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The Short Report – 12 Sep 2019

Weekly Reports | Sep 12 2019

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 5, 2019

Back to normal programming this week, after the ASIC debacle of the prior two.

Last week saw the ASX200 run up very hard to end a volatile August and then fall back down again for the start of the new month.

Only a handful of reds and greens for last week, which is more typical, but there were three stocks which enjoyed short position falls of one percentage point or more and yes, all can be explained.

In a tale of two earnings result responses, we saw Inghams Group ((ING)) shorts fall to 15.0% from 17.3% and Bega Cheese ((BGA)) shorts fall to 9.3% from 10.6%. Those responses were nevertheless in contrast. See below.

Western Areas ((WSA)) shorts fell to 5.7% from 7.2%. Bit of a no brainer. See below.

A special nod this week to a newbie at the bottom of the table, although if memory serves I believe we have seen it there before – Fortescue Metals ((FMG)).

Weekly short positions as a percentage of market cap:

10%+
NUF    18.6
GXY   16.7
ORE    16.4
ING     15.0
BAL    14.8
SYR    14.5
NXT    14.5
JBH     13.0
HUB   11.4
GWA  11.1
BWX   11.0
DMP   10.4

Out: PLS, BGA         

9.0-9.9

BOQ, IFL, PLS, HVN, MTS, BIN, BGA, RWC, SGM

In: PLS, BGA             Out: CGC
                                                           
8.0-8.9%

IVC, CGC, BKL, SUL, OML, PPT, DCN

In: CGC, OML                       Out: SDA       

7.0-7.9%

SDA, CLH, MYR, AMP, CGF, CSR

In: SDA, CSR             Out: OML, WSA

6.0-6.9%

A2M, NCZ, PGH, KGN, SFR, GEM, NEC, COE, CTD

Out: NWL, WEB

5.0-5.9%

SAR, LNG, CLQ, GMA, NEA, WSA, CUV, FMG, MSB, WEB, ELD, SXY, SEK, ALG, EHL, NWL

In: WSA, WEB, NWL, SAR, FMG, ALG, EHL     

                  
Movers & Shakers

The week prior, Inghams Group sat in second place on the most shorted list behind Nufarm ((NUF)). Both we can call “drought stories”.

Bega Cheese is another agri-stock, although dairy farms are mostly further south and closer to the coast, away from the worst drought-affected areas, so it is questionable as to whether we can call this a drought story, albeit the shorts did line up at 10.6%.

The difference between the two is that Bega provided a profit warning heading into results season and Inghams didn’t. Inghams’ weak result was thus severely punished on the day and the share price has not since recovered, while Bega’s result met downgraded guidance and the stock has since rallied.

In Inghams case shorters profits took care of the sellers, (15.0% shorted down from 17.3%) while in Bega’s case it appears short-covering helped lift the stock price (9.3% from 10.6%).

Switching from farming to mining, last week the Indonesian government announced it was bringing forward its planned ban on nickel ore exports, thus reducing global supply and sending the nickel price soaring. This is the second round of bans from Indonesia, which is trying to move up the value-add chain by becoming a nickel processor and not just a rock exporter, offering incentives to domestic and foreign companies to construct smelters.

Clearly the first ban was not sufficiently successful.

As the listed nickel miner most leveraged to the nickel price, Western Areas ((WSA)) has rallied 38% since the announcement, while another beneficiary Independence Group ((IGO)) also enjoyed a 30% rally. Mixed miner South32 ((S32)) has risen 12%.

Western Areas shorts have fallen to 5.7% from 7.2%, and may have further to go.

ASX20 Short Positions (%)

Code Last Week Week Before Code Last Week Week Before
AMC 0.7 0.8 RIO 4.6 4.2
ANZ 0.6 0.6 S32 1.1 1.0
BHP 3.6 3.4 SCP 0.9 0.9
BXB 0.1 0.0 SUN 0.9 0.8
CBA 1.1 1.1 TCL 0.4 0.4
COL 0.9 0.7 TLS 0.2 0.3
CSL 0.2 0.2 WBC 0.8 1.0
IAG 0.6 0.6 WES 1.0 1.0
MQG 0.5 0.7 WOW 0.9 1.4
NAB 0.4 0.4 WPL 0.9 0.9

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

BGA FMG IGO ING NUF S32 WSA