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Aug 16, 2016

S3 BLACKLIGHT: Shorts Buy to Cover Before Valueact Capital Announces 2% M.S. Ownership

Activist hedge fund Valueact Capital Management reported in a regulatory filing that they purchased 38 million shares, a 2% stake, of Morgan Stanley (MS US) as of June 30th. Morgan Stanley stock is up 2% on the news today, but still down 4.9% year to date.

Short interest in Morgan Stanley was down to $366 million at the start of 2016 after averaging $467 million in 2015. Shorts began to slowly accumulate positions in the 2nd quarter and levels had increased 20%, to $438 million, by the end of July.

The S3 Relative Velocity Indicator, a measure of real-time relative change in shorting activity, starting trending downward in late July and accelerated in August. Shorts bought to cover $103 million in positions prior to Valueact’s announcement and short interest dropped down to $325 million.

We expect short interest in Morgan Stanley to increase slightly in the next few days in response to the 2% bump in share price. If Valueact presses Morgan Stanley management for changes, accelerated expense cuts and reductions of their fixed income business short sellers may begin to close out their positions as Morgan Stanley becomes more profitable and its stock price rises. We may see an even greater drop in short interest if Valueact forces a restructuring or spinoff of any of Morgan Stanley’s less profitable business units.

For more information on the above analysis, please contact:

Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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