The Short Report

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By Chris Shaw

Increases in short positions for Australian stocks were far more pronounced than decreases in the week from July 3, as while only two companies saw positions decline by more than one percentage point there were 10 increases in excess of 1.5 percentage points.

The largest increase in shorts was in Gunns ((GNS)), where positions rose to 8.9% from 3.6%. The increase came prior to news the company was disputing an amended tax assessment and before the sale of the Portland Woodchip Export facility.

Shorts in CSR ((CSR)) also rose for the week to 9.08% from 6.19%, the changes coming before the group's AGM, where earnings guidance was revised lower. The company is seeing reduced volumes in building products and aluminium earnings are also under pressure, while at least one broker has expressed concerns about balance sheet pressures for CSR given current tough market conditions.

Aluminium market issues have extended to Alumina ((AWC)), where brokers have been cutting earnings forecasts and price targets to reflect market weakness. The market has picked up on this, as shorts in Alumina increased in the week from July 3 to 7.1% from 4.59% previously.

Short positions in Alesco ((ALS)) have also risen, increasing to 2.39% from 0.13% the week before as the market continues to adopt a wait an see approach to the bid for the company from DuluxGroup ((DLX)).

Primary Health Care ((PRY)) experienced a jump in shorts from 0.87% to 3.08% for the week, the news during the period being the company increasing its stake in Vision Eye Institute in an attempt to capture additional opthalmic revenues that the company can't otherwise capture.

While there has been little in the way of announcements from Mortgage Choice ((MOC)) of late short positions in the company rose for the week to 1.86% from 0.01%, which may be tied into signs of further softening in the residential housing market.

Shorts in Dart Energy ((DTE)) rose to just over 4.6% from 2.77% previously in the week as the company updated on Dart International, where a public offering in Singapore had previously been deferred to later this year.

Both Downer EDI ((DOW)) and Nufarm ((NUF)) experienced an increase in short positions of 1.56 percentage points for the week. For Downer EDI the change in positions came after news the group would be re-locating its locomotive manufacturing facilities, while for Nufarm the change came despite no specific announcements from the company.

The largest fall in short positions in the week from July 3 was in Metcash ((MTS)), where total positions declined to 4.51% from 6.00%. The change came on the back of a full year earnings result that largely met expectations, while positions were also adjusted to reflect a capital raising announced with the profit result.

Cabcharge ((CAB)) enjoyed a fall in shorts to 1.2% from 2.38% previously, this coming despite recent news the Reserve Bank of Australia is considering looking at reforming the current surcharging system for card transactions.

With most of the significant changes in short positions occurring outside the top 20 positions this list remains largely unchanged, with discretionary retail exposures continuing to dominate. JB Hi-Fi ((JBH)), Carsales.com ((CRZ)), Harvey Norman ((HVN)) and Flight Centre ((FLT)) remain among the largest positions, along with the likes of Fairfax ((FXJ)), Cochlear ((COH)), Iluka ((ILU)), Paladin ((PDN)) and CSR.

Among monthly changes to positions for the period from June 8 the largest increase for a stock was experienced by Alumina, while the retailers including Myer, JB Hi-Fi and David Jones all saw short positions fall by more than three percentage points for the month.

Elsewhere, RBS Australia points out in recent weeks short positions in OZ Minerals ((OZL)) have risen by around 0.5 percentage points to just over 2.0%. Short mine life and acquisition risk continue to impact on the company in the broker's view and are likely to continue to overhang the share price as management looks for a significant transaction to deliver some growth.

RBS also notes an on-market share buyback has been completed, which removes some support for the stock shorter-term. Adding in ongoing cost pressures at the Carrapateena project leaves RBS with the view a re-rating for OZ Minerals is unlikely in coming weeks.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20604482	98850643	20.84
2	FLT	13422790	100047288	13.42
3	FXJ	296270915	2351955725	12.60
4	CRZ	27003148	233689223	11.56
5	COH	6079087	56929432	10.68
6	LYC	181816905	1715029131	10.60
7	ISO	537351	5103165	10.53
8	ILU	41630980	418700517	9.94
9	HVN	99164903	1062316784	9.33
10	BBG	37888973	410969573	9.22
11	PDN	76443859	835645290	9.15
12	CSR	45952376	506000315	9.08
13	GNS	75476962	848401559	8.90
14	LNC	39758171	504487631	7.88
15	MYR	45595742	583384551	7.82
16	DJS	39663604	528655600	7.50
17	WTF	15133949	211736244	7.15
18	AWC	173253968	2440196187	7.10
19	TRS	1842956	26071170	7.07
20	MSB	18369445	284478361	6.46

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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