The Short Report

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By Chris Shaw

The week from July 17 saw reasonable balance between significant increases and decreases in short positions on the Australian market. A total of seven companies saw shorts increase by more than one percentage point, while five experienced falls in shorts of a similar magnitude.

Among the increases the largest was in The Reject Shop ((TRS)), where total shorts rose to 10.2% from 7.2% the week before. The change came on the back of some adjustments to major shareholdings and also followed some changes to earnings estimates for the company in the market.

Shorts in Mesoblast ((MSB)) increased to 6.47% from 3.65% in the week prior to the company announcing some positive early test results for MPC treatment of rheumatoid arthritis, which brokers note offer a potential new market for the company's stem cell technology.

In Cabcharge ((CAB)), total short positions rose to 3.71% from 1.45% in the week from July 17 as the market deals with some uncertainty from the potential for the Reserve Bank of Australia (RBA) to cap surcharge levels. Such a move by the RBA would impact on earnings for Cabcharge.

While quarterly production from St Barbara ((SBM)) was solid, a proposed deal for some gold assets could act as an overhang for the stock in the view of some analysts. This has been reflected in short positions increasing for the week to 4.67% from 2.51% previously.

While short positions for discretionary retailers had been trending down slightly in recent week the week from July 17 saw this trend reverse, as short positions in both Myer ((MYR)) and David Jones ((DJS)) rose by a little more than 1.6% for the period. For Myer total shorts increased to 9.56%, while for Davis Jones total positions rose to 8.59%.

This leaves both stocks comfortably in the top 20 short positions on the Australian market, along with other discretionary retail exposures such as JB Hi-Fi ((JBH)), Flight Centre ((FLT)), The Reject Shop, Harvey Norman ((HVN)) and Billabong ((BBG)).

Others in the top 20 total short positions include CSR ((CSR)) and Boral ((BLD)) among the building materials plays, Paladin ((PDN)) and Iluka ((ILU)) among resource stocks and Cochlear ((COH)) and Mesoblast among health care and biotech exposures.

APA Group's ((APA)) bid for Hastings Diversified ((HDF)) is not going to be opposed by the ACCC and given this adds to uncertainty surrounding the stock, shorts in APA rose for the week to 2.63% from 1.08% previously.

Among the declines in short positions for the week from July 17 the largest was in Henderson Group ((HGG)), where total shorts fell to 0.83% from 3.61% previously. The change comes on the back of Henderson announcing the acquisition of Horizon Investment Management in France.

Yancoal new shares ((YALN)) also saw a fall in shorts to 0.995 from 3.62%, as the market continues to adjust positions following the recent listing of the company. With DuluxGroup ((DLX)) increasing its offer for Alesco ((ALS)), shorts in the target have also fallen, declining to 0.66% from 2.26% previously.

In Senex Energy ((SXY)) shorts have fallen to 0.5% from 1.98% the week before, this as the company announced oil flows from the unconventional Sasanof-1 well. Shorts in Echo Entertainment ((EGP)) also fell to 2.94% from 3.95%, with potential corporate activity still viewed as the major likely catalyst for the share price in coming months.

Among changes to monthly short positions for the period from June 22, Both Flight Centre and Alumina ((AWC)) saw increases of more than three percentage points. Changes to aluminium price forecasts and a quarterly report from Alcoa of the US have seen adjustments to expectations for Alumina, while a potential capital raising in 2013 remains an issue for the market.

Others to see a solid increase in short positions for the month from June 22 include Gryphon Minerals ((GRY)) and Discovery Metals ((DML)), the former seeing shorts rise to 4.98% from 2.58% and the latter to 5.46% from 3.1%. In the period Gryphon announced an increase in the Banfora resource, while Discovery delivered a quarterly report that broadly met market expectations.

The major falls in monthly short positions were generally among stocks in the top 20 total short positions such as Echo Entertainment, Myer, Carsales.com ((CRZ)) and David Jones. Shorts in Fairfax ((FXJ)) also fell to 12.65% from 14.43%, the major news in the period being Standard & Poor's cutting its outlook on the company to negative from stable and ongoing unrest stemming from the shareholding of Gina Rinehart.

RBS Australia notes shorts in Kingsgate Consolidated ((KCN)) have risen to 4.1%, an increase of more than 0.5 percentage points over the past three weeks. In the broker's view an ongoing issue for Kingsgate is a disparity between earnings and operating cash flows, something RBS expects will continue to weigh on the share price.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21182357	98850643	21.43
2	FLT	13572412	100047288	13.57
3	FXJ	297454558	2351955725	12.65
4	LYC	192108623	1715029131	11.20
5	CRZ	24166612	233689223	10.34
6	TRS	2658125	26071170	10.20
7	COH	5685568	56929432	9.99
8	HVN	103238138	1062316784	9.72
9	MYR	55798828	583384551	9.56
10	BBG	38109669	410969573	9.27
11	CSR	46684415	506000315	9.23
12	GNS	75429555	848401559	8.89
13	DJS	45418153	528655600	8.59
14	ILU	35804085	418700517	8.55
15	PDN	70984353	835645290	8.49
16	LNC	42751086	504487631	8.47
17	WTF	16230748	211736244	7.67
18	AWC	173991622	2440196187	7.13
19	MSB	18415368	284478361	6.47
20	BLD	46392266	758572140	6.12

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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