Hey, “It’s tough out there !”
Yes, indeed. Let’s see where we are:
- What will happen with interest rates? Is there a bond bubble ?
- What is the future impact from Europe ?
- Will emerging markets continue to grow and support commodity markets?
- Will there be a QEIII ?
- What will be the impact as we approach the end of 2012 and we have the expiration of the many incentive programs, including the Bush tax cuts, long-term unemployment benefits, Alternative Minimum Tax relief, and a series of business tax breaks (i.e. 100% depreciation). Don’t forget about the seeming enactment of automatic spending cuts in the federal budget.
Thornton Melon offers an answer to life’s educational and learning challenges which he passes on in a speech to the graduating class, lecturing that the real world is hard, so: “Move back in with your parents… let them worry about it!”
Hmmm. That might not cut it. But what does the investor do. Rates are so low so bond yields are at risk and stocks are at risk as they are clearly buoyed from positive sentiment regarding the latest earnings reports and yields that exceed money market returns.
What about commodity stocks. We hear constantly about how beaten up the gold stocks are and how they lag the underlying metal. Junior commodities have gotten hammered, going down in a down market and seemingly do not make their way back on the upswing.
The 1 year charts show a lot, with the Dow off early on and recovering as sentiment toward stocks grew. Meanwhile, the resource-laden TSX fell in sympathy, but has not recovered. However, the junior resource market, the CDNX, has rocketed straight down, falling from well over 2000 to the current level of less than 1400, or retreating by over a third of its value 12 months ago.
Yes, we know some of the reasons why the TSX has retreated, including:
- Lack of liquidity,
- Easier to invest in ETF,
- Company specific risks,
In addition, with the venture exchange, there seems to be these wide swings in overall sentiment, so that as one retreats, a herd follows. We now seem to be in this phase.
On the other hand, past experience shows us that this can change. We do know that world consumption of resources continues to be high. Commodity prices are undeniably high. Commodity producers are constantly seeking new, lower cost deposits to exploit. Take a look at an article today put out by Stockwatch, which summarizes some interesting observations from an RBC analyst, warning of higher operating and capital costs, along with declining grades.”
This is interesting because it really serves to lay the basis for a very definite strategy, which is:
- Take advantage of the current lows in the junior sector, emanating from very negative sentiment,
- Within this sector, look for company having deposits with real potential to offer high grades, along with low capital and operating costs (in other words, the kind of deposits that will be of greatest interest to the majors).
If you can successfully develop a basket of such stocks, you may be offered the potential for a double whammy – company-specific returns, along with market returns as value returns to this market.
Happy investing !