Small Cap Issuers’ Excess Supply Smothers Demand

James West

There’s a handful of institutional check writers left in the natural resource sector after the brutal decade now in the rear view mirror. But the supply of would-be precious metals explorers has gone up in the last year and a half, since gold began to come to life again.

The collapse in value in the cannabis sector however, is still in a downward trajectory itself. Too many cheap shares choking any buying that shows up.

This is one of the fundamental weaknesses of Canadian junior markets, regardless of sector. As soon as a bull market materializes in any segment, a trickle of public companies pursuing the opportunities becomes an ocean of pubcos chasing a finite pool of investors to get bootstrapped and then trying to sell those shares to a beaten and abused retail sector.

The longer term effect is that bull markets fail to materialize even when underlying commodity supply and demand dynamics drive up prices.

Institutional investors decrease through attrition in down markets, reducing the availability of venture and start-up capital. The uniform condition of getting financed with most moneys accessing Canadian capital markets is that they provide a liquidity event to those investors in short order….usually about 4 months.

Retail investors are expected to come in and drive the price higher through demand for shares, but not when the company IPO’s and promptly tanks. The retail shareholder scurries back to safety and dumps is money into an S&P ETF.

Repeat that cycle enough times and there are neither institutional check writers left nor retail shareholders to provide a market.

And that’s the direction capital markets are going in Canada. Regulators are powerless to thwart that progress because they are essentially captive to the registered members in the securities industry.

There needs to be an intelligent approach to re-organizing the capital markets that does not cause junior companies with no revenue to be sold to retail investors by insiders and institutions who paid a fraction of the quoted price.

With the current state of affairs, everything becomes a fire sale race-to-the-exits as soon as the issuer starts trading. And another generation of retail investors gets wiped out, never to return.

It’s no wonder the TSX Venture is flirting with its all-time low close of 473.74 on January 20, 2016. At the time of this writing, it is at 572.09 – less than 100 points away from setting new lows.

James West

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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