Who shorts a penny stock and why? Lithium Americas

Lithium Americas is a penny stock.  I would put an asterisk after that however, because I don't believe it qualifies as your typical penny play for a number of reasons.

• LAC trades on Canada's big board TSX exchange, not the lower profile Venture
• The company recently announced a 50/50 JV with incumbent producer and NYSE listed SQM for their Argentinian project
• NYSE traded LIT, the only Lithium based ETF, has LAC as one of its holdings.

Regardless of those points however, LAC still qualifies as a penny stock by the strictest definitions.

With that being said, there is no hard and fixed rule for what qualifies as a penny stock.  For some any stock trading for less than one single dollar qualifies, others say $2, and some go as high as $5. Do note that in US funds LACDF is currently trading under $0.80 cents.

If you're looking to sell LAC short, for all intents and purposes it is a penny stock.  

I'm often surprised by the fact that a lot of retail investors really don't understand short selling. Pretty much everyone understands that its a ''bet'' that a stock's price is going to fall, but beyond that many don't understand how it works or how one might profit from it.

A PRIMER ON HOW SHORT SELLING WORKS

It might help to think of something other than stocks.  Imagine you have a friend with a really fancy watch, one that is Swiss made and is worth $5,000.  Now imagine you find out that this Swiss watch contains a cancer causing element, and that news is expected to be released in another week or two.

How might you profit from this knowledge?

You could borrow your friend's fancy expensive watch, maybe give him $100 to lend it to you saying you need to impress some people at a conference or something.  After borrowing the watch you then go out and sell it immediately, netting $5,000.  But of course your friend wants his watch back. When the news comes out about the carcinogenic element you're able to buy it back for say $100.  

You just made $4,800 from something you never owned.  $5,000 from selling the watch less the $100 you paid to buy it back and the $100 you gave your friend to loan it to you.   

Stocks are no different.  If you have say 100,000 shares of LAC (or LACDF) sitting in your brokerage account, then those shares could be loaned out to someone to be sold short, just as with the watch in the above example.  The individual borrowing your shares will have to pay a fee of course, and with penny stocks it can be hefty, but it can be done.  

If the 100,000 shares are sold for $1.00 CDN the short seller profits provided he is able to buy them back at a lower cost.  If LAC were to fall to .50 cents, then our short selling bear could take $50,000 out of the $100,000 he got from selling the shares short and buy them back, returning them to the broker they were borrowed from.  In this example the short player would have made $50,000 less brokerage and trading fees.

Clear as mud?

Take note though, shorting a stock is exponentially more risky than going long.  If you buy 100,000 shares of LAC at $1 per then the most you can lose is $100,000, that's a lot of money certainly, but its nothing compared to the theoretical losses a short seller could incur.  While a stock cannot possibly go below $0.00 there is no fixed limit as to how high it could go.  

CYNK was a penny stock pump and dump that went from around 5 pennies to up over $20. 

Imagine someone shorting 100,000 shares of CYNK at $1.00 and then being forced to buy it back for $10, $15 or $20....The shorting of 100K shares of CYNK at $1.00 nets $100,000 but if a margin call were to force the short seller to cover at $10, then those shares that netted $100,000 would cost $1,000,000 for a loss of $900,000....at $20 per share those losses double.  OUCHIE!!!

Shorts have to be hyper careful, obviously.  Bears have a reputation for being incredibly diligent in their research because of these risks.  And it is for this reason that I give bears a lot of respect. Facing the potential for losses that, in theory at least, could be limitless....they had better be pretty damn confident in their decisions.

That is why, if I see a stock with 10, 20, 30% or more of its outstanding shares sold short....I take notice.  There are stocks with big short interest of course, but typically they're trading much higher than a single Canadian dollar.   

SHORT INTEREST IN LITHIUM AMERICAS CLIMBS

LAC is nowhere near even 10% short interest however.  In fact its only at 1.14% as of June 30th 2016.

But the raw number is still enough to raise an eyebrow.  The number sits at 3,391,624 and again, that is current up to June 30th 2016 as per the site StockWatch.  Up to June 15th 2016 the number had been 3,044,216 for an increase of 347,408 shares.

In fact short interest for LAC has been climbing steadily since the company completed the merger with Western Lithium (former symbol WLC) and reverted back to trading under the symbol LAC.

Up to March 31st of this year the number of shares shorted was 769,200  By April 15th it had risen to over 1.7 million, then over 1.9 million as recently as May 31st and now (up to June 30th as noted) it sits at over 3.3 million.

On March 31st LAC was trading for less than 50 cents, by April 15th it had climbed to up around 80 cents. On May 31st the PPS closed at 85 cents and now it sits at $1.01 after trading as high as $1.15 on July 4th 2016.  

Obviously short sellers made a bad play.  Or did they?

If you're going to short a stock you better have deep pockets, and that goes double for a penny stock because of the higher margin requirements.  If you're using a discount broker like say BMO, TD or Quest then you can't even short a penny stock regardless.  There are firms that will accommodate those wanting to short penny stocks of course, but you better have a big bankroll.

Just for arguments sake let's assume that those 3.3 million of LAC that have been shorted, let's assume it is one single individual.  And again for arguments sake we'll say the average price they were sold at was .75 cents....half way between 50 cents and a buck.

3.3 million shares sold at .75 cents would net the short seller $2,475,000.00....a hefty sum certainly. But our hypothetical bearish friend doesn't get to go out and spend that money, it has to stay in a margin account.  And that's not all, to guard against a climbing share price our bearish friend will be required to have extra cash in that margin account, perhaps 100% more.  That would mean another $2,475,000.00 on top of what was made from selling the shares.

Our short selling friend now has close to $5,000,000 tied up.  And it gets worse.  LAC isn't trading for $0.75 now, its at $1.00....which means $3,000,000 to buy them back and at 100% an additional $3,000,000 in the margin account.  If the short seller can't come up with the extra million?  Too bad so sad, the broker can then use the $5,000,000 in the margin account to buy the shares back.  

I'm going to wrap this up, there's probably only one or two people who will even bother to read this all the way to the end anyway.

It is my belief that the short selling LAC has seen, that there's a good chance its being used by parties looking to inject some Fear Uncertainty and Doubt (FUD) into retail shareholders.  That or possibly due to Market Maker Broker Dealers (MMs) being surprised by the surge in buying.

If it is MMs, I don't see LAC making a big move until or unless that number declines significantly. If, on the other hand, its accumulators engaging in a little (perfectly legal) manipulation....then hopefully they've accumulated far more than what they're short and perhaps they might be willing to give up the little Wyckoff game, if that is indeed what they're doing.

What?  You've never heard of the so called Wyckoff Method?  Well then, here's some more reading for you:

Secret 1930s Trading Strategy That Hedge Funders Don't Want You To Know About

LED Medical Diagnostics - When promotion fails.....

I am as prone to the sin of vanity as anyone else.  This blog is not yet even 3 months old and already I've put out some ideas that have played out very well.  

I've expressed bullish opinions on Lithium Americas (LAC.TO) at 75 cents and its now at $1.08. Eguana Tech (EGT.V) was another bullish opinion at 15 cents and its over 30 cents currently.  And on the bearish side I've expressed negative views on ZIOP, KTOV and ABRW with all three being down.  

Some of my bullish opinions haven't borne fruit of course, at least not yet.  I did a post on Resverlogix about their phase III clinical trial for their lead compound RVX-208.  That was when the stock was trading in and around $1.30 and it has pulled back to a close of $1.18 today.  And HMPR which I consider to be a low risk play from a buy/hold/prosper perspective, it was written about here at $1.81 and it just closed at $1.76.

Not bad, not perfect of course....but overall pretty good.  EGT has more than doubled, LAC is up around 60% from my predicted low and my bearish calls with KTOV, ZIOP and ABRW are all down with KTOV absolutely cratering from up around $6 to less than $3 currently.

My bullish opinions on RVX and HMPR haven't played out yet, and perhaps they never will but at least with HMPR I am still very bullish.  With RVX I think success or failure hinges on their phase III trial which has a long way to go yet, a very high risk/reward play in my view.

If I was asked to self grade this blog right now I'd give it a B, maybe a B+.  

But it pays to keep yourself humble because success in the markets can be fleeting.  Before starting Avoid The Bag I was writing an InstaBlog on Seeking Alpha.  It was there that I did my first post about LED Medical (LED.V in Canada LEDIF OTC in the US) back on March 29th 2015.  

Beer Budgets And Champagne Tastes - Why Retail Investors Will Avoid LEDIF

In point of fact I'd bought into LMD.V sometime in the summer of 2013, liking the potential for the company to attract the attention of investors with their Velscope device used for detecting oral cancer. The Velscope had been featured on both "Dr. Oz" and "The Doctors" prior to LED Medical being a public company.  

LMD or LEDIF had what I considered to be great potential.  The market cap was small, there were only about 60 million shares outstanding in August of 2013, and trading was thin.....If their story caught fire I figured LMD.V could go from the 30-40 cents it was trading at then to maybe as high as $5 CDN.  

Things did get interesting, Nick Hodge of 'The Outsider Club' fame started touting the company in his email blasts.  I had seen how SBOT traded after this outfit was touting that stock in 2014  with it climbing around 1,000% and figured LMD.V could possibly have a similar run.  A Seeking Alpha Pro Blogger named Dallas Salazar started touting them, Zacks put out a bullish analyst report....I could taste big gains thinking the herd was going to start moving in any day.

Then in October 2013 the company brought on David Gane as CEO.  In checking his history I found that he had a complaint brought against him by the SEC for an alleged promotional scheme from his time with Dicom Imaging Systems, another Dental company.  The SEC claimed Dr. Gane had given out inflated guidance figures in tandem with paid promoters hyping Dicom's stock.  He was exonerated however based on the fact that the guidance figures were forward looking and hence protected by safe harbor provisions.

Was LED (LEDIF OTCBB) going to start soaring?  Would a tsunami of promotion and hype send the PPS up 500% or more?  As you can see from the chart LMD.V never went on a sustained run:

It did pop a little, going up over 50 cents.  But volumes never topped more than a couple million and I figured more was coming....it never did, the herd never showed up.  I had a chance to make a small gain, but I got greedy thinking I could make more.

Despite Outsider Club email blasts, bullish write ups by Pro Seeking Alpha blogger Dallas Salazar, professional IR and bullish analysis by Zacks....nothing worked.  Perhaps Gane's reputation from his days with Dicom squelched serious buying from excited retailers?  

That's life with speculative stocks in money losing companies.  A few will turn things around and become profitable, with their stocks delivering long term shareholder value.  Many more, in my opinion, will see their stock prices rise sharply and then fall, as investors get excited about a story.

Or, as in LMD Medical's case, some will just drift lower and lower.  Sometimes you have to take your lumps, swallow a loss and move on.  And when you do well, remember your failures to keep yourself humble.

Lithium Americas - The Gordie Howe of Canadian Junior Lithium stocks?

Gordie Howe was my late great mother's favorite hockey player.  She taught me a song about him when I was a kid:

Gordie Howe is the greatest of them all

He can stand, while all the others fall

And when he skates down ice

He shoots he scores

We love Gordie Howe

Sorry I can't convey the tune here.  I guess I could make a video with me singing it, but given that I can't carry a tune in a suitcase, ugh.  This pathetic and miserable  little blog would lose the few followers its gained if I foisted my singing (sic) talents on here.  

Why am I comparing Lithium Americas with the legendary Gordie Howe?  Its the second line of that tune, "He can stand, while all the others fall".

Over the past few months LAC.TO has been having a nice little run, and is currently trading at $1.10 CDN, the highest price it has ever closed at.  That's just 5 cents from its 52 week high reached interday the past two trading sessions.  

That compares very well to a number of other junior Lithium stocks that climbed higher and faster, but that have since fallen back (or down). 

• Lithium X Energy (LIX.V) went to $2.85 in April and has fallen back to $1.70 now.
• Nemaska Lithium (NMX.V) reached a high of $1.97 in May of this year but now sits at $1.29
• Pure Energy (PE.V)  up to $1.15 in April now at .69 cents
• Dajin Resources (DJI.V) 30 cents in April 19 cents now

So why has LAC continued to uptrend while all the other juniors mentioned have pulled back?  

I think the mostly likely culprit is dilution.  

LAC has 295,311,916 shares listed as outstanding as of June 15th. There has been some dilution, but not very much.  In March there were 291,974,008 shares.  The increase to 295,311,916 amounts to 3,337,908 more shares or an increase of just 1.1%

Nemaska by contrast showed 206,715,385 listed as outstanding in March 2016, and now that number has climbed to 236,137,873 for an increase of 29,422,488 shares.  That's an increase of over 14%, or about 1,400% more dilution than what LAC has undergone.  And Nemaska recently announced a proposed offering of between 43,480,000 and 52,174,000 more shares priced at $1.15 expected on July 8th of this year.

It should be noted that, concurrent with this share offering Nemaska has received tentative approval for an uplisting to the TSX, and I do think that will help in attracting investors, possibly even institutions which tend to shy away from the riskier Venture exchange.  

Lithium Energy has seen even greater dilution in percentage terms.  As of March 15th the company had 43,820,732 shares outstanding.  The most recent number, current up to June 15th is 60,538,202 an increase of over 16.7 million or 38%.  

Pure Energy, however, has not seen any dilution over this period, staying at the same 66,2 million from March until the most recently available update to June 15th, so obviously the drop in PE.V is not attributable to the printing of more shares.  Perhaps if some Pure Energy shareholders are reading this they can comment.

Dajin Resources though conforms to the dilution narrative having gone from 118.4 million shares in March to 130.9 currently for an increase of about 10.5% 

There is one notable difference between LAC as compared to NMX, LIX, PE and DJI.  The latter four companies all trade on Canada's Venture exchange while LAC trades on the more regulated big board TSX.  It appears that with NMX joining LAC on Canada's big board exchange, they'll be going from the AHL to the NHL, in keeping with the hockey metaphor.

Here's hoping LAC continues climbing, skating down the ice and scoring for shareholders.  

I should note, there is one Canadian listed Lithium mining company that hasn't pulled back, Orocobre, (ORL.TO).  However unlike LAC and the others mentioned above ORL has actually begun production so I don't consider it a "junior" The PPS sits at $4.75, just off its highest ever close of $4.79 on June 23rd, and its 52 week high (achieved interday on July 4 2016) of $4.87.  

Full disclosure:  I currently own shares in Lithium Americas, hence my opinions are not without bias. I have no position, long or short, in any of the other companies mentioned.  Do note that I do expect to sell some or all of my LAC holdings at some point.  

Speculative stocks like LAC and the others mentioned here comport significant risks.  Everyone has different tolerances for risk and different investment objectives.  The bottom line is to sell for more than what you paid, nobody ever went broke taking profits.  

The comment field is always open, but it is moderated....comments that are abusive, contain blatant pumping or bashing, won't be approved.  Pumping and bashing include statements of opinion expressed as fact, such as "Gonna go much higher" or "Look out below".

Can Lithium Americas break through the $1 CDN barrier?

Full disclosure right up front.

I have what I consider to be a significant position in Lithium Americas, traded in Canada on the TSX under the symbol LAC.  In the U.S. the stock symbol is LACDF and trades OTC Foreign.  I have not been compensated for writing this, (or any other) blog entry.  In point of fact I have not and will not accept payment to express an opinion on any stock, either bullish or bearish.

Also it is my full intention to sell my shares of LAC at some point.  And spoiler alert, I do think LAC will break through the $1 CDN barrier.  When I sell I do intend to write a blog post explaining my reasons, however in all probability it will be after the fact.  And if past history is any judge I tend to get out too soon, meaning those buying my shares have had the chance at gains themselves. Nemaska is a prime example.  

Bottom line, nobody ever went broke taking profits, and that axiom is doubly important with speculative stocks like LAC/LACDF from my perspective.

So why do I think the market will support a price of greater than $1 CDN for LAC?  Admittedly its not a big stretch at this point, with LAC sitting at .99 cents on the TSX as I write this.  Since April this is LAC's third kick at the one dollar can as evidenced by the chart below.

I wrote my first blog entry about LAC here at Avoid The Bag on April 27th, Before that I'd shared my opinions on Seeking Alpha.  Seeking Alpha Instablog.  April 27th ATB Blog Post  

In that April 27th ATB entry I offered up the opinion that LAC was seeing the formation of a Cup & Handle chart pattern, the stock was trading at 75 cents and I offered up the view that I could see it dropping as low as 65 cents (it got to 66) before rebounding and heading back to a dollar and beyond.

Well its pretty much made it back to the dollar mark, and I do think it will go beyond....and of course I will explain the rationale behind my opinions.  You can then decide if you consider my opinions rationale or not for yourself.

All my regular readers (all three of them) know that I'm not big on fundamentals.  I consider fundamental data to be any and all information available in the public sphere, and as such it is all dated.  Even if a company announces a merger or acquisition (as happened when LAC and Western Lithium merged), by the time the news hits I consider it already priced in.  Others might pump synergies and economies of scale, but not me.

There are however, events that I believe could serve as catalysts in the future.  

Lithium Americas has a corporate slide presentation available on line that is dated March 2016. (VIEW THE SLIDE PRESENTATION HERE).

In that old slide presentation the company cites a Feasibility Study (FS) done in July of 2012, obviously very old info, soon to be four years old.  In that presentation it cites the price used for Lithium Carbonate in its projections as being $5,500 p/tonne.  

I like conservative estimates, its better to under promise and over deliver.  But while $5,500 p/tonne might have been a reasonable number a few years ago, the explosion in Li prices I believe warrants an upward revision.  When Nemaska announced its updated FS in early April of this year it sent that company's share price sky rocketing from around 70 cents CDN up near $2.  Nemaska revised their Li Carbonate price upward from $5,000 to $7,000 p/tonne.

Then there's the elephant in the room, Tesla.  They will be having their battery Giga Factory grand opening on July 29th.  As the date gets closer I think a lot of Lithium Mining companies, both Juniors and Incumbents, will see their share prices boosted as a bright light shines on the entire sector.  Its the old:  "A rising tide lifts all boats" line of thinking.

And don't forget that Lithium America's recently brought David Deak on board as a Sr VP and CTO. Mr. Deak had spent his previous two years working for Tesla as a Senior Development Engineer according to his Linked-In Profile.  I am not suggesting that anything is in the works between LAC and Tesla, but I do consider it a possibility.

It is for these reasons, in combination with the chart, that I very much like the chances for LAC to bust through that $1 barrier and to make significant gains.  

But please take note....there is no such thing as a slam dunk in the public markets and in my opinion LAC still comports significant risks.  Everyone has different tolerances for risk, and different time horizons.  Stocks can be dangerous, and people do get hurt buying into hype and excitement and the risks here are very real.  

Ultimately any money made or lost, the person to be congratulated or angry with is the one that looks back in the mirror.  The comment field here is open, and while it is moderated, all I ask is that the tone be respectful with no brainless "lots of upside here" pumping or "get out now" bashing.  

Brexit vote hammers the market

My last blog posted expressed the commonly held belief that Britain would vote to remain as a member of the EU, boy was I wrong.  I honestly thought it was a slam dunk.

With polls showing that it could go either way my rationale was simple.  When a vote of a contentious nature comes up, I figure the masses will vote for the status quo.  Its the old better the devil you know line of thinking.  I will say the results somewhat restored my faith in the democratic process.  I considered it very possible that there was going to be Florida style vote counting to tip the results in favor of remain if the exit side was winning.

But even though the Brits voted to leave in their referendum I still think expect Britain to stay in the Euro Zone for a number of reasons.  In no particular order here are some:

• While just over 70% voter turnout is amazing when compared to traditional participation levels, it still means that about 1 in 4 voters stayed home.  It also means that as a percentage of eligible voters only about one third of the total voted to leave.
• Scotland and Ireland voted heavily to remain.  Proceeding to negotiate with Britain's exit from the ECM could result in Ireland and Scotland leaving GB, certainly Scotland.
• Younger voters overwhelmingly voted to remain, while older voters were more likely to vote to leave.  That means those who will have to live the with decision the longest wanted the employment and mobility freedom that comes with staying in the Euro Zone.

Ultimately, if Britain proceeds based on the results of this contentious referendum, its going to be messy.  This is a divorce, and it will get ugly.

Here's hoping calmer heads prevail,  A second referendum would by my preferred option.

Britain - Will they stay or will they go? I say they're staying

There's always something happening in the world to put investors on edge.  Last year it was the recurring possibility of a US default on its debt, but as everyone knows it didn't happen.  Before that it was the situation in Greece.

Now its today's so called Brexit vote.  I am of the strongly held opinion that, again, its much ado about nothing, that Britain will remain in the Euro Zone.  When push comes to shove British voters will vote for the devil they know, as opposed to the devil they haven't known since 1973.

In any case it won't be long until we know, but not until after the closing bells ring on North American markets.  In the interim I expect a rocky day and then a big surge tomorrow when the results that Britain has voted to remain are announced.

Resverlogix - Short interest climbs 1,447%

If you're a Resverlogix shareholder (RVX.TO) relax, its not as bad as the subject line makes it appear.

As noted at the end of MY RECENT BLOG POSTING about Resverlogix,, short interest up to May 31st 2016 was only 1,500 shares.  As per the most recent update through to June 15th 2016 the number of shares sold short climbed to 23,200 shares.  To put that in perspective 23,200 represents a whole two one hundredths of one percent or 0.02% of the roughly 105 million shares outstanding. But it is a big jump in percentage terms.

So why do a blog post about it?

Because I do think there is some possible significance.  The trading of RVX is incredibly thin, Yahoo Finance puts the 3 month average volume on the TSX at just 16,993.  There are many days in fact where volume doesn't even reach 10,000.  On June 14th, 15th and 16th the total TSX volume each day was just 3,800 then 6,900 then 5,900 respectively.

So what does it mean? Is this a bear raid?

Is there someone looking expecting bad news or a failed trial who's looking to cash in on a big drop? I highly, highly, highly, doubt it....not with just 21,700 sold short over this two week period.  The best case scenario for a short seller is if a stock goes to $0.00 and gets de-listed, then there's no need to cover.  Were that to happen with RVX then the party or parties who sold 21,700 shares short would stand to make a little over $20K.  If someone or someones were confident that RVX was going to drop big I would expect to see 10, 20, 30 million or even more shares sold short, not a piddly little 20 odd thousand.

Why short such a small amount?

I consider manipulation by a party or parties looking to buy in or add to an existing position to be a distinct possibility.  20K short on a stock trading around $1 is almost meaningless, were it not for the fact that it represents a full day's trading volume, a little more in fact.  With volumes in RVX being so light its my opinion that parties looking to manipulate the share price, that RVX can be pushed around like the puck on an air hockey table.

Reservlogix is an incredibly speculative investment, and I am long so I may be suffering from something called "confirmation bias", I full acknowledge that.

Any thoughts and/or comments are welcomed, as always please keep it clean and respectful.