Ryan Remiorz/The Canadian Press
The Toronto Stock Exchange's short-interest tables for Sept. 30 tell some interesting tales. Let's look at a few highlights.
The S&P/TSX 60 Index
The bears continued to back away from the iShares S&P/TSX 60 Index ETF (XIU-T). They have cut their short position to 63.2 million shares, a drop of 33 per cent since Aug. 30. This could be a sign that they believe the Canadian stock market's 10-per-cent slide over the past five months has been enough.
Bombardier
Bombardier Inc. was not so fortunate. The short position in its Class B shares leaped 30 per cent to 60.1 million, becoming the second largest on the TSX. The rally of more than 50 per cent during the past month in the shares of the manufacturer of trains and airplanes may be encouraging to some, but the short sellers have not only stayed the course but are raising their bets that the new CSeries aircraft will not bring in enough revenue to support Bombardier's high debt load. That's not a good omen – although the story is still unfolding and a short squeeze cannot be ruled out.
Canadian banks
Short positions on Canadian banks are still elevated as U.S. hedge funds wager on an implosion in the Canadian economy and housing market. Toronto-Dominion Bank, for example, had the third largest short position (60 million shares) on the TSX. In April, it was only 36 million shares.
Nonetheless, with short sellers holding down valuations, it's time to buy the Canadian banks, says the Money Reporter newsletter. The publication believes the expanding U.S. economy will give a lift to Canadian exports and, in turn, the domestic economy. The low Canadian dollar also boosts exports while making it cheap for foreigners to buy Canadian real estate.
Boralex Inc.
Boralex, a developer of renewable-energy power stations, witnessed the largest decline in short sales, from 9.9-million to 1.6-million shares. This likely was mostly due to the redemption of one of its convertible debenture series.
Prior to the redemption, as noted by Lester Asset Management's Stephen Takacsy, the debentures were convertible into shares at a price lower than the market price, so short sellers were long the convertibles and short the stock to exploit discrepancies in conversion and market prices (convertible arbitrage). When the company bought out the debentures, the short sellers had to close their positions.
OceanaGold Corp.
One of the biggest increases in short interest occurred in the shares of OceanaGold Corp., a gold exploration and development company. More than 20 million shares were short on Sept. 30, up from 14.7 million on Sept. 15. Before July 30, OceanaGold did not appear on the TSX's short-interest tables.
The rise in short interest may have had a lot to do with OceanaGold's all-stock takeover bid for Romarco Minerals Inc. As the share prices of companies to be acquired tend to trade below the bid price until the takeover becomes official, short sellers can make a profit by engaging in merger arbitrage.
This involves buying the shares of the company being acquired while shorting those of the company making the acquisition. As the deal is consummated, says Investopedia.com, the arbitrageur gains when the acquired company's share price rises to the bid price while the acquiring company's share price falls because its acquisition costs become a certainty.
Here is a link to the TSX's short selling tables
Larry MacDonald is an economist, author and financial writer. His website is at larrymacdonald.serveblog.net/home.