The Short Report

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By Chris Shaw

Changes in short positions on the Australian market for the week from February 7 showed some interesting movements, as positions for some companies rose from negligible levels to more significant positions and for others they declined in a similar matter.

In terms of increases the most substantial was in Linc Energy ((LNC)), where total shorts rose to 5.75% from 3.82% previously, this despite little news from the company over the past few weeks (but a lot of share price movements, predominantly to the down side). The observed spike continues a trend that has seen shorts in Linc rise to current levels from around 1.8% the month before. Shorts also jumped in Southern Cross Media ((SXL)) to 2.3% from just more than 0.8% the week before, this increase coming prior to the group's interim result later this month.

Energy World Corporation ((EWC)) rose to near the top of the board in terms of short position increases for the week from February 7, total shorts essentially doubling to 2.68% from 1.32% the week prior.

Heading into its result this month shorts have increased for PaperlinX ((PPX)) to more than 1.8% from less than 0.7% previously, while Hastings Diversified ((HDF)) saw a similar increase to 1.88% from 0.77% previously.

Among a largely unchanged top 20, Billabong ((BBG)) saw shorts rise to 11.84% from 10.88% previously. Note this was before the company outlined plans to ease its constrained financial position and before private equity expressed interest in the retailer.

Top 20 short positions for the week ending February 7 continue to be dominated by the consumer discretionary sector given JB Hi-Fi ((JBH)), Billabong, Myer ((MYR)), David Jones ((DJS)), Flight Centre ((FLT)) Harvey Norman ((HVN)) and The Reject Shop ((TRS)) are all on the list.

Bank of Queensland ((BOQ)) scored the largest decline in shorts for the week from February 7, positions declining to 3.35% from 5.19% previously. While some asset quality and funding issues remain there continue to be brokers that see value in BOQ at current levels. More importantly, maybe, is that bank results have not been as bad as feared by sector bears. MEO Australia ((MEO)) saw the other major fall in shorts, total positions for the week declining to 0.33% from 1.84%. This week MEO announced it had acquired some 3D seismic surveys that will help define drilling locations in coming months.

In terms of monthly changes from January 13 the significant short positions in both JB Hi-Fi and Myer both declined modestly, while shorts in Rio Tinto ((RIO)) and Bathurst Resources ((BTU)) also came down by around 1.4 percentage points. Despite the decline, Rio Tinto remains in the top 20 of largest short positions.

Increases in shorts were more significant over the month, with Rialto Energy ((RIA)) seeing short positions jump from virtually none to just over 5.0%, while Linc, Lynas Corporation ((LYC)) and OneSteel ((OST)) all saw increases of more than 2.0 percentage points.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21075487	98833643	21.33
2	FXJ	284038351	2351955725	12.10
3	BBG	30292609	255102103	11.84
4	MYR	69188671	583384551	11.81
5	DJS	58427589	524940325	11.11
6	ISO	579126	5403165	10.72
7	FLT	9439617	100009946	9.44
8	LYC	158092111	1714296913	9.26
9	COH	4801120	56902433	8.40
10	TRS	1804664	26071170	6.91
11	HVN	73147455	1062316784	6.89
12	WTF	14495787	211736244	6.84
13	SEK	22477184	337101307	6.65
14	OST	82098529	1342393583	6.09
15	GNS	51353845	848401559	6.02
16	CRZ	13856706	233264223	5.94
17	PPT	2428312	41980678	5.80
18	LNC	29108913	504487631	5.75
19	CSR	26201717	506000315	5.17
20	RIO	22476202	435758720	5.15

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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