Share rout cues record margin trades

Bloomberg

Sharp Corp.’s biggest one-day stock slide in 37 years sent its shares sold short in Japanese margin-trading accounts surging to a daily record as investors bet volatility will continue.

Sharp, maker of Aquos televisions and phones, plummeted 28 percent, the most since at least September 1974, on Friday after the company widened its loss forecast. The number of shares held in margin-trading accounts that profit if the stock falls jumped 10 times on Aug. 3 to 24.65 million, the highest since Japan Securities Finance Co. began reporting daily data in August 1997. Holdings in accounts that profit if shares go up rose the same day to 6.69 million, the highest since 2004, according to JSF data compiled by Bloomberg.

Monday, Sharp shares dropped 5.7 percent to ¥181.

“The selling hasn’t reached its climax yet,” Hiroyuki Uekusa, general manager of trading at Meiji Yasuda Asset Management Co., which manages about $37 billion, said Aug. 3. “This may be a good time for traders who bet on volatility.”

Sharp relied on overseas sales for 59 percent of its revenue during the three months through June 30, according to data compiled by Bloomberg. The number of shares that changed hands Friday was the highest since at least 1992, the data show.

While margin account holdings that profit when stocks fall surged Friday, those that make money when the company rises, so-called long positions, hit a record before Sharp’s earnings announcement. Long holdings of Sony Corp., Japan’s biggest consumer electronics exporter, also surged to the highest since 1991, the earliest for which Tokyo Stock Exchange weekly data are available, in July.

Sharp forecast an annual loss of ¥250 billion after markets closed Thursday, while Sony reduced its full-year net income forecast to ¥20 billion from ¥30 billion amid slumping demand for TVs and a strengthening yen. Sharp also announced its first layoffs since the 1950s.

A total of 41.5 million Sharp shares were purchased through margin accounts in the week that ended July 27, while 16.7 million shares were bought for Sony in the week that ended July 20, the TSE data show. Sony dropped 7 percent in Tokyo on Aug. 3 after cutting its full-year profit forecast by 33 percent.

“There was expectation of earnings recovery for electronics makers, but that hope was shattered after they cut their forecasts,” said Tomoichiro Kubota, a market analyst at Matsui Securities Co. “With piled up margin-buying of Sony and Sharp shares, there may be more selling as individual investors who bought on margin try to cut losses prompted by margin calls.”

Shares of Sharp fell 56 percent and Sony dropped 47 percent from recent highs in March through Aug. 2. The electronics makers, which both receive more than half their revenue from overseas, declined as reports from the U.S., Europe and China signaled weakness in the global economy. Long holdings in margin accounts more than doubled for Sharp and Sony between the week that ended March 30 and the five days that ended July 27.

Hon Hai Precision Industry Co., the world’s largest contract manufacturer of electronics, intends to continue with the investment in Sharp, spokesman Simon Hsing said Friday. The Taipei-based company plans to renegotiate the price of its investment in Sharp, expecting to pay less than the ¥550 per share it had agreed on in March, Hsing said.

“There will be dumping of shares prompted by margin calls,” said Meiji Yasuda’s Uekusa said. “Margin buying tends to increase during share weakness as investors take a contrarian approach. Those who bought Sharp and Sony shares are now taking a hit.”