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The Short Report

Weekly Reports | Sep 14 2017

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 September 7, 2017

Last week was another in which the ASX200 chopped around a lot but never got very far from 5700.

I flagged in last week’s Report that Bapcor’s ((BAP)) jump in shorts to 9.7% from 6.9% looked suspiciously like an ASIC data blip. It was. Bapcor shorts are now back at 5.8%.

Of all the red and green moves below, only three represent changes of one percentage point or more. One is Western Areas ((WSA)), down to 15.9% from 17.1%. Another is Orocobre ((ORE)), down to 17.3% from 18.6%.

I usually don’t bother highlighting 1ppt moves in the shorts of nickel and lithium/graphite miners given (a) their short positions are so big, 1ppt is small in percentage terms and (b), their share prices are highly volatile, reflecting the volatility of underlying commodity prices.

The song remains the same for nickel, as the spot price had another week of wild gyrations, but this time it’s worth looking into the battery-related stocks (see below).

The other stock is Navitas ((NVT)), which last week jumped from under 5% shorted to 6.0%. The education company last week announced a joint venture with Swansea University in Wales, and the share price enjoyed a pop.

Weekly short positions as a percentage of market cap:

10%+

SYR    19.7
ORE    17.3
WSA   15.9
MYR   15.4
IGO     14.5
SHV    13.2
JBH     12.8
RFG    12.6
DMP   12.4
AAD   11.8
ACX   11.7
GXY   11.3
HVN   10.7
MYX   10.5
MTS    10.5

No changes                

9.0-9.9%

ISD, HSO, APO, GTY
 
In: HSO, APO                        Out: BAP, JHC, NXT                                                                                                           

8.0-8.9%

NXT, QIN, JHC

In: NXT, JHC             Out: APO, HSO,

7.0-7.9%

BKL, RIO, AHG, GXL, FLT, TPM

In: GXL                      Out: IPD, BEN

6.0-6.9%

VRT, NEC, VOC, NSR, BEN, NWS, AAC, IPD, SEK, SAR, MND, NVT, TAH

In: BEN, IPD, NVT               Out: GXL, PRU, OFX

5.0-5.9%

BWX, OFX, PRU, BAP, HT1, CCP, GMA, IPH, KAR, MSB, CTD, QUB, A2M, CSV, RCG, OSH, SDA, WOW, ING

In: BAP, OFX, PRU, SDA, WOW, ING     

Out: MOC, AYS, SRX, AWC, DCN

Movers and Shakers

The death knell has sounded for the internal combustion engine, it would seem.

To date, France and the UK have both set legal deadlines for the end of fossil fuel-powered vehicle production by 2040. British Telecom (BT) has vowed to do the same for its 30,000-strong fleet of service vehicles, by 2030. This week, China got in on the act.

Beijing has not yet set a date, but it announced it will soon do so. Aside from looking to phase out fossil fuel power, Beijing already offers subsidies for electric and hybrid vehicles. When France and the UK announced their moves, the spot price of lithium received a kick. On China’s announcement, it surged.

A handful of stocks listed on the ASX can be considered “battery-related”, as miners of lithium or graphite. Among those are Orocobre, Syrah Resources, Galaxy Resources ((GXY)), Mineral Resources ((MIN)) and Pilbara Minerals ((PLS)).

MinRes spent a very long time in the 10% plus shorted club back when the iron ore price was collapsing, given the company also mines iron ore alongside its mineral services business. But when the market woke up to the fact MinRes also had a lithium project, the stock quickly disappeared right off the table. The lithium price had begun to move.

Funnily enough, MinRes has not reappeared. But in its place, this year has seen the ascendency of Orocobre, Syrah and Galaxy into the 10% plus club, and for the former two, the first and second highest positions. Pilbara popped into the bottom of the table for a while but has since dropped out again.

While no resource sector analyst disputes the upward trend in electric vehicles and subsequently batteries, views on the outlook for the global lithium demand/supply balance are less clear. Lithium is not rare, and given its sudden popularity, projects are sprouting up all over the place. It is, however, a costly and troublesome element to extract.

It is this last point that clouds the issue of whether lithium supply is going to race ahead of demand in the short term, given the EV and home battery growth trend is still in its early stages, or whether the trend will accelerate while miners struggle to get the stuff out of the ground (or pond, as is the case with lithium). This likely explains why (a), these particular miners are in the sights of the shorters and (b), their share prices are highly volatile.

Note that chemically, lithium is the most volatile metal. Somewhat fitting.

This week’s Chinese news sparked big short-covering rallies in Galaxy and Syrah, although not so in Orocobre. Last week Orocobre shorts fell to 17.3% from 18.6%. It will be interesting, next week, to see what the ASIC data reveal about short movements this week.

ASX20 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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CHARTS

BAP GXY MIN NVT ORE PLS WSA