The Short Report

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By Chris Shaw

Earlier this month Western Areas ((WSA)) lifted production and sales guidance for FY12 but the news was not enough to stop the company from experiencing the largest increase in short positions for the week from May 15. Shorts in the stock rose to 6.07% from 4.66%.

The next most significant increase occurred in Goodman Fielder ((GFF)), where shorts rose to 2.9% from 1.63% the week prior. The increase preceded news Cargill was again showing interest in acquiring Goodman's Integro edible fats and oils business. The revived interest from Cargill was seen as something of a surprise given the previous approach had been rejected by the ACCC.

Among the falls in short positions for the week from May 15 the largest was in Mirabela Nickel ((MBN)), the change in positions to 2.97% from 5.17% coinciding with a capital raising by the company. An equity issue of $120 million was announced, Credit Suisse expecting the move will allay some of the market's concerns with respect to Mirabela's balance sheet.

SingTel ((SGT)) also enjoyed a fall in short positions, the total declining to 3.79% from 5.58% previously. The change followed a full year earnings result that broadly met market expectations, though Citi notes guidance for the coming year was somewhat uninspiring.

The next largest decline in shorts for the week was in M2 Telecommunications ((MTU)), where positions fell to 0.15% from 1.59% previously. As with Mirabela the change in positions in M2 follows a capital raising, as an entitlement offer raised more than $83 million to partially fund the recent acquisition of Primus Telecoms Holdings.

With none of the top 20 short positions experiencing much change over the week the consumer discretionary sector continues to dominate, with large short positions remaining in JB Hi-Fi ((JBH)), Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)) and Harvey Norman ((HVN)).

For the week from May 15 Flight Centre ((FLT)) and Carsales.com ((CRZ)) were the second and third largest short positions in the market behind JB Hi-Fi, Flight Centre seeing shorts increase in the month from April 20 to 11.66% from 10.09%.

Other significant increases for the month from April 20 were seen in both the aforementioned Western Areas and Paladin ((PDN)), the latter given the view in the market attention in coming months would focus on balance sheet and cash flow issues rather than production performance. For the month Paladin's shorts increased to 8.21% from 5.74% previously.

Dart Energy ((DTE)) experienced a doubling in shorts for the month from April 20 to 4.43% from 2.16% previously, this despite the company lifting its shale gas estimates to as much as 143TCF and indicating during the period its European business remained on track.

Whitehaven Coal ((WHC)) enjoyed the largest fall in short positions for the month, positions declining to 1.94% from 7.26% previously at the same time as the company announced a takeover attempt for Coalworks ((CWK)), in which Whitehaven already held a 17% stake.

Spark Infrastructure ((SKI)) also saw shorts decline significantly for the month to 2.19% from 5.42% the month prior, this as brokers continue to adjust models and opinions on the stock to account for Spark's interest in acquiring the Sydney Desalination Plant.

Having previously indicated its intention to acquire Hastings Diversified ((HDF)) the need to address ACCC concerns saw Australian Pipeline Trust ((APA)) make some revisions to its proposal that Credit Suisse at least sees as increasing the likelihood the acquisition is allowed to proceed. As this was playing out shorts in APA fell for the month to 0.96% from 3.2% previously.

RBS Australia notes shorts in Telecom Corporation ((TEL)) have been edging higher over the past two months, the broker seeing this as reflective of ongoing earnings concerns over the medium-term. According to RBS, it will likely take around two years for Telecom to establish a solid base for operating gains, while an eventual re-focus on growth is likely to be somewhat painful shorter-term and require additional resources to be fully implemented. 

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	23018840	98850643	23.29
2	FLT	11678508	100031742	11.66
3	CRZ	27060531	233684223	11.60
4	ISO	650567	5703165	11.41
5	MYR	65516262	583384551	11.21
6	FXJ	259056138	2351955725	11.04
7	COH	6238534	56929432	10.90
8	DJS	55607570	528655600	10.51
9	LYC	167718400	1714846913	9.78
10	BBG	23327926	257888239	9.02
11	HVN	95272471	1062316784	8.95
12	EGP	60321600	688019737	8.76
13	PDN	68323012	835645290	8.21
14	GNS	63345192	848401559	7.46
15	CSR	37024145	506000315	7.31
16	WTF	15263261	211736244	7.21
17	ILU	29689294	418700517	7.08
18	WSA	10906664	179735899	6.07
19	ELD	26464169	448598480	5.91
20	TRS	1516903	26071170	5.83

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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