Everything I Got Right or Wrong in 2015
First, HAPPY NEW YEAR to all of you — words cannot describe how truly grateful we are to have you as our readers, and how much we cherish the opportunity to share our winning strategies, research and investment philosophies with you. Wishing you and yours a wonderfully profitable 2016 from my Hideaway in the Utah Mountains (picture attached).
2015 was an interesting year no doubt. We shared dozens of market warnings and buy signals for various markets. We got most right, and a few wrong. So here are the “rights” and “wrongs” of 2015:
What was a total miss:
- Australian Real Estate-WRONG We have been calling for the bottom to fall out of the Australian real estate market for about 3 years. And for 3 years, that market has held on by it’s fingernails in a stubborn defiance against the inevitable bear market, or as I tend to call it, “collapse.” Three years ago, I called for a BOTTOM in or around 2015 for Australian real estate, and it has yet to even enter “correction” territory. Renowned economist Harry Dent is in agreement with my analysis, and we both agree that it is just a matter of time before it happens. Australia’s currency has “collapsed” compared to the 1.00++ from a few years ago to recent lows below the .70 mark. The currency is facing headwinds for many reasons, including the loss of the commodity bull market that has propped up their economy during the woes of other world economies in recent years past. Now that the natural resourced based economy is losing capital flows from China speculation in addition to the woes of their natural resource based economy, I expect Australian real estate prices to fall substantially in an “imminent” move to the downside, however the timing and haste of the fall has eluded me. Nonetheless, if you have assets in Australian currency or assets, now is certainly a time to be divested. The risk to reward ratio for Australian assets right now is 10x in the opposite direction that Savant looks for….In other words, there is 10 times more risk than the potential upside.
What was “in the ball park”:
- Oil-RIGHT That’s right, we called the commodity collapse, including the oil market. However, we did not know the extent of the bottom pricing that currently exists. One thing I have learned about the energy markets, is that they simply get overdone both to the upside and to the downside… Oil really is a “boom and bust” commodity, and it certainly did BUST this time around. 2015 was a great year for us to showcase the oil collapse as a call we made years ago. In fact I remember not many years ago, doing business with energy equipment rental companies who were hounding to follow the oil patch…It was the “BOOM” time, and I knew that following every oil BOOM cycle, there is a BUST. We have done extensive work with clients in the oil patch of North Dakota is recent years, and now we are seeing the toll that $35 oil is taking on the region up there. Oil was a nice call to the downside, but, goodness, this has been a bit overdone, and things may get worse (lower) before they get higher.
- Gold-RIGHT Okay, by now you know I’m NOT a gold bug. In fact, I make fun of gold bugs all too often. Don’t get me wrong, there is a right time to own gold, and the wrong time to own gold. The last few years have been the WRONG time. Gold shot up to huge levels not seen before based on a fear and anxiety play from the money printing that world governments have done. The bottom line is, gold sits in a safe, it doesn’t pay a dividend, and it costs huge amounts of premiums to buy and massive commissions to sell. At the end of the day, gold would be good in the case a nuclear war against the U.S. or during social unrest to extreme degrees. Beyond that, the bullish case for metals has all but disappeared…Just as I predicted. Gold topped at about $1924 in the futures contracts several years ago, and now it’s trading at $1,060 and recently hit $1,045. I have been calling for gold to trade under $1,000 in 2015. It got close, but no cigar. Has it hit the bottom? See below under 2016 predictions.
What went according to plan:
- U.S. Real Estate-RIGHT Right again. We had many clients follow us into residential real estate in 2010 and 2011 and they have made huge fortunes doing so. In 2012 we called the “discount” off the table for homes in the U.S. and called the time to buy commercial real estate. We were right. Softening home prices (but not declining necessarily) is due to the big rise we had up to 2012. Long term housing will continue to do well, but the better buys are in commercial real estate right now. We were right, and we have made millions of dollars in the last couple/few years for ourselves and our clients at Savant Investment Partners. HOWEVER*** Time is running out! We feel that there is a year or two ahead of us that will be viable for acquisition…Then its time to sit back and ride the cycle and wait for the top. This, like anything, is subject to change pending events and circumstances that may change, but the bottom line is that if you don’t buy real estate soon, it may very well be too late in the cycle to get in on it.
- Agriculture-RIGHT Another correct call — Agriculture is in the toilet. I recall arguing with a well know agriculture publisher a few years ago about the future of ag. He was bullish, and I was bearish. Proudly, guess who won. I don’t owe this call all to my own credit — but with great thanks to a large client of ours who educated me on the agriculture markets. As soon as I understood it, it became clear as day to a cycle-based investor like myself, that farmland and agriculture commodity prices were simply in the “Euphoria” stage of the cycle. And so it has begun, the major, major, major bear market in agriculture markets. Based on time charts for the ag-cycle, we expect things to be tough in agriculture for at least another 3 to 4 years, and possibly as many as 5 or 6 years.
- U.S. STOCK MARKET- RIGHT In the beginning of 2015, I gave two thoughts about the stock market. The first one was that the stock market was likely to go higher, especially long term. The second was that things had gotten too heated up, and we “need” a correction to pull the froth off the market so that we could continue up at a more organized pace. Instead, we are finishing the year almost flat. We DID go higher, and when the opportunity arose for a correction, the market didn’t take it… The U.S. stock market has effectively passed up every opportunity to continue a correction into reasonable territory, making it’s current position somewhat susceptible to massive volatility as the big investors try to keep this bull market raging on. That is a dangerous position to be in. We called for excessive volatility, and we got it. We called for somewhat higher prices, but also for a much needed correction. (see below in 2016 forecast). As of right now, I am completely out of the equities markets. And I’m okay with that. If the markets rise without me, I’ll be fine with it. If they dive without me, I’ll be just as satisfied. For now, there are very few good opportunities to be a trader or investor in the stock market. We haven’t hit the peak of the long term cycle, but the shorter cycle certainly suggests the need for some sustained down-time.
- Interest Rates — RIGHT I said that in 2015, we would see the Fed raise rates. They did. I said that real estate rates would remain low…And they did. I also said that the long term interest rate cycle is going to be soft and subdued, and so far, I’m right. The “end-timers” who say interest rates are going to skyrocket have, at least in the interim, been proven wrong. With that said, Bond holders have been on the right side of the bet until this year. Next year, will be a different story.
- Canadian Economy- RIGHT Back in 2014, I talked in earnest about the coming debacle of the Canadian economy, and specifically their incredibly high priced housing. In 2015, Canada officially entered recession, and now housing is in the early stages of softening, which will prove to turn out to an all-out freefall of housing prices if the economic metrics remain as staggering as they are right now. Household debt to income ratios are incredibly high, housing cost per foot is incredibly high, and housing cost per household income is staggering. We have many Canadian friends and clients, so this is not a “fun” thing to be right about…But we were.
- China Stocks & Real Estate- RIGHT In 2014, we issues a stark warning for China in 2015. We knew prices were too high, financial accountability was extremely low, and artificial stimulus into the economy AND especially their real estate markets was, categorically “absurd”. The China story is only starting to unravel. Their stock market has collapsed, and has been artificially pumped up again. China’s real estate market is getting weak, people are losing fortunes, and developers are defaulting on their billions of dollars of loans from the Chinese government run banks, which lent the money to keep the economy rolling at full steam. Some people argued “soft landing” for China, but we have all along been touting that China has many systemic issues in their real estate and stock markets that will take a long time to work out. The Chinese government even went as far as to manipulate their currency against the U.S. Dollar because of their weakening role in manufacturing and outsourcing with a stronger U.S. Dollar.
- U.S. Dollar Rally — RIGHT The U.S. Dollar has risen substantially, as predicted. We touched the 1.00 mark on the USD Index and I fully expect we will go even higher. Only a few short years ago, people were calling for the complete dismemberment of the US Dollar. That’s when I got bullish the USD, and bearish the Euro…And that is exactly when their trends began reversing. In 2014, I called the US Dollar rising in 2015 and beyond. This one was a dead hit.
What was a total surprise:
- I didn’t have a specific forecast for European debt. However, I admit that I completely missed the possibility that by the end of 2015, 40 percent of the European sovereign debt market would be trading at a negative yield. I didn’t consider that investors would have to pay Germany for the privilege of loaning it money for five years. Who would have thought? However, this also presented a great opportunity that investors like Bill Gross (formerly CEO of PIMCO, currently at Janus Capital) took advantage of to short the European debt. And it worked quite well to date. I will say that I forecasted low rates, but the international markets certainly took me by surprise.
All in all, it was a great year. This year, we made well into the 7 figures for investors and ourselves. Although we don’t have a financial arm for trading the various markets for clients (yet), our bets and insights have proven to be more right than wrong, for which we are eternally blessed and grateful for. Now the time comes to predict what 2016 has in store for us…And that you will see below:
What’s in store for 2016:
- The political front will have a big impact on the 2016 economy in the U.S. The democratic institution cannot continue to afford to have low employment participation and low wages. People still “feel” like they are out of work. Technology has played a key role in this, seeing as how technology helps us work more efficiently and fewer hours. This has been a long-term trend. However, for the democratic institution to convince voters that their party is what is best for the U.S. economy, they have to find ways to turn things around. Hence, the “pop” in recent years of hours worked:Although some of this “pop” is due to economic recovery, it is still not that far away from pre-recession levels which remained relatively low in the hay-days of 2003–2006. I see more workers being employed in 2016, and some strain in financial condition on most businesses as a result. This could precipitate the market correction that stock market correction I have been thinking is coming…An earnings recession could very well make its way into the spotlight in 2016. Thus, be prepared for people to “feel like” they are doing better economically, but expect business net profits to slow down a bit.
- The stock market is decidedly tired of this non-stop rally for the last 5 years. If you look at recent charts, you can see that 2015 struggled to hold onto its gains throughout the year. We punched through to new all-time highs, and quickly retraced back and forth between net positive and negative for the year. The U.S. stock market is needing to find some balance…Right now, gravity weighs heavy on the market, and we need a correction to flush out the bull and “reset” things to prime up for another run to the upside, which I think is imminent. While some disagree, I think 2016 will be a volatile year. Here is the S&P chart for 2015:As you can see, we had a correction, but still remain over the 2,000 mark. It was only a few years ago that we were at 1,100…We’ve essentially doubled the major indexes in very short periods of time. I believe before we go higher, we’re going to have to go lower. My bet for a correction is 18% + percent to the downside which would be in the 1,750 neighborhood on the S&P. While there are perpetual bulls who see nothing but upside to the market (it’s their job, who can blame them?), the reality is that the risk versus reward in the stock market is skewed at the moment. For the market to jump to 2,200 would be much more difficult than for it to fall to 1,800. There are headwinds in the equities markets. Thus, I see 2016 as a flat to negative year for equities…December 31, 2016 may prove to be flat to positive, but there is a good likelihood of significant downside rides in the interim. I give an 18% or better correction approximately a 60% chance. That would present a much better buying opportunity for the bull market cycle which I expect will top 2017–2020 in the stock market.
- The gold market will continue to face headwinds. Lack of dividend, lack of demand from India and China, lack of enthusiasm and optimism among investors is one reason why I see gold trading below $1,000 in 2016. We have gotten awfully close to the $1,000 mark in 2015. Although I think we could see a dead-cat bounce to the $1200’s range, I think before 2016 is out, we’ll see gold lower. My bottom minimum target for gold is $964, although I think it could trade as low as $850. The interest thing is that the silver market has literally fallen out of bed. Silver topped at $50, and has devalued by 70%+ trading into the high $13’s. At this point, I think silver is in the range of long-term investment “buy” signals. Silver still may have a dollar or two more to the downside, but long term I see it easily double where it is today. What is “long term” in my book? Probably 5–10 years. I’m always an advocate of buying precious metals as a safe haven, but you have to buy them at the right time. I don’t expect gold or silver to be entering any new bull markets anytime soon…But owning a little bit of it is never a bad idea. 2016 should be a lower year for gold.
- The oil markets are likely to remain depressed for a while. Not to say that they won’t bounce back a little, but energy in general will struggle as the overall commodity cycle is in the bearish mode. $80 oil in 2016? I doubt it. $60-$70? Certainly a possibility. I am planning to invest in energy equities such as Chesapeake, Exxon, and others this year when earnings continue to get slammed due to low margins. I want to enter the market right about the point that these company’s cost-savings measures are being realized in earnings, and that should be the turn-around for them. Long term, oil will boom again. And 2016 should provide a bottom to enter the long term energy play.
- All international real estate such as China, Canada and Australia should begin to take hold of the bear market. While I have made this call before (and been wrong on timing), I am incredibly confident that the call will be right, just maybe not perfect in timing. The commodity cycle and international money flows to these countries are slowing, the economies are on the rocks, and that should prove to at least begin the cracks in the real estate markets. Like anything, real estate does not move particularly fast. Various factors such as interest rates, jobs, affordability, capital flows, etc. etc. etc. all come into play. I see 2016 as a definitive down year for those international real estate markets.
- The U.S. real estate market may hold flat for 2016. There are numerous signs that indicate the U.S. could slow down in 2016 or 2017, and if that is the case, I believe real estate will hold about steady. I believe 2016–2017 are opportunity years to take advantage of the last “deals” in U.S. real estate before we just buy and hold for the long-term cycle to take hold and propel us higher into the 2020’s. The opportunity to buy U.S. real estate at discount prices is decreasing, and the markets, especially the capital markets, are coming back quickly. Thus, the time is sooner than later to be invested, or you may miss the boat. Again, risk versus reward ratios should be stacked incredibly in our favor…Right now they are, but not indefinitely. 2016 should be a flat to slightly higher year for U.S. real estate with the possibility of “softness” creating opportunities. Take this opportunity to buy for the mid-term real estate cycle that we expect to top in 5–6 years +/-.
- U.S. interest rates are going to remain relatively low. Although we may see a 2nd, or even 3rd rate hike by the Fed in 2016, they are all likely to be 25 bps (1/4 point) raises. This may add slightly to real interest rates that borrowing at, but I see real rates still staying in the 5% range for quite some time. Inflation is low, the economy is still sluggish, and the government can’t afford refinancing their maturing debt at much higher rates. Thus, I see 50–75 bps maximum being added in 2016 to the Fed’s rate, and about that much may translate into real interest rates. Take advantage of it by locking up your interest rates and borrowing as much debt as you can on high quality income producing assets like quality commercial and residential real estate. Don’t be afraid of 6.5% real interest rates this year…Its not going to happen. Right now, we are borrowing at about 4.5% on commercial loans with medium maturities. Expect 5% +/- in 2016. However, be ready for 150 bps higher in consumer lending rates. As the number of hours increases that typical workers are working, and wage inflation inches up, consumer lending rates are likely to increase. I see this consumer (unsecured of lightly secured such as credit cards and auto-loans) rate increase definitely starting in 2016.
- Currencies, including the U.S. Dollar and the Euro will continue in their recent trend. I see the US Dollar index easily hitting 1.06- 1.07 mark in 2016, possibly even as high as 1.10–1.12. This means commodities are going to continue to struggle, and other currencies are likely to decline, especially the Euro which I see at the 1.00 mark in 2016. The Canadian dollar will continue to have problems, as will the Australian dollar. Bottom line, I want to hold as much of my assets in U.S. dollar terms as possible, and if you trade currencies, look for opportunities to buy the U.S. Dollar and short the Euro when opportunities to do so present themselves.
- Commodities are going to continue to struggle. Agriculture will be in the dog-house for several more years to come. The best that can be expected in 2016 will be some “relief” with slightly higher crop prices. However, don’t expect a big rally in 2016. Oil, Gold, Agriculture, all should be relatively subdued in 2016. With the exception of oil-stocks and silver for the long term, there will be few opportunities to take advantage of for the long-term picture in 2016 in the commodity arena.
More to come…
As we get into the new year, I’ll be talking about my 3 best investing ideas for 2016. We will schedule our next webinar on the subject for next month, so stay tuned.
Please forgive any spelling errors as I am writing this on a short-staff week — we’ll be back to our regular format next week.
God bless you all, and Happy New Year to you and your families. May 2016 be a blessed year and a profitable one for you.