|
"Another
lesson I learned early is that there is nothing new in Wall Street. There
can't be because speculation is as old as the hills. Whatever happens in the
stock market today has happened before and will happen again. I've never
forgotten that. I suppose I really manage to remember when and how it
happened. The fact that I remember that way is my way of capitalizing
experience." - Jesse Livermore, Reminiscences of a Stock Operator
In October
2002, few stock traders doubted that technology was creating value and
changing the face of the Earth. Even so, the Nasdaq was priced at 1/4 of the
value of its March 2000 peak amid the rubble of the tech crash. Six years
later in 2008, the Nasdaq has gained 100% from its 2002 bottom. Such a swing
speaks to the short-term irrationality of the market.
Today's
resource junior sector offered the same types of glowing promises as the
technology startups did in early 2000. With record commodity prices and
mining producers looking to replenish depleting reserves through acquisition,
the value proposition of junior companies is clear.
For the last
few years, investors bought into junior mining companies for the elusive,
10-bagger discoveries. While there were some success stories, most junior
mining investors have found disappointment so far.
A glance at the
TSX Venture Composite Index (junior resource index), shows that the index is
trading at a nearly 3-year low, which begs the question: "what is going
on?"
 
Top: Nasdaq March 1999 - July 2003
Bottom: Toronto
Venture Index (proxy to junior resource sector), Oct 2004 - July 2008
In the charts
above, I have aligned the Nasdaq's peak in March 2000 with the peak of the
Venture Index in May 2006. You can see striking similarities in those two
charts after the peaks.
Technically,
the Venture index just broke through the green consolidation range and is in
its final bottoming phase. Fundamentally, junior companies without prospects
are selling at or close to cash value. Those with real deposits are being
acquired, as witnessed by recent $ billion+ takeover of Aurelian (by Kinross)
and Gold Eagle (by Gold Corp). This picture reminds me exactly of where the
Nasdaq was in late 2002, where companies were either trading at cash value or
being bought out.
I can't say the
bottom will be in August for sure, or that a surging rebound is around the
corner. There are already casualties and many outfits won't make it through
this correction above water. For me, this is housecleaning time, there is no
exact formula in what to sell, switch, and keep, and I oftentimes consult
experienced brokers for some emotionally unattached advice.
Wall Street can
stay irrational longer than you can stay solvent. Regardless of when the
rebound comes, I wouldn't mortgage the house to buy junior stocks now, or
ever. However, with the all the reasons for investing in the junior mining sector
still intact, for those with pennies to spare, now is the time to average in.
As Warren Buffett puts it: "You should be happy; the hamburger you want
to buy just got cheaper."
By :
John Lee, CFA
Goldmau.com
John Lee is a portfolio manager at
Mau Capital Management. He is a
CFA charter holder and has degrees in Economics and Engineering from Rice University.
He previously studied under Mr. James Turk, a renowned authority
on the gold market, and is specialized in investing in junior gold and resource
companies. Mr. Lee's articles are frequently cited at major resource websites
and a esteemed speaker at several major resource conferences.
Please visit www.GoldMau
for instant market alerts and stock updates.
| 
