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The Short Report – 24 Oct 2019

Weekly Reports | Oct 24 2019

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

Summary:

Week ending October 17, 2019

Supposedly positive developments with regard US-China trade had the ASX200 rallying for most of last week. Short activity was relatively modest in the period, as the table below attests.

There were nevertheless a couple of notable movers.

Shorters continue to gradually exit positions in Nufarm ((NUF)). Progress over the last month, post the announced sale of the company’s LatAm business, has been from 17.4% to 12.7% to 10.7% and last week to 9.4%. It’s not exactly a rush, which might be explained by little sign of relief on the drought front.

Bellamy’s Australia ((BAL)) had been hanging around near the top of the table for some time until the Chinese put in a takeover bid and the shorts were largely wiped. Bellamy’s has reappeared in the table at 7.9%, which might suggest not everyone is confident FIRB will agree to the Chinese getting into foot into our lucrative (thanks to Chinese demand) infant formula industry.

Syrah Resources ((SYR)) has spent many a month near or at the top of the most shorted list, alongside other battery-related (lithium) miners, but last week jumped back to the top with a short increase to 17.5% from 16.3%. The story is a familiar one in the land of “exotic” minerals. See below.

The stand-out move last week was that of Kirkland Lake Gold ((KLA)), which poked its head into the 5% plus shorted table the week before at 5.1% but last week suddenly shot up to 14.5%. See below.

Weekly short positions as a percentage of market cap:

10%+

SYR    17.5
GXY   17.2
ORE    15.6
ING     14.7
KLA    14.5
NXT    13.7
GWA  12.5
JBH     11.8
BOQ   10.9
HUB   10.7
SDA    10.4
DMP   10.4
BIN     10.3

Out: NUF

9.0-9.9

NUF, IVC, CGC, PPT

In: PPT            Out: MTS, HVN
                                               
8.0-8.9%

MTS, BGA, HVN, NEA, IFL, DCN, RWC, SUL, BWX

In: MTS, HVN                        Out: OML, CGF

7.0-7.9%

BAL, CGF, MIN, CLH, WEB, A2M, PLS, OML, SAR, SGM, MYR

In: CGF, OML, BAL, MYR             

6.0-6.9%

NCZ, SLR, RSG, CSR, AMP

In: SLR                       Out: MYR, RFF

5.0-5.9%

CLQ, ADH, COE, FMG, CUV, SFR, CTD, RFF, NEC, GEM, PGH, NWL, LNG, GUD, CMW, KGN, SEK, GMA

In: RFF, CMW                       Out: KLA, SLR, TGA, AWC

                       
Movers & Shakers

History has provided many a boom/bust cycle for metals/minerals that suddenly become “flavour of the month”, outside of your anodyne base/bulk suite of stalwarts. Over a decade ago it was uranium, there followed by rare earth elements and more recently anything to do with new-age batteries, and thus EVs, such as lithium, graphite, cobalt and even nickel.

The underlying tone to all these booms has been “climate change” – from nuclear power to wind turbines to EVs and a lot in between. But the common cycle is one of prices running riot in an undersupplied market, investors then getting carried away, before new supply is hastily brought forward long before the demand trend catches up.

Then it all ends in tears.

No one denies EVs are in a growth phase that will soon become exponential (no one much seems to question exactly where all the E is going to come from), but it’s not an overnight pop. Syrah Resources produces graphite, and graphite prices have experienced the same above-mentioned cycle. The world is now awash with the stuff.

To that end Syrah has been forced to cut production and rationalise operations as it tries to hold on through to the demand-side catching up and graphite prices recovering. The shorters aren’t giving the miner much of a benefit of the doubt.

Kirkland Lake Gold is a Canadian-based miner with operations in Canada and Australia, listed in all of Toronto, New York and Australia. The stock is not covered by FNArena database brokers but recent news all sound very positive for the company, including its cash position.

The only piece of news that might explain a sudden jump to 14.5% from 5.1% is that of US hedge funds with significant investments in the miner recently reducing their exposures. Perhaps one way to get ahead of rivals is to short the stock on the ASX ahead of cutting North American positions.

Not clear. And is all assumes this is not just another blip in ASIC data.

 

ASX20 Short Positions (%)

Code Last Week Week Before Code Last Week Week Before
AMC 0.7 0.6 RIO 4.6 4.9
ANZ 0.6 0.5 S32 1.3 1.4
BHP 3.3 3.3 SCP 1.1 1.1
BXB 0.2 0.1 SUN 0.6 0.5
CBA 0.7 0.7 TCL 0.3 0.4
COL 0.8 0.9 TLS 0.2 0.2
CSL 0.2 0.2 WBC 0.8 0.8
IAG 0.5 0.5 WES 0.7 0.7
MQG 0.3 0.4 WOW 0.9 0.7
NAB 0.7 0.7 WPL 0.8 0.8

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 below.

Summary:

ASX20 Short Positions (%)

Code Last Week Week Before Code Last Week Week Before
AMC 0.7 0.6 RIO 4.6 4.9
ANZ 0.6 0.5 S32 1.3 1.4
BHP 3.3 3.3 SCP 1.1 1.1
BXB 0.2 0.1 SUN 0.6 0.5
CBA 0.7 0.7 TCL 0.3 0.4
COL 0.8 0.9 TLS 0.2 0.2
CSL 0.2 0.2 WBC 0.8 0.8
IAG 0.5 0.5 WES 0.7 0.7
MQG 0.3 0.4 WOW 0.9 0.7
NAB 0.7 0.7 WPL 0.8 0.8

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

KLA NUF SYR