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The Toronto Stock Exchange has published its short-selling tables for Dec. 31, 2015. Were there any large increases that could signal trouble for some companies? And are there persistently large short positions that might be waving red flags? Let's delve a little deeper into the data.
Large increases in short sales of banks
There were indeed some major increases in short interest during the two weeks to Dec. 31. The "Short Canada" crowd resurfaced and took aim at Canadian banks. Bank of Nova Scotia, Royal Bank of Canada and Toronto-Dominion Bank all zoomed to the top of the table showing largest net increases in short positions.
Bank of Nova Scotia registered the biggest move upward of all companies on the exchange, a 56-per-cent jump to 38.7 million shares. RBC leaped 42 per cent to 32.1 million followed by TD with a 10-per-cent rise to 52.9 million.
As December was coming to an end, oil prices were entering a new downturn. And Chinese stocks were under selling pressure, raising fears the country's economic growth and demand for commodities were on the wane. This was encouraging news to the "Short Canada" crowd, which sees the Canadian economy as about to fold and bring down the banks' lending portfolios.
With so many millions of shares sold short and stock prices in downtrends, it seems bearish sentiment is becoming overwhelming on the banks. But to maintain some perspective, it is worth noting that the number of bank shares freely trading on Canadian and U.S. exchanges (the float) is also huge. The large number of shares short could perhaps be more a reflection of the large number of shares trading.
Thus, it may help to look at the banks' U.S. and Canadian short positions as a percentage of their floats. When we do, some rather low percentages are found, ranging from less than 4 per cent for RBC to less than 3 per cent for Scotiabank. Perhaps bearish sentiment is not so daunting, after all.
Companies with large short positions in 2015
During 2015, a number of companies appeared on all (or most) of the TSX's largest short positions tables, which are published every two weeks. Generally, a short position just above 20 million shares was enough to make the list.
Excluding the three banks mentioned above and the iShares S&P/TSX 60 index exchange-traded fund, companies with large short positions included such names as Athabasca Oil Corp., First Quantum Minerals Ltd., Lundin Mining Corp., Manulife Financial Corp., Enbridge Inc., Husky Energy Inc., New Gold Inc., B2Gold Corp., Potash Corp. of Saskatchewan Inc., Power Financial Corp., Bombardier Inc. and Gildan Activewear Inc.
Does this mean red flags are fluttering in the breeze for these companies? Not necessarily. Short interest can reflect other things than a pure bet on a fall in a stock price. All or part can represent hedging or arbitrage operations, such as convertible debenture or merger arbitrage.
Moreover, many of the large short positions don't look all that scary as a percentage of the float. For example, U.S. and Canadian short sales of Manulife Financial Corp., Enbridge Inc., B2Gold Corp. and Bombardier Inc. were under 5 per cent of their floats. But Athabasca Oil Corp. and Gildan Activewear Inc. exceeded 10 per cent.
There were Canadian companies that did not appear often on the TSX tables highlighting large short positions, yet they still had substantial positions because of heavy short sales on U.S. exchanges. In December, nearly 100 million shares of BlackBerry Ltd. were short in Canada and the United States, which was close to 20 per cent of the float. Short interest for Teck Resources Ltd. on Canadian and U.S. exchanges in December was approximately 95 million, or 17 per cent of its float.
Larry MacDonald is an economist, author and financial writer. His website is larrymacdonald.serveblog.net/home.