ASIC announced that it would lift the current ban on short selling of non-financial securities from opening of trading on 19 November 2008 but would continue the ban on covered short sales in financial securities. ASIC put a 30-day ban on covered short selling of securities on 21 September 2008 and extended this ban on 21 October 2008 as market conditions remained difficult.
The ban on short selling of financial securities will remain in place until at least 27 January 2009, consistent with many other jurisdictions, while ASX will maintain the ban on naked short selling indefinitely. ASIC confirmed that financial securities would be those comprising the S&P/ASX 200 Financials (including property funds) plus five other APRA regulated businesses.
What Does this Mean for the Stock Market?
The ban was imposed to stop the market falling, however it appears to have been ineffective. On the day the ban was imposed the ASX 200 closed at 5020. This one day jump caused some investors a fleeting moment of joy, but since that time the market has fallen to 3748 at the end of last week and is lower again this week. In fact the market is down over 25% since the ban was imposed.
Some may say that short selling is the fuel that can kick start a strong rally once the bottom has been reached. As short sellers cover their shorts to lock in profits this can catapult the market off the lows and allow it to push higher. But the question remains, when the bottom will occur, as it has appeared to be reached more than once during the last year. The news flow at present is extremely down beat with job cuts, bankruptcies and recession dominating the media. As far as the economy goes it is likely to get worse before it gets better, however you must remember that the stock market will recover 6 12 months before the economy does.
Existing Short Positions
Investors were able to hold existing short positions through the short selling ban, but were unable to open new positions. It is unlikely that the lifting of the short selling ban will encourage any of the investors that remained short during this time to alter their positions.
On the other hand do not believe that because the ban on short selling the market will now fall through the floor, which was their reason for imposing the ban in the first place. It is unlikely that there will be a flood of short sellers into the market once the ban is lifted just as imposing the ban did not stop the market falling in the first place.
Which Shares and Sectors are Most Vulnerable to Short Selling?
While financial shares in Australia are more robust than their US counterparts they are still likely to be hit by a down turn in the economy as their profits fall. The cause of this drop will be rising loan defaults as overstretched consumers and businesses struggle to make ends meet. In addition to this lending growth will slow due to tighter credit criteria and lack of confidence on the part of borrowers. The ban on short selling these shares remains in place, so it is likely that there will be no significant impact on these shares with the lifting of this ban.
With the economic slow down likely to continue for some time yet consumers are likely to tighten their belts further. One of the first sectors to feel this will be the Discretionary sector of the market, which includes your retailers, tourism and fast food. Car retailers and appliance retailers are likely to be particularly hard hit by a drop in sales and profit margins as consumers delay purchase of big ticket items. Tourism is also likely to be impacted on both a domestic and an international scale as people put off unnecessary travel.
Some Sectors Likely to Come Under Pressure
We have reviewed some key market sectors that are likely to come under pressure in the likelihood of weakening economic demand and reduced earnings going forward.
The sectors we have highlighted here include:
Paper & Packaging
(Fundamental data is as of close of business 17 Nov 08)
The stocks within these sectors have been highlighted because they:
have deteriorating fundamentals
are generally in strong down trends
have broken key support levels in the past week
Other Areas of Weakness
Regardless of the sector that the company is in there are other companies that are likely to suffer as the economy slows down. Any company that has high debt levels is more likely to struggle as their income drops away and it becomes more difficult for them to service their debt. Refinancing loans in the current environment has become very difficult due to the lack of available credit and the freezing of the credit markets. Any company with significant loans to be refinanced is likely to attract short sellers.
Debt Laden Stocks
We have investigated the market for you and identified some key stocks that are likely to come under further pressure now that the shorting ban has been lifted. The filters that we have used identify:
1) ASX200 Stocks with Negative Cashflows and Debt/Equity over 80%
and trending down.
2) ASX200 Stocks with Debt/Equity over 80% and trending down.
Note that generally all of the stocks highlighted are in strong down trends.
(Fundamental data is as of close of business 17 Nov 08)
Which Shares and Sectors are Likely to be Ok?
For the Healthcare, Utilities and Staples sectors it is more likely to be business as usual as people continue to buy food, power and medical services. A recession is likely to have less impact on these areas than on items that are not seen as essentials to everyday living. People will not delay eating, or put off medical procedures because of the economic environment. These sectors are less likely to attract short selling interest.
Imposing a short selling ban, and removing the same, will not make a significant difference to the markets overall. It is unlikely to be the catalyst for a sharp fall in the market (the market is already doing that) or a sharp rebound either. The Consumer Discretionary sector is likely to be most at risk from the removal of the short selling ban. In addition to this any company that currently has a high debt exposure or the need to refinance existing debt obligations is also at risk.
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