FYI | Oct 03 2012
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By Andrew Nelson
Short selling and covering activity on the Australian Stock Exchange remained fairly restrained over the week to 25 September 2012. There were just two significant decreases in short positions booked over the week, with only two significant increases recorded as well. This week, however, we have altered the meaning of “significant” to include moves of one percentage point or more compared to our usual definition of “significant” based on moves of two percentage points or more.
We’ll start with the stocks on the way up. Silver Lake Resources ((SLR)) lead the way higher last week, with its total short position increasing by 1.73 percentage points from 4.07% to 5.8% over the period. The stock is covered by one major Australian broker, JP Morgan, who maintains a Buy call and said earlier last month the company’s FY12 result was a solid one, although also noting FY13 will be about bedding down the Integra Mining ((IGR)) acquisition and the speed at which synergies can be extracted.
Next on the list of largest increases to overall short positions is Aspen Group ((APZ)), whose short position ticked 1.02ppt higher from just 0.09% to 1.11%. This is another stock thinly covered by major brokers, with an Underperform call from Macquarie the only entry in the FNArena Database. It looks like the announcement of an unexpected impairment charge and a subsequent capital raising are probably behind the shorting.
While the move is minor, David Jones ((DJS)) also saw its total short position move a little higher. The company’s short position increased 0.8ppt from 9.5% to 10.3% after putting out an in-line, if rather uninspiring FY report at the beginning of the period. The stock remains negatively regarded in the FNArena Database, with three Sells, four Holds and a Buy. When reading through the post FY report commentary from each broker the phrase “subdued earnings outlook” appears quite regularly.
Switching to the other side of the ledger brings us to Linc Energy ((LNC)), whose short position pulled back 1.49ppt from 8.24% to 6.75%. The last major broker comment was made back in March, when RBS discussed a JV in China. There was some news, however, early last month about a reserve upgrade at its Umiat prospect in the Brooks Range foothills of Alaska. The stock enjoys a Buy call from UBS and offers quite significant upside to the broker’s target according to the FNArena database.
Western Areas ((WSA)) saw its short position come off 1ppt from 7.6% to 6.6%. The stock remains positively regarded in the FNArena Database, with six Buys and two Holds to its name.
Weekly changes to the Top 20 list were once again fairly minimal. Iluka ((ILU)) and Fairfax ((FXJ)) swapped places at four and five, with Fairfax now at four. While not booking much of an increase in overall short position, Wotif.com ((WTF)) moved from number 15 to 12, while Linc Energy, with its big weekly decline, has dropped from 14 to 17, Lastly, Ten ((TEN)) has replaced Mesoblast ((MSB)) at number 20.
Looking at the monthly moves, we’ll switch “significant” back to 2% or greater and note there were three significant increases to short positions, while only two to the downside. Lynas Corp ((LYC)) reigns supreme on a monthly basis, with its short position adding 2.71ppt from 10.89% to 13.6% on continued commissioning issues in Malaysia. While not germane to the short position change up to the 29th, it’s worth noting that UBS downgraded its call to Neutral from Buy yesterday to adjust for a weakening rare earth market and because of commissioning risk in Malaysia.
Industrea ((IDL)) has booked the second largest increase over the month to 25 September 2012, with its short position rising 2.13ppt from 0.15% to 2.28%. The stock remains Neutrally regarded in the FNArena Database. Silver Lake Resources finds itself next on the monthly list, its weekly short position decline not able to offset the 2.07ppt short position increase from 3.73% to 5.8% on a monthly basis.
St Barbara ((SMB)) booked the biggest monthly decrease in short position, coming off 2.23ppt from 3.37% to 1.14%, while Linc’s pullback last week helped lift it to number two spot on the decliners list. Short positions in Linc declined 2ppt from 8.75% to 6.75%, with investors getting used to the plan to acquire Allied Gold ((ALD)).
While not significant by our own definition, a 1.74ppt drop in Cochlear’s short position is certainly noteworthy. The company’s short position decreased from 10.06% to 8.32% over the month. The Stock remains a Sell on most brokers’ lists, with too high a valuation for not enough earnings being the general consensus.
Top 20 Largest Short Positions
| Rank | Symbol | Short Position | Total Product | %Short |
| 1 | JBH | 21452051 | 98850643 | 21.70 |
| 2 | LYC | 233321967 | 1716129131 | 13.60 |
| 3 | FLT | 13428216 | 100142666 | 13.41 |
| 4 | FXJ | 271331268 | 2351955725 | 11.54 |
| 5 | ILU | 47152972 | 418700517 | 11.26 |
| 6 | MYR | 64328200 | 583384551 | 11.03 |
| 7 | DJS | 54433366 | 528655600 | 10.30 |
| 8 | TRS | 2635113 | 26092220 | 10.10 |
| 9 | CSR | 45022054 | 506000315 | 8.90 |
| 10 | AWC | 215229591 | 2440196187 | 8.82 |
| 11 | HVN | 93260480 | 1062316784 | 8.78 |
| 12 | WTF | 17751636 | 211736244 | 8.38 |
| 13 | COH | 4740496 | 56972605 | 8.32 |
| 14 | PDN | 67937019 | 836825651 | 8.12 |
| 15 | SGT | 10874617 | 145123714 | 7.49 |
| 16 | FMG | 218774184 | 3113798659 | 7.03 |
| 17 | LNC | 34052052 | 504487631 | 6.75 |
| 18 | CRZ | 15588974 | 235089159 | 6.63 |
| 19 | WSA | 11870924 | 179735899 | 6.60 |
| 20 | TEN | 92969625 | 1437204873 | 6.47 |
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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