The Short Report

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

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 April 7, 2016

Last week saw a rally for the ASX200 towards 5100 fail before the index bottomed out again near 4900. As I write we’re testing 5100 once more.

In last week’s Report I wrote:

“Perhaps worthy of note otherwise is that Fortescue Metals ((FMG)) has continued to wear the shorters down with its substantial cost cutting efforts in the face of the potential for another drop in the iron ore price. Having reached as high as the 9% bracket earlier in the year, Fortescue shorts have steadily slipped away and with the stock now down in the 5% bracket. We may be saying goodbye from the table by next week.”

I was right.

Probably just as well for the shorters, given this week saw another solid production report from Fortescue, featuring further cost cutting, and a substantial bounce in the iron ore price.

I was also right last week not to persist with highlighting movements in resource sector services companies, as they have become tedious. Sure enough, having jumped back to the 8% bracket from the 6% bracket the week before, last week MMA Offshore ((MMA)) fell back into the 6% bracket again.

This Report’s two highlight stocks nevertheless include one miner. Western Areas shorts fell from 11.0% to 7.9% last week following the company’s capital raising, which some shorters would have used to close out positions.

And a couple of weeks ago I noted 2015 high-flyers Blackmores ((BKL)) and Bellamy’s had stuck their heads into the table for the first time, into the 5% bracket. Blackmores has since slipped out again but thanks to Chinese tariff changes, Bellamy’s leapt back up last week to 6.5% shorted.

Another good call, on the strength of this week’s losses in shares of anything dairy.

Weekly short positions as a percentage of market cap:

10%+

MTS    16.6
WOR   14.0
MYR   13.5
PRY    13.0
ORI     11.9
PRY    12.1
FLT     11.4
MND   11.0

Out: WSA

9.0-9.9%

AWE, JBH, AWC, CAB
 
No changes    

8.0-8.9%

WOW

Out: MRM

7.0-7.9%

WSA, GUD, MIN, SEK, OSH, IGO, RFG, SGH

In: WSA, IGO, SGH              Out: IVC

6.0-6.9%

IVC, BEN, MRM, BAL, NWS, GXL, SHV

In: MRM, IVC, BAL, NWS              Out: SGH, IGO, SUL, TFC

5.0-5.9%

TFC, ALQ, CTD, AAC, SUL, GEM, CAR, CDD, AHY, WHC, SGM, PDN, IFL, QUB

In: TFC, SUL              Out: BDR, FMG, CQR

Movers and Shakers

Nickel is one commodity for which many an analyst has been forecasting a rebound ahead, on the assumption loss-making capacity must surely be shut down, and has applied such a forecast into the valuation of nickel miner shares. So far there has not been much joy on that front.

But rebound forecasts remain and hence at least some brokers thought a capital raising by Western Areas ((WSA)) was a good idea to provide funds for the company’s growth projects at a time cash is being burnt on existing production. A capital raising at a discount is a gift for traders holding short positions, offering an easy means of profit-taking. Last week Western Areas shorts fell 3.1 percentage points to 7.9% from 11.0%.

The big news in the market this week has been the tweaking of Chinese tariff rules for online purchases, the result of which is higher import prices for the Chinese for Australian health food and vitamin products, including baby formula. All the stocks on the market which had previously run up hard on soaring Chinese demand for milk products have taken a beating this week.

The Chinese regulation change had been flagged, which is likely why last week shorts in Bellamy’s Australia ((BAL)) jumped from under 5% up to 6.5%.

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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