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article 3 months old

Weekly Broker Wrap: Global Investor Confidence Rising

By Chris Shaw

A survey of nearly 700 institutional clients by Barclays Capital has shown global investor confidence has risen significantly over the past three months. The lift reflects the expectation prospects for the US economy are likely to continue improving as well as the fact asset valuations are not a major concern at current levels.

While confidence has improved, Barclays notes clients are not overly bullish, which is acknowledgement many risks remain such as the sovereign debt crisis in Europe. The survey showed 38% of respondents expect at least one country will leave the euro zone this year. Barclays views this number, down from 50% in the same survey last year, as still uncomfortably high given the potential significance of such an outcome.

Among its clients, Barclays notes 37% view equities as likely to be the strongest performing asset class, followed by credit at 18%. This compares to December survey results that showed 34% viewed bonds as the likely best performer compared to 19% for equities. 

For clients that are equity market investors, the survey showed 71% expect equity prices will increase by 5% or more by the end of this year. This measure is up from 25% last December. Only 10% of such clients expect a fall of at least 5%.

Confidence has also improved in other asset classes, with Barclays noting 39.5% of investors in credit markets expect US high yield securities to be the best performer. Foreign exchange investors see best results coming from G10 currencies, followed by emerging market commodity currencies.

While investors were also fairly confident about the coming year in the first quarter survey last year, Barclays suggests conditions are somewhat different now, as while concerns over the euro zone crisis remain they have diminished somewhat.

A positive is both within and outside the US, monetary policy is expected to remain loose, which should prove to be supportive of economic growth. 

BA Merrill Lynch has conducted a similar survey, finding while global equities have risen 28% from their lows of last October, sentiment is far from overly bullish. Cash levels remain high, while March allocations to equities, Europe and Banks rose only modestly from the previous month.

From a macro perspective, BA-ML notes its survey shows investors are now pricing out fresh central bank liquidity measures, as 47% now say there will be no QE3 in the US, which is up from 36% in the previous survey. It is a similar story in Europe as 43% expect no new European Central Bank QE, up from 23% previously.

In terms of asset allocations, BA-ML notes investors remain overweight equities and commodities and are underweight bonds and cash. Among equity markets, emerging market positions remain very overweight, long US equities remains popular and underweight European equities is still the case for most investors. Allocations to Japan rose strongly from the previous month.

In the view of BA-ML, the reluctance of investors to trim emerging market allocations may partly reflect an improving macro outlook, as a net 28% of investors see the global economy strengthening over the next 12 months. This is up from 13% last month.

Among Asia Pacific investors, BA-ML notes while overweight China remains a dominant position allocations fell to a five-month low of plus 26%. Hong Kong is the next most favoured market at plus 18%. Australia remains the least loved market in the region at a minus 13% position.

With respect to the Australian market, Deutsche Bank suggests conditions for a recovery in deposit margins for the major banks are emerging, which could deliver significant upside surprise to profits going forward.

This can be explained by the correlation between falling wholesale funding costs and improving deposit spreads of 0.8x, so the recent 70-80 basis point reduction in wholesale funding costs should see deposit rates reduce, so boosting industry margins.

For every 20-basis point improvement in spreads there is a 5-7 basis point improvement in group margins, which Deutsche suggests would translate to a 3-4% upgrade in earnings per share. The broker suggests ANZ Banking Group ((ANZ)), Commonwealth Bank ((CBA)) and Westpac ((WBC)) should benefit by around the same amount from this theme, while National Australia Bank ((NAB)) would lag given its UK operations.

Among the major banks Deutsche rates ANZ and NAB as Buy, while ascribing Hold ratings to CBA and Westpac.

UBS has looked more closely at the impact of department stores on Australian REITs, especially those involved in leasing retail space. This market is significant given department stores contribute around 5% of total rent, occupy about 20% of gross lettable area and pay rent of around $200-$250 per square metre.

At present, UBS notes the two major department stores in Australia are at opposite ends of the spectrum. Myer ((MYR)) is focused on trying to optimise its store network and returning space to landlords when possible, while David Jones ((DJS)) has a relatively small current footprint but is committed to growing its store network.

By income, UBS estimates CFS Retail Property ((CFX)) has 7.5% exposure to department stores, Westfield Retail ((WRT)) 6.0%, GPT ((GPT)) 4.0% and Centro Retail ((CRF)) 2.1%. The importance of these exposure levels, in the view of UBS, is concerns from retailers on rents are unlikely to go away anytime soon.

This suggests to UBS a cautious stance on those stocks where there is no capital management or capital recycling to prove up net asset value is appropriate. Among the REITs the broker's order of preference remains Westfield Group ((WDC)) and Charter Hall Retail ((CQR)) as the top picks, following by mid-weightings on CFS Retail, GPT, Centro Retail and Westfield Retail. UBS continues to prefer CS Retail to Westfield Retail.

Still in relation to retail in Australia, BA-ML notes earnings growth for food and beverage producers and retailers has been in decline for the past two to three years, this rate of decline picking up sharply over the last six to 12 months.

While the retailers have attributed weaker earnings to cyclical factors such as adverse weather and weak consumer spending, BA-ML sees the issue as more structural. These include over-investment in an already crowded market, a large proportion of investment being on property developments and renovations and the effective entry of a new major competitor given the resurgence in Coles over the past couple of years.

BA-ML argues the consumer sector is currently experiencing margin pressure from price deflation and increasing costs, with these stemming more from over-investment than from cyclical factors. This implies a lengthy period of margin pressure for the Australian food and beverage sector. 

On BA-ML's numbers, the three main food retailers in Australia need to lift earnings before interest and tax (EBIT) by around $1.3 billion over the next three years to make an acceptable rate of return. A concern in achieving this is retailers are likely to step up what are already intense efforts to boost earnings via measures such as price cuts, which could cause a worsening outlook for both consumer products and the retailers.

Given price deflation is expected to stay for at least some time, BA-ML suggests Australian consumer companies are likely to realise, at best, low single digit earnings growth over the next two to three years. 

For BA-ML a key will be owners and managers adjusting growth expectations to reflect the new market reality. This means not acting in an overly ambitious manner by investing to sustain abnormal growth rates, as such action could generate material dilution to returns on investment.

BA-ML notes the leading consumer stocks in Australia – Woolworths ((WOW)), Wesfarmers ((WES)) and Coca-Cola Amatil ((CCL)) are all trading on earnings multiples of 14-15 times at present, while dividends are better than 4.5%.

A company offering 3% growth with a cost of equity of 10% and a dividend yield of around 5% should have a price to growth multiple of around 1.2 times on BA-ML's numbers. This equates to an earnings multiple of around 10 times, well below current multiples for the sector leaders. This highlights BA-ML's caution in terms of investing in the sector at current levels.

JP Morgan has reviewed its coverage of emerging companies, noting since the start of 2012 the Small Industrials accumulation index has risen 15%. This is outperformance relative to an 8% increase in the Small Resources index and the 4% and 5% gains for S&P/ASX100 Industrials and Resources indices.

In JP Morgan's view the primary reason for the recent outperformance has been earnings multiple expansion, as the Small Industrials are now trading at a premium of around 10% relative to the S&P/ASX100 Industrials on a 12-month forward basis.

Among the emerging cap stocks under coverage, JP Morgan rates Asciano ((AIX)), Aristocrat ((ALL)), Ausdrill ((ASL)), Blackmores ((BKL)), Bradken ((BKN)), Credit Corp ((CCP)), Dulux ((DLX)), Fantastic Holdings ((FAN)), Flight Centre ((FLT)), Henderson Group ((HGG)), iiNet ((IIN)), Jetset Travelworld ((JET)), Miclyn Express ((MIO)), Norfolk ((NFK)), NIB Holdings ((NHF)), Programmed Maintenance ((PRG)), QRxPharma ((QRX)), REA Group ((REA)), SAI Global ((SAI)), Silex Systems ((SLX)), Seven Group ((SVW)), Transfield Services ((TSE)), Thinksmart ((TSM)) and Wotif.com ((WTF)) as Overweight.

Among the REITs, JP Morgan has Overweight ratings on Astro Japan ((AJA)), Carindale Property Trust ((CDP)), Charter Hall Group ((CHC)) and FKP Properties ((FKP)), while for the resource plays Overweight ratings are ascribed to Australian Worldwide ((AWE)), Aston Resources ((AZT)), Grange Resources ((GRR)), Hillgrove Resources ((HGO)), PMI Gold ((PVM)), Roc Oil ((ROC)), Silver Lake ((SLR)), Venture Minerals ((VMS)) and YTC Resources ((YTC)).

Among JP Morgan's Underweight recommendations are REIT plays Bunnings Warehouse Property ((BWP)) and Charter Hall Retail and resource plays Aurora Oil & Gas ((AUT)) and Sandfire Resources ((SFR)).

Among the emerging industrials, JP Morgan is Underweight on Austar ((AUN)), Billabong ((BBG)), Envestra ((ENV)), Gunns ((GNS)), Hastie ((HST)), Matrix Composites ((MCE)), Nufarm ((NUF)) and PaperlinX ((PPX)).


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article 3 months old

The Short Report

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By Chris Shaw

For the week from February 21 the most significant changes in short positions were reductions in total shorts, with five companies seeing reductions of more than 2.0 percentage points from the previous week.

The largest reduction in total shorts was in Gunns ((GNS)), where positions fell to 1.98% from 6.25% the week prior. The change in positions was prior to an interim profit result impacted by asset impairments and revaluations and followed a proposed capital raising that would strengthen the group's balance sheet. The share price rallied.

Shorts in retailer The Reject Shop ((TRS)) fell to 3.62% from 6.55%, the change again coming after interim earnings for the company that brokers viewed as solid and suggestive of reduced financial risks surrounding the company. Shares in The Reject Shop have since rallied strongly too.

Wesfarmers ((WES)) again saw a decline in shorts in its new securities ((WESN)) to a total position of just 0.11%, down from 2.44% the week before. This followed a solid interim, though Macquarie suggested some disappointment in that the company appears to have a focus on value creation while the market is looking for growth. Shorts in the regular Wesfarmers shares also declined during the week, to 2.53% from 3.39% previously. Shares in Wesfarmers have failed to rally, instead they discovered that trending south is the path of least resistance.

While still the number one stock for short positions on the market, total shorts in JB Hi-Fi ((JBH)) fell during the week from February 21 to 19.4% from 21.7%. While the company met guidance with its interim result, brokers remain cautious given a still tough consumer discretionary market. Shares in JB Hi-Fi have also failed to rally. Just like Wesfarmers, they have weakened instead.

Stocks exposed to the consumer discretionary sector continue to dominate the top short positions, as along with JB Hi-Fi the top 20 includes Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)), Harvey Norman ((HVN)) and Flight Centre ((FLT)).

Of these, Billabong also enjoyed a solid fall in total shorts for the week from February 21, positions declining to around 8.8% from nearly 11% the previous week as the company continues to look at restructuring options and remains of interest to private equity.

There were no increases in short positions of 1.0% or more in the week from February 21 but closest was Ten Network ((TEN)), where total shorts increased to 6.2% from 5.3% previously. Ten's latest guidance update was disappointing and left brokers with the expectation further cuts to consensus earnings numbers were likely. A similar increase in shorts was seen in Western Areas ((WSA)), which came after an interim report that fell a little short of expectations due to the timing of some ore shipments.

Among the monthly changes, Rialto Energy ((RIA)) saw shorts increase from 0.2% to around 5.0% and SingTel ((SGT)) to 5.4% from 3.1%, while shorts in Gunns, JB Hi-Fi and The Reject Shop all declined by 2.6% to 3.0%.

While Flight Centre remains among the top 20 short positions, BA Merrill Lynch is not sure the market's concerns over the outlook for consumer discretionary stocks is appropriate in this case. This is because Flight Centre has a more flexible business structure and a dominant market share and faces less short-term structural threats than others in the sector.

Tabcorp ((TAH)) remains well down the list in terms of total short positions, standing at just 1.31% for the week from February 21. But as RBS Australia notes, this has increased by almost double over the past few weeks, something RBS sees as a reflection of ongoing challenges including weak organic revenue growth and an expense base that is difficult to control. In RBS's view Tabcorp is a stock that will struggle to outperform the broader market given this issues.

Previous research conducted by RBS suggests increasing numbers in short positions are usually closely linked to share price underperformance in the following weeks, if not months.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 19175716 98840643 19.40
2 FXJ 269023275 2351955725 11.45
3 ISO 586412 5403165 10.85
4 MYR 61159541 583384551 10.46
5 DJS 52413224 524940325 9.96
6 FLT 9627616 100009946 9.59
7 BBG 22544808 255102103 8.82
8 COH 4990491 56922933 8.75
9 LYC 146148090 1714396913 8.53
10 WTF 14582724 211736244 6.87
11 HVN 70934517 1062316784 6.67
12 TEN 64765918 1045236720 6.19
13 SEK 19199119 337101307 5.69
14 PPT 2339462 41980678 5.57
15 CRZ 13024435 233264223 5.56
16 SGT 9943853 183608625 5.41
17 ILU 21922037 418700517 5.23
18 WSA 9352753 179735899 5.20
19 RIA 21505734 431256264 4.99
20 RIO 20840257 435758720 4.77

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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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The final week of reporting season for Australian equities has again seen downgrades from brokers in the FNArena database outweigh upgrades, this time by a score of 35 to 17. The ratings changes have brought total Buy ratings to 51.45%, down from 52.15% last week.

Among the companies to receive more than one upgrade were James Hardie ((JHX)) and QBE Insurance ((QBE)). Upgrades for the former came from UBS and Credit Suisse, both moving to Neutral recommendations from Sell previously.

The changes followed a 3Q result that gave some cause for optimism the worst may be behind the company, particularly with the prospect of additional capital management initiatives going forward. At the same time Macquarie downgraded to a Neutral recommendation from Outperform on valuation grounds.

More positive were the upgrades for QBE as Citi, BA-Merrill Lynch, JP Morgan and UBS all moved to Buy ratings from Neutral previously. The changes reflect a combination of factors, including value in the stock at current levels, better understanding of the company's margin outlook post its recent result and a more positive stance on general insurance stocks in general.

Among the other upgrades where brokers moved to Buy views were Aston Resources ((AZT)), Macquarie seeing some upside from the proposal for 10% of the group's stake in the Maules Creek project to be sold.

Deutsche Bank upgraded CSL ((CSL)) to a Buy from Neutral given its view the company should continue to enjoy margin expansion in coming years, while Citi has turned more positive on Insurance Australia Group ((IAG)) also in part due to an improved margin outlook.

Jetset Travelworld ((JET)) offers potential for a re-rating over the next 12 months according to Deutsche and this was enough to prompt an upgrade to Buy, while RBS Australia made the same change with Prime Television ((PRT)) given a somewhat more positive outlook and the potential for some corporate activity involving the company.

For Deutsche the potential for grade and production expansion is enough to justify upgrading to a Buy on Regis Resources ((RRL)), though at the same time UBS has downgraded to a Neutral rating on the stock on valuation grounds.

ResMed ((RMD)) offers scope for an increased buyback boosting earnings per share, which sees Credit Suisse lift its valuation and move to a Buy rating. It was a similar story for Seven Group ((SVW)), as BA-ML no longer sees working capital as an issue and expects valuation support from the group's media assets.

Warrnambool Cheese and Butter ((WCB)) was upgraded to a Buy by RBS following a stronger than expected profit result that implies good value at current levels, while JP Morgan upgraded Westpac ((WBC)) on relative valuation grounds following what appears to be excessive underperformance relative to ANZ Bank ((ANZ)). The broker downgraded ANZ to a Sell at the same time.

On the downgrades side, those receiving multiple cuts to ratings were Aristocrat Leisure ((ALL)), Australian Worldwide Exploration ((AWE)), Harvey Norman ((HVN)) and Newcrest Mining ((NCM)).

For Aristocrat, the downgrades were a factor of valuation after recent share price gains, as full year earnings were generally better than expected and prompted increases to earnings estimates and price targets.

UBS and Deutsche both moved to Neutral ratings on AWE from previous Buy ratings, again valuation calls following recent share price gains. Harvey Norman continues to deal with poor retail conditions and brokers now see additional pressure on franchise margins, which was enough for Macquarie and BA-ML to downgrade to Sell ratings from Hold previously. 

Newcrest also has some issues as Lihir is again proving a problematic asset, enough that full year production expectations have been revised lower. The changes saw JP Morgan and UBS downgrade to Neutral views as shorter-term outperformance now appears less likely.

The other most significant downgrade this week came courtesy of Macquarie, the broker moving to a Sell on Air New Zealand ((AIZ)) from a Buy previously. The change in view reflects still tough operating conditions given a combination of weaker long haul demand and increases to operating costs.

In terms of changes to price targets, the largest increases were in Seven Group, Aristocrat and Ausdrill ((ASL)), the latter on the back of a better than expected interim result. Price target cuts were most significant for Jetset, as brokers adjusted for lower than expected interim earnings.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 ABACUS PROPERTY GROUP Sell Neutral JP Morgan
2 ASTON RESOURCES LIMITED Neutral Buy Macquarie
3 CSL LIMITED Neutral Buy Deutsche Bank
4 INSURANCE AUSTRALIA GROUP LIMITED Neutral Buy Citi
5 JAMES HARDIE INDUSTRIES N.V. Sell Neutral UBS
6 JAMES HARDIE INDUSTRIES N.V. Sell Neutral Credit Suisse
7 JETSET TRAVELWORLD LIMITED Neutral Buy Deutsche Bank
8 PRIME TELEVISION LIMITED Neutral Buy RBS Australia
9 QBE INSURANCE GROUP LIMITED Neutral Buy Citi
10 QBE INSURANCE GROUP LIMITED Neutral Buy BA-Merrill Lynch
11 QBE INSURANCE GROUP LIMITED Neutral Buy JP Morgan
12 QBE INSURANCE GROUP LIMITED Neutral Buy UBS
13 REGIS RESOURCES LIMITED Neutral Buy Deutsche Bank
14 RESMED INC Neutral Buy Credit Suisse
15 SEVEN GROUP HOLDINGS LIMITED Neutral Buy BA-Merrill Lynch
16 WARRNAMBOOL CHEESE AND BUTTER FACTORY COMPANY HOLDING LTD Neutral Buy RBS Australia
17 WESTPAC BANKING CORPORATION Neutral Buy JP Morgan
Downgrade
18 AIR NEW ZEALAND LIMITED Buy Sell Macquarie
19 ARISTOCRAT LEISURE LIMITED Neutral Sell Macquarie
20 ARISTOCRAT LEISURE LIMITED Buy Buy Citi
21 ARISTOCRAT LEISURE LIMITED Neutral Sell Deutsche Bank
22 ASG GROUP LIMITED Buy Neutral UBS
23 AUSDRILL LIMITED Buy Neutral BA-Merrill Lynch
24 AUSTAL LIMITED Buy Neutral Macquarie
25 AUSTRALIA & NEW ZEALAND BANKING GROUP Neutral Sell JP Morgan
26 AUSTRALIAN WORLDWIDE EXPLORATION LIMITED Buy Neutral UBS
27 AUSTRALIAN WORLDWIDE EXPLORATION LIMITED Buy Neutral Deutsche Bank
28 BEACH PETROLEUM LIMITED Buy Neutral Macquarie
29 BRAVURA SOLUTIONS LIMITED Buy Neutral JP Morgan
30 CLARIUS GROUP LIMITED Buy Neutral JP Morgan
31 CROWN LIMITED Buy Neutral RBS Australia
32 ECHO ENTERTAINMENT GROUP LIMITED Buy Neutral Citi
33 GLOUCESTER COAL LTD Buy Neutral RBS Australia
34 GRANGE RESOURCES LIMITED Buy Neutral RBS Australia
35 HARVEY NORMAN HOLDINGS LIMITED Neutral Sell Macquarie
36 HARVEY NORMAN HOLDINGS LIMITED Neutral Sell BA-Merrill Lynch
37 HENDERSON GROUP PLC. Buy Neutral Citi
38 HUTCHISON TELECOMMUNICATIONS (AUST) LIMITED Buy Neutral RBS Australia
39 JAMES HARDIE INDUSTRIES N.V. Buy Neutral Macquarie
40 LINDSAY AUSTRALIA LIMITED Buy Neutral RBS Australia
41 MACQUARIE ATLAS ROADS GROUP Buy Neutral Macquarie
42 NATIONAL AUSTRALIA BANK LIMITED Buy Neutral UBS
43 NEW HOPE CORPORATION LIMITED Buy Neutral RBS Australia
44 NEWCREST MINING LIMITED Buy Neutral JP Morgan
45 NEWCREST MINING LIMITED Buy Neutral UBS
46 PREMIER INVESTMENTS LIMITED Neutral Sell Credit Suisse
47 REGIONAL EXPRESS HOLDINGS LIMITED Buy Neutral RBS Australia
48 REGIS RESOURCES LIMITED Buy Neutral UBS
49 RETAIL FOOD GROUP LIMITED Buy Neutral JP Morgan
50 TAP OIL LIMITED Buy Neutral Credit Suisse
51 TELECOM CORPORATION OF NEW ZEALAND LIMITED Buy Neutral Deutsche Bank
52 THORN GROUP LIMITED Buy Buy RBS Australia
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 QBE 13.0% 63.0% 50.0% 8
2 SYD - 25.0% 17.0% 42.0% 6
3 SVW 50.0% 75.0% 25.0% 4
4 JET 50.0% 75.0% 25.0% 4
5 AZT 80.0% 100.0% 20.0% 5
6 PRT 33.0% 50.0% 17.0% 6
7 SUL 57.0% 71.0% 14.0% 7
8 RMD 50.0% 63.0% 13.0% 8
9 WBC 38.0% 50.0% 12.0% 8
10 CSL 63.0% 75.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 AIZ 100.0% 50.0% - 50.0% 4
2 RHC 25.0% - 13.0% - 38.0% 8
3 TTS 13.0% - 25.0% - 38.0% 8
4 NHC 67.0% 33.0% - 34.0% 3
5 ENV 17.0% - 17.0% - 34.0% 6
6 RFG 67.0% 33.0% - 34.0% 3
7 AWE 71.0% 43.0% - 28.0% 7
8 TAP 75.0% 50.0% - 25.0% 4
9 ALL 38.0% 13.0% - 25.0% 8
10 NCM 100.0% 75.0% - 25.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 SVW 9.423 10.925 15.94% 4
2 ALL 2.656 2.989 12.54% 8
3 ASL 4.018 4.456 10.90% 5
4 TOL 5.436 5.783 6.38% 8
5 PRT 0.760 0.807 6.18% 6
6 TPI 0.878 0.923 5.13% 6
7 RSG 1.750 1.833 4.74% 3
8 AWE 1.961 2.050 4.54% 7
9 IAG 3.368 3.499 3.89% 8
10 ENV 0.763 0.792 3.80% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 JET 0.988 0.890 - 9.92% 4
2 FKP 0.798 0.760 - 4.76% 6
3 GCL 9.618 9.225 - 4.09% 5
4 RFG 3.017 2.917 - 3.31% 3
5 ILU 21.074 20.569 - 2.40% 8
6 NCM 42.969 41.965 - 2.34% 8
7 CWN 10.150 9.944 - 2.03% 8
8 DJS 2.656 2.605 - 1.92% 8
9 NHC 6.073 6.017 - 0.92% 3
10 TAP 1.085 1.075 - 0.92% 4
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 CHC 17.800 22.417 25.94% 6
2 NWH 30.300 33.600 10.89% 4
3 SKI 12.600 13.938 10.62% 8
4 ASL 33.440 36.880 10.29% 5
5 PAN 4.700 5.050 7.45% 4
6 TAP 3.075 3.300 7.32% 4
7 ENV 4.083 4.367 6.96% 6
8 SVW 82.180 87.780 6.81% 4
9 IAG 22.013 23.450 6.53% 8
10 VBA 2.914 3.086 5.90% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 GCL 5.480 - 22.520 - 510.95% 5
2 AGO 20.726 7.300 - 64.78% 8
3 AIZ 6.579 3.245 - 50.68% 4
4 QUB 14.075 7.600 - 46.00% 4
5 IGO 6.020 4.080 - 32.23% 5
6 ROC 6.532 4.716 - 27.80% 5
7 FKP 10.450 8.483 - 18.82% 6
8 HZN 1.365 1.148 - 15.90% 4
9 ILU 290.388 248.038 - 14.58% 8
10 FXJ 10.600 9.163 - 13.56% 8
 

Technical limitations

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article 3 months old

The Short Report

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By Chris Shaw

Changes in short positions on the Australian market for the week from February 7 showed some interesting movements, as positions for some companies rose from negligible levels to more significant positions and for others they declined in a similar matter.

In terms of increases the most substantial was in Linc Energy ((LNC)), where total shorts rose to 5.75% from 3.82% previously, this despite little news from the company over the past few weeks (but a lot of share price movements, predominantly to the down side). The observed spike continues a trend that has seen shorts in Linc rise to current levels from around 1.8% the month before. Shorts also jumped in Southern Cross Media ((SXL)) to 2.3% from just more than 0.8% the week before, this increase coming prior to the group's interim result later this month.

Energy World Corporation ((EWC)) rose to near the top of the board in terms of short position increases for the week from February 7, total shorts essentially doubling to 2.68% from 1.32% the week prior.

Heading into its result this month shorts have increased for PaperlinX ((PPX)) to more than 1.8% from less than 0.7% previously, while Hastings Diversified ((HDF)) saw a similar increase to 1.88% from 0.77% previously.

Among a largely unchanged top 20, Billabong ((BBG)) saw shorts rise to 11.84% from 10.88% previously. Note this was before the company outlined plans to ease its constrained financial position and before private equity expressed interest in the retailer.

Top 20 short positions for the week ending February 7 continue to be dominated by the consumer discretionary sector given JB Hi-Fi ((JBH)), Billabong, Myer ((MYR)), David Jones ((DJS)), Flight Centre ((FLT)) Harvey Norman ((HVN)) and The Reject Shop ((TRS)) are all on the list.

Bank of Queensland ((BOQ)) scored the largest decline in shorts for the week from February 7, positions declining to 3.35% from 5.19% previously. While some asset quality and funding issues remain there continue to be brokers that see value in BOQ at current levels. More importantly, maybe, is that bank results have not been as bad as feared by sector bears. MEO Australia ((MEO)) saw the other major fall in shorts, total positions for the week declining to 0.33% from 1.84%. This week MEO announced it had acquired some 3D seismic surveys that will help define drilling locations in coming months.

In terms of monthly changes from January 13 the significant short positions in both JB Hi-Fi and Myer both declined modestly, while shorts in Rio Tinto ((RIO)) and Bathurst Resources ((BTU)) also came down by around 1.4 percentage points. Despite the decline, Rio Tinto remains in the top 20 of largest short positions.

Increases in shorts were more significant over the month, with Rialto Energy ((RIA)) seeing short positions jump from virtually none to just over 5.0%, while Linc, Lynas Corporation ((LYC)) and OneSteel ((OST)) all saw increases of more than 2.0 percentage points.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 21075487 98833643 21.33
2 FXJ 284038351 2351955725 12.10
3 BBG 30292609 255102103 11.84
4 MYR 69188671 583384551 11.81
5 DJS 58427589 524940325 11.11
6 ISO 579126 5403165 10.72
7 FLT 9439617 100009946 9.44
8 LYC 158092111 1714296913 9.26
9 COH 4801120 56902433 8.40
10 TRS 1804664 26071170 6.91
11 HVN 73147455 1062316784 6.89
12 WTF 14495787 211736244 6.84
13 SEK 22477184 337101307 6.65
14 OST 82098529 1342393583 6.09
15 GNS 51353845 848401559 6.02
16 CRZ 13856706 233264223 5.94
17 PPT 2428312 41980678 5.80
18 LNC 29108913 504487631 5.75
19 CSR 26201717 506000315 5.17
20 RIO 22476202 435758720 5.15

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

Brokers Review Oz Media Sector Outlook

 - Conditions remain tough for media stocks
 - Competition intensifying, cost cutting getting harder
 - Downside earnings risk leading into upcoming reporting season
 

By Chris Shaw

With advertising growth again stalling, and as the structural shift to online continues, 2012 is shaping as another tough year for the media sector in the view of Citi. Adding to the problems is increasing competition for audiences, cost inflation and in a number of cases bloated corporate balance sheets.

The news is not all negative, as Citi has identified cases of strong free cash flow generation, low capital intensity and high dividend yields. But given these are not universal qualities, the broker suggests stock selection will be important for investors.

The major themes expected to dominate the Australian media sector this year include the ongoing rise of social media and the impact this is having on marketing budgets, the cost inflation involved in the battle for TV sports rights and the growing importance of cross-selling. The strong structural position of outdoor advertising, moves to monetise online operations and the opportunities and risks involved in newspapers moving to charge for online content are also important factors.

As well, Citi is focused on the two speed advertising market, the importance of ratings in the TV sector, the check on cash returns due to bloated balance sheets, the possibility of M&A activity in the sector, a clouded employment outlook and the risk this poses to classifieds and consumptions generally and the sector focus on cost control.

Overall Citi is Neutral on the media sector outlook, as while valuations are attractive in many cases there is near-term earnings risk from a challenging economic backdrop. Relative to the market the sector is attractive but again Citi stresses the need for investors to be selective in their exposures.

Goldman Sachs is similarly cautious and for similar reasons, noting factors such as flattish ad market growth and a subdued consumption outlook are likely to limit upside potential in coming months. While traditional media companies are attempting to counter this by pursuing new revenue streams, Goldman Sachs notes there is also increased competition from social media. This and the emergence of new technology is accelerating structural change across the sector.

The developing structural changes offer a way to base exposure in the view of Goldman Sachs, the broker suggesting investors should stick with the structural winners such as the companies with strong franchise and business models and differentiated and sustainable competitive advantages.

Ad market conditions should eventually improve and when this occurs Goldman Sachs will consider chasing stocks offering the best ad market leverage. On the flip side, structurally disadvantaged stocks should be avoided as they are value traps rather than value opportunities.

Given the still difficult outlook for media companies, UBS suggests the earnings downgrade cycle has not yet run its course. To reflect this the broker has further lowered expectations for ad market growth in FY12 to just 1.0% from 2.3% previously. This flows through to cuts to earnings estimates for traditional media stocks in particular, leaving UBS below consensus with its earnings estimates across the sector by an average of 2.9% for FY12 and 3.5% for FY13.

One potential issue picked up by UBS is scope for balance sheet pressures in the sector to prompt cuts to dividends. While companies are attempting to cut costs to deal with the sector pressures in place, UBS notes this raises the risk of underinvestment in content producing a deterioration in product. This creates a death spiral, where ad revenues are negatively impacted, so meaning less funding for future content investment.

Leading into the upcoming profit season, UBS suggests Trade Me Group ((TME)) and REA Group ((REA)) have the greatest potential to beat earnings expectations. The greatest risk of earnings disappointment lies with Ten Network ((TEN)), Seek ((SEK)) and Seven West Media ((SWM)). 

Prior to results UBS has downgraded APN News & Media ((APN)), Carsales.com ((CRZ)) and REA Group to Neutral ratings from Buys previously. This leaves Austar ((AUN)), Ten Network and Seek as the broker's top picks in the sector. 

The latter two remain top picks despite material downgrade risk at the upcoming results, as UBS sees both valuation upside from current levels and strong leverage to any eventual recovery in advertising markets.

To sum up its view, Goldman Sachs rates News Corporation ((NWS)), REA Group and Carsales.com as Buys, while Fairfax ((FXJ)) is rated as Neutral and APN News & Media should be avoided.

In terms of an order of preference for the Australian plays, Citi ranks see Seek as its top exposure, followed by Seven West Media, Southern Cross ((SXL)), Consolidated Media ((CMJ)), Fairfax, Ten Network, APN News & Media and Austar.
 

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

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By Chris Shaw

Retail plays continue to lead the way in terms of largest short positions on the Australian market, with the likes of JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Myer ((MYR)), David Jones ((DJS)) and Billabong ((BBG)) having an average short interest of more than 10% at present.

Other stocks where short interest remains high include Flight Centre ((FLT)), which is also exposed to discretionary spending, while the Media and Basic Materials sectors in general also have elevated levels of short positions.

In terms of stocks experiencing larger changes in short positions in recent sessions, Whitehaven Coal ((WHC)) experienced the largest increase for the weak from January 16. Short positions in the stock rose 1.99% to 3.19% in total, this prior to a quarterly production report viewed as disappointing by a number of brokers covering the stock.

Output for the period fell well short of expectations, though this was largely explained by some one-off factors such as poor weather and some explosives supply issues. Whitehaven also saw the largest monthly increase in shorts from December 22, a rise of 3.0% from an initial position of just 0.19%.

Goodman Fielder ((GFF)) also saw a jump in shorts for the week to 4.54% from 2.7% previously, though the change in positions was not associated with any recent news from the company. As evidenced of the high level of shorts among media companies, total shorts in Fairfax ((FXJ)) rose by 1.28% for the week to 12.42%, again without there being any recent news.

Shorts in Iluka rose 1.07% to 4.36% during the week from January 16, this despite a solid quarterly production report released earlier in the month. One possible issue for Iluka is the Credit Suisse view the large increases in minerals sands prices experienced over the last several months now appear done, meaning the year ahead will now likely be more about Iluka returning money to shareholders.

The largest decline in shorts for the week from January 16 and only decline of more than 1.0% was in the iShares S&P High Dividend security ((IHD)), where positions declined 1.19% to 2.79% in total.

Among the more interesting changes in monthly short positions were the opposite moves for steel plays OneSteel ((OST)) and BlueScope ((BSL)). While OneSteel's shorts rose 1.59% to 4.69% in the month from December 22, BlueScope went the other way and saw total shorts decline 2.81% to just 0.88%. Of the two OneSteel remains more exposed to movements in iron ore prices.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 22211566 98833643 22.48
2 ISO 931556 5403165 17.24
3 MYR 73945643 583384551 12.65
4 FXJ 292046944 2351955725 12.42
5 BBG 27763281 255102103 10.89
6 DJS 54588681 524940325 10.40
7 FLT 9530577 100005264 9.52
8 COH 4759822 56902433 8.30
9 LYC 132314551 1713846913 7.73
10 WTF 14208700 211736244 6.71
11 TRS 1655541 26071170 6.35
12 HVN 64406772 1062316784 6.07
13 PPT 2497587 41980678 5.96
14 CRZ 13400087 233264223 5.76
15 RIO 24923568 435758720 5.70
16 BOQ 11769782 229598329 5.11
17 SEK 17010606 337101307 5.02
18 GNS 42511104 848401559 4.99
19 TEN 51684919 1045236720 4.95
20 WSA 8698545 179735899 4.85

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 Chris Shaw

Increases in short positions outweighed decreases in the week from December 7th, with three companies seeing shorts increase by more than 1.0% against just one fall by a similar amount.

The largest increase was in BlueScope Steel ((BSL)), shorts increasing by 2.1% to nearly 4.4% as the market continues to adjust to both tough trading conditions and the recently announced capital raising by the company.

Shorts also jumped higher for Whitehaven Coal ((WHC)) from a negligible level to 1.63%, this following the proposal for a merger of equals between Whitehaven and Aston Resources ((AZT)). Brokers in general are positive on the proposal, though the price being paid for the Boardwalk Resources assets has been identified as a possible point of concern.

Media market conditions remain tough and as a reflection of this shorts in Fairfax ((FXJ)) remain at an elevated level, rising a further 1.4% to nearly 13%. The other dominant sector in terms of high short positions is retail, where the likes of Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)) and JB Hi-Fi ((JBH)) continue to have short positions among the highest in the market.

Investors have been proven correct with respect to both Billabong and JB Hi-Fi given both have delivered profit warnings to the market in recent sessions.

The most significant fall in short positions for the week from December 7th was in Singtel ((SGT)), where a decline of 1.1% has total shorts now at 2.45%. There has been little from the company since a quarterly update early in November.

Monthly changes in short positions suggest concerns over companies exposed to the discretionary retail sector remain, as Flight Centre ((FLT)) and Myer both saw shorts rise by more than 1.3% for the period.

Shorts in Iluka ((ILU)) also rose over the past month by 1.6% to nearly 3.2%, this despite the company announcing strong price increases for titanium oxide that has seen brokers lift earnings estimates for the coming year.

Resource companies in general have been among the more prominent in terms of short position increases over the past month, this as the European debt crisis continues to weigh on the global growth outlook and on the prospects for commodity demand.

Alkane Exploration ((ALK)), Ramelius Resources ((RMS)), Arafura Resources ((ARU)) and Kingsgate Consolidated ((KCN)) all experienced increases in shorts of more than 1.0% over the past month. Wesfarmers ((WES)), which also has a discretionary retail exposure through the Coles group, was the closest of the industrials as its shorts rose by 0.9% during the period.

Falls in shorts for the month from November 14th were also dominated by resource stocks, with Santos ((STO)), Murchison Metals ((MMX)) and Paladin ((PDN)) all enjoying falls of more than 1.0%. Aristocrat Leisure ((ALL)) was the only industrial stock to enjoy a more than 1.0% fall in shorts for the month from November 14th.

Elsewhere, RBS notes Macquarie Group ((MQG)) has seen an increase in shorts of just over 0.5% in the past month. In the view of RBS this reflects ongoing tough conditions in capital markets given the Eurozone crisis continues to drag, something expected to weigh on earnings for Macquarie.

One stock where short position moves indicate the market is uncertain is Cochlear ((COH)), as RBS notes while shorts have risen by almost 1.0% over the past month they have fallen slightly in the last week. The changes have mirrored the news flow from the company, as ongoing concerns about issues with the Nucleus 5 implant may be tempered in coming sessions given the company has indicated it has found out why the device was failing.
 

Top Ten Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 21613182 98833643 21.87
2 ISO 935644 5401916 17.32
3 FXJ 306805187 2351955725 13.05
4 MYR 71813085 583384551 12.30
5 BBG 29113634 255102103 11.43
6 DJS 51019454 524940325 9.70
7 FLT 9514262 99997851 9.49
8 LYC 117271559 1713846913 6.83
9 WTF 13734586 211736244 6.48
10 PPT 2714307 41980678 6.45

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

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Christmas is edging ever so closer but the share market is not displaying its usual tendencies to put a positive twist onto the calendar year's finish, but that doesn't stop the major stockbrokerages in Australia to continue to downgrade more stocks than to issue upgrades. The week past saw the eight brokers in the FNArena database downgrading recommendations on 16 stocks while lifting only four. Total Buy ratings now stand at 56.6%, down from 57.1% last week.

Among the upgrades was ANZ Banking Group ((ANZ)), BA Merrill Lynch upgrading to a Buy rating from Neutral on both valuation grounds and expectations Asia will provide solid growth opportunities for the bank going forward. ANZ is now the broker's top pick in the sector.

A full review of Cochlear's ((COH)) prospects sees Macquarie upgrade to an Outperform rating from Neutral, this despite cuts to earnings estimates and price target to reflect manufacturing issues, supply constraints and product recalls. The upgrade is a valuation call, Macquarie seeing the stock as attractive at current levels given recent share price weakness.

Investa Office ((IOF)) was the only play to receive two upgrades, both JP Morgan and Deutsche Bank lifting ratings to Buy from Hold previously. For JP Morgan the call is valuation inspired after recent relative underperformance, while Deutsche sees reduced execution risk and some growth prospects following offshore asset sales and a share buyback. 

Deutsche has also adjusted its target for Investa slightly higher. The upgrades follow a similar move the previous week by UBS, who also identified improved value in the stock on the back of overseas asset sales.

On the downgrade side, Amcor ((AMC)) saw a cut to a Neutral rating by Citi given the current share price represents a premium on the broker's numbers. Earnings estimates were also adjusted slightly to reflect changes to forex assumptions.

Citi made a similar change with respect to Ansell ((ANN)), again on the basis the current share price is a stretch relative to valuation even allowing for the possibility current earnings guidance might turn out to be conservative. Target has been trimmed slightly.

APA ((APA)) has made an offer for Hastings Diversified ((HDF)) and this has prompted both Citi and BA-ML to downgrade ratings, the former to Neutral and the latter to Underperform. While the associated sale of AllGas is viewed positively, the possibility a higher offer may be needed and some valuation concerns post recent share price gains is enough to see both brokers adopt more conservative views. Citi has also trimmed its price target.

Commonwealth Property Office ((CPA)) has enjoyed some gains of late and this has created some valuation issues for both Credit Suisse and JP Morgan. The former has moved to an Underperform rating and the latter to a Neutral recommendation as both now see better value elsewhere in the sector.

A review by Deutsche Bank left the broker with the view competition is increasing in some of CSL's ((CSL)) markets, a concern that was enough for the broker to downgrade to a Hold rating. The downgrade also reflects recent share price outperformance, while the review generated an increase in price target.

JB Hi-Fi ((JBH)) surprised the market on Thursday by cutting earnings guidance for 1H12, citing ongoing price deflation and tough competition. Brokers have responded by cutting earnings estimates and price targets, with Citi, JP Morgan and UBS all downgrading ratings as well. JP Morgan moves to Underweight, the other two brokers to Neutral recommendations. 

Valuation has been the driver of Credit Suisse's downgrade on Mirvac ((MGR)) to a Neutral rating, the broker similarly cutting its rating on Stockland ((SGP)) to Underperform following recent share price movements.

As brokers continue to adjust numbers for Telecom New Zealand ((TEL)) to account for the recent de-merger, RBS has gone a step further and downgraded to a Sell rating, this reflecting recent relative outperformance post the de-merger. The broker's target comes down to account for the split in the business.

An asset tour saw UBS adjust numbers for Wesfarmers ((WES)), the trimming of forecasts enough for a minor cut in target. Such a reaction was also seen elsewhere in the market, though UBS was the only broker to also downgrade its rating, moving to Neutral on valuation grounds.

A similar review of prospects for Ten network ((TEN)) saw Deutsche downgrade to a Sell rating, the broker now factoring in increased overall risk and volatility for earnings in the shorter-term.

Elsewhere, BA-ML has reviewed prospects for the IT sector and the result is changes to earnings estimates and price target for Oakton ((OKN)), the move following similar cuts to expectations for SMS Management and Technology ((SMX)) made by Macquarie last week.

Changes to sales assumptions for Whitehaven ((WHC)) have seen RBS Australia lower expectations and price target for the coal play, while a capital raising by Qube Logistics ((QUB)) sees brokers adjust earnings per share expectations.

Changes to expectations for Echo Entertainment ((EGP)) resulted in BA-ML lifting earnings estimates and price target for the group, while Citi has lifted earnings forecasts for Australian Worldwide Exploration ((AWE)) post a review of the Sugarloaf project.

A change in analyst at JP Morgan has resulted in some changes to price target and earnings forecasts for Charter Hall ((CHC)), while AMP's ((AMP)) strategic distribution agreement with Mitsubishi UFJ in Japan has caused some estimate and target changes across the market. Citi has further lowered earnings estimates and its price target for Ridley ((RIC)) to reflect poor weather conditions and associated operating delays.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AUSTRALIA & NEW ZEALAND BANKING GROUP Neutral Buy BA-Merrill Lynch
2 COCHLEAR LIMITED Neutral Buy Macquarie
3 INVESTA OFFICE FUND Neutral Buy JP Morgan
4 INVESTA OFFICE FUND Neutral Buy Deutsche Bank
Downgrade
5 AMCOR LIMITED Buy Neutral Citi
6 ANSELL LIMITED Buy Neutral Citi
7 AUSTRALIAN PIPELINE TRUST Buy Neutral RBS Australia
8 AUSTRALIAN PIPELINE TRUST Buy Neutral Citi
9 AUSTRALIAN PIPELINE TRUST Neutral Sell BA-Merrill Lynch
10 COMMONWEALTH PROPERTY OFFICE FUND Buy Neutral JP Morgan
11 COMMONWEALTH PROPERTY OFFICE FUND Neutral Sell Credit Suisse
12 CSL LIMITED Buy Neutral Deutsche Bank
13 JB HI-FI LIMITED Buy Neutral Citi
14 JB HI-FI LIMITED Neutral Sell JP Morgan
15 JB HI-FI LIMITED Buy Neutral UBS
16 MIRVAC GROUP Buy Neutral Credit Suisse
17 STOCKLAND Neutral Sell Credit Suisse
18 TELECOM CORPORATION OF NEW ZEALAND LIMITED Neutral Sell RBS Australia
19 TEN NETWORK HOLDINGS LIMITED Neutral Sell Deutsche Bank
20 WESFARMERS LIMITED Buy Neutral UBS
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 IOF 50.0% 67.0% 17.0% 6
2 COH - 38.0% - 25.0% 13.0% 8
3 ILU 75.0% 88.0% 13.0% 8
4 EGP 63.0% 75.0% 12.0% 8
5 ANZ 38.0% 50.0% 12.0% 8
6 SGT 57.0% 67.0% 10.0% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 JBH 75.0% 38.0% - 37.0% 8
2 OKN 60.0% 40.0% - 20.0% 5
3 MAH 67.0% 50.0% - 17.0% 4
4 WHC 100.0% 83.0% - 17.0% 6
5 SGP 71.0% 57.0% - 14.0% 7
6 MGR 71.0% 57.0% - 14.0% 7
7 TCL 100.0% 86.0% - 14.0% 7
8 CFX 71.0% 57.0% - 14.0% 7
9 ANN 43.0% 29.0% - 14.0% 7
10 CSL 63.0% 50.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 ILU 20.219 20.786 2.80% 8
2 CSL 33.600 33.891 0.87% 8
3 IOF 0.678 0.683 0.74% 6
4 EGP 4.440 4.468 0.63% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 OKN 1.970 1.770 - 10.15% 5
2 JBH 17.996 16.925 - 5.95% 8
3 MAH 0.713 0.685 - 3.93% 4
4 WHC 7.090 6.980 - 1.55% 6
5 COH 54.840 54.084 - 1.38% 8
6 QUB 1.593 1.580 - 0.82% 4
7 ANZ 22.869 22.688 - 0.79% 8
8 WES 32.941 32.716 - 0.68% 8
9 TEN 1.036 1.029 - 0.68% 8
10 ANN 14.391 14.357 - 0.24% 7
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 HST 3.237 20.300 527.12% 5
2 QUB 7.800 14.075 80.45% 4
3 BPT 4.140 4.920 18.84% 5
4 AWE 6.871 7.300 6.24% 7
5 QAN 12.988 13.688 5.39% 8
6 CHC 22.800 23.467 2.93% 6
7 AMP 32.103 32.678 1.79% 8
8 HGG 15.964 16.172 1.30% 6
9 STO 59.000 59.538 0.91% 8
10 OSH 14.833 14.959 0.85% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AZT 17.980 - 3.600 - 120.02% 5
2 WHC 37.600 31.650 - 15.82% 6
3 TEL 14.691 12.553 - 14.55% 8
4 PAN 11.475 9.925 - 13.51% 4
5 RIC 10.033 9.333 - 6.98% 3
6 TAH 47.375 44.438 - 6.20% 8
7 JBH 138.325 130.500 - 5.66% 8
8 OKN 18.620 17.640 - 5.26% 5
9 COH 220.275 210.400 - 4.48% 8
10 SMX 48.420 46.460 - 4.05% 5
 

Technical limitations

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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

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By Chris Shaw

Changes in weekly short positions this week have seen only one case where total shorts have risen by more than 1.0%, while no reductions in short positions reached that level over the past seven days and only two fell by more than 0.5%.

On the increased short position side the biggest increase was seen by a derivative in Asciano ((AIODC)), where shorts rose nearly 1.5% from a negligible level previously. The next largest increase was seen in Alkane Resources ((ALK)), where shorts increased by 0.48% to just more than 3.0%.

On the other side of the ledger, shorts fell most significantly in Bank of Queensland ((BOQ)), a decline of 0.73% to around 4.5% coming despite JP Morgan seeing evidence of the bank still dealing with some margin pressures, but amidst market speculation BOQ's French shareholder Banque Populaire, which owns 12.1%, might be putting its stake up for sale.

Ansell ((ANN)) also enjoyed a decline in shorts of 0.57% to just over 1.5% in the past week, which comes after the company made a minor acquisition in the US that RBS Australia suggested offers some longer-term upside.

Monthly changes in short positions have shown some larger adjustments, with a number of stocks seeing total shorts change by more than 1.0%. On the increase side the largest was for Flight Centre ((FLT)) and Myer ((MYR)), shorts for both increasing by around the 2.0% mark. Despite two cuts in official interest rates signs still point to a difficult trading environment for Australian companies exposed to the consumer discretionary sector.

Another where shorts have risen well above previous levels for the month is Wesfarmers ((WES)), the stock recording an increase for the month of 1.3% to around 3.4% in total. Brokers recently trimmed earnings estimates for Wesfarmers post a site visit, this reflecting not only the impact of ongoing food deflation for Coles but also changes to expectations for the coal operations.

Monthly falls in shorts have been most pronounced for Fairfax ((FXJ)) and BlueScope Steel ((BSL)), both seeing positions decline by around 2.0%. The latter likely reflects ongoing position adjustments post the recently announced equity issue by the company.

Resource stocks have also seen short positions come in, with Western Areas ((WSA)) and Murchison Metals ((MMX)) both recording declines of close to 1.5%. Shorts remain elevated for Western Areas at around 5.7%, though the company is expected to deliver solid news flow between now and the end of the year given the recent commencement of underground mining at Spotted Quoll.

Short positions in Santos ((STO)) have also come down significantly, essentially halving over the past month to 1.3%. While costs at the PNG LNG project are likely to increase the market had been expecting this, so brokers continue to like Santos on relative valuation grounds.

Elsewhere, an increase in short positions for QR National ((QRN)) has been more modest in recent weeks, totalling only around 0.45% for the past month. Despite this, RBS Australia suggests the increase is of significance as a recent cut to coal haulage guidance for the coming year implies some downside risk to earnings in coming months.

While housing numbers in Australia continue to suggest a tough market, shorts have declined over the past month for both James Hardie ((JHX)) and Boral ((BLD)), both by close to 1.0%. For both stocks brokers have seen some signs of conditions improving, these including price increases by Boral and a gradually improving outlook in the US market for James Hardie.

 

Top Ten Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 21256085 98833643 21.51
2 ISO 910691 5401916 16.86
3 FXJ 306769252 2351955725 13.07
4 MYR 71330818 583384551 12.20
5 BBG 27827437 255102103 10.91
6 DJS 51341362 524940325 9.76
7 FLT 9018033 99997851 9.01
8 LYC 113981561 1713846913 6.62
9 PPT 2642927 41342420 6.38
10 WTF 13391127 211255444 6.31

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 Chris Shaw

The past week has seen a number of relatively significant changes in short positions on the Australian Stock Exchange, with 10 companies seeing a change of more than 1% in their total short positions relative to the previous week.

Among those where shorts came down were Beach Energy ((BPT)), shorts here falling by 3.39% over the week to 0.60%. The change follows news the Tantanna to Gidgealpa pipeline is back online, something UBS noted would boost oil volumes for Beach.

Paladin ((PDN)), BlueScope Steel ((BSL)) and James Hardie ((JHX)) also experienced falls in short positions of more than 2% over the past week. For Paladin the change may reflect the Federal Government's proposal to end the ban on uranium sales to India, BA Merrill Lynch seeing this as increasing the pressure on those opposed to uranium mining.

BlueScope has announced a capital raising and the market has likely adjusted its views on the stock given the move will strengthen the balance sheet, while the second quarter report from James Hardie last month came in above most market expectations.

David Jones ((DJS)) has also seen shorts come down, the fall of 1.58% bringing total shorts down to 8.42%. The expected Reserve Bank of Australia rate cut announced yesterday is regarded as a potential positive for the retail sector.

Shorts in Aston Resources ((AZT)) also fell by 0.65% to 0.50% in the week from November 23, which may reflect preliminary merger discussions between Aston and Whitehaven Coal ((WHC)). UBS suggests such a merger would deliver some shared synergies.

In terms of increased short positions, the largest gain over the week from November 23 was in Campbell Brothers ((CPB)), this despite a strong interim profit result. Valuation seems a concern for Campbell Brothers, JP Morgan noting the stock is priced for a continuation of buoyant conditions in its core markets.

Shorts in White Energy ((WEC)) also rose by nearly 2% for the week to just over 3.0% in total, the market still adjusting to the announcement earlier in November of an apparent fall-out with joint venture partner and coal supplier PT Bayan.

Western Areas ((WSA) saw a jump in shorts of 1.26% to 6.7% despite the company announcing the start of underground mining at Spotted Quoll. The start of new operations is when mining companies tend to experience the most teething difficulties, so investors may be adopting a cautious approach while expecting operational hiccups.

Unlike the fall in shorts for David Jones, fellow retailer Myer ((MYR)) has seen shorts rise by 1.25% to more than 11.3% in the past week. This continues a trend of increased short positions in the stock over the past month. RBS Australia estimates Myer is currently trading at a discount to David Jones. This might explain the diverging trend between the two.

RBS also notes an increase in shorts in OM Holdings ((OMH)) over the past week, which may indicate traders continuing to position themselves ahead of an expected equity raising to help fund the Sarawak smelting project.

From a longer-term perspective of a few weeks, RBS Australia notes short positions in ASX ((ASX)) have been creeping up over the past month and now stand at around 1.36%. This is up from around 0.8% a month ago, the change possibly explained by the market accounting for softening volumes in both equities trading and new listings, as well as increasing competitive threats that are emerging.

Another major increase over the past month has been in Bank of Queensland ((BOQ)), shorts here rising from 2.88% late in October to more than 4.5% in late November. Poor credit quality in the core Queensland market has been a major market concern, though some stockbrokers feel this threat has been overplayed and so the stock is seen offering value.

Shorts in Flight Centre ((FLT)) have also risen over the past month, increasing by more than 2.0% to a total short interest of nearly 9.0%. This comes despite the most recent update from the company in early November indicating a strong outbound leisure travel market. This is causing earnings to track well above year ago levels.

Another significant increase over the past month has been to short positions in Wotif.com ((WTF)), which have risen by just over 2.5% to more than 6.2%. Over the last few weeks broker commentary on Wotif.com has reflected increasing concern over the group's growth profile as competition continues to increase.

Falls in short positions of 1-2% over the past month have been experienced by Carsales.com ((CRZ)) and Goodman Fielder ((GFF)), the latter coming at the same time as management indicated a strategic review was still being undertaken to find the best way forward for the company.

 

Top Ten Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 FIX 209662 407763 51.42
2 BBG 28297259 255102103 11.11
3 BOQ 11865233 225369547 5.26
4 ALL 25035750 543181024 4.62
5 APN 25522616 630211415 4.03
6 ARU 10658766 367980342 2.87
7 AUT 11710494 411655343 2.82
8 ALS 2494569 94193403 2.64
9 ALK 6992475 269028158 2.60
10 ANN 2792718 131197201 2.12

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.