-- Posted Tuesday, 29 May 2007 | Digg This Article
The HRA Journal
Hard Rock Analyst Journal
David Coffin and Eric Coffin
When it comes to fears about major corrections in the world’s markets, October is usually the month people look out for, thanks to its association with a couple of history’s great crashes. When it comes to resource stocks however, October doesn’t hold a candle to May. The phrase “sell in May and go away” has been a warning to the unwary for years.
Even though late spring/early summer corrections are viewed as a fixture in the market, they aren’t quite as predictable or standardized as the “sell in May” bromide might lead you to imagine.
The chart above shows the TSX Venture index for the last three and a half years. We could have gone further back, but the basic story doesn’t change much. The chart shows there have indeed been some nasty corrections in the past couple of Springs, but the timing and depth has varied widely. If you look farther back you would find even wider variation.
Last year’s correction was particularly nasty, though the 2005 pullback was also large. Does this chart tell us anything about what might or might not happen this year?
2005 and 2006 had corrections of about 22% and 30% respectively, peak to trough. In both cases, those declines were preceded by long bull runs. The market moved up by 47% in 11 months before it topped in 2005 and an astounding 104% through 12 months before topping in 2006. That advance was punctuated by a couple of 10% corrections which may have added to its longevity.
Before we look at the current move, there are two other important points to note about the last two advances. One is that only one actually ended in May, the market topped in February in 2005.
The other important reference is at the top of the chart which displays the RSI or Relative Strength Indicator for the Venture Index. RSI calculation results in a value between 0 and 100. Values above 70 are considered “overbought” while those below 30 are considered “oversold”. As you can see from the chart, the Index was well into over bought territory at both of the previous peaks, especially last year. So far this year, RSI has stayed below overbought levels, though not by much.
Heavy buying in the past few sessions gives contrarians like us pause, but the comparison to last year is not so simple. The market backdrop is very different. Last year’s steep decline was precipitated by a big pullback in metals prices, especially base metals. This year virtually all metals are going the other way and there is no evidence to suggest they will run out of steam soon. We’re a little more leery about the major markets but here too liquidity is king and there is plenty of it to go around. Institutional buying has been very heavy, which could become a negative at some point, as could the huge volume of new stock created in placements. We’ve already had a couple of small corrections which may help stabilize things but it is May. Keep an eye on the RSI going forward and take profits on big gainers approaching summer
The Great Equalizer? from the May 2007 issue of:
The HRA Journal
Hard Rock Analyst Journal
David Coffin and Eric Coffin
A lot of ink has been consumed on the subject of the commodity supercycle in the past month or two. Other media have recently taken up the topic, some to chronicle it, others to argue it doesn’t really exist. We were among the first to talk about it and see no need to argue its existence with anyone who hasn’t grasped the obvious by this point.
While we’re all tied up in soaring commodity and share prices, there is a revolution of sorts going on. While much of the obvious wealth creation happens in the market, high commodity prices are, in our opinion, one of the chief reasons that many areas of the world with spotty economic track records suddenly look like growth engines.
This isn’t surprising when you look at the situation on a world wide basis. As miners often say, “ore bodies are where you find them”. Miners don't get to pick preferred locales, as much as they would like to. Many areas that have been off limits in recent decades due to politics, warfare or just bad logistics are starting to open up. These newly active areas are predominately in the developing or lesser developed economies.
To give some notion of scale, the worldwide copper market, at today’s prices, represents roughly $100 billion in top line revenue per year. Obviously, a lot of that revenue rests with large integrated miners and smelters but by no means all of it. Take those sort of numbers and multiply them to include other metals and you have the makings of one of the most significant wealth transfers in history.
There are no shortage of misguided NGO’s (“non-government organizations”) who like to vilify the mining industry. The truth however, is the is it is often miners who go into dodgy areas first. If they succeed in making new discoveries, they are often the builders of new infrastructure to make those discoveries exploitable and those areas, in turn, more livable.
When mines start up, they not only generate revenues for local and national governments (for good or ill) but also create high paying jobs in areas where, often, none existed before.
This cycle should be especially good for developing economies. Not only are metals prices at sky high levels, but skill shortages are widespread. This means any company that expects to successfully operate has to go out of its way to train local workers. The effect of this is not just good wages but skills transfer.
Though its viewed by many as low tech, an operating mine actually requires a diverse set of skilled workers to operate efficiently. Electricians, millwrights, heavy duty mechanics and the like all have very transferable skills.
Mining sector wages are among the highest in any economy, which means they are “high multiple” jobs that support a lot of secondary jobs in the local service sector, and often large family groups as well.
Do an internet search on just about any mineral rich area and you’ll be inundated with references from groups who are out to “save” the locals. Often as not, that seems to mean keeping all areas “pristine” and “quaint” and “colorful”. Unfortunately for the local population, quaint and pristine to western anti-development eyes usually translates as “poor, with little or no health or education, low life expectancy and high infant mortality”. Quaint indeed. These groups rarely have realistic development alternatives and rarely do anything constructive to help their “charges”. They just don’t want extractive industries.
We are not saying that resources should not be used more efficiently, or that mining should not be done to the highest environmental standards. Of course they should. But its time that all of us to recognize that this cycle may move an order of magnitude more money into deserving areas than all the highly touted anti poverty initiatives combined.
Ideally, miners will maximize the returns at a local level by providing top notch infrastructure and employing as many as feasible in high paying skill rich jobs. This isn’t altruism. Its common sense and it’s the best defense against NGO bombastics and, one hopes, grasping and corrupt politicians.
As the Africo Update shows, we’re definitely not out of the woods yet when it comes to political interference—of both the free and paid variety. Its still a minefield out there for miners seeking new wealth in new areas but they might be the best chance we have to break the cycle of poverty in the process. More on this later. Ω
-- Posted Tuesday, 29 May 2007 | Digg This Article
