Misery
to continue unabated as oil prices plumb new 5-year depths
The
S&P TSX Venture Composite Index (INDEXTSI:JX)
set a new record for its all time lowest closing price on Monday, December
8th, 2014. In the entire history of the combined exchange – born out of the
combination of the Vancouver Stock Exchange, the Alberta Stock Exchange, the
Canadian Dealer Network, and the Montreal Stock Exchange – the index has
never dipped below 684 points. It is perhaps a perverse coincidence that that
date also closely lands on the 15th Anniversary of the TSX Venture Exchange’s
Founding. (The TSX Venture’s first day of trading was arguably November 28th,
1999 with the formation of the Canadian Venture Exchange, subsequently renamed
to the TSX Venture Exchange in 2002 with the addition of additional elements,
specifically:
In
1999, Canadian Venture Exchange (CDNX) was formed when the Vancouver and
Alberta Stock Exchanges merged. The Canadian Dealing Network, Winnipeg Stock
Exchange and equities portion of the Montreal Exchange later merged with
CDNX. In 2001, Toronto Stock Exchange (TSX) acquired CDNX and renamed it TSX
Venture Exchange in 2002.
The
S&P TSX Venture Index was launched by Standard and Poors in 2002.
The
question now is, does this represent the capitulation point widely bandied
about by investors, from which a reversal of fortune for the beleaguered
index is inevitable? Or is this merely another stop on a downward journey
that will see years of pain and agony persist?
The
accurate answer is, “It depends”. There are negative potential catalysts
that, if they materialize, will ensure the risk appetite necessary to induce
a bull market in commodities does not manifest any time soon. On the other
hand, there are developments unfolding worldwide, that could, arguably bring
about just such a bull market.
For
now, we are immersed in a confluence of events that together represent a more
or less ‘perfect’ storm for persistent TSX Venture Composite attrition.
Anemic
Metals Prices Have Kneecapped Mining
The
main dragging force of the TSX Venture Index has been the mining exploration
companies. Of the 406 companies forming the TSX Venture Composite, 201, or 49
percent, are mining companies. Such a weighting is guaranteed to force the index lower,
as mining companies are essentially themselves being slowly starved to death
of their lifeblood – capital. As long as the companies in that sector are
still paying their listing maintenance fees, they will continue to contribute
incrementally weaker share prices to the index.
With
metals prices uniformly static across precious, industrial and base metals,
there is simply no reason to go investing in a company whose wildest
imaginable success will only catalyze a ‘liquidity event’ for long suffering
shareholders eager to sell.
Recent
drill results are perfect examples.
Kootenay Silver Inc. (TSX.V:KTN)
delivered
spectacular drill results to the market on the morning of November 26th
from their La Negra project in Sonora, Mexico. Among the highlights:
- 200 meters from surface of 156 gpt Silver in LN
21-14 including the bottom 50 meters grading 442 gpt Silver. This hole
bottomed in 492 gpt over 17 meters.
- 6 meters of 1337 gpt Silver in LN 21-14, the
highest grade interval to date.
- 34 meters from surface of 265 gpt Silver in LN
22-14 with 18 meters of 467 gpt Silver
- 30 meters from surface of 250 gpt Silver in LN
23-14 with 13 meters of 459 gpt Silver
- 33 meters from surface of 179 gpt Silver with
11 meters of 412 gpt Silver in LN 14-14.
- 49 meters from 13 meter depth of 92 gpt Silver
with 34 meters of 251 gpt Silver in LN 8-14.
- 140 meters from surface of 61 gpt Silver with
47 meters of 79 gpt Silver and 8 meters of 355 gpt Silver in LN 13-14.
If this
were 2007, such a set of drill results would have at least doubled the market
cap of the company, if not tripled, on huge volume. With silver wallowing
around $16 an ounce, however, the stock lurched up a few pennies on the day
of the news before fizzling back its pre-drill results price of $0.31 today.
So with
such a disheartening response to what can only be categorized as outstanding
drill results, is it any wonder that retail investors have lost all hope and
abandoned mining altogether?
Oil
Prices Provide the Nail in the Coffin
The
second largest representative on the TSX Venture Composite is the Energy
Sector. There are 82 oil and gas explorers and producers, representing
slightly more than 20% of the constituents of the S&P TSX Venture
Composite, and another dozen or so are in the energy services sector or
otherwise dependent on energy prices for business. So between mining and oil
and gas companies, the TSX Venture Index thus represented by over 70% of its
constituents. With oil prices widely predicted to sink as low as $40 a barrel
next year, that would suggest the TSX Venture Composite has a lot further to
fall.
There
are many factors at work driving oil prices lower, and the great unstated
reality that this is a combined economic warfare attack against Russia and
ISIS or ISIL or IS (or whatever we’re calling it today) is just one that is
not too much a part of the public mainstream discourse. Interestingly, for
the first time in history, a serious plunge in oil prices is not derailing alternative green energy
efforts, as evidenced by the China – U.S. committment to reduce emissions,
the fact the Toyota is rolling out a production edition of a pure Hydrogen
vehicle, Elon Musk has broke ground on his Lithium Ion battery Gigafactory,
and pipelines and LNG projects are looking increasingly shaky economically
and environmentally.
The
real longer term risk to energy prices is the risk that these vast
hydrocarbon deposits now deemed accessible thanks to fracking, horizontal
drilling and enhanced oil recovery technologies may evolve to become stranded
assets. What happens if, during this period of accelerated evolution away
from hydrocarbon energy, we actually find ourselves in a world where
alternative non-hydrocarbon energy is cheaper than gasoline, coal and oil?
While this seems like a distant possibility at present, its not such a long
shot. Already subsidies in certain European jurisdictions are driving down
the price of wind energy, solar energy and alternative automotive energy
fuels to the point where they are cheaper than hydrocarbons. With the impetus
and social demand for non-polluting energy growing rapidly in developed and
emerging economies, this could happen within ten years.
What
does that mean for oil prices? What does that mean for the TSX Venture
exchange?
Light
at the End of the Tunnel
The unfortunate
reality is that many of the companies on the TSX Venture Composite Index are
growing companies with potentially hugely disruptive products that could one
day become replacements for incumbent, long term ones.
Take POET Technologies Inc. target="_blank"(TSX.V:PTK),
for example.
The
company’s opto-planar technology platform has target="_blank" attracted
the likes of former Global Foundries CEO Ajit Manocha, and its gallium
arsenide chips may one day be the principle computing source for gadgets from
BlackBerry to Apple Mac Pros. Its share price has remained volatile as the
company is painted with the TSX Venture ugly brush, guaranteeing it a
lacklustre performance thanks to its membership among the rogues’ gallery of
mining companies.
A
technology company that has been a stellar performer though is Sphere3D Corp target="_blank"(NASDAQ:ANY),
who recently acquired Tape Drive Storage company Overland Storage, who used
to count Hewlett Packard among its former clients, and still boasts a roster
of Fortune 500 companies and a global sales force in excess of 18,000
partners. Sphere 3D surged from a start of $0.45 back in 2013, and today
trades above $7 on NASDAQ with a market cap exceeding US$150 Million. Its
great promise potentially lies in the broad commercial rollout of its
Virtualization Platform called GlassWare 2.0.
Perfect
Storm for Tech Bubble 2.0
Another
factor that perhaps is not widely recognized right now by the broader market
is that December 2014 looks an awful lot like December 1999.
To
refresh your memory, if you somehow managed to miss being trampled by that
stampede for the exits, in late 1999 the NASDAQ and NYSE were trading at all
time highs as valuations for dot coms and other technology stocks defied both
gravity and reason. Oil was cheap and mining stocks were definitely wayyyy
out of favour, as gold flirted with a decades record low around $300 an
ounce. Then, as now, the popular chorus howled that this was going to go on
forever, and well, it didn’t. By March of 2000, the bottom was falling out of
U.S. markets and $5 trillion of investor wealth was vaporized (or more
accurately, re-distributed) up the food chain as panic selling became
complete insanity.
But,
once the smoke cleared, what emerged from the ruins of that bubble’s messy
burst was a bull market in gold, the secular bull market in commodities, and
fresh bubbles in real estate and asset backed paper.
Will
history repeat itself?
Other
Global Catalysts to Watch
The
evolving macro-economic landscape is governed by a mountain of if-then
potentialities, which collectively, form the otherwise unpredictable morass
of data from which what is left of untampered-with financial data,
fundamental influences can be discerned. But the most impactful of those,
colour-coded to impart their likely effect on TSX Mis-adVenture, can likely
be limited to:
- Fed Interest Rate Increases:That
shock absorbing, reactive, global economy distorting, money fabricating,
ostensibly non-governmental institution that is positioned prominently
in the popular perspective as our saviour from the evil machinations of
the feckless financial services industry – in other words, the good cop
vs the bad cop – has found itself in possession of data that has induced
what might be (but then again, might not be) a premature ejaculation of
optimism regarding that miraculous invention of the 21st century, Zero
Interest Rate Policy. There are even suggestions that rates may begin to
rise as early as Q3 2015.
Now you know and I know that this is akin to Monty
Python’s prematurely brave sallying forth into the mouth of the cave where
dwells the man-eating rabbits, resulting in their famous retreat among a
chorus of “Run away! Run away!” We saw the Fed version of this skit when they
announced a little too boldly that Quantitative Easing was going to be
throttled back in June of 2013, which prompted a market swoon, causing the
Fed to ‘Run Away!’ from that idea and backtrack.
It seems particularly improbable that, as one global
trading bloc ceases fabricating money from thin air while in tandem raising
interest rates, across the ocean, QE is being initiated in a very big way,
and interest rates, already at zero, would go lower if there was any way the
EuroMess could find a way to do so. Its remarkable how when it serves the
purpose, our world is a globally linked economy, and when it doesn’t, we are
distinct economic regions with problems that are of our own devise and
solution, should one be necessary.
At any rate, should that feint to reality unfold, a
catastrophic reversal of fortune might result, though the tentative nature of
Fed utterances as a result of that 2013 lesson indicate some wisdom was
earned in the transaction, and greater sensitivity to the ever-speculating
Smart Money and how it reacts to such statements appears to be the outcome.
- Super Mario Draghi, Draghi Draghi:
The European version of the Central Bank Soothe Sayer, Mario ‘We’ll do
whatever it takes!’ Draghi has a few options up his sleeve, which really
boil down to ‘how much money will the Euro Zone print’? Never mind how,
and don’t bother pointing out to me the policy paragraphs that prevent
the European Central Bank becoming an American-style Lender of Last
Resort: we live in the era of ‘Asymetrical Economic Warfare’ where
policy is just what you want your adversaries to think you’re thinking
while you’re really thinking something else entirely.Regardless or what,
how much, and how, such an eventuality will have some serious
repercussions for the bull market underway in the States, and the Bear
Market afflicting our precious little TSX Venture. The U.S. Technology
Sector has had such a long-running monopoly on Fed-fabricated exuberance
that the only really attractive equity market in the world is the U.S.
major indices. Meaning, that renewed impetus to the ongoing fabrication
from thin air of billions monthly in capital miraculously fractionally
banked into 8 – 12 times that will have no real place to go except of
course into U.S. Major Indices where valuations will thus be prompted to
soar even higher, and the vacuum vortex left behind by the re-lifting
off of that market will likely be filled by the detritus of global minor
markets like our poor bedraggled TSXV.
- Don’t Count Out the Price of Gold
The TSX Venture has always reflected in some part the fortunes of the
gold price. Notwithstanding the coordination of Goldman Sachs’ Jeffrey
Curry and his statements in research notes calling for gold below $1000
by the end of the year, there is some reason to be optimistic that the
Goldman Sachs – Wall Street Journal – Futures Market may be losing a
little bit of its functionality in the face of swirling and weakening
global economic indicators. There is every possibility, furthermore,
that the failure of Draghi to act, combined with the continuing
degradation in oil prices, could conceivably push the whole financial go-cart
off the track, and perhaps for a little while, anyway, until the U.S. is
forced to resume Stimulus, gold might actually look like the best bet in
town. That’s not a very popular line of reasoning, I know, and one that
has been abandoned by many newsletter writers. But its as plain as day
to anybody who cares to look that there are vast unreconcilable ounces
of gold on offer in the futures market that are never delivered.
Meanwhile,
Rome burns. Or at least, Toronto does.
