Issues relation to shorts and what to watch out for
As pointed out, the Shortman figures can be misleading, and you have to take more into account.
The big picture at the moment is that shorts have been covering (4m covered after the Grünenthal deal), although there has been a small dead cat bounce in recent days of a new 750,000 shares shorted (which already looks like it is fizzling out).
Shorts may have their last great opportunity to cover if Capital decides to sell its remaining 5% of MSB.
The balance sheet and cash burn are fixed for at least two years (and more if extra Grunenthal payments are taken into account and sales revenue from GvHD starts in the Dec half of 2020) and any further big partnering deals should make MSB think seriously about a share buyback.
In relation to how to read the gross and net short positions:
1. The Net Shorts are the more interesting figure, however they are not reported until around 1pm on a T+4 basis
2. Gross Shorts are reported T+1 but don't really mean much
3. Not all movements in the short register go through the market
4. Once a short has been covered, that stock may not necessarily be available for lending again
5. There's still nothing going on with shorts except around 4m covered post the Grünenthal deal - most selling looks like it has been Capital selling at least 2m shares and possibly some other longs speculating that Capital will sell more and push the price down
Investors have to report (and brokers have to inquire) whether a trade is a "long buy", "short sell" or "long sell" - however they don't report "short buy" - ie they don't notify that a purchase is being done to cover a short. They generally use specified IRESS or FIX field codes to indicate short selling and cover their reporting requirements. If the order is placed by phone they say "buy", "sell long" or "sell short".
So a single High Frequency Trader could start the day short selling 10,000 MSB, then cover, then short again and cover again several times - accumulating to over 100,000 Gross Shorts on the day, even though they've all been covered. The Net Short position which comes out 4 days later would not register a change.
A big 1m Net Short position could be covered by buying back in the market on a day nobody is shorting - that would show Gross Shorts of zero, but 4 days later the Net Short would fall by 1m shares. However, you would normally see bigger than usual volume traded in the market to indicate something like this is happening. Some of the really big short positions have been reduced around the same time that big crossings go through the market in after hours trades.
It is possible to transfer stock between the US ADRs and Australian share registers to create new or bust up existing ADRs - it costs a fixed $US5.00 per 100 ADRs (or part thereof) to do this , but means it is possible that short positions on either US NASDAQ or ASX can be covered (in theory) on the other market. In practice, there isn't a lot of transfers of ADRs, particularly when the share price is down near $A1 as it costs US5c/0.685 = A7.3c per ADR = A1.46c per Aussie share and that's before you add the cost of currency conversion when you want to move the money back to your own currency. Currently there are 8.464m ADRs outstanding, and M&G own 1.491m of them, so there are less than 7m ADRs in existence to trade against in the US - and that's why most of the liquidity has migrated to the Aussie market. As at 30 Sep, there were only 255,089 ADRs shorted (equivalent to 1.275m shares) - or 3% of the ADRs on issue. That's only 10,000 ADRs below the 12-month peak of 265,000 in mid-September. It is possible that the shorts of these ADRs could buy back in the Aussie market (paying currency conversion costs to get $A) then convert the shares they buy to ADRs (paying US5c per ADR) then use those ADRs to cover their short ADR position. That would show up as trading volume in the Aussie market, but nothing in the US market. Similarly, the reverse could happen where Aussie shorts cover by buying ADRs in the US then bust them back into Aussie shares and reduce their short without any trading volume appearing in the Aussie market - though this is expensive less likely due to the low US trading volumes which means you have much bigger spread costs on top of ADR costs and currency conversion.
There is also the possibility of big jumps in short positions when the lender wants the stock back - maybe so they can sell, or to receive franking credits on a dividend for example, or to be able to vote at a company meeting. There is also the possibility that a shorter wants to temporarily buy back if they think the price may bounce, and then re-short after the bounce - you would expect to be able to see more stock available for lending if that happens, but not always - in a tight register like MSB where there is hardly any stock available for lending the shorts don't want to cover and return the borrowed stock for fear someone will jump in and borrow it, so they pay the lender the normal interest rate to reserve the position in case they want to re-short it. Usually these sort of moves create large daily trading volumes as the shorter covers his position, then reshorts later.
Then, to make sense of what's going on, you have to depend on people reporting accurately and in a timely fashion - there can be human error in the reporting, or there could be deliberate misleading which is quite easy to do. Big funds don't want to gain a bad reputation and invite more scrutiny from the regulators, so in the main they do the right thing - especially if there is no personal gain for the dealer or fund manager, and with the threat that he may lose his/her job if they act outside of their firm's policy. Despite all this, big firms do make errors in reporting, which may be fixed a day or two later, or they may not report in time to make the cutoff. There may be more manipulation or deliberate misreporting from offshore smaller firms and some of the nastier offshore short sellers - especially if the fund manager/dealer has a personal position in the stock.
I try to take all of these things into account when looking at what's probably going on with the short position. For several months now, there has been effectively "limited" MSB stock available to short (you have to get this info from the brokers directly, it isn't generally available). I look at the net shorts to see what's really going on - but that's 4 days late. If the most recent gross shorts show not much movement, then the net shorts probably aren't doing much, especially if there's no stock available for shorting and if there hasn't been abnormal daily trading volumes in Australia or the US. You can also get a printout of the major brokers trading in a stock and see if there's any unusual activity by, say Morgan Stanley, UBS, or to a lesser extent Credit Suisse (all who have been active in the past in MSB trading and shorting)
The last big bout of MSB short activity was the rise in shorting from November last year up to the high at the end of January this year of 8.35% of the company or 41.6m shares shorted - to me that looks related to the Capital selling at the time when one Capital fund sold out completely. I suspected that someone knew Capital was going to sell and that someone built up an aggressive short position (driving down the share price in the process), which the shorts then profitably unwound when Capital dumped the stock in February. I also said back then that it would be worth watching to see if the other Capital fund started selling. There is now evidence that the other Capital fund has reduced its position to less than 5% of MSB in the wake of Mark Denning's highly visible downfall. This takes MSB out of the public eye as far as Capital is concerned (except for the Top 20 Shareholders list) - and maybe that's all they want to do in the near term - it means they won't need to make any more substantial shareholder disclosures re MSB, particularly if they start selling again.
There is currently no indication that Capital wants to sell the rest of their holding. Brokers are like wild animals (or Box Hill parking police) when they see something like this unfolding and they would be putting all their efforts into putting a group of shorters and instos together and bidding Capital for the rest of their holding. That would be a great way for the shorts to cover for the lowest loss, and may be their last big chance at getting some volume without pushing up the share price. The long funds who recently took the placement at $2 would also want to participate as they would look silly if they paid $2 but then passed on buying more at 10-15% less and then saw the price bounce back over $2 (especially if they are big funds). The fact that 4.99% of MSB's shares owned by Capital has not yet been crossed means that Capital is happy to hold for the time being - although you'd be prudent to assume they will sell at some stage.
This whole situation is very embarrassing for Capital and hurts their reputation - they won't want to compound the error of selling their first big chunk sub-$1.20 back in February, then losing one of their most senior fund managers and then selling out now around $1.60 to $1.80 only to see another partnering deal push the share price to new 12-month highs of maybe $2.50 or $3 - the whole thing is a nightmare for them and all over a tiny stock.
MSB is no longer one of the most shorted stocks in the country. It is currently number 90 of the most shorted stocks in terms of days-to-cover (13 days) and outside the Top 70 in terms of percentage shorted (4.3%). This is as a result of the drop in the short position since the Grunenfeld partnership was announced, the increase in the number of shares on issue (by 7.5%) and the increase in the average daily trading volumes this month to around 1.6m shares per day (more than 4x the 385,000 per day in August). All these volumes include Chi-X.
It is possible that the 750,000 net shorts that have been put on since October 10th are in response to the Mark Denning/Capital situation and that coincides with still high trading volumes around 1.9m per day (from Oct 10th up until 4 days ago) - it is possible that these were previously covered shorts that the shorters were paying to hold and they have now been shorted again. It is likely that most of the volume in the market since October 10th is from selling from Capital and other stale Longs who are taking profits and selling to new Longs (ie the typical Fibonacci profit taking retracement - it just went a bit further than normal due to news of Mark Denning hitting right at the end). The rise in shorts has been weak after the big drop of 4m post Grünenthal announcement. Movements in Gross shorts have been negligible in the past three days and are an indication that the small amount of new net shorting stopped when Mark Denning's removal was announced - in other words, people who thought they had more info than the market stopped their selling when that info was officially released.
I see no current evidence that MSB is a plaything of the shorts any more. I also don't believe it is sensible to call it one of the most hated stocks in the Australian market (as several disgruntled holders on HC tend to do) - the drop in "hate" is evidenced by the big reduction in shorting, and thinking this way is crazy given the huge price rise from $1.01 in December last year to $1.77 now. In fact the share price is above the 1-year and 3-year volume weighted average price - so most recent holders are in front, and several long-term holders have taken the opportunity to average down. There are a class of new insto holders creeping on to the register, and plenty of potential buying from index funds in the next 6 months. On top of that, the balance sheet and cash levels are fine for at least two years (and that's only counting $US45m of Grunenthal's $US150m upfront and milestones, and not counting another $US25m milestone from Tasly and ignoring the possibility of more big partnering deals) - my view remains MSB will need to do a buyback if they do another major partnering deal, particularly if the new partner wants to secure the relationship with an equity placement.
Why would you want to be short with all that going on? The whole short-thesis has been blown out of the water and it will be even worse when the next partnering deal is announced. The only low-cost way avenue to cover some of the big shorts in the near term is to buy stock from Capital - and we could even see a special sale go through one day in the near future and find that a big portion of the shorts have covered. Of course, if Capital chooses not to sell, and a new partnering deal is announced, the shorts are in trouble.
(20min delay)
