WHYTECLIFF FINANCIAL CORP.
By Bradley Parkes
Markets – Trades
Investment ideas for Q2/16
Note: Distribution dates have been changed to the following:
First week of January, April, July and October.
Previous editions can be found at http://www.whytecliffcorp.com/#!whytecliff-financial-corp/c1iy4
For daily commentary please see www.macrochart.blogspot.ca
Stay tuned for the launch of www.economisms.com where the daily blog posts will be moved (and maintained at www.macrochart.blogspot.ca), a new Weekly Report (out Sunday night), a Monthly review and our Quarterly Investment Ideas reports will be available. Eventually more to come!
In addition thematic reports will be released each quarter
Q2/16 - What Oil Bottoms Look Like
Q3/16 – India – A New China?
Q4/16 – Worried About Stranded Assets – An Investment Strategy Based on Reserve Life Index
Quarter 1/2016 Investment Ideas
GOLD (HGD.T in Canada and GLL.US in the US)
Oil (HOU.to in Canada and USO.N in the US)
Consumer Staples (XLP.N)
Long DOW - With AAPL a new component in the DOW and with capital flows to the US from (Africa, Asia, Europe...) the S&P500 and DJIA are likely going to peak at a level considered obscene...DJIA = 22,000. This trade is the break down of European socialism and will violate cheap/expensive market metrics as money flees to where it seems “safe”. It may not seem rational. Capital tends to flee the battlefield.
Returns Since Inception
The above chart shows the return on $1 invested since inception vs. various benchmarks in both CAD and USD. The portfolio returns represent investing and reallocation of assets to new ideas only at the beginning of the quarter. This is the buy and hold return.
“Your best work involves timing. If someone wrote the best hip hop song of all time in the Middle Ages, he had bad timing.”
Usually I would change the quote, but my timing was wrong and that was inexcusable. To rectify this, the weekly report will discuss exit points for when trades go against us. Thankfully we have a stop loss system in place to let losses only run to a maximum of 15%.
The way I want to do this is we will act as if we closed out each position at the end of the quarter. However each position has a maximum 15% loss and that position should be closed if a position goes 15% against us. My discount broker charges me $9.99/trade so transaction costs should not alter the returns too much. The reason we close out each quarter is that I never want to be able to claim that “I sold that six weeks ago before it declined”. Each one of my ideas should be good for at least a quarter and likely longer. Should the idea still have merit we will re-enter the idea at the beginning of the next quarter.
The portfolio returned -12.24% CAD in Q1, following a 4.9% return for Q4/2015. The returns in USD were -4.69% following 4.62% US in Q4/15. For three quarters (plus one month) since the portfolio was initiated the return has been 0.65% CAD and 0.55% US, vs S&P500 in CAD which had a return of 1.09% ,TSX in CAD -11.2% and the S&P500 in USD returning -2.24%. To add a level of risk management a weekly update will be initiated to give us price levels to close out should the market go against us. This is a quarterly hold idea generator and in volatile and changing markets that strategy can be detrimental. This portfolio is a real return portfolio and so allocating assets to maximize returns requires catching tailwinds. A strong tailwind the previous quarters was a weak Canadian Dollar. As warned this tail wind became a headwind, with the CAD rising 6.9% over the quarter. However, this headwind should moderate. When adjusting the US benchmarks to Canadian Dollars the portfolio has now underperformed from inception.
We closed the EUR short the previous month was prudent as the USD sold off this quarter raising the CAD value and eliminating some of the returns on the portfolio. However, I think the CAD is more or less range bound for the rest of the year, while I think the EUR will be a tempting short for end of Q2 or Q3/2016.
Early this year we were long Consumer Discretionary, but last quarter rotated into the Consumer Staples to become a little more defensive, this trade worked, losing only due to currency gains in Canada and returning 6.6% in the US portfolio. I think it is time to return to the Consumer close the Consumer Staples trade but it is not quite ready for the Consumer Discretionary trade, potentially at the end of the year. The economy is not strong, but it is not recessionary, yet.
We will continue to stay long the DJIA (in USD) because capital should continue to flow to America. Even though Central Banks, including America, hint of tighter policy, even with subsequent potential rate hikes, policy is still accommodative. Global Central Bank’s will likely fall behind the curve largely due to their inability to take short term pain, what I call market socialism. This will lead to higher inflation and larger debts and a FAT phase for stocks.
Gold and Gold stocks have not bottomed. They will probably on the next plunge. Oil has bottomed and has started a new bull market.
New Ideas (in Orange) and Re-entered (in purple) trades:
1). Short Gold
Gold has had a significant rise early in the year, however, the seasonal period of strength is coming to an end and I suspect there is one more big shake out in gold before the new bull begins.
Gold stocks have an eerily similar chart to gold and are leading the metal in percentage return, I do not think they will decline as much as gold does or below the January base, but a rest is needed.
2). Long WTI Oil
Oil has bottomed. The double bottom from January to February, with the decline this month, an inverse head and shoulders pattern (from March 2/16|) that argues for the low $40’s by early April and potentially more upside. I believe that oil will trade to the higher $40-$50’s by end of June 2016, as indicated by the March 16/16 chart.
The above chart has the 20 largest single day rallies in the history of WTIC futures pricing plotted on the price. As you can see more often than not, large rallies are found at bottoms.
2). Long DJIA
The Dow is testing 70 year support, according to this great chart by Kimble Charting Solutions in their free update.
In previous editions I have shown the below charts. The green lines have held as major support, except in the September 2015 panic selling and the early 2016 panic selling.
Triple tops tend to be broken through to the upside. It concerns me that there are lower highs and lower lows, but February 2016 could be a swing low/fake breakdown moving everyone to the sidelines. I still believe that international capital is fleeing Europe, Britain, Japan, Africa and the Mid East to America and this will drive stocks higher, especially the DOW because it so well known. I did not invent this idea but it makes so much sense.
4). Long China
China is the most hated market in the world. China has problems. China has debt. Large nations go through many issues as they grow. My big thesis on this is that very few people own Chinese stocks. I believe that changes in the future.
Average hourly earnings are finally rising at levels last seen during the collapse from 2007-2009 housing and finance bubble. Rising wages would help the Fed.
But weakness is seen in the Manufacturers New Orders.
One indicator of business conditions in the US is the sale of light trucks. Light Truck sales tend to be in a major decline prior to recessions (except the Tech recession).
Echoing the signal from light trucks, that weakness has not shown up in Real Private Construction, although it does appear to be leveling off.
Both measures of consumer prices are firming. Will inflation be the surprise of the year?
Review of Outlooks
1) America is the likely to remain the destination for capital. This should push markets higher, well past fair valuations as this is capital fleeing the battlefield.
1) So far. January TIC data showed a net $118 billion into the US.
2) Europe is recovering, but will flare up. I believe by the second half of the year the periphery will begin to outperform the core nations.
2) Too early for anything to be determined.
3) Asian markets are maturing. China’s inclusion to the SDR and the MSCI, in combination with the devaluation of the Renminbi will drive money into Chinese equities. The rest of the region will likely remain lackluster, other than some smaller markets.
3) The predictions continue to be dire but nothing happens. I think this is a second half story. Too early to tell.
4) Inflation may be the surprise of 2015. I think we are at an inflection point. Wages are rising in the US, while Europe is stabilizing. Core inflation is at the FEDs 2%, and any increase in the price of oil will pull headline inflation higher. War is heating up and war and inflation are connected.
4) Still on its way
5) Oil has been testing 2008 and 2004 lows. I believe oil drifts higher, but the largest price effect will be the renewal of the terror premium.
5) So far yes.
6) Gold should bottom below $1000 sometime in mid-2016 and finish somewhere north of $1200. A new gold bull is on the horizon.
6) No, so far.
7). Copper will make a new low in early 2016 .This cycle is bottoming. The green revolution will need a lot of copper to wire all those solar installations.
7) Possible, but certain the low is in yet.
Sign up for the newsletter and receive the following new reports:
How Oil Markets Bottom
The Creeping inflation Trade
Investors should carefully consider the investment objectives, risks, charges and expenses of any investment. The above does not constitute investment advice or recommendations, just crazy ideas I have when I cannot sleep. There is no guarantee that any investment (or this investment) will achieve its objectives, goals, generate positive returns, or avoid losses. The information provided should probably be disregarded and potentially treated as a contrarian advice, with the expectations that I am 100% wrong on everything. Please consult someone with a higher level of intelligence than the author with respect to investing money.