Short Stories

UBS

Europe’s biggest casualty of the subprime crisis, UBS (UBSN), has announced a further massive loss and its second capital increase in two months, says the FT. The bank's chairman Marcel Ospel today said that he would not seek re-election amid the crisis.

Whether or not the FT are correct in saying that this bank is the biggest casualty is arguable (the share holders of Northern Rock might have something to say about that), but nonetheless, 4% of UBS' Market Cap is on loan (%MCOL), up from 1.5% in early January (please click to enlarge graph). This may seem like small fry, but this is 4% of an approximate $65bn.  Shares have tumbled from 53CHF to 30CHF since December 27th. Utilisation is 13%, so there is still a lot left to borrow. For those investors wishing to buy back shares there are 2.77 Days to Cover (also known as "short interest ratio").

Some of this trading could be dividend related (next dividend is April 25th), but our data reveals that this would be pointless for many investors who receive 100% of the dividend anyway, further reflected in the low Utilisation figure. These holders of the stock have continued to lend the stock out, presumably to short investors.

In the land of the blind, the one eyed man is king

Volatility breeds fear.  Nothing becomes easier than to blame circumstances on the one thing you can't see or understand.  Hence people have convinced themselves that those rumours were started by those seeking to make a quick killing by a quick fall. Who are we to let the truth get in the way of a good story?

Except that even hacks have commented that this blame game takes us back 10 years or more. The authorities are so worried about their reputation that they would send 100 people to investigate the opening of an envelope at present.  Reasons are emerging to begin to question whether the press were spun in the wrong direction.

Short interest, as measured by properly covered stock borrows,  is low in HBOS. About 6% mcol last Tues evening, then has hovered around that level.  The FTSE average is around 4.5%.

Institutional investors didn't believe the rumour and took the price weakness as an opp to buy more shares  -  to the tune of 5% in fact.

Then on Monday, news emerged of Mike Ashley's large long spread bet in HBOS.  Michael Owen scored for the Magpies and his Chairman bet big on the Halifax? Strange times.

In Australia certain companies have fallen rapidily in price for two reasons. Firstly firms like ABC Learning Centres issued a profits warning. But secondly, it is often public knowledge that their CEO's have borrowed cash from banks using their share options at collateral.

Could it just be that the HBOS fiasco was a tale of so called "predatory trading" as opposed to a bear raid?

Finally, one wonders what other spin would have been made should HBOS have moved as aggresively as say LEH or Bear Stearns or Soc Gen over recent weeks. A 17% fall was not remarkable in the recent context.

Data Explorers Short Portfolio: Up 30% in 8 Months

Data Explorers has been monitoring the performance of a portfolio of short stocks selected by our screening tools since 7th June 2007.  The performance of this paper portfolio shows that the average return (calculated on an equally weighted basis opening price to opening price between the date when the story was published and 28th January 2008) was 29.7% per stock compared with a (short) return of 10% in the FTSE All World during the same period.

Total based on alerts since 7th June 2007	30%
Total based on news since 29th October 2007	9%
Overall Total since 7th June 2007	19%
FTSE ALL WORLD since 7th June 2007	10%

Of the thirty-eight stocks in the portfolio, only four have subsequently risen in price since the publication date, namely Yamana Gold, Hagemeyer, Calmaine and Fast Retailing.  Outstanding successes on the short side were: American Home Mortgage (delisted), Erinaceous Group (down 95% since publication), Northern Rock (down 78% since we highlighted it in a report on EMEA banks), Ambac (down 69%), Black's Leisure (down 65%), Martha Stewart (down 59%) and IKB (down 55%).  Download short_portfolio.xls

While some people may find it macabre to examine stocks which have lost so much value, we believe it is important to highlight the fact that stock borrowers (hedge funds and prop traders)came early to many of the themes which have dominated the last eight months, namely subprime, property and retail.  We would also highlight the fact that the cost of borrowing many of the stocks in our portfolio is not taken into account, and nor is the bid-offer spread. Please refer to our disclaimer concerning investment advice.

After 29th October, we began to focus more on stocks which feature in the daily news.  These stocks produced a return of 9% on average between 29th October and 28th January, while the FTSE World index produced a return of 14% in the same period.

If you would like further information about the methodology used to screen for potential short stocks, please contact Alex Hofmann (+44) 207 392 4010 or Email: ah@dataexplorers.com

Is there really a story with HSBC?

Well the story is that there is no story. Even though $3.4bn writedown in its third quarter profits is higher than expected, it is relatively small compared to Citi’s $11bn loss a few weeks ago. It’s clear that HSBC got off lighter than most and is less exposed to the sub-prime than the other banks. $1.4bn of the figure is related to non-mortgage loans. HSBC only has 1% MCOL out today, compared with 2.16% of Citi’s; still a marginal amount compared to Northern Rock’s 11.9% reported today. It’s been said that ‘The Rock’ will take years to recover, but although HSBC’s chairman Stephan Green was gloomy, he predicted that the “prolonged weakness” would last at least through to 2008 “and probably” 2009. It would appear that the bank’s activities in other areas such as Asia and the Middle East have done more than enough to make up for the US consumer finance problems.