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The Short Report

Australia | Jul 28 2016

This story features WOOLWORTHS GROUP LIMITED. For more info SHARE ANALYSIS: WOW

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 July 21, 2016

Last week saw the ASX200 begin to plateau out following the Brexit rebound, as the market turned its attention to upcoming Australian data and global central bank meetings. Importantly, the market is now also eyeing off the upcoming August result season.

The striking aspect to the table below is that all the movements in short positons are green, meaning reductions. Anyone would think we had a result season approaching. We’ve been close to it, but I don’t believe we’ve had an absolutely all-green table before in the history of this Report.

It is nevertheless typical for short positions to be trimmed ahead of upside/downside surprise risk offered by individual company results. While there may be more to come, we can probably assume any company planning on issuing a profit warning pre-result has down so by now.

All the reductions last week reflect no more than a creep to one bracket lower, with the exception of Oil Search. Its shorts fell to 7.8% from 9.1% in the wake of the company’s decision not to increase its takeover bid for InterOil.

As a point of interest, we note Woolworths ((WOW)) shorts were stable at 7.9% last week, still far and away the biggest short position among the Top 20 stocks in the market. This week has seen Woolies announce a restructuring which sparked buying of the stock, and a short-covering scramble led to an 8% share price pop on the day.

We await this week’s ASIC data, available next week, for confirmation of a short reduction.

Weekly short positions as a percentage of market cap:

10%+

MYR   16.7
MTS    13.4
WOR   13.2
FLT     11.2
MND   10.2

No changes

9.0-9.9%

CVO, BAL, WSA
 
Out: OSH, IFL, MYO                       

8.0-8.9%

IFL, MYO, AWC, IGO, ORI, CAB

In: IFL, MYO             Out: BEN       

7.0-7.9%

CTD, WOW, OSH, BEN, IVC, JBH, AWE

In: OSH, BEN                        Out: NWS

6.0-6.9%

SGH, DOW, NWS, ISD, TFC, NEC, PRY, AHY

In: NWS                     

5.0-5.9%

QUB, ANN, SGM, GUD, MSB, SEK, SPO, AAC, RFG, VOC

Out: MRM, OFX

Movers and Shakers

Back in May Oil Search ((OSH)) launched a takeover bid for one of its joint venture partners in the PNG LNG project, InterOil. Analysts could see some merit but were not convinced, and the market didn’t much warm to the news.

In the interim, another joint venture partner, and project operator, ExxonMobil, made a counterbid for InterOil. Last week Oil Search announced it did not intend to out-bid Exxon and could see the merits to the project in Exxon’s ownership.

Having not liked the idea previously, the market was heartened to learn Oil Search had abandoned it. The share price rose and shorters cut positions. We might also note InterOil is a company founded in Canada, headquartered in PNG, and listed on the NYSE. It is also listed on the ASX, thus offering the possibility of a standard takeover play – short the suitor and go long the target, assuming the first bid is never enough or a counterbid may emerge.
 

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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