuluxGroup ((DLX)). Alesco's board has rejected the offer.

Outside of those stocks in the top 20, increases in shorts for the month from May 4 were largest for Dart Energy ((DTE)) and Centro Retail, where in both cases shorts rose by just under 2.0 percentage points to 4.31% and 2.28% respectively. For Dart the changes came prior to the stock being removed from the S&P/ASX200 index.

Monthly falls in shorts were largest for Whitehaven Coal ((WHC)) and Spark Infrastructure ((SKI)), the former falling to 1.03% from 4.72% and the latter to 2.66% from 6.31%. The changes for Whitehaven came prior to news the longwall at the Narrabri underground mine has been installed, while for Spark the market continues to adjust views in relation to the proposed acquisition of the Sydney de-sal plant.

The other fall in shorts of more than 2.0 percentage points for the month was in Henderson Group ((HGG)), where positions declined to 0.75% from 2.8% previously. The major news for the company in the period was IOOF Holdings ((IFL)) lifting its stake in the company.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	23734597	98850643	24.01
2	MYR	73693279	583384551	12.62
3	CRZ	28322705	233689223	12.15
4	FLT	11833312	100039833	11.82
5	FXJ	273740259	2351955725	11.64
6	DJS	58662263	528655600	11.06
7	COH	6180079	56929432	10.83
8	LYC	176783079	1714846913	10.31
9	ISO	566387	5703165	9.93
10	ILU	41017629	418700517	9.79
11	BBG	24170908	257888239	9.38
12	HVN	99837835	1062316784	9.38
13	PDN	75419878	835645290	9.03
14	GNS	75429556	848401559	8.88
15	CSR	41480002	506000315	8.21
16	WTF	16287604	211736244	7.69
17	EGP	49018195	688019737	7.14
18	LNC	34079022	504487631	6.73
19	TEN	64630518	1045236720	6.19
20	MSB	17572480	284478361	6.17

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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