Outlook for December 2016

Well, here we are. Plenty to look forward to as we ring in the end of a rollercoaster year. Things still seem to be chugging along nicely as investors are happy about the state of the world economy (even though they shouldnt be). The Fed is almost guaranteed at this point to raise the interest rates by another 25 basis points. In anticipation, we have seen major holders such as sovereigns (such as China, Saudis etc) dumping treasury bills in the market driving up the yield and changing the yield curve. With the increase in yield, we noted a milestone achieved during the month of November — the 10 yr US treasury yield crossed above the S&P 500 yield. Over the past decade, the narrative has been to pay a higher premium and go into riskier assets (i.e., stocks) to generate income…now that the same kind of income can be generated in a less risky asset (i.e., bonds), investors have to question whether they want to own stocks to generate same level of income. It will be interesting to note how the market proceeds, and we are already seeing a slow slide in share prices in some of the stock sectors such as consumer staples, healthcare, REITs, telecommunications etc. As of this writing, $3T (yes, trillion) have already been wiped out from the bond markets due to rising yields — the other markets (stock mkts, currency mkts) will feel the effects of this storm.

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 has in the past given clear indication that the monetary policy could see further easing – potentially a rate cut from the current 0.5% in their October Policy Report.

Outlook for December 2016

As things stand, there are a lot of headwinds facing the economy. Potential recession/depression troubles still exist. EU banks are on the verge of collapse, barring a massive bailout from their governments. The Chinese speculators are blowing a bubble into commodity markets. However, the rest of 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.

outlook-dec2016

Portfolio Considerations

After some big moves over the past few months, I am sitting comfortably waiting for the fat pitches. Over the course of summer, I liquidated a big portion of my portfolio and took profits in stocks that were clearly overvalued. In addition, I simplified my focus on a smaller group of companies. As for hard assets, 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.  As it stands, our current portfolio diversification is as shown below:

image-22

Dividend Increases

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

  • Ventas Inc (VTR) – last increase was 10% in Sep 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 December 2016

  1. It’s a bifurcated market, isn’t it buddy. I’m glad you got out of some of those positions when you did. Many of those Reits, Consumer Staples, and Utilities are a slow motion trainwreck at this time. So are US bond, but we had both avoided those. Now, not to get drawn into the suckers rally in energy….and wait for the fat pitches. They will come soon enough. My guess is that REITs and selective Staples like Pepsico will be the next sectors I target. So far this year it has been gold/silver and emerging market equities. Still looking to add to them both…..but not quite yet. Silly market. Haha. Hope you’re having a great week
    Bryan

    • Thanks for sharing your thoughts, Bryan. It is a crazy market indeed. Bond yields rising and stocks are brushing it off. PMs getting clobbered on strong dollar while base metals are rocketing higher. Complete madness!
      Im glad I got out of some of those positions in summer as well. The slow erosion in shareprice is interesting to watch in REITs and cons staples. Once they get into a nice range, I will be back onto that bandwagon 🙂

      regards
      R2R

  2. Sam the Man says:

    Your gold/silver, REITs, and utilities stocks are going down anticipation of an interest rate increase in December. Are you planning to average down ?

    Sam

  3. Nothing to worry about. Just opportunity waiting to happen. Unless you’re like me and you’re holding all your cash to buy a property, in which case there’s just nothing to see here either way.

    I hope you see prosperity regardless of where the stock, bond, and commodity markets go. I’ll continue to look for opportunities to snatch up great dividend companies on the cheap. The drop in consumer staples has led to nothing but opportunity. I just hope prices STAY low for the next couple years so we can all capitalize.

    Sincerely,
    ARB–Angry Retail Banker

    • Hey ARB,
      Thanks for stopping by and sharing. I hear on holding cash to buy property — I was there a couple of year ago. My wife and I were just discussing whether we should look into paying down mortgage faster, but for the time being we have decided to keep more cash aside and stay liquid in case some other opportunities come up. We might still put a few thousand dollars a year extra on top of our mortgage dues just to keep chipping away at it.

      Best
      R2R

  4. Thanks for sharing your market forecast for the month ahead! One other potential source of uncertainty is today’s referendum in Italy and election in Austria. They could present more chances for the establishment consensus to be disrupted by disenfranchised populist voters. Given the state of EU banks will this be the straw that breaks the camel’s back, or just another one on the pile?

    Cheers!
    Jay

    • You are welcome, Jay. Theres more uncertainty than the market is pricing in with the Italian ref (now that it is confirmed ‘No’). Capital is moving more towards the US as these financial issues will only rock the EU markets. EU banks are definitely close to the brink – I think I just saw that Unicredit was halted earlier today. Interesting times…

      R2R

  5. This is an interesting market as most things look overvalued by most analysis but they keep going up. Hell, I felt that way months ago and the stock market is up a ton since then. I think there’s going to be some values created once the fed starts raising rates. Dividend payers whose P/Es grew too much in the search for yield might finally start to look appealing and some are already getting there soon.

    • Yup…this market is bonkers. No other way to put it. The higher yielders should see some air out let out of hte bubble as the fed raises rates slowly. We are already seeing some cons staples and telecoms take a breather and starting to pull back. The repricing is slowly making them more interesting again…as the valuations get more attractive.

      R2R

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