The Short Report

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By Chris Shaw

The week from February 28 saw a number of significant increases in short positions on the Australian market, while reductions in short positions were far more modest. Increases of more than five percentage points were experienced by three stocks and of more than two percentage points by eight companies, while only three companies saw short positions fall by more than one percentage point.

On the increase in short positions side the largest was in Echo Entertainment ((EGP)), total shorts increasing from a negligible 0.79% to 7.0% during the week. The change came after an interim earnings report that fell short of some expectations and was regarded in some quarters as a low quality result. Corporate activity remains a possibility with Echo but the likes of JP Morgan question whether there are enough synergies for a deal to be completed.

Beach Energy ((BPT)) saw total shorts increase to 7.21% from 1.74% previously, as while the company continues to try and develop its unconventional gas resources some brokers are cautious in terms of whether the resources can be brought to a successful financial conclusion.

Uncertain end markets remain an issue for Gunns ((GNS)) and this is reflected in short positions continuing to rise to 6.98% for the week from February 28 from 5.0% previously. Shorts also rose in QBE Insurance ((QBE)) to 4.44% from just over 3.0% previously, this coming prior to some modestly accretive acquisitions in the Hong Kong and South American markets.

Shorts increased in Mesoblast ((MSB)) post a slightly disappointing interim earnings result to 4.88% from 1.94% previously, while news of a stem cell trial by Baxter also indicates competition in the group's markets is increasing.

Having trended down in recent weeks shorts in Billabong ((BBG)) turned higher for the week from February 28, rising to 11.47% from 8.82% the previous week. This came on the back of news of Billabong management turning away interest from private equity.

Billabong has moved to number three in terms of the market's largest short positions overall, trailing only JB Hi-Fi ((JBH)) and Fairfax ((FXJ)). Consumer discretionary stocks continue to dominate overall short positions as the top 20 include Myer ((MYR)), David Jones ((DJS)), Harvey Norman ((HVN)) and the likes of Wotif.com ((WRF)) and Carsales.com ((CRZ)).

The Reject Shop ((TRS)) is another consumer discretionary stock where short positions rose for the week from February 28, increasing to 6.19% from 3.62%, while shorts in JB Hi-Fi rose for the week to 21.56% from 19.4% previously.

On the other side of the ledger shorts in Seek ((SEK)) fell to 4.51% from 5.69% in the week from February 28, this change coming post an interim profit result that was slightly better than most in the market had expected.

Shorts have also declined in both Treasury Wine Estates ((TWE)) and OneSteel ((OST)) by a little more than one percentage point for the week, to less than 2.4% for the former and to just over 3.2% for the latter.

With respect to monthly increases for the period from February 6, Iluka ((ILU)) was among the more significant as shorts rose from less than 3.6% to more than 6.1%, while shorts in Bradken ((BKN)) also increased to a more significant 3.09% from 1.21% previously.

The former may reflect the risk of weaker zircon prices if the Chinese property market falls, while for the latter the market may still be adjusting to a slightly weaker than expected interim result.

Bank of Queensland ((BOQ)) experienced one of the more significant declines in short positions for the month from February 6, falling to 3.33% from 5.36%, this despite brokers continuing to trim earnings estimates to reflect the expectation of further increases in bad debt charges.

Top 20 Largest Short Positions

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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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