My explanation is that markets are increasingly driven by fund managers rather than mom & dad investors taking the proverbial 'punt' on a 'spec'. I think this trend is gathering momentum because the lack of support for specs has resulted in even the mom's & dad's abandoning the sector. So where is all the money going?
I think money is flowing into those areas that suit investors in the 'New World Economy', and I will outline for my reasons why.
1. Commodities trading: Commodities have become the 'new fashion' in investment. Previously this class of security was considered too risky because of high volatility, low liquidity, but the use of derivatives does offer lucrative returns. Better still growth in this security class has increased liquidity. I attended a conference on Commodities for Fund Managers in Tokyo 2 years ago, and there was alot of interest.
2. Blue chip equities: There is I think a great preference for blue chips for several reasons including the capacity for investors to place funds in managed funds that only invest in large companies. Small companies just dont meet their liquidity requirements, nor can they be happy with the string of failed companies, whether its Perseverence Mining, Gleneagle Mining, Lafayette Mining, Highlands Pacific, and others. Add to this the capacity of the investor to leverage their investment with CFDs or margin loans and I think the rationale for the trend away from specs has some merit. I think that is why we are seeing the exceptionally low value being placed on specs.
I think the executives that run speculative companies have a lot to answer for precipitating this trend. I dont think they are wholly responsible, but the poor disclosure, due diligence and lax standards of work highlight a growing problem for the sector. I might add that to some extent small companies are on the receiving end of incompetent services, given the shortage of qualified service providers. Shortage of skilled geoscientists are forcing miners to employ dodgy practitioners I guess. But by the same token, I think there is a failure of executives to apply quality control checks.
I think this increases the disparity between spec and blue chip pricing. Far from heralding the end of the sector, I think it just increases the upside if you can find the right companies. But more generally I think it will mean that rallies in specs will be short lived for most stocks, so specs become trading opportunities rather than investments unless they can demonstrate 'sustained value'.
Andrew Sheldon www.sheldonthinks.com