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A Canada Day review of the markets

Emerging Growth Stocks takes a mid-year look at what kind of recovery we might see in the months ahead — and the perils of penny stocks.

Hope you had a happy Canada Day.

We heard a few grumbles about it being in the middle of the week and therefore robbing us of a long weekend — but that’s no excuse for not being happy to be in Canada.

Canada Day means something else. It’s smack dab in the middle of the year, a perfect time to pause for a mid-year review. You may think summer is a much too carefree time of the year to take stock. But let’s face it — this has not been a carefree year.

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Mr. Louis Paquette thinks it’s just the time for a review. What’s more, he can draw on many other investment analysts for their opinions, having just returned from an analysts’ chinwag.

He gives their points of view and his own in the latest issue of Emerging Growth Stocks.

It being that kind of year, he also tells us what can go wrong with an emerging growth stock, in this case a gold miner. We’ll start there.

Anticipating hot results

Anticipation is wonderful, but it doesn’t pay the bills. In fact, it can leave your wallet feeling a little emptier.

Mr. Paquette picked Golden Arrow (TSX-GRG) this past February. This mining firm was drilling away at the Poncha gold prospect in Argentina. As winter turned into spring, the assay results from four holes were eagerly anticipated. Release date: June 15.

Days before that due date, the stock jumped from just below $0.40 up to $0.60 “as if the market was sensing that hot results were coming.”

They weren’t. The results were mixed, not at all what the market was expecting. So the stock went scurrying on back.

“I can tell you the company wasn’t hyping the play,” says Mr. Paquette. They offered no specific guidance when he called them.

His guess on the stock’s jumpy behaviour — “someone covering a short position forcefully, or forcing a long fill after supply of stock dried up.” For Golden Arrow’s management, it’s back to the drawing board.

Such are the perils of penny stocks. We notice, however, that the company announced a private placement of $1 million just before the holiday.

The fall of the Roman Empire

Earlier in June, the World Resource Investment Conference took place in Vancouver. A host of investment analysts, advisory publishers, market historians and the like descended on the city.

As you can well imagine, they were not shy in expressing their opinions. The conference was the first Mr. Paquette had attended since the market scraped bottom in March.

The subsequent turnaround in the markets has not impressed many of the assembled experts. “Most felt that the credit bubble which took decades to form would not be resolved in a matter of a few weeks, or months, but years,” says the editor.

“This isn’t some kind of inventory recession that could be solved with a few interest rate cuts, but a far more serious balance sheet recession that consumers would take years, maybe a generation, to recover from.”

Mr. Doug Casey (whose advisory, the International Speculator, has been cited regularly in these pages) had the most dramatic pronouncement. He compared “the demise of America to the fall of the Roman Empire,” says Mr. Paquette, “and we all know how long the subsequent Dark Ages lasted (I suspect he exaggerates to make the point that he believes the situation is quite serious and lasting).”

Mr. Bob Hoye, a market historian, compared the market’s spring rally to the “dead cat bounce” that took place in 1932, i.e., early in the Great Depression. Many similarly cheerless comments were uttered.

If there was a split at the conference, it fell along the lines of age, Mr. Paquette tells us, with many of the younger speakers looking on the bright side. The editor surmises that “either these guys are naïve and too optimistic or the older ones are being too negative.”

One thing was certain — “how uncertain everyone had become.”

The high spenders

Mr. Paquette weighs in with his own outlook. What we’ve got here, he says, is a cyclical bull market operating within the confines of a secular bear market that began in 2000. “Secular” in this case means a trend persisting for many years.

But this mini-bull market should last for 1 to 3 years, claims the editor, for three reasons:

“1. The charts are saying it is. 2. Because of all the government stimulus. 3. Because the demographics are still positive.”

The key demographic concerns people between the ages of 45 and 54. The number of people in that age group is still rising, and will until 2012.

Once the number of these high spenders begins to decline, in 2013, the bear market will be back in business. The “high spender” demographic is due to keep on declining until 2025, in fact.

“I realize that is a long, grim outlook. But I am here to tell you the truth, not what you or I want to happen,” the editor tells the readers of Emerging Growth Stocks frankly. “And like Mark Stein says, demographics may not explain everything, just about 90% of everything.”

The recovery will be muted, he further concludes. And there may be some short-term sluggishness in the cyclical bull market as well, following the more than 40 per cent recovery in the markets since March.

He has one final suggestion for his subscribers. Read Mr. Dan Arnold’s The Great Bust Ahead (we haven’t read it, but will certainly look into it). Mr. Arnold spells out “what lies ahead and why nothing is going to stop it.”

With that rather gloomy epilogue, we once again hope your Canada Day was as bullish as it could be.