Vol. 278 - TSX Venture Summer Doldrums

Dear member,

The summer doldrums have officially arrived. It's late July and there is no better time to spend with family and relax. The summer is also a great time to evaluate your portfolio and look for opportunity while many professional investors are vacationing.

Thanks to the lack of participation (seen every year at this time) and the general uncertainty in the world economy, it's easy to forget about the market. If you are vested in fundamentally sound deals, well positioned, with cash in the bank, forgetting about the market is somewhat relaxing in itself. Although many investors will opt to wait until September, October or even November to re-enter the market, our team believes this 'laissez faire' approach may prove costly.

While valuations and volume continue to hit extreme lows on the TSX Venture, our team believes a positive rebound, following Labor Day weekend when participants re-enter the market, will occur.  

Volume Has Been Turned Down

Stock market volume is down significantly. Nowhere is the lack of volume more exaggerated or prevalent than on the TSX Venture. In the last 30 days, the Venture has failed to trade more than 100 million shares in a single trading day. Back in 2011, over the same 30 day period, from June 20th to July 20th, there were 4 days when the Venture traded more than 100 million shares and 8 days which saw more than 90 million shares traded (one year ago the TSX Venture was also in an extreme bearish trend yet buyers stayed in the game).

In the past 30 days, the Venture has failed to post a single day over 90 million shares traded. Even factoring in the seasonality, these low volumes are unprecedented. When you look back to 2007 and 2008 pre-crash, the volume was similar to today. 50-75 million shares traded (daily) on the Venture, but the exchange was worth more than twice its current value! So the volume was more than double what it is today (in dollar value). We've seen market participation vanish.

There is only one year, in respect to value of volume (in the same 30 day period), comparable to the TSX Venture of today. It was the summer of 2009. The Venture was slowly emerging from its most crushing bear market in its short history. Investors were still devastated and thought the markets would never be the same. The Venture had been decimated and many had denounced investing in the exchange forever. As we all know, the Venture ultimately proved to be the best performing exchange in North America in the 1.5 years following the 2008 crash.

That 2009 desperation and hopelessness is back, which is why we are here to tell you it will not and cannot last.

On July 20th 2009 the Venture closed at 1,118.09.

On July 20th 2012 the Venture closed at 1,196.19.

Less than one hundred points separate the July 20th 2009 value from the July 20th 2012 value for the Venture. The volume on July 20th of 2009 was just over 80 million total shares, whereas Friday's volume was a shockingly low 44 million shares.

The TSX Venture market is running out of sellers. This is by far the longest bear market (16 months) the TSX Venture has ever experienced and thousands of investors, coast to coast, have thrown in the towel. The vast majority of investors still in the game are not selling nor are they buying much. The Venture could, without question, lose another 20% from here, but that would be extreme and we believe further downside from there to be unlikely.

Other North American exchanges are not as fortunate. Although they have enjoyed greater stability in recent years, they are now top heavy and present significant downside risk. The Dow, and to some degree even the TSX, have rebounded and seen multi-year highs over the past 16 months, whereas the Venture has been pummelled month after month over the same time period.

If you have lost money or made no money over the past 1.5 years and are looking for upside potential, where are you going to find it?

The Dow?

The TSX?

The TSX is at 11,600. The Dow is at 12,800.  From a percentage standpoint, these exchanges offer little upside in our view (particularly the Dow). The headwinds are plentiful and these markets are due for a correction. The Venture may correct further, but let's be honest, 80% of the stocks on this exchange are down 50%-70% year over year. Are they going to lose another 50%? Highly unlikely. Again, who is left to sell? Volume on the Venture is at multi-year lows.  

With seller exhaustion evident in these summer doldrum months, our team believes it will not take much volume to move the Venture up 40% - 50% from these levels. Can you see that kind of opportunity for any other exchange? It is not unrealistic to think the Venture could increase in value to 1700 or 1800 in a span of 12 months from today. 1700 - 1800 on the Venture is not exactly a historically high level for the exchange, yet it would create extreme profits from these levels.  The Dow would have to hit higher than 18,000 for those same gains to be realized - a level never seen before in its history. All the TSX Venture has to do is increase slightly higher than where it was in March of this year for those gains to be realized. Realistic? Absolutely.

The Venture exchange is not going to dissolve. The buyers are going to come back at some point. As we've previously stated eventually the fear, driven by distaste for any risk, will turn to greed as sound companies with money continue to execute their goals.

The due diligence one must practice to excel in this market has to be thorough, but great opportunities are plentiful. Companies on the TSX Venture will provide returns other exchanges simply cannot compete with. Naturally, with great upside comes a certain degree of risk. With that said, the risk in the TSX Venture has shrunken remarkably from 12 months ago. Our team is using this time to closely analyze the broader fundamental movements in the market, knowing that the Dow and other large exchanges have plenty of room for corrections; whereas the Venture, in our opinion, does not.

On a closing note: In many ways the Venture's fate, which is primarily commodity based, rests with the continued decline of the US dollar. The debt super-cycle is far from over. If you have any doubts, just pick up a paper, it really doesn't matter which country you live in. The US dollar is the world's largest debtor nation and debtors benefit from inflation. Inflation is the only way out for the US. Inflation will allow the country to repay its debts with money of less value. Inflation will also allow the US to expand its tax base, and create phony higher GDP numbers in a last ditch attempt to pay its creditors and stimulate its economy. Inflation is coming and when it creeps in, rest assured, the TSX Venture will directly benefit.

All the best with your investments,

I was seldom able to see an opportunity until it had ceased to be one.
      - Mark Twain  

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