Vol. 271 - TSX Venture Exchange Bucks the Trend

Dear member,

The major markets traded sideways or lost ground this week, while the TSX Venture rebounded sharply. This is the first time we've seen the Venture buck the trend in over a year. Is it possible investors are finally beginning to see the value in the Venture after it lost 50% in roughly one year?  

We aren't calling a bottom on the Venture just yet. However,  this week showed it has become obvious to many investors that dozens of sound companies on the Venture have been tremendously oversold (no kidding). Think about it; if you're an investor looking for discounts, you're not going to look to the Dow, S&P, Nasdaq and NYSE. All these exchanges are trading within 2-4% of their post 2008 highs. Perhaps you may look to the TSX for opportunity as it's off roughly 15% from its post 2008 highs, but even that doesn't come close to the discounts the Venture is offering.

Despite almost all major markets trending lower to finish the week, the Venture closed up strong, gaining 2.09% on Friday alone. The Dow, NYSE, NASDAQ and S&P all lost on Friday with the TSX barely in the green ( up .09%). On Wednesday and Thursday the Venture outperformed as well. The naysayers will point to the fact that it's only a few day trend and no big deal, which in most cases we'd agree. However, when you're talking about a TSX Venture exchange that has been in a free-fall for 3 months, a downtrend for a year and has been the first exchange investors exit, this is a trend to take note of. Lastly, the Venture closed at the high of the day on Friday - something it has had trouble doing for months.

Last Week Chart for the TSX Venture

One of our long time Pinnacle Professor's, Gary Tanashian, published a great article last week, titled, "Dumb Money Sold in May, and Went Away". Click here to read.

Aggregate 'smart/dumb' confidence courtesy sentimentrader.com

The above chart comes as great interest to our team as the insiders, institutions and professional investors (smart money so to speak) spot trends and opportunities before the masses. Look at the green line spike in August of 2011 before a sustained rally in the white line, which represents the S&P. In both scenarios, August 2011 and now, the smart money buying came in after a significant correction. In Gary's article he explains that the last time sentiment (from smart money) entered such a contrarian bullish structure, was towards the end of last summer's euro crisis. Central banks stepped in, inflation abounded, the risk trade was back on and markets rallied.

Euro Troubles Will Lead to Inflation

On May 6 the Greeks failed to produce a working majority in parliament as the country stands at odds to bail on the euro. A referendum has been called and on June 17th Greeks vote again to decide who will lead them and if they will exit the Eurozone. Whether they decide to stay in the Eurozone on June 17th or not, our team believes that eventually Greece will be gone. The shenanigans and outright lies by Greek politicians has killed the market's trust in that country. Fellow members of the Eurozone don't want to lend the country any more money because every six months Greece threatens to leave unless previous debt is restructured.

Although returning to the drachma and exiting the euro will indeed have short-term pain for the Greeks, we liken it to a man contemplating bankruptcy. He will lose everything, all credit worthiness and respect, but he will be free. Experts have anticipated the Greeks will immediately lose 30% of their net worth as the value of the drachma will be nowhere near that of the euro. With that stated, it will give Greeks freedom from their oppressors - their debt collectors. And if the Greeks turn into opportunists, and utilize a weak drachma to their advantage by manufacturing and exporting, who knows, they may be the next Argentina (although it's doubtful). They'll likely abuse their currency by continually printing paper to pay for their lackluster productivity - while simultaneously creating hyperinflation.

Greece will exit the Eurozone, it's just a matter of when. When it does exit the Eurozone you can bet the ECB will implement its most bold action yet (conducive to inflation). This will be done to save the rest of the Eurozone and will work for a period. Also, whenever Greece leaves the Eurozone, Germany may be inclined to finally give in to the idea of euro bonds - which is believed by many to be the saviour for the Eurozone.

As a side note, with or without Greece, the Eurozone will likely follow the North American model of insuring bank deposits. As we stated in our report last week (Deflation vs Inflation), there is currently a run on the banks in Greece and it's starting to pick up in countries like Spain. Leaders of the Eurozone must restore confidence in the banking system. Deposit insurance will help restore confidence and prevent a Great Depression style bank run.

Enter the Fed

The Fed meets on June 19th and 20th just a few days after the Greeks vote. This two day meeting will be pivotal to the state of the global economy. If the Fed wants to loosen its purse strings and maintain a level of control over its rising currency, stimulus or money printing will be the play. Remember, inflation has been muted recently and by the 19th the world could be in disarray if Greece exits the Eurozone.

The risk to the current administration losing power could be too great if the Fed doesn't act in June. The reason for this is that the Fed's next FOMC meeting is not until September, just two short months before the election. Will the Fed roll the dice and pray the markets stay calm and that the economy grows on its own in the final months of Obama's first-term? We don't think so.

Despite the negativity which continues to consume the markets, and the junior explorers in particular, there has been some compellingly bullish information recently released.

Mineweb has recently reported that:

Despite a rocky junior market, exploration continues apace in the Yukon, which is set to have near record exploration expenditures this year. Natural Resources Canada recently estimated nearly C$300 million would go into mineral exploration in the Yukon during 2012, just a little bit less than last year's C$307 million.

This is a telling statistic from which much can be gained. The Yukon isn't the only mining rich region that is experiencing near record investment in exploration expenditures. There will be massive discoveries made this summer. And nothing pays like discovery.  

So if the markets are doomed, as much of the media likes to hint, then why would  these mining/exploration companies be spending billions in North America on project development? Because they know the markets will turn and there is intense global demand for several commodities (with supply shortfalls expected over the coming years).

The leaders and success stories of the junior mining industry know that gold, along with other commodities, will continue to trade near record highs. And they also know that many commodities face threats of supply restraints many years into the future.

Our team sees the continued record investment in exploration as a bullish indicator. It ensures there will be numerous massive discoveries this summer and continued value added to dozens of companies on the TSX and TSX Venture exchanges.

The companies with proven resources and big partners aren't going away. They are coming back along with the 'risk on' trade that the Fed and ECB will ignite. The USD has gained too much value in the past month and the Fed cannot and will not allow it to continue. Inflation will start to build momentum by mid-summer and we want to be on the right side of the trade now. There is too much opportunity not to be.

All the best with your investments,  

 
   
 
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