The Short Report

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

By Rudi Filapek-Vandyck

If the ASX-codes QRE and SSO do not immediately ring a bell, don't worry, I am certain you are far from the only one. But both codes should have investors' attention nevertheless.

The first code refers to an ETF representing resources companies inside the ASX200 index. The second code represents the Small Ordinaries. The fact that both feature prominently in today's table of the 20 most shorted financial assets that trade on the ASX (on the basis of data provided by ASIC) is… interesting, to say the least.

Ben Bernanke is leaving the Federal Reserve to Janet Yellen and with her comes a continuation of ultra-accommodative monetary policy. It's the reason why equities are showing the intention to move into the new calendar year on a  high note. Meanwhile, both QRE and SSO carry around 25% shorts.

One obvious thing to watch is whether the number of shorts is still up there when the world resumes trading in January.

Otherwise, and in line with both observations, the table of most shorted stocks in the Australian share market remains an amalgamation of smaller resources stocks, mining services providers and the usual suspects such as Cochlear ((COH)), Cabcharge ((CAB)), Myer ((MYR)) and Fairfax ((FXJ)).

On a weekly basis, last week saw the remarkable disappearance of virtually all short positions for Wesfarmers ((WES)) and that was before management announced it had found a buyer for parts of its insurance operations. Litigation expert IMF ((IMF)) also saw shorts running for the hills. Note the company has been renamed as Bentham IMF Limited.

Also remarkable is that newly listed electronics retailer Dick Smith ((DSH)) has already made an entrance with a short term build up of short positions representing 2.57% of its total market capitalisation. That'll be one interesting case to keep an eye on too.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	NWSLV	1455464	4018120	36.22
2	QRE	809000	3020814	26.78
3	SSO	199018	800855	24.85
4	COH	8704170	57062020	15.25
5	KCN	22326901	152284777	14.66
6	NWS	3098509	21223350	14.60
7	CAB	16039116	120430683	13.32
8	MND	11786608	92308047	12.77
9	MYR	70161230	585684551	11.98
10	BKN	19919961	169240662	11.77
11	WSA	23117968	196862806	11.74
12	MTS	100336920	880704786	11.39
13	UGL	18380833	166511240	11.04
14	FXJ	257903147	2351955725	10.97
15	PDN	99847800	964118567	10.36
16	TSE	49210939	512457716	9.60
17	ILU	38319558	418700517	9.15
18	LYC	172653592	1961160594	8.80
19	FOXLV	842138	9958155	8.46
20	GUD	6001177	71241319	8.42

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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