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Over the past month on the Toronto Stock Exchange, there were significant increases in short sales of exchange-traded funds (ETFs) tracking bond markets, a development which may presage an upturn in the economy, inflation and interest rates. There were also large increases for banking and precious-metals stocks, according to data-analytics firm S3 Partners.

There were sizable declines in short interest for the long suffering cannabis and energy sectors as well, providing a glimmer of hope that the worse may finally be over for these stocks.

Lastly, the cost to borrow selected stocks is examined, ending with a brief description of a little-known method for augmenting returns via interest rates of up to 100 per cent on stocks loaned out to short sellers.

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Largest increases in short positions for ETFs (Aug. 31 to Sept. 15)

ETFIncrease in # of shares short% increase in shares short# of shares short
BMO Laddered Preferred Share IndexZPR-T5,125,70140%17,936,621
Pimco Monthly Income Fund (Canada)PMIF-T1,331,09218698%1,338,211
BMO Mid Corporate Bond IndexZCM-T487,781265%671,869
BMO Mid-Term US Corp Bond Index (C$)ZIC-T357,00014613%359,443
iShares Gold Bullion CGL-T331,292202%494,969
iShares Canadian Corporate Bond IndexXCB-T314,80469%771,233
Betapro Natural Gas Leveraged Daily BullHNU-T284,29064%728,149
BMO Mid Federal Bond IndexZFM-T273,43320,86%286,538
iShares Core Universe BondXBB-T267,33145%861,977
iShares Short-term Corp and Municipal BondXSH-T255,104415%316,511

Source: Investment Industry Regulatory Organization of Canada

Of the ten largest increases in short sales of ETFs during the first half of September, nearly all were registered by bond and income ETFs. Perhaps this development – especially if it extends into upcoming weeks –is foreshadowing a pickup in world economies and inflation. That’s the kind of environment that would cause the prices of bonds and income securities to decline and generate profits for short sellers.

It wouldn’t be an overly surprising development: the stimulus unleashed by policymakers in response to COVID-19 has been massive and is now triggering a sharp upturn in the purchases of houses – which historically leads an upswing in the broader economy. Investment firm Arbor Research & Trading provides collaborating evidence: inflows into the ETF tracking Treasury Inflation-Protected Securities (TIPS) in the United States reached record levels over the past three months.

Largest increases in short interest over past 3 months (to Sept. 25)

CompanyIncrease in short position past 3 months% increase in short position past 3 monthsShort interest ($-mill)Short interest as % of float
Barrick Gold Corp.ABX-T$861.3 35.0%$3,321.9 4.9%
TC Energy Corp.TRP-T$332.0 13.3%$2,824.8 4.9%
Royal Bank Of CanadaRY-T$324.0 17.9%$2,139.2 1.6%
Toronto-Dominion BankTD-T$316.9 8.1%$4,232.7 3.9%
Wheaton Precious MetalsWPM-T$301.0 29.4%$1,323.1 4.5%
Bank Of Nova ScotiaBNS-T$299.9 11.0%$3,029.0 4.6%
CIBCCM-T$287.2 12.3%$2,627.5 5.8%
Kirkland Lake Gold Ltd.KL-T$237.4 40.7%$820.2 4.9%
CP RailwayCP-T$232.2 44.5%$754.2 1.4%
GFL Environmental Inc.GFL-T$202.1 111.9%$382.8 5.5%
Nutrien Ltd.NTR-T$175.5 62.3%$457.3 1.5%
Agnico Eagle MinesAEM-T$149.8 42.6%$501.5 2.0%
Lundin Mining Corp.LUN-T$148.9 78.0%$339.7 6.7%
Sun Life FinancialSLF-T$129.2 13.7%$1,071.5 3.4%
Gildan ActivewearGIL-T$108.9 65.8%$274.3 5.3%
iShares Core S&P/TSX ETFXIC-T$108.7 35.5%$415.0 6.4%
Power Corp. CanadaPOW-T$108.3 16.5%$764.7 4.9%
Ballard Power SystemsBLDP-T$105.1 57.8%$287.1 7.3%
Algonquin Power & UtilitiesAQN-T$91.2 57.3%$250.6 2.3%
National Bank of CanadaNA-T$90.8 11.2%$902.0 4.0%

Source: S3 Partners

U.S. trades are included for inter-listed stocks (after converting to C$)

Banks and precious-metals miners dominate the list of companies with the largest increases in short interest over the past three months. If a ramp-up in business conditions and inflation is in the cards, it could result in an end to the historically low interest rates that have triggered a wave of buying in property and precious-metals markets.

GFL Environmental Inc. stormed onto the table with a 112-per-cent hike in short interest, the highest of the group. The waste-management firm was targeted in August by activist short-selling firm Spruce Point Capital Management, which accused it of using aggressive accounting to inflate its balance sheet. It was also alleged that company executives had highly questionable business connections.

Largest decreases in short interest over past 3 months (to Sept. 25)

CompanyDecrease in short position past 3 months ($-mill)% decrease in short position past 3 monthsShort interest ($-mill)Short interest as % of float
Shares S&P/TSX 60 ETFXIU-T-$586.6-21.9%$2,085.9 23.1%
Shopify Inc.SHOP-T-$393.3-13.6%$2,509.4 1.8%
BCE Inc.BCE-T-$232.9-10.8%$1,920.3 3.8%
Canadian National ResourcesCNQ-T-$202.5-32.1%$427.7 1.7%
Suncor EnergySU-T-$201.2-34.7%$378.6 1.5%
Canopy Growth Corp.WEED-T-$171.7-13.1%$1,142.9 23.7%
Alimentation Couche-TardATD-B-T-$145.2-33.3%$290.3 0.8%
Aurora Cannabis Inc.ACB-T-$134.8-37.5%$225.0 20.7%
Imperial Oil Ltd.IMO-T-$121.1-27.2%$323.7 8.2%
Tilray Inc.TLRY-T-$115.8-50.3%$114.3 16.7%
Pembina Pipeline Corp.PPL-T-$113.3-12.4%$800.2 4.9%
Brookfield RenewableBEP-UN-T-$107.6-60.6%$69.9 0.6%
Ovintiv Inc.OVV-T-$84.1-15.3%$463.8 14.7%
Telus Corp.T-T-$82.3-6.5%$1,190.1 3.9%
Cronos GroupCRON-T-$79.7-18.2%$358.5 28.8%
Canadian Tire Corp.CTC-A-T-$78.1-9.2%$775.9 10.7%
Brookfield Asset ManagementBAM-A-T-$75.9-5.8%$1,224.7 2.1%
Air CanadaAC-T-$70.2-19.3%$293.5 6.0%
Enbridge Inc.ENB-T-$67.2-2.0%$3,326.2 4.1%
Pan American SilverPAAS-T-$63.4-31.3%$139.1 1.5%

Source: S3 Partners

U.S. trades are included for inter-listed stocks (after converting to C$)

Two beaten up sectors of the stock market, cannabis and energy producers, are seeing some of the largest declines in short interest. Perhaps this may signal an end to the carnage suffered since 2019? The cannabis firms include: Canopy Growth Corp., Aurora Cannabis Inc. Tilray Inc. and Cronos Group Inc.; the energy firms include: Canadian National Resources Ltd., Suncor Energy Inc., Imperial Oil Ltd., Pembina Pipeline Corp., Brookfield Renewable Partners LP, Ovintiv Inc. and Enbridge Inc.

Largest short positions as percentage of float (as of Sept. 25)

CompanyShort interest ($-mill)Short interest as % of floatAnnualized borrow fee% change in short interest
Just Energy GroupJE-T$15.8 37.6%47.1%137.1%
Cronos GroupCRON-T$358.5 28.8%2.8%-7.5%
Alpha Pro Tech Ltd.APT-A$66.5 27.9%15.1%-8.0%
Westshore Terminals Corp.WTE-T$155.8 24.7%0.3%-11.8%
Canopy Growth Corp.WEED-T$1,142.9 23.7%5.5%-6.5%
iShares S&P/TSX 60 ETFXIU-T$2,085.9 23.1%0.9%-6.0%
First Majestic Silver Corp.FR-T$562.2 20.9%0.8%0.0%
Aurora Cannabis Inc.ACB-T$225.0 20.7%14.3%-15.6%
Village Farms InternationalVFF-T$55.9 17.8%21.1%14.7%
Canada Goose HoldingsGOOS-T$382.1 17.5%1.3%21.9%
Paramount ResourcesPOU-T$27.4 17.1%14.6%-14.6%
Tilray Inc.TLRY-Q$114.3 16.7%20.6%-34.3%
Aphria Inc.APHA-T$260.1 15.0%5.0%-5.0%
AutoCanada Inc.ACQ-T$58.4 14.9%4.6%2.7%
Frontera Energy Corp.FEC-T$21.7 14.7%7.6%-13.8%
Ovintiv Inc.OVV-T$463.8 14.7%0.6%-14.2%
Lions Gate EntertainmentLGF.A-N$127.0 13.2%0.3%8.5%
Neptune Wellness SolutionsNEPT-T$39.2 13.0%41.1%-11.2%
Energy Fuels Inc.EFR-T$34.9 12.8%4.7%2.0%
Lithium Americas Corp.LAC-T$84.9 12.8%42.6%21.0%

Source: S3 Partners

U.S. trades are included for inter-listed stocks (after converting to C$)

Rocketing to the top of firms with the highest percentage of float short is Just Energy Group Inc., a marketer of electricity and natural gas contracts. It does a lot of selling through door-to-door channels and kiosks at malls, which is not an easy business model to ply in the midst of a pandemic.

The company is carrying out a re-organization whereby its preferred shares and debt will convert into common shares. As initially set up, the conversion would occur at a lower price than the common shares trading in the market. So there was an opportunity to arbitrage the price differential by shorting the common shares and going long on the preferreds and bonds.

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The most expensive stocks to short (as of Sept. 24)

The cost to borrow UrtheCast Corp. shares has soared to 356 per cent, making it the most expensive stock to sell short as of Sept. 24. Shortly after raising $1 million in financing, the microcap company filed for creditor protection, which means its shares will likely be delisted.

Also leaping onto the list of most expensive shares was Calfrac Well Services Ltd.. The provider of technical services to oil-and-gas wells has been hit hard by the industry’s suspension of capex while oil and gas prices remain depressed. As a result, it is planning to recapitalize by converting $570 million of long-term debt into equity, vastly diluting existing shareholders.

CompanyBorrow fee (annualized)
UrtheCast Corp.UR-T356.4%
Calfrac Well Services LtdCFW-T122.6%
Electrovaya IncEFL-T87.9%
Eastmain Resources IncER-T86.9%
Cathedral Energy Services LtdCET-T83.6%
Chesswood Group LtdCHW-T79.7%
Cardiol Therapeutics Inc.CRDL-T68.0%
Ethos Gold Corp.ECC-T67.1%
Resverlogix Corp.RVX-T62.4%
Erdene Resource Development Corp.ERD-T59.0%
Platinum Group Metals Ltd.PTM-T57.9%
Oncolytics Biotech Inc.ONC-T56.4%
Batero Gold Corp.BAT-T54.3%
Mega Uranium Ltd.MGA-T51.7%
Obsidian Energy Ltd.OBE-T45.8%
Painted Pony Energy Ltd.PONY-T45.3%
Alexco Resource Corp.AXR-T43.4%
Neptune Wellness Solutions Inc.NEPT-T42.3%
Lithium Americas Corp.LAC-T40.3%
IMV Inc.IMV-T40.0%

Source: Interactive Brokers

How to profit from short sellers

Fees to borrow stocks can be high, even above 100 per cent. If an investor owns stocks with high borrow fees, they should hold them at a broker that shares the fees. To illustrate the advantage, consider a portfolio of five companies selected at random from a sample of expensive-to-borrow shares.

An average of $5000 is invested (on paper) into each stock in early January of 2017 and held to mid-September of 2020. Back data and preliminary calculations show that the average annual return at Broker A (no sharing of borrow fees) is negative 1.6 per cent; at Broker B (shares half of borrow fees), it is 21.6 per cent.

Keep in mind that this finding is only illustrative: portfolios of different sizes and composition will yield different results. Hard-to-borrow stocks also tend to be speculative in nature, suitable mainly for investors with high risk tolerances.

CompanyBroker A: Gain/loss without borrow feeBroker B: Gain/loss with borrow feeMinimum borrow feeMaximum borrow fee
Electrovaya IncEFL-T-69.0%-22.8%70%100%
Titan Medical Inc.TMD-T-90.8%-60.4%22%80%
Lithium Americas Corp.LAC-T202.7%329.3%25%44%
Mega Uranium LtdMGA-T9.9%171.1%15%100%
Horizons Marijuana Life Science ETFHMMJ-T-42.7%19.3%15%40%
Portfolio return: Jan. 2017 - Sept. 2020-4.6%77.9%
Portfolio annualized return -1.6%21.6%

Source: Interactive Brokers

Income from borrow fees is approximated by taking the product of average borrow rates and average share values in a year, summing across years for each stock, and taking half (i.e. assume broker shares half)

Larry MacDonald is an author, journalist and economist. He can be reached at mccolumn@yahoo.com

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