The Short Report

This story features APA GROUP, and other companies. For more info SHARE ANALYSIS: APA

.ref1 {background-color:#B8E3F8;}

By Chris Shaw

The week from February 14 was relatively quiet in terms of significant changes in short positions, only 10 stocks experiencing changes in total short positions of more than one percentage point.

Among the increases the largest was in Wesfarmers ((WESN)), where total positions increased from 0.04% to 2.44%. At the same time shorts in the ordinary shares of Wesfarmers also rose to 3.39% from 2.86% previously, this following an interim earnings result that missed on a few key metrics (margins for Coles included).

Shorts continued to rise in Cochlear, hitting 9.59% for the week from February 14 compared to 8.4% the week before, again post what was a solid interim for some in the market but a less positive result in the view of others including UBS given a decline in unit sales.

Little covered Alliance Aviation ((AQZ)) and Tangiers Petroleum ((TPT)) both saw shorts jump from a negligible levels of less than 0.25% the previous week to more than 1.0% respectively, while Paladin ((PDN)) and Iluka ((ILU)) also saw modest increases in total short positions.

In terms of declining short positions, Linc Energy ((LNC)) saw shorts fall from a somewhat significant 5.75% the week before to 2.94% for the week from February 14, while Shorts in Southern Cross Media ((SXL)) declined from 2.3% to 0.44% after the company announced a share buyback with its interim result.

Shorts in Hastings Diversified ((HDF)) fell to 0.41% from 1.88% the previous week as the market adjusts to a proposed acquisition of the company by APA Group ((APA)). The next largest decline in shorts was in Energy World Corporation ((EWC)), where positions in the junior fell to 1.33% from 2.68% the week before.

With respect to monthly changes, the major increases were experienced by Rialto Energy ((RIA)) and Singapore Telecom ((SGT)), increases of more than 5.0 and 3.0 percentage points in each case pushing total shorts to 5.23% and 4.88% respectively.

The major decline over the month from January 20 has been in the iShares Small Ords derivative ((ISO)), where total shorts have fallen to 10.58% from 17.24% previously. From a stock perspective, the major decline was in Bank of Queensland ((BOQ)), shorts falling to 3.28% from just over 5.0% previously.

The changes in positions have not impacted significantly on the top 20 short positions, which continue to be dominated by consumer discretionary stocks. Among the top 20 continue to be JB Hi-Fi ((JBH)), Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)), Flight Centre ((FLT)), Harvey Norman ((HVN)), The Reject Shop ((TRS)) and Wotif.com ((WTF)).

Among these companies the pick of the interim results appeared to come from Wotif.com, where headline results were a little better than had been expected. While this was due in part to one-off cost cutting, the result was enough to prompt a solid rally in the share price that may have reflected some covering of short positions.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21449536	98840643	21.70
2	MYR	70933745	583384551	12.12
3	FXJ	282570650	2351955725	12.04
4	DJS	58355903	524940325	11.09
5	BBG	28028623	255102103	10.96
6	ISO	571468	5403165	10.58
7	COH	5450536	56902933	9.59
8	FLT	9517934	100009946	9.49
9	LYC	156953209	1714396913	9.15
10	HVN	74774546	1062316784	7.05
11	SEK	23486633	337101307	6.94
12	WTF	14407551	211736244	6.82
13	TRS	1714382	26071170	6.55
14	GNS	53124711	848401559	6.25
15	VLC	10000	160001	6.25
16	OST	80037613	1342393583	5.96
17	CRZ	13890041	233264223	5.94
18	PPT	2284897	41980678	5.43
19	TEN	55392137	1045236720	5.31
20	RIA	22560161	431256264	5.23

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.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms