The Short Report

This story features ESTIA HEALTH LIMITED, and other companies. For more info SHARE ANALYSIS: EHE

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending September 15, 2016

Last week we saw the ASX200 continuing to head lower on Fed rate rise fears although these were being tempered by week’s end, and we now know them to be misplaced. Selling in yield stocks drove the index lower.

Yield stocks are not particularly popular with short traders for the obvious reason that their dividend yields provide a natural share price floor.

Still popular with shorters last week was nevertheless the ongoing residential aged care thematic, and associated regulatory risk, and to that end we saw Estia Health ((EHE)) climb another rung to 8.4% shorted from 7.9% and Gateway Lifestyle Group ((GTY)) sneak into our 5% plus table for the first time.

For travel insurer Cover-More ((CVO)), ongoing risk surrounding the company’s negotiations underway for a new underwriting deal have led to its shorts pushing up to 10.4% from 9.8% to put the stock in the elite 10% plus shorted club.

The biggest short increases last week were reserved for nickel miners Western Areas and Independence Group. Western Areas has now moved into overall third spot on the table.

And as flagged last week, NextDC’s sudden jump into the 8% shorted bracket the week before was all about a rights issue arbitrage play, and as such the stock has disappeared from the table once more.

Weekly short positions as a percentage of market cap:

10%+

WOR   16.4
MYR   15.7
WSA   12.6
MTS    12.4
BAL    11.0
MND   10.9
FLT     10.5
CVO   10.4

In: CVO

9.0-9.9%

AWC
 
Out: CVO      

8.0-8.9%

EHE, ORI, MYO, IFL, BKL, WOW

In: EHE                       Out: BEN

7.0-7.9%

TFC, BEN, DOW, NEC, CAB, IGO, SGM

In: BEN, NEC, IGO, SGM                Out: EHE

6.0-6.9%

SYR, IVC, AWE, SGH, PRY, GEM

In: GEM          Out: NEC, SGM, IGO

5.0-5.9%

SEK, MSB, NWS, OSH, PDN, JHC, KAR, UGL, GTY, CTD

In: UGL, GTY                        Out: GEM, JBH

Movers and Shakers

Nickel is the most expensive of the heavily traded base metals (tin is more expensive but lightly traded) and often the most volatile in price. Volatility has pricked up again recently given market influences beyond simple demand and supply.

The Chinese government has been on a mission for some time to reduce pollution and the obvious place to start has been excess capacity in metals processing, including nickel smelters. Attempts to curb in efficient stainless steel production impact on nickel demand.

On the supply side, a couple of years ago Indonesia banned nickel ore exports in an attempt to promote the construction of value-add nickel processing plants in the country, which for a while drove nickel prices higher. That ban has now been eased but in the meantime, the new Philippines government has made overtures about shutting down heavily polluting nickel mines in that country.

The result has been a lot of push-pull on the nickel price in recent times from a regulatory perspective and a lot of volatility in the share prices of nickel miners as a result. This heightened risk is likely behind shorts in Western Areas ((WSA)) last week climbing a further 1.3 percentage points to 12.6% to put the stock in the number three most shorted position.

Shorts in Independence Group ((IGO)) last week rose to 7.3% from 6.3%.

It is quite possible these positions form one half of a long-short play among miners.
 

ASX20 Short Positions (%)

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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