The Short Report

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

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly and monthly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX).

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Summary:

Period: Week to, and month to, November 14, 2013.

FNArena has been faced with a dilemma this week with regard to the weekly Short Report. Having noted a sharp jump in weekly short position decreases of more than two percentage points or more in last week's report, this week has thrown up an equally sharp jump in weekly short position increases. On closer inspection, it turns out that no less than thirteen stocks registering weekly short increases of 2ppt+ this week registered short decreases of 2ppt+ last week, in many cases by eerily similar amounts. For example, last week's report showed Harvey Norman shorts falling to 4.65% from 6.06%, while this week's report shows HVN shorts rising to 6.06% from 4.65%.

This seems all too coincidental to FNArena, thus raising suspicions about the accuracy of both this week's and last week's numbers. FNArena thus attempted to contact ASIC by phone but was directed to an email address. An auto-reply suggested ASIC would respond to the enquiry with 48 hours.

FNArena has decided nevertheless to go ahead with today's report rather than withdraw the report without notice, pending clarification. In order to avoid readers being potentially misled, those stocks under suspicion have been highlighted in red. Stocks not under suspicion have suggested explanations as usual.

Weekly Short Increases

Shorts in Nufarm ((NUF)) increased to 5.58% from 3.20%

Shorts in Mesoblast ((MSB)) increased to 6.29% from 4.07%

Shorts in Cabcharge ((CAB)) increased to 13.16% from 10.99%

Shorts in Kingsgate Consolidated ((KCN)) increased to 14.24% from 12.12%

Kingsgate has effectively become the second most shorted stock in the market after Cochlear, if we don’t count News Corp-related untangling and ETFs. The market is clearly anticipating a capital raising will be required to fund the company’s ongoing development plans in a weak gold market.

Shorts in M2 Telecommunications ((MTU)) increased to 5.05% from 2.94%

Shorts in Shopping Centres Australia ((SCP)) increased to 5.63% from 3.77%

Shorts in Bradken ((BKN)) increased to 11.64% from 9.98%

Shorts in Bradken have been on the rise for a while. A shorters’ favourite, sitting at number 10 on the Top 20, Bradken’s AGM suggested a heavy reliance on an expected second half skew. Traders don’t like backing skews (witness WorleyParsons).

Shorts in Paladin Energy ((PDN)) increased to 9.76% from 8.19%

Shorts in Virgin Australia ((VAH)) increased to 5.34% from 3.77%

Shorts in GWA Group ((GWA)) increased to 4.49% from 3.00%

Shorts in Harvey Norman ((HVN)) increased to 6.06% from 4.65%

Shorts in SMS Management & Technology ((SMX)) increased to 5.08% from 3.68%

SMS shares have been on the slide since the company’s AGM late last month, which featured guidance to a 20-25% fall in earnings, half on half. Of four FNArena database brokers covering the stock, two have Sell ratings (to two Hold).

Shorts in Horizon Oil ((HZN)) increased to 6.06% from 4.65%

Despite a promising quarterly production report, Horizon’s share price was on the slide last week on lower oil prices.

Shorts in Energy World Corporation ((EWC)) increased to 3.21% from 1.90%

FNArena database brokers do not cover ECW, but like Horizon (above), EWC saw its shares sliding last week.

Shorts in Boral ((BLD)) increased to 5.97% from 4.79%

Shorts in Beadell Resources ((BDR)) increased to 4.79% from 3.62%

Shorts in Alumina ((AWC)) increased to 6.04% from 4.93%

Alumina Ltd shares have been weakening this month, potentially in response to new LME warehousing rules for aluminium which threaten to evoke price weakness right down the production chain.

Shorts in Mineral Deposits ((MDL)) increased to 2.52% from 1.42%

Shorts in Macquarie Atlas Roads ((MQA)) increased to 2.65% from 1.62%

Shorts in Atlas Iron ((AGO)) increased to 7.32% from 6.29%

Atlas shares continue to ride high on solid iron ore prices, but despite iron ore prices being volatile, shorters may well be eyeing off the company’s dire need to secure rail access in order to convert its production into sales.

Weekly Short Decreases

Shorts in FKP Property ((FKP)) decreased to 3.82% from 6.26%

An equivalent jump in short positions occurred the week before after FKP announced a highly dilutive rights issue. That increase represented an arbitrage play on the issue, which last week was closed down.

Shorts in Webjet ((WEB)) decreased to 1.69% from 3.28%

Webjet shares took a tumble last week following a profit downgrade announced at the company’s AGM. The shorters have taken profits.

Monthly Short Increases

Shorts in Kingsgate Consolidated increased to 14.24% from 9.21%

See above.

Shorts in Cokal ((CKA)) increased to 3.93% from 0.04%

Cokal’s share price has been stagnant all month. The one FNArena database broker covering the stock maintained an Outperform rating after CKA delivered a positive update late last month. Perhaps someone doesn’t like coal.

Shorts in Atlas Iron increased to 7.32% from 3.52%

See above.

Shorts in Bradken increased to 11.64% from 9.00%

See above.

Shorts in Sims Metal Management ((SGM)) increased to 6.44% from 4.06%

Sims’ scrap metal peers in the US were reporting their quarterly results over the month and the picture is not a pretty one, suggesting chronic overcapacity.

Shorts in Paladin Energy ((PDN)) increased to 9.76% from 7.69%

See above.

Monthly Short Decreases

Shorts in Wotif.com ((WTF)) decreased to 3.71% from 8.40%

Wotif shares have fallen steeply since the company’s AGM. WTF announced new initiatives to offset ongoing weakness in hotel bookings, but the market was not convinced. The shorters have seen weakness as an opportunity to cash in on previously established positions.

Shorts in Linc Energy ((LNC)) decreased to 0.67% from 3.23%

Linc is moving its listing to the Singapore Exchange.

Shorts in David Jones ((DJS)) decreased to 9.31% from 11.55%

David Jones announced an improvement in quarterly sales the week before and while not quite so significant, Myer largely followed suit last week. With consumer sentiment supposedly improving, department store shares have rallied and long-term shorts are being covered.

Shorts in Myer ((MYR)) decreased to 12.28% from 14.48%

See David Jones.

Top 20 Largest Short Positions

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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