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 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, November 28, 2013.

Mining service companies continue to be short list favourites which is no great surprise given the spate of profit warnings the sector has dished up of late. The sector in general has been steadily sold, if only by association, which has allowed some of the longstanding short positions to be profitably reduced. There were nevertheless some new faces among the short movers this week, with REA Group and Bank of Queensland unfamiliar targets, for example, for which overvaluation appears the issue. Five short increases of one percentage point or more met six decreases last week.

There are few new faces in the monthly crew, where seven short increases of 2ppt or more met five decreases. Miners and mining service companies remain well represented on the increase side while the improving consumer discretionary sector is seeing decreases. The Top 20 shorted list is unchanged in constituents this week, notwithstanding some shuffling of places. News Corp demerger shares and two ETFs continue to make up the top three.
 

Weekly Short Increases

Shorts in Vision Eye Group ((VEI)) increased to 2.16% from 0.24%

Vision Eye is not covered by FNArena database brokers but FNArena did report this week on Bell Potter’s downgrade to Neutral based on the company’s share price run and need to restructure its model in order to prevent further debt issues.

Shorts in Singapore Telecom ((SGT)) increased to 1.91% from 0.64%

Singtel’s quarterly profit result released last week indicated stabilisation in regional earnings which was enough to encourage a share price jump. But brokers believe Optus will need to spend in 2014 to provide mobile growth in 2015 with Vodaphone ((HTA)) offering up competition.

Shorts in Bank of Queensland ((BOQ)) increased to 2.53% from 1.31%

BOQ’s update the week before suggested balance sheet repair is on track but brokers find the stock fully valued and not one in the FNArena database can conjure up a Buy rating.

Shorts in News Corp ((NWS)) increased to 10.94 from 9.73%

The News demerger kerfuffle continues and it is yet unclear as to whether short positions include pairs trades against the Fox ((FOX)) spin-off, which is the more preferred of the two new entities.

Shorts in REA Group ((REA)) increased to 1.72% from 0.61%

High flyer REA is a bit of a new face in the shorting list. The week before, the company posted quarterly results which again left brokers struggling to find anything but admiration yet on a persistent share price run all brokers feel the stock is well valued.

Shorts in Ausdrill ((ASL)) increased to 7.55% from 6.49%

Last month’s profit warning and further warnings in the mining services sector remind is that volatile Ausdrill is a shorter’s favourite albeit not quite enough to put the stock in the Top 20 shorted list at present.

Weekly Short Decreases

Shorts in Fairfax Media ((FXJ)) decreased to 8.58% from 11.56%

Will Fairfax be forced to spin off its digital business? This is a question brokers are now asking as last month’s AGM revealed revenue improvement but little in the way of a significant turnaround. The share price rallied which may have caught out some shorts. FXJ is sitting at 18 in the Top 20.

Shorts in Fleetwood ((FWD)) decreased to 3.38% from 6.07%

Grey nomads continue to offer support for Fleetwood but if it walks like a mining services company and talks like a mining services company, it’s basically a mining services company and thus a current pariah. Fleetwood shares fell over the period and shorters appear to have taken profits.

Shorts in Whitehaven Coal ((WHC)) decreased to 5.81% from 8.18%

Whitehaven shorts are basically a play on the Maules Creek mine not being granted approval but an analysts’ trip to the Narrabri mine in the period prompted some positive reports and a rise in the share price. Despite talk an opportunistic capital raising might be a possibility, the shorters bailed.

Shorts in Hillgrove Resources ((HGO)) decreased to 0.05% from 1.73%

A relatively solid production report from Hillgrove may have been enough to chase a shorter away.

Shorts in Boart Longyear ((BLY)) decreased to 8.53% from 9.98%

Boart shares have been quietly slip-sliding allowing this long shorted stock to offer up profits. BLY remains at 19 in the Top 20 amongst a group of mining service peers.

Shorts in Monadelphous ((MND)) decreased to 12.53% from 13.82%

Mona announced in the period its FY14 result is likely to be flat on FY13, which in mining services terms — a sector from which significant profit warnings have been flowing — is akin to a stellar effort. Yet this slight reduction in shorts still leaves MND at 7 in the Top 20 shorted.

Monthly Short Increases

Shorts in Ausdrill increased to 7.55% from 4.72%

See above.

Shorts in Kingsgate Consolidated ((KCN)) increased to 14.41% from 11.60%

Kingsgate has effectively become the second most shorted stock in the market after Cochlear, if we don’t count News Corp-related untangling and ETFs. The market is clearly anticipating a capital raising will be required to fund the company’s ongoing development plans in a weak gold market.

Shorts in Atlas Iron ((AGO)) increased to 7.55% from 4.72%

Atlas is rapidly becoming a shorters’ favourite although has not quite reached the Top 20 table just yet. Atlas shares continue to ride high on solid iron ore prices, but despite iron ore prices being volatile, shorters may well be eyeing off the company’s dire need to secure rail access in order to convert its production into sales.

Shorts in News Corp increased to 10.94% from 8.57%

See above.

Shorts in Bradken ((BKN)) increased to 12.23% from 9.87%

Shorts in Bradken have been on the rise for a while. A shorters’ favourite, sitting at number 8 on the Top 20, Bradken’s AGM suggested a heavy reliance on an expected second half skew. Traders don’t like backing skews (witness WorleyParsons).

Shorts in Silver Lake Resources ((SLR)) increased to 4.65% from 2.50%

Early in the month gold/copper producer Silver Lake posted a quarterly production report which beat estimates, and reiterated FY14 guidance. The gold price has since fallen and copper price has not done much better, sending SLR shares further south.

Shorts in Vision Eye Group increased to 2.16% from 0.09%

See above.

Monthly Short Decreases

Shorts in Whitehaven Coal decreased to 5.81% from 8.45%

See above.

Shorts in David Jones ((DJS)) decreased to 8.65% from 11.12%

Both David Jones (17) and Myer (9) remain in the Top 20 but have seen short-covering since their respective quarterly sales reports surprised the market and the shares rallied on an assumption of improved consumer sentiment. DJs was considered the more promising of the two and is at risk of dropping out of the Top 20 after a long tenure. Myer has a bit more work to do.

Shorts in Wotif.com ((WTF)) decreased to 3.96% from 6.31%

The short play put in place following the company’s less than convincing AGM last month continues to unwind on a falling WTF price, albeit some price consolidation has been seen recently.

Shorts in Fairfax Media decreased to 8.58% from 10.83%

See above.
 

Top 20 Largest Short Positions

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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