By Chris Shaw

The week commencing May 9 saw a number of changes in short positions on both sides of the ledger and on stocks from a number of different industries.

The largest increase for the week was in CSR ((CSR)), where total positions rose to 6.78% from 4.87% prior to the company's full year profit result. While headline earnings for CSR were better than expected the result was helped by a low tax rate and post result broker opinions on the stock remain mixed.

Shorts in Mirabela Nickel ((MBN)) rose to 4.99% from 3.57% in the week, the increase coming ahead of the announcement of a $120 million capital raising that is hoped will address concerns over the company's liquidity levels as projects such as Santa Rita continue to be developed.

Primary Health Care ((PRY)) saw shorts essentially double in the week from May 9 to 2.8% from 1.44% previously, despite little in the way of news from the company. The most recent update has been the announcement an existing co-payment initiative will be reversed given it flattened growth rates and impacted on referrals.

APN News & Media ((APN)) is undertaking a review of its New Zealand assets but this has not prevented shorts in the stock rising to 3.96% from 2.84% previously, while shorts in Nufarm ((NUF)) increased to 2.06% from less than 1.0% previously as tough operating conditions in markets outside of Australia persist.

While there had been some concerns about slower growth in some of Boral's ((BLD)) Asian markets post site visits to the region, the major news is the current CEO has announced plans to step down. This comes after shorts in the stock rose to 5.61% in the week from May 9 from 4.54% previously.

Among the falls in short positions were Spark Infrastructure ((SKI)), where total positions declined sharply to 2.61% from 5.24% as brokers reiterated the stock is a Buy at current levels given an attractive valuation. The potential acquisition of the Sydney Desalination Plant remains a key issue for the company in the market's view.

Among retail plays both Myer ((MYR)) and David Jones ((DJS)) saw shorts fall in the week from May 9, for Myer to 9.76% from 11.65% previously and for David Jones to 9.5% from 10.32%. This followed a further cut in interest rates by the Reserve Bank of Australia.

Despite the falls in positions retail stocks continue to dominate the top 20 list of short positions, with Myer and Davis Jones joined on the list by the likes of JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Billabong ((BBG)) and The Reject Shop ((TRS)). The top 20 also contains stocks exposed to discretionary spending such as Carsales.com ((CRZ)) and Wotif.com ((WTF)), media plays Fairfax ((FXJ)) and Ten Network ((TEN)), resource stocks Lynas Corporation ((LYC)), Paladin ((PDN)) and Iluka ((ILU)) and others such as Cochlear ((COH)) and Gunns ((GNS)).

While fund flows remain lacklustre, Henderson Group ((HGG)) enjoyed a fall in short positions in the week from May 9, total shorts declining to 1.65 from 2.91% previously. Unlike the increase in CSR's shorts there was a decline in total positions for James Hardie ((JHX)) in the week, the fall to 2.98% from 3.54% previously.

In terms of monthly changes the largest increase has been in Paladin, where shorts for the month from April 16 rose to 8.6% from 5.1%. The view of brokers is cash flows and balance sheet issues will be the main driver of the stock in coming months given upcoming refinancing commitments.

Aside from Myer the largest monthly decline in shorts was in Atlas Iron ((AGO)), where the total fell to 0.5% from 1.59% previously. This change came ahead of an update on development plans for the Horizon 1 project, which suggested lower capex than the market had been expecting.

Elsewhere in the market, RBS Australia notes shorts in Echo Entertainment Group have been building since Crown ((CWN)) acquired a 10% stake in February, increasing by nearly two percentage points in that time.

In RBS's view Crown took the stake to extract required concessions for the Barangaroo development and is not a precursor to a takeover for Echo. As well, the broker expects the Star redevelopment will fall short of guidance in FY14, which implies some downside risk to Echo.

In general terms, RBS notes average short interest across the SAP/ASX200 index is presently at a record high of 2.25%. Shorts have been building in the resources, capital goods, gold and building materials sectors.

Top 20 Largest Short Positions

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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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