This weekend Berkshire Hathaway’s Warren Buffet sold his stake in his four airline holdings, United (UAL), American (AAL), Delta (DAL) and Southwest (LUV) that he initiated in 2016 at a loss. He stated that the industry “changed in a very major way” and “the future is much less clear to me.” The sector is down -4.75% for the day on the news.
Short interest in the sector is $3.14 billion with +$635 million of new short selling over the last month, although we did see -$60 million of short covering over the last week. Delta had the largest amount of short covering last week, with -$140 million of buy-to-covers which decreased their short exposure by -20%.
Shorting the Airline Sector was a very profitable trade in 2020 with the entire sector up +$4.13 billion in net-of-financing mark-to-market profits, +91% on the year. Today’s price weakness added +$188 million to short seller’s profits, up +6.37%.
While long shareholders are long $556 million of the U.S. Global Jets ETF (JETS), short sellers prefer to pick and choose their short sales in the Airline Sector as there are only 710 thousand shares shorted, worth only $10 million, in the JETS ETF, 1.75% of its float. One of the main reasons for the lack of short selling in the JETS ETF is the 13% to 15% stock borrow fee due to scarcity of lendable shares.
We should see continued short selling in AAL, UAL and DAL and a resumption of short selling in LUV after Buffett’s comments and today’s price action. Shorts, who are already deep in the money, should be letting their profits run as long as the airline stock prices trend downward. But if prices start to rebound, we can expect a quick rush to cover some of their short exposure in order to realize their 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 as well as generate new trade ideas.
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Managing Director Predictive Analytics, S3 Partners, LLC
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