Anglo American (AAL) is a heavyweight FTSE100 player. Historically, these big conglomerates with market caps of multi-billions would swing around with commodity prices (as you would expect) but also on broader market sentiment. But if you take a look at the last 2 years, the story for AAL looks more like an AIM listed penny share. It’s worth taking a closer look purely to understand the huge money flows involved and to appreciate just how crazy today’s markets have become.
Starting off, lets look at the 5 year chart below. Also for comparison, FTSE100 chart below.
In the good old of days of 2011, AAL reached circa £34 a share. Then the commodity bubble popped around 2012 and by 2013 the stock was trading at circa £20 a share. As the slump continued, the stock dipped to £10 per share in mid 2015. By Early Jan 2016, the stock was at 220p a share. For a mammoth company like Anglo, the fall was massive. That’s £34 down to £2.20 a share in the space of 4.5 years. So if you needed a valuation example to understand just how bombed out the commodity sector is then look no further than this bellwether. In comparison the broader FTSE100 index falls were modest although clearly there is a defined relationship, which is kind of what you would expect.
Now, lets look at the declared ‘short positions of 0.5% or more’ chart as below:
As you can see, the short positions were relatively low in the periods from 2013 to late 2015. That’s a little odd as on a comparable basis AAL dropped from £20 to £10 per share. A spike in short interest kicked in around Nov/Dec 2015 and lasted for about 3/4 months. During this period, AAL traded from around 750p a share to a low of 220p a share in early Jan 16. As shorts closed out, the price rebounded to 800p a share. Not far off a 3 bagger. Not bad for a multi billion pound company. That’s about £6bln in cash exchanging hands (and that’s being conservative) unlike the £60m type level swings on an AIM stock.
Now here’s the interesting part. Between March 2017 and today, short exposure (above 0.5%) has increased from 1.5% to a whopping 9%! That’s twice the level of short exposure used in Dec 2015 which helped pushed the price down to 220p.
So how how has that worked out for the shorters over the last 6 months? Answer: Not very well at all. Infact, it looks terrible. Anglo has risen by roughly 35% and that’s against a huge shorting campaign. Just imagine where it would be if it hadn’t had 9% of it’s stock shorted? Here’s some numbers… in the last 6 months Anglo has seen a massive increase in short exposure to 9%+ (just the 0.5% or over positions, there will be more smaller short positions in the market). In cash terms, that’s close to £2bln on the line here. Compare this to the 35%+ rise that has ocurred and it’s not far off £700m in potential losses. I say ‘potential’ because the trades are still open and who knows what awaits around the corner? But for the moment, you have to blink a few times just to take the numbers in here. For a FTSE100 player, it makes many AIM minnows look sedentary. It’s not the only example. Glencore (double the size of AAL) has pretty much the same story although short exposure on GLEN is near zero today. The mind boggles, but ti wouldn’t be the first time the cty shorters got caught out with massive losses. Porsche/VW is still one event that many remember fondly and others not so well.
It will be interesting to see how the short situation unfolds over the coming months. But as more short weights are added, the price keeps doing the opposite and just goes on rising. That’s got to be hurting a few. Now… if another conglomerate was to bang in an offer for AAL of £30 a share tomorrow, then that really would be a Porsche event repeated and one that would make toast of quite a few of the below:
In summary, the AAL case example helps provide some insight into how the market gets it right and wrong. But more importantly, it shows the commodity bubble low point and the recent recovery. Metal prices and Oil prices have risen strongly. So it is no surprise to see Glencore and Anglo recovery. But what about the midcaps? The Tullow’s, Petrofac’s, Enquest’s and Premier Oil’s are all trading at levels signifcantly below March 2017. Here’s an example:
March ’17 AAL share price 1130p (approx) Oct ’17 AAL share Price 1466p (+30%) And that’s with 9%+ short 0.5% or above weighting.
March ’17 TLW share price 280p (approx) Oct ’17 TLW share Price 188p (-33%)
With 7.7%+ short 0.5% or above weighting.
March ’17 PMO share price 60p (approx) Oct ’17 PMO share Price 65p (+8%)
With 8%+ short 0.5% or above weighting.
March ’17 ENQ share price 41.5p (approx) Oct ’17 ENQ share Price 25.5p (-38%)
With 8%+ short 0.5% or above weighting.
So watch out for the midcaps/smaller caps. They are long overdue a recovery to rival their bigger bellwether peers. But equally, you can’t write off shorters being correct and AAL retraces back to 0% levels or worse. In an event like that I would expect the FTSE100 to take a hefty hit too. And with Santa rally season not far away, that’s looking hard to imagine in a market that does like a christmas bonus. Finally, the smaller miners are showing a touch of the AAL’s or GLEN’s about them of late with strong interest returning and share price’s multiplying like it’s 2009 again. It’s certainly a market of ‘opportunity’ out there right now. Not without significant risks of course.