Financial sense have made available a transcript of the aforementioned show with the junior short discussion. I thought I would post it as I think it is very instructive.

http://www.financialsense.com/fsn/BP/2008/0308.html#buythem 

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JOHN:  You know, Jim, over the last six months you’ve been pounding obviously not only on the concept of the value of metals themselves but also precious metal stocks.  And I think one of the questions that people are wondering about is why it is that the PM stocks haven’t taken off in the same way that the metals have, given the atmosphere that we’re in?

JIM:  Well, last year you had bullion outperform precious metal stocks.  Bullion was up over 30%, the precious metal stocks, at least the HUI was up only 20% and even that was misleading because you’re only talking about six stocks in the HUI that did well; some neutral and some actually lost money.  I think there are a number of things going on:  1) the price of gold up until August of last year was lagging the price inflation that you were seeing in the mining industry.  Mining costs have been going up at 25 to 30%.  And remember, up until about the middle of August when the Fed began slashing interest rates gold was in the $600 range.  But, today we’re looking at gold closer to 1000 and now the price of precious metals has gone up high enough that all of these mining companies are going to start making some higher levels of profit.  In other words, the price has finally caught up and exceeded the cost of production. 

And as a result of that you’ve seen a shift this year.  You’ve got gold prices which are up roughly about, let me see, spot gold is up about 17% and you’ve got the HUI which is the large cap stocks up about 19 ½%.  So the big cap gold stocks are doing very well; they’re beating bullion.  I mean Agnico-Eagle is up about 34%; if you take a look at, for example, Yamana gold it ‘s up 43%; if you look at Goldcorp, it’s up 27%; or Kinross up 37%; I can just go down the list.  So the liquidity that’s come into this market, it is still largely going into the large cap gold stocks and what is happening is they’re shorting the juniors.  I have never seen the kind of short positions I’ve seen in juniors and some of them are absolutely insane.  It doesn’t matter if you’re looking at soon-to-be producers.  I mean one soon-to-be producer the short position increased almost 50% alone in that stock.  The short position has gone from almost 2 million shares to 3 million shares and you’re talking about a stock that has only 50 million shares outstanding and is tightly held by some long term investors. 

And I think…It’s like Rob McEwen on the roundtable last week said the hedge funds exited the mining sector last May; well, I think they went beyond that.  They’ve gone from being long the junior sector to being short the sector.  I don’t care if I’m looking at late stage development plays, if I’m looking at silver stocks.  Just to give you an example, one of the silver stocks, Silver Standard, has about 62 million shares outstanding.  This is a tightly held stock but if you look at the short position in this stock, this is the highest I’ve seen it:  almost 2.5 million shares short.  This reminds of a couple of years ago, one of the plays in the market was to write credit default swaps on GM bonds and then as a hedge short GM stock.  But unfortunately for that hedge a guy by the name of Kirk Kerkorian came along and all of a sudden made a potential bid for GM and all of a sudden the hedge just blew up and people lost a lot of money; and that is what I think has happened here. 

I think a lot of these hedge funds and investment banks have taken large short positions in these juniors and they were not counting on the explosion in the mining stocks, and especially gold.  And so what they’ve done to hold this rise in the stocks is they’ve bumped their short positions, which is just absolutely insane because there is strong money as we heard from Jeff Christian.  Last year, bullion demand went up 12% globally.  That’s almost the seventh year in a row – consecutive year – that we’ve seen an increase in investment demand; and John, this is just beginning.  And one of the things that you really have to watch out here is when markets go up as we’ve seen in the last week, for example, gold stocks, liquidity comes into the sector.  In other words,  all of a sudden there is more buying and at the same time the selling comes in so liquidity increases but then once you go through one of these moves liquidity dries up.  So what happens if you’re short almost a month’s supply of trading?  I mean this is a very dangerous position to be in.  [51:15]

JOHN:  So if the stocks are pulling back, then what should the investor decide to do.  Do you try to trade them, stay in accumulation mode; which way?

JIM:  You know what, I do believe that we’re going to see gold go over 1000.  I would not be surprised to see gold go to 12, 1500 by the end of the year.  If you’re going to trade them I recommend you trade the large cap stocks, and you’d probably be better off trading some kind of ETF like the GDX where there’s plenty of liquidity and you can get in and out.  The GDX is sort of the HUI index.  And if you’re going to trade and you’re a nimble trader that’s what you do:  You trade the large cap stocks.  But the juniors when they’re shorting them like this and trying to hold the price down, you use that as an accumulation. 

I hate buying juniors when the stocks are going up.  I’d rather buy them when they’re going down and especially someone like ourself that is institutional, I prefer when a large block of liquidity comes in on the sell side which is what we saw in quite a few of the juniors because I mean we’re sitting on $50 million in cash that we’re going to put to work in about four or five juniors.  So we look for those liquidity moves to provide us with the ability to buy these stocks without driving them up because when stocks are going up if we were to go in and buy we would drive the price of the shares up.  So at least from an institutional side, you use these pull backs and these huge short positions, you take advantage of it.  In other words,  let them take the price down and as they take the price down go in and pick these shares up at a cheaper price.  [52:59]

JOHN:  You wouldn’t recommend trading juniors then?

JIM:  No, we have, for example, a uranium junior that’s up 200% in the last two weeks because they just hit a spectacular...they made a uranium discovery.  I mean that’s the risk that you run in the junior sector because you never know what’s going to be…what are juniors doing?  They’re going out and they’re putting drills in the ground and you’re not going to know when one of those drills hit.  And that’s one of the reasons why you’ve got to take a longer term view when you’re in this sector.  And I think trying to trade in and out of this sector, and especially the juniors you’re just going to outsmart yourself.  [53:35]

JOHN:  So how do you know if a Junior is short, and then if you assume that you know, how do you play that as an investor?

JIM:  The short positions on the mining stocks are listed.  In fact, if you go to our website on Financial Sense on the right hand side you have our precious metals page, we have two links to short positions.  We have the HUI short positions and then we have the link to overall short positions.  And one of the things that you do is, and you can see this. I mean it’s obvious, you’ll see it.  And especially when they do this at the end of the day because when stocks are rising and these hedge funds are shorting the stocks and the investment banks are shorting the stock, they don’t want to have their books in negative territory.  In other words, if they shorted the stock and the stock goes up what’ll happen is their short position goes into negative and they might have to post margin and cover that.  So what they’ll do is they’ll try to manipulate the price and they’ll come in like 30 seconds left of trading at the end of the day, what they’ll do is they’ll come in and they’ll whack all the bids.  Let’s say a stock is up 20 cents and the last 30 seconds they’ll just start whacking and taking the stock down.  So they close the price of the stock negative.  So when you see that kind of action, what you do is let them drive the bids down.  In other words,  if they’re trying to drive the stock down then lower your bid for the stock.  If the stock is at a dollar and they drive it down to 95 cents at the end of the day, then reduce your bid to 95 cents.  In other words,  make the shorts come down to you.  Don’t try to chase them.  In that way you can get these shares at a cheaper price, but more importantly if you pick them up – let’s say you buy them at 95 and the next day they drive the price to 90 cents then what you do is lower your bid to 90 cents.  In other words,  don’t chase the offers. 

And it’s very important that you have a broker that understands that; that you have a Level II so you can see where the bid and ask prices are; and then you can pinpoint also who the brokerage houses who are behind the short positions because they’ll tell you which house is shorting, which house is buying and this is the kind of information you need if you’re going to be in the junior sector.  But I think these guys are going to be committing economic suicide because all that has to happen is if the market goes up, it’s some event – a financial event or whatever it is, maybe it’s the price of gold going north of 1000 – what’ll happen is they’ll go in and increase their short positions.  And all across the board this week in a lot of the juniors (with the exception of one particular junior that we’re following where the shorts are starting to cover because they’re in a very precarious position) that we have our eyes on, you could just see the short positions increase.  One short position increased by over a half million shares this week alone.  So that’s how you use the shorts position to your advantage.  When you see this kind of activity on Level II, then just reduce your bid.  Make the short seller come to you and sell you your shares at a lower price.  What you don’t want to do is chase the stock so that the shorts can sell it to you at a higher price and then when the price goes down they can come back and cover it at a lower price.  You don’t want to play their game, you want to make them play your game.  [57:03]

JOHN:  And the worst thing you could do in this case would be to sell your shares, you know, you panic and you say, “aagh, I’ve got to get out of this real fast” and then you sell the shares going down. because you’ve actually rewarded the short sellers in that case.

JIM:  What you’re doing is you’re playing their game because that’s what they want you to do.  They want you to chase the price higher therefore they will short the shares to you at a higher price and then what’ll happen is then when they drive it down at the end of the day because they don’t want to be in a negative position, they’ll pick up  the shares at a lower price because what they’re going to do is they’re going to…they’ll come in and they call them bear raids where they’ll just carpet bomb the stock.  They’ll drive the price down and then as a result as the price goes down people see the price go down, they don’t understand what’s going on, they panic, they go “my stock’s down 10, 15% I better get out.”  You panic.  And that’s exactly what the short seller wants you to do.  They want to scare, they want to panic you and they want you to sell your shares so  they can cover and profit off you.  And that’s why it’s a losing game when you play that.  So when you see that kind of activity make the short seller come to you, make them sell, lower your bid, make them sell the shares to you at a lower price; and more importantly, increase your position, buy more stock.  But more importantly, don’t panic.  Understand that they’re giving you an opportunity and you hold your shares.   You don’t trade them.  And the unfortunate thing is they try to scare you out by coming in and doing these carpet bombs and hoping they’ll shake and panic people so they can cover their short position.  [58:48]

JOHN:  Now, when you talk about carpet bombing that’s obviously a slang phrase.  What does that mean?

JIM:  Usually what they’ll do when they’re trying to create liquidity or cover a position they’ll come in and use maybe two or three brokerage firms and what they’ll do is all of a sudden a stock is hardly trading and one day volume just goes through the roof, they slam the stock and they drive it down 15 to 20%.  And you know, investors say, “What the heck just happened.  There’s no news.  There’s nothing.”  And what they’re trying to do is start a bear run on the stock because they’re shorting and what they’re hoping to do is scare a bunch of people out of the stocks so they can pick up the shares and cover their short position.  So these are just some of the tricks that they use to scare people out.  And the hedge funds and the investment banks have been playing the individual investor. 

In fact, next week we’re going to have an author of a new book called Lost on Bay Street, Alex Doulis, who talks about a lot of these games that the hedge funds and the investment banks play against individual investors.  So there are two things you can do:  you can either get bummed out and play their game, in which case you’re going to lose; or you can make them play your game – and that I think is the most important thing to understand in this kind of market.  [60:05]

JOHN:  So the point of carpet bombing is to really to start a stampede is what they want to do.

JIM:  Yeah, that’s what they want to do is they want to panic people.  And you see this – we get a lot of emails (we don’t cover these on the program because I don’t want to get into individual stocks):  “What happened to XYZ, I can’t believe the stock went down 10, 15 percent.  There was no news,” or “they released incredible drill results and they sell the stock off.”  That’s exactly what’s going on: the short sellers and the investment banks working in conjunction are coming in here and trying to drive and stampede investors and get them to panic because you’ve got to remember, John, liquidity can seize up in the market.  I sure would not want to be short a lot of these juniors when these things explode because the losses these guys are going to suffer are going to be incredible in this kind of market.  I mean the Fed just came out on Friday saying they are going to be flooding the markets with liquidity; we know they’re going to be lowering interest rates; we’ve got commodity, gold prices on fire and money – smart money – is moving in to this sector and I’m talking about big money here. 

But once again, you don’t want to play their game.  And too often that’s what happens with investors.  That’s why we always talk about fundamentals on the program; understanding the company, go to the company website, read the press releases, talk to management about their particular project so that you understand the fundamentals; so that you know these fundamentals, you don’t let these games of the hedge funds and the investment banks be played against you.  Therefore when you see them carpet bomb or try to stampede a stock or you follow the short positions and you see that they’re increasing then use that knowledge to your advantage, so that you can use the short sellers price manipulation to your advantage so you can pick up your shares at a lower price and more importantly you hold your positions and you don’t panic because that’s exactly what they’re trying to do.  And they will try to do that, you’ll see them carpet bomb the stock in the last 30 seconds, two minutes of trading; they’ll send people on chatrooms – we call them ‘bashers’ – and they’ll plant all kinds of rumors and little innuendos.  That’s one of the reasons why I think Agoracom is going to become the standard in chatrooms because they don’t allow a lot of this manipulation that you see so often on Yahoo and Stockhouse where you can say anything.  You could go on anonymously and say the president of a company is a pedophile, he was in jail, or you can just say anything you want and there are no standards.  [1:02:41]

JOHN:  So in summary, basically, you’d be buying at this time, adding to your position while the pullback is en route. 

JIM:  Yeah, I would take a look at some of these stocks.  You’ve got some of these juniors are selling for $25 gold in the ground; you’ve got a soon-to-be mine coming into production selling at almost 25% of the mine’s value.  But once again,  make sure you understand the company, you understand the story.  And make sure you understand what is going on in the marketplace each day.  In other words, is it a short position that’s driving the stock down.  If it is, use that to your advantage.  Lower your bids, make the short sellers come to you, increase your position.  But more importantly:  Hold your position.  [1:03:33]