Smallcap Discoveries: Weekly Update: October 2

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Subject: Smallcap Discoveries: Weekly Update: October 2 - 6

October 2 - 6

Market Commentary

Markets

Happy Canadian Thanksgivings Day!

North American equity markets continued their volatile ways this past week. Rising treasury yields early in the week weighed heavily on equities and then on Friday we had US jobs data that initially was viewed as bearish for equities but by late in the day were discounted enough to see markets rally. Perhaps it was the dramatic drop in oil prices that had had equity investors cheering, expecting that to help ease some of the inflation concerns. In any event the DOW was down by 0.3% for the week while Nasdaq produced a gain of 1.6% and the energy heavy TSX was lower by 1.5%.

Only 3 weeks ago the TSX was on the verge of breaking out to 52 week highs and now it’s trading closer to its 52-week low.

Of course this weekend we heard the terrible news of a terrorist attack on Israel and Israel’s declaration of war on Hamas which will no doubt increase Middle East instability and draw energy supply concerns due to the possibility of an escalation of hostilities. We can expect markets to remain volatile for some time to come. Let’s hope the hostilities end quickly and with as little loss of innocent civilian lives as possible.

Financials

We saw US treasury yields hit yet another new multi year high this past week. Everyone have their eyes glued to the 10 year treasury bonds as they’ve seen a near parabolic rise in yields and the resultant bonds themselves have seen one of the largest drops in value in history. US treasuries prices recently have become more volatile than the price of gold!

The US dollar index was lower this past week for the first time in months but still managed to close above 106 after reaching new 10-month highs early in the week.

As for Canada it seems bond yields are following the US rates almost lock-step and also reached new multi year (17 year) highs pushing most mortgage rates higher as well.

The Canadian dollar continued to weaken versus the US greenback as lower oil prices weigh down the loonie.

Commodities

Oil had one of its worst weeks in months dropping 10% in 5 days with WTI oil closing on Friday at $82.81. The massive price drop in unleaded gasoline appears to be dragging oil prices with it.

Unleaded gasoline has dropped almost 27% in less than 2 months and is nearing the $2 level closing on Friday at $2.19 a gallon.

The drop in oil and gasoline will be a welcome relief to those concerned over energy’s inflationary contributions.

It seems that natural gas is now carrying the inflationary torch as it has spike in the past few sessions and closed on Friday at $3.33, a roughly 9 month high and up over 10% on the week.

It can be expected that the whole energy complex will trade higher in the short term as Middle East hostilities and the potential for escalation into oil producing territories and shipping routes grows. Currently in overnight trading WTI oil is up roughly 4%.

According to Baker Hughes there was another big drop in rig count in both the US and in Canada with the US seeing a 4 rig drop and Canada dropping by 11 rigs.

Gold managed to hold above the $1800 level as the recent drop has it in significant oversold conditions. Gold futures closed the week at US$1847 per ounce, down roughly $10 per ounce.

Stocks

I often say the cure for low prices is low prices. Well this week we saw a company whose low price was enough to encourage a take out offer for $4.25 per share, a 68% premium to the stock’s previous day’s closing price. We interviewed H2O Innovation roughly 2 years back when it was trading at only $1.88. The company closed on Friday at $4.17.

We expect this type of opportunistic action to continue as many high quality smaller companies continue to trade at very attractive valuations and in many cases well below comparable private company valuations.

We interviewed William Crossland this past Thursday. Mr. Crossland is the CEO of Thermal Energy, our latest high conviction stock pick. I recommend that you take the time to listen to the interview and the follow up free-for-all as we covered a lot of the highlights and reasons we are so excited about the outlook for the company.

Shares in TMG.V have been consolidating the most recent move and on Friday tested its 52-week high of $0.18. I managed to add a tiny amount to my holdings at $0.175. The company is due to release its Q1 financial results before the end of October which, historically is slightly weaker than Q4 results but should be significantly stronger than last year’s Q1 results. Good Q1 results should increase focus on the company and likely attracts more investors.

TMG.V continues to be a table pounding buy in our opinion.

Other Stuff

We are only a few days away from our SmallCap Discoveries investor conference. We have a few open 1 on 1 meeting spots available. If you have an interest in speaking with management or if you want to sit in as a group while someone else asks all the questions let myself or Trevor know and we can accommodate. We are excited to have so many of you in town and at the show. We think we have 22 of the best microcap investing opportunities in Canada showcased at our conference, many of which are presenting to an in person audience for the first time ever. We are looking forward hearing some great presentations and of course to seeing many of you very soon.

This Week I’m Reading: Trading in the Zone – Mark Douglas - Douglas uncovers the underlying reasons for lack of consistency and helps traders overcome the ingrained mental habits that cost them money. He takes on the myths of the market and exposes those one by one teaching traders to look beyond random outcomes, to understand the true realities of risk, and to be comfortable with the "probabilities" of market movement that governs all market speculation.

To your wealth,

Paul and Trevor

Buys and Sells This Week