The Short Report

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By Chris Shaw

Changes in weekly short positions this week have seen only one case where total shorts have risen by more than 1.0%, while no reductions in short positions reached that level over the past seven days and only two fell by more than 0.5%.

On the increased short position side the biggest increase was seen by a derivative in Asciano ((AIODC)), where shorts rose nearly 1.5% from a negligible level previously. The next largest increase was seen in Alkane Resources ((ALK)), where shorts increased by 0.48% to just more than 3.0%.

On the other side of the ledger, shorts fell most significantly in Bank of Queensland ((BOQ)), a decline of 0.73% to around 4.5% coming despite JP Morgan seeing evidence of the bank still dealing with some margin pressures, but amidst market speculation BOQ's French shareholder Banque Populaire, which owns 12.1%, might be putting its stake up for sale.

Ansell ((ANN)) also enjoyed a decline in shorts of 0.57% to just over 1.5% in the past week, which comes after the company made a minor acquisition in the US that RBS Australia suggested offers some longer-term upside.

Monthly changes in short positions have shown some larger adjustments, with a number of stocks seeing total shorts change by more than 1.0%. On the increase side the largest was for Flight Centre ((FLT)) and Myer ((MYR)), shorts for both increasing by around the 2.0% mark. Despite two cuts in official interest rates signs still point to a difficult trading environment for Australian companies exposed to the consumer discretionary sector.

Another where shorts have risen well above previous levels for the month is Wesfarmers ((WES)), the stock recording an increase for the month of 1.3% to around 3.4% in total. Brokers recently trimmed earnings estimates for Wesfarmers post a site visit, this reflecting not only the impact of ongoing food deflation for Coles but also changes to expectations for the coal operations.

Monthly falls in shorts have been most pronounced for Fairfax ((FXJ)) and BlueScope Steel ((BSL)), both seeing positions decline by around 2.0%. The latter likely reflects ongoing position adjustments post the recently announced equity issue by the company.

Resource stocks have also seen short positions come in, with Western Areas ((WSA)) and Murchison Metals ((MMX)) both recording declines of close to 1.5%. Shorts remain elevated for Western Areas at around 5.7%, though the company is expected to deliver solid news flow between now and the end of the year given the recent commencement of underground mining at Spotted Quoll.

Short positions in Santos ((STO)) have also come down significantly, essentially halving over the past month to 1.3%. While costs at the PNG LNG project are likely to increase the market had been expecting this, so brokers continue to like Santos on relative valuation grounds.

Elsewhere, an increase in short positions for QR National ((QRN)) has been more modest in recent weeks, totalling only around 0.45% for the past month. Despite this, RBS Australia suggests the increase is of significance as a recent cut to coal haulage guidance for the coming year implies some downside risk to earnings in coming months.

While housing numbers in Australia continue to suggest a tough market, shorts have declined over the past month for both James Hardie ((JHX)) and Boral ((BLD)), both by close to 1.0%. For both stocks brokers have seen some signs of conditions improving, these including price increases by Boral and a gradually improving outlook in the US market for James Hardie.

 

Top Ten Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21256085	98833643	21.51
2	ISO	910691	5401916	16.86
3	FXJ	306769252	2351955725	13.07
4	MYR	71330818	583384551	12.20
5	BBG	27827437	255102103	10.91
6	DJS	51341362	524940325	9.76
7	FLT	9018033	99997851	9.01
8	LYC	113981561	1713846913	6.62
9	PPT	2642927	41342420	6.38
10	WTF	13391127	211255444	6.31

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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