St legers day is out of the way… hooray! But just one day into the new week and it feels dull dull dull again. One new issue to consider… is ESMA.
New rules kicked off in July designed to reduce leverage and exposure to protect the non-professional investor. The rules were supposed to be temporary but in August ESMA renewed the ban. UK regulator the Financial Conduct Authority supports the measures and is open to applying them permanently.
The main bookies feeling the pinch are IG Group, CMC and Plus500. These companies will be forced to seek a different approach to previous market book balance… that’s parlour for your standard bookie/casino manipulation. Volumes drive business. If volume dries up then it becomes difficult to get the liquidity required to generate interest in stocks. I firmly believe that since Mid 2018 (ESMA rules introduced), volumes have reduced. Much of this could be placed into the ‘summer slumber’ period but just looking at the first week after St leger’s and the market still looks weak and sleepy across the small caps and higher risk plays. Bigger investors/II’s are often handcuffed on the weights/volumes that they can invest in smaller caps due to risk profiles. The irony is, many are free to plough billions of individuals’ pensions funds into apparent safer blue chip stocks like… Carillion or AA or Debenhams… the list goes on. No company is safe. Perils are abound. King fund managers like Mr Woodford have lost millions in a bull market which is a feat. Markets have been awash with cash via QE for years now. If Mr Woodford cannot make money in an easy market, heaven help him when the markets turn down… and they will. Long term market icons like Buffet should be applauded and admired. To get through decade after decade of market girations and still turn in the billions is a sign of a genius. TheShareHub has delivered many multibaggers, some 10 baggers and some 20 baggers. But there have been casualties. It’s par for the course. But for some investors who do not manage risk and get into debt – it can be catastrophic. So greater risk constraints are welcome if anything to save us all from ourselves. It might take sometime before the market finds a way around ESMA’s regs but it will. That’s what markets do. They find gaps and holes. They even create gaps and holes. And as seen by Lehmans debacle they even create the invisible. The untradable. And still sell it on. Binary bets or single lined stock has for an age been cited as carrying greater risk. Goldman’s and co have been pushing ETF’s for years now. Spread the risk is the mantra but in truth it actually means spread your cash between equities and your fund managers pockets. The digital age has opened the door to one click trading. One slip of the mouse or fat finger and the DOW Jones can fall by over 1000pts and then fall another 2000pts after that when all the programmed Algo bots start chasing the trend without actually identifying the cause. Scary isn’t it? Highly complex markets with HFT cables dug under the sea apparently designed to nick a 1000th of a second advantage on ‘getting in and getting out’. So where’s this going? What am I getting at? In simple terms… I’m saying the landscape is changing. It’s not the market you thought you knew anymore. It’s becoming something quite different and it’s going to take some understanding. For some retail investors, it’s painful. Less leverage means less opportunity or less ammunition. But look at it another way. US Markets are at all time highs…when the downturn comes you’ll be grateful that you are stopped out or margined out. Had similar rules been in place post OPEC’s decision to flood the market in Dec 2014, I believe quite a few investors would have been in a stronger position today. Since then, many stocks have recovered but the majority are a country mile away from where they once were. High impact exploration stocks like CHAR were trading at £500m market caps ahead of TD. Targeted resources of 200mmboe were given an opportunistic (prospective) valuation of circa $5pb. Today, there are companies selling reserves for $5pb. PetroMatad as an example, has an exploration folio targeting billions and is fully funded yet today’s valuation is just 10% of CHAR’s value from years ago. That’s 90% discount. Or viewed another way… 90% risk off. 90% doubters. 90% of disinterested and once burned investors? One of the main reasons to the disinterest in high impact explorers is down to risk off trading/investing by the larger II’s. Instead of chasing growth stocks, they simply wait for the discoveries (commodities etc) to come in, wait for the share price fever to reduce and then await the predictable cash call or equity placing to raise funds for development. Hurricane Energy is a classic example. Great success story but diluted by a market playing hard ball. The stock was around 50p post placing some years ago and since then has discovered billions of barrels of oil (and proven them up). It is close to generating cash flows from a fully funded phase one production facility and what’s the share price??… 54.5p! The market cap has moved more than 4 or 5 fold. But the share price is virtually at share price IPO entry level. That’s not how exploration or development used to work. But that’s how it works today. Well, for the time being.
Week 37 Review
Some decent news coming in from a number of ShareHub picks. AMER looks to have turned a corner and the new exploration phase should see a share price recovery to the mid 20’s. Any meaningful success could see 30p+. Recoveries from SOLG and WRES have helped the top ten picks move up towards the 8%+ level. CERP and HUM should get a spurt on in Q3/4 as both have news / results due which should be positive. Interest in POG has fallen of late but with Trump mid term elections around the corner, surely it’s time for Gold to return back to this years earlier levels of 1350. The DailyMail picks moves into the green after a few weeks in the red. The Guardian Picks look… doomed!
13 weeks left to Christmas…scary isn’t it? TheShareHub picks should have the muscle and potential to break 15% this year, so roll on the next Santa rally please…