Over the past few days, one of the biggest events in the financial history of the US stock exchange, arguably since the Global Financial Crisis of 2008-2009, started taking place. Everything started after the stock of a video game retail chain - GameStop, was short sold (see here for an explanation on what that means if you are still unfamiliar) at nearly 140% in an attempt to suppress the stock market price. This angered fans of the store chain set up a movement, which ultimately resulted in driving the share price to exorbitant levels, thus triggering an event called short squeeze. Short squeeze occurs when the price of a stock increases rapidly, and the short seller having to close their short position by buying back the stock, thus pushing the stock market price even further up. Here is a short explanation of the whole story.
The overall exercise sounds like a "we vs them" case, but that is not exactly so. It exposed a number of shortcomings in the legislation of the stock markets, and for the first time in a while put hedge funds - arguably one of the most influential elements in world finance - in the limelight. Back in Malaysia, over the past few weeks we have been following the unfolding of an enormous for the size of Bursa short position on the stock of the biggest 4 glove manufacturers in the country - Top Glove, Hartalega, Kossan, and Supermax. You can read more about what has been happening in the links below:
Gloves: The Bad Guy Loses (From Time to Time)
Gloves: Zero Short Positions Closed for the Entire Last Week
Has the Short Seller Closed the Big Gloves Short?
If you do not want to go through all of this, and instead want the short (pun intended) version, here's what has been happening in a nutshell.
On January 4, stock of the 4 companies with a total value of close to RM925 million was sold short. This resulted in the immediate plummeting of the stock price of each of the companies, by between 10% and 15%. The short selling continued on, and is still ongoing until today. As of Wednesday, the total value of the short positions opened on the 4 stocks was a little over RM2.2 billion. Only about 100 companies on the Malaysian stock exchange have market capitalization larger than the value of this short position. To give you another idea of how disproportionately large this short position is - its value represents approximately 85% of the total value of all the short positions on all the stocks on Bursa Malaysia opened during the same period. By far the most shorted stock is the one of Top Glove, with a total value of the short positions opened throughout the month of January equal to RM1.37 billion, representing 52% of the entire value of all the short positions on all the stocks on Bursa Malaysia. This is out of a list of almost 250 companies, whose shares can be short sold (see here).
Don't get me wrong - it is perfectly fine to believe that the stock of a company will go down, and it is perfectly legal to take a position that means you would benefit from the stock price going down. However, I have a number of problems with the way the system has been used in this particular case. Here are the reasons:
1. Disproportionate Volume
The sheer volume of the position, and the way how it was executed, are disproportionate to the size of the Malaysian stock market. On normal days, the total daily value of all transactions on Bursa Malaysia is around RM4 billion. Thus, the stock short sold on January 4 represented 25% of the normal value of the totality of all market trades on Bursa on a normal day.
Additionally, as mentioned the short seller(s) has/have been shorting stock on an almost daily basis over the past 4 weeks. Only on 2 days there was no short selling activity associated with Top Glove for instance. On a number of occasions, the short selling activity represented more than 10% of all the selling activity of the stock, reaching sometimes 25% of the sell-side activity. In other words, on some days 1 of every 4 shares of Top Glove sold, was actually a short seller shorting that share and not an actual selling activity.
2. No Time Limit
Today (Friday), the stock market price of Top Glove closed 54 sen higher than it did on Wednesday. This happened because retail investors, inspired by the GameStop example, decided to take things in their hands. 2,516,300 shares of Top Glove were sold short today. We still don't have the total value of these newly opened positions. However, if we ignore them and just look at the positions as of Wednesday, the total paper loss for the short seller(s) on Top Glove's stock amounts to a little over RM240 million. If you add to that the paper losses on the existing short positions on Hartalega, Kossan, and Supermax, the total paper loss goes beyond RM350 million, or now exceeding 16% of the value of the short positions.
When transactions are arranged "over the counter" - as is the case with this "regulated short selling" position, there is normally no time limit to when the borrowed stock might need to be returned to the lender. However, at present the situation is turning rather abnormal. If you or I had borrowed something - money or stock (if we had the right to do so, more on this below), and if the potential loss on our borrowings was so high (RM350 million in face value, 16% in relative value), we would get a margin call. In the case of short selling, the demand of this call would be that we return the borrowed stock to the lender. We would have to buy back the stock as quickly as possible, accept all the paper losses, and return the stock. One of the theories is that something like that might have been the reason for the short seller to return (part of?) the borrowed stock to EPF last week (see here). However, instead of buying back the stock to return it, the short seller has borrowed stock from someone else (likely at a higher borrowing fee). The short seller is free to do that for as long as there are willing lenders of stock.
3. Very Few Can Do This
All short-selling activities were banned on Bursa from the time the COVID crisis started, to the end of last year. However, one segment of these activities was allowed again in the beginning of this year - regulated short selling. The official reason for this uplifting of the ban was "to facilitate investors’ risk management and revive Securities Borrowing and Lending (SBL) activities, which is an integral capital market function to promote product development and market making activities" (see here). Short selling is indeed an integral part of the market making process of a stock market. In some cases, certain market players have to take short positions for hedging purposes for instance. However, I fail to see how specifically focusing on 1 (or 4) stocks achieves that. As mentioned, the short position on Top Glove alone represents 52% of the value of all the short positions that have been opened on Bursa Malaysia over the past 1 month, so it glaringly exceeds any normal market making activity.
As mentioned by SC and Bursa, the reason for uplifting the ban on RSS in particular is in order to revive the SBL activities. As you can imagine, retail investors are not eligible to participate in this activity. There are only 11 approved borrowing representatives, and you can see the full list here. In other words, this is playground reserved for institutional players.
Why I Don't Plan to Sell
I missed the entire euphoria around the gloves last year, which continued from May to at least September. I consider myself a conservative investor. In fact, I have invested in fewer than 10 businesses in my whole life. So missing the euphoria was a no-brainer. However, equally a no-brainer was my beginning to buy shares of Top Glove in late November. At that time a number of factories of the company were closed for quarantine and sanitation due to the discovered COVID cluster. While the company and independent analysts explained that this will only result in financial year revenue damage equal to between 3% and 5%, the stock price fell by almost 20% in the month between November 9 (closing price RM8.48) when the cluster was announced to be linked to the company, and December 9 (closing price RM6.84).
On December 12, JP Morgan issued an extremely bearish report on the entire glove sector, putting price target on Top Glove at RM3.50 (see here). If you are interested, you can read my quick thoughts on JP Morgan's report here. This happened amid other financial analysts issuing reports, explaining the relatively low impact of the factory closures, and either reinstating their price targets, or lowering them only based on "ESG concerns" (i.e. not because of earnings potential concerns). This resulted in a further dampening of the sentiment to the glove sector, which was already shaky since September when vaccine news started pouring in, and since the factory closures of Top Glove.
On January 4, the huge short position mentioned above was opened, and the price fell to as low as RM5.23 intraday. This, and what happened in December, helped me to accumulate more shares of the company and to significantly lower my average acquisition price, which I already considered low as of November. Currently my average acquisition price for Top Glove's stock is comfortably below the closing price as of today. However, I have no plans of selling my stock any time soon, short squeeze or not.
I have previously written extensively on the factors that make me so positive on the company's prospects. You can read my posts here:
Top Glove Stock Analysis Factor 1: Vaccine and End of COVID-19
Top Glove Stock Analysis Factor 2: ASPs and Earnings Potential
Top Glove Stock Analysis Factor 3: Beyond COVID
The 70% dividend payout (extra 20%, on top of the company's 50% dividend payout policy) the company announced in the beginning of this month was only a pleasant surprise, and not something I had factored in the analysis of my position. However you might want to take it into account since it is already a known (and potentially important) factor. For instance, the consensus profits for the current quarter will come at about RM3.5 billion. At dividend payout of 70%, the dividend received for this quarter (2Q FY21) may come to 30 sen per share, according to the analysts' consensus estimates.
Additionally, recently I wrote a more detailed article on the macroeconomic situation surrounding COVID-19, which relates to why I believe the extraordinary profits of the Malaysia glovemakers may continue on for a longer period of time than initially anticipated (including in my write-up where I was analysing Factor 1 in December referred to above). You can read the article here.
In summary, my view of the prospects of the company is high enough to not make me consider selling my stock at any point in the foreseeable future. When buying Top Glove's stock, remember that you are actually becoming the owner of a part of the biggest glove producer in the world. In a business field like glove production, where the positive effects of economies of scale run through the entire chain of the business activities, this is as safe position as even a truly conservative stock investor as myself could take. The status quo with regards to Top Glove's stock was inspired by what happened with GameStop, but my opinion is that while retail investors run a significant risk by continuing to buy GameStop's stock, buying Top Glove's stock is just a smart investment. Please treat it as such.
Important disclaimer: Any views expressed are for informational and
discussion purposes only. None of this information is intended as, and
must not be understood as, a source of advice. It is imperative that you
always do your own research and that you make any decisions based on
your personal situation and your own personal understanding.
https://klse.i3investor.com/blogs/bursainvestments/2021-01-29-story-h1540218377-Short_Squeeze_or_Fundamentals_Why_I_Am_Not_Selling_Any_Time_Soon.jsp
