The Short Report

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

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Since FNArena's last Short Report just before Christmas, the top ten of percentage shorts as calculated by ASIC remains dominated by the retail sector. JB Hi-Fi ((JBH)) at over 23% short remains at number one and we might presume there have been some profits made by the short-side since the company's profit warning. In the week to January 9 (the most recent ASIC data) shorts on JBH have actually increased by 1.63 percentage points, and that's the biggest increase of any stock in the week. Number one twice.

If long-standing top ten short Fairfax ((FXJ)) is indicative at all of a market belief in the demise of an old model, then one might assume the same theory has emerged for the “old world” retail model of large chains occupying expensive real estate and running on extensive costs. Myer ((MYR)) sits in third position ahead of Fairfax and then Billabong ((BBG)), which has also offered solid profits recently for shorters, and David Jones ((DJS)) follow behind. Harvey Norman ((HVN)) sits just outside the top ten.

Such extensive retail shorts may suggest a “switch” or “pairs” position with longs offsetting in perhaps online businesses or maybe just plain old defensives. But we can only speculate.

Flight Centre ((FLT)) has had its downs and ups around Christmas dominated by insurance issues, and its sitting in there still at number seven. Potentially volatile rare earth darling Lynas ((LYC)) has now slipped to number ten.

Wotif ((WTF)) is one of those online stocks but it has problems with a lack of domestic travel. WTF has now fallen out of the top ten along with perpetually struggling Perpetual ((PPT)). Position eight has been taken by Cochlear ((COH)) which is still under somewhat of a recall cloud, while perhaps the most surprising new top ten member is Rio Tinto ((RIO)) sitting in ninth spot.

Rio saw a 0.9 percentage point increase in shorts over the week (as did Cochlear) and now boasts shorts approaching 7% of capital. Rio's major rival BHP Billiton ((BHP)) shows shorts of only 0.9% by comparison. Another “switch” position?

Other stocks outside the top ten to see short increases of more than 0.5 percentage points over the week include Harvey Norman, embattled QBE Insurance ((QBE)) and embattled Goodman Fielder ((GFF)).

Number two on the short list remains the iShares Smalls Ords ETF ((ISO)) which is likely reflective of a short small cap play against long large caps. 

Top Ten Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	22842902	98833643	23.11
2	ISO	939700	5403165	17.39
3	MYR	74856653	583384551	12.81
4	FXJ	284812505	2351955725	12.12
5	BBG	27698032	255102103	10.84
6	DJS	55490289	524940325	10.56
7	FLT	9699450	100005264	9.70
8	COH	4320946	56902433	7.55
9	RIO	30274926	435758720	6.95
10	LYC	117836157	1713846913	6.88

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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