The Short Report

This story features METCASH LIMITED, and other companies. For more info SHARE ANALYSIS: MTS

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 November 12, 2015.

Last week saw the ASX200 continue on its merry way south, driven by falls in commodity prices, weak leads from Wall Street and a none too encouraging AGM season. The index was set to breach 5000 once more.

On the subject of AGM season, the trend among outlooks for resource sector service providers has been one of “no bottom in sight”. As commodity prices fall, so too does service demand, and already weak analyst forecasts are having to be further downgraded.

Service providers have long been popular targets for shorters, with good reason. Enthusiasm appears to be picking up nevertheless as dour outlooks are trotted out, despite a bit of M&A activity having been seen in the sector. Monadelphous and Mineral Resources have been long resident in the 10% plus shorted club and WorleyParsons is a recent inductee, and last week all three saw substantial increases in short positions.

A decent increase was also seen for top of the table incumbent Metcash ((MTS)), opening up the gap to fellow struggling retailer Myer ((MYR)). A 1.2 percentage point rise takes Metcash to 24.6% shorted, ahead of Myer on 20.6% and Monadelphous on 19.4%.

Meanwhile, we welcome two new members this week to a 10% plus club that is bulging at the seams. I do not recall there being as many as 20 members since I have being writing this Report. Joining this week are alumina producer Alumina Ltd, with a sizeable lift, and nickel miner Western Areas on a smaller increase.

Weekly short positions as a percentage of market cap:

10%+

MTS    24.5
MYR   20.6
MND   19.3
MIN    16.9
SGH    16.0
JBH     14.4
ORI     14.0
FLT     13.8
WOR   13.3
CAB    12.8
PRY    12.6
GEM   11.9
AWE   11.7
GXL    11.5
DSH    11.4
AWC   10.8
NEC    10.7
SEK    10.4
SUL    10.2
WSA   10.0

In: AWC, WSA         

9.0-9.9%

WOW
 
Out: AWC, WSA, IVC, MRM

8.0-8.9%

IVC, MRM, UGL, FMG, STO, ARI, SPO

In: IVC, MRM, UGL, SPO               

7.0-7.9%

VOC, ALQ, WHC, MSB, KAR, RFG, MGX, NVT, PDN

Out: UGL, SPO, MGX, NVT, PDN

6.0-6.9%

TFC, NWH, BKN, MGX, NVT, SVW, CDD, PDN, IFL

In: MGX, NVT, PDN, CDD, IFL                  Out: BOQ, AAC

5.0-5.9%

SYR, AAC, TEN, GWA, SXY, BOQ, SGM, CAR, SWM, NWS, URI, OFX, ILU, NXT, SGN

In: AAC, BOQ, URI, OFX                Out: IFL, KCN, ORE, IMF

Movers and Shakers

Resource sector service provider Monadelphous ((MND)) held its AGM this week, at which an ongoing revenue decline was acknowledged, but shorters started upping the ante last week in anticipation. A 3.1 percentage point short increase to 19.4% from 16.3% cements Mona position as third most shorted stock, ahead of Mineral Resources ((MIN)) which moved into fourth with a 3.2ppt increase to 16.9% from 13.7%.

Peer WorleyParsons had been hanging around at the bottom of the 10% plus bracket but last week jumped up into the middle with a 2.5ppt increase to 13.3% from 10.8%.

Another service provider, Cardno ((CDD)), had fallen out of the 5% plus table in last week’s Report as private equity continues to build its stake, but has jumped back in again this week at 6.2% shorted.

Resource sector providers are struggling and drawing shorters’ attention due to weak commodity prices, and so it naturally follows that shorters would see resource producers as an obvious target as well. Two commodities that have come under a lot of pressure lately are aluminium and nickel, and we’ve seen both Alumina Ltd ((AWC)) and Western Areas ((WSA)) climbing quietly up the table over recent months.

Last week Alumina shorts jumped 1.4ppt to 10.8% from 9.4% for the stock to join the 10% plus club while a 0.8% increase was enough for Western Areas to sneak in on 10.0%.

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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