The Short Report

This story features WORLEY LIMITED, and other companies. For more info SHARE ANALYSIS: WOR

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 June 9, 2016

Last week saw the ASX200 make another attempt at 5400 before this time peaking out at 5370 and failing, ahead of this week’s Brexit slide.

Before Brexit became a factor we saw both a very strong GDP result and an RBA policy statement that appeared to pour cold water on the thought of follow-up rate cuts. The banks had led the market up towards 5400 on the expectation of such cuts, which, while normally not a good thing for banks, in this instance would take the pressure off bad debts and allow for further mortgage repricing.

Thus fading rate cut hopes saw a reversal in bank stocks, before this week’s Brexit fears had investors running for the exits.

Shorters took the opportunity last week to take profits (or maybe cut losses) on bank short positions. More in Movers & Shakers this week.

Otherwise, the most notable aspect of this Report is the ever shrinking list of stocks 5% of more shorted. This week’s movements are all green. The biggest short reductions are amongst the energy sector service providers.

Regular readers of this Report will be aware of how many times I have highlighted big short position drops in this sector only to be red-faced as such positions are immediately restored the following week. To that end, I will not this week attempt to provide a reason why WorleyParsons ((WOR)) shorts fell 3.3 percentage points to 12.6% last week, Monadelphous ((MND)) shorts fell 2.4ppt to 8.4% and MMA Offshore ((MRM)) shorts fell 2.6ppt to 5.2% despite no new news from any of them.

We’ll wait until next week to see whether these movements hold.

Beyond that, the only stock in the green below to see a short reduction of more than 1ppt last week was Primary Health Care, falling to 7.4% from 9.2%.

Weekly short positions as a percentage of market cap:

10%+

MYR   16.4
MTS    13.0
WOR   12.6
FLT     10.2
ORI     10.0

Out: MND, IGO

9.0-9.9%

IGO
 
In: IGO           Out: PRY                               

8.0-8.9%

BAL, AWC, CAB, MND, JBH, OSH, IFL, SHV

In: MND                    

7.0-7.9%

BEN, PRY, WOW, WSA, NWS, AAC, CVO, IVC, AWE

In: PRY                       Out: MRM

6.0-6.9%

SGH, ISD, GUD, NEC, AHY, CTD

Out: BKL, DOW       

5.0-5.9%

SEK, BKL, DOW, RFG, SPO, TFC, MRM, WHC

In: MRM, BKL, DOW                       Out: MYO, QUB, FMG, KAR

Movers and Shakers

Medical centre and medical services company Primary Health Care ((PRY)) is a listed company very much beholden to changes in government regulation, specifically with regard Medicare rebates. Subsequently Primary investors always get the jitters ahead of the annual May budget, particularly if a conservative government is in power.

This year’s budget proved benign and as such Primary has enjoyed a share price rally ever since and a subsequent reduction in short positions. A couple of weeks ago the stock fell out of the elite 10% plus shorted club and last week saw a further 1.8ppt reduction to 7.4% from 9.2%.

Macquarie was one broker who, prior to last month’s bank reporting season, made specific note of the fact short positions on the Big Four were as high as they’d ever been. On that basis, Macquarie suggested the banks were at risk of an upside pop if the results were well-received, and limited downside if not.

As it was, the results were poorly received, but that all went out the window when the very weak March quarter CPI result was released. That release had economists scrambling to forecast one, two or three more RBA rate cuts through to 2017. Given the reason bank results were poorly received was largely to do with big jumps in single-name bad debt provisions, the prospect of lower rates supposedly eased the pressure on those bad debts. It also offered up the prospect of further mortgage repricing in a still-hot housing market.

The subsequent GDP result then rather killed off the three rate cut idea, and the June RBA statement suggested the central bank was indeed back “on hold”. Last week saw falling bank shares and falls in bank short positions, as are evident in the table below.
 

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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