Nuclear deters investors

The dividend season is clouding our view of stock on loan in Japan and we are conscious of the need for sensitivity in making assumptions about investor sentiment given the terrible crisis faced by the world’s third largest economy. Our piece today is focused on investor sentiment towards Uranium producers, the key element in the production of nuclear power, and we will also look at a Japanese focused ETF. This includes: iShares MSCI Japan ETF (NYSE:EWJ), Global X Uranium (NYSE:URA), Uranium One (TSE:UUU), Uranium Energy (AMEX:UEC), Uranium Resources (NASDAQ:URRE), Uranium Participation (TSE:U) and carbon credit company, Camco (LSE:CAO).

From recent academic research which can be found on our new Research portal (www.dataexplorers.com/research), we know that short sellers are known to be quick to react to news flow. Yet other research shows that it is long selling more than short selling that drives down prices at times of major shock. In Japan, we can describe the demand to borrow in the iShares MSCI Japan ETF. Just under 7% of the shares in issue are on loan -a 2 year high - and this represents most of the institutional supply.

Turning to nuclear energy, we ask whether investors feel the future is bleak, at least in the short term? In recent days we have seen tactical short sales in everything Uranium related from the Global X Uranium ETF to the individual mining firms. The ETF has historically seen negligible interest as either a hedging or directional short selling instrument, but this has changed. 5% of its total shares are on loan, which is most of the supply available via asset management pools.

Of all the basic materials, Uranium was relatively slow to benefit from the recent resources boom. With Governments selling their depleted Uranium into the market as they decommissioned their nuclear weapons, the supply covered the demand too easily for the price to shoot up. This changed in the second half of last year and many Uranium mining firms saw their share prices double prior to the explosions at the Fukushima plant in northern Japan. Unfortunately, the short selling in Uranium Energy, Uranium Resources and Uranium Participation has shot up with traders timing the fall in the spot price. Demand to borrow in these names is 15%, 7% and 1% respectively. Uranium One is the biggest firm here but the situation is more complicated with some of the 9.5% of the shares on loan, being a hedge against their convertible debt.

Observers are no doubt mostly interested in how this nuclear energy crisis will impact the major and most liquid energy firms, many of whom have nuclear capabilities. But, such is their diversification and scale that short selling is seldom a feature for firms like Areva, EDF and RWE.

However, as noted by the FT yesterday, other energy markets will benefit and we have already seen a bounce in share prices this week for solar companies– and many of these were heavily shorted, as noted in earlier pieces. A less obvious but more interesting factor (than buying oil or natural gas producers) will be if this disaster re-awakens the carbon credit market. Broker Peel Hunt points out that carbon credit trading house, Camco (LSE:CAO) will see EUR 9m of value added to its carbon portfolio for every EUR 1 change in the carbon price, which has risen 15% in the last five days. Interestingly, institutional investors had started buying this company prior to the earthquake and this looks set to rise further.