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Commodity Market Top Marked By Sprott IPO




Way back in May 2008 I wondered: Will Sprott IPO Mark Top Of Commodity Bull Market?

Yes. Yes, it did.

For those unfamiliar with them, Sprott is a boutique asset manager in Canada. The IPO of Sprott was an accurate tell for the commodity market top because of the firms expertise in and their cheerleading of the commodities markets.

You had to ask yourself this simple question: If they believed that the bull market in commodities would continue, why would they sell such a highly leveraged asset as their equity?

sprott IPO CRB commodities top

The dashed line is the CRB Index, the most popular measure of the commodities markets and the solid line is the price of Sprott (SII) on the Toronto Stock Exchange. It closed the first day at around $10 a share but fell immediately. It approached that high again to put in a double top and started to fall in lock step with the CRB index. In mid-November 2008 it traded below $2.50 - less than a 25% of the IPO initial price.

Another case of watching what others are doing and not necessarily saying. In general, you want to always be wary of whatever Wall St. sells. They aren't doing it out of the kindness of their hearts or to be charitable.

This market 'tell' was one of the reasons why I was bearish on commodities and for the most part it was the right posture. The only exception lately of course has been the gold market which has surprisingly revived to once again gain the $1000/oz. level. I'll come back to the gold market another time since it deserves more attention.

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2 Responses to “Commodity Market Top Marked By Sprott IPO”  

  1. 1 Peter

    Thank you very much for your excellent blog.

    Yes.

    Numerous such examples in the markets:

    1n 1990s, every dot.com flying
    In 2005, every company attached with oil sand flying...
    In 2006, every company attached with uranium flying...
    In late 2007 to the first half of 2008, every company attached with shale gas/potash/coal flying...

    It seems when some small companies change their names to the hot ones (dot.com, oil sand, uranium, potash, coal), it is normally a warning signal of sector topping.

    All the best.

    Peter

  2. 2 jfp

    Another clear example is Mastercard and Visa.

    How is it after a decade of US consumer shopping using debt helps build revenue millions, and just when the US consumer is tapped out and changes it consumer behavior to a savings sentiment, the IPO for Mastercard and Visa hit in 2006 and 2008 respectively. How prudent for shareholders.

    Visa trades at a 49 P/E. Why? Tapped out developed economy consumers paying down debt, how will they be spending on Visa? Just look at the debt as a %GDP for these developed economies. If global banks are shutting off credit lines to minimize losses in a deepening recession, it's only a matter of time til everyone else figures that one out.

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