The Short Report

This story features WESTPAC BANKING CORPORATION. For more info SHARE ANALYSIS: WBC

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By Chris Shaw

Increases in short positions outweighed decreases for the week from April 16, with shorts in both Spark Infrastructure ((SKI)) and Whitehaven ((WHC)) rising by more than 4.0 percentage points.

For Spark Infrastructure shorts now stand at 5.28% from 0.5% the week prior, this as the company announced the intention to bid for the Sydney desalination plant in a move to expand away from electricity assets.

While Whitehaven is now a go-to coal play given the lack of independent coal producers listed on the ASX, Citi is cautious on the group's ramp-up ambitions as these plans appear very optimistic. Shorts in Whitehaven have increased to 7.08% from 2.86% previously.

Despite a lack of news in recent weeks shorts in Mesoblast ((MSB)) rose in the week from April 16 to 5.43% from 2.72% previously, enough to push Mesoblast into the top 20 short positions list. At the same time shorts in Carsales.com ((CRZ)) increased to 11.68% from 9.12% the week before in a continuation of the recent trend of rising shorts in the stock.

The increase cements Carsales.com in the top 20 largest short positions on the Australian market, a list that continues to be dominated by companies exposed to the consumer discretionary sector. Others in the sector making the list include JB Hi-Fi ((JBH)), where those holding short positions would be happy given recently revised down earnings guidance, Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)) and Harvey Norman ((HVN)).

Other stocks in the top 20 list cover a range of sectors, with the likes of Cochlear ((COH)) in the healthcare sector, Ten Network ((TEN)) and Fairfax ((FXJ)) among media plays, Echo Entertainment ((EGP)) in the gaming sector and Iluka ((ILU)) and Lynas Corporation ((LYC)) among commodity plays.

The largest decline in short positions for the week from April 16 was in SingTel ((SGT)), where positions declined to 4.05% from 5.72% despite no major announcements from the company.

With respect to monthly changes the biggest increases have come in Whitehaven, Spark Infrastructure, Bathurst Resources ((BTU)), Carsales.com and Independence Group ((IGO)). The increase in shorts for Bathurst came ahead of a quarterly production report indicating a slower ramp-up in production, while for Independence Group the major upcoming catalyst is the first gold pour at Tropicana continues to get closer.

Among the falls in short positions over the month from March 23, Billabong has seen total positions decline to 9.37% from 11.3% the month prior, while shorts also declined by more than 1.5 basis points in (FMS)), Wesfarmers Partly Protected shares ((WESN)) and Western Areas ((WSA)). Of those only Western Areas has a significant level of short positions at 3.58%, which may not be impacted by this week's quarterly production report that was broadly in line with expectations.

Elsewhere, RBS Australia notes short positions in Westpac ((WBC)) have risen by 35 basis points over the past month to a level of around 2.0%. Leading into bank reporting season this month the increase makes sense in the broker's view, as Westpac has delivered below peer loan book growth over the past year and has the greatest reliance on wholesale funding markets of the major banks. This leaves Westpac most exposed to any increase in eurozone tensions, something RBS expects will occur in coming months.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	22928391	98850643	23.20
2	MYR	75404121	583384551	12.90
3	ISO	723617	5703165	12.69
4	CRZ	27277138	233684223	11.68
5	FXJ	273373404	2351955725	11.64
6	COH	6311333	56929432	11.10
7	FLT	10065499	100024697	10.06
8	DJS	52157507	524940325	9.96
9	LYC	161692161	1714496913	9.45
10	BBG	24223691	257888239	9.37
11	EGP	57361567	688019737	8.34
12	HVN	77576325	1062316784	7.26
13	GNS	61598376	848401559	7.25
14	WHC	35728428	502668417	7.08
15	WTF	13857249	211736244	6.53
16	ILU	26940403	418700517	6.42
17	TEN	62009646	1045236720	5.91
18	TRS	1528794	26071170	5.89
19	CSR	29662405	506000315	5.85
20	MSB	15445890	284478361	5.43

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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