German internet payments and processing services company Wirecard AG (WDI GR) is delaying the issuance of its 2019 annual report again as it cannot substantiate 1.9 billion euros in cash balances. This may turn into a terminal liquidity issue and cause the cessation of 2 billion euros worth of loans and threaten the continuation of its Visa and MasterCard licenses. WDI GR is down -70% on the news today.
Wirecard is the largest short in the German market with $3.22 billion of short interest; 27.48 million shares shorted; 23.92% of its float. Stock borrow fees on existing short positions is 15% fee, but it is rising dramatically with most new stock borrow rates over 20% fee today and some stock borrows topping the 30% fee level.
We have been seeing short covering in Wirecard over the last month as price strength coupled with rising stock borrow fees have squeezed some short sellers out of their trades. We have seen 2.51 million shorted shares, -8.38% of total shares shorted, covered over the last month worth $295 million as Wirecard’s stock price rallied +29% (prior to today’s -70% price move). Short covering was active recently with half of the buy-to-covers were transacted over the last week. Total shares shorted declined by -1.28 million shares, -4.45% of total shares shorted, worth $150 million as Wirecard’s stock price rose +10.6%.
Using our Black App we can see that short sellers have been riding a Profit & Loss rollercoaster ride in 2020 and short selling\covering has followed profitability in the stock closely. Wirecard shorts started out 2020 in the red and did not turn profitable until March 11th. Short selling continued to grow, increasing +22%, until March 24th as Wirecard’s stock price fell -41%. Shares shorted then decreased by -8% as Wirecard’s stock price rose +57% by the end of April. The rollercoaster continued as Wirecard’s stock price fell -42% by mid-May and shares shorted reacted as expected, rising by +18%. The last leg of Wirecard’s short selling ride saw its stock price rise +41% and shares shorted decline by -10%.
Short sellers went into the red yesterday, down -$58 million in year-to-date net-of-financing mark-to-market losses but the red Profit & Loss numbers were a one day blip. Today’s -70% plunge in Wirecard’s stock price generated +$2.25 billion in mark-to-market profits. Wirecard short sellers are now up +$2.19 billion in mark-to-market profits for the year.
Wirecard stock borrow rates have been climbing recently, with rates on existing short positions around the 15% fee level. We are seeing increased short selling and stock borrow demand today, with stock borrow rates trending between 20% and 25% fee with some trades topping the 30% fee level. Prior to today’s price move there were approximately 4 million shares of Wirecard available to borrow but that number will decrease substantially over the next few days as stock borrow availability is taken down to cover new short selling and some long shareholders who were lending their stock begin to liquidate their positions.
With short selling increasing and stock borrow share availability decreasing we will see rates spike higher in the near term and stay expensive as long as shorts stay in their trades. Short sale locates may get more difficult to come by as brokers find less stock to borrow. Because of this tightness in the stock borrow market we can be certain that today’s downward price action was predominately due to long selling and not short selling. Only 2% to 10% of today’s 46 million shares of trading volume could have been short selling based on the amount of stock that was available to borrow. Any future declines in Wirecard’s stock price will also be principally long-selling driven as stock borrow supply continues to dwindle.
Expect stock borrow rates to increase significantly and short selling activity to be limited in the near term. But if Wirecard’s stock price rebounds, expect a slew of short covering as short sellers should be quick to close up their positions in order to realize their outsized recent mark-to-market profits.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.