CASH: Don’t sound too surprised now. Yep, IPO activity is at a good level. But we’re starting to see the quality deteriorate just a bit. Nothing too serious — but it’s something to keep an eye on.

JL: Can you explain the “quality” issue a little more? Does that mean we’re seeing more duds come to market?

CASH: Right, that’s part of it. When companies see that optimism is up and liquidity is flowing, it makes sense for them to try and raise capital while that window is open. Keep in mind that few people really expect this firm market to continue. So folks are trying to grab what they can, while they can.

JL: Makes sense. Anything else?

CASH: In addition to lower-quality companies, you’re also starting to see smaller companies tagging along. An example of this is Real Goods Solar (RSOL), a company that’s supposed to price its IPO this week. Because RSOL is so small — less than $20 million in revenues — they’re unable to attract the all-star underwriters. They have to use second-tier partners instead.

JL: So what effect will that have on the stock? If they’re small and putting fewer shares out there, it seems that might benefit the price, right? Keeping supply low to help the ‘ole S-and-D curve?

CASH: Don’t forget the other input for that curve…

JL: Never. Supply and demand is about the only useful thing I got out of college economics. So what do you see on the demand side?

CASH: Nothing.

JL: Nothing?

CASH: Nada. Zip. Zilch. Goose egg. Bagel. The big donut…

JL: I got it, I got it. But what does that mean exactly?

CASH: It’s means there’s just no demand — period. These underwriters (think names you’ve never heard of, like Equity, Canaccord Adams, & Broadpoint) don’t have anywhere near the footprint or the clout that, say, a Goldman Sachs, a Merrill Lynch, or a Morgan Stanley would bring. And so, while this might be a reasonably strong company with limited supply of stock, the underwriting machine is weak. They won’t be able to gin up enough interest for a good price pop.

JL: So do you short a name like this right out of the box?

CASH: Quite possibly. Although I’m a little uncomfortable being short a thin name in a hopeful market, even if the hope is fleeting. But it’s a possibility, and that brings us around to our topic for the day.

JL: Which is?

CASH: Shorting! Last week I said I’d bring a little balance to our banter. Today I wanted to give a little clearer picture as to how Cash McDash makes money on the “dark side.”

JL: Sweet, the dark side! Insert Darth Vader joke here. Can we talk about Jedi mind tricks, too?

CASH: Let’s not and say we did.

JL: Fair enough. Where should we begin?

CASH: Well, there are basically two different categories of short trades that I use. We can skim over the first and dig a little deeper into the second.

JL: Hold on! We’re just getting into the good stuff and you’re already skimming? Why don’t we take ‘em one at a time and get some more detail.

CASH: Because the first category of shorting doesn’t quite fit for this type of conversation. The trades are too specialized… Oftentimes they have to be executed very quickly, with very little notice, in order to lock in solid profits. I can tell you “how” that’s done, but if I tried throwing out picks in that area to a broad audience, it would be more trouble than it’s worth. I’m more interested in sharing that type of info with a small, select group of readers who are dead serious about their trading gains.

JL: Fair enough. So give us the Cliffs Notes then.

CASH: Well, the first way I make money on the short side is by selling underwriting dogs right from the beginning — “out of the box,” as you say. Because I’m so plugged in to that whole hidden process of taking companies public, I see what most others don’t. I know whether or not the demand is there, and I can get a very clear read on whether or not the underwriters have buyers for the stock.

JL: Hey, so you’re kind of like that guy Simon Cowell on American Idol or something. Except you, uh, judge new issues instead of wannabe pop stars.

CASH: Ugh. I’d rather be Darth Vader. But, yes, from time to time there are deals that are just destined to fail. And even although the public can sometimes get excited over these deals, my behind-the-scenes view makes it exceedingly clear that money is to be made on the short side.

JL: How about an example folks might recognize.