The Short Report

This story features CSR LIMITED, and other companies. For more info SHARE ANALYSIS: CSR

By Andrew Nelson

Decreases in short positions again outweighed increases for the week from August 9. There were 12 companies experiencing a total short decrease of more than 1.0 percentage point, while there were just three instances of shorts increasing by more than 1.0 percentage point. Although one of those increases was quite significant.

Shorts in SingTel ((SGT)) increased by a substantial 2.34 percentage points, with total short positions moving from 5.64% to 7.98% over the course of the week. Yesterday, subsidiary Optus posted a 1Q decline in earnings and revenue, while the broader group also missed analyst estimates on currency moves and the lower result from Optus.

There were several other noteworthy climbers including Silver Lake Resources ((SLR)), whose short position increased by 1.81 percentage points,to 2.2%. This is up from a mere 0.41% a week prior. Last week the company announced it would buy Integra Mining ((IGR)) for $426 million in shares.

It is estimated the move may as much as double Silver Lake’s annual output and make it one of Australia’s largest gold producers. Nonetheless, shares have back-tracked significantly since last week’s announcement.

Bathurst Resources ((BTU)) also saw a better than one percentage point rise in its short position, with the share price having run up strongly since the beginning of the month.

Shorts also rose in Cochlear ((COH)) by 0.57 percentage points, or from 9.48% to 10.05%. The stock is quite negatively reviewed by Australian brokers and received a downgrade to Sell last week from JP Morgan on the heels of its FY results. UBS, Citi and Deutsche Bank also maintain Sell calls on the stock.

CSR ((CSR)) lead the list of short position decliners, dropping 2.04 percentage points to a short position of 7.31%, down from 9.35% the previous week. The stock dropped 6 position on the Top 20 list from number 10 to number 16. Last week saw the company host its AGM and commentary was fairly well received by most.

Shorts in Downer EDI ((DOW)) also pulled back over the week to 0.41% from 1.89%, with help likely coming from a fairly well received FY effort.

Discretionary retail exposures continue to dominate the top 20 list, with significant short positions in JB Hi-Fi ((JBH)), Flight Centre ((FLT)), The Reject Shop ((TRS)), Harvey Norman ((HVN)), Myer ((MYR)) and David Jones ((DJS)).

Resource companies also hold prominent position among the largest shorts in the market as aside from Alumina ((AWC) and Iluka ((ILU)), the top 20 also includes Fortescue Metals ((FMG)), Paladin ((PDN)) and Lynas Corporation ((LYC)).

In terms of month on month numbers, the main players from last week were the same from the week before.  The Reject Shop ((TRS)) has seen its shorts increase to 10.4% from 6.3% ahead of an earnings report which may reflect the weak consumer backdrop. Or maybe there's some consumer sector pairs trading going on, with takeover target Billabong ((BBG)) seeing its shorts down to 1.9% from 9.0% after a long period at the top of the short table.

Alumina ((AWC)) is yet to individually report but shorts have increased to 7.9% from 5.5% month on month following JV partner Alcoa's result, while Gunns ((GNS)) is a company devoid of any good news for some time and its shorts have increased to 6.5% from 3.6%. Another takeover possible — Echo Entertainment ((EGP)) — has seen its shorts reduced to 1.2% from 4.4% month on month.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20823851	98850643	21.07
2	FLT	13451283	100055135	13.44
3	FXJ	270619144	2351955725	11.51
4	LYC	194368103	1715029131	11.33
5	TRS	2730779	26092220	10.47
6	CRZ	23900272	233689223	10.23
7	COH	5625114	56929432	9.88
8	ILU	38082082	418700517	9.10
9	MYR	51759790	583384551	8.87
10	HVN	93150742	1062316784	8.77
11	LNC	44085298	504487631	8.74
12	PDN	69288439	835645290	8.29
13	WTF	17453975	211736244	8.24
14	AWC	184241731	2440196187	7.55
15	DJS	39144286	528655600	7.40
16	CSR	36487572	506000315	7.21
17	MSB	18603211	284478361	6.54
18	GNS	55013785	848401559	6.48
19	SGT	9476843	154444714	6.14
20	FMG	176054508	3113798659	5.65

 

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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