The Short Report

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

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 9, 2015.

Last week was another in which the ASX200 zig-zagged wildly as a Greece deal seemed on, then off, then on again, and government intervention finally saw the Chinese stock market crash arrested. The net result was frayed nerves but an ultimately steady market. As I write we’re on our way back towards 5700 again now the Greek deal appears on.

The week before last saw notable increases in short positions in general across the market and last week that trend continued to some extent, although there is a little bit more green evident in our table this time. Stockbrokers Morgans has made note that the average market short position has now risen to its highest point this year, at 3.0%, well above the long-running average of 2.6%, with earnings season due to begin shortly.

Morgans’ analysis finds that increased short positions lead to medium-term stock underperformance, and highlights Cabcharge ((CAB)), JB Hi-Fi ((JBH)), GWA Group ((GWA)), G8 Education ((GEM)), Woolworths ((WOW)) and Ainsworth Gaming ((AGI)) as stocks to watch given recent short increases. Note that Ainsworth does not make into our table, registering shorts of 3.5%.

Movers & Shakers were few last week, and all M&A related. Programmed Maintenance and Vocus both saw short position reductions while Independence Group has leapt into our table from below 5%.
 

Weekly short positions as a percentage of market cap:

10%+

MYR   21.3
MTS    19.4
ORI     14.4
MND   13.5
MRM  13.3
MIN    12.9
WOR   11.7
CAB    10.7
FLT     10.3
AGO   10.1

No changes

9.0-9.9%

FMG, PRY, SXY, UGL, MGX, CDD, DSH
 
In: SXY, MGX           Out: PRG                   

8.0-8.9%

SGH, NWH

In: NWH         Out: SXY, MGX

7.0-7.9%

SEK, SGM, GEM, WOW, ACR, KAR, NXT, PRG, MSB, GWA, GXL, KCN, SUL, AWE, JHC

In: PRG, GWA, KCN, AWE, JHC    Out: NWH, OFX, SWM, VOC

6.0-6.9%

SWM, WHC, JBH, DOW, SGN, IGO, OFX, ILU, AWC

In: SWM, OFX, IGO, AWC              Out: KCN, AWE, JHC, GWA, PBG, ASL

5.0-5.9%

SPO, PBG, NWS, CAR, PDN, NEC, TFC, ARI, STO, ASL, BCI, TEN, ALQ, TRS, BPT

In: PBG, ASL, ALQ, TRS

Movers and Shakers

Services company Programmed Maintenance ((PRG)) and peer Skilled Group ((SKE)) entered into friendly merger talks in May before Programmed made an official cash and scrip offer late last month. Even though the offer was immediately approved by the Skilled board, it still requires shareholder and ACCC approval and thus is not yet a done deal.

The week before last, Programmed shorts rose to 9.1% from 6.8% and last week they fell 1.8ppt to 7.3%, as the PRG stock price continued to fall.  

Negotiations are still underway for the intended merger of fibre specialists Amcom ((AMM)) and Vocus ((VOC)) but last week Vocus dropped right out of our 5% plus table from 7.0% shorted the week before.

In contrast, Independence Group ((IGO)) did not appear in our 5% plus table prior to last week but is suddenly sitting at 6.3% shorted. The gold and nickel miner has made a merger offer to rival Sirius Resources ((SIR)) which would significantly increase gearing.
 

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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