Independent Investor Wire
Aug 02, 2011
Are junior resource stocks undervalued?
A quick look at the chart below of the TSX Venture Index would indicate they are:
As you can see, the TSX Venture Index is down more nearly 40% from its 2007 highs set when gold first passed $1000 an ounce.
More currently, the Index has been in steady decline since March. It has lost more than 20% of its value from peak to trough. In fact, it has been one of the worst performing markets in the world. Greece, Italy, Spain, and Egypt have all fared better.
On top of that, the current decline has coincided with a relatively strong market for commodities. Gold, silver, oil, and base metal prices have continued to rise or, at worst, stayed flat.
The lagging performance undoubtedly has a lot of junior resource stock investors interested. But wait, there’s something else at work here.
And at the Prosperity Dispatch, where we try and look a bit beyond the well-traveled surface, we’ve found an indicator that’s a much more accurate measure of value for the Venture market and which also paints a much different picture than the Index would show.
Numbers Don’t Lie
The TSX Venture decline has sent shares of many junior resource stocks diving. Many have been halved or worse in the since the spring.
But it’s not the share price that matters so much as the total value of the company or, in this case, the markets total value.
After all, if a company’s share price gets cut in half while it doubles its shares outstanding through warrant/option exercises and additional financings, there has been no change in the market value of the company.
The same is true for the overall TSX Venture market.
The chart below shows the total value of the TSX Venture has
declined much less than the overall TSX Venture Index:
The chart shows the TSX Venture has given back a mere 16% of its total market value since March. The TSX Venture Index declined by nearly 25% over the same time period.
The divergence is critical. And understanding it will give you a good idea of what criteria will be essential to outperforming the TSX Venture Index going forward.
The High Cost of Shareholder Dilution
The divergence between share performance and total market value has proven the market’s ability to issue more shares can and will from time to time outweigh demand for shares, regardless of how strong demand may be growing.
The importance of this is more glaring when you back over the past few years.
For example, the current market value of the TSX Venture is just over $65 billion. Its peak in March 2011 was about $77 billion.
Granted, that’s not too terrible of a downswing. But when the newly issued shares from additional financings, options, and warrants are added in, the effect on an individual share’s value can be very high.
Consider this. The TSX Venture Index was at 3,200 in March 2007. At the time the total market value was about $64 billion.
Today, the Index is sitting around 2,000. That’s nearly 40% lower than it was in March 2007. But the total market value at $65 billion is current roughly equal what it was at the high in 2007.
Basically, the value of each share has been cut by 40% while the number of shares has increased by nearly 67%.
In short, anyone holding between 2007 to today has lost 40% of their value to dilution while commodity prices have mostly eclipsed their 2007 prices levels – many by a wide margin.
The Rising Tide Has Risen, What Now?
At this point, you can no longer bank on a rising tide to lift your boats.
Although a quick look at the TSX Venture Index chart may appear attractive, it hides the costly dilution that has happened over the past few years.
All is not lost though. This is still the TSX Venture and there are massive gains to be had. However, since we’re long past the “easy money” period, you have to take less risk and keep more cash on hand for when corrections do come.
And it’s now more important than ever to stick to junior resource stocks you love, with solid management, sizeable assets, and strong development plans, and shares that offer very high rewards for the risks involved.
Going forward, it’s not going to be like December 2008 when the total market value of the TSX Venture fell to $17 billion (about one fourth of its current value) when we proclaimed 2009 was going to be the year to take risks, but there will be risks worth taking. Just not as many.
Chief Investment Strategist, Q1 Publishing
Apr 26, 2011
The junior market is on the verge of blowing up like a “Coke geyser.”
If you’re not one of the 13 million views of what happens when Mentos are dropped into a bottle of Diet Coke, you should know it creates an eruption of foam reaching as high as 20 feet.
That’s exactly what the junior market is set to do soon.
Could it get any better?
The junior market hasn’t performed as well as should be expected over the last few months.
There are, as always, the few special situations that have done very well.
The overall market, however, has lagged significantly while the fundamentals say it should be setting new highs along with gold, silver and oil. But it hasn’t.
The table below breaks down the return of various assets since the start of the year:
This should be “Prime Time” for junior stocks that are often so highly leveraged to the prices of the gold, silver, and oil. But junior stocks have performed more poorly than almost any other related asset.
There are a number of factors one could easily point to for this lag. The Japan earthquake and financial fallout devastated junior stocks. Mr. Market believes gold and silver have run too far, too fast. Overall economic sentiment has taken a turn for the worse.
But they’re all wrong. The TSX Venture Index has fully recovered from the post-Japan sell-off. Gold and silver prices are still well below their inflation-adjusted historical highs and low for the current (and widely expected) negative real interest rates. Economic sentiment has never fully recovered from 2008.
The real reason for the lagging performance, I believe is much simpler. And it’s creating a great and predictable opportunity.
Every year the TSX Venture goes through a similar seasonal cycle.
For example, last year the TSX Venture Index fell 19% between March and July. Meanwhile, gold, silver, and oil fell 3%, 2%, and 8%, respectively, over the same time period.
The current lag in the TSX Venture Index happens every spring and it has a simple explanation - financings.
Junior resource companies issue new shares year round, but most deals are completed in the late fall and winter. November through February is the peak financing period.
The trend hasn’t changed this year either. The only real difference is that the total value of financing deals completed was much higher.
The table below shows how TSX Venture financings between November and February increased by 80% compared to the same period the year before:
The massive amount of financings (most with four month hold periods) is the most critical drag on the overall TSX Venture market.
With more than $5 billion worth of stock (that’s excluding an increase in value of shares and value of attached warrants) coming free trading, there’s a lot to soak up. After all, the total market value of the TSX Venture market is about $80 billion. So a $5 billion wall creates a big hurdle.
What’s happening right now is the financial equivalent of dropping Mentos into a bottle of Diet Coke and putting a cap on it. The cap is going to hold for a while, but it’s going to explode higher and faster when it does. That’s why we’re seeing this as buying season for juniors.
Catalyst for change
There are multiple catalysts to blow the lid off of the junior market.
There are major new discoveries being made every at the rate of once or twice per year.
Drilling season in the Yukon is about to get started and if another discovery is made, there’s going to be some big speculative premiums on almost all Yukon-focused junior gold companies.
Also, as time goes by, there will be less shares coming on the market. TSX Venture financing deals peaked last December. Those are just coming free trading now. January and February were lighter activity months and have left a smaller wall. In the end, all of these deals will be unlocked by July anyways. It’s just a matter of time.
Any way you look at it, the junior market is poised to explode over the next few months and finish the year incredibly strongly if gold and silver prices hold together.
Even if they don’t correct too hard (imagine $1450 gold and $40 silver), conditions would be exceptionally positive for junior resource stocks to do well.
Remember, oil, gold, and silver prices fell between 2% and 8% during the same period last year while the TSX Venture fell 19%.
Currently the inverse is about to happen – only an order of magnitude larger. Gold, silver, and oil prices are up significantly between 9% and 50%. But the TSX Venture index is actually down despite the most optimal conditions.
Everything is in place for a big jump in junior resource stocks and conditions will likely continue to be in the coming months (more reasons why available here). There may be an inclination to sell in May and go away, but the seasonal nature of the junior market is making it a much better time to be a buyer.
Chief Investment Strategist, Q1 Publishing
Jan 24, 2011
The “Gold is a Bubble” crowd has been reawakened.
CNN warned earlier this week: Gold is a bubble, resist its charms.
Gold’s six percent fall in the last six weeks and the Amex Gold Bugs Index (HUI) nearly 20% decline have signaled the gold correction is here.
The correction has emboldened the anti-gold crowd more than they have been since the 2008 credit crunch.
The correction is has been a tough one so far. But it hasn’t shown itself to be anything more than just a correction. And if history is any example, it will last about two more months and gold will be returning to new highs by the end of 2011.
Despite the needed correction, gold’s future is as bright as ever.
Contrary to rising opinion, gold is not in a bubble…yet. Here are nine
1. Still Waiting for the Blow-Off Top
The top of every bubble has been marked by a massive, parabolic surge in prices.
The NASDAQ rose from 1500 to more than 5,000 between October 1998 and March 200. That was an 18 month increase of 233%.
The last gold bubble ended in three years of significant and accelerating increases in annual average gold prices. Gold went up 30.81% in 1978. It rose 58.72% in 1979. And “the top” was marked by a parabolic 99.74% increase in 1978.
Gold prices have risen at an annual average rate of 18% in this current bull market. In the last three years gold has risen at a 16% annual rate.
Even best-case scenario intended to skew the numbers to the most extreme fails to match previous bubble tops. Gold rose at annual average rate of 29.8% from its 2008 lows to its 2010 all-time high.
These increases are indicative of a bull market, but pale in comparison to past bubbles.
2. Gold Hasn’t Gone Mainstream…Yet
Bubbles suck a lot of investors in at the top. Panic buyers, fearful of missing out on an opportunity to get rich quick, rush in at the end in droves.
For example, in 1970, investors had $48 billion in stock mutual funds. By the top of the stock bubble in 2000, investors had more than $7 trillion in stock funds. In 2000 investors plowed $309 billion of new capital into stock funds. That’s five times more than all of the money invested in funds in 1970.
Stock fever was well-dispersed too at the top too. The New York Stock Exchange found 7.5 million Americans own stock in 1954. The number of stock investors rose 10-fold to 78 million in 1999.
3. The “We Buy Gold” Advertising Fallacy
One of the often cited signals of a gold market top is all of the “we buy gold” companies which buy jewelry from people.
The argument is completely misguided. These are service companies which buy gold at discount (ranging from 20% to 40%) and then have it refined.
A higher gold price makes the business more profitable,
will attract more customers, and allow for greater advertising budgets,
but it’s not a signal of the top. A better signal would be seeing
these companies failing as the masses refuse to sell their gold because
“it’s going to make them rich.”
4. Gold Pays No Dividend
It’s true, gold doesn’t pay a dividend. It has no earnings. It’s not an investment. There is no way to value it using traditional measures of stocks and other financial assets.
Gold’s benefits comes during periods when real dividends and income-producing assets’ yields are so low, gold is a much better alternative.
These periods where gold outperforms income-producing assets is when real interest rates (interest minus inflation) are negative.
Consider this, a long-term U.S. Treasury bond currently pays about 4% per year. Inflation, as tracked by rising cost of living and excluding housing price declines which have kept official inflation numbers down, is greater than 5%.
As a result, the real rate of interest is a negative 1%. In real terms, it costs 1% a year to hold the long-term Treasury bond even though it yields 4%.
This is why investors turn to gold when interest rates are negative and gold prices are driven higher by negative real interest rates.
Gold pays no nominal dividend or income. But it does retain its purchasing power while other income-producing assets decline.
5. Interest Rate Increases Will Not Send Gold Prices Tumbling
The current gold correction has been exacerbated by liquidity fears and traders’ risk reduction resulting from expected hikes in short-term interest rates in China, India, and other countries.
Many pundits have already started confusing small hikes in short-term rates as the catalyst to pop the “gold bubble.”
This makes sense on paper, but is historically incorrect. Interest rate increases determined by the market and not resulting from arbitrarily imposed short-term rates central banks have historically been an indicator of rising inflation.
Rising interest rates are bad for stocks, housing, and bonds, but have coincided with increases in the prices of gold:
6. Customer Service and Innovation have Nothing to Do with Sentiment
In 11 Signs that Gold is in a Bubble That is Going to Burst” the author notes, “For the first time ever, gold ATM machines are dispensing bars of bullion. The first ones opened up in Abu Dhabi, Munich, and Madrid. Next in line are Boca Raton and Las Vegas in the US. What are you doing to do with all that gold? Bury it in your backyard? Have no fear.”
Service innovation from businesses which earn wider profit margins as gold prices rise and demand for gold increases are hardly a signal investor sentiment is too high.
Whether a bullion buyer picks up gold at a store, online, or at a
gold-dispensing ATM, in no way signals sentiment is too high. In a way,
these innovations are actually helping turn new investors onto gold by
making it easier to buy gold.
7. The Closed-End Fund Indicator Well Within Historical Norms
One of the best indicators of true investor sentiment (which is driven by their investment dollars rather than surveys) is closed end funds (CEF). Since CEFs trade at a discount or premium to their underlying Net Asset Value (NAV), they serve as a reliable indicator of extreme optimum and pessimism.
For example, at the height of the China bubble in 2007, investors were clamoring to get Chinese “A-Shares.” These shares were only traded in China and most foreign investors were barred from owning them directly.
Investors could get direct access to A-Shares by buying the Morgan Stanley China A-Share Fund (NYSE:CAF). At the height of the China bubble, the A Share Fund was trading at a 40% premium to its NAV. A-Share demand and optimism were so high, investors were willing to pay $1.40 for each dollar of A-Shares. It was clearly an extreme high.
There are two closed end funds which own physical silver and gold. Both of them show optimism is hardly at an extreme high.
The current premium on the Central Fund of Canada (NYSE:CEF) is a mere 3.09%. Its five-year average premium is 9.0%.
The current premium on the Sprott Physical Silver Trust (NASDAQ:PSLV) is a bit higher at 14.8%. Although relatively high, that’s still below the new fund’s all-time high premium of more than 17%.
gold bubble reaches its peak, there will likely be a very large gap
between the price of physical gold and paper gold as it’s traded on the
major exchanges. As a result, the premiums on the closed end funds
which own physical gold and silver reflect that difference through some
very large premiums.
8. Gold Stocks Show Gold is a “Hot Money” Trade and Investor Conviction is Low
A surprising anomaly in the gold market signals the top in gold is still a long ways away.
The price of gold has increased 22% in the past twelve months. The Amex Gold Bugs Index (HUI) meanwhile has only increased 27%.
Normally, the HUI would significantly outpace the price of gold, but gold stocks have failed to really outpace gold as they have and will again as gold prices rise.
The chart below shows how investors still lack the conviction that higher gold prices are here to stay as gold stocks are still significantly lagging the price of gold:
When we do reach the top in the gold market, valuations for gold companies will be significantly higher than they are now.
At the top, gold mining shares won’t be based on the current price of
gold. They’ll be based on how much higher gold prices can go. Remember
price-to-eyeballs and other new valuation metrics for dot-coms? The
same thing will happen to gold stocks at the top of the bubble.
9. The “How To” Market Still Lags
All investment manias have attracted the majority of investors at the top. And when these new speculators move in, they want to learn how to do it. A willing and ready publishing community has been there to sell the information at the worst possible time.
For example, the top selling non-fiction books in 1999 included:
#8: Wall Street Journal Guide to Understanding Money and Investing
#9: Investing for Dummies
#11: How to Get Started in Electronic Day Trading
Those are very high positions for a segment normally dominated by high-profile biographies and self-help books. They also show how the top of the 90s was led by inexperienced day traders and first-time investors.
At the height of the gold bubble in the late 1970s, the #3 best-selling non-fiction book was Howard Ruff’s How to Prosper During the Coming Bad Years.
The book warned of social chaos, end of the family, and hyperinflation. It recommended “protecting” yourself by hoarding gold, silver, and dried food. The “safe” investments performed terribly for the next two decades.
In 2010, no investment-themed books made even made it in the Top 10 of best-sellers. The masses still don’t want much to do with gold and learning about how to “get rich quick off of it.”
There are so many fallacious arguments cited by the gold is a bubble crowd. But long time investors have seen all this before.
A bull market rises. Investors jump on board. It corrects and the weak hands walk away. It sets new highs and attracts still more investors. It corrects and the weak hands walk away. The process repeats until euphoric highs attract everyone in.
That’s when conviction is strong, everyone is betting on how much money they’ll make, and no one sees a bubble forming, they just a great opportunity for quick riches.
There are a lot of signs when a bubble is peaking, but none of them are appearing right now.
In fact, by the end of year, this correction will be likely viewed as a great time to start reloading on high quality gold and silver stocks. Five of our top picks poised to capitalize on the coming gold bubble are available here in our latest update of our Free Gold Report.
Chief Investment Strategist, Q1 Publishing
Jan 19, 2011
Today’s post is a guest post from Lori Pinkowski, an associate portfolio manager at Raymond James. As the head of the Pinkowski-Allen Financial Group, Lori is responsible for overseeing the assets of numerous wealth clients across Vancouver, BC and the rest of Canada.
As a result, she’s equally concerned with rising interest rates as we are. Below Lori explains a few simple ways investors can beat rising interest rates.
Simple Ways to Beat Rising Interest Rates
By Lori Pinkowski, Senior VP, Raymond James
The Bank of Canada finally raised rates for the first time in almost three years.
What does that mean for your investment portfolio and are there any changes that you should make?
The Bank of Canada, as expected, raised its key rate a quarter point to 0.50 per cent. This is the overnight rate at which major financial institutions borrow and lend one-day funds among themselves and is the basis for other interest rates such as prime rate which is now at 2.50 per cent.
They had been warning us of their plans for months as our red hot Canadian economy continues its speedy recovery so most of this increase was already priced into the stock and bond markets. However, it appears that we could be heading into a new cycle of higher interest rates and investors may need to adjust their portfolio in order to get better returns in this different environment as the various sectors or asset classes will behave differently.
The prices of bonds and preferred shares will fall as interest rates rise so it's important to ensure that your fixed income investments have specific maturity dates so you can simply hold until your principal is returned and not worry about rates moving around. Sticking to shorter term bonds (2014 and shorter) will minimize price fluctuations and allow you to re-invest the money sooner if rates rise substantially. Any preferred shares held should be "rate reset preferreds" which have their dividend rate updated every five years. Often these preferreds simply get redeemed by the issuer at the first reset date so they can be treated like a short term bond.
Review your portfolio for stocks that may be more sensitive to interest rate changes such as financials, utilities or sectors where demand is dependent on debt such as real estate or automotive. Other sectors such as the telecoms tend to withstand a hike as the interest rate increase doesn't really affect whether consumers will use their phones or not while commodities will often see initially higher demand due to the same economic conditions that brought about the interest rate increase. In all sectors, companies with lower debt levels and stronger balance sheets will fare much better with rising interest rates.
The Bank of Canada didn't indicate any plans for additional rate hikes in the near future and with headwinds for global economic growth from Europe and Asia looking to cool its growth slightly we are likely safe from any more changes for now. The gradual increase of interest rates will help minimize their impact but it is important to plan ahead and look through your portfolio for any fine tuning that it might need to reduce your interest rate risk.
Senior VP, Raymond James
Lori Pinkowski is an associate portfolio manager and senior vice president at Raymond James and is a regular commentator on CKNW radio network. Additional information is available at Lori Pinkowski’s website: www.pinkowski.ca. This article is for informational purposes only.
This article was originally published on June 13, 2010 in North Shore News.
Nov 19, 2010
Over the long run, everything is driven by interest rates.
Stocks, bonds, gold, real estate, etc. are all heavily impacted by interest rates.
The return of the Euro debt contagion and drop in the bond markets across the world has pushed interest rates higher in the last few weeks and it has investors concerned and rightly so. Nowhere has the concern been more prominent than in gold.
A large and growing percentage of them have realized the real driver of gold prices is, has been, and will be negative real interest rates (nominal interest rates minus inflation).
Central bank policies of inducing negative real rates to ‘incentivize’ borrowing (you get paid to borrow), keep money supply expanding, and devalue currencies have forced investors into real assets like gold and silver.
It has happened before and it’s happening again:
Nominal rates have stayed very low throughout the last couple of years and are so low that real interest rates must be negative.
That’s starting to change as interest rates are back on the rise. And at this point, with gold nearing new all-time highs once again, it’s a prudent move to investigate whether the recent rise in rates could slow the gold bull or completely stop it in its tracks.
Backdrop: QE2 backfires, rates rise
Rates across the board have been on the rise since the Fed announced its latest round of quantitative easing.
The yield on the 10-year U.S. Treasury bond climbed from 2.40% to a recent high of 2.90% - a relative rise of 20.8%.
The junk bond market has fared even worse. After a post credit crisis renaissance that saw record setting amounts of high-yield debt issues, the bull market has shown its first signs of weakness. The yield on CCC rated debt (official defined as: currently vulnerable and dependent upon favorable business, financial, and economic conditions to meet commitments) has increased from a 52-week low of 10.2% to 13.9% - a relative 36% increase.
Muni bonds have been hit too. The Republican takeover of the House has made a bailout of profligate-spending States even more unlikely as more of them near insolvency. Merrill Lynch reports the yield investors expect on short-term muni debt has climbed from 2.4% to 3.2% - a relative increase of 33%.
In a gold bull market that has been fueled by negative real rates, conventional thinking would suggest rate increases would, at the very least, halt the rise of gold as the negative real rates get closer to turning positive.
History, however, actually says the exact opposite is true.
Rising rates: A symptom of inflationary disease
The gold bull market of the 1970s was dominated by inflation. Interest rates rose steadily to keep up with it, but real interest rates were mostly negative the entire time.
The table below shows how rising rates coincided with rising
In 13 of the 14 years tracked both interest rates and average gold prices rose. The only exception was 1981, which came after a year when average gold prices nearly doubled.
This time around we’re seeing a very similar situation. The 10-year Treasury bond yield has increased 30% and gold prices have climbed 55% since treasuries yields bottomed out in December 2008. That move is strikingly similar to 1979 when rates increased 24.3% and gold rose 58.72%.
At the risk of saying “this time is different” though, it really is. There’s no incoming Fed chief with plans of whipping inflation now (in fact, they’re taking steps to do the exact opposite). And the political will to induce a recession that would drive housing prices to their natural levels, put an end to the stock rally, destroy the bond market, and likely bottom out near the next election, is non-existent.
So if you’re concerned about the recent rise in rates – which you should be. Rising rates are not good for stocks, bonds, or the economy.
When it comes to the gold bull market however, interest rates are likely a symptom of growing underlying inflation and, if history is any example, their rise will coincide with gold.
We continue to believe what we said in our gold stock report (follow this link to claim your complimentary copy):
Normally, gold is a poor investment. Just look at the gold bear market between 1981 and 2001. Not much money was made in gold. And from a fundamental perspective, gold is a metal with virtually no industrial uses. Gold’s not like a piece of manufacturing equipment. It’s not productive capital which you can invest in and use to increase production of something. It’s gold.
Every few decades though, the right conditions come along to make an absolute fortune in gold and gold stocks. Right now the conditions are right.
Rising interest rates are more a signal that conditions for gold are only improving.
Chief Investment Strategist, Q1 Publishing