The Short Report

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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 August 27, 2015.

Last week saw the ASX200 beginning and ending at around 5200. But it was a bit of a horror show in between, in which the index bottomed out well below 5000 thanks to Wall Street’s capitulation triggered by weak Chinese data.

Amidst the most extreme level of volatility in at least a couple of years, the final, and busiest, week of the August result season was also progressing.

While the macro clearly dominated the micro throughout the week, there were still a couple of standout micro stories to emerge thanks to results season. Otherwise, the volatility once again did not trigger any notable profit taking among well-established shorts. The index may have lost 1000 points, but the shorters are sticking to their positions within the 10%-plus club, from which no stock departed last week, and pretty much all the way down the table.

Programmed Maintenance ((PRG)) was the only stock to see a notable drop in shorts, but PRG has been flying all over the table of late ahead of the completion of the Skilled Group merger, so we’ll ignore it.

Otherwise, weak earnings reports from Dick Smith Holdings and WorleyParsons saw both stocks jump into the 10% plus shorted club with decent increases. Worley has been in and out of the club all year, but Dick is a newcomer.

Santos did not report a surprisingly weak result, but the departure of the company’s CEO and announced strategic review for the most indebted of Australia’s major energy names helped Santos jump into the 8% shorted bracket from the 6% shorted bracket. Santos only entered our 5% plus table a few weeks ago.
 

Weekly short positions as a percentage of market cap:

10%+

MYR   21.3
MTS    20.8
ORI     16.9
CAB    16.3
SGH    14.7
MND   14.6
MRM  12.9
PRY    12.3
MIN    12.3
UGL    11.9
FLT     11.3
DSH    11.2
WOR   10.4
FMG   10.0

In: DSH, WOR

9.0-9.9%

GXL, CDD, GWA, GEM, JBH, SUL
 
In: CDD, SUL                        Out: DSH, WOR, PRG                                 

8.0-8.9%

MGX, AWE, STO, SEK, WOW, ALQ, KAR

In: STO, ALQ, KAR              Out: CDD, SUL        

7.0-7.9%

NEC, AWC, KCN, MSB, NWH, PRG, BKN, SXY

In: PRG, BKN                        Out: ALQ, KAR, PDN

6.0-6.9%

ARI, PDN, WHC, SGN, JHC, CAR, SWM

In: PDN, SWM                      Out: STO, BKN, NXT, NWS, ILU, PBG

5.0-5.9%

NWS, ILU, PBG, NXT, IGO, RRL, TFC, FXL, CVO, SPO, RFG, TEN, SGM, AAC, AAD, IVC

In: NXT, NWS, ILU, PBG, CVO, RFG, SGM, IVC

Out: SWM, WSA, DLS

Movers and Shakers

Energy sector service contractor WorleyParsons ((WOR)) has long been a company analysts have admired, but there is no discounting the impact on the company’s margins from the falling oil price. Negative cash flow in FY15 meant increased debt, triggering a dividend reduction. Unfortunately, energy market analysts warn the worst is yet to come as LNG construction spending winds down.

Last week Worley shorts rose 1.2 percentage points to 10.4% from 9.2%.

Dick Smith ((DSH)) had previously downgraded guidance so the company’s headline result was of no surprise. But analysts were concerned with a declining sales trend in the fourth quarter, and called the result compositionally weak. The electronics retailer saw its shorts jump 2.1ppt last week to 11.2% from 9.1%.

Dick is a new member of the elite 10% plus shorted club.

All three of Australia’s large cap energy companies have suffered from lower oil prices. But Woodside Petroleum ((WPL)) is running on strong positive cash flow, having shelved most growth options, and Oil Search ((OSH)) is already producing solid cash flows from PNG LNG with production expansion all but guaranteed.

Santos ((STO)), on the other hand, has spent a good deal of money in building its GLNG facility and while very, very close to start-up, is carrying the burden of heavy debt used to fund construction. With oil prices as low as they are, that debt is very much in the market’s focus.

And it doesn’t engender market confidence when the CEO falls on his sword and the chairman announces a strategic review. Having snuck into the bottom of our 5% plus shorted table only a handful of weeks ago, Santos shorts last week jumped 1.8ppt to 8.5% from 6.7%.

 

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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