Good questions!
The use in discussing it is that supply and demand of stock is more important in the short term than "fundamentals".
A company can have great long term fundamentals and remain undervalued and even fall in price if there are more aggressive sellers than buyers (note there are never more sellers than buyers, for every share traded there is one buyer and one seller).
Shorters form part of the supply side - and they have an obvious interest in pushing the price down and trying to cast doubt over the success of the company - in extreme cases they can cause so much doubt that banks become scared and pull in their loans or refuse to refinance and the company is forced into a downward spiral of issuing cheap equity to top up security with their bankers. The shorters often use these periods of panic to buy back their short and make a profit.
So, if you can get a handle on what the shorters are doing right now, it can help with short term buy and sell points for traders. Of course, it's also helpful if you can predict when new aggressive buyers are entering the stock on the demand side.
Both of these are predictions, "feeling the pulse" of the market, and they can change rapidly. They are really only of use to traders, and even then they can change so rapidly as to be useless. Often it isn't so much that the market is being "manipulated" as that you can't know what everyone is doing and what their motives are.
For what it's worth, I think the recent gyrations in the short positions and the share price were caused by Capital suffering a big redemption in one of its funds (I have covered this in previous notes). It is quite possible that one of the short sellers got wind of this between late 2018 and March 2019 and shorted MSB knowing that Capital would be selling consistently over a couple of months. This pushed the price down from around $1.40 in late November to $1.00 in late December in thin trading as the US stock market fell 20% - making it easy for shorts to get the upper hand. More aggressive sellers than buyers! In January, after some more good announcements and a strong rebound in the US stock market, MSB bounced back to $1.40 - BUT the shorts may have known Capital were still sellers and the short position kept increasing up to its high in late January. This last episode of shorting pushed the price back down below $1.20 and volumes stayed very light through February. As it turns out, the big gyrations in the net short position could have been indicating Capital was recalling stock it had lent so that they could then sell it in the market. The shorters would then have had to find a new source of borrowing and this may have come from the prime broker or one of its other clients - hence several moves up and down in the net short register without any stock going through the market, before finally the short sellers covered their position in a crossing with either Capital or their prime broker etc. It appears that the shorts may have bought the position back at $1.15 in the now famous S3 XT trade or in the crossings the following day.
You can't have enough knowledge of what everyone is doing to accurately predict this stuff. In fact, if you do, you may be acting illegally. For instance, if you knew that Capital was a forced seller and this info was not generally available to the market and was expected to move the share price, and you acted on this info by selling, or causing someone else to sell, then that would satisfy the main requirements of insider trading. You could even have short sold below $1.20 through most of February and then missed out on the S3 XT trade and have seen the share price jump to $1.27 the next day and $1.40 the day after and you would have made a big loss on your short position! It wouldn't be much fun to have inside knowledge, then trade for a loss, then get investigated by ASIC and the ASX (a team of 65 compliance people and computers analysing unusual trades) - just ask Rene Rivkin!
Therefore, long-term investing is much easier!! You just have to assess long term value and decide if the current price is above or below that, then try and pick your entry point having regard to all these supply/demand factors.
Shorters will eventually also form part of the demand side when they unwind their short (but often by then so much damage has been done to the share price that it takes a long time to rebuild the market's trust. I would note that many stocks have been through this cycle and recovered strongly from the lows once the damage is repaired - off the top of my head I mention FMG ($1.50 to $7.20 in just over 1 year); QAN ($1 to $6.90 over 5 years), CGF (under $1 to over $14 in 9 years) - these are all large stocks which were written off by analysts. BSL was another classic - after raising new equity at desperate levels of $1.50 (actually 25c, then a 6:1 consolidation followed) it rose to $18.90 over the next 6 years. These stocks all had huge falls to their lows before these strong rises - note that BSL and FMG were still well below their all-time highs even after the big rises, while QAN and CGF went to new highs.
I remember when major analysts called QAN "no longer investment grade" at the low - and it took years in some cases to rebuild the market's trust in all these stocks which were selling on P/E ratios of as little as 3x forecast earnings. MSB has had a similar history of disappointment and is also trading on a very low prospective P/E (admittedly the earnings are not gearing up until 2021 or 2022) if you believe the consensus of US analysts. MSB has fallen from $10 to $1 and is starting to rise again after forming a big base over the past 3 years. If it rebounds like these other stocks, it will repay current long-term investors in spades. The price you paid is immaterial to whether you should own it own, it is simply a decision of whether it is correct for you to own it at the current price.
The low P/E ratios in the above cases didn't matter, panic sellers were desperate to sell near the lows, fed by rumours of capital raisings (true in the case of BSL, but it fixed the balance sheet), bank foreclosures and short selling; long shareholders were distraught and pointing fingers at management and blaming everyone else for their misfortune. Every investment bank in town was banging on the doors of Qantas management and Board pitching capital raisings at $1 - yet they held firm and the share price bounced back. The correct approach was to analyse the long term potential, the cheap P/E and decide whether the short term pressures were going to sink the company.
MSB has been through all these sorts of pressures in the past, particularly when they lost Teva as an investor and partner (throwing some doubt on the technology in the process), and when the high cash burn left them vulnerable to a discounted capital raising. This gave the shorters plenty of opportunity to put out negative reports (we all remember Macquaire's efforts) and to stir up trouble on sites like Hotcopper, trying to scare weak shareholders into selling. They were successful, and in hindsight it was profitable to sell at those levels and then re-buy later. Whether they were right or wrong is immaterial to current investors. The question for long term investors must always be "is the stock cheap or dear at current levels compared to long term valuations?"
So, sure, ignore the shorts if you are a long term investor. But for those seeking an entry point, who believe it is good long term value, it is part of the supply/demand for shares that can give a great entry point if you can read the tea leaves correctly. Don't worry if you can't as it is very difficult and most of us are operating on imperfect information. For me though, it appears that Capital was a forced seller, and someone knew this. I think they were short selling despite all the good news coming out from the company, knowing that they would probably be able to buy back cheaper. It certainly appears that Capital has finished selling (see my previous notes) - so that means the short term pressure from this seller has gone. Whether the short seller comes back at higher levels is the next question - if they do, it will be much riskier for them as they won't have a guaranteed supplier of stock to cover their position, nor will they have someone pushing the price down. So, in the meantime, the line of least resistance is probably higher.
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