Outlook for October 2016

The third quarter for 2016 finally comes to an end and it will be interesting to note how companies have performed. Most companies have had falling earnings for a few quarters now, but the stock buybacks have kept the stock prices buoyant, portraying a better than actual EPS number. However, the buybacks appear to have peaked and slowed down a bit according to research from FactSet. This, and when you consider that the earnings numbers put forward by companies do not even conform to standard accounting practices just stinks of an massive con in the equity markets. Income Surfer has already brought our attention to this fact last quarter, so I will point you to the post “This Quarter Has Been Adjusted” instead of repeating it all here. Whether this will translate to the fireworks we’ve been expecting now or will we have to wait a few more months? I have no idea…but I remain hopeful that the market will provide some great opportunities in the coming weeks/months.

On the central banks front, its business as usual. Lots of circular reasoning and lost credibility from the Broken Fed as they fail to raise rates again while passing hawkish and dovish comments every other day. In Yellen-Wonderland things appear to be awesome. Current expectations remain that the Fed will raise the rates in December (based on bond market probability matrix). Other central bankers are going the other way, most of them cutting interest rates as the economies are anemic. All eyes will be on the central banks to get a glimpse of future expectation.

I continue to watch from the sidelines and hoard cash waiting for the fat pitches. I am the least bit interested in staying fully invested here and make a measly 1% or 2%. I continue liquidating more of my riskier assets and purchase hard assets instead – which should provide some shelter and see benefit during the coming downturn.

Outlook for October 2016

As things stand, there are a lot of headwinds facing the economy. Potential recession/depression troubles still exist. German and Italian banks are on the verge of collapse, barring a massive bailout from their governments. However, the stock market continues flying high thanks to a handful of stocks and investors continue ignoring all warnings. If there is any doubt, simply compare the market caps of the largest 5 tech giants: Apple, Alphabet, Amazon, Facebook and Microsoft. Together they comprise $2.2T in market cap! These five companies make 10% of the whole US stock market!! That is an astounding number and a very high percentage. History has shown that these kind of dependencies on a handful of stocks to support the whole market have never ended well. 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.

outlook-oct2016

Portfolio Considerations

I recently decided to liquidated 1/3 of my portfolio and moved to cash. However, I have continued selling after that as I want to shed the weaker names in my portfolio. 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 few months, I have initiated new positions in Silver Wheaton (SLW.TO), Pan American Silver (PAA.TO) and B2Gold Corp (BTO.TO). Those have grown into sizeable positions now and I am comfortable with my overall portfolio.

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

divers-oct2016

Dividend Increases

October is expected to be another slow month when it comes to dividend increase announcements. I am expecting only two companies to announce an increase our portfolio.

  • Omega Healthcare Investors Inc (OHI) – last increase was 3.45% in Jul 2016
  • Starbucks Corp (SBUX) – last increase was 25% in Oct 2015

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.

13 thoughts on “Outlook for October 2016

  1. That’s a heavy cash split! Are you expecting a big pullback soon? I’m also a bit more cash than I generally am(near my 10% max) but I’m not so certain a big pullback is going to happen in the near term even though I totally agree that the market is frothy and a bit overpriced.

    • I dont know when the market will pullback and by how much. But I do expect a lot of issues that need to be resolved in the financial world before I can risk any more of my capital in the markets. Whether we get it sooner or later is anyones guess.

      Best
      R2R

  2. Retired Canadian says:

    R2R
    I have read your missives for quite some time now, and I must admit I find them very educational. Unfortunately for me, I was way too early on your gold and silver premise, and I paid dearly for being too soon. As Rick Rule says, “if your four years too early, your not early, your wrong”. However, like yourself I have raised a lot of cash, but not quite 40%, because I have moved extensively to the safety of physical metals and related equities. The debate over gold & silver continues to rage, and I read both sides of the debate with interest, but I am firmly committed to the premise that fiat currencies are headed towards their intrinsic value, zero. Thanks for the great missives…

    • Rick Rule has made some mistakes and lots and lots of successes. That is the nature of investing and risking your capital. I have been watching a lot of his videos and learning about his investment mentality and thinking. Ive learned a lot from him 🙂

      PMs, esp physical PMs are a good safe haven. Most people dont seem to understand that the whole premise of modern monetary system is built around inflation. When eroding the purchasing power of your fiat currency is so central to the system, why would you not want to hold (hard) assets that are good value stores? You are definitely protected whether we are in an inflationary or deflationary environment.

      Best wishes and thank for stopping by to comment
      R2R

  3. Thanks for the update on your plan this year. I think your cautious and careful outlook as demonstrated by your emphasis on trimming the weaker holdings, is warranted.

    Your point about the large concentration of funds in AAPL, GOOGL, AMZN, FB etc is well-taken. I agree, and it speaks the momentum-oriented nature of popular market-cap weighted index ETFs like SPY.

    • The stock market is quite wonky imo. This kind of weightage at the top is not really healthy for market in any condition. It’ll be interesting to see how things will unravel of the coming months.

      Best
      R2R

  4. That’s a heavy cash position, admire the strength of your conviction. If you’re right, you’ll be very very ahead 🙂

    What are your thoughts about the international markets, overpriced as well?

    • Hi SLM,
      Thanks for stopping by and commenting. Funny you should mention international markets — thats something I am currently looking at. Most of the investors seem to be convinced that the US is the best equity market to invest in and I am looking outside as a contrarian trade. Some emerging markets are looking very attractive, so I am trying to study and figure out where the opportunities lie. On the surface, Russia and Brazil very attractive, but I need to do more research before I put any money into those funds.

      cheers
      R2R

  5. Congrats on your moves R2R, I applaud you for your moves. You are extremely prepared to jump on some great opportunities. If I take all of us who are still invested out of the equation, I hope you get some good bargains soon 🙂

    Tristan

  6. Hey – I noticed that you’re a unitholder of Brookfield Infrastructure Partners LP. Are you subject to any funny tax treatment because of their distributions? I’m north of the border in Canada and BIP’s distributions are not subject to our dividend tax credit, to my knowledge.

    • Hi FC,
      I am in Canada as well and hold the TSX listed stock (BIP.UN.TO). I hold them in a TFSA and have no tax implications whatsoever. Outside of RRSP/TFSA, I am not sure if there are tax credit issues — I had a discussion with Mark from My Own Advisor a long time ago who had some concerns on that front. You might want to check with him.

      Best
      R2R

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