Outlook for August 2016

The summer doldrums are in effect, but that doesnt mean that there isnt much going on in the finance and investing world. There are a number of macro events taking place across the world – from central banks to IMF to other geopolitical issues in the middle east, Europe, Asia etc. All these issues could spell trouble for the world and I remain in a “risk-off” mode, no matter what the S&P thinks.

The stock market seems to be trading as if nothing is wrong with the world, but look under the surface and there is nothing optimistic as it continues to trade at all time highs. Interest raise expectations have all but vanished at the Fed, helicopter money is openly discussed as if it’s a normal course of action and the world will be able to “grow” again. I remain extremely skeptical and have been moving my portfolio to protect against the coming disaster.

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 August 2016

As things stand, there are a lot of headwinds facing the economy. Potential recession/depression troubles still exist. The stock market continues flying high and investors continue ignoring all warnings coming from the bond market, commodities market, transportation market, manufacturing market indices etc. Even an earnings recession and discarding GAAP measure for accounting principles by most blue chip companies cannot seem to bring this market down. I however remain skeptical and wait for the storm. It is for this reason that gold and silver, typical safe havens, continue to be my focus. 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. Since then, I have picked up shares of B2Gold Corp (BTO.TO) which is a much better run company and trades a good price even after the spectacular run up this year.

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. Jim Rickards had an interesting comment about the movement stating: “Gold stopped being a commodity and became money”, which I thought was very telling.

 

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.

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

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Dividend Increases

August 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.

  • Bank of Nova Scotia (BNS.TO) – last increase was 2.86% in Mar 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.

20 thoughts on “Outlook for August 2016

  1. One thing we can all be certain of is that this stock market will be crashing soon. I’ve bought high quality businesses (as has the rest of the DGI community, I hope) so I’m expecting more buying opportunities than dividend cuts. Hopefully I’m right there.

    I hope your current gold/silver portfolio works out for you. My next investment purchase is actually going to be silver bullion.

    Sincerely,
    ARB–Angry Retail Banker

    • Thats right, ARB. Sooner or later, we will get to a crash and/or recession. How will that take effect is anybody’s guess. It could come from any of the major events that are unfolding as we speak…best thing to do imo here is to hold cash and be ready to move when there is panic.

      R2R

  2. Hey R2R, I like your considered thoughts. It’s extremely difficult to know where we’re going to go from here. What is going to be the tipping point – for better or worse? It’s extremely hard to say.

    I can understand your big move to cash, I bet you feel much better having done that!

    Australia just reduced its interest rate again to 1.5% (I know it’s a long way off other countries, but ours started a lot higher a few years ago).

    Tristan

    • The straws are loading on the camel and it’ll be interesting to see which one will break the back. The EU banks look like a disaster and its hard to believe that investors, central bankers and politicians are eating up the drivel coming from there. Stocks arent any better either — lots of number massaging and discarding GAAP guidelines to make things look better.

      I noticed that AUS cut the rates — still high compared to the rest of the developed world, and Ive been looking for a decent way to invest in Australian bonds for a while now, but cant find anything good. My only option has been to buy US$-denominated bond funds (since I am limited to trading on the N.American markets) which means that I have to consider currency conversions.

      Best
      R2R

  3. I think the U.S. dollar/gold correlation is really throwing many people off. To see both continue to rise is an interesting phenomenon and I agree that once weakness in the USD will take hold the metals will really shine. There is a lot of weird stuff going on these days. Look how oil has gripped the market. Oil drops, market drops. Oil rises, market rises. This isn’t normal either. I’m still long ADM despite near term weakness and happy to see a BNS dividend raise should it come. I guess stick to the super quality names like JNJ and the like and you should be OK.

    • Thats right, DivHut. The correlations are throwing many people off. People much smarter than me cant seem to figure out where or how this market is working and that has played a role in my decision to move to cash. The oil market is also behaving weirdly with the rest of the stock market.

      ADM is a company that I would like to buy more…but I have to read up on the latest earnings release…not sure what happened there. I noted that the revenue missed by $1B but the stock barely moved. I have to do some research on the weekend to figure out if this was just a bad call from the analysts or something weirder going on.

      Thanks for stopping by and sharing your thoughts. Appreciate it.
      R2R

  4. Sabeel,

    Thanks for sharing your thoughts, I always appreciate and look forward to these updates. I’m completely with you when it comes to the stock market as well, most days I’m just left scratching my head trying to make sense of things.

    Being strong cash seems to be the prudent place to be right now… The fall is usually an interesting time, so I wouldn’t be surprised in the least bit if we see some fireworks from about now until November.

    Happy hunting!

    • Haha Im with you there, buddy. This market makes no sense to me either and I am happy to be sitting on cash. What am I missing by sitting this market out? 2-3% gains. Sounds fine by me, if I can protect 35-40% of my assets in the event of a cash.

      R2R

  5. I completely agree buddy. We raised a bunch of cash over the past few months also. The problem at the moment is there aren’t that many good investment opportunities. We hold our “long term holdings” and I’m doing a little swing trading in the deep value space, but this is the most frustrating market I’ve tried to invest in since 2001. Ah, what I wouldn’t give for a crash…..or one of our long term holdings falling by half……

    A guy can dream, right?! Happy value hunting!
    -Bryan

    • I hear you. Nothing excites me these days in this market except the gold/silver holdings. The bull market is just getting started and has a long way to go as it comes out of the doldrums over the last 3-4 years. Ive been looking at some deep value as well – but havent been able to find anything decent.

      Hopefully we will have a crash soon 🙂
      R2R

  6. Roadmap,

    I like ADM, TGT, TROW and JNJ. Canadian banks always look nice too. Excited to hear about what you learn from the mining industry – doesn’t hurt to learn, right? Very tired of seeing the market in the green and could use a 5-10% correction AND BE HAPPY about it. Bah! haha (Disgruntled investor) haha.

    -Lanny

    • Hi Lanny,
      Thanks for stopping by and sharing your thoughts. Those are some good companies to invest in. I follow ADM and JNJ but not the other two mentioned. Canadian banks look good too, but there are some issues on the horizon with the Canadian housing market in the bubble territory. More recently, the Canadian government put in some bail-in rules so that the taxpayers arent on the hook in case of a US-style crash from last decade.

      R2R

  7. As I mentioned last month, i like your strategy. There’s nothing wrong with capturing gains and parking the money for a while. Any money you miss out on by waiting will be offset by lower entrance prices in the future.

    I’m getting close to closing a handful of positions to hedge against a market correction.

    Thanks for sharing

  8. JC says:

    Your comment about the move in gold despite higher USD prices made me think of a potential issue that could crop up. If a global recession is in the works then the USD could move higher since it’ll be seen as a safe haven. I have no clue what that will do to gold since it’s already moving outside of its norm but it’s something to watch because it could be an issue. I don’t expect the USD to weaken much because of the “flight to safety” that is likely to occur driving up its price.

    One thing for sure is that it’s an interesting time to be investing full of unknowns. Of course that statement could be used for every single time period in the history of investing.

    • Hi JC,
      The movement in gold and US$ has caught a lot of them by surprise. The only sane argument that Ive seen on why thats happening is from Jim Rickards, who’s tweet I included in the post — which is that gold stopped being a commodity and has become “money”again as investors run to safety. I the Brexit vote was a nice reminder to everyone that belief in fiat currencies can wreck havoc on your savings, portfolios and retirement plans. Yes, the stock market itself if up a bit — but look at the value of GBP — that is a massive devaluation. Only investors who held gold and other precious precious metals in their portfolio were able to retain their fortunes through the rough times.

      I already have some decent exposure to gold and silver in my portfolio, but looking to buy some bullion as well instead of saving cash in the bank.

      Best
      R2R

    • Hi Rudy,
      I follow a couple of companies out of interest, but I dont trade on the Australian markets. All of my assets are in tax protected accounts which stop me from trading outside N.American markets — unless I pay a huge transaction fee (something like $175 per transaction). So, I am not purchasing anything on those markets…but Australian market is definitely an interesting one and there are some really good opportunities out there.

      What have you been looking at?
      R2R

  9. That’s a pretty big move into cash. I myself am holding more cash than I generally do(my portfolio strategy calls for a 10% max) as I think the market is overvalued by most metrics I look at but this low interest rate environment is really hard to pinpoint. I think stocks could still run a good deal here because there aren’t that many viable alternatives due to the very low interest rates.

    I’m almost positive a correction is coming…eventually but since I don’t think I can time the market, I’ll just continue to stay in stocks – maybe stick overweight in cash a bit and continue buying since my investment horizon is a ways out.

    I’m having a hard time finding values right now so I’d actually like to see a bit of a decrease so I can put some of my excess money to use.

    • Thanks for the comment, TITM.
      I considered a lot of different options about how much to go into cash and at the end decided that this is what I am comfortable with. Now I am sitting just a bit over 1/3 in cash and waiting for this crazy market to play out. The central banks can manipulate all they want and this circus can continue for another year or two — who knows. I just dont want to participate 100% in this market and have some reserves to move when this market finally falters.

      Like you, I am finding it very hard to get decent value out of this market. The only place I see anything positive is the gold/silver market and thats what I am concentrating my focus on these days.
      R2R

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