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Mar 21, 2017

S3 BLACKLIGHT: Australia Short Interest Recap For the Week of March 10-17

Short interest in the Australian Region has increased by $47 million from March 10th through March 17th, with total short interest at $22.1 billion.

Four of the top seven shorted stocks in the Australian market this week were banking stocks. Short interest in Commonwealth Bank of Australia (CBA AU), National Australia Bank (NAB AU), Australia & New Zealand Banking (ANZ AU) and Westpac Banking Corp (WBC AU) was up a total of $356.3 million, or 9.1%, for the week. Australia’s big four are experiencing tighter net margin spreads as deposit rates are increasing along with funding costs. With the bulk of these banks’ revenues coming from retail banking, the only way to offset this margin squeeze is through internal cost controls and a reversal of the recent trend of increased provision charges. The four banks’ stock prices are up an average of 4.2% for the year and 2.6% in March alone. Short sellers are looking for a reversal to the recent stock price run up specifically, because near term revenues may not meet expectations.

As Australian banks begin increasing borrow rates, a knock off effect may be a drag on consumer discretionary spending. In particular, Harvey Norman Holdings (HVN AU) may face a two pronged blow to its sales figures if housing demand also tails off. HVN’s stock price has declined over 15% this year and short interest is beginning to reflect increased pessimism in the stock. Short interest is up $85 million, or 68%, this year with a majority of the short activity occurring in the last week. If short sellers are correct, HVN’s downward trending stock price will continue through the rest of the month.

While the banking sector had the biggest increase in short interest, the Metals & Mining sector had the second largest decrease in short interest, with a drop of $106 million. Three of the top five short losers for the week, Rio Tinto Ltd (RIO AU), Fortescue Metals Group (FMG AU) and BHP Billiton Ltd (BHP AU) lost $211 million this week, a negative return of 8.32% on an average short position of $2.5 billion. With China pledging to reduce pollution levels by cutting back on some of its higher polluting industries, international iron ore and copper producers are seeing prices and demand finally moving in more profitable directions. The rebound in commodity prices has produced a rebound in mining and petroleum stocks, but if there are any setbacks in China’s consumption forecasts, expect a quick downturn in worldwide commodity related stocks.

After reporting an unexpected first half net loss and cutting its first half dividend altogether, engineering and energy project firm WorleyParsons Ltd (WOR AU) saw its stock price drop 19% in a week. However, short sellers’ mood changed quickly as WOR’s stock price reversed course quickly and is now up 7% for the year as Dubai-based Dar Group purchased a 13.3% stake in the company. Short interest is down $129 million, or 53%, in March coming down from $244 million to $115 million. It looks like short sellers are covering their positions in anticipation that the Dar Group continues to increase its stake and either drive WOR’s price up even further, or take over the total company.

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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