Tag Archives: Leisure & Tourism

article 3 months old

Weekly Broker Wrap: How Goes The Consumer-Led Recovery?

-Travel sector accelerating
-David Jones turnaround
-Coles' lead undermined
-Metcash needs new strategy
 

By Eva Brocklehurst

Bell Potter expects a further acceleration this year in Australians holidaying overseas. This is the strongest growth segment for Australian short-term departures, as a snapshot from the Australian Bureau of Statistics on overseas arrivals and departures shows. The analysts believe international travel rates, particularly for holidays, will be helped along by improving household confidence as a result of the positive wealth effect from property and equity markets. The analysts note that international travel bottomed in March 2013 at a time when a weak domestic economy undermined household consumption. The broker's top picks in the travel sector are Flight Centre ((FLT)) and Corporate Travel Management ((CTD)).

Morgan Stanley prefers discretionary consumer stocks to the staples. Driving this view is a better retail environment, as the consumer benefits from low interest rates and the improving housing market. The lower Australian dollar is also slowing online leakage and improving tourism spending. The broker is avoiding exposure to supermarkets, as the publicly-stated store roll-out plans seem very bullish. Morgan Stanley points out that industry space growth will be 3.5% per annum over the next three years, well ahead of population growth of 1.6%.

The broker thinks David Jones ((DJS)) has a turnaround story in the making and a possible merger with Myer ((MYR)) provides potential upside. Super Retail Group ((SUL)) is considered a premium business, given market share gain and margin potential, while Flight Centre has multiple drivers for double digit earnings growth. David Jones, Super Retail and Flight Centre are key consumer picks for the broker. Morgan Stanley is Underweight Coca-Cola Amatil ((CCL)) as earnings risks remain with a slowing in carbonated soft drink sales. On the point of earnings risk the broker is Equal Weight Treasury Wine Estate ((TWE)), but does think the asset backing will provide support.

Commonwealth Bank analysts have always considered targeting residential construction to transition growth as mining capex wanes is smart policy. It's relatively easy, the analysts assert - you just cut interest rates and wait. It's also smart because there is a genuine demand for new housing. There are some factors that differentiate the story this time around, adding intensity. Competition with mining and infrastructure for skilled labour and materials has limited the supply of new dwellings so the demand for housing has become quite urgent. The focus on skilled migrants who are cashed up tends to add to housing demand more quickly. Education visas are also lifting, and these students need somewhere to live, even if not settling permanently. Finally, real estate investment is attracting, anecdotally at least, a high level of interest from foreign investors.

Consensus earnings for consumer stocks were downgraded for around 50% of the companies that reported in the recent earnings season, Goldman Sachs notes, and momentum will need to accelerate for most in the second half in order to meet estimates for FY14. Food and beverage companies and the discount department stores were materially downgraded. The broker notes major supermarkets will continue to focus on value and seem to be winning at the expense of wholesalers and consumer product companies. Goods, apparel and department stores remain cautious. The most upbeat are consumer electrical businesses.

Goldman is selective and retains Buy ratings for Wesfarmers ((WES)) and Harvey Norman ((HVN)). Woolworths ((WOW)) is rated Sell as it is reliant on growth in trading areas and gross profit margin expansion. Goldman notes online sales are driving a disproportionate share of like-for-like sales for those that disclose the data. Super Retail and Specialty Fashion ((SFH)) are two which are showing a welcome ramping up of online, IT and supply chain investment.

UBS observes that Coles' momentum is on the wane. From the broker's latest supermarket tracker survey, the analysts explored issues in supermarket operations. For Coles the scores were weaker across marketing, creating in-store theatre and pricing strategy compared to the prior surveys. Coles had been leading in innovation, price and in-store initiatives but this survey finds both Woolworths and Aldi are making inroads. Woolworths' scores improved across most key measures in the survey. The survey signalled performance is converging and differentiation is less visible. Woolworths is the broker's preferred exposure in the Australian grocery space.

Food and grocery wholesaler/distributor Metcash ((MTS)) is losing market share and if the company is to turn around the earnings decline, it must engage better with the retailers in the network, according to CLSA. The independent supermarkets - the IGA brand - are critical and, if Metcash is to lead a resurgence in the independents it must confront improvements to the in-store experience, evolving a differentiated branding structure, easing the challenges for suppliers and addressing the poor private label offering - to name a few of the items on CLSA's agenda for change. Enabling online shopping would also be a bonus.

The broker does not believe tinkering at the edges will be enough. Metcash spent several years hoping price deflation was a cyclical issue that would be alleviated by a fall in the Australian dollar, CLSA observes. Aldi's increasing presence and continuing conservative consumer attitudes have dashed that hope. CLSA believes, if the company implements the required strategy, the stock could reach $4.50 on a three-year view, if Metcash is to re-rates back to a 20% discount to Woolworths. Right now, CLSA has a Sell rating and $2.80 target.
 

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article 3 months old

Wotif A Perfect Storm Arrived?

-Market share loss accelerates
-Increased marketing investment needed
-Seen struggling for some years
 

By Eva Brocklehurst

Online accommodation booking service,Wotif.com ((WTF)), is finding some aggressive competitors have their sights firmly set on Australasia. The company has downgraded profit expectations, having been hit by a perfect storm of increased competition, lower transaction volumes and higher costs. Wotif.com was generating more than one third of all online accommodation sales in Australia. That may not be the case in future.

Morgan Stanley has been bearish on the value of the company's position relative to the product superiority, global networks and marketing strength of global online travel agents. This view is seen supported by the fact that Booking.com chose Australia as the first market outside the US to roll out its offline marketing campaign and, according to Morgan Stanley, this company is prepared to spend. Lower sales, higher costs and competitors with scale make up an unattractive investment case for Wotif, in Morgan Stanley's opinion, and the Underweight rating stays firmly in place. What could change this view? Cyclical shifts towards domestic holidays and short breaks, improved conditions in Asian markets and price rises.

It's the same case for Citi. The broker notes the company's response has been to ramp up marketing spending but then there's been a jump in costs, largely attributed to increased IT development spending. Annualising the fist half wage guidance adds $7m to the company's operating costs and this falls straight to the bottom line. None of this is expected to reverse any time soon. If anything, Citi thinks marketing spending will have to increase further and compares the fact that Expedia spends 40% of revenue on marketing and Booking.com spends 30% with Wotif's 19% expenditure, on FY14 estimates.

Citi has a Sell rating, seeing a high probability of further market share loss. Macquarie notes room night declines are a major concern. While this reflects the soft market conditions, the broker suspects leakage to Hotels Direct remains the key issue for the company's business model. Initiatives are underway to arrest the declines but, with the exception of commission rate increases, none appear likely to make a material difference, in the broker's view.

Earnings margins are expected to fall to 45% from 54% in JP Morgan's estimates, and may go further. Wotif is trading at half the 2014 market cap-weighted, average price earnings of its travel agent peers. JP Morgan considers the company is structurally challenged. Wotif has attributed some of the downgrade to first half profit forecasts - expected to be around 19% below the prior corresponding half - to a soft market. Domestic visitor nights decreased 3.7% in the September quarter and the company thinks this has worsened in the December quarter. JP Morgan believes there could still be value in the domestic accommodation market, with revenue growth of around 5% and a step down in margins, but it's the competition that's taken a toll and this can only be met with more marketing.

The fact that market share loss is accelerating and marketing costs are rising makes CIMB concerned about the longer term growth profile. The broker finds upside potential exists from incremental revenue streams but a positive stance is premised on the company retaining market share. This hasn't happened. Hence the broker has downgraded to a Hold rating. Only some evidence that conditions have stabilised or that new revenue streams are offsetting market share losses, would make CIMB feel any differently. Deutsche Bank has been encouraged by the strong growth in the flights segments and sees the risk-reward profile as balanced. Having said that, the broker also considers that, until there is a volume recovery in the core business, it's hard to be much more positive.

The company is going to struggle to deliver any earnings growth over the next three years, according to BA-Merrill Lynch. The consumer backdrop is tough and Australians were substituting domestic travel for overseas travel while market share erosion has hampered top line growth. Domestic transaction value is down 5% in the first half against being down 1% in the second half. The outlook is fragile and the broker notes management was unable to provide guidance. Merrills sees a structural decline towards 40% margins, given the need to invest in sales and marketing to shore up market share against the overseas competitors. Moreover, the broker suspects the company was under-investing in marketing previously, over-earning on earnings margins of 50%. The only supporting factor, in Merrills' view, is the balance sheet retains a net cash position.

On the FNArena database the stock has no Buy rating. There are five Hold and three Sell. The consensus price target has fallen to $3.45 from $4.80 previously, but this could decline further as more broker reviews are received. The target is currently showing 30% upside to the last share price. The dividend yield on FY14 earnings forecasts is 7.7% and on FY15 it's 8.4%.

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article 3 months old

Flight Centre Cruising At Altitude

-Valuation compelling for Morgan Stanley
-Aust dollar correlation doesn't fit
-Capitalising on shop and online
-No signs of lower base rate commissions
 

By Eva Brocklehurst

Travel services operator Flight Centre ((FLT)) has established a position in the top 100 Australian stocks, yet it is one of the most shorted stocks in the market, Macquarie notes (Number five on ASX top shorted list; see FNArena's Short Report). The company continues to demonstrate earnings resilience, despite fears that shop front travel agency business is dying. Flight Centre is still making inroads into offshore businesses and has a network of around 2,300 shops and 36 brands.

Morgan Stanley has expressed a view that the share price will rise relative to the country index over the next 60 days. This is because the stock has weakened recently, making the short term valuation that much more compelling. Along with a strong FY13 result the broker expects a positive outlook and for the stock to outperform during August's earnings season. Other brokers reassessed the stock earlier in July when Flight Centre made the second upgrade in as many months to profit guidance for FY13. Australian consumer growth is seen offsetting slowing corporate growth, while the company confirmed the market share gains being made in the UK. Flight Centre USA continues to improve and corporates now represent 40% of the business. All countries in which the company operates are expected to make positive earnings contributions.

Macquarie does expect a more sluggish FY14 because of the slowdown in Australian demand but with net cash and substantial franking credits, investors are seen buying into the strong longer-term travel demand without taking on airline pricing risk or capital intensity. There is also the potential for either an increased dividend or accelerated growth though bolt-on acquisitions.

One thing Macquarie has observed is that the stock is NOT negatively correlated to the Australian dollar. There is little statistical correlation between the share price and strength of the local currency, other than during the GFC. Travel patterns are driven more by airline capacity and falling real costs of travel. Even with a falling Australian dollar the cost of an international holiday can still be cheaper than domestic travel in terms of food and accommodation. Moreover, Flight Centre is not just about leisure. A third of the total transaction value (TTV) stems from a corporate client base and that has grown around 23% over the past three years, a much faster rate than the leisure offering. Still, there is a risk that a continually falling Australia dollar could lead to a shift in Australian passenger travel patterns back towards domestic rather than international travel and this, on balance, could be a negative for Flight Centre.

Another interesting figure in the Australian dollar story is the fact that Flight Centre's ticketing for international travel is over 70% and this proportion did not materially changed despite the strengthening of the Australian dollar against the US dollar from FY09 to FY12. Macquarie's reasoning is that the company's wholesale strength meant it continued to provide attractive domestic holidays for those looking to stay close to home. What would likely be of greater concern to the broker, with the falling value of the Australian dollar on the trade weighted index, is if airlines started to restrict international capacity (reversing what they did when the Australian dollar was strengthening). This would slow international growth and make for higher airfares. There is no sign this is happening, as yet.

Macquarie observes Flight Centre is holding up well against online travel agents and since selling of product actively commenced online in 2011 the company's model is now a blend that capitalises on the strengths of each channel. Physical infrastructure provides a major point of differentiation with pure online offerings. Travel agents are still an integral distribution channel for the airlines and Flight Centre has a market share in Australia at around 38% of travel agency spending.

Airlines and hotels are bypassing intermediaries such as Flight Centre and transacting directly with consumers and Macquarie suspects that over time this could rise, improving airline bargaining power and ability to negotiate down existing base commissions. In Flight Centre's favour is its size and scale in the Australian market and, as yet, there are no signs of lower base rate commissions and lower margins, or TTV per store decreasing in either the UK or Australia.

Any other concerns? Citi has observed that total returns are running at just 2% and, while further positive earnings surprises may be in store in FY14, this is factored into the share price. The broker prefers a Neutral rating. All the good news is now factored into the share price for Deutsche Bank as well and UBS has a similar Neutral theme. Macquarie acknowledges that, as with any company in the travel industry, fluctuations in demand can be caused by natural disasters, disease outbreaks such as SARS, terrorism and the economic cycle. Demand risks can have a materially negative effect on earnings, as evidenced in FY09 when earnings fell to $88 million from $200m the prior year. Hence, Flight Centre maintains a fairly sizeable cash balance as a precaution against such risk which could have a negative near-term impact on bookings.

Macquarie has chosen to upgrade the stock to Outperform from Neutral and joins CIMB, JP Morgan and BA-Merrill Lynch with similar ratings on the FNArena database. All up, there are five Buy ratings and three Hold. The price targets range from $38.70, jointly held by UBS and Citi to Macquarie's $53.16. The consensus target price of $43.62 suggests 1.1% downside to the current share price. The stock is tightly held. Five investors have 48% of the share registry with CEO and founder Graham Turner holding 15% and fellow founder Bill James 13%. The business ownership scheme is also quite unusual. Shop managers invest in unsecured notes which pay floating returns depending on the profitability of their businesses.
 

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article 3 months old

Weekly Broker Wrap: How Some Oz Stocks Fare In Low Growth Environment

-Building materials get more lift from US
-Modest residential recovery this year
-NBN scope for TPM and IIN
-Bank dividends should hold up
-Lower $A and leisure stocks
 

By Eva Brocklehurst

June was characterised by a weakening job market with Australia's unemployment rate pushing to near 4-year highs of 5.7%. This should put downward pressure on inflation and, for UBS, cements a 25 basis points cut to the cash rate when the Reserve Bank next meets in August. This is of course, unless the June quarter CPI throws a spanner in the works. Of interest, by state, employment growth was faster in NSW and Victoria improved, while Western Australia has slowed sharply and Queensland was soft.

Meanwhile, the domestic building materials sector may have outperformed in the week to July 11 but Goldman Sachs finds it was primarily US-exposed stocks such as Boral ((BLD)) and James Hardie ((JHX)) that gained the advantage. Adelaide Brighton ((ABC)) and CSR ((CSR)) were more modest performers. Domestic dwelling starts appear to be recovering slower than anticipated, although the volatile multi-unit component has amplified the month-on-month moves. Building approvals for residences declined 1.1% in May and are down 3.2% for the year to May whereas the single family dwelling, which was up 2.8% on the prior month, is up 13.1% in the year to May.

The market recovery is modest but low interest rates are continuing to support home buyer optimism while auction clearance rates are now at a 3-year high. Despite this, with an expected rise in unemployment, BA-Merrill Lynch believes a more positive outlook for the domestic economy is needed to support a stronger residential recovery. The broker leaves forecasts for the major developers unchanged but expects the apartment sector to sustain most of the lift in approvals. Top picks for the sector are Mirvac ((MGR)) and Lend Lease ((LLC)) in large caps and Peet ((PPC)) as a pure residential exposure.

Despite the accommodative interest rates, recovery in housing has been quite tentative. BA-Merrill Lynch 's models suggest current house prices are around 7.6% below fair value and a lack of confidence may be restricting sharp increases in prices. Labour market uncertainty near term suggests price rises, and the general level of activity, will stay subdued throughout 2013.

Australia's National Broadband Network roll-out will expose players to narrower fixed line re-seller margins. This is a threat to TPG Telecom's ((TPM)) growth upside in JP Morgan's opinion. While expecting TPG can increase market share in the NBN world, the lower capital intensity and open architecture of the NBN suggests it will attract new entrants. TPG has limited ability to re-base costs as margins erode because it is already quite lean. The problem is that TPG lacks a content proposition which might protect margins. The company's recent spectrum purchase does raise the possibility that a mobile proposition will form part of its response to margin compression in fixed line. The concern is that, to be meaningful, this would require a link up with Vodafone Hutchison ((HTA)) and this is a problematic scenario, in JP Morgan's view.

JP Morgan expects the NBN will provide scope to drive broadband penetration and open up non-metro markets to greater competition. Overall, the size of the addressable market for both TPG and small telco competitor iiNet ((IIN)) should increase by 70% by 2020.

The broker has remodeled iiNet in the face of this re-basing of margins on the NBN and downgraded the stock to Underweight. Where iiNet has an advantage relative to competitors is a higher proportion of low-margin off-net customers compared with TPG. The Coalition's plans for the NBN, should it win government, are more negative for iiNet, in JP Morgan's view. This is because the NBN would roll out faster and margin assumptions put a net negative impact on iiNet. The broker has acknowledged the relative stability of iiNet's earnings in the near term and, along with a lower bond yield assumption, this offsets some of the NBN margin erosion. A lower discount rate, nonetheless, does not save the day and the broker's target at $4.41 is well shy of a share price that's had a strong run recently.

The banking sector may be slowing down. Citi forecasts the sector delivering earnings growth around 4% in FY14/15. On the broker's modelling, neutralising of the divided reinvestment plan could cease for two years but no bank would be forced to cut dividends, although National Australia Bank ((NAB)) would come closest. This reflects the much higher capital ratios that banks now have and the much lower leverage in corporate Australia compared with past slowdowns. The models show Commonwealth Bank ((CBA)) fares the best and NAB the worst through the slowing scenario. This reflects higher return on equity and better credit quality at CBA. With no threat to the dividend pay-outs from the slowing scenario, the sector's 5.9% prospective dividend yield remains compelling value for Citi. Prospective yields still maintain a 200 basis point premium to 10-year bonds and a 200 basis point premium to term deposit rates.

Investor appetite for leisure stocks should also hold up in the wake of a lower Australian dollar. Village Roadshow ((VRL)) and Ardent Leisure ((AAD)) have outperformed the ASX Small Industrials by 11% and 12% respectively since mid May. Deutsche Bank notes the lower Australian dollar will drive domestic and international inbound tourism and Ardent benefits further from the US dollar earnings of Main Event. The broker's preference is for Village, as it is trading at a 20% discount to Ardent with earnings upside. Deutsche Bank admits Ardent's yield and US dollar earnings are still attractive. It's just that this stock is on the expensive side, trading on a 2014 estimated enterprise value/earnings of 14.1 times. Hence Deutsche Bank has a Buy rating for Village and a Hold rating for Ardent.
 

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article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

The scoreboard:

-          The ASX200 closed on its lows to close up 8 points or 0.2% to 4583

-          The AUD held strong overnight gains, currently reading 1.0528 vs the USD

-          Total volume was strong at over $5B

Shares on the ASX200 continued to climb today, pushing through 4600 to fresh 16-month highs in early trade before closing close on its lows after the defensives dragged the broader index lower. The market opened with conviction across all sectors before a report that the lunatics in North Korea had launched a ballistic missile toward Japan swirled through markets and took the shine off the early move. Bullish economic data out of Germany had the DAX hitting its highest level since early 2008 and helped other European markets and Wall Street push out healthy gains.

A big news story for the morning was the Aussie dollar jumping above 1.05 against the greenback as confidence of a rebounding China got traders confident about prospects for Australian equities in 2013. Improving sentiment in the global growth story pushed the AUD to near three-month highs, despite the negative domestic outlook. The main driver offshore was the German business sentiment index which rebounded strongly to a seven-month high. German’s are traditionally rather conservative, perhaps overly pessimistic and if they seeing bullish signals then they must be seeing something good right? Well that was the way the market interpreted the news at least which bolstered Euro markets and flowed through to strong buying of the AUD which is widely known as a good barometer for confidence surrounding global growth.

Cyclicals again stole the show as the risk-on trade gathered even more momentum. BHP Billiton ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)) and Woodside Petroleum ((WPL)) all rose between 1-2%.

Some strength in BHP and WPL can be attributed to BHP’s sale of its stake in the proposed Browse gas-export project in Australia to PetroChina. Browse operator and major stakeholder WPL jumped on the price implications of the deal.  

High-yielding defensive stocks saw more profit taking with Telstra ((TLS)) down 1.4%, ANZ Bank ((ANZ)) down 0.8%.

Everyone is taking notice of our market’s breakout and confident push through the 4550 resistance level to new 16-month highs. Markets generally appear like they will push higher as the Fiscal cliff saga seems to have eroded to a mound and positivity surrounding a rebounding China has investors feeling good.

The big question is whether the move into cyclicals will be from a defined switch out of the defensives OR fresh cash out of term deposits due to a lower interest rate environment. A best guess would be a mix of both.

The reaction of currencies and precious metals will be closely watched ahead of tonight FOMC decision regarding expansion of the current QE plan. Any expansion of QE will likely see gold move higher as has been seen in recent years.

DOW futures are pointing to a negative opening, currently down 11 points 
 

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

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article 3 months old

Oz Consumers Wary But Keen On Property

By Greg Peel

Mortgage broker Mortgage Choice has today released the results of its annual Consumer Sentiment Survey. In short, Australian consumers are not feeling confident going into 2013 and budgets will again be reined in, however the RBA's easing cycle is firing up renewed interest in property, from both owner/occupiers or, more emphatically, potential investors.

One might argue that the global economic scene has been uncertain, volatile and very worrisome since things started to go awry in late 2007. However the stimulus-fuelled global stock market rally of 2009 provided some hope that the GFC would prove a devastating but rapidly resolvable blip. But as we entered 2010, Greece reared its ugly head and set off the dominoes that became the European financial crisis. By 2011, the US debt situation had grabbed the spotlight and the fiscal cliff” of 2012-13 was created. In between, a slowing China has added to the anxiety.

In 2010, 75% of respondents to the Mortgage Choice sentiment survey were fairly or very confident with regard to the Australian economy. By 2011, that number had plunged to 56%. The 2012 survey shows a further shrinkage down to 51%. Looking at it the other way, only 12.5% of respondents were “worried” about the state of the economy in 2010, 24% became worried by 2011, and 27% are worried today.

What is worrying Australian consumers most about 2012, and thus 2013 ahead? 

One might feel safe in assuming the state of the global economy would be the overriding fear, but only 11% of respondents cited this factor as their greatest concern – the second highest response. Equal second on 11% each are job security and the federal government's economic management. The greatest concern heading into 2013, according to 22% of respondents, is the rising cost of utility bills.

There will be fewer garish Christmas light displays around the suburbs this year, one might presume.

Australians have already spent the post-GFC years reducing household debt, as any retailer will tell you. Savings have also risen, with term deposits a popular choice over risk assets, but once again Australian consumers (55%) find themselves dipping into savings to make up for the hole left in the household budget by the sudden, steep rise in utility costs. This has left many (38%) unsatisfied with their level of savings, driving a need (30%) to save money simply to cover day to day living expenses and also to protect (36%) against any future economic disasters.

More than half (52%) of those surveyed intend to review their financial situation in 2013, looking to reassess the household budget, reduce unnecessary spending and review the home loan.

At this stage it doesn't look like being much of an indulgent Christmas or Christmas holiday break in Australia. Consumer discretionary and tourism-related sectors beware. The consumer staple sector may also need to load up on smaller turkeys this year.

It is clear the RBA rate cut cycle which began in November last year has not provided Australians with a renewed incentive to spend at the consumer level. Utility costs and general uncertainty have seen to that. But that doesn't mean the 1.25% of rate cuts provided up to the survey (plus another 0.25% this week) hasn't encouraged Australians to think differently on the investment front. Close to a quarter of respondents (23%) claim they will be more likely to buy property in 2013 if rates keep falling, while over a third (39%) intend to buy property in the next two years. Of those prospective buyers, 25% will be moving to a next home, 30% will be buying a first home and a “staggering”, to quote Mortgage Choice, 45% will be property investors.

Some 34% believe property prices will remain stable over 2013 and 34% believe they will rise. Only 16% believe they will fall. 

On those numbers, one might assume a level of self-fulfillment will ensure property prices cannot fall (on average). A tide of 68% believing property prices will at worst remain stable and 45% looking to invest suggests a demand-push upward trend.

The trend evident among FNArena's two-monthly survey respondents – a cohort one might consider to specifically be “investors” as compared to the wider cohort of the Mortgage Choice catchment – does not contradict the Mortgage Choice findings. The November survey showed a 1% increase over four months in portfolio allocations to bricks-and-mortar property to 20% and, widening the “risk asset” spectrum, a 2% increase in equity (including REIT) allocation to 45%.

With cash quietly losing its yield appeal, the flipside is a 1% reduction in cash allocation over four months to 21% (which represents a 3% reduction over two months). Cash has ever so quietly begun to “move off the sidelines”.
 

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article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

The XJO put in a solid day of trade following positive leads from the Street overnight as Cliff talks once again stole the show. Both Obama and House of Reps. speaker Boehner said they were optimistic that a deal could be struck over the budgetary issue. The XJO finished the day on its highs up 30 points or 0.7% to points on better than recent volume of $3.5B despite trailing the futures by 10 points for most of the day.

You must now have observed that this is a nightly saga where equity markets around the around the world are totally dictated to by mere words from individual US politicians. This type of weak headline-driven price action makes trading markets incredibly difficult so for those traders out there trying to make sense of things, don’t be too hard on yourself because this is as tough as it gets.

Take some solace from the fact Goldman Sachs chief Lloyd Blankfein described Obama’s fiscal cliff plan as “very credible”, we all know brokers have a vested interest in injecting confidence into markets but this is actually a pretty important development. Both because it means Obama actually has a plan and also because it shows Republican support for the Democrat’s plan. Obama taking the stage to confirm they were actively working on a ‘plan’ may be the next step to putting the issue to bed. Don’t expect the volatility to end before there a signatures on paper though.

On the data front, Aussie Q3 Capital Investment data showed capex had risen by 2.8% q/q (in real terms) in Q3 ahead of expectations of a 2% rise. More importantly total nominal capex in 12/13 was revised 3% lower from the previous estimate. The peak of the mining capex cycle is beginning to bite, BHP Billiton ((BHP)) chief said it was even behind us at the BHP AGM today, so don’t be surprised to see this number decline going forward. Anyone care to bet on an interest rate cut next Tuesday?

Mining services took a beating today following NRW Holdings’ ((NWH)) profit downgrade and sell off yesterday which has now fallen 28.9% in two days. Mining consumables (far more resilient than pure services and capital equipment suppliers) company Bradken ((BKN)) got sold down 7.1% to due to worsening sentiment in the sector. Other players in the space: Cardno ((CDD)), Macmahon Holdings ((MAH)), Ausdrill ((ASL)) all ended the day lower.

Otherwise it was a strong day for across the board with stocks in the defensive and cyclical sectors both ending the day well.

US futures closed the overnight session up 80 odd points then reopened intraday down 5 or so points. They are now tracking up nicely and are currently reading in the green up 18 points
 
(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

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article 3 months old

Weekly Broker Wrap: RBA, Banks And Swan’s Surplus Challenge

By Eva Brocklehurst

As the Reserve Bank board meets on October 2 for its monthly mulling over the forces in the economy, and ponders whether to carve off some more points from its official interest rates (and a number of economists suggest they will), the markets are doing their best to muddy the picture.

The overriding emphasis has been on mining, and coal and iron ore prices. It is now a case of, well, the peak has passed, where will any gap/opportunity come in the country's continued wealth creation?

A lot has been said about other sectors and how they struggle in the midst of all this focus on mining investment. Do they stand ready to pick up any opportunity? Can they take advantage of lower interest rates? According to economists at Bank of America Merrill Lynch, it might be not be all gloomy in the commodity country for its tourist industry, fraught for several years by the high Australian dollar which has made tourist arrivals slump.

The hallmark was Cyclone Yasi's devastating impact a couple of years ago on its psyche. After all, Far North Queensland, with its large economic dependence on tourism felt the financial devastation. However, the analysts are now mentioning ...tailwinds!

Merrills says, despite soft consumer confidence and challenging market conditions, "we are seeing potential tailwinds emerging in the domestic travel market". Domestic airfare prices are expected to hit new levels of affordability and drive an increase in passenger numbers (expected to be up 6-7%). So, they suggest a pairs trade strategy - Buy on Flight Centre ((FLT)) and go Underperform on Wotif.com ((WTF)).

The airlines team is forecasting domestic yield compression of 2.5% for Qantas in FY13 as a result of capacity additions and subsequent discounting. Nevertheless, declining yields are positive for the domestic travel industry and act as a proxy for airfare prices. Merrills continues to prefer Flight Centre as FY12 trading comments were supportive for growth in FY13. FLT remains a heavily shorted stock, however days short has decreased and the broker continues to view the short as an overplayed theme. As for Wotif.com, the analysts see some lift in the domestic travel market but are cautious on WTF given the structural challenges remain heightened and this translates into a muted EBIT (earnings before interest and taxes) growth forecast of 4.6% in FY13.

Another sector that has fallen hard is media and the upcoming AGM season (Oct/Nov) will likely tell the tale of woe. JP Morgan expects consensus downgrades across traditional media names.

There are several reasons for this including a subdued advertising market start, a lack of visibility on FY13 revenue as well as structural challenges. JPM analysis has highlighted FY13 EBITDA (earnings before interest, taxes, depreciation and amortisation) downside risk for Ten Network (-21%), Fairfax (-18%), Southern Cross Media (-13%), Seek (-9%) & Seven West (-8%).

So, stresses and strains in several sectors but a bit of hope in one that has been terribly stressed? Yes, it's muddy waters.

Lastly, what about the role of the banks?

According to UBS banking analysts, one thing that all the bank boards are likely to acknowledge is, that in tight times and with higher risks of a blow-out in defaults, cutting the ordinary dividend should be avoided wherever possible. The sector holds a big key to sentiment as a huge number of the retail shareholders are reliant on dividends as a form of income. UBS asks the question as to what bad debts could each bank sustain without needing to cut payouts.

The stockbroker notes that, with a large corporate default, banks are more likely to look through the issue than if the overall debt defaulting is a result of a broader economic slowdown. It seems, given the nature of this economic downturn, that banks have less ability to look through a deterioration in asset quality than in other cycles.

Then, a hint of a wish list.

UBS says the banks are now strong generators of free cash flow and, given the franking credit regime in Australia and shareholder desire for yield investments, there is a significant incentive for the boards to return much of this to shareholders in the form of higher dividend payout ratios. However, the question must still be asked whether this is a prudent approach in the current environment? Bank earnings are very highly leveraged to changes in asset quality and, while this is relatively benign, the higher levels of non-performing loans are not dissipating quickly.

Deputy Prime Minister Wayne Swan has a big task at hand for his mid-year economic report, which is likely to be delivered in the next six weeks. According to Goldman Sachs there are big challenges for the commitment to a Commonwealth budget surplus. Indeed, the economists flagged the RBA's Financial Stability Review, recently released, which noted increased financial system vulnerability, but continued to characterise the ongoing consolidation in corporate and household balance sheets as desirable.

This means less money is coming into the government's coffers.

Goldman says the bigger issue since mid-year is the degree to which the adverse, and unusual, falling bulk commodity prices and strong Australian dollar, both have undermined the outlook. The economists have tested the sensitivity of Australian tax revenues to a terms of trade-driven negative income shock of around 2% of nominal GDP and find there is around $20bn downside risk to forecast Commonwealth tax revenues over FY13 and FY14 - mostly via a weaker company tax take.

In contrast, a commodity price shock presents a comparatively modest downside risk to state government goods and services tax receipts, with a much larger threat posed via the outlook for mining royalties. Moreover, the economists flag that absent new efforts to claw back revenue and restrain spending, fiscal projections will fall materially short of budget. However, sufficient revenue and mitigating expenditure cuts should be found to preserve existing sovereign credit ratings.. phew.

Yes, a hard task wading through muddy water.

 
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article 3 months old

The Short Report

By Andrew Nelson

Significant increases in short positions outweighed significant decreases for the week to 29 August, while the total number of short position increases also outpaced decreases. A total of 3 stocks experienced a short position increase of more than 1% over the period, while only one stock enjoyed a decrease greater than 1%.

Allied Gold ((ALD)) finds itself on top of the weekly short increase leader board this week, with total shorts increasing by 1.9 percentage points from 0.91% to 2.81% over the course of the week. Shareholders approved the merger with St Barbara Mines ((SBM)) a few weeks back and High Court approval followed on August 29th.

No prizes for guessing who’s next on the short increase list. Shorts in St Barbara increased by 1.83 percentage points from 1.77% to 3.60% over the period. The stock is Neutrally regarded by brokers in the FNArena database, with a Buy, Hold and Sell call recorded. The company’s in-line FY result was reviewed by all three brokers on the 24th, with Macquarie skeptical about the risk/reward profile of the merger.

JB Hi-Fi ((JBH)) increased its lead at the number one position on the leader board, with short positions rising 1.36 percentage points from 18.91% to 20.27% over the course of the weekly period. Broker’s reviewed the company’s broadly in-line FY report on the 14th of August, although a good number remain skeptical about the prospects for earnings improvement. The stock is negatively regarded by brokers in the FNArena database, with 2 Buys, 3 Neutrals and 3 Sell calls.

As mentioned, only one stock enjoyed a 1%+ decrease in short positions over the weekly period. Shorts in Australian Infrastructure ((AIX)) pulled back 1.26 percentage points from 3.05% to 2.17%. The FY result posted during the period was viewed positively for the most part, although news that AIX had received a $2bn offer from the Future Fund for all of the group's assets saw both JP Morgan and UBS downgrade the stock to Sell and Neutral respectively on the basis of a good offer price.

Regular Top 10 inclusion Cochlear ((COH)) booked a slightly less significant decrease in its short position over the period. Shorts in the stock pulled back by 0.68 percentage points from 10.61% to 9.93% despite no news or broker commentary over the period. The stock remains negatively reviewed by brokers in the FNArena database, with 4 Neutrals and 4 Sells.

The weekly Top 20 list was little changed, with one stock leaving the list and one stock joining. SingTel ((SGT)) came off the Top 20, giving its number 18 position to Specialty Fashion ((SFH)).

Discretionary retail plays continued to dominate the top 20 most shorted list, with investors and brokers remaining concerned about the uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi, Flight Centre ((FLT)), The Reject Shop ((TRS)), Harvey Norman ((HVN)) and Myer ((MYR)), which all remain in the top 10.

With the slowdown in China continuing to stifle commodity prices, short sellers also continue to focus on resources and resources services stocks.  Lynas ((LYC)) and Iluka ((ILU)) remain in the Top 10, while numbers 11-20 are dominated by resource plays of various description.

Looking at month on month numbers, stocks on the increase and decrease were fairly well balanced, although the magnitude of the decreases were somewhat more significant than the increases. Fifteen stocks saw short position improve by more than 1 percentage point, while sixteen increased by more than 1 percentage points.

Positively regarded Seven West Media ((SWM)) booked the biggest monthly improvement, with its overall short position dropping 3.61 percentage points from 5.34% to just 1.73%. The move is mostly likely due to a well received FY effort put out over the period.

RBS thinks the stock is cheap on a FY13 PER of 7.3x and especially given a dividend yield of 7.5%. The broker notes TV earnings remain solid and it believes the company should easily be able to maintain a 39-40% market share, with earnings upside possible if Seven can take greater advantage of Ten’s ((TEN)) fall in the ratings.

Myer also featured prominently on the monthly decliners list, with shorts positions coming off 2.75 percentage points from 9.98% shorted down to 7.23%. The stock is Neutrally regarded by brokers in the FNArena universe.

Not to be left out, fellow retailer The Reject Shop also posted a solid monthly improvement, with shorts slipping 2.33 percentage points from 10.2% to 7.87% shorted. Credit Suisse upgraded the stock to Neutral over the period post a fairly well received FY report.

The biggest monthly increase in overall short position was booked by Silver Lake Resources ((SLR)). Opinions remained mixed on the Integra ((IGR)) acquisition leading into the company’s FY result, which occurred just after the weekly period we are reviewing. JP Morgan thought said FY result was solid.

Whitehaven Coal ((WHC)) also saw a significant increase in its overall short position, which was up 2.96 percentage points from 1.2% to 4.16%. The company booked an in-line FY profit result over the period, but investors were likely troubled by news that Nathan Tinkler had withdrawn its takeover offer. The stock still rates all Buys in the FNArena database.

Looking at the week to 3 September, analysts from RBS note short positioning across the market has reached a record high average of 2.4%. Small to mid-cap resource stocks like Fortescue ((FMG)), Alumina ((AWC)) and Kingsgate Consolidated ((KCN)) led the way, with short positions sitting at 7.2%, 9% and 4.8% respectively. The broker also points out that short position in gold and iron ore stocks have doubled in the past six months.
 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 20579042 98850643 20.82
2 FLT 13272368 100055135 13.27
3 FXJ 264192329 2351955725 11.23
4 TRS 2906225 26092220 11.14
5 LYC 190207424 1715029131 11.09
6 MYR 59546708 583384551 10.21
7 COH 5710860 56972605 10.02
8 ILU 40451260 418700517 9.66
9 HVN 98496106 1062316784 9.27
10 DJS 48870611 528655600 9.24
11 CSR 45665370 506000315 9.02
12 LNC 44180651 504487631 8.76
13 AWC 212078319 2440196187 8.69
14 CRZ 19132975 233689223 8.19
15 WTF 17067127 211736244 8.06
16 PDN 63616539 835645290 7.61
17 FMG 226135686 3113798659 7.26
18 SFY 401384 6123605 6.55
19 MSB 18533201 284478361 6.51
20 GNS 55105305 848401559 6.50

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.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

The Short Report

By Andrew Nelson

Significant decreases in short positions outweighed significant increases for the week to August 21. There were six companies that experienced a total short increase of more than 1.0 percentage points, while there were seven instances of shorts decreasing by more than 1.0 percentage point over the course of the week.

Analysts from RBS note that index-weighted short interest across the S&P/ASX 200 is at its lowest level this year. That said, average shorts are significantly higher, at 2.4%, which the broker notes is a sign of elevated short interest in small-cap stocks, on average.

On a sector basis, RBS’s numbers show short positions continue to be covered in the Building Materials and Media sector, while Healthcare stocks have seen a sharp increase in short interest over the past six weeks.

As far as companies reporting this week go, short selling activity remains high in Flight Centre ((FLT)) at 13.3%, Aristocrat ((ALL)) at 4.6%, Perpetual ((PPT)) at 5.5% and Harvey Norman ((HVN)) at 9.9%.

While by no means massively shorted just yet, the broker has noticed an interesting trend developing with Bendigo and Adelaide Bank ((BEN)). Over the past four months short positions have been increasing steadily, up 1.5% over the period to 2.5% right now. The broker thinks this could have something to do with the fact that the PE ratio is too high for the flat FY12-15 EPS outlook.

Whitehaven Coal ((WHC)) finds itself on top of the short increase leader board this week, with total shorts increasing by 2.43 percentage points from 1.58% to 4.10% over the course of the week. News that Nathan Tinkler has withdrawn his bid for the company may well have a further impact next week. The stock remains favourably viewed by brokers, enjoying unanimous Buy ratings in the FNArena database.

Another noteworthy increase in short position was booked by Fortescue Metals ((FMG)), posting a 1 percentage point increase from 5.72% to 6.72%. The stock remains positively regarded, with only one Neutral vs seven Buys in the FNarena database. The company’s FY result was positively regarded, but brokers in general are turning more cautious on the prospects of iron ore plays given the protracted weakness in iron ore prices.

Shorts in APA Group ((APA)) picked up by 1.19 percentage points from 2.20% to 3.39%, while short positions in Wesfarmers ((WES)) rose 1.0 percentage point from 1.98% to 2.98%. Wesfarmers is a neutrally regarded stock in the FNArena universe, seeing an upgrade from RBS and a downgrade from Citi the week before last in the wake of FY earnings.

The Reject Shop ((TRS)) led the list of short position decliners, dropping 2.93 percentage points to a short position of 7.52%, down from 10.45% the previous week. The stock is somewhat favourably rated by brokers, with Credit Suisse upgrading its call to Neutral last week in the wake of an in-line FY report.

Cabcharge ((CAB)) is next off the rank, shedding 2.27 percentage points to 1.69% shorted from 3.96% after reporting in-line FY results last week. Myer ((MYR)) also enjoyed a decline in its overall short position, which came off 2.13 percentage points to being 7.52% shorted from 9.65%  despite downgrading its FY guidance last week.

Probably the most notable decline in short position was posted by perennial short market leader JB HiFi ((JBH)). Overall shorts declined 2.08 percentage points to 18.91% from 20.99% after posting an in-line FY result a couple of weeks back. Broker opinion leans to the negative side, but those positive on the stock like the longer term prospects of the company.

Despite improvements in The Reject Shop, Myer’s and JB HiFi’s short positions, discretionary retail plays continue to dominate the top 20 most shorted list, with investors and brokers remaining concerned about the uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi, Flight Centre ((FLT)), The Reject Shop, Harvey Norman ((HVN)), Myer, which are all in the top 10.

Looking at month on month numbers, stocks on the decrease again far outweighed stocks on the increase, both in terms of the raw numbers and in terms of the magnitude of changes. Twenty two  stocks saw short position improve by more than 1 percentage point, while eleven increased by more than 1 percentage points.

Billabong’s short position continued to decrease, with the month on month decline now a whopping 9.3 percentage points to 1.32% short from 10.62% short. The ongoing takeover bid from TPG is driving the stock right now. The Reject Shop and Myer also featured prominently on the monthly decliners list.

Gunns ((GNS)) also saw a marked decrease in month on month terms, with its short position declining by 2.39 percentage points to 6.5% shorted from 8.89%. The stock is negatively viewed by those brokers that cover it and there has been little in the way of newsflow of late.

Wotif ((WTF)) also sits near the top of the monthly increase list, with its short position climbing 2.53 percentage points to 8.19% shorted from 5.66%. Last week’s FY result came in ahead of the market, but those brokers more negative on the stock seem to think the company won’t be able to pull the cost cutting lever too much longer.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 20611035 98850643 20.85
2 FLT 13173176 100055135 13.17
3 FXJ 262436783 2351955725 11.16
4 LYC 183808577 1715029131 10.72
5 COH 6072529 56930432 10.67
6 TRS 2772125 26092220 10.62
7 MYR 59728763 583384551 10.24
8 HVN 104080560 1062316784 9.80
9 ILU 40477878 418700517 9.67
10 CSR 47200893 506000315 9.33
11 DJS 48049414 528655600 9.09
12 LNC 44516918 504487631 8.82
13 AWC 205547540 2440196187 8.42
14 CRZ 19209631 233689223 8.22
15 WTF 17368209 211736244 8.20
16 PDN 64717211 835645290 7.74
17 FMG 213132479 3113798659 6.84
18 SGT 10056163 154444714 6.51
19 GNS 55105305 848401559 6.50
20 MSB 18504984 284478361 6.50

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.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.