Aaron
Good to be back. We’re getting close to the end of summer here. Today, we want to focus on our little sandbox, which is the Canadian venture capital and specifically the TSX Venture.
Alex
Just looking at the composite it’s impossible to overstate how bad the drop in liquidity has been. Today will be the fifth trading day in a row below 20 million total shares traded on the TSX Venture Composite.
You have to go back to 2015 to find a date below 20 million shares traded total. So it’s just totally unprecedented. Even in August, even in a seasonally weak period like we’re in. It’s completely unprecedented, these low volumes. [In years prior] You were always seeing 50, 60, 70 million shares traded even in the summer doldrums . You’re having days like that where now we don’t get above 30.
Looking back to July 1st, we’ve only seen four days where the volume was above 30 million total shares on the TSX Venture Composite. Only four days.
Aaron
It’s definitely historic and this has definitely been the summer of no bid as we said it was going to be a couple of months ago. People are kind of taking a wait-and-see approach, which is to say basically, “I’m done selling for now. I want to see what happens after Labor Day.” And I think those first five, ten trading days for the TSX venture after Labor Day will probably tell the tale. From then until tax loss selling season at the end of November.
Alex
Look no further than the real estate market. This is happening across the board. It’s not just the Venture. Liquidity is drying up everywhere you look with higher interest rates. The Canadian Real Estate Association came out today and said that the average house price declined by $27,000 in the month of July.
Aaron
Obviously when the value of people’s homes go down, and again not to toot our horn, but we did talk about this. As interest rates rise, disposable income drops. And when disposable income drops, participation in speculative high risk markets like the Venture from the retail investor disappears. They can’t afford to take those risks on stocks that can either potentially go to the moon or oftentimes go to near-zero if they fail.
So definitely, I think the real estate market is, at least in Canada, very closely tied to our venture markets and the performance of our venture markets and participation rates. Because right now, the retail investor said goodbye to the Venture months ago.
Alex
The wealth effect of real estate in Canada is like nowhere on earth. And everyone was feeling great, in 2020 and 2021, even though it was all paper gains. The mentality of what that does to the psyche when you’re speculating on an exchange like the Venture…a massive difference.
Aaron
What was interesting from 2017 until probably the beginning of 2022 is that when I would go to Vancouver, everybody talked about real estate, everybody was a real estate speculator. Even the financiers who basically help keep the Venture churning, and new opportunities coming out, who do quite well financing these startups… they are talking about real estate when you go to meetings with them.
To accommodate the tough market environment, I think, astutely, the people who run the Venture lowered the minimum financing requirement for some of these companies that are struggling to raise capital. So, I’ll read off just the first paragraph and we’ll include a link to the full article in our description. But, effective June 23rd, this is from Clark Wilson, our legal firm, “…the TSX Venture has amended some of the minimum pricing requirements in its Corporate Finance Manual to incorporate, on a permanent basis, relief from minimum pricing requirements previously available on a temporary basis (the “Temporary Relief”). Prior to this amendment, and in the absence of the Temporary Relief, listed shares of an Exchange listed company were subject to a minimum sale price of $0.05. The Temporary Relief allowed an Issuer to sell listed shares with a market price of less than $0.05 at the market price, subject to a minimum price of $0.01.”
So, basically what they’re saying is if there’s a company struggling, trading well below or trading below $0.05, they can now finance a deal as low as a penny. If that’s not a sign of the times, I don’t know what is.
Alex
Even going back to August 2008 before the big crash, the Venture [Composite] traded 50 to 70 million shares a day. But back then the TSX Composite was at 2000. Today we’re at 640. Even in the heyday of 2010, 2011 it was trading 200 million plus shares a day in total. We’ve now lost 95% of the volume. We’re trading 15 million, 16 million shares a day on the Composite. Down from 200. Down from 100. Look back six months and we’re down 85% of the volume…stunning!
Aaron
So Q1 2021 was probably the most euphoric time for TSX Venture stocks… maybe ever. If you plucked out ten retail investors who were actively participating in that market in Q1 2021, you sat in a room with them today and you said, “hey, how many venture stocks have you bought in the last three or four months?” Nine out of ten would probably say not one.
Alex
And this is where I think it’s going. You go back to 2010, see the volume, and it’s like there are 100 people trading stocks in a room. Today, there are five trading stocks in a room. But I think the big difference is the millennials… they took part in the last run, specifically in the last two or three years – the crypto/cannabis kind of infused run. The Millennials were in there. Now, they’ve taken their ball and gone home. I think the younger generation that got hit in this last crash are done. They’re not even looking at stocks. It’s like passé. They’ve moved on to something else. And we’re kind of back where we were prior to this run.
Aaron
I’m painting with a broad brush here, but the older generation, let’s say the boomer generation, really love natural resource plays. They love mining stocks. And I think, a decade ago during that great run, 2010, 2011, they were kind of the catalyst for liquidity as the boomer generation, who appreciates natural resource development, and who like to speculate on attractive deposits that maybe one day will go into production.
If you just look at the demographics in North America now, for every two people who are turning 65 this year we have one person turning 20. So, as the boomers get to that fixed income kind of life where they’re no longer working, the TSX Venture is the last place they should be looking to invest. It’s too risky. They’re on a fixed income and a fixed income in a highly inflationary environment. You don’t have room to take risks.
There are a few issues that are impacting the Venture, and I think that is one of the sidebar issues, but it’s still significant.
Alex
Well said, I think that’s hugely significant. The window for the exchange to be ignited is getting smaller and smaller. The next couple weeks could be very fascinating.
Aaron
I would even say, the next couple of days. So, Canadian banking institutions are what Canada hangs its economic hat on. Since the days of Confederation, we’ve had a banking system that prides itself on conservatism and safety and just all-round efficient operations. Bloomberg just came out today saying that it’s expected that the banks will report their first decrease in profits in roughly two years since COVID kicked off.
That’s a big deal. But why? It’s been implied that they’re doing it to prepare for potential loan losses and they are stocking their reserves.
So the next couple days will be big. If the Canadian banks show any weakness – knowing this country prides itself on its banks – you can basically write the venture market off for a quarter.
Nothing’s really going to happen until this issue either crystallizes at yes, there is a problem and the banks are worried, or actually it’s not that big of a deal. So the next couple of days could be very telling for the overall sentiment for Q4.
– End of Transcription
Disclaimer and Forward-Looking Statements:
THIS IS NOT INVESTMENT ADVICE. This video is intended for informational and entertainment purposes only. All statements in this video are to be checked and verified by the viewer. This video may contain technical or other inaccuracies, omissions, or errors, for which Maximus Strategic Consulting Inc. (“Maximus”), owner of PinnacleDigest.com, assumes no responsibility.
Trading and liquidity data discussed referencing the TSX Venture, the Venture, the TSX Venture Index or TSX Venture Exchange, is intended to represent that of the S&P/TSX Venture Composite Index.
Neither Aaron Hoddinott nor Alexander Smith are financial advisors. Before investing in any securities, you should consult with your financial advisor and a registered broker-dealer. Aaron Hoddinott and Alexander Smith ( the “Contributors”) have made wrong predictions in the past, and they’ll likely do it again. Never make an investment based solely on what you hear or see in this video. As with all investments, investors should carefully consider their investment objectives and risk tolerance before investing. Conduct your own thorough and independent due diligence to understand the risks associated with investing in any security.
All statements, other than statements of historical fact, that address activities, events or developments the Contributors expect or anticipate will or may occur in the future are forward-looking statements. Such forward-looking statements also include, but are not limited to, statements regarding: predictions for the future performance of various stock exchanges, including the TSX Venture; real estate activity in Canada; the timing of investment opportunities; future performance of industries; interest rates; inflation; stock market liquidity; future trading activity in various markets, including individual stocks, and other estimates or expectations.
Much of this video is comprised of statements of projection. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements.
Maximus and the Contributors disclaim all liability for any loss that may arise (whether direct, indirect, consequential, incidental, punitive or otherwise) from any use of the information in this video. Information in this video has been obtained from sources believed to be reliable, but Maximus and the Contributors make no representation or warranty as to the accuracy, timeliness or completeness of the content in this video. Any opinion expressed in this video is subject to change without notice.
