Outlook for November 2016

We are well into the last quarter of the year and corporate earnings season is demonstrating some telling signs of the overall state of the economy. Some sectors are chugging along just as usual, but things do not look good for some sectors such as Cons Disc or Industrial. The adjusted EPS numbers continue to temper investors’ emotions and stopping them from dumping the stocks and anemic growth. Meanwhile, M&A deals have been roaring as the companies flush with cheap access to cash continue destroying shareholder value. M&A deals always increase late in the cycle as corporate boards flush with cash try to bump their falling revenues and earnings with desperate need to prop up stock prices. These moves are as predictable as they come.

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 central bank world, devoid of any reason and completely disconnected from reality, everything appears normal. Current expectations remain that the Fed will raise the rates in December (based on bond market probability matrix). However, it was very interesting to note that Yellen used the words “high-pressure economy”, which is an indication that the rise in interest rates may not be as rapid as previously perceived and/or showing some doubt on even raising rates. Any increase in interest rates will bring immense turmoil into the markets as it has a cascading effect on bond markets, stock markets, currency markets and the commodity markets. All eyes will be focused on the Fed.

Other central bankers seem to be heading the other way as they are more in tune with the problems in their respective economies. The Bank of Canada, for the first time in a while gave some clear indication that the monetary policy could see further easing – potentially a rate cut from the current 0.5% in their October Policy Report.

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 turmoil.

Outlook for November 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. It is for this reason that gold and silver, typical safe havens, continue to be my focus. My gold and silver equity exposure is currently ~20%-ish which is close to my target range, so unless I see any screaming buys, I wont be swinging there either. Meanwhile, I continue to wait for better opportunities elsewhere in the market.

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Portfolio Considerations

I decided to liquidated 1/3 of my portfolio and moved to cash in the summer. 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 space that I am bullish on is: hard assets. Over the course of last few months, I have initiated new positions in Franco Nevada (FNV.TO), Silver Wheaton (SLW.TO), Pan American Silver (PAA.TO), B2Gold Corp (BTO.TO) and Newmarket Gold (NMI.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:

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Dividend Increases

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

  • Inter Pipeline Ltd (IPL.TO) – last increase was 6.12% in Nov 2015
  • 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.

10 thoughts on “Outlook for November 2016

  1. JC says:

    The thing that’s really surprised me is that the earnings reports thus far haven’t been anything special. In general it’s blah revenue and slight EPS beats. Of course those EPS beats are off lowered estimates. What I don’t really understand is how the Q3 GDP growth rate came in pretty strong, yet we’re not really seeing it coming through via the earnings releases. Something’s going on there and I can’t figure out what exactly it is.

    Like you I’m trying to build up some more cash, but keep it working some via selling puts that give pretty deep discounts so they aren’t likely to be executed. One thing I’m considering with REITs and the more interest rate sensitive investments is to do some buy/writes. Realty Income down in the $50’s is better but I still think it’s overvalued here. Since I expect the share price to likely drift downward if rates do rise, even though a 0.25% bump doesn’t make any material difference to them, selling ITM calls seems like a decent proposition. The healthcare sector is looking better too after the pullback over the last couple weeks, but I think it’s taken many of the companies to just slightly above the mid point of a fair value range.

    November should be an interesting month with the election just a week away now.

    • Haha the official numbers are something to gawk at, arent they? A few things to note there. First, most people who arent drinking the mainstream media koolaid do not buy those official numbers. Those numbers are manipulated, especially with the elections right around the corner. Its a little trick that theyve been playing — highlight a great growth number, everyones happy and cheery, then revise it down after a month or two. The Q3 GDP has been highlighted as a 2.9% growth, but thats QoQ, and we all know what the YoY numbers (which are the ones that matter) are. The fact is that, growth is slowing. But the headlines will paint a very different picture.

      I havent really been paying attention to O until you mentioned it…wow, its down in 50s? Im glad I sold out in the summer when it was trading at insane valuations. I still wouldnt pay $50s for it, just like you. It has to fall way more than where it is, before I would even consider it as an investment option. My understanding of options writing is very basic. Doesnt writing puts leave you exposed to a lot of pain in case of a market crash? IMHO, writing covered calls (buy/writes) is probably a better strategy here.

      Thanks for sharing your thoughts

      cheers
      R2R

      • JC says:

        Puts do expose you to downside risk in the event of a serious market event, but calls limit your upside in the event of a large move higher. So it’s a risk either way of paying higher than you could have or getting less profit than you could have. The way I’m playing it though is usually 8-10% downside protection and at least 6% yield via the option premium. Take DLR for example I sold a put on the shares in early October that expires on Nov 18. The strike price is $80 and at the time the share price was around $90-92. It’s still at that level now. So I was getting about 8% downside protection via the strike price plus the extra downside protection of the option premium.

        Obviously if there’s a serious market crash then well you miss out. The problem with betting 100% on a market crash is that yes one will come…eventually…but no one knows when. I don’t want to sit on my cash until that comes because it could be a long time or the stock market could just go nowhere for a couple years while EPS grow to reduce the valuation. We don’t necessarily have to have a market crash to get the valuations in check. Although I’m still looking for opportunities to trim or close a few positions to build cash because there very well could be a large selloff.

        Plus you can always buy back the put options at a loss if you think the market will continue to head even lower. It would suck to do that but if the share prices do keep going lower you can make up for the loss on the option via even lower purchase prices.

        • Thanks for the quick breakdown. These days, I would be very nervous about writing puts as you know what my position is on the overall market. Chances of a melt ‘up’ are lower than a meltdown imo. But thats just me. I just cant justify myself to be fully invested based on the current risk-reward scenario.

          Best wishes
          R2R

    • Hi Alex,
      Last month provided some great buying opportunities in gold/silver stocks…looks like the next leg up is starting as the leveraged plays to the metal, i.e., the miners are jumping for the last couple of days. Ride the bull market…theres plenty more to come from the gold/silver markets 🙂

      R2R

    • Thats a good way to put it…the Fed is damned if they did and damned if they didnt. They have painted themselves into a corner and trying to thread the needle — which I have no faith to getting executed without disrupting markets.

      R2R

  2. I think your strategy of hoarding cash and waiting for fat pitches is awesome. I’m not seeing a ton to swing at these days either. Thanks for the thorough update and outlook on the state of the market, monetary policy and the economy,

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