Short Stories

Sears: Stand by for short covering

The FT reported this morning that Sears (SHLD) the US’ fourth-largest retailer, has announced a Q3 earning fall of 99%.

Short interest has certainly risen in Sears, as you can see from this graph of the last six months’ borrowing activity. The red line documents the % Market Cap on Loan (%MCOL), which in simple terms is the percentage of the entire Market Cap that is out on loan. It has increased significantly since late June, where the %MCOL was around 2% to today’s figure of 9.31%. This graph shows an inverse correlation – where the share price (green line) in late July crosses over with the %MCOL.

The second graph shows Utilisation, in other words, the percentage of what is available to borrow from the available shares. You can see that again, there is an inverse correlation with between Utilisation and share price.

Finally, can the news get any worse for this company? If not, stand by for some short covering.

Longs are more active than shorts in UK pub sector

Earlier this year, Enterprise Inns (ETI) became the target of short sellers, with a %Market Cap on Loan (%MCOL) rising from 2% – 8% between August 7 - September 7. Since then, the share price has fallen from 650.00GBP to 528.00GBP, but short investors seem confident that British pubs are finally riding out the wave of the smoking ban, because they have closed out their positions which could also be down to predictions of an OK Christmas.

However, long-only investors have been reducing their holdings to short investors, meaning supply has gone down and Utilisation has risen, moreover sharply from 1% to 5% in the last two weeks, with a Lendable Quantity decrease of 21%.

Mitchells & Butlers (MAB) remains a long-term short. Since November 2006, the %MCOL has not slipped under 10%. Today the company, who own 2,000 businesses offering food and drink, have a %MCOL of 17%. Like Enterprise Inns, the short has been closed slightly, down from almost 20% in early November. There is a two-way pool with MAB. Robert Tchenguiz’s R2 has invested, and John Magnier’s and JP McManus’ Elpida, own a 4% stake in the company. Mr Tchenguiz has suggested that the company become a REIT. MAB have also branched out into Property Development. Since mid-July the price of MAB has dropped from 900.00GBP to 608.00GBP today, with a Lendable Quantity decrease of 16%. If you strip away the special situation what is the outlook then?

Punch Taverns (PUB) have seen a sharp increase in the short sell over the past three months. In August 2007 the company announced a completion of an £825 million refinancing project at an effective rate of 6.4%, and since mid-September the borrow has increased from 4%, with peaks and troughs, to a %MCOL of 9% today. The Lendable Quantity has dropped 9%.

J D Wetherspoon’s (JDW) %MCOL is still relatively low at under 5%, but there has been an increase in the borrow from 3% to 4% between August and today, with a 400% rise of %MCOL between early September and mid-October. And the share price continues to fall, from 600.00GBP in late August to 400.00GBP today. The Lendable is relatively flat, so investors are hanging in there.

Perhaps the most notable statistic is which pub’s Lendable Quantity has decreased the most, which is Enterprise Inns at 21%, and Mitchells & Butlers at 16%.

Short Interest in the luxury goods sector

Jewellery retailer Signet (SIG), owner of H.Samuel, Ernest Jones and Leslie Davis, has been the focus of short-sellers for the last six months, particularly since October.  The percentage of market cap on loan (%MCOL) rose from 9% on October 7^th to 12% today.  Signet’s %MCOL (12%) is more than double the UK retail sector average (4.85%).

Traders started borrowing Signet at the end of June 2007 and it has proved to be a very profitable trade.

At the other end of the spectrum, Tiffany (NYSE:TIF) has also seen a rise in short interest, with the percentage of market cap on loan rising from 2% on October 22 to 5% today. Utilisation stands at 10%, up from 5% in late October. Institutional asset managers have been buying TIF throughout the year and they have been increasing their exposure even during the price weakness of the last month. Days to cover stands at five days because volume in the cash equity is so high.

Summary of borrowing in other companies with exposure to the luxury goods sector

Richemont (CFR) has seen a rise in borrowing since mid-September, but the percentage of market cap on loan is much lower than Tiffany at 1.4%.

Borrowing in Hermes (RMS) is off its summer highs at 5.54% of the market cap, while traders have been covering shorts in Bulgari ever since May.  5.12% of its market cap is currently on loan.

Tod’s (TOD) Utilisation has doubled since May, from 25% to 50%, while the market cap on loan has risen from 8% on November 1^st to 11.26% today.

Bang & Olufsen (BO B) has been a highly successful short trade for patient investors.  The borrow in B&O first started rising back in April 2006, rising from 6% to 14% by the end of 2006.  B&O’s share price was fairly resilient until May 2007, since when it has fallen from DK 750 to DK 485 today.  Long-only funds have been buying on weakness during November, causing the utilisation to fall from 86% in mid-November to 80% today.  The percentage of market cap on loan remains stubbornly high at 14.38%.

Charts available on request.

UK and American pre-Christmas retail sector

There has been a noticeable rise in short interest in Woolworths (WOW) in the past six weeks. We blogged on Woolworths on October 12. On October 10th the percentage of Market Cap on Loan (MCOL) was 8%, compared to the latest figure of 11.67%.

This is high compared to the rest of the Retail sector, where 4.87% of the market cap is on loan. The graph below compares the last six months’ lending activity in Woolworths (red), the Retail Sector (green) and Woolworths’ share price (orange) - which has continued to plummet since June – down from 28.00GBP then to 15.00GBP today.

Woolworth’s Utilisation has risen by 100% in the last six weeks - from 25% on October 10 to 50% today.

The most borrowed company in the retail sector is HMV (HMV), with 33.72% of its shares on loan .  This is a long-standing short, which was one of the most successful shorts in 2006. The group’s Utilisation has risen from 60% in June to 77% today.

Debenhams (DEB), who we blogged on November 5, has the second highest %MCOL at 17.57%, significantly lower than HMV, but a significant increase since June when the figure stood at 2.5% (see graph below.)

JJB Sports (JJB), who recently reported losses after England’s failure to qualify for the European Cup next summer, have the fifth highest %MCOL of 12.24%.

Over in America, electrical consumer store Circuit City (CC) has been a target for shortsellers since June 2007.  The share price has fallen from 20USD in January to 6USD today.  Shortsellers came late to this trade, but the %MCOL on loan remains very high, putting the company into the top decile in the S&P 500.  %MCOL currently stands at 14% and Utilisation is 37%. Circuit City is by no means the most heavily shorted stock in the North American Retail Sector. Urban Outfitters (URBN) is higher at 15.46%, as is booksellers Borders Group (BGP) at 15.29%. Borders has a Utilisation figure of 55.60%, which has risen steadily as the share price fell from 16.00USD to 12.00USD today.

Please click here to read our report on the US Apparel Sector.

How do investors feel about Barclays?

Short interest has decreased since November 12 in Barclays – from a %Market Cap on Loan (MCOL) of 4.8% to 3.94% today.

Barclays is for the first time since early September below the FTSE 100 with regards to % Market Cap on Loan. The FTSE’s %MCOL currently stands at 4.07%, which now steadied since the sharp rise at the beginning of this year.

The Bank sector’s %MCOL today stands at 6.7%, a sharp increase from 3.5% at the beginning of November as you will see from this graph which compares Barclays to the Bank sector

With investors naturally long banking stocks, exposure is often reduced prior to when shorting has taken place, as evidenced by the decrease of the Lendable Quantity since the end of August by 3.09%.

What do you think investors feel about Barclays? Have your say below.

Short interest in Natixis

We read on Reuters that the French Bank Natixis has hit a financial crisis in Q3.

The data reveals that there has been a dramatic increase in the borrow of Natixis, with its % Market Cap on Loan (%MCOL) rising from 2% at the beginning of November to 3.72% today, reaching 4.3% at the end of last week. Obviously, this is still a small percentage, despite the sharp rise in short interest.

Utilisation stood at 30% in August, with a sharp rise since early November to 65% today. Today’s level is high compared to the Market Average of 26.62%, and moreover the bank’s Sector Average of 16.42%.

Below is a graph with Natixis' %MCOL and Utilisation over the past three months.

European banks are currently in the headlines as the fallout from the credit crisis spreads.

Natixis’ Lendable as a % of Market Cap is 2.9% today, with 8.56 Days to Cover.

The share price has also fallen – from 17.00EUR at the end of September to 13.00EUR today.

As well as being higher than the Market Average, it is also high for Natixis’ average Utilisation over the last two years where it has never been as high. The only time the Utilisation level rose to near today’s figure was in April 2006 when the percentage was nearly 60%.

Natixis is underneath BNP Paribas’ 5.39% MCOL, and Societe Generale’s 4.88%.

For Societe Generale, however, the borrow has decreased since August from 6.6% to today’s figure. However, the share price has also only dropped from 127.00EUR to 94.00EUR today. Societe Generale’s Lendable % of the Market Cap available to borrow is today is 16.56%, with 4.19 Days to Cover.

It will be interesting to see which European Bank comes off the best after the ECB’s revelations this morning that it will move to inject an unprecedented amount into European money markets.

Short interest in HBOS increases

Recently there has been a large change in the short interest in HBOS, whose % of Market Cap on Loan stands at 3.5% today.

This is not a large amount to have on loan, but what is interesting is that the borrow did not really move until October, when it climbed by 100% to today’s figure.

In the past six months, Utilisation has risen steadily – from 0% on the 21^st May 2007 to 4.89% today with a sharp increase on September 18^th to 5% as well. Again, this is a relatively low figure. It’s lendable as % of Market Cap today is 26.22%, with 1.84 days to cover.

UK and American mortgage lenders have been in the news as of late after warnings of subprime woes, but as you can see from our graph, the short interest in HBOS, represented by the % Market Cap on Loan is marginally lower than the rest of its FTSE sector which has a Market Cap on Loan of 3.78%.

Although HBOS is still lower than the rest of the FTSE Markets’ current % Market Cap on Loan of 3.8%, since October 7^th it has climbed reasonably quickly from 1.5% to 2.7% on November7th, reaching just under the FTSE Market to 3.5% today.

Utilisation rises for Sports Direct

The England football teams's sorry run of defeats, leading to a failure to qualify for the 2007 European Cup, could indicate a loss in profits for Sports Direct (SPD). Since the start of the championship earlier this autumn, its share prices has dropped from 150.00GBP on October 15th to 119.00GBP.

Sports Direct who sell the England Football shirts said today that: "As England have not qualified, the company can no longer be confident of achieving that level of financial performance."

With the bad news of profit loss comes a rise in short selling, and in the last three months the % Market Cap on Loan has risen from 3% to 4.32%. Utilisation has also risen from 35% in August to 65% today, as you will see from the graph below.

Interestingly the makers of football shirts Umbro (UMG) is subject to a takeover bid from (NKE), whom traders are becoming more confident towards. We wrote a special report on Nike's fate this Christmas, which you can read by clicking here.

The boot of Croation striker Mladen Petric has also dented the prospects of strong sales at Umbro. The soccer uniform-maker, who rely on international tournaments to fuel demand for replica England team jerseys, has seen a Utilisation rise from 0% in August to 22%.

Other sufferances could include JJB Sports (JJB), who in mid-October had short sellers making profit with the short closing off slightly, but its %MCOL is still relatively high at 12.7%.

What's in store for Nike this Christmas?

Today we have published a new report into stock borrowing in the U.S. Apparel sector.

To view the report click here -  Download Apparel.pdf

Happy Thanksgiving!

German steel company's short interest

German steel company Kloeckner And Co have been short sold of late.

Their % Market Cap on Loan rose today to 12.71%, a 100% rise since October 15^th this year. But there is still an opportunity for more borrow because Utilisation stands at 26.37%.

However, the price has dropped quite dramatically in the past 5 weeks – from 53.00EUR at the end of September to 26.92EUR today.

Kloeckner is positioned fourth among the midcaps, in terms of its % Market Cap on Loan, with Deutsche Euroshop at the top, with 24.98% MCOL and a Utilisation of 21.79%.

Angang Steel found themselves in a similar situation at the end of September, when the %MCOL rose dramatically from 2% to 12% at the beginning of November, but it looks like the shorts have been closed out with the price weakening, with its %MCOL today at 7.05%.