Short Stories

General Motors

In early July, nearly 40% of General Motors' (GM) Market Cap was out on loan (%MCOL) to short investors, making it one of the most borrowed stocks globally. There are still significant short positions in this stock, with 32.56% MCOL as of c.o.b on Wednesday. Utilisation is extremely high at 89%, so the question is now is whether or not a short squeeze will occur with more and more investors wanting to close their positions with the recent price hike. With this in mind, there are 15.16 Days to Cover which is not dangerously high for those who want to take profits.

 

Borders - a short squeeze?

Could there be a short squeeze in Borders (BGP)? Some investors have already closed out their positions in anticipation of today's announcement of better-than-expected second quarter results and the 20% price hike. The percentage of Borders' Market Cap out on loan (%MCOL) is still high at 21% today, down from 28% in March this year. Utilisation was at 80% which is extremely high - and it is not much lower now at 70%. Moreover, there are 62 Days to Cover.

Lehman

Lehman's (LEH) shares were 6.7% lower yesterday $13.45  after South Korea's top financial regulator warned that Korea Development Bank should take a "cautious" approach to buying an overseas bank, following the state-run group's expression of interest in Lehman. Lehman's decline led the shares of other investment banks lower with the S&P investment index down 2.8% to 106.7. You can see from this graph that there has been a substantial amount of short covering in Lehman since mid-July, when the percentage of the company's Market Cap out on loan (%MCOL) was 23%, a two-year high, with Utilisation at 65% and 25 Days to Cover. Now, Lehman's %MCOL is at 12%, Utilisation is at 40%  and there are 13.53 Days to Cover. The Lendable Quantity has also gone up - from 140m shares on June 13th to 186.65m shares today which means that the long-only institutions are buying the stock as well.

Persimmon rises but short interest stays high

Shares in UK housebuilders rose yesterday after Persimmon (PSY) said it thought conditions in the sector were beginning to stabilise. The data shows that the percentage of PSY's market cap on loan (%MCOL) has continued to rise, although this is as of c.o.b on Tuesday. The short position in this company is still significant with a %MCOL of of 29.03%, up from 27.85% on Tuesday 12th August (please see graph). It will be interesting to see what the data says next week and whether short sellers will cover their positions (this is likely).

Shares in other housebuilders were boosted by PSY's comments and there has been some suitable short covering in the stocks below. Barratt (BDEV) enjoyed the biggest improvement, with shares ending 13.75% stronger at 128.25p. BDEV still has 22.78% of its shares on loan, although as you can see from this graph, there has been a small amount of short covering in the stock.

Taylor Wimpey (TW) was also up 2.42% to 42.5p. 16.03% of TW's shares are on loan, and as you can see from this graph there has been some short covering in the stock.

Bovis Homes (BVS) rose 3.45% to 412.25p. 25.19% of its shares are on loan, but like TW there has been some short covering - please see graph.

Bellway (BWY) improved 7.6% improvement to 566p, and again, short covering has been prevalent.

Global Financial Stocks

HBOS (HBOS) was the main casualty yesterday as financial stocks sent the London market to its sharpest decline in more than a month, leaving the bank just 2.5p above the 275p underwriting price on last month's rights issue. Short interest evened out in the stock at the end of last week, with 5.86% of its Market Cap being on loan (%MCOL) to short investors, a slight rise from 5%.

Barclays (BARC) lost 5.4% to 215p, and as you can see from this chart, short investors have started to increase their positions in this stock over the past six weeks, with the %MCOL rising from 6% in early June to 8.8% today. But it was those investors who came to the trade even earlier than June - in mid to late May when BARC's share price started to tumble who would have made sizeable profits.

Scottish & Southern Energy (SSE) added 1% to £14.53 as take-over talk did the rounds. Vattenfall (VTT), Sweden's state-owned utility, was once again being suggested as a potential bidder. As you can see from this graph, short investors have been increasing their positions in the stock since early August, when the %MCOL went from 3% to 5.5% today.

US stocks also fell yesterday as investors responded to deepening worries about the financial sector, inflation and poor economic data. Freddie Mac and Fannie Mae were again in sharp focus, with Freddie's shares down 5% and Fannie's down 2.3%. This graph of Freddie Mac shows the recent rise in short interest despite some short covering since early August.

Babcock & Brown Power

Babcock & Brown Power (BBP) said it wrote down 410M AU dollars on its Alinta retail-energy business and recorded a large loss on the sale of a power station, according to the Wall Street Journal. The announcement triggered a 41% freefall in BBP's stock price and further damaged the credibility of the Australian-power generation fund, a listed satellite of Babcock & Brown Ltd (BNB).

This graph of BBP also demonstrates how the ASX Small Cap stock's price has plummeted this year - down from $3AUD in October 2007 to $0.5AUD now which should have given short investors an opportunity to make sizeable profits. However, rather like yesterday's posting on Coeur d'Alene Mines (CDE), this short has been badly timed and, moreover, this is also a Small Cap stock which means it is more difficult and expensive to borrow - a costly mistake for short sellers. Investors held 12% of BBP's Market Cap on loan (%MCOL) in August 2007 when the share price was at $3AUD, but then closed out positions dramatically when the share price started to drop, when in fact they should have either increased their positions in the company or held the same %MCOL. In fact, the %MCOL dropped down to 2% between October and January 2007, only to rise again to 8% in March (as the share price rose again) and then back down again to 2% in May, up to 6% in late June and then down again to approximately 4% over the past two weeks. This has all been in conjunction with the fall in share price. The more recent increase in positions is teamed with yet another fall in share price as The Wall Street Journal said, which could mean that this time, short sellers have got the timing right.

Coeur D'Alene Mines Corp

The Russell 2000 stock Coeur D'Alene Mines Corp (CDE) has seen a significant rise in the percentage of its Market Cap on loan (%MCOL) since late February this year - from 10% then to 23% today. Prior to this, the stock peaked at an all-time high of 40% MCOL on January 4th, making it one of the most heavily borrowed stocks of recent years with Utilisation at over 90%. Yet, despite the price fall - from $5 in March to $2 now, this is classic case of when short investors have 'got it wrong.'

You will see from this chart of CDE's %MCOL over the last year that short investors began to increase their positions in the stock as the price continued to rise - between August 2007 and February/March this year. As soon as the price started to fall; between March and May/June, short sellers then closed out their positions meaning that little profit was made. It is only in recent months that these positions have been increased again and some profits have been taken. Adding insult to injury, the Russell 2000 is more expensive to borrow than, for example, the S&P 500 because it is a small cap index and there is less stock available, so these misconstrued investments could have been extremely costly for certain companies.

American banks bounce back

Wall Street stocks rose for the first time in three sessions yesterday as a rally in the banking sector and a decline in oil prices offset concerns about rising inflation and persistently high levels of jobless claims, says the FT. The Financial sector, which had lagged in the last two sessions, topped the list of gainers with a 2.6% advance as investors bought back into some of the most heavily sold stocks of recent days.

Short positions have been covered in Lehman Brothers (LEH), which gained 4.1% yesterday. In late July the percentage of LEH's Market Cap out on loan to short investors (%MCOL) was 32% - this figure has now dropped down to 14% as of c.o.b Wednesday night, presumably in anticipation of the rise in price. There are 14 Days to Cover.

Bank of America (BAC) climbed 4.6% to $30.18, and like LEH, investors have closed out positions and taken profits in the bank. The short interest in BAC has not reached the extremes of LEH and Wachovia (WB), but all the same, the %MCOL has dropped from 4% in late July to 2.5% today.

PMI group, the mortgage insurer, was another gainer, soaring 49.5% to $4.17 after agreeing to sells its Australian operations for $920m, but the shares are still down more than 80% over the past year. As you can see from this graph, short positions have also been covered in this stock and the %MCOL has decreased from 23% in early July to 17% today.

Interestingly, short positions are still being held in Wachovia, despite its 6.9% gain to $15.83 yesterday. The bank's %MCOL has risen steadily over the past six months, reaching an all-time high earlier this week of 18.5%. Utilisation is at 60% so it will now be relatively hard to borrow this stock. The average Utilisation for the rest of the North America Banks sector is 30%, and for the rest of the S&P 500 it is 8.13%. There are 30.4 Days to Cover in this stock.

General Motors

General Motors (GM) fell 5% yesterday after Moody's downgraded the carmaker, citing concerns over whether it could make and sell smaller cars fast enough to compensate for collapsing large vehicle sales.

Short sellers have held a large position in this stock for the past two years. In August 2006 20% of GM's Market Cap was on Loan (%MCOL) to short investors, and this figure remained approximately the same until January this year when it started to increase to an all-time high of 40% in early July and now back to a still significant figure of 31% today. This is in conjunction with a fall in share price - from 21USD in May 2008 to 11USD today. For those who increased their positions at the correct time (some long ago), substantial profit has been made. 87% of  GM's available supply is now out on loan (Utilisation) which means it is virtually impossible to borrow this stock now. A potential short squeeze could be on the horizon as there are 40 Days to Cover. This is juxtaposed with a slight rise in share price which could mean that short investors are keen to cover their positions and take profits.

Media

The FT reported today that the Media sector has been left reeling as the credit crunch starts to bite into earnings and deal activity. Andrew Edgecliffe-Johnson also reported from New York that Thomson Reuters' growth in its financial data division had slowed, using the data to say that 17% of the London-listed shares in Thomson Reuters are out on loan to short sellers (%MCOL), as is 15.5% of the Toronto-based stock.

The chief executive of Reed Elsevier (REL) also spoke to the FT a fortnight ago - with frustration born of running a successful company in a failing industry. Few sectors of the UK corporate environment have been hit harder than Media: share prices have halved since May 2007, said the paper. Although the short interest in REL is not significant, you can see from this graph that short positions have been increased in the media company since mid-June, when the %MCOL rose from 3.7% then, to 5.3% now. There are 19 Days to Cover.

Punishment has come across the board, with more obvious companies such as Johnston Press (JPR), one of our best-timed shorts of last year, who are exposed to downturns in classified advertising. 13.66% of JPR's shares are on loan to short sellers.

Yell (YELL)  is trading promisingly on price-earnings ratios of 2.8. although the directories business still has considerable net debt. Yell has 17.25% of its MCOL, up from 7% in March of this year. However, there has been some short covering in this stock, which hit n all-time high of 22% on July 18th (please see graph).

Trinity Mirror, another exposed media group, has 18% MCOL.