Retail doyen, Gerry Harvey of Harvey Norman fame, is really annoyed with short sellers. In fact, he is more than just annoyed, he is downright angry. In an exclusive TV interview with Peter Switzer, he labels their activities as “criminal” (you can watch it here).
Gerry is angry because 116 million Harvey Norman shares, worth around $400m, are presently short sold. This represents more than 10% of the total number of Harvey Norman (HVN) shares on issue, or a more alarming 20% of the “free float”, when you take out Gerry and his family’s 50% stake in the business.
Short selling, that is selling a stock that you don’t own and hoping to buy it back at a lower price, keeps downward pressure on the share price. But it also has a purpose in that it can aid the efficiency of the market by reducing wild swings in prices, particularly on the downside, and work to eliminate stock pricing anomalies.
If a professional trader wants to say that Wesfarmers is going to outperform Woolworths, and then buys Wesfarmers shares and short sells Woolworths shares (to effectively mitigate the overall market risk from the trade), and if a super fund wants to lend the short seller the Woolworths shares and be paid by the short seller to do so, thereby enhancing the return for the fund’s members, I have no problem with this. Or if an option market maker wants to short sell the underlying shares against a put option he writes, I have no problem with this either.
And if a punter wants to take a view on a company and short sell the shares because he or she thinks that they are a dog, I have no problem with this, provided it is done within reason.
What I do have a problem with is the extent of the short positions being taken, the lack of timely reporting on short positions, and regrettably, the increasing practice by some short sellers to “misspeak” about a company after taking a short position. Actively talk it down. Gerry goes further than this, calling some of them “liars”, and doing it from outside Australia, away from the eyes of ASIC and the Corporations Law section that deals with the act of disseminating “misleading information”.
Let’s look at the extent of the short positions being taken.
The biggest short positions
Listed below are the top 10 companies by the size of the short position. Topping the list is would be graphite producer, Syrah Resources, which has 20.3% of its ordinary shares (60 million shares) sold short. This is based on the latest data from ASIC (released Wednesday) and covers position as at the close of business last Thursday, 6 September.
Retailer JB Hi-Fi comes in second with 19.5%, while Lithium hopeful Orocobre ranks fourth at 16.3%. In the case of JB Hi-Fi, the 22.3m shares sold short are worth around $520m. Big bets are being taken on some of these companies.
Looking through the top short positions, three industries dominate the short sellers’ interest. Retailers, who may be impacted by the Amazon threat (and don’t we just keep hearing about how much damage Amazon will do to the industry) and the changing nature of the competitive landscape are a clear favourite, as are the minerals companies getting ready to produce “next generation” minerals such as lithium, graphite and nickel. Financial service companies also feature prominently due to concerns about “Royal Commission risk” and a possible downturn in the housing market. Some of the mid cap growth “darlings”, such as Seek, Dominos and Flight Centre, also have major short positions.
The following tables show the overall short position rankings of the most shorted retail, financial services and mineral stocks.
The short sellers don’t always get it right, and in fact, there have been some spectacular failures. But in the main, these professionals get it right more often than they get it wrong, they have very deep pockets and can hang on to their positions for many months, sometimes years. Investors betting against the short sellers are making a “courageous” call.
ASIC needs to act
As I said at the outset, I am not against short selling per se. However, it is time to put some controls on it and improve transparency.
The first thing ASIC should do is to up the ante about the reporting of short sales. The data ASIC will publish on its website today around midday reflects positions taken three and a half business days’ ago. This is despite the market having moved to a T+2 settlement basis 30 months ago in March 2016. At the very least, the data should be no more than two and a half days’ old.
However, with modern technology, there is no reason why we shouldn’t be able to see same day reporting, or even better still, real time reporting of short sales.
Next, ASIC needs to clamp down on short sellers “talking their book" and filling the media with “bad news”. Regrettably, our media (particularly the ABC and Fairfax) love bad news when it comes to finance, and seem only too happy to run unsourced stories pointing to investor or analyst concerns about a company’s prospects, industry threats, or other financial risks. This may require changes to the law because while spreading “misleading or false” information is illegal under the Corporations Law, it is no doubt very hard to prove. The bar may need to be lowered. And ASIC needs to consider how to work with overseas regulators to cut off this route.
Finally, I think it is time for an outright cap on short selling. Many companies have core strategic shareholders or shares under an escrow arrangement, and the free float of shares is often very small. Short sellers selling up to 20% of the ordinary shares on issue can represent a huge expansion in the free float, thereby placing enormous downward pressure on the share price. While any cap should arguably be assessed on a company by company basis, a blanket across the board 5% cap would be a good place to start and even out the playing field for the average “long only” investor.
Time to act. ASIC, do your job.
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