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Corrected Version: The Short Report

Weekly Reports | Oct 04 2018

Note: the original version of this report erroneously cited plutonium of a by-product of rare earth mineral processing at Lynas Corp's plant in Malaysia. The by-products are uranium and thorium. FNArena apologises for the error.

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 UIKeyInputLeftArrowamounts 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 27, 2018

Last week saw the ASX200 continue its choppy graft higher before succumbing to risk-off selling this week.

A lot of red and green on the table below suggests a lot of bouncing around of short positions last week, but only one move exceeded one percentage point. NextDC ((NXT)) saw shorts increase to 8.6% from 7.1%. See below.

Otherwise we might note that Syrah Resources ((SYR)), having lost top spot on the table to JB Hi-Fi ((JBH)) last week, has now fallen to fourth behind the two lithium miners. But it’s only incremental – Syrah shorts fell to 16.3% from 16.7%.

We may also welcome Bank of Queensland ((BOQ)) back to the 5%-plus shorted table at the low end, ahead of its result release today (the stock is up 3.6% as I write), and also welcome Lynas Corp ((LYC)) and Australian Pharmaceutical Industries ((API)). See below.

Weekly short positions as a percentage of market cap:

10%+

JBH     19.7
ORE    17.0
GXY   16.5
SYR    16.3
DMP   12.9
ING     12.6
MTS    12.0
MYR   11.1
GEM   10.1
GXL    11.1
BWX   10.0

Out: HVN                                          

9.0-9.9

IVC, IFL, HVN, CSR, NEC, NWS

In: HVN, IVC    Out:CSR, NEC 

                                                                                                            
8.0-8.9%

NXT, NUF, NAN, SUL, VOC, IGO

In: NXT, NAN           Out: IVC, CSR, NEC, AAC             

7.0-7.9%

AAC, PLS

In: AAC, PLS             Out: NXT, NAN, GMA, MLX

6.0-6.9%

MLX, RSG, FLT, SDA, BIN, SEK, GMA, HT1, KDR, MND, SIG, NWL MYO, KAR, GNC, MOC

In: MLX, GMA, SDA, KDR, NWL, BIN                 Out: PLS, MYO, KAR, GNC, MOC

5.0-5.9%

KAR, GNC, MOC, MSB, LYC, BAL, BLA, ALX, BOQ, API, BEN, CQR, CAB, AMP, TNE, BKL

In: KAR, GNC, MOC, LYC, ALX, BOQ, API, TNE, BKL                       

Out: NWL, BIN, SDA, KDR, CLQ, PPT    

                   
Movers & Shakers

Data centre operator NextDC polarises analysts. One the one hand we have a longer term story of increasing demand for data storage and cloud operations driving demand for capacity, and on the other we have a slightly disappointing earnings result posted in late August that suggests customer growth at the company’s second round of capital city data centres is slower than the first round.

The Buy-raters dismiss slower growth as being a factor of larger round two centres and the initial burst of demand growth slowing as one might expect. NextDC has spent heavily to build the centres, and every new customer represents pure operational leverage.

If you build it…

NextDC shorts have risen to 8.6% from 7.1%.

It’s been a tough road for rare earth mineral producer Lynas Corp over the past years. Aside from a rare earth market bubble and bust, the decision by the company to build its processing plant (LAMP) in Malaysia, where it’s cheaper, than in WA, where the government was keen, has proven misjudged. LAMP originally ran into the stumbling block of environmental protest in Malaysia due to the production of by-products uranium and thorium in the process.

Government approval was finally achieved, but now there’s a new government, which has sought to review the LAMP’s approval. Lynas has appeared at the bottom of the 5%-plus shorted table.

Having run up 30% since the announced acquisition of Clearskincare in June, the share price of Australian Pharmaceutical Industries took a hit last week when Credit Suisse pointed to an increasingly challenging operating environment and downgraded to Underperform. The only other FNArena database broker covering the stock, Morgan Stanley, has had an Underweight rating since April.

API also appeared at the bottom of the table last 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

API BOQ JBH LYC NXT SYR