Massive short covering.
That was the main reason one investment adviser gave last week when trying to explain the sharp take part in the stock price of Enbridge dads and moms performing a massive $2.3 billion equity financing.
That financing, announced following a markets closed on Feb. 24, was larger than previous Enbridge financings, was costing a considerable discount (5.7 percent) and closed inside a shorter period than usual.
Well, that explanation, succumbed front from the official conformation that came Thursday, is from the objective. Mid-morning the TSX released its bi-monthly list of Top 20 short positions.
But up against the expectation, the TSX data indicated that rather than decreasing, the Enbridge short position had increased. As after February, the short position stood at 47.792 million shares. A couple weeks earlier it was 37.194 million shares so for that two-week period, the short position rose by 10.598 million shares. For your month of February, rapid position jumped by 16.348 million shares.
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So, the truth appear to obstruct of massive short covering as being a satisfactory explanation. “It doesn’t sound right,” said one market participant, who also noted a possible explanation might be a one-day one of the publication inside the short position and also the closing from the financing.
So another theory is required. Here’s one possibility.
The TSX short position statistics are similar to a company balance sheet: they appraise the situation at two points of your energy, meaning how are you affected between the above deadlines isn’t known.
But it’s feasible that between the start and end points rapid position did decline – before rising by month end.
That scenario is advanced since there was market talk that Enbridge, given its capital expenditure need, will need to do an equity raise at some stage. That knowledge may have encouraged some short selling since equity issue, assuming it came, might be for much less for the prevailing value. So when that raise occurred rapid sellers could cover rapid position either from an allocation inside the new issue or from buying in the marketplace.
So a shorting strategy made sense.
When the equity issue arrived, it absolutely was both large and priced to sell therefore the underwriters had little difficulty to discover buyers: actually demand was large enough for your underwriters to workout the $300 million over-allotment option. Which demand continued given that Enbridge’s stock price kept rising.
Indeed a part of that rise may have been caused by short covering: shorters covering their position by buying stock in the marketplace.
While that activity would cut back the general short position, some investors, after they received an allocation, might then short the stock inside the full knowledge they’d be capable of cover rapid with shares inside the new issue. “A great deal of brokers do that. They’re given an allocation, they hedge their position and select closing,” noted one adviser. “We will get a much better concept of so what happened once the mid-March numbers are release.”
While this explanation is specific to Enbridge, other market participants argue the developments are members of a larger “dynamic,” and reflect unusual market conditions. “It’s a macro call, area of the short Canada story,” noted one participant.
bcritchley@nationalpost.com
