The Short Report

This story features CSR LIMITED. For more info SHARE ANALYSIS: CSR

By Chris Shaw

There were some significant changes in short positions for the week from June 12. A total of three stocks saw increases of more than one percentage point, while the same number of companies enjoyed decreases of a similar magnitude.

The largest increase in shorts was for Fairfax ((FXJ)), where positions jumped to 14.29% from 10.97% previously. The change in positions came before a trading update from the company, which indicated additional cost savings would be sought as part of a restructuring as management continues to deal with difficult trading conditions on top of having to deal with ambitious shareholder Gina Rinehart whose media buying spree continues to divide general opinion throughout Australia.

The increase in shorts in Fairfax has pushed the stock to the second largest short position, behind only JB Hi-Fi ((JBH)). Consumer discretionary stocks such as retailers continue to dominate the large short position table, with the likes of Myer ((MYR)), David Jones ((DJS)) and Harvey Norman ((HVN)) among the top 20.

Also in the top 20 is Billabong ((BBG)), where the shorts have been vindicated as the share price tanked following the announcement of a capital raising in combination with some restructuring initiatives. Others in the top 20 short positions include Gunns ((GNS)), Echo Entertainment ((EGP)), Mesoblast ((MSB)), CSR ((CSR)), Iluka ((ILU)) and Paladin ((PDN)).

Behind Fairfax, the next largest increase in short positions was for Northern Star Resources ((NST)), where total shorts rose during the week to 1.88% from 0.08% previously. The increase came despite the company announcing good deep drilling results that have extended the known limits of the Paulsens Gold Mine orebody.

Echo Entertainment saw the next largest increase in shorts as positions climbed to 7.49% from 6.36% the week prior. This came as the company announced plans to raise more than $450 million to repay debt while indicating earnings for the current half would be down relative to the previous corresponding period.

While the discretionary retail sector dominates the top 20 short positions, three plays in the sector saw significant falls in shorts in the week from June 12. The three – JB Hi-Fi, David Jones and Myer, all saw declines in total positions of more than two percentage points. Positions remain significant at more than 21%, more than 8% and more than 10% of all outstanding capital respectively.

Monthly changes in shorts for the period from May 18 have also delivered some significant moves, with shorts in Iluka rising to 9.75% from 6.42% as brokers have updated commodity price assumptions that in recent weeks have generated lower earnings estimates and price targets for the company.

The weekly change in Fairfax continued a trend of the past month of an increase in shorts in the company. The number rose to 14.29% from 11.09% in the month. Another media play experiencing a similar trend was Seven West Media ((SWM)), where shorts increased to 4.4% from 1.98%. The change in positions comes as forecasts for Seven West have been trimmed in recent weeks as brokers factor in lower earnings given ongoing deterioration in the TV advertising market.

Among the largest falls in short positions for the month from May 18 was Bradken ((BKN)), where total shorts declined to 1.36% from 4.49% the month before. RBS Australia also picked up on this, attributing the decline in shorts to significant short covering in the stock.

In RBS's view Bradken offers strong earnings growth potential over the next three years given it is one of the better placed mining service companies in the market, especially thanks to an exposure that offers more predictable production volumes and cost and revenue benefits from offshoring plans.

Another stock where shorts fell during the past month was Mirabela Nickel ((MBN)). Positions declined to 2.46% from 4.51% the month prior, this as the company completed a capital raising that addressed the market's balance sheet concerns.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21367258	98850643	21.62
2	FXJ	336725347	2351955725	14.29
3	CRZ	28553286	233689223	12.21
4	FLT	12101459	100039833	12.08
5	COH	6296488	56929432	11.02
6	MYR	59821089	583384551	10.24
7	LYC	175433094	1714846913	10.22
8	BBG	25300490	257888239	9.79
9	ILU	40924332	418700517	9.75
10	HVN	96109837	1062316784	9.04
11	PDN	75681421	835645290	9.04
12	GNS	74495950	848401559	8.77
13	DJS	44150046	528655600	8.36
14	ISO	434568	5703165	7.62
15	EGP	51549744	688019737	7.49
16	CSR	37433829	506000315	7.40
17	WTF	15464628	211736244	7.30
18	LNC	36268295	504487631	7.19
19	MSB	18172893	284478361	6.39
20	TRS	1668103	26071170	6.39

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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