Volatile Markets - My Perspective as it relates to Tocvan. Not to sound like a broken record, it was another quiet week for Tocvan, closing Friday at $0.485 on 1,700 shares. Tocvan traded only 120,000 shares for the entire week, and 50,000 of this was from a single buyer.
It is already July 10th and the closing ceremonies for the Olympics are on Sunday. It was a great success for Canada with a few disappointments and many upsets. Summer McIntosh met and exceeded expectations with 3 golds and 4 metals in swimming, both the men and women brought home the gold in the hammer thrower, and the men's 4x100 relay really got my blood pumping. Unfortunately, Sarah Mitton, shot put thrower from Brooklyn Nova Scotia, didn't make the finals.
Now that the Olympics are over and summer vacations are slowly winding down, I can begin to turn my attention to what is happening in the stock markets. It was a wild week that started with a meltdown on Monday, and then a general recovery by the end of the week. People frantically sold as though the sky was falling, but what is really behind all the drama?
It is complicated to say the least, but when one peels back the layers of the onion, there are several very startling revelations to be found.
Some fear the U.S. labour market is in trouble and the Feds waited too long to cut interest rates. If you look back all the way to 2008, there has been a slow buildup of risky bets. The stock markets have exceeded expectations and created wealth that has never been seen before, the markets have literally gone straight up to dizzy heights. It is complicated and many things are interrelated, but there are a few reasons that stand out.
I believe the long stretch of low interest rates has led to investors taking too many risks. If my dad was alive, I am sure he would have said this, "Never, Never, Never has he seen this before". First, never have the markets gone this fast to new highs (over the last 16 years). Second, never have trading multiples and valuations been this high before. And third, never have such profits been made in this short of a time period.
The buildup of risks since 2008 started with the housing crisis when interest rates were reduced to near ZERO. This resulted in reducing returns in the money markets to near ZERO, forcing investors to seek riskier bets as borrowing was cheap. Rates were again reduced during the coronavirus hysteria again forcing investors to take riskier bets. The average person leveraged borrowed debt upon borrowed debt due to low interest and mortgage rates, i.e. second mortgages to buy bigger homes, expensive cars, boats, etc.
As both Canada and the US began to raise rates in 2022, the dynamics shifted dramatically as investors looked for safer bets, putting riskier bets under pressure. I, for example, started buying multiple year GIC's in Canada above 5%, providing me with little risk and a guaranteed income. However, a much bigger problem began to emerge, Japan didn't raise their interest rates and kept them near ZERO. This was an opportunity to buy cheap money in Japan and deploy them in higher-yielding investments in North America. This is known as a "Carry Trade". This was understandably a major trade for Hedge Funds, greed would continue to drive this at record speed, and literally everyone joined the party.
The gun was loaded when Japan raised interest rates last week for only the second time in 20 years, and when coupling this with decreasing interest rates in Canada, and the Feds in the U.S. signaling they were going to lower interest rates, this caused a spike in the yen when the return gap narrowed. This led to a punishing unwind of Carry Trades.
This in turn spooked the Japanese markets causing a 3-day loss of more than 20% in Japanese stocks, the largest decline since the 1950's. We all know what happened, half of the loss in the US was attributed to the "Magnificent Seven", but US traders decided the drop was an overreaction, thus the recovery over the remainder of the week. Guess what happened, greedy traders and brokers made staggering profits as investors frantically sold and bought at a record pace.
Lastly, another part of the volatility this week has been due to summer vacations, which brings me back to Tocvan.
The value proposition for Tocvan hasn't changed and is likely better given the timing of the summer to fall cycle and improving weather in Mexico. Tocvan has been working through the rainy season developing drilling sites and putting together approvals for drilling. The drills will start turning in the fall, a Maiden Resource Estimate is slated for the 4th QTR, and production at some level is anticipated to begin in Q1 2025. The share structure is still excellent and will allow for more capital to be raised with minimal dilution, and let's not forget, a "Major" has been sniffing around the property for an extended time.
Brodie is executing well given the difficult junior resource market. One doesn't have to look far to see many other resource stocks that have been punished during this period. Some say the great rotation is coming, i.e. selloff of expensive stocks and placement of money into less expensive more leveraged stocks. This should make it easier for Tocvan to raise capital.
The stock markets have never created more wealth than it has in the last 14 years. With gold near all-time highs, Tocvan is in a sweet spot to fund future development. If you believe in higher trading multiples for producing stocks that have tight share structures, Tocvan is looking more and more attractive with each passing day.
As my dad would always say, "nothing goes straight up forever". but then again, he didn't know about Bitcoin, AI, or even a computer. I believe he is correct in saying this, it is just a matter of time.