Outlook for July 2016

We are halfway through 2016 already. The world is stunned by the Brexit vote, which caught almost everyone by surprise — causing some mayhem in the global markets. What this means long term remains to be seen as the referendum is a non-binding agreement. But the move to leave EU has sent shockwaves across Europe, with local political parties starting a rhetoric in nine other countries about their own referendums to leave the EU. Brexit could be the first domino to fall leading to something big.

With the vote going in that direction, the odds of interest rates rising have all but collapsed. The markets were already pricing the odds of a raise early next year, and but after this vote, there have been calls to not raise, but actually cut the interest rates! The other central bankers – ECB, BoE are expected to announce that they intend to step-in to stabilize the markets.

What does this all mean for the macro/global economy. Its hard to know…except that it brings more volatility and starts the next innings of currency wars. The US$ continues to rise against the global basket of currencies, but interesting the Japanese Yen has been rallying as well. Keeping an eye on the currency can provide a good pulse on how different markets are perceived in the overall global economy.

Outlook for July 2016

As things stand, there are a lot of headwinds facing the economy. Potential recession/depression troubles still exist. The bond market, commodities market, transportation market, manufacturing market indices are all sending very strong signals that all is not well in the world. Some sectors are seeing an “earnings recession”. It is for this reason that gold and silver, typical safe havens, has done well in the first half of the year. Generally speaking, things haven’t changed much since my Outlook for 2016 (from January) post. Be sure to check it out for further investment ideas.

R2RPortfolio-Jun30

Portfolio Considerations

I recently decided to liquidated 1/3 of my portfolio and move to cash. I still continue to hold DGI stocks, and am focused on reducing the overall number of holdings. The reasons have been shared in this post. As I already discussed in that article, I want to concentrate on a smaller number of holdings and the only sector that I am bullish on is the precious metals space — gold and silver. Over the course of last couple of months, I have initiated new positions in Silver Wheaton (SLW.TO) and Pan American Silver (PAA.TO) and will be looking for any weakness to add more. I am also looking to upgrade to a better quality of gold mining stock. I own IAMGold (IMG.TO) and the company has had some management issues — a company that I do not mind selling, hence the reason I wrote a covered call on it last month during the ensuing panic after the Brexit vote.

I am currently reading and learning a lot about the mining industry. Its a space that I do not understand very well, and I hope to build my knowledge up. The commodities continue to be hated, but the moves in H1 2016 have been promising. Perhaps this is the start of a new bull market? Or is it a dead cat bounce? A false start perhaps? No one really knows…but I think its a good time to start loading up some shares in the sector as its one area I find presents good opportunities.

It is interesting to note that gold/silver have had an incredible performance so far this year as the US$ continues to rise (which normally has inverse correlation). So, when the tide turns around US$, we can expect gold/silver to really take off.

As it stands, our current portfolio diversification is as shown below:

image (1)

Dividend Increases

July is expected to be another slow month when it comes to dividend increase announcements. I am expecting only one company to announce an increase our portfolio.

  • Omega Healthcare Investors Inc (OHI) – last increase was 1.75% in Apr 2016

What are your thoughts on the stocks mentioned here? Do you own them or are they on your watchlist? What do you think of the current market levels and buying here? Make sure to leave a comment below as I value reading your questions and comments.

Disclosure: Our full list of holdings is available here.
Image Credit: Kansasphoto

23 thoughts on “Outlook for July 2016

  1. Thanks for sharing those thoughts Sabeel. My outlook is very similar to yours, and in addition to the precious metals, I’m extremely bullish on clean energy, lithium in particular.

    I keep hearing how spectacular the future growth will be in Asia, and now that I’m in HK, I have a really good opportunity to do further research into things 😉

    The markets have rallied a bit since Brexit, but I see absolutely nothing wrong in getting a little defensive and hoarding more cash. I’m trying to do the save as well, but since I’m no longer working, that’s a pretty tough thing for me to accomplish.

    Cheers!

    • Hi Jay,
      Great to hear from you. Hope you are settling down well in HK — looking forward to hear some stories and your take on things from that part of the world.

      I have learned a lot about the clean energy and Lithium after talking to you over the past few months — and I am bullish on that sector too. Will be interesting to see how things progress. Looks like the risk is back on for now after the Brexit vote…but things havent changed much overall. The central bankers have no other tools left. Lower interest rates. More QE. Fix debt issues with more debt. Thats all they got. I heard a great quote when I was listening to a podcast…”Keynes would be a great economist, if there was no such thing as a balance sheet”. lol

      Stay in touch buddy
      R2R

      • R2R,

        Oh definitely, nothing has changed at all… Except the price of silver keeps on soaring… Are the markets trying to tell us something? It really looks like big money is starting to pour in, and silver is an extremely tiny market.

        If only the TSX was open today! SLW and PAAS have been performing very well, congrats on those entry points.

        Also agree that there are many better gold options to IAG, but that’s a pretty big producer and the rising prices are helping offset their higher AISC a lot.

        • It is very interesting that precious metals are actually performing so well considering the US$ is in its bull market. Just imagine what the metal prices will be if and when the tide turns against the US$!! I dont expect that to happen overnight…we might see another couple of years before the US$ starts weakening, but I am buying now to load up on the sector.

          SLW and PAAS have done fantastically….I intend to add more if theres a pull back and/or some consolidation. I am still on the hunt for a better company to replace my IAG position…like you mentioned I looked at B2Gold recently. I also had a look at Detour and NewGold…between these companies, I like the prospect of B2Gold. Wondering if there are better plays out there. Let me know if you have any suggestions.

          cheers
          R2R

          • I like all 3 companies, very solid gold producers. I would agree and say that B2Gold is my favorite, particularly b/c they are a low cost producer, and have 2 key new projects coming down the pipeline that should help them get to close to ~1 million/oz per annum. Fekola, although maybe not quite world class, is one of the more exciting new gold projects in development.

            Detour and New Gold give investors access to the safest and best jurisdictions (North America, primarily Canada focus), but valuations are a little more lofty b/c of that. If Detour was cheaper, it would be one of my top picks. New Gold will do very well if gold keeps rising as their Rainy River project will add many ounces, but it needs a higher gold price to really do well.

            Happy Hunting!

          • Thanks for the input, Jay. Always appreciate it. I did read somewhere that the Rainy River project was a bit more expensive and gold needs to go higher to make it a good deal for New Gold. By comparison Fekola in B2Gold was a much better proposition. Not sure if its really apples and apples comparing these two projects though. I still need to do my DD.

            Good to know that Detour would be your top picks if valuation was cheaper…will take another closer look at it.
            R2R

          • Yes, Rainy River has a large CAPEX. I got this from the FS:

            Base case economics – at $1,300 per ounce gold, $22.00 per ounce silver and a 0.95 US$/C$ foreign exchange rate, Rainy River has a pre-tax 5% net present value (“NPV”) of $438 million, an internal rate of return (“IRR”) of 13.1% and a payback period of 5.4 years

            Development capital costs of $885 million inclusive of a $70 million contingency

            In comparison to Fekola FS:

            Estimated pre-production capital cost of $395 million plus $67 million for fleet and generator costs which are expected to be lease financed. This does not include approximately $30 million of early work on schedule to be completed by the end of June 2015

            Cumulative LOM net cash flow pre-tax of $1.66 billion at an assumed gold price of $1,300 per ounce
            Net present value (“NPV”) pre-tax of $1.01 billion at a 5% discount rate generating a pre-tax internal rate of return (“IRR”) of 35%

            Probably a good idea to compile a spreadsheet to compare projects side-to-side (annual production, LOM, AISC, cash costs, CAPEX, IRR, NPV, etc.etc.), as often it is like apples vs. oranges. For instance, the Fekola numbers are all shown as pre-tax, not sure why they don’t present after-tax numbers… But you can see the IRR will look much better since CAPEX is significantly less than Rainy River.

            Also, a lot of people think Pretium will be the next Detour… At a market cap of $2 billion and “nuggety” possibly bimodal (unpredictable) gold distribution, though, I decided to close out my position in PVG… It’s higher risk but the upside could be Detour like if they meet/exceed expectations and the deposit is as good (or better) than they think it is.

          • hmm interesting. Thanks for the overview, Jay. Thats a good idea..I should start doing that in a separate spreadsheet.

            Pretium also seems interesting is held in high regard with a lot of investors — also helps that Rick Rule is a fan 🙂

            R2R

      • DH,

        I’m not a fan of ALB since only 15% of revenue is derived from lithium. Yes, they are a big 3 producer and will do very well if lithum/clean energy take off, but I like to focus on pure lithium players as opposed to the diversified companies.

        Don’t like to cross promote, but this article might be useful for those considering potential lithium plays:

        http://www.fifighter.com/lithium/2016/05/the-global-x-lithium-etf-lit-why-i-dont-like-it/

        Take care!

        • No worries about the cross promote, Jay.

          DH, find and follow Joe Lowry (@globallithium) and his Twitter and read his take on things on his LinkedIn blog. He is the go-to guy when it comes to the lithium market. His take is that that Big 3 have a shrinking market share and juniors will make >50% of Li market in a few years.

          R2R

          • Thanks Sabeel! Glad you didn’t take it the wrong way 😉

            I think ABL is the de factor lithium stock since it’s one of the very few that is NYSE listed… I get asked about that name the most often. Great tips above as well, there’s a lot of conflicting info out there, so it’s always good to follow multiple sources and Joe is definitely one of the go-to names for the latest lithium news.

            For instance, it’ll take a lot of reading and research to figure out the whole brine vs. hard rock (spodumene) argument and all the pros/cons… That took me a good while before I came to my own conclusions…

            Cheers!

          • You said it, Jay. Thats the problem when you are jumping into a new field – you have to separate the novices who are just stating their opinion and promising the world from a small micro cap and talking a company up vs. someone reliable. I am learning each day and reading up everything Joe Lowry puts out. Some great observations and not many like him.

            R2R

  2. Hi – I’ve only found your blog in the past week and have enjoyed reading several of your posts about you thoughts on the current market and getting into precious metals. I do not know anything about this space and have only just begun dividend investing as well, so I look forward to following you and also catching up on some of your olders posts.

    Cheers

    Papa

    • Welcome to the blog, Pap. I just checked out your site and looks like a very interesting story…looking forward to reading more.
      I have tried my hand at precious metals before but there was no method to my investment and I was simply following my impulses. Now, I am learning a lot more and understanding the space and how the sector/industry works before I put money to work. As with any investing model, there are risks and I am taking some measured risks that I am ok with based on my risk-reward appetite. I have received some more messages from other readers on this subject and I am planning on writing and sharing a few of my viewpoints on this topic soon. Stay tuned!

      Good to hear that you have found your groove with dividend investing. It has worked for me well in the past, but the fever pitched BUY-mania and the reach for yield makes me nervous. I have decided to take some money off the table until this market cools off a bit.

      Best
      R2R

  3. R2R,

    I wish you luck here and hope you–and all of us–are making the right moves. When it comes to your non-cash holdings, I would be careful of portfolio concentration. Being only in precious metals can definitely come back to bite you if those commodities go south. Ask anyone who put their life savings in nothing but oil stocks what they think about not just being all in on not just one sector, but a cyclical commodity one at that.

    I know from the chart that you aren’t ONLY owning mining companies, but you indicated that, after your sales, that’s all you’re looking to buy. I don’t want to see you with a portfolio that is more than 50% mining companies and the underlying commodities suddenly bottom out.

    Good luck and best to ya!

    Sincerely,
    ARB–Angry Retail Banker

    • Hi ARB,
      Thanks for the wishes. I do not intend to stick to just one sector. I still believe in diversification to make sure that I do not take unnecessary gamble with my family’s future. I summarized by short term strategy in the ‘Recent Sell – Big Reset Edition’ edition last week. I am moving 1/3 of my portfolio to cash and the other 2/3 will stay invested. I intend to have 1/3 in hard assets (precious metals + real estate/REITs) and the last 1/3 in other DGI stocks spread across various sectors of the economy.

      The precious metals are just starting out their bull market and hence why I keep harking about why I am bullish on this sector. We got a little sneak peak last week when Brexit vote went the other way as the market was anticipating. Gold and silver shot up as the panic ensued. We can expect more of this as this market unravels — the Fed, the companies, the consumers are all overlevereraged and when we start seeing problems, gold/silver will do well.

      Anyway, back to the point…as it stands, I only have approx 15% of our portfolio in hard assets (about 9% in REITs and 6% in precious metals)…so, I am not putting all eggs in one basket. I intend to buy more to bring my gold/silver/REIT exposure to my target range. All this depends on whether I get good entry points — if we see a market correction sooner rather than later, I may start putting some of my cash to work in other places. Staying in cash allows me the liquidity to move fast — and considering that inflation is low, I only have to deal with lost opportunity cost and not worry too bad about losing my money’s purchasing power while I wait. If inflation does show up fast — the hard assets will continue outperforming in my portfolio.

      R2R

  4. My personal outlook for July is that the markets will move higher. Or lower. Or sideways. But one of those 3 will happen. I’m very bullish on clean energy for the long term and need to start researching what the best plays would be in that space because it’s a very broad investment category. Love the field for the next 30 years but trying to pick the winners is going to be difficult. I would love to see another market pullback to bring some of the higher growth companies in that space and some other specific companies to better valuations to load up on them. All the best in July. We’ll see what the dog days of summer bring.

    • Haha thats the reality, isnt it? No one really knows. I can plan to do this or that, but I have to wait and be patient as to what the market will give us. I just happen to sit more on the sidelines with some dry powder than others and ready to move when the time is right.

      Best
      R2R

      • Yeah I don’t blame you if the reason is that you aren’t finding much value right now. Which I have to say there’s not a whole lot that is intriguing me right now. Starbucks looks kind of interesting since the company continues to grow but the share price hasn’t really done much of anything this year. But there’s not much that I would just really want to buy right now. I can’t believe that Realty Income is knocking on $70 with less than a 3.5% yield. That’s crazy to me and it’s getting close to where it might be worth it to sell. I hate to get rid of O from my portfolio, but sheesh it looks like several years of share price consolidation or a big drop is necessary to bring the value in line with the company. Right now you’re banking on big acquisitions from management to try and bring the value up but real estate deals that would move the needle and offer a good return are likely hard to find. And that doesn’t factor in that O would need to dilute shareholders to fund any acquisitions. Although that might not be a bad idea considering the high valuation.

        • I hear you on both those accounts too. SBUX looks like a great long term story. The growth will continue but for now, the stock price has stagnated, as the market has rotated out of momo stocks to focus on value stocks.
          O is looking ridiculous, isnt it? Most of the REITs are on a tear recently, which I wonder is because of the upcoming category creation of the REIT sector in GICS classiciation — probably Big Money loading up before the indexes start buying after the creation. I am tempted too…the capital gains I am seeing are already adding up to 15 years worth of dividends that I can get from holding the stock. When do I say that its time to just take my cash and lock in the gains? Selling is a much tougher decision than buying.

          R2R

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