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Proof the Largest Canadian Banks are Taking Over, Gold Market Outlook, Gold Stocks from a Technical Perspective, and More Manipulation

Dear Readers, 

Last week, I talked about why the TSX Venture is failing.

If you are an investor or a public company in Canada, you should be forwarding that article to as many media outlets and friends as you can; otherwise, you will eventually have to leave the junior investment market in Canada for greener pastures.

That means fewer jobs, less innovation, and less opportunities in Canada.

The more Canadians are educated about what is going on, the higher the chances of someone actually doing something about it.

“You can continue the discussion on why the TSX Venture is failing by CLICKING Here”

The rules and regulations that took place last October added a lot more fuel to a fire that was already burning in the commodities sector, and thus the TSX Venture.

Those rules are forcing the little guys, both public companies on the TSX Venture and smaller financial institutions, out of the market. It’s important to note that while the little guys are shrinking, the big banks are getting bigger.

Last week, I gave you a glimpse of how it is being accomplished:

“With the removal of the uptick rule, firms are now shorting at will and destroying companies for small profits. Institutions (big banks) have many advantages that we don’t. They can short stock and have a fairly lengthy period before they have to replace that stock, should their shorts need to be covered. Even if their shorts need to be covered in a short time frame, they can extend that time frame by borrowing stock owned by their clients.

I have witnessed trades for many stocks where you can clearly see the manipulative efforts of small block sell orders coming through, that appear to be intentionally forcing share price down…Much of this activity runs through the houses of Canada’s biggest banks, and it almost always forces the price of stocks down to a point where liquidity and buy orders have completely dried up and there is no more stock floating around in the system to short.

Too big too fail is sadly a very real scenario. As smaller institutions dry up, investors will transfer over to the bigger guys who will then control more money.”

The big banks don’t want you to trade with your own money. They want you to let them “wealth-manage” it for you so they can collect fees from you, as well as underwriting and advisory fees from companies.

Their strategy is working.

RBC

RBC, the best performer of the big Canadian banks, announced Q2 earnings up 26% as takeovers lifted their earnings.

Via Bloomberg:

“…Wealth-management profit increased 6.1% to $225 million. RBC Capital Markets, the firm’s investment-banking unit, reported profit of $386 million, up 4% from a year earlier, lifted by higher underwriting and advisory fees.”

But check out the punch line:

“…Trading revenue across the bank fell 26% to $566 million from a year earlier…”

While the smaller institutions are drying up along with the TSX Venture, it seems the big Canadian banks are doing just fine; replacing loss in trading revenue with wealth-management profits and investment banking.

RBC wasn’t alone. CIBC reported a profit of $876-million, up 8%, and ahead of analyst estimates.

The big banks in Canada are doing so well that Canadian bankers now rank among highest-paid – and overpaid – CEOs in North America, according to a new list compiled by Bloomberg Markets magazine.

Via the Canadian Press:

“In all, six Canadian bank CEOs were in the Top 20, led by the Royal Bank of Canada’s Gordon Nixon, who came in at No. 4.

Bank of Nova Scotia’s Richard Waugh…seventh place, with US$11.1 million, followed by TD Bank’s Ed Clark, who was No. 8 on the list with US$10.8 million.

Gerald McCaughey, CEO of the Canadian Imperial Bank of Commerce, took home US$9.3 million…good for 11th place…

The Bank of Montreal’s William Downe – No. 12 – took in US$9.2 million…

National Bank of Canada chief Louis Vachon…on the list at No. 17 with US$7.2 million.

…The Bloomberg Markets magazine rankings also put Nixon, Waugh and Clark among some of the most overpaid CEOs when comparing compensation to a bank’s average asset, stock performance and return on equity.”

How do you feel about these over-paid CEO’s?

The days of the little guys being given the opportunity for 10-baggers are slowly fading away…

But is the TSX Venture exchange completely done?

Mergers and Acquisitions

Fundamentals will slowly find its way back into the market and shine some light on some of the great companies listed on the TSX Venture exchange. We are going through a massive cleanse, which is why I only bet on companies with lots of money in the bank right now.

The index seems to be stabilizing but volume remains lackluster at best.

However, I stress that great companies will be scooped up through lots of M&A activity in the coming months. For example, New Gold just offered a 42 per cent premium over market prices to acquire Rainy River Resources Ltd. This type of activity will likely continue moving forward and spark the interest of some of the better gold juniors.

I’ve always said that the best time to buy stocks is when nobody wants them, but fundamentals remain astoundingly strong.

So let’s talk about that.

Resource Sentiment

Last week, I met some friends over at the World Resource Investment Conference in Vancouver, Canada. Generally, this conference attracts a decent audience of investors and other interested groups.

But this time it was drastically different.

Take a look at these pictures, taken at 2pm PST:

World Resource Investment Conference 2013
World Resource Investment Conference 2013

A picture is worth a thousand words.

The place was dead. I have never in my life seen this trade show so dead.

It really does seem like nobody wants anything to do with the junior resource and precious metals sector.

Best time to buy stocks is when nobody else wants them…check.

Since precious metals stocks make up a large portion of the Canadian junior stock market. Let’s talk about gold fundamentals.

Gold Fundamentals

The fundamentals for the precious metals sectors could not be stronger. The physical metals are witnessing a ridiculous amount of buy-side interest that hasn’t been seen for decades.

It is the gold rush of the modern era.

In the last few weeks, headlines that support gold’s strong fundamentals were everywhere.

Russia, Greece, Turkey, Kazakhstan, Belarus and Azerbaijan expanded their gold reserves for a seventh straight month in April

According to the World Gold Council (WGC), India gold demand is expected to touch a record level of 300-400 tonnes between April and June, a 200 per cent year-on-year increase and almost half of total imports last year.

China’s reserves rose 721% from 2004 through 2012, while the combined total among Brazil, Russia and India rose about 400% to $1.1 trillion.

The Belgian Central Bank just told us last week that about 25 tons of the European nation’s gold reserves have been lent to bullion banks. That’s nearly 10% of the National Bank of Belgium’s remaining 227.5 tons of gold reserves, which may spark repatriation by the Bank, as other nations such as Germany and Venezuela are already doing.

In Dubai, there has been a massive surge in the demand for gold since the price collapse of last month, with demand far outstripping supply. According to Emirates 247, various estimates suggest that demand in the past few weeks has been nothing short of astronomical, surging by 10 times the normal demand.

In Singapore, Reuters reports that “supply constraints” have sent premiums to “all time highs” at $7 to spot London prices.

In the U.S., the U.S. mint continues to experience a a shortage of supply. However, they recently brought back the one-tenth ounce gold proof coins for sale after a supply shortage, only to offer it at 35% over spot price. The American Silver Eagles are currently being sold at over 117% over spot silver price. Take a look yourself:

“Want Gold or Silver from the U.S.? Pay a Massive Premium.”

Meanwhile, the volume for the Shanghai Gold Exchange’s benchmark cash contract has been surging. Earlier in the week, in just two days, the volumes have nearly doubled and surged from 10,094 kilograms to 19,599 or 94%.

The Shanghai exchange is also pushing forward with previously announced plans to open existing products to overseas investors, starting with nonferrous metals and natural rubber, and then to gold and silver.

This is an important factor in the prices of precious metals as we can clearly see the manipulative efforts on this side of the world. During Thursday night in overseas trading, gold touched a high of $1421/oz, before getting smacked down below $1400 once trading began here in N. America.

Someone on this side of the world doesn’t want to see gold above $1400.

 

Lastly, I am still expecting that the People’s Bank of China will make a massive announcement later this year regarding its gold purchases. We already know that they are continuing and have openly said they’re buying gold during every dip. I expect a massive increase in their reserves that will shock the world.

Fundamentals astoundingly strong…check.

A Technical Look at Gold Stocks

Gold stocks finally saw some love this week.

Despite the sell-off Friday, the Market Vectors Gold Miners ETF (NYSE ARCA: GDX) is still up over 5 percent, with an increase of 4.4 percent on Thursday alone.

While big fund managers are selling gold ETF’s, they’re out there taking positions in the miners.

George Soros recently increased his holdings in the GDX, the Market Vectors Gold Miners ETF by 69%, from $59 million, to $100 million. He also added $32 million to specific gold stocks and added $25 million of call options in the juniors.

From a technical perspective, things are also beginning to look bullish. It seems we are close to a bottom, but until we can see support in the coming weeks, caution is warranted:

Point & Figure Chart for S&P TSX Global Gold Index
Point & Figure Chart for S&P TSX Global Gold Index

If we can break through pass 220 on the above chart, prices could break out in the short term.

Using the Bullish Percentage Indicator (BPI), we see a very clear signal that the market may be forming a bottom and that the breadth of the stock is improving from an oversold condition in the Gold Miners Index (NYSE ARCA: GDM):

bullish percentage indicator gold stocks
bullish percentage indicator gold stocks

If we see gold price rise next week, this will likely send strong signals to the buy side of the gold miners and we may be able to see a good short term trade. However, I would keep my eyes closely on these technical patterns in relation to gold prices.

Is Everything Truly Better?

The market continues to climb with euphoria fueling its growth. But is the stock market really telling us the truth?

Leverage in both our economy and the stock market is higher than ever, fueled by liquidity created by the Fed.

Stock Market Manipulation

Over the past years, I have told you how the stock market has been manipulated higher. We know the Fed and the U.S. government is printing reckless amounts of money, but they need people to spend and borrow for it to have any affect on the real economy; yet, people and businesses are reluctant to do either.

So does it surprise me that the companies who are borrowing and spending beyond their means are the ones that have been given a major boost in the stock market?

In a recent video by Bloomberg, they found that the companies with the lowest working capital, smallest earnings overall, but the highest debt ratios are actually the biggest winners this year; climbing about 27% percent on the year, while companies with strong balance sheets have climbed less than 15%.

Take a look:

Screen-Shot-2013-05-31-at-12.02.25-PM

Is the Fed rewarding those who are borrowing and spending with a boost in their shares? You tell me.

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Until next time,
Ivan Lo
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