IN UNUSUAL TIMES, A MARKET FALL MAY NOT BE IMMINENT

Training for Chicago Marathon leads to musings on investments for Peter Hodson.

So, I am training for the Chicago Marathon in October, and much of my summer has been spent, well, running around. Since I don’t really like listening to music while I am running, during my (very) long training runs, my brain needs something to do. Most of the time, I just go into some sort of trance. But on occasion, I come up with some big stock market and investment-related issues. Here’s what my running-logged brain came up with as I logged 35 kilometres last Saturday.

WHY DOES THE MARKET HAVE TO GO DOWN?

Most everyone these days expects a market correction. “The market has been too strong for too long,” they say, or “it is normal to expect an economic/ market correction after a period of expansion.” Sure, that may be true. But nothing about the past 10 years can be classified as “normal.” The market rally was brought on by a massive flood of liquidity following the financial crisis of 2008-09, and then it simply took hold and resulted in better employment and higher asset prices.

In a “normal” economy, there is expansion, followed by wage pressure, higher interest rates, and then — a contraction. However, since there is no wage pressure and no inflation to really speak of right now, why must the market decline? In fact, most times, when everyone expects a correction the market hardly ever does, since it is already reflected in stock prices. I am not saying the market will go up forever, but just give me some reasons why it needs to go down now.

ARE CRYPTO-CURRENCIES GOING TO REPLACE GOLD?

For eons, gold has represented a store of value and a replacement currency. Now, however, we have bitcoin, ethereum and other currencies that are all soaring in value.

Are investors going to abandon gold? Well, ethereum is up more than 2,000 per cent this year, and gold is up 13 per cent. Which would you rather have owned? Crypto-currencies have some advantages over gold, like storage and pricing that is set by the market and not some old fogeys in London twice a day.

WILL INVESTMENT BANKERS BE EXTINCT?

The talk on Wall Street these days is the (probable) IPO of Spotify, the fast-growing music streaming service. Spotify hopes to do a direct listing later this year.

A direct listing is an IPO where shares are simply listed: there is no selling group and the company sells no shares directly. Spotify wants to do this for two reasons: one, it is already profitable.

It does not need any money. Why should it dilute its existing shareholders by selling shares to raise money it does not need?

And, two, a direct listing will save it tens of millions in investment banking fees. Bankers LOVE IPOs, as they get a chance to gouge companies on fees. If a company raises $1 billion, they barely notice the $40 million or so fees that the bankers get. But, smartly, Spotify wants to keep this money. It is so nice to see, and if more companies go this route the investment bankers might not get to upgrade their Aston Martins next year.

NOT MUCH ALARM ABOUT POTENTIAL NUCLEAR WAR

The story of late summer was North Korea’s aggressive missile testing. We won’t go into the politics, but from a market standpoint if investors were REALLY worried about nuclear war then the market would be down 50 per cent, 60 per cent, 85 per cent or more. As it is, the market has barely noticed.

Does this mean investors see the standoff as nothing, and mere posturing? It certainly indicates that investors have a lot of confidence, if nothing else. If the U.S./ Korean standoff dissipates we imagine the market goes on a big run, even though it really hasn’t even gone down while the crisis was unfolding.

HOW DO TAKEOVER TALKS ACTUALLY UNFOLD?

Polaris Minerals (PLS on TSX) announced recently it was going to be acquired by Vulcan Materials. The takeover premium? A stunning 191 per cent.

So, how exactly did those discussions go when the two boards met? Did Vulcan, say, “we would like to buy your company at a 50 per cent premium,” and did Polaris respond, “no, we want closer to 200 per cent” and then Vulcan just said, “OK, fine?” Seriously, how do you extract a 191 per cent premium when other investors seemed not to care much at all (based on prior pricing in the market). Perhaps Polaris management can now teach a course to other companies who believe their shares are undervalued.

That’s all for now. Gotta ... run. Financial Post Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors.