enr market outlook november 2017 executive summary · enr market outlook 2017 executive summary:...
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November 2017 ENR Market Outlook
Executive Summary:
Global major stock markets have generated a 16.5% return in 2017 – the best annual gain since 2014 and the third
best calendar year since the 2008 financial crisis. Emerging market equities have rallied 30% this year, the biggest
calendar year gain since 2009. The S&P 500 Index has gained 17% this year but has lagged the Dow Jones
Industrials Average, up more than 19% as cyclical stocks dominate performance;
The U.S. markets’ technical breadth has been excellent with the advance-decline line strong, new highs versus
new lows rising, and bullish signals confirmed by the Dow Jones Transportation Average, smaller companies and
recently, rising commodities. The bull market remains technically strong;
In the United States, stock market declines have grown shallower over the past two years and are snapping back
sooner. The S&P 500 Index has gone 246 trading days without trading more than 3% below its record high – the
longest streak ever for the benchmark. The broader market hasn’t declined 10% or more since February 2016;
The MSCI World Index of major bourses, hasn’t declined more than 6.6% since the summer of 2016, and like the
S&P 500 Index, hasn’t posted a meaningful decline since February 2016 when it sank 20%. It’s the same story for
the emerging markets, on a wild tear since the first quarter of last year.
Non-government fixed-income securities mostly declined in value in October. High-yield debt, corporate and
mortgage bonds, and emerging market debt all posted modest losses as stocks hit fresh highs across markets
worldwide;
As China’s Xi Jinping ascends to the zenith of power in China and commands more authority than even Deng
Xiaoping and possibly Mao, the investment implications for global investors are important. Fears are growing that
perhaps Xing will seek to take a government stake in the fast-growing e-commerce companies dominating the
global marketplace: Tencent Holdings and Alibaba Group Holdings. Both Chinese behemoths now rank among
the top ten most valuable tech companies in the world along with Apple Inc., Facebook and Amazon.com. One
wonders if the Chinese government won’t force Tencent and Alibaba to work closer, sharing user-profile data and
other financial information. The government is also starting to take capital stakes in internet companies to gain
board seats and influence corporate strategy;
The European Central Bank (ECB) will trim its asset purchases in January to €30 billion ($35 billion) from €60 billion
($70 billion) currently as the euro-zone recovers from a multi-year debt crisis in its southern periphery and a
protracted economic slowdown since 2010. Business and consumer sentiment continues to improve across the
19-nation bloc. The ECB, however, will continue to ‘softly taper’ asset purchases of (mostly bonds) until September
2018;
Japanese stocks are on a tear, now at 21-year highs following the successful re-election of Shinzo Abe, a weaker
Japanese yen, and strong corporate earnings. The Japanese central bank remains the largest buyer of Japanese
stocks, ETFs, REITs and bonds.
France has emerged as a potentially leading euro-zone investment destination for business following the
introduction of lower corporate tax rates and falling individual income tax rates under Emmanuel Macron. Also,
France is benefiting along with Germany as multinationals leave the UK due to Brexit. Starting in 2018, the French
government will scrap its ‘wealth tax’ on everything, except real estate assets, cutting the tax by 70%. A 30% flat
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
2 ENR Market Outlook
tax rate will also be introduced on capital gains, dividends and interest income. The Paris CAC-40 Index has gained
13% this year in local currency terms and 23% measured in USDs;
The U.S. Dollar Index continued its ascent in October, rising 1.7% but still down 7.6% in 2017. One of the worst-
performing currencies last month, the New Zealand dollar tanked more than 5% vis-à-vis the USD following the
central bank’s decision to keep rates steady and new spending priorities by the Labour government;
The benchmark Reuters-CRB Index of commodities posted its most profitable month in October, rising 2.4% on
the heels of stronger oil prices, rising base metals and a rally in most soft agricultural commodities. The index,
however, remains down this year, off 2.6%;
The International Monetary Fund (IMF) warned that risks loom amid a current euphoric market outlook as a $135
trillion-dollar debt load pressures the G20 or the world’s biggest economies. The IMF, part of the World Bank,
stressed that debt-servicing costs are already taking a toll on companies and consumers, and threatens to trigger
another financial crisis. The IMF found cause to worry in the growing non-financial sector debt in G20 economies,
which in 2016 reached $135 trillion dollars or about 235% of aggregate annual economic output. The United States
and China each accounted for about a third of the $80 trillion-dollar increase in debt since 2006, according to the
IMF. The body isolated those countries where debt-servicing ratios were most acute, including Australia, Canada
and China;
The exchange-traded-fund (ETF) industry, dominated by Blackrock, Vanguard, Schwab, Invesco, Fidelity and State
Street, continues to gain momentum as new and existing players cut management fees to draw assets. In October,
Franklin-Templeton Investments announced a series of new country funds to compete with Blackrock’s iShares.
Templeton, which prides itself as one of the oldest global value investors in the United States, is finally throwing
in the towel to compete with passive sponsors. The new Franklin FTSE Japan ETF, for example, will offer the lowest
expense ratio in the industry at just 0.09% per year compared with 0.48% for a comparable product offered by
iShares Japan ETF. The top three ETF companies (Blackrock, Vanguard and State Street) control 70% of the entire
global ETF industry, according to Forbes;
ETF inflows continue to hit records. Fund-flows into bond ETFs and stock ETFs hit fresh records almost every
month. The inflows into bond funds thus far through September 30th have already exceeded the 2012 record by
34% to $241 billion dollars, according to Bank of America Merrill Lynch. Amazingly, investors are still lunging for
the equivalent of ‘bread crumbs’ in the bond market after a massive 35-year secular decline in interest rates;
Ireland has nearly completed paying the last tranche of borrowing from the depths of the 2008 financial crisis.
Ireland’s bad bank (NAMA), was established in 2009 following the states’ bailout of its financial system. NAMA
redeemed the final €500 million ($582 million) of government-guaranteed debt, three years ahead of the target
it sought to meet in 2009;
We recommend avoiding most bonds, especially high-yield debt, emerging market bonds and leveraged loans.
Credit spreads for these and other high risk fixed-income securities have compressed markedly this year and are
approaching record lows last seen in 2007. We prefer floating rate investment-grade bonds, Treasury-Inflation-
Protected Securities (TIPS) and short-term Treasury bonds. Investors are advised to maintain short durations or
avoid most bonds altogether in favour of cash. Compared to 12 months, 90-day U.S. T-bills now yield 1.17% versus
0.32% in November 2016;
ENR still prefers global equities to bonds. We’ve raised cash to upgrade ahead of another expected Federal
Reserve rate hike in December and rising short-term rates. However, we’ve been warning for months that most
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
3 ENR Market Outlook
stocks are overvalued and supported by still prevalent low global interest rates and rising corporate earnings. A
correction is long overdue at this point. Though the economic cycle – now into its ninth year of expansion -- is
advanced, dangers lurk ahead of the Fed’s plans to reduce its balance-sheet this fall. Stocks still provide the best
relative values in a prolonged cycle of low inflation and exceptionally low interest rates. Investors should be
mindful that ‘bubbles’ are forming in some sectors of the stock market in late 2017 and bond yields are likely to
drift higher in 2018. Bonds are exceptionally expensive and should only be purchased mainly as a hedge against
deflation. In the fourth quarter, the Shiller CAPE S&P 500 Index hit its second-highest ever valuation after 1999 at
31.5 trailing earnings;
ENR’s growth-based portfolios, ENR Global Contrarian and ENR Aggressive Growth, hold 68% and 80% in global
equities, respectively, as of October 31. Both programs also own hedges in gold and silver, Swiss francs and
Japanese yen amid an expensive market and rising global interest rates. The ENR Global Contrarian Portfolio has
gained 8% in 2017 and the ENR Aggressive Growth Portfolio is up 14.5%;
ENR is pleased to announce that Wiener Privatbank SE has expanded further this fall following the planned
acquisition by Arca Capital Group. Based in Bratislava, Slovakia, Arca Capital Group manages $1.63 billion dollars
in assets, mostly in international private equity and financial services. The group (founded in 1999) is currently in
advanced negotiations to buy-out Wiener Privatbanks’ two primary shareholders, contingent on the approval of
the Austrian Financial Market Authority, expected in the second quarter of 2018. The planned purchase will be a
great opportunity to bundle Wiener Privatbank’s expertise in investment and asset management with the sales
strength of the Arca Group. Wiener Privatbank remains committed to and will continue to service its U.S. client
base and their asset managers, insurance and IRA service-providers. The bank’s headquarters will remain in
Vienna, providing an ideal strategic location for the planned expansion of the group in Central and Eastern Europe.
For more information, please contact our office in Montreal or Mr. Conor Hayden at Wiener Privatbank in Vienna.
Global Equities
Your Late-Cycle Market Check-List
The following was published recently for ENR’s Advisory Extra (self-directed) clients. I think it pertains to all investors, too.
As we approach the latter stages of this bull market in financial assets, investors should take precautions and adjust their
portfolios. This is a late-cycle market environment as we head into December. You don’t have to engage in a wholesale
liquidation of your stocks; market-timing is impossible anyway. It would also trigger a big tax bill, if held outside of a tax-
deferred account. Instead, follow these suggestions to ensure you’re braced for a new economic cycle, and possibly, a
bear market later in 2018 or 2019:
If you’re less than five years away from retirement, reduce your stock exposure to a maximum of 35%. If you’re
adamant about maintaining more equity exposure, be patient and wait for a correction in the market before
buying again;
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
4 ENR Market Outlook
Raise your cash balances. Cash might not yield very much but it’s a wise option for those investors sitting on some
unrealized stock market gains and little or no cash reserves. Compared to 12 months ago, U.S. 90-day Treasury
bills now yield 1.17% versus just 0.32% on November 1, 2016;
To invest for safety, you need cash, short-term Treasury debt and insurance coverage that can buffer sudden
market shocks (e.g. 2008, 2000-2002, 1998 etc). These assets, along with a sensibly purchased home, have a long-
term expected return of about zero after inflation. But, unlike equities and most fixed-income securities and
commodities, they offer little risk of catastrophic loss;
Hedge your growth stock portfolio now. If you have a portfolio consisting of 65% or more in equities, consider
buying hedges; a true hedge will provide you with a negative correlation to stocks in a down market. It’s insurance.
The deeper the sell-off, the better the odds of strong performance from things like Swiss francs, the Japanese yen
and gold. You should only buy a reverse index ETF like the Pro Shares Short S&P 500 ETF (NYSE-SH), for example,
after the market breaks. You don’t need to purchase something like the Pro Shares Short S&P 500 ETF now; market
breadth remains very strong and there’s no signs of an imminent break in the primary trend, unlike 1998 and mid-
2008. But it’s something to watch carefully and possibly consider when we head into the next bear market cycle.
Remember, this is already the longest economic expansion since WW II and the second-longest bull market in
history – two important market anecdotes worth considering.
For now, the Swiss franc, Japanese yen and gold should be purchased if you hold 65% or more in common stocks.
Please see our recommendation table for complete details and trading symbols;
Focus on strong companies with wide economic moats and strong cash-flow. In a recession, most stocks post
double-digit declines. But big blue-chip stocks that pay rising dividends usually perform better and lose much less.
Small-cap and mid-cap equities fare the worst amid a recession.
After Years of Hardship, Greece Beckons No other country in the European Union (EU) has suffered more financial pain than Greece since the emergence of the
debt crisis in 2010. Since 2009, Greek GDP (gross domestic product) has contracted 23% and logged its first expansion
earlier this year, barely growing 0.4%. Its debt mountain, at an estimated €314 billion ($366 billion), according to the New
York Times, is unlikely to ever be repaid; Greece, we believe, will need some sort of debt forgiveness from creditors.
In June 2015, the Greek government shuttered its banks for almost a month, limiting cash withdrawals at the time to just
€60 per day. The IMF and European Commission (EC) immediately suspended loans.
After receiving several bailouts from the EC, the International Monetary Fund (IMF) and World Bank, Greece is finally
turning the corner – albeit slowly, in late 2017. The calmer climate has attracted the attention of investors, especially in
the United States, where companies and financial firms appear to be intensifying their search for deals as the Greek
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
5 ENR Market Outlook
economy shows signs of stabilizing. Hedge funds have circled for months targeting undervalued companies traded on the
Athens bourse, including distressed financial shares.
Greece is probably the cheapest investable stock market in Europe. And it’s cheap for good reason. A busted financial
system, an economic depression and soaring unemployment until last year all added tremendous strain on the economy
and its population. Greece is still far from emerging where it was prior to the outbreak of the debt crisis in 2010. But based
on valuations and the contrarian nature of this market, it warrants an investment for investors with a 12 to 24-month
horizon. The stock market has gained more than a third over the past year but relative to its highs over the last decade
and beyond, the rally is a pittance.
For aggressive-risk investors, Athens won’t be a free lunch, either. The economy is still struggling, tourism is way below its
pre-crisis levels and its politics remain volatile. Greece is probably not going to remain in the euro-zone or monetary union.
But it can muddle-through for the next several years until fresh borrowings will be required to service the interest on its
massive debt-pile. Volatility will remain a prevalent theme in Greek financial markets.
Though it’s up sharply this year (+19%), its miles away from its best levels eighteen years ago and 43% below its best level
in 2014 – four years after the emergence of its financial depression. Compared to most other international markets, many
selling at record highs and lofty valuations, Athens is a colossal bargain.
Just how cheap is Greece? The MSCI World Index trades at 20.8 times trailing earnings and 2.36 price-to-book. The MSCI
Emerging Markets Index sells at 15.3 times price-to-earnings and 1.74 times book. But the Athens Stock Exchange is dirt
cheap in comparison at just 0.33 times price-to-book – or a huge 67% discount to book-value. An investor can buy €1
worth of stocks in Athens for just €0.67 cents.
The Global X MSCI Greece ETF (NYSE-GREK) is a great vehicle to ride the recovery in Athens. The ETF has good liquidity
and charges 0.62% in total annual expenses. The Fund holds 32 Greek companies with a big bias towards financials at a
combined 29% of the portfolio. The financials are extremely cheap -- even after a big rally recently. Top holdings include
Hellenic Telecommunications, Alpha Bank AE, OPAP, National Bank of Greece SA and Eurobank Ergasisas SA.
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
6 ENR Market Outlook
BUY the Global X MSCI Greece ETF (NYSE-GREK) at market up to $10.33. Place a 20% stop-loss on your entry price.
ENR Market Outlook Portfolio
The ENR Market Outlook Portfolio mostly consolidated in October. Despite another winning month for the MSCI World
Index, our high concentration in dividend stocks, including several names in food and beverage, resulted in lower prices.
Among the laggards, Kraft-Heinz (Nasdaq-KHC), Nestlé (Zurich-NESN) Edgewell Personal Care (NYSE-EPC) and Procter &
Gamble Corp. (NYSE-PG) were considerably weak. Still, it’s largely been a good year for our selections with PayPal Holdings
(Nasdaq-PYPL) leading the pack, up 80% in 2017 followed by Dollarama, Inc. (Toronto-DOL), up more than 50% in USDs.
Apple, Inc. (Nasdaq-AAPL) is also strong, rallying 44% this year.
Global stocks start November harbouring a 16% return for the 2017 year-to-date period – the best annual return since
2014 and the third best calendar year since the 2008 financial crisis. Whether major markets or emerging markets, indices
have hit all-time highs this year or in most cases, approaching near-record levels. The markets’ technical breadth has been
excellent with the advance-decline line strong, new highs versus new lows rising, and bullish signals confirmed by the Dow
Jones Transportation Average and small-caps. The bull market is still alive and kicking.
But as many of you already know, this is occurring amid record bullishness, as NYSE margin debt continues to hit records,
investment advisor bullishness sits at record highs (exceeding the summer of 1987 peak) and valuation levels trading at
their second most expensive since 1929. Stock market values in the United States were only more expensive in late 1999.
Also, credit spreads between the riskiest bonds and the safest sit near all-time lows last seen in October 2007. Let’s not
even discuss how the CBOE Volatility Index or VIX is a lost cause at this point as the investment community dumps hedges
and runs into stocks. The VIX continues to languish below 10, a 24-year low.
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
7 ENR Market Outlook
In early October, the cost of protecting against default by the highest-rated American companies dropped to a ten-year
low as demand remains voracious for fixed-income. The CDX investment-grade index – reflecting the cost of default
protection on a basket of 125 companies – fell to 54.44 on October 3rd, its lowest since 2007.
In the United States, stock market declines have grown shallower over the past two years and are snapping back sooner.
The S&P 500 Index has gone 246 trading days without trading more than 3% below its record high – the longest streak
ever for the benchmark. The broader market hasn’t declined 10% or more since February 2016. The MSCI World Index of
major bourses, hasn’t declined more than 6.6% since the summer of 2016, and like the S&P 500 Index, hasn’t posted a
meaningful decline since February 2016 when it sank 20%. It’s the same story for the emerging markets, on a wild tear
since the first quarter of last year.
The U.S. market needs tax cuts at this point. Just what sort of cut lies ahead is still difficult to predict. But unless the GOP
wants to disappear altogether as a viable party ahead of mid-term elections, it needs to work with the President to get
tax reform legislated. The party is in disarray, plagued by infighting and defections. The Corker-Trump spat was a total
embarrassment for the party. If tax reform fails, the odds are very high that the market will decline sharply. The chart
below depicts the S&P 500 Index’s price-to-earnings ratio, currently at 26 times historical earnings. The CAPE Shiller S&P
500 Index P/E ratio now stands at 32 times historical earnings. A high-priced market is historically a harbinger to poor
future returns. If tax reform fails, stocks will lose altitude.
In a world selling at all-time high valuations for many stocks, most fixed-income securities and major city properties,
investors should be braced for a sell-off at some point. The lack of a correction, rampant bullishness and complacency
among investors is a dangerous signal. The markets, however, shortly commence seasonal strength around American
Thanksgiving and lasts through May. Historically, stocks generate the bulk of their annual gains from November to May.
But considering how far we’ve come over the past 12-18 months, market history isn’t a guarantee this fall. Plus, let’s not
forget the Fed is still hiking interest rates.
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
8 ENR Market Outlook
The margin of safety for investors in a late-stage bull market is to purchase high quality companies with value attributes.
Contrarian investments, if you will. Our favorites this month include Global X MSCI Greece ETF (NYSE-GREK), Kraft-Heinz
Corp. (Nasdaq-KHC), Daimler AG (Frankfurt-DAI) and the PowerShares KBW Regional Banking Portfolio (Nasdaq-KBR).
We’re downgrading Edgewell Personal Care to HOLD.
Market Outlook Stock Portfolio:
Security Listed Symbol Entry Price
Date Current Yield
Current Price
Gain/ Loss
Advice
Global X MSCI Greece ETF
NYSE GREK $9.41 Nov 2/17 1.63% $9.41 NEW BUY
The Kraft Heinz Company⁹
NYSE KHC $77.17 Oct 3/17 3.12% $76.59 -0.75% BUY
PowerShares KBW Regional Banking ETF
NASDAQ KBWR $53.35 Jun 28/17 1.57% $54.62 2.77% BUY
SPDR EURO Stoxx 50
NYSE FEZ $39.07 May 8/17 2.33% $41.76 8.93% BUY
Daimler AG Frankfurt DAI € 64.94 Sep 11/17 4.45% € 72.91 9.40% HOLD
Huntington Ingalls Industries⁷
NYSE HII $193.55 May 30/17 1.03% $233.63 21.02% HOLD
Edgewell Personal Care Co.
NYSE EPC $71.61 Apr 7/17 0.00% $62.45 -12.79% HOLD
BCE, Inc.⁸ TSE BCE CAD 57.97 Mar 8/17 4.77% CAD 60.54 13.75% HOLD
Mitsubishi Heavy Industries
Tokyo 7011 ¥4,510.0 Feb 9/17 0.00% ¥4,308.0 0.87% HOLD
PayPal Holdings NASDAQ PYPL $40.10 Jan 3/17 0.00% $72.26 80.20% HOLD
Nestlé SA⁵ VTX NESN CHF 65.15 Dec 7/16 2.75% CHF 83.40 32.04% HOLD
Pfizer Inc.⁶ NYSE PFE $32.92 Jan 3/17 3.57% $35.21 9.87% HOLD
iShares Global Infrastructure Index ETF
NYSE IGF $39.57 Nov 7/16 2.79% $45.55 18.32% HOLD
Diageo ADR NYSE DEO $113.71 Jul 4/16 2.40% $134.48 22.79% HOLD
Apple Inc¹ NASDAQ AAPL $92.79 May 9/16 1.44% $166.30 82.42% HOLD
General Dynamics NYSE GD $131.37 Mar 31/16 1.63% $202.22 58.16% HOLD
Dollarama Inc² TSE DOL CAD 71.60 Feb 12/16 0.30% CAD 143.99 118.12% HOLD
Procter & Gamble³
NYSE PG $77.38 Jul 6/15 3.15% $86.39 20.35% HOLD
Disclaimer: The ENR Global Contrarian Portfolio owns Kraft-Heinz Corp., Power Shares KBW Regional Banking ETF, Huntington Ingalls Industries, Nestlé, Apple Inc., General Dynamics, Dollarama and Procter & Gamble Corp. ENR Low Risk Portfolio owns the Kraft-Heinz Corp., SPDR EURO Stoxx 50 ETF, Pfizer, Nestlé and Procter & Gamble Corp. ENR Medium Risk Portfolio owns the Kraft-Heinz Corp., Huntington Ingalls Industries, SPDR EURO Stoxx 50 ETF, Apple Inc., General Dynamics, Procter & Gamble Corp and Pfizer. ENR Global Aggressive Growth Portfolio owns Power Shares KBW Regional Banking ETF, Huntington Ingalls Industries, Apple Inc., General Dynamics, Nestlé, PayPal Holdings and Dollarama.
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
9 ENR Market Outlook
Fixed-Income
BBB-rated Bonds now 47% of Investment-Grade
Market as Investors Chase Yield
The odds of a 2013 ‘taper tantrum’ occurring again over the next 12 months are rising as central banks slowly remove
stimulus. There’s no doubting that central bank bond-buying since 2009 has vastly distorted corporate credit markets,
driving down yields to unchartered and overvalued territory. According to Bank of America, by March 2018, the collective
bond buying from the Federal Reserve, the ECB, the Bank of Japan and the Bank of England will peak at about $15.3 trillion
dollars.
Our discussion this month turns to investment-grade debt and the stunning rise of BBB-rated paper.
For the last several years, most investment-grade bonds have barely provided the coupon rate to cover inflation while
some bond markets still trade at a negative rate of interest, meaning the investors must pay the issuer for the right of
bond ownership. This is still the case across most of the government yield-curve in Switzerland, Germany and Japan. We’ve
long argued these are classic signs of a ‘bubble’ and investors should avoid most debt securities. In the event inflation
rates ever percolate again, a massacre of spectacular proportions would engulf fixed-income portfolios.
The IMF released an important warning to fixed-income investors last month. According to the IMF, ‘Low yields,
compressed spreads, abundant financing, and the relatively high cost of equity capital have encouraged a buildup of
financial balance sheet leverage.’ According to a report from The Wall Street Journal, the market in investment-grade
bonds is increasingly dominated by the lowest tier of credit quality in late 2017 – a bearish sign.
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
10 ENR Market Outlook
The portion of bonds rated BBB or the last tier of investment-grade status before hitting junk bond classification at BB or
lower, has almost doubled over the last ten years and now makes up nearly half of all investment-grade credit. We can’t
emphasize how potentially dangerous this development might be, if default rates start to rise.
The share of U.S. BBB-rated bonds has recently surpassed its 2002 peak, climbing above 47% of all investment-grade
credit. Approximately 48% of bonds in the euro-zone are rated BBB while less than 20% were when Lehman Brothers
went bankrupt in September 2008. The yield on Bank of America Merrill Lynch’s Global Corporate BBB Index is just 2.89%
compared with a 20-year average of about 5.1%. The ultra-low spread offered between BBB debt and Treasury securities
is very tight, offering little protection if inflation rates rise or default rates accelerate. The spread or difference between
the highest and lowest-rated investment grade bonds has collapsed: In 2008, BBB-rated bonds yielded over 8% or more
than 4 percentage points (400 basis points) more than AAA-rated debt. In October, that spread was just 0.25%.
Another major Red Flag this fall is the record sum of inflows heading into fixed-income products, despite the poor values
available across most of the universe. Approximately $241 billion dollars have already flowed into U.S. high-grade bond
funds and ETFs in the first nine months of the year, according to Bank of America Merrill Lynch. That’s 34% higher than
2012’s full-year record of $180 billion dollars. And companies continue to turn to low-cost bond markets to borrow record
sums. That pace is already more than $1.4 trillion dollars in 2017.
A recent Economist magazine story caught my eye. It’s titled The Bull Market in Everything and worth reading. Jeremy
Stein, a researcher who contributed to the article, claims ‘that when the mood in credit markets is bullish, the economy
will soon suffer, with an abrupt tightening of credit and slower growth.’
Finally, as more central banks start to tighten among the major economies in 2018, the odds are rising that some sort of
bond market dislocation lies ahead. The danger is any major correction in bonds might trigger a recession. Leverage in the
financial system might be far less than it was back in 2008; but several parts of the credit system are overheating. These
include overvalued fixed-income markets and in some cases, extreme overheating in leveraged loans (see above chart of
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
11 ENR Market Outlook
SRLN), corporate borrowing and the rising percentage of border-line investment-grade paper comprising investment-
grade benchmarks.
The only real values now are TIPS or Treasury-Inflation-Protected Securities. Though certainly vulnerable to a bond market
sell-off, TIPS at least provide a measure of inflation protection and remain inexpensive compared to nominal fixed-income
securities.
Market Outlook Bond Portfolio:
Security Listed Symbol Entry Price
Date Current Yield
Current Price
Gain/ Loss
Advice
iShares TIPS NYSE TIP $113.53 Dec 7/16 1.53% $113.89 1.63% BUY
iShares Floating Rate
NYSE FLOT $50.69 Oct 5/16 1.39% $50.90 1.81% HOLD
Vanguard Intermediate-Term Corporate Bond ETF
NYSE VCIT $85.66 Jan 3/17 3.19% $87.84 4.69% HOLD
Disclaimer: The ENR Low Risk Portfolio holds the iShares TIPS Bond Fund, the iShares Floating Rate Bond ETF and the Vanguard Intermediate-Term Corporate Bond ETF. The ENR Medium Risk Portfolio holds the iShares TIPS Bond Fund, the iShares Floating Rate Bond Fund and the Vanguard Intermediate-Term Corporate Bond ETF. The ENR Global Contrarian Portfolio holds the iShares Floating Rate Bond ETF.
Foreign Exchange
USD Index Gains 4.5% off Lows; Resource Currencies Tumble Despite Commodity Rally The U.S. Dollar Index has now rallied 4.5% off its three-year low earlier in September. The dollar entered September
heavily oversold after suffering six consecutive losing months. Latest economic data has improved and along with the
hopeful passage of corporate and individual tax reform in 2018, consumer spending and business investment is rising.
Consumer confidence remains near historic highs, too. The Fed, glued to wages and employment trends, will hike interest
rates again in December and that’s enough to keep the bid for USD strong across most FX markets. We continue to
recommend avoid selling dollars at these levels, awaiting a better exit point.
Natural resource currencies have declined sharply. Despite generally stronger commodity prices over the past several
weeks, including oil now at two-year highs, resource currencies have been weak. The worst performer among the
commodity units is the South African rand, down 13% since last summer. Other losers include the New Zealand dollar,
down 8% followed by a 5.7% decline for the Canadian dollar, 5.4% loss for the Norwegian krone and 5% for the Aussie. In
our view, these currencies are oversold. Oil prices have rallied almost 30% off their mid-summer low and this should
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
12 ENR Market Outlook
eventually support those units with oil surpluses: the NOK and CAD should reverse losses and are rated ‘strong buys’ even
for USD-based investors.
Mark Carney at the Bank of England became the third Anglo-Saxon central bank governor to raise rates this week. This
follows the Bank of Canada’s second interest rate hike in September and the U.S. Fed’s expected fifth rate hike next month.
The Fed has hiked rates four times since December 2015.
In November, the Bank of England raised rates for the first time since 2007 from 0.25% to 0.50%. The GBP declined after
the BOE’s decision after several weeks of gains on expectations of a rate increase. In 2017, the GBP has gained 5.5% versus
the dollar but is down 4.3% versus the EUR. UK inflation sits at a multi-year high (in fact, the highest in the G10) and the
economy remains soft. Brexit negotiations are in limbo with no clear policy direction. Business investment has stalled. We
see no reason to be long the pound.
USD Index Extends Rally
Global Currency Sandwich Continues Correction
The ENR Global Currency Sandwich, including gold, continued pulling back in October and it’s still softening the first few
days of November amid renewed USD strength. The sandwich has gained 4.64% in 2017. The weakest constituents this
fall are the Canadian dollar, Norwegian krone and the Swedish krona. Gold prices have also declined, down more than 5%
from their 52-week high of $1,346/ounce.
If you’re over-weighted U.S. dollars in your portfolio (think ERISA’s, your home, investment portfolio, life insurance etc.),
the Global Currency Sandwich is a great long-term vehicle to hedge your dollar risk. We suggest clients dollar-cost-average
their way into foreign currencies and gold at these levels on expectations of further USD strength for the time being.
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
13 ENR Market Outlook
In December, we’ll announce the 2018 Global Currency Sandwich. Stay tuned!
2017 ENR Global Currency Sandwich (Equally-Weighted):
Gold Bullion
EUR: Added on June 30, 2017.
Canadian dollar: Added on June 30, 2017
Swedish krona: Guggenheim Currency Shares Swedish Krona Trust (NYSE-FXS)
Swiss franc: Guggenheim Currency Shares Swiss Franc Trust (NYSE-FXF)
Norwegian krone
Brazilian real: Sold on June 30, 2017
Commodities
As Palladium Surges, Platinum Looking Attractive
The best-performing precious metal this year isn’t gold or silver. At $994 an ounce, spot palladium prices are red-hot and
rank as the top-performing commodity, up 39%. A key input in emission filters for gas engines, the white metal has traded
above the platinum price for most of 2017 – as rare occurrence in its trading history and the first time in 16 years it’s
higher than platinum. As the global economy continues to gain momentum and is the most synchronized since before the
2008 financial crisis, expectations are rising that auto sales will rise heading into 2018. Car sales in China, the world’s
largest auto market, gained 4.3% the first eight months of the year. According to broker Johnson Matthey, palladium
demand will exceed supply by roughly 163,000 ounces this year.
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
14 ENR Market Outlook
And it’s not just rising demand for gas-powered cars driving the palladium price. The big buzz around Tesla (Nasdaq-TSLA)
and other electric cars over the last few years is also expected to boost demand for palladium. Most hybrid cars use
gasoline-powered engines, not diesel. Unfortunately for platinum, used mainly in diesel cars, demand has dropped
considerably amid the Volkswagen (Frankfurt-VOW) emissions scandal. Herein lies the opportunity.
As palladium has raced higher this year, platinum has been left in the dust, up just 2.4%. The platinum price has strong
support over the last year around $890 an ounce and should be poised to rally at some point because palladium is
becoming too expensive for manufacturers as it tops $1,000. In the longer term, there’s a strong possibility the auto
industry may consider switching to platinum in gasoline engines if the price of palladium continues to climb.
The ETFS Physical Platinum Shares (NYSE-PPLT) is an easy way to ride a recovery in platinum and much less expensive
than paying commissions to buy the white metal. The Fund stores the physical metal in vaults in Zurich and London (no
physical delivery offered) and levies a 0.60% annual fee. The fund isn’t liquid, which may be a good sign at this stage
because there’s a lack of interest in the metal. Place your bids carefully. From its all-time high in 2008 at $2,286 an ounce,
platinum is down 59%. PPLT, which has only been available since 2010, is down a cumulative 54% from its high in 2011.
BUY the ETFS Physical Platinum Shares (NYSE-PPLT).
If you’d rather purchase platinum (coins, wafers), then most reputable coin dealers will be happy to take your business.
I’ve dealt with KITCO here in Montreal (www.kitco.com) for years and they ship throughout North America.
ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com
15 ENR Market Outlook
Market Outlook Commodity Portfolio:
Security Listed Symbol Entry Price
Date Current Yield
Current Price
Gain/ Loss
Advice
ETFS Physical Platinum
NYSE PPLT $88.54 Nov 2/17 0.00% $88.54 NEW BUY
Newmont Mining NYSE NEM $17.99 Dec 31/15
0.63% $36.28 103.34% BUY
Randgold Resources
NASDAQ GOLD $61.93 Dec 31/15
1.02% $91.39 50.25% BUY
Inter Pipeline Ltd TSE IPL CAD
25.67 Jun 28/17
6.13% CAD
26.37 6.17% HOLD
Gran Tierra Energy
TSE GTE CAD 3.18 May 30/17
0.00% CAD 2.89 -4.18% HOLD
Exxon-Mobil⁴ NYSE XOM $77.95 Dec 31/15
3.62% $83.22 13.52% HOLD
Schlumberger NYSE SLB $69.75 Dec 31/15
3.11% $63.56 -4.57% HOLD
Shareholder Disclaimer:
1. ENR or its employees or its access persons own shares of Apple Inc. 2. ENR or its employees or its access persons own shares of Dollarama Inc. 3. ENR or its employees or its access persons own shares of Procter & Gamble. 4. ENR or its employees or its access persons own shares of Exxon-Mobil. 5. ENR or its employees or its access persons own shares of Nestlé
6. ENR or its employees or its access persons own shares of Pfizer Inc.
7. ENR or its employees or its access persons own shares of BCE Inc.
8. ENR or its employees or its access persons own shares of Huntington Ingalls Industries.
9. ENR or its employees or its access persons own shares of Kraft-Heinz Corp.
Eric N Roseman November 3, 2017 Montréal, Canada