Wednesday, April 10, 2013

Replacing The Venture Market

I could not say this better. You've heard me sounding the warnings since the beginning of 2011. Slowly the big names have started to admit what I already knew. Some are even going so far as to admit the details of the Ventures demise including what the Venture has done to itself.

"This new game seems to be over. The institutional money has vacated the sector because of pessimism that the super-cycle remains intact and concern that gold may have nowhere to go but down. I am concerned that we may see structural collapse in the junior resource sector due to a vacuum created by the departure of the feasibility-oriented institutional money and the continued absence of the more exploration discovery-oriented retail investor. Juniors still working on advanced projects cannot get the funding to continue work except at horrific dilution due to low stock prices. Juniors with good exploration ideas have a hard time raising any money because the market perceives the exploration glass as worse than half empty. This situation threatens the viability of the 1,000 companies on the TSX Venture Exchange that are real, functioning companies. We may see an entire institution disappear."
For the full Gold Report Article see here:

I'm less concerned with the movements of the market being a cyclical thing. This is not why institutions are backing out. Not at all. The truth is that the Venture itself has sown the seeds of destruction. I keep pointing you to this news release:
And Kaisers' take: In contrast, a structural inefficiency is one that does not disappear through competition generated by its identification. It is the collaborative fleecing of a victim where the spoils are systemically shared by the so-called arbitragers who are not competing with each other, but rather collectively against the victim.
The Canadian junior resource sector has been invaded by such a structural inefficiency. The trading culture that has turned 40% of the U.S. market into algorithmic-type trading has now wandered into the Canadian junior arena. Computerized programs and human proprietary traders armed with computers are stalking the system. When money flows in, they scuffle over to it and harvest it by selling stock they do not even own, flattening the position by the end of the day. The regulators allow these “directionally neutral” accounts that have the privilege of not tagging short sales as such because the intent is to cover short positions by the end of the day.
The uptick rule was eliminated to facilitate high frequency trading where the goal is to arbitrage price differences between equities and various structured products such as index funds, exchange traded funds, options and futures. This requires computer assisted simultaneous buying and selling of related securities in different markets. This is impossible to do legally on a meaningful scale if the uptick rule applies to short sales in equity markets.
This is one of the real reasons. It's the dirty play that goes on. The Venture has destroyed its own reputation by encouraging this type of behavior. This by itself is not enough to wipe the market out. Add High Frequency Trading and large capital pools. As Kaiser says, you can have great upside for nothing. The problem is that when this last round of proven projects completes there will be nothing left at all.

Only companies who can crowd source will be left. If you can't directly appeal to the crowd you'd better have a patron or you will perish.

I have to quote this for you too: "As an illustration, consider a gold deposit that was barely economic at $900/ounce ($90/oz) gold in 2008. Gold is currently trading nearly 80% higher at $1,610/oz. So you would think it is party time for the junior whose gold deposit was marginal at $900/oz gold. But it is not the case because if operating costs escalated 10% annually during the past five years, that $900/oz operating cost is 60% higher today or about $1,450/oz. Apply the same 10% escalation to the capital cost, which has to be incurred upfront, and you get a nasty capital expenditure explosion. Throw in tougher royalty and tax regimes imposed by financially stressed governments fixated on the phenomenal gain in the price of gold, and the economics decline further. So despite the gold price nearly doubling, many deposits are worse off today than a decade ago.
For many companies that got hold of a project, established a resource and perhaps even did a preliminary economic assessment (PEA), the projects are not viable even at current metal prices. Add into the mix the latent fear that precious metal prices are in a bubble, and it is no wonder the junior resource sector has been abandoned. Some of these projects may be recyclable a decade or so from now, but today these companies have an asset without any real value with current metal prices. A similar situation applies to the base metal sector."

Look what Newmont just did. Write down their northern project to the tune of $1.6 Billion!

The word is "go big or go home". If you wonder why CUU and GVR are holding up despite the market, well, now you know. And yes, don't be surprised to see Newmont looking at these projects. I'm betting they won't be the only ones. Newmont is a smart company and they are getting out of the gate early.

I have to quote this too because it's appearing all over the place. This is no accident. This was deliberate and it was intended to eliminate the retail forcing you to go to a broker who uses an HFT. The problem with relying on those types of investment outlets is they have an abysmal track record of picking winners.

"Regulators are also restricting the flow of money into corporate treasuries by trying to funnel it through the brokerage industry on the premise that brokers know how to assess a client’s risk profile and the risk-reward nature of a resource junior. What the regulators are really doing is setting a liability trap for the brokerage industry, which is avoiding it by shunning all but the more lucrative advanced resource juniors. Rules are being introduced that would prohibit a finder’s fee being paid to third parties who are not part of the brokerage establishment. The regulators are even thinking about reducing the exemptions that allow non-brokered private placements to be done. The regulators seem focused on stopping abuses whereby stock in private companies is sold to retail investors on false premises using the private placement exemptions. Public companies that are subject to rigorous disclosure rules and enforcement are unintended roadkill in efforts to deal with a serious problem."

If you've been reading up on this subject you will have come across the interview with a particular firm who I named before. In that interview they tried to counter my article point for point in an effort to convince people that they could still play in this market at a profit. Nonsense I say. This is literally the last round of the old ways.

The rules were set up to allow the abuses just like they were for the naked short as articled above (near the top of the page) and just like they were for several other dubious activities. Do you really believe these were acts of short shortsightedness? Really?? Bunk I say. This was a stupid attempt to make a cesspool out of the industry so you'd run for the cover of BANKS. See the link on my blog to the Venture Crisis Org people below.

But they've gone to far. Now the new money is taking over. Crowd sourcing is self regulating and pretty much a bare knuckle match for funds. Only the strong will survive there. No phony ass kissing boot licking regulators there who only serve their masters and bleed money off the system like vampires. No CEO who contrives to manipulate the investors into some ridiculous scheme where they abandon their own control over what they want to buy and sell. Just pure one on one economics.

Now, I have a bone to pick. If you are going to talk about stuff that I wrote you could at least give me a prop.
"The end game for this situation is that eventually fundamentals-oriented investors will withdraw entirely from the junior resource sector, leaving only the algo and human prop traders to battle each other. That may create the appearance of a thriving market for a while, but none of the capital in play flows into corporate treasuries. If the companies cannot produce fundamental successes, there is no reason for investors seeking winning bets on fundamental outcomes to pay attention to the junior resource sector. Furthermore, these day traders have become pretty good at recognizing when they are battling each other. Once it becomes apparent that they are cannibalizing each other rather than preying on real investors, they flee. Then there will be only very large spreads with little stock on either the bid or offer side, in effect a dead market. This is the institutional failure of the Canadian junior resource market that I fear." I went into a lot more detail in my article but this is essentially what will remain.

I'm sorry but I almost blew coffee out my nose onto my keyboard when reading the proposed solution. JK you have to realize that it's not possible to adequately predict the impacts of such things as First Nations groups or nutty dictators. I realize you want the Venture Exchange to survive but a Farmville of mining really?? Why not just admit that the game is crooked and needs to be done away with. You can't get rid of the crooks because they run the game. Crowd sourcing and direct action investment is the only way to keep these corrupt monsters out of the game permanently.

Clearly, the problem with the proposed model is that the lobbyist money would game the consensus to their pet projects whereby they could do exactly the same as before. This solution is not a solution and is just another attempt to keep the casino doors open. This solution is basically a graphical representation of the Bullboards! Gee, these are really useful. Perhaps you should read Stockhouse.

I'll leave off on this note for now. I understand why the big names are desperately looking for ways to revive this dead horse but adding another dead horse to get the wagon moving again? Sigh   

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