The Short Report

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

By Chris Shaw

FNArena proudly presents The Short Report which from today onwards will be a daily updated service to paying subscribers on the FNArena website. The set of tables on the website will be accompanied by a weekly news story starting today.

The top 10 short positions for ASX-listed stocks in terms of the percentage of reported short positions is headed by JB Hi-Fi ((JBH)), Fairfax ((FXJ)) and Billabong ((BBG)), followed by Myer ((MYR)), David Jones ((DJS)), Flight Centre ((FLT)), Perpetual Trustees ((PPT)), Western Areas ((WSA)) and Carsales.com ((CRZ)). Also among the top 10 is the IShares S&P/ASX Small Ordinaries ((ISO)), which aims to track the performance of the Small Ordinaries index.

Note that while these names contain quite a few retailers, short positions in retail stocks have actually fallen by between 0.5% to 1.8% in comparison with the week earlier. Regardless, short positions remain above 10% for the four retail plays. In contrast, another discretionary retailer The Reject Shop ((TRS)) has seen a lift in shorts, but total positions are still only around the 6% level.

The largest change in short positions for the week was recorded by Fairfax, which fell to 12.4% from 15.3% previously, while shorts in Goodman Fielder fell to 1.2% from 3.2% previously. Shorts in Cochlear ((COH)) have also come in over the past week, this on the back of commentary from competitor Advanced Bionics that it didn't expect to steal market share from Cochlear as it returned to the hearing implant market.

Note that ASIC data are only available at a week's delay.

Among the banks there has been a fall in short positions for Westpac ((WBC)) and Commonwealth Bank ((CBA)) over the last seven days. This follows the completion of the interim earnings reporting period for three of the majors and a trading update from CBA. Short positions in building materials plays CSR ((CSR)) and James Hardie ((JHX)) also fell during the week, these changes coming before James Hardie surprised to the upside with respect to its second quarter report but after CSR met expectations with respect to interim earnings.

Among stocks where short positions increased was Paladin ((PDN)), which earlier in November recorded a quarterly production report that disappointed some in the market, while the sector as a whole continues to deal with weak uranium prices. Shorts in Paladin now stand at nearly 5.5%, up from 3.6% previously.

Another resource play where shorts rose was Lynas Corporation ((LYC)), which is dealing with some uncertainty with respect to the granting of licences for its LAMP assets in Malaysia. Total shorts are now a little above 6% for Lynas.

Flight Centre recorded an increase in short positions over the last week, to around 7.5% from just under 7% previously. Issues at Qantas ((QAN)) leading to disruptions in flights are not helping the travel market, but recent data from Flight Centre suggest Australians continue to take advantage of a stronger Australian dollar to travel overseas.

Weaker iron ore prices over the past few weeks have been a negative for earnings for OneSteel ((OST)) but prices now seem to have stabilised. Short positions have come in to less than 2.5% from about 2.8% previously. Over the same period shorts in BlueScope ((BSL)) have increased by a similar amount.

Small Ordinaries index tracker ISO has seen shorts rise over the past week to just over 16% from around 15.9% previously.

Note: disclaimer below (with details) and the fact the most recent available data are from seven days ago.

Top Ten Largest 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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