The Short Report

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly and monthly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX).

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.

Summary:

Period: Week to, and month to, August 1, 2013

Shorting activity has slowed down into August as traders await the significant earnings result season. Weekly movements were minimal in the period, with only four changes of 1ppt or more split two up, two down. The only real movement of note was for Billabong, which has rallied 300% since nearly going out backwards.

July was a strong month for the Australian market, encouraged by new all-time highs on Wall Street and some relative stability in the Aussie dollar. The only real trend in the monthly movements is increases for stocks with gold exposure, while monthly decreases largely represented short-covering in the market rally. Five stocks saw shorts increased by 2ppt or more and five saw equivalent decreases.

Weekly Short Increases

Shorts in Ausdrill ((ASL)) increased to 8.12% from 7.02%

Ausdrill is a mining services company which has copped a severe thrashing this year on the mining capex peak, as well as the gold price. Exposure to gold exploration is just not a winner at present. Despite the share price fall to reasonable valuation, Macquarie downgraded to Hold from Buy (equivalent) last week given a lack of any near term upside potential. ASL now sits just outside the short Top 20.

Shorts in UGL ((UGL)) increased to 10.24% from 9.27%

UGL, an E&C company with exposure to mining, issued a profit warning back in May which saw its shares tumble over 30% to a June nadir.  The share price has staged somewhat of a recovery since but as we head into earnings season it is clear risks still remain around mining capex and government infra-spend. UGL sits at 10^th in the Top 20 shorted list and boast only one database Buy rating.

Weekly Short Decreases

Shorts in Billabong International decreased to 3.25% from 4.74%

Since Billabong’s rescue from potential oblivion the week before, the question now is whereto from here? BBG is now a trading stock for the risk-takers, with yet another takeover bid always a possibility. Once the most heavily shorted stock on the market (successfully), BBG no longer appears in the Top 20. BBG shares have rallied over 300% from their near death low.

Shorts in JB Hi-Fi ((JBH)) have decreased to 15.91% from 16.95%

Despite the reduction, JBH remains the perennial shorters' favourite, still sitting atop the tree at Number One. Consumer discretionary stocks dominate the Top 20 and while it makes sense some position squaring should occur ahead of results season, this week’s shocker of a retail sales release will have the shorters smiling.

Monthly Short Increases

Shorts in Ausdrill increased to 8.12% from 3.71%

See above.

Shorts in Kingsgate Consolidated ((KCN)) increased to 7.02% from 3.97%

The gold price crash has taken its toll on Kingsgate. Despite solid production at Chatree, KCN’s quarterly production report showed weakness at Challenger and brokers now assume the Thai IPO will not go ahead in this gold price environment. Citi has downgraded to Underperform, putting all three database brokers covering the stock on Sell or equivalent.

Shorts in Bathurst Resources New Zealand ((BRL)) increased to 6.00% from 2.42%

BRL is a dual listed New Zealand coal miner associated with but not to be confused with Bathurst Resources (BTU) and not covered by FNArena brokers.

Shorts in UGL increased to 10.24% from 8.21%

See above.

Shorts in Bradken ((BKN)) increased to 9.10% from 7.25%

Bradken is another mining services stock having suffered in recent months but after downgrading FY13 profit guidance in late the June the stock has enjoyed somewhat of a rebound. Brokers were quick to point out BKN’s consumables business puts it in much better stead than most peers to cope with cyclicality in the industry. The rebound may have again brought in the shorters ahead of the company’s official result release.

Monthly Short Decreases

Shorts in Troy Resources ((TRY)) decreased to 0.24% from 7.14%

Troy is not covered by FNArena database brokers, but last month moved to compulsory acquisition of takeover target Azimuth Resources (AZH) which likely explains both the sharp drop in shorts and the short position in the first place.

Shorts in Singapore Telecom ((SGT)) decreased to 1.63% from 7.23%

Shares in Optus owner SingTel fell in May and June following the company’s FY13 profit result, but began recovering in July. A solid performance since perhaps suggests short-covering.

Shorts in NRW Holdings decreased to 6.62% from 9.88%

Traders have shown little mercy to mining services company NWH. The stock has halved in value since March as the peak in Australia’s mining capex became more clearly apparent. No longer a short list Top 20, NWH is most likely seeing punters gradually taking profits on their positions.

Shorts in CSR ((CSR)) decreased to 6.46% from 9.00%

July was a volatile month for CSR shares as analysts downgraded aluminium price forecasts while adjusting producer earnings for the lower currency. With the currency having taken another leg down, the bounce in CSR smacks of short-covering.

Shorts in Iluka Resources ((ILU)) decreased to 9.40% from 11.47%.

Iluka ranks as the 14^th most shorted stock and is a regular Top 20 member. The stock is highly sensitive to zircon/titanium prices and to the currency. ILU has spent July rebounding strongly and its quarterly production report had brokers suggesting perhaps a bottom may have been seen in zircon prices as sales have picked up noticeably.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	15742221	98947309	15.91
2	FXJ	373442843	2351955725	15.88
3	MYR	81289499	583594551	13.93
4	PDN	108321921	837187808	12.94
5	FLT	12664238	100426726	12.61
6	MND	11190426	90940258	12.31
7	DJS	60304715	535002401	11.27
8	LYC	202681475	1960801292	10.34
9	WSA	20216585	196843803	10.27
10	UGL	17053512	166511240	10.24
11	WHC	104204082	1025692710	10.16
12	WTF	21081532	211736244	9.96
13	CAB	11535965	120430683	9.58
14	ILU	39355508	418700517	9.40
15	BLY	43097154	461163412	9.35
16	BKN	15400042	169240662	9.10
17	ALQ	31936375	361657668	8.83
18	MTS	75747926	880704786	8.60
19	HVN	90651458	1062316784	8.53
20	COH	4830983	57040932	8.47

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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