The Short Report

Array
(
    [0] => Array
        (
            [0] => ((IIN))
            [1] => ((SGT))
            [2] => ((AGO))
            [3] => ((FMG))
            [4] => ((MIN))
            [5] => ((DJS))
            [6] => ((MYR))
        )

    [1] => Array
        (
            [0] => IIN
            [1] => SGT
            [2] => AGO
            [3] => FMG
            [4] => MIN
            [5] => DJS
            [6] => MYR
        )

)

This story features FORTESCUE LIMITED, and other companies.
For more info SHARE ANALYSIS: FMG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

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.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending July 3, 2014

The lead-in to financial year-end saw substantial ASX 200 volatility, and the move through financial year-end last week saw more of the same. Initially we saw decent selling and then we saw a sharp rebound, all of which means nothing when financial year-ends are involved. With the dust settled, we're still jogging on the spot between 5400 and 5500.

There was not a lot of short activity of note last week, but it will be interesting to see if July brings some squaring up of positions ahead of August's result season. In the meantime, we note that a sizeable pairs trading is building in the telcos — short iiNet, long SingTel — and shorting iron ore juniors remain in fashion, with Atlas Iron sneaking into the double-digit club, just, and Mineral Resources moving up the table.
 

Weekly short positions as a percentage of market cap:

10%+

COH   18.5
MND   13.3
ACR    13.2
JBH     13.0
MTS    12.4
TRS     11.7
PDN    11.7
UGL    11.4
ALQ    10.7
MYR   10.7
NWS   10.5
AGO   10.0

In: AGO

9.00-9.99%

ILU

Out: AGO, SGT

8.00-8.99%

BKN, CAB, IIN, NXT, BLY, MTU

In: IIN             Out: ASL                   

7.00-7.99%

ASL, MIN, WHC, DSH, RRL, SGT, WSA

In: SGT, ASL, MIN  

6.00-6.99%

FMG, TEN, MSB, TSE, NUF, BRU

In: BRU          Out: MIN, SGM, TSE

5.00-5.99%

VET, SGM, FLT, SCP, GWA, HVN, KAR, TSE, LYC, GNC, OZL, WTF

In: SGM, TSE, GNC              Out: BRU

Movers and Shakers

Last week I made “special mention” of iiNet ((IIN)), because while not entering our plus 5% table the stock did see a notable short position increase of 2.2ppt to 4.3% the week prior. Well last week IIN shorts jumped even more, by 4.3ppt to 8.6%. This not only shoots IIN straight into our table, it suddenly makes the stock amongst the twenty most shorted on the ASX.

There has been no news of note out of IIN in the period and its share price dipped and bounced last week only in a pattern that mimicked the index itself. Thus my suggestion of last week likely stands, that as a telco among several on the ASX, including one very big one and one multinational, IIN is attractive to pairs traders.

And what else do we see? Last week that multinational, Singapore Telecom ((SGT)), which we know is a popular pairs trade candidate given its short position bounces around constantly, saw its shorts fall by 1.9ppt to 7.2% from 9.1%. Divide the IIN share price by the SGT share price and we get a ratio of 2.2. Multiply the 1.9ppt fall in SGT shorts by that ratio and we get 4.3ppt, which is exactly the amount by which IIN shorts increased.

So what we most probably saw last week is a reflection of one big pairs trade: short IIN, long SGT. It is a lesson in interpreting the information provided in this Short Report each week: don’t simply assume short positions must imply naked bearishness.

Shorting iron ore stocks has nevertheless become more popular, and while this might imply pairs trades against longs in your major diversifieds it can also imply naked short plays on the assumption of weaker for longer iron ore prices, and subsequent cash flow difficulties for the juniors. Atlas Iron ((AGO)) is now 10.0% shorted, Fortescue Metals ((FMG)) is 6.7%, and last week Mineral Resources ((MIN)) shorts rose 1.3ppt to 7.5% from 6.2%.

Last week saw no short reductions worthy of particular mention other than SingTel, although we might note David Jones ((DJS)) shorts continue to dwindle under the takeover offer, down 1.1ppt last week to 2.7%, while rival Myer ((MYR)) sits among the most shorted at 10.7%.

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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