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“Short selling can be much like a cat waiting outside a mouse hole,” Kathryn Staley wrote in her 1997 book, The Art of Short Selling. “The level of persistence, patience and attentiveness is not for everyone ….”

That was so true for most of the past decade when a relentless bull market yielded little worthwhile that short sellers could gainfully pounce on. But 2022 is finally rewarding the patient ones with big year-to-date declines in the Nasdaq Composite Index (down over 20 per cent) and the S&P 500 Index (down over 15 per cent).

Patience hasn’t been so much a virtue, however, for Canadian cats: the S&P/TSX Capped Composite Index is down by less than 3 per cent this year thanks to its technology-light and resource-heavy composition.

Ms. Staley’s book was written before the rise of activist short sellers, a species that doesn’t wait by the mouse hole but instead flushes out prey right away with a lot of loud noise in public venues. This approach, especially the version that targets corporate fraud, was more successful in terms of performance over the past decade – but now has problems of a different sort.

In 2022, investigations of activist short sellers are being carried out by the U.S. Department of Justice, Securities Exchange Commission, Federal Bureau of Investigation and some Canadian counterparts. In the United States, computers have been seized from the homes of some activist short sellers while others have received subpoenas for communications and other records. Even if no charges are laid, the regulatory framework for financial market could see amendments that impact short sellers.

Recent short selling on the Toronto Stock Exchange

As for recent short-selling activity on the Toronto Stock Exchange, S3 Partners provides short data that highlights companies where bearish bets are particularly elevated. As of Feb. 22, the top three companies, with over 20 per cent of their float short were: Air Canada (28.0 per cent), Canopy Growth Corp. (24.6 per cent) and Lion Electric Co. (24.1 per cent).

Top 20 short positions by percentage of float (Feb. 22)

Air CanadaAC-T28.0%
Canopy Growth Corp.WEED-T24.6%
Lion Electric Co.LEV-T24.1%
Meta Materials Inc.MMAT-Q19.5%
iShares S&P/TSX 60 ETFXIU-T19.0%
Hexo Corp.HEXO-T18.1%
iShares S&P/TSX Energy ETFXEG-T17.5%
Ballard Power SystemsBLDP-T16.1%
CI Galaxy Ethereum ETFETHX.B-T15.8%
Tilray Inc.TLRY-T15.0%
Sierra Oncology Inc.SRRA-Q14.8%
Briacell Therapeutics Corp.BCT-T14.6%
Energy Fuels Inc.EFR-T13.7%
Dirtt Environmental Corp.DRT-T13.5%
Lithium Americas Corp.LAC-T13.1%
Aurora Cannabis Inc.ACB-T12.7%
Morguard REITMRT-UN-T12.4%
Sundial Growers Inc.SNDL-Q12.4%
Tucows Inc.TC-T12.2%
Canada Goose HoldingsGOOS-T12.1%

Source: S3 Partners

Mostly resource and financial companies had the largest increases in short sales by dollar amount during the three months to Feb. 22. The leaders were: Agnico Eagle Mines Ltd., Canadian Natural Resources Ltd. and Suncor Energy Inc..

Top 20 increases in short positions by dollar value (3 months to Feb. 22)

Agnico Eagle MinesAEM-T$899.5
Canadian Natural ResCNQ-T$839.9
Suncor EnergySU-T$818.6
TD BankTD-T$807.3
Royal Bank of CanadaRY-T$563.6
Bank of MontrealBMO-T$492.7
Manulife FinancialMFC-T$390.0
BCE IncBCE-T$375.9
Bank of Nova ScotiaBNS-T$331.9
Nutrien LtdNTR-T$319.9
Telus CorpT-T$311.0
TC Energy CorpTRP-T$297.4
iShares S&P/TSX 60 ETFXIU-T$197.8
Teck Resources Ltd.TECK-B-T$197.1
Magna InternationalMG-T$196.4
BMO S&P/TSX Eq Wt Banks ETFZEB-T$186.5
Pembina Pipeline CorpPPL-T$183.7
Waste ConnectionsWCN-T$178.3
Cenovus EnergyCVE-T$178.1
First Quantum MineralsFM-T$173.1

Source: S3 Partners

A variety of companies had the largest decreases in short sales by dollar amount during the three months to Feb. 22. The leaders were: Canadian Pacific Railway Ltd., Shopify Inc. and Enbridge Inc.

Top 20 decreases in short positions in dollar value (3 months to Feb. 22)

CP RailwayCP-T-$6,045.5
Shopify IncSHOP-T-$2,372.1
Enbridge IncENB-T-$1,993.1
iShares Core S&P/TSX CappedXIC-T-$432.7
Canopy Growth CorpWEED-T-$309.1
Tilray IncTLRY-T-$278.6
Aurora Cannabis IncACB-T-$266.3
BMO S&P 500 ETFZSP-T-$228.6
Sun Life FinancialSLF-T-$220.6
Lightspeed Commerce IncLSPD-CN-$212.8
Lululemon AthleticaLULU-Q-$209.4
Blackberry Ltd.BB-T-$207.7
Brookfield InfrastructureBIP-UN-T-$204.7
Ballard Power SystemsBLDP-T-$199.4
Cameco CorpCCO-T-$191.8
National BankNA-T-$163.0
GFL Environmental IncGFL-T-$158.9
B2Gold CorpBTO-T-$154.0
TFI International IncTFII-CN-$147.6
Sundial Growers IncSNDL-Q-$141.7

Source: S3 Partners

Another way to explore bearish sentiment on the TSX is by examining the portfolios of investment and hedge funds to see what short positions they have.

Veritas Investment Research Corp. has a reputation for quality research, so let’s look at the portfolio of the long-short fund (Veritas Absolute Return Fund) managed by its affiliate, Veritas Asset Management. In the fund’s annual report released Feb. 16, it had ten short positions (in effect as of Dec. 31):

  • Ballard Power Systems Inc. (BLDP-T)
  • Boralex Inc. (BLX-T)
  • Canadian Tire Corp. Inc. (CTC.A-T)
  • GFL Environmental Inc. (GFL-T)
  • Great-West Lifeco Inc. (GWO-T)
  • Imperial Oil Ltd. (IMO-T)
  • Innergex Renewable Energy Inc. (INE-T)
  • Northland Power Inc. (NPI-T)
  • Sun Life Financial Inc. (SLF-T)
  • TransAlta Renewables Inc. (TA-T)

The urbane David Burrows provides an illuminating weekly update on financial markets and investments on the website of Barometer Capital. One of his slides presents the short positions of his firm; interestingly, they are all bond or fixed-interest ETFs. Obviously, the bet is on interest rates rising and bond prices falling. Here is the list:

  • Invesco Emerging Markets Sovereign Debt ETF (PCY-A)
  • Invesco Financial Preferreds ETF (PGF-A)
  • Vanguard Total International Bond ETF (BNDX-Q)
  • iShares 20+ Year Treasury Bond ETF (TLT-Q)
  • High Yield Bond ETF SPDR (JNK-A)
  • Vanguard Intermediate Term Bond ETF (BIV-A)
  • SPDR Intermediate Term Corporate Bond Portfolio (SPIB-A)
  • Mortgage-Backed Securities Vanguard (VMBS-Q)
  • iShares 7-10 Year Treasury Bond ETF (IEF-Q)
  • iShares Core CDN Short Term Bond ETF (XSB-T)
  • DB US Dollar Index Bullish Fund Invesco (UUP-A)

Larry MacDonald writes at Investing Journey.

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