Last Wednesday saw three announcements of bankruptcy on the Canadian junior exchanges to go along with the halting of two brokerage houses earlier in the week which, at any other place on the great historical timeline of the northern markets, would be seen as a bad thing.
And certainly if you’re a bagholder of Banks Island Gold (
TSXV:BOZ,
Forum), Belvedere (
TSXV:BEL,
Forum), or Sensio Technologies (
TSXV:SIO,
Forum) (or a broker at Jacob or Salman), it isn’t good.
But at a time when the junior space is largely sitting in stasis, with financing hard to come by, investors sitting pat, and fundamentals being often sneered at over promo, a period of good old-fashioned arse kicking is probably exactly what we need.
Fo rthe last four years, the junior markets have been, to put it in the parlance of last week's political ravings, well and truly ‘schlonged’, and there doesn’t appear to have been much learned during that time, nor improved upon, by regulators and exchanges, which have tied the industry in knots at exactly the point where it needed streamlining.
A question was posed to me this week while recording a podcast with the venerable
James West of MidasLetter; he said, ‘how do you determine what to invest in for the long term – what do you like for five year returns?’
It’s a hell of a question, the more I think about it, because if you’d invested in anything clever five years ago, and not touched it in the time since, that investment would be long underwater now. And whatever you invest in today as a ‘smart five-year play’ would just as likely be a shimmering flaming mess by April of next year.
As an example of this, cast your brain back five years ago to 2010. The Winter Olympics were gearing up in Vancouver. Gas prices were climbing ever higher. Mining was raging along, with thousands of venture companies raising money out of the usual brigade of grey hairs and Frankfurters and bigger mining companies that couldn’t be arsed generating their own projects. Tech was dead, biotech even more so, and corporate weed was not yet a glimmer in a stoner’s red eye.
The traditionalists at that time would have invested in oil, gas and mining, because that was all the rage and returns were strong and, really, it’s not like oil will ever be so plentiful that it would drop in price.. right?
The contrarians might have said to get into biotech, grabbing it while it was low, and though that business certainly had its moments in the years following, they were usually closely followed by downturns and FDA rejection wipeouts.
The tech startups were all running to venture capitalists rather than the markets, so they were no help. And really, what else was there? Fashion had a nice run for a few years, until people stopped shopping in malls and companies like The Gap (
NYSE:GPS,
Forum) and American Apparel (
AMX:APP,
Forum) bit the big one.. another trend few would have guessed half a decade back.
Basically, if you’d sat pat on those ‘smart’ five year investments, you might have enjoyed paper wealth for a few moments, and then descended into the sort of returns one gets going long on Zimbabwean currency.
When I was a kid, my mother had a bunch of shares someone had left her in an Australian newspaper company. Those shares went up every year, without fail, because the company made money and the economy was not built with elastic bands and IOUs, and there were dividend cheques in the mail every so often they could be included in the household budget. It was a family asset for decades, and never looked like a sell. We had an actual share certificate and everything.
But that was then. A five-year-plus investment makes no sense anymore, in a world where economies shift and industries are shredded and investors rage quit on three-monthly cycles.
If I think back just six months ago, the biggest worries in the markets are now things we don’t talk about anymore.
Remember when Greece’s economy was going to destroy Europe? It didn’t because we basically bought Greece. Remember when weed was showing 1400% returns in a few weeks? Those reversed because, pump. Remember when the Chinese markets were collapsing and we were all going to be eating Ramen noodles? Still steak.. but only after a few brokers were arrested and provided 'totally reliable' TV confessions claiming they rigged the market.
Remember when people gave a crap about Blackberry (
TSX:BB,
Forum), and Bombardier (
TSX:BBD.A,
Forum) wasn’t a damn laughing stock, and the New York Times (
NYSE:NYT,
Forum) was worth more money than Vice.com?
And do you remember when gas was over $100 a barrel and we were paying $1.38 a litre to fill our tanks? Now the barrel price is down 60% from that point, Alberta is in ruins, and we’re.. paying.. uh.. $1.28 a litre to fill up.
Huh. Okay, so not everything makes sense.
And that goes double in the Venture market, where for decades the Canadian economy has been stoked via raising finance for mines that would never happen but would make some people rich on the way up at the expense of others on the way down. If the federal government taxed corporate shells on the Venture, goodbye deficit. If it taxed cheap paper, we’d be the UAE. If it taxed under-delivery from CEOs who raise money to do one thing and spend that money paying themselves and asking for more money, we’d have Dr Evil Cash and be building volcano lairs in Saskatoon guarded by sharks with fricking lasers on their heads.
The game has shifted. Investors no longer move as a predictable pack, grazing the grasslands before moving on to the next field. Instead, the investor community has morphed into several groups of tribes that plunder wherever they find a little booty, and burn everything behind them. We’re all corporate raiders now.
Those tribes are pretty distinct. You’ve got the Geo Rats, still pounding the phones looking for someone to cut a cheque for $10k to keep the lights on at graphite project #982 because, Tesla. You’ve got the Twitterati, scanning the various social media touts, telling their 20k+ followers what they're investing in this hour, and posting screenshots of their latest 18-minute win. You’ve got the brokers, who are largely broken, beaten down by nickel and dime trading commissions and a weird inability to generate new investors as regulators throw them into endlessly bureaucratic chokeholds. You’ve got the robots, front-running our trades for the investment houses, killing a few percentage points of any wins by buying them a microsecond before we do, and selling them a microsecond later.
You’ve got ‘Anonymous’, buying and selling and pegging unfathomable orders that spook the market and feed weak hands their lunch. You’ve got financial institutions, making market crushing moves based on some algorithm and the early morning notions of intern #823 at cubicle #76b. You’ve got the newsletter folks, taking a chunk of a deal in return for writing about the deal, wondering why they can’t pull a 20% stock spike on coverage anymore and why their cheque swaps are turning into tax liabilities.
There are the stock bashers, who inelegantly, repeatedly, boringly, obviously, and borderline illegally spend their days on messageboards casting shade on companies they’re shorting, no matter the invalidity of their information, sucking whatever rookie investor shows up into their vortex of ick. You’ve got the fake analysts, generating pages of fluffy love for whatever company paid them $2k for the ‘analysis’, complete with eight pages of disclaimers warning you shouldn’t take any of it seriously because it’s just a gig and they told me to say this and please don’t sue me when you lose your money because, hey, surely you can’t take any of this seriously.
And then there are the daytraders, who have no F’s to give about company fundamentals or profits and losses or future or past or management or supply chains, and only want to know what’s being bought right this minute so they can scrape a few percentage points of win before things swing the other way.
Let’s be honest, we’re all daytraders now. Maybe we’re not playing the minute-by-minute swings, but we’re sure as hell a lot more liquid in our trades than we once were. If we hold, we die, so we play the game lest it's us being played.
Case in point: I like Golden Leaf Holdings (
CSE:GLH,
Forum) a lot. This is no surprise to anyone paying attention to my work. They’re making cash money selling cannabis oil products in Oregon, which is a way bigger market than Canada right now, and looking to enter Washington State, which is s way bigger market than Oregon right now. They make more than any Canadian weed company, and they sell out every month, and they’re bringing in so many more extraction machines they’ve literally got their supplier working around the clock, exclusively, to fill the back orders. With grown-up execs at the helm and every milestone promised this year delivered, it’s a heck of a good story. It’s cash money. It’s a five year investment if ever I’ve seen one.
Also, full disclosure here, I own a bunch of it, and I’ve consulted for them, and they’re a marketing client of Stockhouse, all of which I’m proud of because they’re legit and it makes my work easy.
GLH, in my opinion, is a hell of a deal. But the stock price has been marching backwards. Why? Because the old rules don’t apply anymore.
Nowadays, what matters more than what a company is doing is whether people are buying the stock right this minute. Or promoting it this week.
Reading the messageboards for Golden Leaf, you see almost all of the groups mentioned above at work. The bashers, the pumpers, the basement analysts, the daytraders, the social media humps, the inside players, and they’re all running the same game; they buy when the price drops, they sell when it jumps, and they work not on what news the company is releasing, but what the other buyers and sellers are doing at any given time.
Ask any sensible person about Golden Leaf’s fundamentals and you get positive feedback. Dundee Capital has
started coverage of the company with a $2 target price. If you ‘had’ to lock in your money for a year, you’d load up right now, while it’s at $0.80 to $0.90, which is a 25% drop from where they most recently raised money, despite positive news across the board. I’ve been buying the stock consistently on dips because it’s madly undervalued, in my opinion. I know many others doing likewise.
But trading volume in the stock is low – not because nobody knows the story or because nobody thinks news is coming, but because every potential investor is sizing up the others and saying, ‘You doing this now? Not yet? Me either. Now?’
Maybe Golden Leaf announces big news that catapults them next week and we never see $0.85 again. But maybe, and this is what the tribes are focused on, some early founding insider decides to take his profits on stock he bought for $0.15 eighteen months ago and the price drops down again. Maybe tax loss season takes it down another five cents.. Maybe a trio of stock bashers start in on the company, pointing to their ‘loss’ last quarter (a loss consistent with what they spent on adding new extraction machines), and spooking a couple of weak hands, triggering some stops and taking it down another 12%.
To be a good investor in the Canadian smallcap space, one needs to understand company fundamentals, but one also REALLY needs a massive bullshit detector powered by straight up super-uranium. You need to know who the players are, who the good promoters are and who their clients are, which CEOs have been CEOs at six companies in the last seven years, and what shifts are going on in messageboard land, be they based on common sense or total fairydust.
Five-year investments? Jesus, we don’t even do five-year marriages anymore.
Remember when companies on the public markets paid dividends? When’s the last time a Venture listing, or a CSE listing, or even half the TSX listings, said ‘we’re going to pay a dividend?’ That’s when a five-year investment makes a little sense, but that doesn’t happen anymore. The prevalence of ‘growth mode’ has taken away one of the most important ways investors used to make a return on their money, which is one of the reasons the grey hairs are out of the markets now.
The other is, they’ve had the literal crap kicked out of them by pump and dumpers, bad CEOs, list-burning brokers, exiting ex-wives, spiralling Canadian dollars, and all of those ‘can’t lose’ oil investments they’d made that are now worth less than rare earths plays.
Here’s a thing worth noting that a broker pointed out to me this week: Teck Resources (
TSX:TCK.B,
Forum) was priced at $62.36 in early 2011. It’s worth $5.06 today. That’s a 91.8% drop in less than five years, on one of the bigger resource companies around, and the bulk of that drop didn’t come in the 2011 mining crash. It has come bit by bit, month by month, quarter by quarter.
In fact, Teck stock hit a five-year low on December 17 of this year, which would mean it’s unlikely to stage a comeback any time soon. What we’re actually seeing is a devaluing of the work Teck does, in favour of other things.
It’s not a momentary blip and it’s not a ‘cycle’, it’s a sea change.
Let me put it another way: Casinos long ago figured out that relying on seniors to play penny slot machines and eat $2 hot dogs was just bad business, so they started angling for the family market with fountain ballets and sinking pirate ships and Britney Spears live every night. Then, when that market was saturated, they went for the young and affluent market, with beach parties at night clubs and slots that play like video games and $500 laps in NASCAR vehicles.
When that market was tapped, they move on to the introvert demographic, with online poker which dominated everything for a few years, and they’ve now moved to the ‘too dumb for poker’ market with daily fantasy sports.
Nowadays, the Vegas penny slots are tough to track down, but the lineup outside the horrible Coyote Ugly bar at the New York New York is a mile long. Why? Because when your target market is tapped out, you need to create a new target, and a target with money and not a lot of cconcern about what happens to it, is the golden goose.
20- to 35-year-old guys with no ex-wives and no kids and nice cars and a passion for new things? Every industry in the world wants to connect with those marks. Except the Canadian Venture exchange.
The Venture space has no investors left, short of the insiders and game players and promoters and insurance widows. So what is it doing to get new investor ins? Where is the push to sign up a younger crowd? Where’s the innovation? Where’s the growth going to come from when Frankfurt taps out?
Hell, the biggest video game on the planet is Minecraft right now, a game in which the player digs for resources so he or she can build homes and machines and weapons and cake. The world champion professional Minecraft player is
ten years old. Every child in the world with a video game console, mine included, is literally spending hours a day MINING FOR DIAMONDS.
But is the mining industry plugging into that trend in any way? NOPE.
Recently, the head of the TSX put out a call for ideas to rejuvenate the market, which was as big as sign as you’d need that there are no innovators at the wheel.
Here’s an idea: Maybe chasing off the weed and tech companies because they weren’t up to your ethical standards while 2000+ half-cent pretendsies mining companies chased NI 43-101’s in Takemylandistan wasn’t the brightest move.
At Stockhouse, 18 months ago, we set about covering the tech space – private and public, post- and pre-IPO – like we used to cover mining, and today around 75% of our clients are tech-based. We transitioned.
But the Venture Exchange has not. It’s still *really hoping* that people start buying gold again, rather than Samsung phones and Teslas and Millennium Falcon quad-drones.
Here’s another idea, aimed squarely at the IIROC crowd: Stop it with the accredited investor racket. To suggest a person who is well read, earns $85k a year and has squirreled away $5k of play money shouldn’t be allowed to take part in a private placement financing because he has to be protected from himself, while some douchenoz’ who was born with a silver spoon jammed up his jacksie and pisses his inheritance against the wall at the craps table is clever enough to cut a cheque for $100k, is mind boggling.
I mean, in this day and age, when companies can’t find financing to save themselves and the digital world can achieve almost anything, why not put together an online ‘accredited investor’ course that, once completed, allows a now-educated Regular Joe to get access to the deals that insiders currently get exclusively?
Why protect the wealthy idiot and feed him sweet 5c deals, while the majority of the population is told ‘nope, you can wait until it goes public at 25c and the paper starts flushing’? Who exactly is being protected by the current scenario?
I sit at Joe Fortes and Cactus Club and Joeys and talk to Vancouver money guys on the regular, and the conversation always moves to ‘I got in on this at 5c’ or ‘I took $20k of that at 2c in the last financing’, while at the same time you guys reading this are on the Bullboards boasting you bought the same stock at 18c, sold it at 20c, and made a killing.
The game is rigged against you, and the rigging comes, inadvertently, from the people who are employed to ‘protect’ you from yourselves.
Stockhouse has been quietly developing
a ‘deal room’ for private placement deals over the last few months, so users who have gone through the process of confirming their accredited investor status can access those deals online, quickly and easily. It’s a great idea (that, ahem, I came up with), but because of the way the regulations are written, it’s only going to be open to those of you who earn $200k a year or who have a million bucks squared away, because the nanny state thinks most of you are morons who can’t be trusted not to put the family home on red.
So investors get divvied up into haves and have nots, companies have to keep pounding the same tiny group of accredited folks for financing dollars, the exchange continues to slump in the absence of any mining love, and the CSE keeps snagging innovative new companies like a long line trawler.
What was my point? Oh yeah, everything’s crap.
Look, the regulators could change the rules tomorrow to allow unaccredited folks to invest up to a limit of $5k, or force investors to go through a course warning them of dangerous investing habits or force CEOs to be held liable if they raise money and don’t put it to the use they claimed it would go to. They could allow two-tier financing – one side for the insiders with the usual levels of risk, and one for the unaccredited where, if things go south, they get first divvy in a bankruptcy proceeding. They could allow retail pools, where groups of unaccredited investors could take part as one, under the direction of a broker who gets paid his commission based on the entrance cost vs the exit return. They could move four month holds to six month holds, giving companies more time to get to profitability before the accredited crowd yanks their money to get in on the next penny financing.
These ideas are innovations that would see IMMEDIATE market jumps, but they fly contrary to every rule currently in place by the regulators right now – rules that are strangling the market just as much as crappy CEOs, endlessly stalled mining deals, and Howe Street pump and dumpers.
Maybe mining will come back. Or maybe, if you believe (as Rick Rule famously does) that the end won’t come until the thousands of guys sitting on mining claims they’ll never advance finally capitulate and surrender to the inevitable, it won’t any time soon.
Maybe weed will turn out. Maybe the wave of tech companies going public rather than getting tooled about by VCs will finally take root and surge. Maybe biotech will push past the Valleant scandal. Maybe Google will buy another social media network for stupid money and everyone will get another empathy bump.
I don’t know. But I know until the entire Canadian system figures out what the casinos figured out two decades ago – that if you’re not growing your market, you’re dying - the only way to play things is to watch who is making the moves and try to get in front of them.
In a post-apocalyptic wasteland, the only way to survive is to pillage and plunder.
And that, my friends, is how we open 2016.
--Chris Parry
https://www.twitter.com/chrisparry