Massive short covering.
That was the reason one investment adviser gave the other day when attempting to describe the sharp play the share cost of Enbridge in the days carrying out a massive $2.3 billion equity financing.
That financing, announced after the markets closed on Feb. 24, was larger than previous Enbridge financings, was priced at a considerable discount (5.7 percent) and closed inside a shorter period than normal.
Well, that explanation, given ahead of the official conformation that came Thursday, is a bit off the mark. Mid-morning the TSX released its bi-monthly listing of Top 20 short positions.
But contrary to the expectation, the TSX data showed that instead of decreasing, the Enbridge short position had increased. As at the end of February, rapid position stood at 47.792 million shares. Two weeks earlier it had been 37.194 million shares so for the two-week period, the short position rose by 10.598 million shares. For the month of February, rapid position jumped by 16.348 million shares.
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So, the reality appear to obstruct of massive short covering as being a satisfactory explanation. “It doesn’t seem sensible,” said one market participant, who also noted a possible explanation might be a one-day distinction between the publication from the short position and the closing from the financing.
So an alternative theory is required. Here is one possibility.
The TSX short position statistics are like a company balance sheet: they measure the situation at two points of time, meaning what goes on between those two points in time isn’t known.
But it’s entirely possible that between your start and end points the short position did decline – before rising by month end.
That scenario is advanced because there is market talk that Enbridge, given its capital expenditure need, would need to do an equity raise at some stage. That knowledge would have encouraged some short selling since equity issue, assuming it came, could be for a cheap price towards the prevailing selling price. And when that raise occurred the short sellers could cover the short position either from an allocation from the new issue or from buying on the market.
So a shorting strategy made sense.
When the equity issue arrived, it had been both large and priced to market so the underwriters had little difficulty in finding buyers: actually demand was large enough for that underwriters to workout the $300 million over-allotment option. Which demand continued considering that Enbridge’s share price kept rising.
Indeed part of that rise might have been brought on by short covering: shorters covering their position by buying stock on the market.
While that activity would cut back the overall short position, some investors, once they received an allocation, might then short the stock in the full knowledge they’d be able to cover the short with shares in the new issue. “A lot of brokers do that. They’re given an allocation, they hedge their position and choose closing,” noted one adviser. “We will receive a better idea of what happened once the mid-March numbers are released.”
While this explanation is specific to Enbridge, other market participants argue the developments are members of a bigger “dynamic,” and reflect unusual market conditions. “It’s a macro call, part of the short Canada story,” noted one participant.
bcritchley@nationalpost.com
