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The Short Report – 10 Oct 2019

Weekly Reports | Oct 10 2019

See Guide further below (for readers with full access).

Summary:

Week ending October 3, 2019

Last week ended with a major sell-off for the ASX200, in line with Wall Street’s response to a slew of weak US data and the re-emergence of the R-word.

Such a sell-off would be reason enough to assume an opportunity for shorters to take profits, and the sea of green below would be testament. But…

I’m just a little bit sceptical because I’ve been here before often enough to know that when shorts appeared to be covered in such numbers, it could be a case of misleading ASIC data. It may all revert next week. For now, we’ll take it as read, but with a grain of salt until then

What does definitely make sense is a drop in shorts in Nufarm ((NUF)) to 12.7% from a table-topping 17.4%, leaving a familiar scene of the top three shorted stocks all being battery-related miners. See below.

Otherwise, JB Hi-Fi ((JBH)) shorts fell to 11.5% from 13.1% and GWA Group ((GWA)) to 10.8% from 12.3%. See below.

Weekly short positions as a percentage of market cap:

10%+
GXY   16.9
SYR    16.3
ORE    16.0
ING     14.9
NXT    13.2
NUF    12.7
HUB   11.7
JBH     11.5
GWA  11.8
BKL    10.5
BIN     10.4
SDA    10.2

In: SDA          Out: DMP      

9.0-9.9

BOQ, CGC, MTS, IVC, BGA

Out: SDA, IVC
                                               
8.0-8.9%

IVC, DMP, HVN, DCN, OML, BWX, RWC, SUL

In: DMP, IVC             Out: PPT, IFL, SGM, CGF

7.0-7.9%

CGF, SGM, CLH, IFL, PPT, A2M, PLS

In: CGF, SGM            , IFL, PPT, A2M         Out: NEA, CSR, MYR

6.0-6.9%

MYR, CSR, NCZ, AMP, MIN, SFR

In: MYR CSR, MIN               Out: A2M, SAR, CUV

5.0-5.9%

CTD, COE, CLQ, RSG, NEC, NWL, SAR, FMG, GMA, MSB, LNG, GUD, SEK, AWC,

In: SAR, AWC           Out: PGH, GEM, WEB, ADH, KGN, MIN, BAP, RFF, CMW, EHL
                     
Movers & Shakers

It’s been a tough year for agri-chemicals supplier Nufarm. The relentless drought has led to profit warning after profit warning. Such running disclosure meant there were no surprises in the company’s earnings result released last week. What did catch the market by surprise was the announced sale of Nufarm’s LatAm business.

Prior to that announcement, Nufarm’s biggest concern was its debt position, which threatened to become a major problem were the drought to linger on and on. Not only did the price paid for the LatAm business exceed all broker expectations, the subsequent debt reduction opportunity means Nufarm is now well out of the woods.

Which was enough to have the stocks rallying 32% on the day, and another 14% subsequently, clearly aided by a short-covering scramble as shorts dropped to 12.7% from 17.4%.

As for both electronics retailer JB Hi-Fi and kitchen & bathroom supplier GWA Group, there’s been no new news out of either company. But when Wall Street turned around and rebounded after the October 3 sell-off, JB HiFi’s share price took off to a new all-time high. GWA’s bounce was rather less spectacular.

But it was prior to the bounce that JB shorts fell to 11.5% from 13.1%, and GWA’s to 10.8% from 12.3%. Serendipity? Or a decision to cover shorts in the wake of yet another RBA rate cut, which should by rights provide a boost to consumer spending (it hasn’t)?

Whatever the case, shorters have been self-flagellating for years in keeping JB Hi-Fi almost perennially near the top of the most shorted table, while rarely ever being provided with a chance to cash in, except maybe during the GFC and the arrival of Amazon, the latter proving an unfounded fear.

ASX20 Short Positions (%)

Code Last Week Week Before Code Last Week Week Before
AMC 0.7 0.6 RIO 4.8 4.8
ANZ 0.6 0.7 S32 1.4 1.4
BHP 3.4 3.3 SCP 1.1 1.0
BXB 0.1 0.1 SUN 0.1 0.5
CBA 0.8 0.8 TCL 0.3 0.3
COL 1.0 1.1 TLS 0.2 0.2
CSL 0.2 0.2 WBC 0.8 0.8
IAG 0.5 0.4 WES 0.7 0.8
MQG 0.5 0.6 WOW 0.8 0.8
NAB 0.6 0.7 WPL 0.7 0.7

To see the full Short Report, please go to this link

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 above.

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

GWA JBH NUF