Responsibility for market pricing and liquidity

Whose responsibility is market pricing? Whether you consider ASIC, the legislature or the Australian Stock Exchange to be responsible for market regulation, you would have to wonder why a company is able to persist with a 'market pricing regime' which undermines the capacity of shareholders to sell stock. I am talking of course of the situation in which Non-Liability companies (N.L.) are able to raise capital below their  par value infinitum, to the point of amassing issued capital in Australia in the billions, whilst retaining just 3,000-10,000 shareholders; often with just 100s of units after years of depreciation, and no incentive to sell because the value of the stock is less than the brokerage fee to sell them (i.e. $30). This problem is overcome by the provisions for companies to buy back small 'unmarketable' parcels of stock.

What is lacking however is an assurance that the company, ASIC or the ASX will ensure that there is a 'real market' in the stock. Consider the situation for two mining stocks that come to mind:

1. Republic Gold (RAU.ASX) - stock quotes as of 12th July

Buyers   11 83288497 0.1c

Sellers

Price         Quantity         Number

0.002 186536704 113

0.003 44261847 27

0.004 11897500 13

0.005 17970861 16

0.006 10167149 6

0.007 4831500         3

0.008 1300001         2

0.009 11740000 3

0.010 1750000         2

0.012 176338

Its fair to say that there is no real market in this stock. It is also fair to say that shareholders should not have to raise their price 100% in order to buy some stock, nor lower their price 100% in order to sell. The implication is that there is no 'liquidity' in this market, and no effort has been made by all concerned to ensure that liquidity. I personally know this stock, and I suggest there is no reason to expect a turnaround that is likely to lift it 500%, which might otherwise justify 'patience'. Irrespective, the current context justifies a recapitalisation of the stock. No director wants to do this because its a concession that you have failed to retain shareholder value. In fact however, exploration is risky, and some directors are better than others at finding good projects. 

Here is another example....

2. RAM Resources (RMR.ASX) - stock quotes as of 12th July

Buyers

14 13864126 0.002

52 117649338 0.001

Sellers

Price         Quantity         Number

0.003 6083332         13

0.004 17417700 7

0.005 2672000         4

0.006 4330423         3

0.007 5445163         2

0.008 80000         1

0.009 4000000         2

0.010 6266301         5

0.011 1608933         3

This stock is actually one of merit; but again, it is ridiculous that a stock is able to rise 50% in one day simply because there is no effective liquidity, or interim increments of unit price to justify the price rise. The simply solution is for this company's 955mil shares to be recapitalised from 0.2c with a 10x consolidation to 95.5mil shares around 2-3c. This is still a very cheap stock price, but at least it offers some liquidity. 

RAM Resources actually has an appealing project in Greenland for rare earths. This is a pristine natural landscape so you might wonder whether this project will be developed; though its mineral composition differs from the equally significant rare earth deposits of Greenland Minerals & Energy (GGG.ASX). China produces 80% of the world's rare earths; and yet industrial countries are being challenged to find new sources because China has adopted quotas to ensure security of supplies. It intends to cut output by 15% per annum. 

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Andrew Sheldon www.sheldonthinks.com

Summary: Market Outlook 2012-2014

The outlook is for higher food and energy commodity prices, strong NZD, a two-speed economy, with high oil prices, the strong NZD going to undermine economic activity. There is going to be an attack on North Korea and Iran within a year; however they will be short-lived occurrences, but they will hit market confidence, so sell your shares. The high oil prices is what will impact consumer confidence most.

The US and other central banks will then look to offer stimulus, so you can expect a recovery in 2014. Give it a year to turn around, so we are 2 years away still from the resumption of the China 'bull market' story. Clearly the time to get back into equities is a few months after those missile attacks on North Korean and Iranian facilities. In neither case do I expect ground troops.

I think gold prices will certainly do better in this period of 'uncertainty', however not as well as you would expect because there will be broad-based selling pressure. I do however not write-off gold; I think gold will hold up until that stimulus comes through, but expect gold to be sold off thereafter...such that I'd not be surprised to see it under $1000/oz by 2016, so forget about the gold explorers. But in late 2013, we might expect those base metal stocks, including explorers, to look really good, as well as rare earth stocks like Alkane Exploration. Too early now though. Its always best to go for those exotic elements in these times; as they are relatively under-priced. i.e. Vital Metals might have advanced its wolframite (tungsten) project by this time. China produces 80% of the world's tungsten, and this company has the Japanese government as a partner. This is because the Japanese government invests where security of supply constraints are posed. Another appealing exotic company is South Australian based Archer Exploration....not yet though. Wait for the military strikes.

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Andrew Sheldon www.sheldonthinks.com

The US market potentially set for recovery

I've been taking time off to focus on writing books lately, and develop new websites, mostly of a political nature. Seeing that the US has managed to create 230,000 jobs in the last money, and get its unemployment rate down to 8.3%, I am wondering if this is pre-election stimulus, or real jobs. Perhaps someone could look at the job numbers and tell me whether these jobs are bureaucrats or factory workers. If indeed these are factory workers, then we are likely to be seeing a global recovery. Back in 2008, I fully expected this recession to last 4-5 years. So we are in the 4th year, and the market tends to look 12-18 months ahead, so we might thus expect this market to bubble ahead; at least for another 15 years until India and China have fully absorbed their labour surpluses. This is of course the reason why inflation is under control.

I based my 4-5year recession outlook on the basis of a log-linear curve of the Dow Jones. I should reproduce it, so we can see where we sit. Really, its an arbitrary measure because there is no reason why governments cannot pre-empt such trends with stimulus...if only temporary.

So recognising this outlook, we are inclined at this point to get excited. Well, this is why I ask if these are real jobs. Please tell me, as I'm too business etching out a philosophical treatise for the time when society wants to discard representative democracy. I want to avoid some cheap form of populism. You will undoubtedly be rich, and you will be looking around for concrete measures to protect your assets, and you will undoubtedly be snubbing intellectuals like me; retorting "What good are ideas in a crisis!". I will of course respond "A great deal of good if you listen a decade earlier".

So back to the 'boom'. Is it real or not? Maybe I should just look to my trusty log-linear chart. I might have to make it a priority. I used to be so much more focused on such data.

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Andrew Sheldon www.sheldonthinks.com