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

EU fails to make resolution so far

It is hard to envisage the markets recovering unless the EU gets its debt obligations in sync. It is very hard to imagine that happening, so we might expect more volatility in the short term. Unless the US overshadows these events of course with more quantitative easing. Don't see this happening though; unless equity markets slide.

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Andrew Sheldon www.sheldonthinks.com

Fed decision - what does it mean?

The Fed has said that it will freeze interest rates for 2 years. Whilst this can be considered a measure to give the market confidence; the question has to be asked, is the measure reasonable, or just another scam to suck in long suffering taxpayers and investors. Consider that 3 Fed governors rejected the idea. Three does not make a majority; but it strikes me as ludicrous that these governors would commit to such an arbitrary policy. This is all 'illusionary'. It strikes me as a rather desperate measure to commit to something that one has no necessary intention to keep. i.e. Ben Bernacke is not Santa. He is allowed to keep his promises. More worrisome is the fact that its not clear to me that the majority of other Fed governors have committed to the freeze.

In any respect, they are bankers. I would sooner believe in Santa than the promises of a Fed chair? Will the market buy this? I doubt it. This is why the doubt remains in the market. The market might be volatile if the Fed does not step in and clarify. Ben - Stop playing silly buggers with my money. Oh, its ok, I'm holding gold!

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Andrew Sheldon www.sheldonthinks.com

Market about to recover - Australian market leads

Here is a statistic for you. In the last 5 days some $4.5 trillion was wiped off the value of global equities. That is despite the value of all Italian debt being just $3 trillion. Of course, there is also the debt of the US, which would be another $14 trillion.

Of course a great deal of that debt is actually sensible and sustainable, i.e. Not requiring any bail out. We might then ask whether there is a need for equities to fall further. The answer is a resounding nope. Expect a recovery. The signs are there. The US Dow Jones index closed at its lows. I expect this will be its double-bottom, and the market will gap up tonight.

We might expect gold to fall, so people should shift from gold producers to explorers, as confidence rebuilds. Ready for another rally. Will it require more Fed stimulus? Yes, probably to give it some momentum or sustainability.

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Andrew Sheldon www.sheldonthinks.com

Gold stocks will shine!

Gold stocks are all the rage at the moment, and the Australian market makes a lot of sense for several reasons:

1. High levels of household indebtedness mean there are political reasons for the govt to keep the Overnight Cash Rate low

2. The subdued industrial demand for commodities means the currency is going to be weaker than otherwise would be the case; though not so bad to effect confidence.

3. Gold prices are $1750; probably have downside, but are otherwise going to $2400/oz

The question then is - what to buy?

There are of course high-priced gold producers, but can also look at explorers. Why? Gold explorers need confidence, and with confidence restored by the Fed, there is a good chance for another rally. This is all in accordance with our 5-year plan, i.e. A 'sideways' market, where you have to trade in & out, and otherwise simply hold gold or gold stocks otherwise.

When the Dow approaches previous highs, you sell the explorers, unless they are close to production, i.e. They have finance. You can keep doing that until gold approaches $2400/oz.

We recommend a number of explorers at our specs blog, and we offer a 2nd edition ebook to help you buy the right ones.

These are the perfect conditions for gold; low interest rates, subdued or negative growth and monetary debasement. Low confidence adds to its charm.

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Andrew Sheldon www.sheldonthinks.com

Equity market is vulnerable to a correction

The market is coming off significantly at present, and given that it has failed to breach previous resistance and there seems no prospect of support from the central banks, there is good reason to expect a significant correction. This has us looking for significant support levels:

1. The 10,550 level in the Dow Jones - we need to be watching for a breach of the uptrend since 2008.

2. The 4,000 level in the ASX-200 - there is a shorter support of 4300, which might be a more probable support if the Dow Jones breaks its uptrend.

The implication is that there will be good buying as the market confronts these vulnerabilities.

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Andrew Sheldon www.sheldonthinks.com

Japanese financial stimulus stifling

Ok, the Japanese government has its excuse for an economic meltdown. It was not their fault, it was the earthquake. They just never had a chance. The US of course has their excuse as well. Bad luck, and of course others. The Republicans will blame Clinton for easing restrictions on home lending, and the Democrats will blame Bush for allowing the problem to grow. Others will blame Greenspan. The Europeans will blame those 'shameless Southerners', the Greeks, Spanish and Italians for loving life. And of course taxpayers will sign, all too happy that they have the power to repress all bad news.

Nevermind that this current $0.5 trillion in stimulus is coming on top of a public debt which exceeds 200% of GDP. Nevermind that the Japanese savings cannot sustain this level of indebtedness. Someone will pay for this largesse. My guess it will be Japanese property holders; a lot with a 'shot' of currency debasement.

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Andrew Sheldon www.sheldonthinks.com

Dow Jones equities heading down

The S&P500 has broken support in the last 2 days....sadly I was not watching the market. Irrespective, I was well cashed up, since a number of stocks I like had announced issues, so it was of no consequence. Remaining in my holdings are some gold stocks. Rest assured however there will be some good trading rallies on the way down. Gold explorers, which I very much like, will come under threat because they are intangible, even at a time of high gold prices.

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Andrew Sheldon www.sheldonthinks.com