Back in May, US blogger Wolf Richer held forth on Wolf Street that hedge funds were betting record amounts on the imminent meltdown of Australian banks and our housing bubble by shorting shares.
His arguments had me nodding my bearish head in agreement, yet the facts tell a different story.
If shorts think a business is overvalued, they sell shares and drive down a company’s price, planning to buy them later at lower prices to make a profit and close their position. An easy path to tidy profits – IF the bet is correct and the timing is right.
The Australian Stock Exchange and the Australian Securities and Investments Commission insist all shorts be ‘covered’ – shorts must borrow shares for a fee to guarantee delivery to buyers. The cost of renting means shorts can’t hold open positions forever.
Those convinced, like me, that Australian land prices are sorely overvalued and headed for a big fall, could sell any of: Commonwealth, Westpac, ANZ, NAB, smaller banks, mortgage insurer Genworth or the listed property developers.
Wolf Richter rightly points out this is known as the ‘widow-maker’ trade as many have tried and been run over by the Australian economic locomotive.
Are the shorts crawling all over these obvious candidates for a big fall? Not at all.
According to shortman.com.au, which refreshes ASIC data daily, the most shorted stock is Myer, with 16% of their free float shorted.
The only companies on the wish-list in the top 100 shorted stocks are Bendigo and Adelaide Bank at number 15 with 7.86% shorted and Genworth at number 39 with 4.64% shorted. The big 4 banks and land developers are nowhere to be seen.
Shortman helpfully offers a chart of shorts in the big 4 banks. There are short positions of just under $6 billion, which seems like a lot of leaning against the trend, until it is put against the combined market capitalisation of the big 4 banks – currently $374 billion, or short positions of 1.6%.
The financial world is watching The Great Australian Land Bubble with much interest. Their absence from this particular market suggests the land price revert-to-mean is still some time away. When they think land prices and bank profits are set to tumble, they will be quick to place very large bets. Just not yet.