Right now in the global competition to attract risk capital, the TSX Venture is sucking hind teat in a big way. Since a December 2008 crisis-induced plunge to 697 from an all time high of 3372 in 2007, the S&P TSX Venture index recovered to 2439 in March 2011.
Since then, however, its been a long, painful incremental drift to its current level above 900. So since its post-recovery high two years ago, the index has seen a 61% drop in value. There were no IPO’s in the first quarter of 2013, and volumes have come down significantly.
The motivation to convene the first of two ‘town hall’ meetings by the TSX was thus apparent, and turnout was robust in Vancouver – standing room only in a hall that accommodates 240.
The onstage panel included Rick Rule, Chairman of Founder of Sprott USA Holdings, Gordon Keep, Executive Vice President of Fiore Financial Corp., Kevan Cowan, President of TSX Markets and Group Head of Equities. The panel was moderated by Robert Kang who is the Director of the TSX Venture Exchange in Vancouver, but the real conductor of the whole proceeding was John McCoach, president of the TSX Venture Exchange, who provided roving moderation and deftly scotched long-windedness and attempts to monopolize the microphone.
Some Valuable Nuggets
Among the great take-aways from the meeting, McCoach announced that 90 percent of the sustaining fees due from issuers in 2013 had been paid, and that “the pundits have it wrong” in asserting that “500 companies are going to disappear” from the TSX Venture Exchange.
Kevan Cowan revealed that less than 5 percent of the volume on the TSX Venture came from High Frequency Trading, and that the major Canadian banks, who are also the largest shareholders of the Maple Group that took over the TSX Exchange, were the single biggest voice in opposition to High Frequency Trading. (Rick Rule pointed out that the TSX Venture was suffering from ‘low-frequency’ trading.)
Individual Investors Absent
What was immediately apparent about the ‘town hall’ format was who was missing. The idea of a ‘town hall’ meeting implies that the ‘common people’ can engage in a discussion with the senior staff of any given government or group. While there were traders, brokers, and promoters in abundance, there were no “common people” or as would be the case here, individual investors.
And interestingly, John McCoach made it clear that the protection of the individual investor was job number one of the TMX group, even while he referred to the assembled audience as “customers”.
Just as their dollars in the TSX Venture market are absent, any representation of individual investors was conspicuously absent.
While many worthwhile issues were discussed, the focus was on regulation – or more appropriately, ‘de-regulation’. From excessive trading and listing fees to ‘stale-dating’ of listing applications, and excessive scrutiny of business plans, the complaints were uniformly of participant nature. The industry-focused audience was, for the most part, intent on using the forum to lobby for less regulation and lower fees.
Self-Serving Viewpoints Offered
It became increasingly evident as the two-hour joust-fest progressed that in this Town Hall, everybody had a different – an primarily self-serving – opinion as to what the problems were with the TSX Venture. This list of issues volunteered by the audience included:
• Prospectus Exempt Private Placements;
• Barriers to Entry (to individual investors)
• Negative Effects of High Frequency Trading (Algorithmic Automated Trading)
• Short Trading and the “uptick” rule;
• Lack of transparency;
• Excessive red tape in the listing process.
After the opening remarks, the microphone was handed round the room and from that point on it was basically a sequence of attack-defend duels between audience and panel. Everybody had their own idea of what was wrong and how to fix it.
A senior broker in the audience stood up and rattled off a list of grievances that opened with the declaration that “investors in the TSX Venture market are not investors, they’re speculators – risk takers and gamblers. They’re not investors.”
A technology entrepreneur recounted the story of why he has to raise capital for successive technology ventures in the United States because the Canadian regulators over-scrutinized his business plan.
Another audience member stood up and suggested that Canada should adopt accommodative policy towards crowd-funding “like they do in the states”.
Another bemoaned the presence of High Frequency Trading as a serious effect on TSX Venture share prices. (That idea was dismissed by Rick Rule as a “major non-issue’).
Rule, in typical wry style, chastised the promoters who were complaining about short sellers, saying “Some of the people in this room will know, years ago, that I was a fairly active short seller. And frankly, I didn’t make as much money short as long… Some people will know that I was involved years ago with stock promotion.
There is nothing that I enjoyed more as a stock promoter than a good short position. If somebody was short a few million shares to me, that meant that I had already placed a few million shares, and the price was just a fight between me and them…This is another great big non-issue. As far as I’m concerned, any kind of volume we can get in this paper is good volume. If you people are putting forward a story that isn’t strong enough to take on the wise guys, shame on you. And if you’re putting forward a story that is strong enough, and you get ‘em short, you’ve already got a buyer. You get them filled at a price that’s a fight between your story and their story, and that oughta be a fair fight…
….We’re supposed to be free market capitalists here, and we’re looking for the sort of ..the nannies, to protect us from people who have a different opinion, people who are trying to get ahead just as we are? Shame on us…this is silly.
We’re supposed to be free market capitalists here, and we’re looking for the sort of ..the nannies, to protect us from people who have a different opinion, people who are trying to get ahead just as we are? Shame on us…this is silly.
Gordon Keep told the story of how Lions Gate Entertainment grew to a billion dollar a year company, but could only do so on a US exchange.
And so it went. Two hours of loosely relevant and totally irrelevant stories being told and responses given, and, underscoring the limited utility of the “town hall” format, which is to give participants a feel-good because they have the ear of the movers and shakers, there was very little in the way of meaningful dialogue.
Interests Not Aligned
At the end it seemed that the underlying issue that is alienating individual investors is that the interests of stakeholders in the whole TSX Venture structure are not perfectly aligned with the individual investor. If the TSX Venture has as its customers promoters who are targeting individual investors for their exit strategies, while at the same time it is the exchange’s mission to provide a safe investing environment for the individual investor, then the exchange is perfectly conflicted.
Funds, on the other hand, whose interest is first and foremost the protection of their unit holders, also don’t have their interests exactly in line with individual investors.
Transparency for the individual investor is progressively rendered opaque by the influence of traders, fund managers and brokers on TSX policy, whose interests are not at aligned with those of the individual investor they ostensibly serve. Lack of transparency in large aggregated position control, block trades, short interest, insider interest, technology superiority – all contribute to the disadvantages institutions already enjoy over individual investors. Addressing those gaps in access to information would certainly be a positive step.
US Quantitative Easing not Discussed
The discussion failed to consider the fact that US equity markets and investment products, which are subsidized by some portion of the $85 billion a month in Wall Street Welfare, will obviously enhance the appeal of US markets at the direct expense of the Canadian venture market, which is neither subsidized nor supported financially (except of course, in the case of flow-through financings).
According to Stan Druckenmiller, former fund manager for George Soros,
“The Federal Reserve’s decision to hold interest rates near zero and buy $85 billion of assets a month is pumping up the stock market, all with the hope that rich people will spend those gains, and that money will trickle down to the rest of the country.”
To what degree is risk capital that might otherwise be directed towards Canadian exploration being drawn off by the heavily subsidized US market?
General and Administrative Expenses a Significant
Rick Rule made the excellent point that General and Administrative expenses by issuers consumed 50 percent of the venture capital raised.
My own belief is that bull markets create bear markets.
I do think we have ourselves to blame. During the bull market, we let ourselves get too fat. There was certainly too much G&A in the system –at every level.
We (at Sprott) looked at the General and Administrative expenses of 75 issuers, relative to the
exploration expenditures, and it was about 50/50.
The fact is that this market got stupidly overpriced in 2009, and 2010, we all raised capital on far far far too easy terms, and we didn’t spend the capital as well as we might have, and what we’re living through now is a consequence of that. Not some short sellers or some high frequency traders. When we giver the investors an excuse to come back to the market –and we will – this low market now, will cause investors to come back because they’re bargain hunters. Investors will come back because the low prices will beget mergers and acquisitions and we will come into a discovery cycle.
The problems that you’re talking about, relative to the problems we have caused ourselves, I think, are infinitesimal.”
Mining and Commodities are in a Bear Phase
The discussion also failed to put forth the number one reason the TSX Venture is in decline: it’s a mining exchange, and as mining worldwide goes into decline due to lowering commodity prices on decreasing demand, so too will the appetite for exploration investment evaporate.
Consider:
• Caterpillar (NYSE: CAT), the world’s number one manufacturer of heavy mining equipment’s earnings fell to $880 million, or $1.31 a share, from $1.59 billion, or $2.37 a share, a year ago;
• The iron ore market price has fallen 12 percent since February 20. Copper, nickel and aluminium prices have fallen 15 per cent, 18 per cent and 13 per cent respectively since early February;
• Gold and silver prices have fallen 25% since last year;
• Shares in BHP (NYSE:BHP) have fallen 13.3 per cent so far this year while those of rival Rio Tinto (NYSE:RIO) have lost 16 per cent, with investors worried about the impact on profits of rising costs.
So there is the fact that prices for precious and industrial metals have taken serious hits, and that, as much as anything, will cause a general stampede for the exits.
Twiddling with the knobs on the world’s best exchange for resource exploration capital is an ever-present ambition of participants and managers. Red herrings like High Frequency Trading and short selling are not going to bring back investors or catalyze a bull market in metals.
At the end of the day, there’s not a lot that needs fixing, or that can be fixed, without negatively impacting the machine.
What Will Reverse the Trend?
Each of the bull markets that I’ve been around to participate in are always instigated by the end of a bull market in an unrelated sector, itself usually catalyzed by some fundamental shift in the global economic landscape.
The dot com bomb in 2001 sent investors scurrying out from under the collapsing pyramid of over-capitalized and under-managed technology ideas into mining.
The real estate craze of the mid 2000’s was brought about by the monetary policy of Alan Greenspan, which was recklessly inflationary (then) and its consequences are still being reaped today by the deflated home prices now.
The boom in mining and the wealth it created catalyzed the rise of Exchange Traded Funds, which gave investors a way to play bets on commodities without having to actually take on the burden and risk of physical possession, and facilitating the ability to side-step the risks associated with public companies.
So here are the conditions that I believe will bring about an end to the bear market on the TSX Venture:
1. A spike in precious metals prices (if physical demand could overwhelm central banks’ ability to supply it) through the past record of US$1920 would spark a rush to gold and silver mining equities;
2. If the G8 nations were to somehow miraculously find a way to retire the debt loads of its membership, a sense of financial stability might then ignite a bull market as pent-up economic opportunity then emerged from the shadows of global financial uncertainty.
Apart from those two events, I don’t see anything on the horizon that would inspire an increase in global demand for the commodities that TSX Venture-listed companies explore for. So we continue to wait, huddled around the scant fire of the odd win in the long dark winter of the TSX Venture predicted in 2011 that is now upon us.
I guess I’m in agreement with Rick Rule on that front, who said in his opening remarks that bull markets cause bear markets and bear markets cause bull markets.
The bear market has been here for almost 2 years. Where’s the beef?