The Short Report

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By Chris Shaw

For the week from May 22 the largest short position increase on the ASX was in Sundance Resources ((SDL)), where positions rose from just 0.27% to 2.24%. This occurred just prior to the company presenting at a mining forum in Cameroon and agreeing some key terms for its Mbalam iron ore project.

The next largest increase was in Iluka ((ILU)), where shorts increased to 8.93% from 7.08% after the company updated both zircon sales guidance and the outlook for the zircon market in general. Lower sales volumes and a slow recovery in the market are priced into the stock at current levels in the view of Macquarie.

A jump in shorts to 8.89% from 7.46% previously for Gunns ((GNS)) comes on the back of an update from management that included news of the sale of the Heyfield timber business. Further asset sales are expected as is a significant capital raising, so changes in shorts likely reflect positioning for such an event.

Among those to enjoy significant falls in short positions for the week from May 22 were retail plays David Jones ((DJS)) and Myer ((MYR)), the former seeing a decline in shorts to 8.81% from 10.51% and the latter to 9.72% from 11.21%.

The change for David Jones came ahead of what was viewed by most as a disappointing 3Q sales result, though the result did at least give some indication sales were stabilising. The change for Myer follows a trading update that included a cut in earnings guidance, which led brokers to comment upcoming sales periods for both companies will be important for full year earnings.

Despite the falls in respective short positions both David Jones and Myer remain among the top 20 short positions on the Australian market, along with other consumer discretionary plays such as JB Hi-Fi ((JBH)), Billabong ((BBG)), Harvey Norman ((HVN)), Flight Centre ((FLT)) and Carsales.com ((CRZ)).

Also among the top 20 are Iluka, Paladin ((PDN)) and Lynas ((LYC)) among resource plays, Echo Entertainment ((EGP)) in the gaming sector, building materials play CSR ((CSR)), rural group Elders ((ELD)) and biotech play Mesoblast ((MSB)). Shorts in both Echo Entertainment and Paladin fell by around 1.0 percentage point in the week from May 22.

Shorts in Western Areas ((WSA)) declined to 4.66% from 6.07% the week prior after the market updated expectations to reflect higher production and sales guidance from the company, while shorts in Whitehaven Coal ((WHC)) also declined to 0.74% from 1.94% as the company supplied an initial resource for the Ferndale project.

From the perspective of monthly changes in shorts for the period from April 26, Iluka experienced the largest increase with a move to 8.93% from 6.48% the month prior. Sparsely covered Linc Energy ((LNC)) also saw a jump in shorts to 5.58% from 3.34%, this despite management responding to an ASX query by confirming previous guidance for oil production and cash management for the full year.

A number of the top 20 short position stocks saw total positions increase by around 1.0% or more in the month from April 26, these including Billabong, Gunns, Harvey Norman, Flight Centre, Western Areas, CSR and Elders.

On the side of falling short positions, Whitehaven saw the greatest decline for the month, while utilities Spark Infrastructure ((SKI)) and Australian Pipeline Trust ((APA)) also enjoyed solid falls in total positions. For the former shorts fell to 2.29% from 5.46% and for the latter to 1.02% from 3.23% as the market continues to digest potential acquisitions in both cases.

Shorts in SingTel ((SGT)) declined to 3.6% from 5.93% the month before as the market viewed full year earnings as broadly in line with expectations, while a solid update indicating fund performance has been good and there is potential for an increase in fund inflows in coming months may have helped shorts in Henderson Group ((HGG)) fall to 0.69% from 2.26% previously.

Elsewhere in the market, RBS Australia notes Metcash ((MTS)) short positions have increased by more than 50 basis points over the past three weeks and now stand at 5.5%. In RBS's view such an increase is justified by weak trading conditions, which are expected to pressure independent supermarkets more than those of Coles and Woolworths ((WOW)). Such a trend would make it more difficult for Metash to sell many of its Franklins stores.

Investors should note past research conducted by RBS has shown that increasing/decreasing short positions for an individual stock can function as an early indication for the share price underperforming/outperforming respectively in the weeks/months ahead.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	23026494	98850643	23.29
2	FLT	11708664	100031742	11.70
3	CRZ	27135451	233689223	11.60
4	FXJ	269444917	2351955725	11.48
5	COH	6460589	56929432	11.32
6	LYC	175865064	1714846913	10.26
7	ISO	564043	5703165	9.89
8	MYR	56759223	583384551	9.72
9	BBG	24988441	257888239	9.69
10	ILU	37466989	418700517	8.93
11	GNS	75481203	848401559	8.89
12	HVN	94109184	1062316784	8.83
13	DJS	46649603	528655600	8.81
14	EGP	52714970	688019737	7.66
15	WTF	15883143	211736244	7.49
16	CSR	36894219	506000315	7.29
17	PDN	60483039	835645290	7.22
18	MSB	16644576	284478361	5.85
19	GWA	17206537	302005514	5.71
20	ELD	25258709	448598480	5.63

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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