While legendary market strategist Barton Biggs believes the time could soon be perfect for the "mother of all bear market rallies," you would never know it from watching the TSX or TSX.V. The drag on commodity prices and poor economic news continues to hammer Canada's markets and the small cap and micro cap stocks have taken it particularly hard as buying all but disappears.
This environment has given new meaning to the old saying "Catch a Falling Fridge" in which an investor tries to bottom fish oversold stocks but simply finds that the timing is almost impossible as prices fall lower and lower. A bad situation has been made worse by the time of year. The buying volume has dried up at a time people are moving to cash or selling at any price to lock in the tax loss for 2008. When you have emotional trading that is already fed off panic and fear mongering from the media, then throw tax planning into the equation, you have the mess we are currently faced with.
Making matters even worse for small or speculative stocks is the unwinding of hedge funds and institutional investors (funds), who have liquidated positions and reduced their exposure to higher risk equities like micro caps and small caps. These folks can afford to take the giant percentage losses that retail investors lose sleep over. And, believe me, a lot of people are losing a lot of sleep over their portfolios that have been eroded down to nothing.
The majority of the tax planning we're seeing will wind down in two weeks. That removes one important element of selling pressure (obviously not them all, but it sure helps). Between Christmas and New Years it will be critical that we see something (anything) that resembles a market rally. Massive amounts of money have been wiped from the financial system but still, huge amounts of money are sitting on the sidelines. Typically what we will see is money moving into the market before the start of the New Year on hope January and February are decent months.
Given the fact we have been decimated for almost three months now, the first sign of money moving back into speculative stocks could start a chain reaction of buying that fuels one heck of a rally in many of the small stocks. Since many are trading well below cash value or were beaten beyond recognition, they will move dramatically quick once it appears that buying is more than a one or two day rally.
I think it’s best to renew the Prozac prescription for another few weeks and see what transpires the last week of December. If the markets sell off hard for no apparent reason, the major auto companies drop a bomb shell on us, or the media broadsides us with more doom and gloom, then we really have something to think about. Every time this market comes up for a breath, our head is pushed back under the water. Obviously this takes a real mental toll on people and if we don't get some breathing room soon, I may start "selling" Prozac.
Speculating on discounted cash in coal & potash
So many stocks seem pointless to bottom fish right now but nine times out of 10, stocks are grossly oversold in bear markets as much as they are grossly overbought during speculative rallies - just like the huge coal and potash rallies we saw during 2008 on the TSX. Coincidentally these two sectors surfaced again when we are looking for big discounts to cash value on fundamentally strong companies. My main concern with both is that we run into the same type of incompetence as we witnessed with T.BIM (when they burned their shareholders and their cash in November).
Assuming we are not broadsided by stupidity, the outlook for both coal and potash remains strong and the two companies below are worth researching.
Phoscan Chemical (TSX: V.FOS; 20 cents) - www.phoscan.ca
52-week High: $2.48; Low: 19 cents
July 31st net cash: Approx. $79 million, or 45 cents/share
Market Values Phosphate project at Nil / Book Value of same deposit $78 million
Last financing: June 2008 for $55 million at $1.90
Phoscan (TSX: V.FOS, Stock Forum) is an early-stage development company that was able to raise an enormous amount of money during a potash (fertilizer) sector rally in mid 2008. It allowed them to purchase a 100% interest in a large Ontario-based phosphate project. They are working on a feasibility study and while they are several years from production (if it ever gets that far), the discount to cash value makes this a very viable speculation. This assumes, of course, that when the next set of financials are filed, they have not burned through cash like drunken sailors.
The website has plenty of information to complete your due diligence.
The sector itself looks very promising even in light of this economic crisis. Potash Corp of Saskatchewan (the world's largest producer of Potash), stated last week that they expect grain prices to rebound next year because of rising food demand.
"We expect tight global grain supply-demand fundamentals to ignite a powerful rebound in crop prices next year," Chief Executive Officer Bill Doyle said at an investor conference organized by Citigroup in New York. Demand for crop nutrients has weakened as wheat, corn and soybean prices dropped in the second half, undermined by the credit crisis. At the same time, world population growth continues to increase demand for food, putting pressure on grain inventories and setting the stage for higher crop prices, Doyle said.
"The current economic turmoil will not impact the desire of an increasing number of people to feed themselves and their families," Doyle said.
It's prime time for expansion, saying that demand will likely outpace supply in the next few years.
2) Phoenix Coal (TSX: T.PHC; 12 cents) - www.phxcoal.com
52-week High: $2.19; Low: nine cents
Sep 30th net cash: Approx. $28 million, or 19 cents/share
Market Values Property, Plant, Equip, Mining Rights at Nil / Sep 30th; Book Value of same: $96 million
Last financing: June 2008 for 62 million shares at $1.75
The company went public in June near $2/share.
Phoenix Coal (TSX: T.PHC, Stock Forum) is a U.S.-based coal producer with operating interests in the Illinois Basin of western Kentucky. Since going public they have run into several operational challenges and still face many for 2009. However, the sector is strong with the demand for coal high and many opportunities will exist for share price appreciation in 2009.
Phoenix was stuck with old contract pricing as the price of coal in the region increased dramatically. They are trying to renegotiate this, which if successful, would have a huge impact on their bottom line. However, the chance also exists that the energy companies will refuse to bring delivery prices closer to market value. They have also hit permitting delays on new, near-term production, and the construction of their Pratt underground mine will depend on credit markets for new financing.
I don't hold a lot of faith lately in brokerage analyst price targets but if you can assume this one is not biased, Dundee Capital Markets issued an updated Research Report on Phoenix on November 17. In the report, they lowered their 12-month price target from $1.50 to $1.10. Even if we assumed the target was completely out to lunch, it’s a far cry from the 12 cents we are currently seeing. Anyone interested might be able to get the report copy from the authors or the company.
Harish K. Srinivasa, M. Eng / (416) 350-3345
hsrinivasa@dundeesecurities.com
David A. Talbot / (416) 350-3082
Disclosure: Danny Deadlock owns 50,000 shares of Phoenix Coal (TSX: T.PHC) and 50,000 shares of Phoscan Chemical (TSX: V.FOS).