Best-Timed Shorts January – June 2008 - Short Stories

Best-Timed Shorts
January – June 2008

Copyright Data Explorers Limited
June 2008

Email: [email protected] Website: www.dataexplorers.com

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A Word from Mark Faulkner, Founder of Data Explorers

Short-selling has been the focus of unprecedented media and investor attention during the first six months of
2008. Data Explorers is a non-advisory, non-transactional data company which collects stock loan data between
the lending community and the borrowing community. Our data suggests that housebuilders, global financials
and consumer retail have been the focus of shortsellers’ attention during 2008.

Factors which have affected shorting this year include:

• Increased demand to borrow stock, particularly in US midcaps, as evidenced by the rising cost to borrowing the
Russell 2000 (Jan 1st: 69bps average cost to borrow compared with 118bps on July 2nd)

• Sector focus: The total value of short positions globally has not increased during this period, but traders have
focussed on specific sectors which we look at on pp. 27-32.

• Momentum on the downside caused some commentators to talk about an anti-bubble – the opposite of a
speculative bubble in some stocks.

• New Regulation: The FSA shocked the market on June 13th by introducing temporary disclosure regulations
regarding stocks which have announced rights issues.

Yours etc,

Mark

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Company Description

Data Explorers is an independent specialist provider of services to the securities lending and
asset management industry.

Our objective is to encourage a broader understanding and debate about the impact of the
stock lending on capital markets.

We believe that stock lending levels can act as a proxy for short interest but we do not offer
investment advice or research.

Our clients use the data to benchmark their stock lending/borrowing activity and to make
better-timed trades.

For further information, please contact:

[email protected] or call +44 20 7264 7600 or +1 212 710 2210 and ask to speak to
the Sales team.

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Index of Companies and Sectors

North America Europe Asia Sectors

Wachovia.............................. 6 Cattles. ............................... 15 Joint Corp...........................23 Asian and Emerging Market
Carphone Warehouse...........16 Air China............................24 Sector Highlights.............30
Bear Stearns..........................7 DSG.................................... 17 China Southern Airlines......25
Vanco.................................. 18 Honeys................................ 26 Sectors where short interest is
R.H Donnelly.......................8 Banco de Sabadell................19 Sinopec. .............................. 27 low................................... 31
Yell..................................... 20 Babcock & Brown...............28
Capital One Financial Corp...9 Heidelberger Asian and American Food,
Beverage and Tobacco Sectors...
Qwest Communications Druckmaschinen AG........21 32
International. ................... 10 Portugal Telecom................22
Airlines............................... 33
Lehman............................... 11
Best-Timed Shorts of 2007,
American International six months on...................34
Group. ............................. 12
Performance Analysis of
Downey. ............................. 13 the Best-Timed Shorts
of 2007............................35
Gildan Activewear..............14

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Definitions of our graphs

Our left hand graphs document Utilisation, which is defined as the amount of stock which has been borrowed,
as a percentage of the amount which is available to borrow from the majority of the world’s major custodians and
beneficial owners.
Our right hand graphs* document the percentage of a stock’s entire Market Cap that is on loan at any given time.

*Where there is only one graph, the percentage of the Market Cap on loan figures will appear.

How the stocks were selected

• We used internal Data Explorers systems to screen for when the borrow began to rise in global equities. We then
analysed each potential candidate to assess whether the short was well-timed or was ‘late’ in coming to the trade.

• We have selected large-cap names wherever possible.

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North America 20th February: Goldman Sachs forecast
that Wachovia was likely to take a first
Wachovia (WB) quarter write-down in excess of $1bn

December 12th: The fifth-largest US bank by
market value issues a negative forecast for this
quarter’s performance, and falls 16% in a month

Wachovia Corp (North America Banks)

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Bear Stearns (BSC)

December 20th: Bear Stearns reports a quarterly
loss for the first time in 84 years as a public company
– four times the size of analysts’ forecasts

Bear Stearns

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R.H Donnelly (RHD)

February 28th: RHD Donnelly forecasts 20th March 2008: Insiders report
a mid single digit fall in advertising sales, buying more than $149.64K of RHD’s
and the shares fall 40% in early trading stock as it trades at a 52 week low

Rh Donnelley Corp (North America Media)

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Capital One Financial Corp (COF)

February 4th: UBS tells investors to sell shares in COF, citing
expectations of rising credit losses in the consumer finance
sector – February 11th COF falls by 4.4% to $46.82

data Capital One Financial Corp (North America Diversified Financials)

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Qwest Communications International (Q)

January 10th: Qwest stock drops below $6 for the first time in nearly January 18th: Qwest, among the hardest hit in the
two years, a day after larger peer AT&T told investors it is seeing a telecommunications sector so far this year, falls 11 cents,
slowdown in the consumer wire-line and Internet business. down 20% for the year and is trading at a two-year low.

data Qwest Communications International Inc (North America Telecommunication Services)

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Lehman (LEH) 9th June: Lehman projects a $2.8bn loss for its second quarter.
The bank’s CEO Richard Fuld is forced to part company with his
June 4th: Investors continue to bet life long friend and number two Joseph Gregory
heavily against Lehman, lifting the
banks shares sold short to record levels

Lehman Brothers Holdings Inc (US Equity (S&P500))

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American International Group (AIG)

June 9th: AIG faces increasing dissent from its two major shareholders. Shelby Davis of Davis May 21st: Former AIG CEO
Selected Advisers LP and Bill Miller of Legg Mason Inc, who control more than 100 million of Maurice ‘Hank’ Greenberg
AIG’s shares, representing about 4% of company’s stock, send a letter to the company’s board could face civil actions
two days before the annual meeting, citing a ‘staggering breakdown of risk controls.’

American International Group Inc (US Equity (S&P500))

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Downey (DSL) February 12th: AIG takes a $723m write down
for the accelerated amortization provisions in
January 15th: The bank slips 13% on the NYSE, boosting the CDO tranches that it is running.
its non-performing assets level after disclosing some
modified loans should be accounted for as troubled debt.

Downey Financial Corp (North America Banks)

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Gildan Activewear (GIL) April 29th 2008: The stock closes 28.8% lower after reducing FY2008
and Q2 adjusted EPS forecast numbers. The company highlights a
Gildan has had a difficult six months, culminating in a profit warning on production shortfall in their factory in the Dominican Republic, higher
29th April. On top of this, GIL operates in a contracting market. According freight and energy costs and writes down inventory values.
to First Research, the output of US apparel manufacturing is forecast to
fall at an annual compounded rate of -1.1% between 2007 and 2012.

down inventory values.

Gildan Activewear Inc (CA Equity (TSX60))

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Europe April 22nd: Cattles becomes the latest UK
lender to seek cash from its shareholders.
Cattles (CTT)

February 23rd: Shares in Cattles drop 27p after the bank’s
announcement it would not make an offer for London Scottish Bank

Cattles

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Carphone Warehouse (CPW)

January 9th: CPW comes under heavy selling pressure as hedge April 15th: CPW drops 13% after surprising the market with news that
funds bet that a forthcoming trading update would disappoint. year-end debt levels would be higher than market expectations due to
adverse currency movements and increased capital investments.

Carphone Warehouse

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DSG (DSGI) April 12th: DSG’s shares fall 11% after the retailer delivered
another profits warning as cash-strapped customers
January 11th: DSG issues avoided full priced goods and sought out bargains instead.
the sector’s first post-
Christmas profit warning.

DSG

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Vanco (VAN)

February 1st: Vanco issues a debt 18th May: Vanco is expected to be sold for as little as one pound over

warning, citing the company’s year-end the next two weeks. Eventually the company was sold on May 26th to

debt was well above its interim guidance. Reliance Comms for $77m - it was once worth $400m USD
26 to Reliance Comms for $77m - it was once worth 400million USD

Vanco

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Banco de Sabadell (SAB)

June 3rd: French insurers Axa and Groupama submit offers to acquire 50 per cent of
the insurance arm of SAB in a sale process organised by the Spanish Bank. Sources
close to the matter value SAB’s insurance business at 1.2 to 1.5 billion euros.

Banco de Sabadell Sa (ES Equity (IBEX))

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Yell (YELL) March 18th: Yell drops 12.1% to a record low of 147p,
taking its losses since the turn of the year to 63%, as
January 9th: UBS downgrades investors continue to steer clear of media companies.
Yell to ‘Sell’ and the share price
drops 6.2%.

Yell Group

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Heidelberger Druckmaschinen AG (HDD)

January 1st: JP Morgan gives a ‘neutral’ April 1st: Heidelberger has its steepest
recommendation to HDD, projecting a significant profit drop in two months after failing to
decrease in earnings over the next six to 12 months meet its annual profit and sales targets.

Heidelberger Druckmaschinen Ag (DE Equity (MDAX))

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Portugal Telecom (PTC) The company faces increased competition in
the domestic fixed telecoms market and the
Portugal Telecom lacks any real ‘growth drivers’ apart from the Brazilian company is engaged in an ongoing program of
business, according to research from Ca Cheuvreux in June 2008. The company cost cutting in an attempt to improve profitability.
continues to have a fine shareholder register, with the highly-respected UK-
based fund manager Taube Hodson Stonex declaring a stake of 2.06% in April.

Portugal Telecom Sgps Sa (PT Equity (PS120))

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Asia Trading volume in the underlying equity
has risen over the last six months, as
Joint Corp (8874) has the amount of stock on loan.

Joint Corporation has been hit by the slow-down
in the domestic property market and tighter
government building regulations

Joint Corp (Japan Real Estate)

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Air China (0753) The company also suffered from the after-effects
of the May earthquake in Sichuan province and the
Air china has suffered this year as inflation near abolition of a week-long national Labour Day holiday.
an eleven year high has cut the discretionary
spending of Chinese consumers.

Air China Ltd (HK Equity (Others))

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China Southern Airlines (1055)

China’s largest air carrier warned in June that it would cut some international flights in
response to rising fuel costs which have nearly doubled in a year. Other factors which
have caused the share price to fall by around 50% this year include extreme snowfall,
visa restrictions on international travellers and the May earthquake.

China Southern Airlines Co Ltd (HK Equity (Others))

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Honeys (2792) 18th June 2008: The stock was the third most
heavily borrowed in the Japan Retailing sector,
Japanese retail spending has fallen this year, and Honeys has behind only Daiei and Don Quijote.
suffered, along with the rest of the consumer discretionary sector.
The stock has been heavily borrowed throughout the year, with
Utilisation oscillating between 55% and 85% of available stock.

Honeys Co Ltd (JP Equity (Others))

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Sinopec (0338) Absolute shorting levels are not high,
however supply is fairly constrained
Sinopec admitted to facing an increasingly difficult operating climate in with only 9.34% of the market cap
2008 when it announced its FY 2007 results in April. Factors cited include: available to lend.
high oil prices, accelerating RMB appreciation, export tax rebates, State
control over domestic petroleum products and tightening monetary policy.

Sinopec Shanghai Petrochemical Co Ltd (HK Equity (Others))

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Babcock & Brown In recent weeks, pension funds, insurance companies and
mutual funds have been selling considerable amounts of
Babcock & Brown has been the focus of everyone’s stock, with the amount of lendable stock falling from 38m
attention this year. The stock has shown extreme volatility shares on 6 June to 29m shares on 16th June.
in June, but the percentage of the company’s Market Cap
on Loan actually hit an all-time high in early February.

Babcock & Brown Ltd (AU Equity (ASX50))

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Sectors

Predictably, given the present financial climate, it is the Banking, Retail and Consumer Services sectors where
short interest has risen this year, particularly in North America. The Banking sector has been heavily borrowed,
with North American Banks seeing the most activity. October 2007 appears to have been the time when investors
increased their banking short positions and they stayed high throughout H1 2008.

Below – North America’s banks, consumer, and retail sectors

Utilisation (%) 25.00 index Utilisation (%) 24.00 index Utilisation (%) 30.00 index
20.00 22.00 25.00
15.00 Utilisation – North American Banks 20.00 20.00 Utilisation – North American Retailing
10.00 18.00 15.00
16.00 10.00
5.00 14.00
0.00 5.00
0.00

01-Dec-07 01-Dec-07 01-Dec-07
01-Jan-08 01-Jan-08 01-Jan-08
01-Feb-08 01-Feb-08 01-Feb-08
01-Mar-08 01-Mar-08 01-Mar-08
01-Apr-08 01-Apr-08 01-Apr-08
01-May-08 01-May-08 01-May-08

Utilisation – North American Consumer Services

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Asian and Emerging Market Sector Highlights

• Unlike in the American and European Utilisation (%) 25.00 index Utilisation (%) 60.00 index
Banks sector, where hedge funds are yet 20.00 50.00
to close short positions, profits have been 15.00 Utilisation – Australasia Pharmaceuticals, 40.00
taken in their Japanese counterparts, with 10.00 Biotechnology & Life Sciences 30.00
Utilisation in Japanese Banks rising from 20.00
12% to 22% and then falling to 16%. 5.00 index 10.00
0.00
• Emerging markets bank shares saw 01-Dec-07 Utilisation – EM Banks 01-Dec-07
shorting more than double during 2008. 14.00 01-Jan-08 01-Jan-08
European banks saw an increase in short 12.00 01-Feb-08 01-Feb-08
positions although some of this increase is 10.00 01-Mar-08 01-Mar-08
dividend-related. 01-Apr-08 01-Apr-08
8.00 01-May-08 01-May-08
• Japan Retail and Asian Transportation 6.00
have both seen increases in Utilisation this 4.00 Utilisation – Asia Transportation
year. Other increases include Software, 2.00
Health Care and Semiconductors. Utilisation (%) 0.00 Utilisation (%) 100.00 index
80.00
• Clockwise from top left: 60.00 Utilisation – Japan Retailing
Japan Banks 40.00
Asia Transportation 20.00
Japan Retailing 0.00
Emerging Markets Banks
01-Jul-07 01-Oct-07 01-Jan-08 01-Dec-07
01-Apr-08 01-Jan-08
01-Feb-08
01-Mar-08
01-Apr-08
01-May-08

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Sectors where short interest is low

• Sectors which are experiencing low utilisation levels include American and Asian Pharmaceuticals
• Australasian biotech firms in particular have seen Utilisation at a 2 year low.
• Below, Australia’s Pharmaceutical sector, and European Banks.

Utilisation (%) 9.00 Utilisation (%) 100.00 index
8.00 80.00
60.00 Utilisation – EMEA Banks
7.00 index 40.00
20.00
6.00 0.00
5.00
4.00

Utilisation – Australasia Pharmaceuticals,
Biotechnology & Life Sciences
01-Dec-07 01-Dec-07
01-Jan-08 01-Jan-08
01-Feb-08 01-Feb-08
01-Mar-08 01-Mar-08
01-Apr-08 01-Apr-08
01-May-08 01-May-08

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Asian and American Food, Beverage and Tobacco Sectors

• In North America and Europe, the Food & Staples Retailing sector saw a significant decrease in Utilisation, which is
understandable given rising global food prices. Below, North America Food & Staples Retailing, Asia Food, Beverage &
Tobacco.

• Asian Food, Beverage and Tobacco has seen a small rise in utilisation during the period, from 8% to 10%, in contrast
with the US and Europe.

• Below, North America Food & Staples Retailing and Asia Food, Beverage & Tobacco

Utilisation (%) 9.50 Utilisation (%) 18.00 index
16.00
9.00
8.50 14.00
12.00
8.00 index 10.00

7.50 8.00
6.00
7.00
6.50

01-Dec-07 01-Jul-07 01-Oct-07
01-Jan-08 01-Jan-08
01-Feb-08 01-Apr-08
01-Mar-08
01-Apr-08
01-May-08

Utilisation – North America Utilisation – Asia Food
Food & Staples Retailing Beverage & Tobacco

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Airlines

• The rising price of fuel has made airlines the target of short investors, as demonstrated by these three graphs of British
Airways, Cathay Pacific, and AMR, which owns all of American Airlines’ common stock.

AMR British Airways Cathay Pacific

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Best-Timed Shorts of 2007, six months on

Summary:

• When we produced our report entitled ‘Best-Timed Shorts of 2007’, we commented that ‘Many investors are still short
of the securities listed in this document, as witnessed by high Utilisation* numbers.’

• We have revisited all of the stocks in this document and the highlights are as follows.

• Average price percentage fall between 2nd January 2008 and 12th June 2008 in the USA: -24.64%

• In Asia, the average change was -8.63% and in Europe, -25.41%.

• This does not include AHM and NRK which delisted. The worst performer in the US was Ambak which has fallen 92%
so far this year. In Europe, Johnston Press was the worst performing stock while in Asia it was China Citic. Asia showed
the greatest dispersion of results, while European and US results were much more closely grouped. Only one US stock
rose during the period, namely Moodys.

• With regard to the Best-Timed Shorts of H1 2008, most of these stocks are still heavily utilised, so we will be watching
their progress closely and will report on these in December 2008.

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Performance Analysis of the Best-Timed Shorts of 2007

Despite the fact that utilisation was high in most of the names which we selected in December 2007, many of these
stocks continued to underperform during the first six months of 2008. The negative momentum behind many of these
stocks and their sectors continued through H1 2008.

% Change in Share Price between % Change in Share Price between % Change in Share Price between
2nd January and 12th June 2008 2nd January and 12th June 2008 2nd January and 12th June 2008

USA Europe Asia

American Home Mortgage Delisted IKB Deutsche IKB -42.93 Sims Group SGM 37.46

D.R. Horton Inc. DHI -7.43 SportsDirect SPD -24.02 Sumitomo Osaka Cement 5232 9.52

MBIA MBI -73.21 Johnston Press JPR -74.43 Techtronic Industries 0669 -10.05

Moodys MDY 8.12 Fimalac FIM 1.95 Kokuyo 7984 1.80

Liz Claiborne LIZ -20.17 Sacyr Vallehermoso SYV -22.48 James Hardie JHX -22.17

Woolworths WLW -23.04 Storebrand STB -20.00 Casio 6952 3.03

Sears Holdings SHLD -19.81 Micronas Semiconductor MNAS -23.24 Toto 5332 -10.15

Ambac ABK -92.64 Ebro Puleva EVA 1.88 Sega 6460 -26.64

MGIC MTG -13.23 Northern Rock NRK n/a China Citic 1998 -44.20

New York Times NYT -4.97 Average % Change -25.41 Sinofert 0297 -24.93

Bear Stearns BSC 0.00 Average % Change -8.63

Average % Change -24.64

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Summary and Disclaimer

• Many investors are still short of the securities listed in this document, as evidenced by high Utilisation*
numbers.

• In many of these cases institutional investors were short long before the share price began to fall.
• *Utilisation is a proprietary calculation which refers to how much demand there is to borrow a stock.

For further information about Data Explorers, please call the Sales team on
+44 (0) 20 7264 7600 or +1 212 710 2210, or Email: [email protected]

Disclaimer: The information and analysis in this document is provided for informational purposes only and is
intended solely for institutional investors. Nothing herein should be interpreted as personalized investment
advice. Under no circumstances does this information represent a recommendation to buy, sell or hold any
security. None of the information in this document is guaranteed to be correct, and anything written here should
be considered subject to independent verification. You, and you alone, are solely responsible for any investment
decisions you make. Data Explorers Limited is not regulated by the Financial Services Authority (FSA).

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