The TSX Venture Revival
January 21, 2014, Tuesday, 18:13 GMT | 13:13 EST | 22:43 IST | 01:13 SGT
The past weeks have been very important for Canadian investors.
They have given us a glimpse into what could be a very profitable year for those still willing to participate in the commodities-weighted Canadian stock exchanges.
Last week, I wrote:
"For many Canadians, (2014) could be the turning point for their investments. Many of the companies on the TSX, and in particular the TSX Venture, have been beaten down but it truly appears a bottom has formed."
This week, the TSX climbed to a new 2.5-year high and has advanced in eight of the last nine sessions. The TSX Venture has continued its uptrend since the beginning of this year and is now up over 4.5%.
I believe this year could be very rewarding for Canadian investors.
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Light at the End of the Tunnel
There's no doubt that access to capital has been a major roadblock to junior companies in Canada. That, combined with tighter regulations and the high legal costs of running a public company, has folded a lot of TSX Venture prospects.
Last year, I wrote many articles on why the TSX Venture was failing; I wasn't the only one. Many respected industry professionals felt the same way and wrote about the major problems that were suffocating the growth of capitalism in Canada.
We took the situation into our own hands and collaboratively made an effort to tell "our" side of the story.
I may be saying this a little early, but our noise may be slowly paying off.
Multilateral CSA Notice 45-312
Proposed Prospectus Exemption for Distributions to Existing Security Holders
A primary frustration for retail investors was their inability to participate in private placement financings that often come with the benefit of a warrant, and sometimes a discounted rate to the secondary market.
These financings have often been restricted to the general retail audience because of the costs and time involved for a Company to file a prospectus.
In short, the current rules mean retail investors are disadvantaged from being able to participate in private placements, while TSX Venture issuers are denied a potential source of capital.
Last November, the Canadian Securities Administrators (CSA) proposed an exemption that would allow TSX Venture issuers to distribute securities to existing security holders, thereby reducing the cost for investors and providing issuers with access to an additional source of financing.
Thus far, it seems all the provincial and territorial regulators, with the major exception of Ontario, like the proposal. Furthermore, it seems the BC Securities Commission and the Alberta securities Commission has been very accommodating to the suggestions of the investment dealers - the key backers of emerging companies in Canada.
The proposed exemption means that retail investors may soon be able to participate in private placement financings without being an accredited investor, and without a company filing or obtaining a receipt for a prospectus.
Investor participation in private placements should not be restricted based on his/her net worth. I believe there are many sophisticated Canadian investors and we should all be given equal rights in determining our own investments.
This proposal is a great step forward in bringing equality and revitalization to Canada's emerging markets.
The deadline for submissions on the proposal is January 20, 2014. If this proposal is accepted, it will be a pivotal turning point for the TSX Venture.
Canadian Stock Market Outlook
Last week, the TSX Venture crossed above its 200-day moving average for the first time in more than three years.
The Venture is currently attempting to break out of its chart resistance at 975 and it looks like we could be there next week. If we move passed this, it would be wise to accumulate the strong performers within the exchange. In particular, it would be wise to focus on many of the gold juniors which have been leading the charge and significantly outperforming gold itself over the past few month.
Although I did not feature a report on a gold company last year, those I featured in 2012 have all climbed significantly over the past two weeks, despite gold remaining relatively unchanged. I will likely be buying many gold stocks this year.
The aphorism "a rising tide lifts all boats" is true for the resource-ridden Canadian stock market.
Stronger Earnings, Improved Conditions
Over the past years, the declines in commodity prices have forced many companies to become more cost-conscience.
While prices may not see an aggressive upswing this year, operational efficiencies and cost-cutting measures have now created a scenario whereby any pickup in the pace of resources could lead to stronger earnings by the miners.
Companies have had to significantly reduce capex, which should lead to improved conditions in cash flow.
While structural demand concerns remain in China (liquidity tightening and current shadow banking fiasco), it would be unwise not to see the opportunity at hand. I believe the declines in commodity prices have been fully priced into the market, while the "efficiency" efforts have not.
The FTSE 350 mining index appears to be rebounding, while the S&P/TSX Capped Diversified Metals and Mining Index has broken aggressively beyond both its 50- and 200-day moving average.
It is better to be a little early on this rebound call rather than too late as investor sentiment has been at an extreme low but reversing aggressively this week.
Could this be a false breakout? We shall see...This will be an important month for the mining sector.
Uranium - Getting Front Stage
Uranium will be one of the hottest commodities this year. I have written extensively about this over the last half of 2013.
Last year, I mentioned that leading up to December, the chances of participating in uranium stocks at bargain prices would be coming to an end.
Uranerz (TSX: URZ) (AMEX: URZ) was a prime example of this call. The Company is now up over 60% since November 21, 2013.
But the sector explosion is just starting to heat up, which means the upside for uranium and uranium stocks could be huge.
More Uranium Catalysts
Two major uranium mines recently shutdown in Niger, Africa. These mines were operated by Areva - a French energy multinational - under a 10-year mining license, which expired as of December 31, 2013. Niger wants more royalties, while Areva claims it cannot operate profitably if that happens.
As I mentioned in my uranium report, France gets 75% of its electricity from its 58 nuclear reactors. According to Oxfam, Areva's two mines in Niger produced more than €3.5bn (£2.9bn) of uranium in 2010. That means uranium from Niger could have been powering close to one in three light bulbs in France.
On the same side of the world, Germany's No.2 utility RWE is preparing to sue for millions of euros (estimated at €187 million ($255 million)) in damages after a federal court confirmed that a state's decision to shut down the company's Biblis nuclear plant in 2011 was illegal.
The plant was forced to shut down by the state of Hesse as a precaution following the disaster at Japan's Fukushima plant. Plants all over Germany were shut down as well.
RWE estimates that dismantling its two reactors at Biblis will cost €1.5 billion, excluding storage costs for the nuclear waste.
So what does this mean?
It means that the state of Hesse may have to pay in excess of €1.6 billion to stop the power plant operations of RWE.
While Germany's switch to renewable energy, known as the Energiewende, remains on the media front, this could be a quiet step in turning the nuclear reactors back on in Germany.
Last, and most significant, is the approval of a revival plan for Tokyo Electric Power Co (Tepco) - the utility responsible for the Fukushima nuclear disaster - by Japan's trade ministry this Wednesday.
The plan hinges on Tepco restarting its Kashiwazaki Kariwa nuclear plant to cut the massive fossil fuel costs for Japan.
The first reactor is expected to go online within the next few months and I expect that many of them will be restarted later this year, as Japan has already given approval for up to 14 nuclear reactor restarts.
While uranium bears believe that uranium stockpiles have been growing - and thus prices have not been moving - they have been growing because the Japanese have been accumulating in anticipation of the nuclear power plant restarts.
The moment these reactors are back online, the stockpiles will be consumed very quickly. More uranium will be required and prices should go up.
Gold - Down But Not Done
There has been a lot of talk about where gold prices are headed.
Gold bears tell us that there is no reason why gold should move higher because investment demand is down. Gold bulls tell us that gold production cannot continue with gold below $1200, which would cause a major supply disruption.
The short term trend for gold remains unclear at this point, but it is by no means going to be the forgotten sector in 2014. It is not sexy, but there is sex appeal in gold stocks.
We are already seeing many gold juniors rise aggressively this past week. However, we have seen this action before and it could simply be a rebound from extreme lows. If gold maintains its position above $1200, junior gold stocks could still do very well this year.
I stayed away from gold stocks in 2013, but I am bringing myself back in the game this year.
Precious Metals Manipulation
This week, Germany's top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal, which has already led to fines of about $6 billion.
"The allegations about the currency and precious metals markets are "particularly serious because such reference values are based -- unlike Libor and Euribor -typically on transactions in liquid markets and not on estimates of the banks," Elke Koenig, the president of Bonn-based Bafin, said in a speech in Frankfurt yesterday.
... Bafin has also interviewed employees of Deutsche Bank AG as part of a probe of potential manipulation of gold and silver prices..."
I have written about gold manipulation many times last year. Will the recent investigation by Bafin lead to a major manipulation scheme discovery that will force gold prices to shoot through the roof? Maybe.
But I suspect that "the powers that be" will likely try and shut this thing up.
Speaking of the "powers that be"...
The Fed - Still in Control
This week, Fed Chairman Ben Bernanke discussed his response to the financial crisis of 2008 and his reign as Fed Chairman.
At the beginning of the interview clip, he was asked by the interviewer:
"The playbook you relied on was essentially given by a British economist in the 1860s, Walter Bagehot, and his dictum was that in a financial crisis, the central bank should lend unlimited amounts to solvent institutions against good collateral, at a penalty rate. How useful in practice was that rule in guiding you?"
"It was excellent advice, used by central banks going back at least to the 1700s."
Anyone else notice the big smirk on his face?
The central banks have been controlling the money supply - and the world - since the 1700s, as Bernanke mentioned. They will constrain the money supply if politics do not agree with them, and they will increase it when politicians allow them to do whatever they want.
Prepare for a bigger government more debt.
Long Robots, Short Humans
Last week, I talked about minimum wage and robots - how America will increase the minimum wage and how robots are replacing humans for work. If you missed it, you can read it by CLICKING HERE.
This week, BofA Merrill Lynch chief investment strategist Michael Hartnett sent a note to his clients, which summarizes everything in one simple chart:
"The rise in the use of industrial robots and the decline in the number of manufacturing jobs for human beings (Chart 1) remind us of the technology theme."
The chart speaks for itself.
Meanwhile, Obama is apparently weighing executive action on raising the minimum wage for Federal contractors...go figure.