"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."
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