Bear Comparison: Today's Junior Resource Sector vs. 2001's Nasdaq

“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. We saw the tech plunge cripple solid companies all over the sector. Some companies, such as Cisco (CSCO), didn’t immediately regain their luster:

Many, however, such as eBay (EBAY), charged back over time because despite the hype in the sector, there were a lot of truly good stories:

Market sentiment is always changing and short-term results are volatile. Over the long-term, though, fundamentals win out; companies like eBay with real earning power will eventually deliver.

Picking the eBays from the Ciscos is never easy, but if a sector on the whole has potential, some of the companies will come through and the market will recover.

Today’s resource junior sector offers 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 (KGC)) and Gold Eagle (by Gold Corp (GG)). 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 that 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.”

Comments

[MarkMedayski:]

Super research,only the difference between Nasdaq and Junior mining stocks is their shareholders.It is easier for big cap stock to rebound and that doesn't have to be because of valuations change,it's how big markets operate.There is psychology that says that big stocks are here forever so nobody cares,if it looks cheap it must be cheap,people are less concerned as media give so much info on big names and they have serious shareholders like biggest mutual funds,pension funds so small investor says I want to be where Calpers on Fidelity,Vanguard is.The only mistake is to think that big investors don't make mistakes,the opposite.
Now regarding small cap resources stocks,do they have real profits regarding their market cap,I have checked few and 90% at least are losing money on their expenditures for many years already,so the question is:Why somebody must support other persons ( company's )
losses.The answer will be same in every case: My stock is the best positioned to capitalize on rising price of Gold,Silver,Uranium,Co... etc.,I don't believe the answer will be different.
So was it worth to hold those small caps or microcaps last few years when prices of commodities increased and many of average investors mining stocks are down well below 40-50%.
Results tell for themselves,it was not worth.
Conclusion:
Almost everybody of investors would make much,much better buying gold coins,platinum bars,big cap mining/oil/gs stocks as many of those seen quantiple in their stock prices for the last few years,and if you take 10 years then one can retire being bought into any mid/big cap resources stock.
Advice:
Keep your small caps,as it have no sense to sell the loser now,especially if we are still very far away from the peak in oil/gas/gold/silver/pa... but then don't make a mistake selling it too cheap.As in every bubble before the crash,such small caps will rise many times over their proven/probable reserves.
So in the end all of you will be lucky and it have nothingto do with valuations as valuations are down 50% ans stocks are losing money.
I do the same as small cap investor,only I trade commodities on short term basis so my profit will not be so big but the losses too.
Good luck,let your loser fly!

2008 Aug 13 06:52 AM

[beabaggage:]

Agree with John here, the headline is "commodity run is over" so time to buy contrarians. NXG, PAL, SWC, CDE all in my portfolio and have added. These are safe mines in "safe" countries with large cap ex aleady out of the way, easy "Pickens" for the next tier co's like Iamgold or large ones like Goldfields tired of being burned in the third world. Dollar is still way down. FED printing money as are EURO Central Banks and this just continues to fuel the bubble in cheap money chasing goods hence- inflation.
Buy juniors /keep averaging in for rebound makes sense to me, thanx for chart to support bottom may be forming. Silver still holding around support as is gold when I look at my Louise Yamada charts/her analysis as well.

2008 Aug 13 09:52 AM

[secmaven:]

PMU was an outstanding junior with "El Dorado" prospects in El Salvador...until the government there refused to issue a mining permit. The stock drops dramatically. This is just an example of the political risk that attends many junior mining issues. Other risks are labor problems, energy problems, inflation in other mining cost problems and more. If you want leverage on gold buy a double performing ETN. Back in the day when junior mining stocks were in vogue GLD and SLV did not exist. I say forget the needle in a haystack search through the juniors and just buy the metal.

2008 Aug 13 02:52 PM

[John C. Lee:]

Another comparison with the NASDAQ recovery is from the period between 1929-1945, during Livermore's time. The 1929 crash and subsequent mild recover from the top looks exactly similar up until now.

Also: there may be confusion when we both submit articles. I'm John Lee too (no surprise given how common the name is), but my ID is John C. Lee to distinguish the two of us: seekingalpha.com/autho...

2008 Aug 17 11:29 PM

[website:]

I think we see the trading index with good growing promises !
The Qustion is when Thing Going to back to normal?
Talking about ebay,but what about craigslist ,can that great classified website hard ebay,s future?

2008 Dec 31 05:05 PM