ASIC Lifts Ban on Covered Short Selling

From today covered short selling of non-financial stocks is allowed again on Australian stock markets. Obviously if you are a short seller you’ve known this for a week. What does it mean to us?

The disclosure and reporting details are in this Market Advice. Australian Securities and Investments Commission – Requirements for disclosure and reporting of short sales from 19 November 2008.

So naked shorts are still banned. Naked shorts means the seller has not yet borrowed the shares before placing the sell order. The seller expects to borrow or buy the shares in order to deliver on the trade.

Covered shorts are allowed for non-financial stocks. Covered shorts means the seller must actually borrow the shares before placing the sell order.

The financial stocks that are still banned from covered short sales are listed at the end of this post. But of course there are some exemptions to that ban

From today all sell orders must be identified as either long sale, short sale (for non-financial stocks) or Covered short sale exempt (you knew there would be an exemption somewhere for financial stocks). Sellers are required to indicate which category their order matches.

Ticker Name
ABP Abacus Property Group
AMP AMP Ltd
ASX ASX Ltd
ALZ Australand Property Group
ANZ Australia & New Zealand Banking Group Ltd
AUW Australian Wealth Management Ltd
AXA AXA Asia Pacific Holdings Ltd
BCM Babcock & Brown Capital Ltd
BJT Babcock & Brown Japan Property Trust
BNB Babcock & Brown Ltd
BOQ Bank of Queensland Ltd
BEN Bendigo and Adelaide Bank Ltd
BWP Bunnings Warehouse Property Trust
CER Centro Retail Group
CFX CFS Retail Property Trust
CGF Challenger Financial Services Group Ltd
CBA Commonwealth Bank of Australia
CPA Commonwealth Property Office Fund
DXS Dexus Property Group
FKP FKP Property Group
GMG Goodman Group
GPT GPT Group
HGG Henderson Group PLC
HFA HFA Holdings Ltd
IIF ING Industrial Fund
IOF ING Office Fund
IAG Insurance Australia Group Ltd
IFL IOOF Holdings Ltd
LLC Lend Lease Corp Ltd
MCW Macquarie CountryWide Trust
MDT Macquarie DDR Trust
MQG Macquarie Group Ltd
MOF Macquarie Office Trust
MGR Mirvac Group
NAB National Australia Bank Ltd
PPT Perpetual Ltd
PTM Platinum Asset Management Ltd
QBE QBE Insurance Group Ltd
SGB St George Bank Ltd
SGP Stockland
SUN Suncorp-Metway Ltd
SDG Sunland Group Ltd
TSO Tishman Speyer Office Fund
TAL Tower Australia Group Ltd
VPG Valad Property Group
WDC Westfield Group
WBC Westpac Banking Corp
Five additional Securities (being APRA regulated businesses)
WES Wesfarmers Limited
ROK The Rock Building Society Limited
WBB Wide Bay Australia Ltd
FCL Futuris Corporation Limited
CIX Calliden Group Limited

Calculate the Beta Coefficient of a stock

Beta CoefficientAs part of the Corporate Finance subject of my MBA we have to calculate the beta coefficient (aka Beta) of a company’s share price. The is applied economics and market mathematics, but it simply is a number which indicates how closely (or not) a company’s share price moves in relation to a broader market (or an index like the S&P ASX200 or the Dow Jones Industrial Average).

Anyway, part of the process is to create an excel format spreadsheet to aid with the calculation. I’ve done it and thought I share it with you. It will work with any spreadsheet program that can open .xls files

Update 1: 31 July 2009 the new version is available for testing by requesting it in a comment below. Once the testing is complete I’ll make it freely available to registered users.

Update 2: 7 July 2011 For a limited time you can get the Beta Coefficient Calculator without registering. Enter a valid email address in this form to receive a link to download the file. You’ll also get an email about new versions and bug fixes (with an opt-out link).

Update 3: 23 July 2011 If the form doesn’t work for you, please comment below and I’ll email it to you. The form is quicker but some people can’t get the download.

Enter your email address to download Beta Coefficient Calculator by Wealth Esteem

Version 0.9 beta_8
* Enabled automatic download via web form
* Added French and German to Translation tab (alpha code there)

Version 0.9 beta_7
* Fixed bug in date text description
* Updated sample data to 6 Jun 2011
* Changed sample data to BHP Billiton
* Made Instructions tab text translatable
* Cosmetic fixes

Version 0.9 beta_6
* Explained Translation tab in instructions and asked for volunteers
* Updated sample data to 2011
* Updated copyright date to 2011

Version 0.9 beta_5
* Added Change Log tab
* Moved text of index symbol & stock symbol to translation tab

Version 0.9 beta_4
* Added explanation of index and stock symbol fields on Beta Coefficient tab
* Updated copyright date to 2010

Version 0.9 beta_3
* Added email address to instructions tab

Version 0.9 beta_2
* Added logic to translate number of periods to a date range and show that range to users in Beta Coefficient tab at C11
* Swapped order of Security and Index tabs
* Fixed bug in coefficient calculation
* Introduced version numbering and control

Version 0.9 beta_1
* Updated instructions tab

Version 0.9 beta
* Initial public version

Support and feedback via the comments below.

Porsche Fleece Hedge Funds for 12 Billion Euro in Volkswagen Sting

Porsche There is No Substitute!

The background:

  • In September 2005 Porsche bought 20% of its larger but less profitable German rival Volkswagen.
  • In March 2007 Porsche bought another 19.9% (to 39.9%) and launched a takeover bid.
  • In October 2007 the law preventing the takeover of Volkswagen was scrapped.
  • On 20 October 2008 Volkswagen’s share price fell 23% on short selling by global hedge funds who bet the price of Volkswagen was too high and Porsche could not economically acquire more stock.
  • On 26 October 2008 Porsche announced it controlled Volkswagen through 42.6% direct holding and call options exercised over the another 32.4% (=75% !). As most of the balance is owned by the state or index funds, that left only about 5% on market to cover the shorts the hedge funds sold.
  • On Tuesday 28 October Volkwagen became the biggest company in the world momentarily when the hedge funds had to buy “at any cost” driving the price to €1,005 (from below €200 a year ago)
  • Late Tuesday Porsche agreed to release an addition 5% of stock to the market to maintain liquidity
  • The hedge funds then complained to the regulators that Porsche built a stake without their knowledge.

The sheer arrogance of Hedge Funds crying foul over this should offend me, but it’s their modus operandi to bully, lie and sneak around to make a buck. They have been accused for years of selling naked shorts. Normally you or I must first borrow the stock we plan to sell short before we are allowed to sell it. We’d pay a fee to the lender of the shares. If you sell without borrowing the shares first you are naked. It’s riskier but often more profitable if you can buy the stock on-market after sentiment has turned against a company. Nothing turns sentiment against a company like a huge overhang of stock on the offer line of the quote screen.

So if you can sell a naked short because you think German Automobile Manufacturers are in for a tough time in this economy, it is in your interests to get that story out after you’ve sold. Short sellers told everyone they could that Lehman Brothers was in trouble after they’d sold.

Now naked short sellers represent a counter-party risk of failure to deliver the stock at Trade plus 3 days (T+3).

Take a look at the failure to deliver reports produced by various exchanges. Some companies are consistently targeted by naked short sellers and the sellers regularly fail to deliver stock without serious penalty.

Finally someone with the clout to take on Hedge Funds called their bluff and made a bundle. So the hedge funds cried to the regulators.

These are the same hedge funds ignoring T+3 delivery dates on equities. Imagine what happens if you or I fail to deliver.

What makes me assert these were naked shorts? If the Volkswagen volume was mainly covered shorts it is unlikely the hedge funds would all need to return their borrowed shares on Tuesday 28 October. The borrowing would all be on a normal distribution. So there would not be a spike on 28 October intraday to €1,005. The price would be elevated but it would shake sellers out to the market.

Similarly any index funds or active investor should have been reweighing their portfolio, so the impact should be relatively minor compared to the recent overall market malaise.

Sadly there is a cost to the punters of this lesson. Most hedge funds do not take retail investments from small investors. Instead our retirement and superannuation funds place some of our pooled funds into them. So a hedge fund’s loss does come home to its small investors.

It still felt good to see hedge funds take a hit.

Credit Crisis Explained

A number of people have asked me if there is a simple explanation of the financial crisis. It is difficult to give a simple explanation that doesn’t paint the exclusive cause as naive greed. The credit crisis is one contributing factor to the financial crisis (I see these as two different issues).

I see four major factors as contributing to the credit crisis.

  1. Poor quality loans on high risk mortgages and lending practices
  2. Securitized high risk loans tainted asset pools that investors purchased
  3. Easy money to avoid a recession since dot crash
  4. Unchecked naked short selling in the market (allegedly by hedge funds)

When the asset inflation driving US housing bubble stopped, it’s like the music stopped in musical chairs. The scramble to get out drove prices further does and undermined asset prices further.

Here is a funny and slide show that explains the first point

Credit Crisis Pictualized

View SlideShare presentation or Upload your own. (tags: presentation comic)