Re short position - and in response to a few queries @col69...

Re short position - and in response to a few queries
@col69 @ddwn

Hi guys, thanks for all the likes, and the happy comments - it seems that the usual short suspects have given up commenting for the time being. They have been out of the market for months, neither putting on new shorts nor covering in any size, although there appears to have been about 500,000 shorts covered since the Grünenthal announcement. As I said in the last comment, the volume on Tuesday and Wednesday last week (11.7m shares in total) would have been a good opportunity to cover shorts, but that the lack of reporting of new gross positions those days meant it was unlikely they had done much and that the net short may be down by today, but maybe only slightly.

On June 7th the Net Short was 27.345m and was hardly changed until the Monday before the Grünenthal announcement at 27.305m, three days later last Thursday the net short was down to 26.814m, so down 0.5m in 3 days (ie 500,000 of apparent net short covering) after no net change for 3 months. We were waiting to see whether the Net shorts indicated new shorting or selling post the Grünenthal announcement last week. It would have been very difficult for the short position to rise as there is still no stock available for lending.

The shorts have therefore missed a big opportunity to cover large amounts in the volume which has traded since the announcement, however, looking back in history this is typical. In the previous big rises in the share price, the short position hardly changed until the rally had topped out, usually associated with new bad news. The rally in October/November 2019 ended with the NIH LVAD heart trial results were misinterpreted and the share price fell from $2.20. Note that the short position had only risen marginally during the share price rise in October, but then rose from 5.78% of the company's capital (28.77m short) to over 8% (41.6m shares short) after the bad news was released.

So, while the price is rising, the shorts hang tough, but when the price has had a big rise and then has bad news, they move back in hard:


Also, apart from bad news, capital raisings have hit the share price in the past. Again this was an attractive entry point for shorts after a big price rise if they could see capital raisings coming - see the graph below showing the rise in the share price in February 2017 from $1.40 to $3.40 in April 2017 (coincided with FDA fast track for GvHD; durable 3 year outcomes in disc disease and the Independent Data Monitoring Committee (IDMC) for the ongoing Phase 3 trial in chronic heart failure (CHF) initiated the process for the pre-specified interim futility analysis of the trial’s efficacy endpoint).

Over that period, the net short position actually fell as 4m shorts were covered, from 5.8% to 4.5% of the company's capital (23.2m shares short to 19.3m short). The following fall in the share price back to $1.33 by September was associated with a rise in the net shorts back up to 23.5m net short after MSB placed $US40m, or 25.25m of new shares at $A2.00 at the end of March.

Obviously some people were happy to take profits on stock issued at $2 which had subsequently run to $3.40 and then in August it was hit by the 1:12 entitlement issue to raise another $A50.7m at $A1.40.

Shorts didn't play a significant role in this fall, and it is interesting to note that they didn't increase their short during the share price surge.


Like these two previous price spikes, I don't expect the shorts to increase their net short position while the share price rises. And like these two previous occasions, I don't expect the price rise to end unless there is the need for big capital raisings/share issues or there is unanticipated bad news. At present, neither of these things are likely to happen, with plenty of cash and no need to raise capital until at least 2022, and a possible huge surplus of cash if another big deal like Grünenthal is done for back pain in the US or CHF or GI bleeding LVAD heart products in the US or Europe - likely to add up to $US150m per indication in upfront fees alone plus Tasly milestones of a similar amount. Given that momentum on deal making is now positive, with pressure on big pharmas to replicate the Grünenthal deal, and continued good results from trials, it's hard to see bad news on the horizon.

So, net shorts are likely to continue to drift lower, though they have missed a big chance to cover in the high volume of last week, and even if shorts wanted to increase their shorts, there's still no stock available to borrow. That will continue to support the share prices.


Re M&G offer to buy shares
@Barman76
No, the potential placement of $US15m of stock would not be an out for the shorters...quite the opposite. M&G is the biggest institutional holder and has been rock solid (even when one of their funds sold, the bigger fund soaked it up). They have indicated they are happy to buy more and that's why they've entered into the Subscription Commitment Letter with MSB.

M&G would lock up these shares as a supportive shareholder - there's no way they would be available to shorters.

From the 30 Aug Preliminary Final Report page 88: "We will also consider equity-based financing to fund operational requirements. Mesoblast have entered into a Subscription Commitment Letter with its largest institutional shareholder, M&G Investment Management, for US$15.0 million in Mesoblast ordinary shares, exercisable by the Company on or before 31 December 2019, subject to customary diligence and with pricing to be agreed at the time Mesoblast gives notice. In addition, in July 2019 we extended the fully discretionary equity facility with Kentgrove Capital from which we can raise capital of up to A$120.0 million (approximately US$82.0 million) over the next 24 months, the quantum and timing of capital raised will be subject to the market price and trading volumes of our ordinary shares during the period and our obligations under ASX Listing Rule 7.1."

MSB is not committed to issuing these shares and no price has been set yet. I had said earlier it could result in 15m shares being issued - but that was when MSB was trading at $US1.00 per share, it is closer to $US1.50 per share now, so only 10m shares would be issued at present market prices.

It will be up to MSB whether they take M&G up on this offer or not and I'd be surprised if other major holders haven't also approached MSB to do a similar placement as it is the best way of getting set for big lines of a very thin stock. Just because insto's approach MSB for shares doesn't mean they'll be issued.

It is a vote of confidence in MSB by the biggest insto holders and would lock the stock up and not be available for shorts.

On the other hand, if MSB wanted to conserve cash, and were to issue stock to Osiris for the $US20m milestone payment on commercialisation of aGvHD some time in 2020, you could assume that stock would eventually be sold after it comes out of a 12-month escrow (ie some time in 2021) and that could allow for some short covering (but not for nearly two years) - that is why I suggested that it might be better for MSB to issue the shares to M&G instead, lock up the stock and then use the cash to pay Osiris.

Furthermore, using the Kentgrove facility could give some scope for shorts to cover, as Kentgrove would probably sell in the market to cover their exposure and I'm sure that's why MSB have never triggered it - it is just there as a backstop.


Equity vs Debt Considerations

Whether MSB uses the Subscription Commitment from M&G or issues shares to Osiris will depend on the share price at the time and by the need to conserve cash. Debt is cheaper than equity (with people discounting cash flows at a Weighted Average Cost of Capital of 15% or more, while even the most expensive NovaQuest debt is only 15% pretax, or 11.85% after US taxes. Debt is currently $50m from Hercules and $US30m from NovaQuest ie $US80m, with the potential to rise to $US115m if the rest is drawn down. Equity market cap is $US730m, so at current prices debt is less than 10% of total debt plus equity, and even once all the debt is drawn down, debt will only be 13.6% of total capital. This will become undergeared when MSB has product approval and begins commercialisation, with major partners and milestone payments likely to follow and cash flows to turn positive.

So, a further $US70m of debt could be justified, taking the potential total up to $US185m, which would be around 20% of total debt plus equity (at the current $US share price). This extra debt would be cheaper than issuing new equity, and given that MSB doesn't appear to need new equity after the Grünenthal partnership and also given that there will eventually be more big partnering deals and between 10m and 30m new shares issued from options (if the share price is between current levels and up to $A5), I doubt MSB would issue new equity unless it was done for what the Prof considers an attractively high price.

M&G ARE SOLID HOLDERS AND POTENTIAL BUYERS!

M&G have clearly signalled their support for MSB and willingness to invest another $US15m via the Subscription Commitment Letter. So, I'm not concerned that they would sell the $US15m placement to allow shorters to cover.

M&G was last reported increasing its holding by 5.05m shares on July 10th (see MSB website under "Ownership Summary" - though I think this was a transfer of holdings between M&G funds), taking the total holding to 65.6m shares. This is valued at $A140m today - a drop in the ocean for one of the world's leading funds management groups. Most (if not all) of the shares appear to be held in the M&G Recovery Fund which is a GBP2,227 million fund ($A4.056 billion) - so the MSB holding is around 3.45% of the fund. M&G Investments had £321 billion of assets under management (as at 31 December 2018) - so the MSB holding is 0.02% of its total investments!

However, as I detailed on 15 July, I don't think the 5.05m shares was new net buying, but was actually a transfer between M&G/Prudential Funds which occurred with the P1 XT trade of 3.64m shares on the ASX on July 10 and the Nasdaq crossing of 452,475 ADRs in a single line at $US5.385 (2.262m shares equivalent at $A1.55) the night before.

The P1 XT "Put Through" after the market closed at 4:13 pm on July 10 (where one fund manager has different funds held through different nominees or custodians and the fund manager crosses stock from one fund to the other) was 3.64m shares at $A1.53 out of a total day's trading of 4.18m shares that were traded in Australia on 10 July at prices between $A1.48 and $A1.545.

It looks like M&G transferred MSB shares after a change in fund managers in its Global Recovery Fund - with that fund selling its entire holding to the much bigger Recovery Fund. The Global Recovery Fund is still listed as holding 3.62m shares on the MSB website in the Mutual Funds table - but I think these were the shares transferred to the Recovery Fund in the P1 XT "put through" and the holding is dated March 2019 - so it is probable that it has changed since then. It also appears that the ADRs might not be counted in this Mutual Funds table.

On July 5 2019, M&G announced that Richard Halle along with Daniel White and Shane Kelly would become co-managers of the smaller £311 million M&G Global Recovery Fund. The incumbent manager of the M&G Global Recovery Fund, David Williams, was stepping down. It appears that this change of management may have precipitated the transfer of the MSB shares and ADRs.


Appendix: Short term trading after big price rise
It's tempting to trade a short term price rise, especially after a few price spikes in the past few years have fizzled out and seen the price fall all the way back again.

@BigCheese10 said he sold out at $2.16 and was looking for a 10% drop - for me, the trading cost implications (assuming a share price rise from the $1.50 highest frequency price in the past 5 years) are that even if I bought back in at $1.94, I'd only be 1c in front after capital gains tax and brokerage. Maybe BigCheese10 holds his stock in a non taxpaying SMSF - in which case trading for a 10% fall makes some sense, as long as it doesn't just keep going up, and if it does fall that you don't get cold feet and fail to re-enter.

I can't really work out what @Cato is up to, he seems to be missing large chunks of the price rise by trading, but he seems happy.

The point is, a lot of people are tempted to take profits after a price rise, and many studies have shown people cut their profits and let their losses run and that at least 80% of traders lose money. That's not just retail investors, but also professional traders. A better way to do it is have a view on the long term value of the company and buy when the shares are below that value and sell when they are above. The last short term price move should be irrelevant (just like the last roll of the roulette ball or coin toss tells you nothing about the next outcome - it is the long term stats that are predictable).

I don't complain about others making sub-optimal short-term trading decisions because that's what creates opportunities in markets. I wish all the best to the traders, and I don't really mind where the share price goes in the short term as it's only the longer term that I'm trying to predict and profit from. There will be traders who make money on any stock on any day - the problem is the predictability of this.

We actually need solid trading volumes to continue to make sure the Index Committee don't downweight MSB for lack of trading volume when it is a chance of entering the ASX200 in March next year.

With most analysts raising their 12-month price target again (some back over $5) and the possibility of more big partnering deals, short squeeze, product approvals, index inclusion, etc likely to push valuations even higher, I think it's missing the point to sell after a A 70c price rise in MSB's aussie shares. Sure it's a $US 240m increase in the market cap - but the upfront payment on Grünenthal is $US 150m, with up to $US1 billion in milestones and double digit royalties - and that's all just for back pain in Europe and LatAm. That all dwarfs the share price rise.

My long term value is well above the current share price and I can't see the point of risking not getting back in if the share price doesn't fall the 10% I need to pay the tax and transaction costs.

Have a look at the following notes on traders' typical behaviour taken from: https://www.tradeciety.com/24-statistics-why-most-traders-lose-money/[/BCOLOR]

1. 80% of all day traders quit within the first two years. 1
2. Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. 1
3. Traders sell winners at a 50% higher rate than losers. 60% of sales are winners, while 40% of sales are losers.2
4. The average individual investor underperforms a market index by 1.5% per year. Active traders underperform by 6.5% annually. 3
5. Day traders with strong past performance go on to earn strong returns in the future. Though only about 1% of all day traders are able to predictably profit net of fees. 1
6. Traders with up to a 10 years negative track record continue to trade. This suggests that day traders even continue to trade when they receive a negative signal regarding their ability. 1
7. Profitable day traders make up a small proportion of all traders – 1.6% in the average year. However, these day traders are very active – accounting for 12% of all day trading activity. 1
8. Among all traders, profitable traders increase their trading more than unprofitable day traders. 1
9. Poor individuals tend to spend a greater proportion of their income on lottery purchases and their demand for lottery increases with a decline in their income. 4
10. Investors with a large differential between their existing economic conditions and their aspiration levels hold riskier stocks in their portfolios. 4
11. Men trade more than women. And unmarried men trade more than married men. 5
12. Poor, young men, who live in urban areas and belong to specific minority groups invest more in stocks with lottery-type features. 5
13. Within each income group, gamblers underperform non-gamblers. 4
14. Investors tend to sell winning investments while holding on to their losing investments. 6
15. Trading in Taiwan dropped by about 25% when a lottery was introduced in April 2002. 7
16. During periods with unusually large lottery jackpot, individual investor trading declines. 8
17. Investors are more likely to repurchase a stock that they previously sold for a profit than one previously sold for a loss. 9
18. An increase in search frequency [in a specific instrument] predicts higher returns in the following two weeks. 10
19. Individual investors trade more actively when their most recent trades were successful.11
20. Traders don’t learn about trading. “Trading to learn” is no more rational or profitable than playing roulette to learn for the individual investor.1
21. The average day trader loses money by a considerable margin after adjusting for transaction costs.
22. [In Taiwan] the losses of individual investors are about 2% of GDP.
23. Investors overweight stocks in the industry in which they are employed.
24. Traders with a high-IQ tend to hold more mutual funds and larger number of stocks. Therefore, benefit more from diversification effects.

Conclusion: Why Most Traders Lose Money Is Not Surprising

After going over these 24 statistics it’s very obvious to tell why traders fail. More often than not trading decisions are not based on sound research or tested trading methods, but on emotions, the need for entertainment and the hope to make a million dollars in your underwear. What traders always forget is that trading is a profession and requires skills that need to be developed over years. Therefore, be mindful about your trading decisions and the view you have on trading. Don’t expect to be a millionaire by the end of the year, but keep in mind the possibilities trading online has.

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– ¹Barber, Lee, Odean (2010): Do Day Traders Rationally Learn About Their Ability?
– ²Odean (1998): Volume, volatility, price, and profit when all traders are above average
– ³Barber, & Odean (2000): Trading is hazardous to your wealth: The common stock investment performance of individual investors
– ⁴ Kumar: Who Gambles In The Stock Market?
– ⁵ Barber, Odean (2001): Boys will be boys: Gender, overconfidence, and common stock investment
– ⁶Calvet, L. E., Campbell, J., & Sodini P. (2009). Fight or flight? Portfolio rebalancing by individual investors.
–⁷Barber, B. M., Lee, Y., Liu, Y., & Odean, T. (2009). Just how much do individual investors lose by trading?
– ⁸Gao, X., & Lin, T. (2011). Do individual investors trade stocks as gambling? Evidence from repeated natural experiments
– ⁹Strahilevitz, M., Odean, T., & Barber, B. (2011). Once burned, twice shy: How naïve learning, counterfactuals, and regret affect the repurchase of stocks previously sol.
– ¹⁰Da, Z., Engelberg, J., & Gao, P. (2011). In search of attention
– ¹¹De, S., Gondhi, N. R. & Pochiraju, B. (2010). Does sign matter more than size? An investigation into the source of investor overconfidence​