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NFP Roulette Creates Only Minor Drama


Today's nonfarm payroll report was slightly better than expected, though by essentially just a rounding error of 50,000 more (in addition to an extra 20,000 last month). However, it was the lowest job creation number in over a year. So, it is not a sign of economic strength, though for everyone playing the relative headline game, it was obviously slightly stronger than expected (even if it probably won't alter anyone's thinking about the path that they already thought the economy was on, regardless of what their conclusions are).

It Could Have Been Worse In any event, the algos who pay attention to relative headlines immediately smashed the equity futures such that the Nasdaq 100 lost about 2.5% with the S&P down 2%-ish. However, by midday those losses had been trimmed to about 0.5% for the S&P and 1% for the Nasdaq 100 and Nasdaq itself. From there the market traded back up to close not too far from unchanged.

Away from stocks, fixed income was hit pretty hard, although not too drastically given its recent strength. It then rallied back to finish a shade higher. Green paper was chased, but again not that much, especially given its recent weakness. That rally failed and it finished a touch lower. (Selling bonds and buying dollars has been the favorite trade for all the people who believe in the supreme omniscience and hawkishness of the Fed.)

Turning to the metals, they were immediately slaughtered, with silver declining almost 3%. It then turned around and finished 1.5% higher. Gold followed a similar pattern but wasn't anywhere near as buoyant, nor did it get hit as hard, falling almost 2% before cutting the losses to roughly $5. The miners were mostly weaker, though not extremely so (ex Wesdome, more about that below), again given the recent strength.

Prospect Theory: Take the Hit? In company-specific news, Wesdome announced an at-the-money offering, which is just another example of the oxymoron called Canadian financing. Bought deals are bad. These are even dumber, if they are fully utilized. This sort of financing, while it creates uncertainty as to how much might get done and when, does give the company more flexibility in terms of how much it needs to raise.

On this topic, a friend of mine spoke to Duncan Middlemiss, and I thought I would share his logic. He said that he doesn't want to use much over $50 to $70 million from his line of credit in order to keep the rest for any emergency down the road. Thus, this offering gives him flexibility to raise money if he needs to.

The difference between this and a bought deal is that with the latter, as bad as they are, you at least know what happened, so you have some degree of certainty about a piece of bad news (because of how they impact trading). In the case of an ATM, if it's just to give the company flexibility and if they don't use it (or just a small amount), then it will turn out to be a better alternative.

On the other hand, if the company uses it all, it's a worse outcome because it could have just gotten all the drama behind it rather than stringing things out. So, if it turns out that not all that much is utilized, I would say this was a satisfactory solution. My friend stated that Duncan has been shown dozens and dozens of bought deals and turned them all down. He also feels that Duncan agreed to this partly just to put an end to the bought deal "shopping" by the brokers.

…Or Roll the Dice? Time will tell whether this was a judicious move or a poor one. While I was initially staunchly in the latter camp, I'm inclined to believe it could turn out to be the former. I'm aware of another situation where a company is using an ATM because it has certain debt covenants it doesn't want to breach and it may or may not get the level of asset sales done that it needs, but its intention is not to use it all. Companies that use it all are generally ones that are forced to, and that's another one of the reasons for the negative connotation.

The bottom line is, if Wesdome weren't in the penalty box for problems mostly beyond its control, the interpretation and market reaction would almost certainly have been different. In Ask Fleck, you'll see that I was initially quite negative on the announcement, but with a little bit of color I'm now prepared to see it as a positive or a negative, depending on how it turns out.

I think the market drastically overreacted to this development because investors in this sector have no patience anymore and consequently demand flawless execution at all times in an industry where that is rarely possible. (It is worth remembering that both Alamos and Agnico also spent a long time in the penalty box, too, while they successfully digested various issues.)

Positions in stocks mentioned: long WDOFF, AEM, and AGI, long AEM calls.