The Short Report – 14 Nov 2019

This story features PILBARA MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: PLS

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

By Greg Peel

Week ending November 7, 2019

The last two weeks of October and the first two weeks of November have all seen the ASX200 follow the same pattern: rally early in the week and then give it back by week’s end. The end result has been a net rally of just over 30 points within a range of 130 points.

The most surprising element of last week’s short position movements is what hasn’t moved rather than what has.

Late in October, protesters moved in to block access to the Chilean salt pans that currently provide the bulk of world lithium production. In the ensuing period, ahead of some profit-taking, locally-listed lithium miner Galaxy Resources ((GXY)) rallied 33%, Orocobre ((ORE)) rallied 21%, and Pilbara Minerals ((PLS)) rallied 36%.

It would be a no-brainer to say “short-covering”. Except that short positions in those stocks had by last week barely changed: Galaxy 16.4%; Orocobre 13.9%, Pilbara 7.2%. This would suggest (unless short-covereres have so far been too embarrassed to inform ASIC) that those rallies are all about fresh buying, and nothing to do with short-covering. The shorts are holding fast.

In terms of short position movements of one percentage or more, last week saw the sharks continue to circle kitchen & bathroom supplier GWA Group ((GWA)), up to 14.8% from 13.8% the week before, satellite company Speedcast International ((SDA)), up to 12.4% from 11.1%, and fruit & veg grower Costa Group ((CGC)), up to 11.7% from 10.0%.

In Costa’s case, an announced capital raising opens the opportunity for an arbitrage – short the stock ahead of participating in the discounted issue.

And just when we thought we had the Kirkland Lake Gold ((KLA)) story covered (US hedge fund selling), that stock is back at 12.7% shorted having dropped down to 7.0%. A glance at a one-month chart reveals a ridiculously choppy trading pattern, so it looks like every time the share price sticks its head up, hedgies slap it back down again.

The company has announced the reopening of the mill at its Cosmo mine in the NT, after exploration at what was a diminishing underground mine has justified a restart, which should please 100 laid-off workers. But that news was yesterday.

No Movers & Shakers this week.

Weekly short positions as a percentage of market cap:

10%+
SYR    17.4
GXY   16.4
GWA  14.8
ORE    13.9
ING     13.8
NXT    13.0
BOQ   12.8
KLA    12.7
SDA    12.4
CGC    11.7
JBH     11.6
WEB   10.6
DMP   10.4
BKL    10.3
HUB   10.1

In: KLA                      Out: BIN, BGA, NEA

9.0-9.9

BIN, BGA, NEA, IVC

In: BIN, BGA, NEA
                                               
8.0-8.9%

MTS, PPT, BAL, MIN, SUL

In: MIN, SUL             Out: RWC, NUF, SAR

7.0-7.9%

SAR, CGF, HVN, CLH, BWX, NUF, RWC, NCZ, IFL, DCN, SLR, PLS, MYR, OML, A2M

In: SAR, NUF, RWC             Out: KLA, MIN, SUL

6.0-6.9%

RSG, SGM, CUV

In: CUV                      Out: AMP

5.0-5.9%

AMP, CLQ, COE, NEC, LNG, PGH, NWL, CMW, RFF, CTD, CSR

In: AMP                      Out: CUV, FMG

Movers & Shakers

See above.

Summary:

ASX20 Short Positions (%)

Code	Last Week	Week Before	Code	Last Week	Week Before
AMC	0.7	0.6	RIO	4.3	4.4
ANZ	0.6	0.7	S32	1.5	1.4
BHP	3.3	3.4	SCG	0.3	0.3
BXB	0.2	0.2	SUN	0.4	0.5
CBA	0.7	0.7	TCL	0.4	0.5
CSL	0.1	0.1	TLS	0.2	0.2
GMG	0.2	0.1	WBC	0.8	0.8
IAG	0.5	0.6	WES	0.6	0.6
MQG	0.3	0.3	WOW	0.8	0.9
NAB	0.5	0.7	WPL	1.0	1.0

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.

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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