The Short Story on the Markets and the Miners
Many bears have been seen wandering around dazed and bewildered lately trying to decide on whether they should buy into the market rally or take some money off the table on their gold mining shares that haven't been going much of anywhere lately. Or whether they should go to cash and sit out what they perceive as a bear market rally. We can certainly see that we don't have the conditions for the end of a bear market:

So a bear could reasonably ask where the money is coming from for the current bear market rally [we'll use this premise for the article]. I did a little research on the short interest positions on the New York Stock Exchange, the NASDAQ and the AMEX for October and November and came up with some interesting results. You can find the Top 100 Shorts on the NYSE at their Data Library page near the bottom of the page. You can find the information for the AMEX at the Amex Monthly Short Interest page and there is a combined AMEX/NASDAQ short interest page at the ViWes InvestInfo web site.

The AMEX/NASDAQ information is from October as of this publication date. I don't know when NASDAQ release their short interest information but AMEX and NYSE usually release it around the middle of the month.

I happened to be short a clothing retailer named Chico's Fashions and was surprised how well it was doing pricewise even though I didn't feel it deserves its current valuation. The ticker symbol is CHS and it has a Price/Earnings of 33, a Price/Book of 9 and a Price/Sales of 4 [from Yahoo Finance Profile Page]. Well, CHS happens to be in the top 100 shorts list on the NYSE which explains why they've been doing so well. Yahoo Profile reports that 28.4% of shares are currently borrowed for shorting with a Short Ratio of 18.91 days. That means that it would take almost 19 days of buying by shorts to cover all shorts. So I covered my short on Chicos.

Let's take a look at another example. Lucent Technologies is number one on the NYSE Short list with 401,706,209 shares short and an average daily volume of 48,119,700 as of November 12, 2002. This yields a short ratio of a little over 8 which can be a good area to have a short squeeze. The gains in Lucent from the low are in excess of 200% as can be seen in the chart.

You can take a look at short positions in various charts in the referenced pages and spot many stocks that have had spectacular gains since October.

For those of you unfamiliar with shorting, it involves borrowing shares of a company, selling them into the market at a given price and then buying the shares back later to repay the stock loan. The short makes money when the price that he buys the share back at is lower then the price that he shorted at.

This past summer, I noticed a few seminar programs that trained you to trade in up and down markets for a few hundred or a few thousand dollars. Some of these programs provided paper trading systems to try without risking real capital. I believe that we had the addition of a lot of bear cubs inexperienced in shorting that have been providing some of the fuel for the current bear market rally. When there are a lot of shorts in a company, a small rise in the price will cause some shorts to cover at market which will push the price up. This can have a chain-reaction effect in causing more shorts to cover and then bringing in longs to the party for a big rally. Dangerous stuff for those that short stocks based on fundamentals.

While perusing the AMEX short interest report, I noticed a few gold-related stocks. I present them here for you to draw your own conclusions. The first numerical column is the number of shares short and the second number is the average daily volume.

APEX SILVER MINES LT   SIL              881,133     103,039
BEMA GOLD CORP.        BGO            2,023,050   1,503,352
CAMBIOR INC.           CBJ               84,400     124,113
CANYON RESOURCES CO.   CAU               33,353      17,634
CENTRAL FUND CN CL A   CEF            1,056,488      73,017
CRYSTALLEX INTERNAT.   KRY            2,586,360     273,856
ECHO BAY MINES LTD     ECO            2,052,610     558,660
GOLDEN STAR RESOURCE   GSS              145,991     255,547
KINROSS GOLD CORP      KGC           14,126,249   1,247,852
RICHMONT MINES INC     RIC               56,000      51,260
VISTA GOLD CORPORAT.   VGZ                9,000     116,026



Michael Moy

November 25, 2002
mmoy@yahoo.com