The Short Report

This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentages in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Month ending January 17, 2019

Welcome to the first Short Report for 2019. Even Short Reports need a break, and this one is now back well rested and ready for excitement in 2019.

Given the break, this first Report covers changes in short positions over the period of a month rather than the usual week. Next week’s Report will revert to the usual week to week analysis.

When last we left the ASX200, it was heading for a bottom of 5493 on Christmas Eve, before rebounding to 5850 last Thursday, being the date of the latest short position data provided by ASIC.

We shall first note that in the interim, S&P/ASX has deigned to recalibrate the Top 20 index of largest cap stocks, short positions for which appear in the table below. Out goes Origin Energy ((ORG)), after only a brief stay, and out goes QBE Insurance ((QBE)). In come Coles ((COL)) and South32 ((S32)).

One reason the Australian stock market is not enormously popular with foreign investors, and the reason why Australian passive investors should be wary of simple index investment, is the extreme overweighting of the Top 20 stocks in the ASX200 by market cap, and the lack of diversification thus offered.

We note that last year Wesfarmers split into Coles and The Rest, yet individually both companies are still bigger than Origin and QBE. The other newcomer is South32, itself a spin-off of then BHP Billiton not that long ago. The Top 20 is thus even more concentrated than it was before.

The previous Top 20 contained no less than eight financial sector stocks (you wouldn’t want to have a Royal Commission if you were a passive investor). QBE’s departure leaves that at seven, while the swap of Origin and South32 leaves resource sector representation at four. There are now four retailers, if we count Shopping Centres ((SCP)), a REIT that lives and dies on Westfield mall traffic, as retail. Diversification beyond these three sectors is left to just five stocks.

Never mind, Canada is much the same.

Of the Top 20, Amcor ((AMC)) is by far the most heavily shorted at 7.6% and at the end of 2018 the only Top 20 stock more than 5% shorted. But say hello to BHP Group ((BHP)), which has since snuck in at 5.5%.

Amcor shorts likely represent a pairs trade with takeover target Bemis in the US. BHP shorts may relate to a play around the special dividend, now paid, so we'll we see where they stand next week.

Outside of the Top 20, there’s been a little bit of a shuffling of the deck chairs among those stocks 10% or more shorted, but nothing of significance. Nufarm’s ((NUF)) entry to the club is a dry argument.

In the 5-9% brackets, only one stock has seen a change in the period of one percentage point or more. Nanosonic ((NAN)) shorts have fallen to 6.0% from 8.3% before Christmas. There is a lot of shuffling around in the lower brackets but nothing of particular note.

At least for the time being, we say goodbye from the 5%-plus table to Carsales ((CAR)), Blue Sky Investments ((BLA)), CleanTeq ((CLQ)), Sigma Healthcare ((SIG)), Perpetual ((PPT)) and Corporate Travel Management ((CTD)).

Movers & Shakers will return next week.

Weekly short positions as a percentage of market cap:

10%+
SYR    17.2
GXY   17.1
JBH     15.8
ING     14.3
ORE    13.4
MTS    13.0
IVC     12.8
NXT    12.1
BWX   11.8
MYR   11.6
NUF    10.0

In: NUF                     

9.0-9.9

DMP, IFL, HVN, BAL, SDA, SUL

Out: NUF                   
                                                                                               
8.0-8.9%

PLS, MSB

In: MSB          Out: NWS, NAN

7.0-7.9%

AMC, NWS, MND, BKL, CGF

In: NWS, BKL, CGF             Out: MSB, KDR, FLT           

6.0-6.9%

CCP, A2M, FLT, AMP, HT1, BGA, GMA, BEN, BOQ, APT, KDR, NAN

In: NAN, KDR, FLT, BEN                Out: BKL, CGF, RWC, AHG, AAC, MLX, GEM  

5.0-5.9%

SEK, ARB, BHP, A2B, MLX, RSG, LYC, PTM, AAC, DHG, KAR, CLH, RWC, BIN, VOC

In: MLX, AAC, RWC, BHP              Out: BEN, CAR, BLA, CLQ, SIG, PPT, CTD

Movers & Shakers

See above.

ASX20 Short Positions (%)

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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