Friday, February 13, 2015 12:18:26 AM
Here are some excerpts from an interview with Rick Rule you may find interesting:
When I asked for his expectation of a final capitulation sell-off in resource markets, Rick noted that, “We came close last October. There were some moments of absolute panic…but we didn’t follow through with a capitulation… Capitulation usually follows a protracted period of diminished volume… [and] I have never seen a bear market in the juniors end without [one].”
“[But] just because I haven’t seen it doesn’t mean it has to be that way,” he further added.
Opportunities found at the extreme lows of capitulation, “[Are[ truly stupendous,” Rick explained. “I remember in the summer of 2000 that some stocks declined from $4.00 to $.40 cents, and were going ‘no bid’—changing hands at $.07 or $.08 cents...That’s what happens at the end of a capitulation, because every last available seller is gone.”
Commenting on tightening resource capital market availability, Rick said, “The cost of capital for commodity producers is high and is going higher… [credit markets are] more constrained than at any time in my career [with exception of the early 80s]… [and] I think you’re going to see – and I’m putting it mildly – a very interesting market in oil and gas-related junk debt for the first six months of 2015.”
TD: Rick, I think it was on October 16th of last year that you issued a specific capitulation commentary. In the following week or two the market just tanked.
A lot of the stocks we follow closely were down 30% to 50% during that period. I thought to myself at the time, “There it is. This is what Rick was talking about.” Then it turned out that a more severe capitulation did not happen.
So for the person reading, can you define ‘capitulation’ based on those few times you’ve seen it in your career? What were people doing and what did you see happening in the market?
RR: Capitulation usually follows a protracted period of diminished volume. The buyers are exhausted and the sellers are exhausted. The stock charts look like the electrocardiogram of a corpse, and that’s followed by some event or series of events that renews ‘enthusiasm,’ if that’s the right word, for the sellers in the absence of buyers.
I remember in the summer of 2000, that some stocks declined from $4.00 to $.40 cents, and were going ‘no bid’—changing hands at $.07 or $.08 cents. The period of time when that occurs is usually very brief, two or three weeks before a couple of people wrap their heads around the fact that for $.08 cents, you can probably buy something that’s worth $.90 cents, and will go to $3.00 in a bull market.
That’s what happens at the end of a capitulation, because every last available seller is gone. Capitulation is truly a wonderful thing. The second thing that happens in capitulation, and this is actually a better thing—is that the issuer community and the financial services community, the so-called ‘smart money’ (by the way it’s not the smart money) – capitulates too.
I remember in the summer of 2000 getting calls from the absolute A-leaguers in the issuer community; Robert Friedland, Adolf Lundin, Lukas Lundin, Ross Beaty, Bob Quartermain, all of these guys were saying, “Listen, there’s nothing to wait for. We have to raise money in this market. Tell us what it will take. Even if we have to dilute our company by 25%, the investments that we make right now will return 400% or 500% in the next five years. We understand that we can’t save our way to prosperity. We can only save our way to solvency.”
That concept is important because you can’t excite a market with the prospect that a company is going to survive. You excite a market with the prospect that a company is going to make a discovery or put something into production. You have to move forward and this is a capital-intensive business, so if you don’t have any capital, you don’t have a business.
The whole idea is that issuers capitulate too and say, “Damn it, let’s get back to work.” That’s what turns the market around, and we haven’t seen that yet.
An investor can only survive cyclical markets (let alone thrive in them), if that investor is a contrarian. You have to buy low and you have to sell high. A market bottom is not a time for selling. It is a time for buying.
(note - some of the points he raises about markets can also hold true for individual companies if the company has the means to keep the lights on and survive the downturn...)
It’s difficult to buy when all of the recent experiences you’ve had have been negative. It doesn’t make you an aggressive person. It makes you a cautious person. But this is precisely the time when you have to discipline yourself to buy the best of the best, and buy it in the context of the fact that you’re not going to be rewarded in April. You’re not going to be rewarded in May. You may not be rewarded in 2015. You might be rewarded in 2017. But the nature of the rewards you might enjoy are, in my opinion, predictable and large, and those are both good things.
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