$2.7 billion riding on company failures
Monday, 11 February 2019
By Bernd Struben
- Let’s all stop breathing too…
- ‘Won’t every asylum-seeker claim to be gravely ill?’
When big-name companies see their share prices tumble, most investors are left poorer at the end of the day.
On the other hand, you’ll find short sellers cheering on every additional percentage drop.
If you’re not familiar, short selling boils down to taking a position against a company’s success.
Tesla, for example, remains one of the most heavily shorted stocks in history. Though investors doubting Elon Musk’s vision and betting against his company have seen few big pay-offs to date.
To short a stock, you essentially borrow shares from a broker and sell them at the current market price. Your hope is that the share price will go down, say by 20%. If it does, you can buy the shares back and return them to your broker. You then pocket that 20% difference, minus any fees.
Of course, if the share price goes up 20% instead, you still have to buy the stock back. And still pay your brokerage fees.
Short selling is clearly not without risk. And you have to remember that a stock’s price can only go down to zero. But it can, theoretically, go to any new height. So your risk by betting against a stock is essentially unlimited.
But this hasn’t stopped investors from betting big against JB Hi-Fi, Super Retail Group, IOOF Holdings, Amcor, Bendigo & Adelaide Bank and AMP. According to the Australian Financial Review (AFR), these six blue chip Aussie stocks have a combined $2.7 billion in short positions against them.
It won’t be long before we know if they’re on to something. Each of these companies is due to report earnings this week. Any disappointment to the downside and the short sellers should be laughing.
Like I said, short selling carries plenty of risk. But it’s a technique Kris Sayce has used with remarkable success at his premium investment advisory, Crash Market Investor.
Checking his latest weekly price table (from Friday 8 February), his top three short trades are up 31.08%, 29.20%, and 43.48%. On the flip side, the worst performing trade listed (recently closed out) was down 20.01%.
Kris remains convinced that the market correction we saw unfold at the end of 2018 was only the beginning of a far larger meltdown. As for 2019’s resurgence? He says it’s just a short term bounce. And he’s currently researching two new stocks for his subscribers to short in February.
Speaking of crashing markets, Australia’s climate warriors scored a major legal victory last week. One which could spell bad news for the Aussie economy.
We’ll get back to that right after a look at the markets…
Over the weekend, the Dow Jones Industrial Average closed down 63.20 points, or 0.25%.
The S&P 500 gained 1.83 points, or 0.07%.
In Europe the Euro Stoxx 50 index finished down 15.14 points, or 0.48%. Meanwhile, the FTSE 100 fell 0.32%, and Germany’s DAX closed down 115.24 points, or 1.05%.
In Asian markets, Japan’s Nikkei 225 is closed for National Founding Day. China’s CSI 300 is up 1.11%.
In Australia, the S&P/ASX 200 is down 25.36 points, or 0.42%.
On the commodities markets, West Texas Intermediate crude oil is US$52.66 per barrel. Brent crude is US$62.06 per barrel.
Brent enjoyed a solid rally during my three-week interstate moving hiatus last month. The global crude benchmark gained more than 15%. But January’s upswing looks to be at an end.
I hope you didn’t put too much faith in the oil bulls hoping OPEC’s supply cuts would see the price sail back above US$70 per barrel.
OPEC, as I’ve been banging on about for months, has lost much of its market manipulating prowess. We have record US shale oil production to thank for that.
Throw in renewed fears that US and Chinese negotiators might not reach an agreement to stave off further tariff increases — potentially dampening global demand for oil — and the short sellers have come back out of hiding.
As Bloomberg notes:
‘Hedge funds reversed course on oil just in time, plowing back into bearish bets as crude skidded into a wall of economic worries.
‘In a shift from four weeks of retreat, short-sellers boosted by 28 percent their wagers that Brent prices would fall in the week ended Feb. 5, according to data released Friday.’
You can see how sentiment is turning in the chart below:
Source: ICE Futures Europe / Bloomberg
Click to enlarge
Turning to gold, the yellow metal is trading for US$1,316.61 (AU$1,857.00) per troy ounce. Silver is US$15.82 (AU$22.31) per troy ounce.
One bitcoin is worth US$3,623.88.
The Aussie dollar is worth 70.90 US cents.
Let’s all stop breathing too…
Before getting back to the Aussie climate warriors’ dubious victory…and myopic views…let’s do a quick review of the state of the Aussie economy.
Wages are flat, having gone almost nowhere for the past decade.
Housing prices in the capital cities are sliding further and faster than anytime since the GFC…down more than 10% year-on-year in Sydney and Melbourne.
Growth in China, Australia’s largest trading partner, is slowing dramatically.
Domestically, retail sales — in a nation where some 58% of GDP is derived from consumer spending — are struggling to stay positive.
Aussie households have never been more indebted. And the government’s first slender budget surplus since 2007 looks likely to be its last in many years. That is if it can really be delivered in the first place.
So what can we do to improve the outlook?
Torpedo our number one export earner, of course.
That, at least, is the answer delivered by Australia’s self-professed climate police.
From the AAP:
‘On Friday, Justice Brian Preston, the chief judge of the NSW Land and Environment Court, dismissed Gloucester Resources Limited’s appeal of the Department of Planning and Environment’s 2017 decision to not approve the mine in the NSW Hunter.
‘Justice Preston said the Rocky Hill project would increase global greenhouse gas emissions “at a time when what is now urgently needed … is a rapid and deep decrease in GHG emission”.
‘”In short, an open cut coal mine in this part of the Gloucester Valley would be in the wrong place at the wrong time,” he said in his judgment.
‘”All of the direct and indirect GHG emissions of the Rocky Hill Coal Project will impact on the environment.”’
Now Rocky Hill’s original application for the mine had already been turned down for reasons totally unrelated to any potential impacts on global warming. Namely that the site is quite close to homes and schools. And that it could hurt the local tourist industry.
That’s all fair enough.
But Brian sets a dangerous — and, let’s be honest, stupid — precedent. We’ll be careful not to allege any bias here. But colleague Greg Canavan tells me the judge also was formerly a principal solicitor at the Environmental Defenders Office.
Perhaps he’s been eager to take a swipe at Australia’s largest export earner for some years now?
As you may know, coal — dirty, evil coal — is set to replace iron ore as Australia’s most valuable export this year. The Department of Industry, Innovation and Science (DIIS) forecasts coal exports will reach $67 billion in 2019. That’s about $3 billion more than the DIIS expects iron ore exports to bring in.
But who needs $67 billion a year?
Apparently not Climate Council chief executive Amanda McKenzie. Amanda was thrilled with the court’s decision. She stated that the ruling finally proved that coal, ‘just like tobacco and asbestos, is bad for us’.
You’re not supposed to smoke it, Amanda!
David Morris, CEO of the Environmental Defenders Office, showed just the kind of slippery slope the ruling puts us on.
From the AFR:
‘Mr Morris urged the government to immediately codify the ruling to give certainty for industry and communities so that proponents have to show how they will mitigate total emissions as well as the social, economic and environmental consequences of projects.’
David’s reasoning here, if you can call it reasoning, is chilling.
Every coal miner will need to show how they will compensate the planet for the total eventual emissions of their product, without knowing how the coal will be burned, or what the actual impact on the climate will be from those emissions.
Not to mention the even greyer ‘social consequences’. Precisely who gets to decide those and how they calculate it will be interesting to see.
It’s no big leap to see the dominos lined up in the social and environmental justice league’s crosshairs falling in rapid order.
Presumably producers of all these products will need to demonstrate ‘how they will mitigate total emissions as well as the social, economic and environmental consequences of projects’.
Can you imagine if you had to pass this hurdle before you could have children? That would solve the whole climate change issue in a hurry!
Speaking of children, I’ll leave you today with this photo, a group of people who are decidedly not children:
Source: AFR / Janie Barrett
Click to enlarge
These are the residents celebrating the judge’s decision.
I imagine they’ve benefited from the cheap energy and export dollars provided by Australia’s fossil fuel industries for many, many, many years. Just as they’ve likely benefited from decades of ballooning government debt.
Boy those were happy times!
But that’s all over now.
Finally, don’t forget to check out the latest from The Australian Tribune:
‘Won’t Every Asylum-Seeker Claim to be Gravely Ill?’
‘There is no shortage of concerns about the well-meaning but ill-conceived changes proposed over the way sick asylum seekers are brought to Australia for treatment.
‘Among those is the simple fact that anyone can claim to be seriously ill. And people who are desperate enough can easily go so far as to actually make themselves sick.
‘Citing a range of…’
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