Wednesday, December 21, 2016

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.

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:

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.

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