Dawes Points - Issue #60

 

Year in Review and 2017 Outlook

Key Points

  • Global economic activity is robust
  • Equity markets making new highs
  • Commodity prices remaining firm
  • Global bond markets have broken down
  • US Banking Sector recovering well after 14 years underperformance
  • Oil price ready for further gains in 2017
  • Outlook for 2017 is more of the same only better
  • Best stocks are BHP RIO FMG S32 WPL NST WSA PSA CYL MLX ASP SWJ MGT CTP LNG
  • Contact me to invest in these and much more
    bdawes@mpsecurities.com.au  +612 9222 9111

2016 was a remarkable and very positive year for the world as seen from here.

Economic activity was reasonably robust, equity markets held gains and many indices made new all time highs. Commodities from aluminium to zinc in industrial metals had good years with consumption yet again at record levels, and supply constraints and low inventories allowing for useful price recoveries.  Iron ore hit my S$80/t, while oil and US natural gas closed the year at two-year highs.

Gold had an excellent June Half and spent the Dec Half disappointing us in a dragged out but piddly 15% correction that gave up about 80% of the Dec 2015-July 2016 US$315 gain.

The recoveries in copper, lead, zinc and the other metals along with iron ore provided some excellent gains for the recommended BHP, RIO, S32, WSA and FMG.

The global bond market had much of its bubble bluster and arrogance rightfully squeezed out with those dopey and hysterical 'negative yields' of July 2016 marking the end of the 35 year bullmarket in these financial instruments called bonds.  The ten year US Treasuries Index lost 8% in capital value from the July highs while the longer and more volatile 30 Year Index gave up 16%.  Ouch.  With US$100tn tied up in bonds and an average maturity of say 5 years a guesstimate of about US$5tn of market value has been lost.

The 40% rise in the US Banking Sector Index flagged here from the beginning of June Qtr 2016, and its strong 33% respective outperformance against the S&P 500 after around 14 years of underperformance, gave robust indications of an improving US economy.  Against rises in the Fed Funds Rate. And also allaying fears of the Pessimists of a US banking collapse etc.

The extraordinary progress in technology has provided immense productivity gains in Artificial Intelligence, robotics, computers, telecommunications, office automation, fintech, agritech, meditech, railways, aircraft, automobiles, domestic appliances and so much more.  Great progress in 2016 and lots more for the next decade.

All the above went well to plan although the A$ was weaker than expected and the Wave 2 Pessimism that crept into the Gold Sector in the Dec Qtr 2016 left many gold stocks quite friendless and brought some share prices back to the levels of the beginning of the year.  Bargains abound.

The Dawes Points Fixed Portfolios did reasonably well to 30 Dec 2016 as follows:-

Dec 2014 Gold Portfolio 

+167%

ASX.XGD

+143%

Jan 2016 Gold Portfolio  

+67%

ASX.XGD

 +55%

July 2016 Resources Portfolio 

+38%

ASX.XMM

+27%

Dec 2016 Gold Portfolio

-0.2%

ASX.XGD

+3%

The stage is set for another strong year in 2017 but it should be just another good year in a Decade of Prosperity to come.

The Trump Presidency is offering some adventure ahead as so much of the US entrenched bureaucracy, policies and administration are turned on their respective heads. Uncertainty and unpredictability are key themes at present but the markets are positive.

Note well that the year’s economic and market performances reflected the underlying economic conditions driven by a relentlessly growing Asia and the recovery in the US.

Long before Trump was even accepted as a candidate.

Consequently the forces driving the economic expansion are wider and deeper than the impact of any US President, even someone as seemingly proactive as Trump, but Trump should accelerate this.

The emphasis on infrastructure, corporate tax cuts and the long needed overhaul of bureaucratic red and green tape should be very positive for our resources sector.  The increase in US consumer confidence appears to be large and so with rising equity markets, improving commodities and mountains of defensive cash to drive it all it might just be all good and even better than previously forecast.

The 2017 Outlook:-  More of the same only better!

A quick trip around important equity markets which are making new all time highs should start as an appetiser. Note that stock markets are essentially barometers looking ahead at changing market conditions and not thermometers giving current readings of market health.

Starting with the US

S&P 500 Big Caps  - New Highs

NASDAQ  - New Highs

Russell 2000 Small Caps  - New Highs

Wilshire 5000 Broad US Market Index – New Highs

And elsewhere:-

Germany   - DAX Leading and heading to new highs

UK  FTSE  - Very powerful now!

Japan Nikkei -  Rally heading to new highs again

Shanghai SSEC – Quiet but powerful underlying strength

 India Nifty 50 Index -  Leading the world and heading to new highs

Australia All Ordinaries – Finally starting to catch up

Equities are showing us where the world economy is going - and it is not going down!!

I expect corporate earnings will be rising everwhere with the US adopting lower tax rates and with improving economic confidence.  The equity indices should rise, despite rising interest rates. And the Bears still don’t own Shares!

On the other hand the financial market cabal of bond markets, bureaucrats, central bankers, welfare lobbies, politicians and media canvassed here early in 2016 is steadily being roasted and hopefully somewhat dismantled by Mr Trump. Wouldn’t it be wonderful if the US, providing 25% of UN funding, decided to drain that swamp as well.

The expenditures using 'near- free money' from low coupon bonds are now over.  Bond yields have to rise much further.

You are probably tired of seeing this but it is a critical component of the outlook.

This 30 Year Treasury Bond Index has fallen 16% from the highs in July and, whilst oversold, might just fall another 5-8% before a bounce comes.  16-20% capital losses on 'risk-free assets'.

30 Year T Bond yields are likely to rise to ~3.7% in 2017 and much higher further out.

Currencies and Sovereign Bonds have always held a fascination for me and I consider a sovereign bond is just currency with an interest coupon.  Where one goes so goes the other.

The US$ and its 30 Year T Bond are the largest in the markets so need to be respected but at the end of the day they are they are just instruments that are bought and sold.

But if the supply of each (Quantative Easing and Bond-financed Budget Deficits) is rising for the US then it becomes a matter of relativity against other currencies.

The long term channels on the US$ Index have been heading down since 1985 but the rally over the past 2-3 years has been strong and has moved into a new top channel.  It could be very tempting to suggest that the US$ might head to 120 on this index as interest rates and bond yields head higher.

Perhaps the strong positive sentiment for the US$ today represents an important high and may be providing a 'good-bye kiss' on this counter trend resistance line.

Note that this current strength against a weak Euro (57% of the Index basket) and the Pound (11.9%) is not confirmed against the Japanese Yen (13.6 %), nor against the Canadian $ (9.1%).

Consideration should be given to a strengthening US$18tn US economy leading to increasing imports and raising commodity prices and thereby assisting most other countries.

The performance of most of the equity indices of the important other economies have certainly been heading higher and will be atractive investment opportunities for capital leaving the US bond markets.

Also, China and Saudi Arabia have been reducing holdings of US T Bonds so those funds will be redeployed to other markets.  Probably to gold, commodities and equities.

These countries, together with Russia, are using yuan, roubles and gold as trading settlement currencies and so the trading base of the US$ is steadily being reduced everywhere.

It just may be that the surprise of 2017 is not a strong US$ but possibly quite a weak currency.

Prices of Industrial Metals have been rising over 12 months and this index of LME monthly closes has had a decisive trend break into a new bull market that should last many years.

Iron ore prices have exceeded my US$80 target (did anyone else make this call in the June Half of 2016?) and could quite possibly reach US$95 by mid 2017 before we see a significant pull back.

The price history of oil carries great similarities to that of iron ore and an assessment of the supply/demand factors indicates the market is already in balance, stocks are now falling and the recent OPEC cuts will be helping as well.

These commodities are only part of the story as the CRB Index is suggesting a sharp move higher soon for most commodities and probably led by oil.

The other aspect of this is that gold is just becoming even more interesting.

Gold has broken upwards against T Bonds.China and Saudi Arabia have been sellers of T Bonds and have probably been swapping from the oversupply of bonds into the ever tightening market for gold.

Gold bought for the East from the West at artificially depressed Western prices using funds from sales of very risky sovereign debt paper.

So the Outlook in 2017 is much more of  the same only better.

These are the stocks that are considered to offer the best total returns in 2017:-

BHP

Iron ore, coking coal, copper and oil

RIO

Iron ore, copper, aluminium and

FMG

Iron ore

S32

Lead-Zinc-Silver, manganese, coal and alumina/aluminium

WPL

Oil and LNG

WSA

Nickel

NST

Growing gold production base in WA

MLX

Tin, copper and nickel

BLK

Growing gold production profile at Wiluna in WA

LNG

Export LNG plants in US

CTP

Gas supplier into Australian East Coast gas

PSA

Oil production growth

CYL

Exploring for another Bendigo in Victoria

SWJ

9moz gold project in Sth Africa

MGT

Sth Australian Major Magnetite Project

ASP

Web-based publisher of resource sector news flow and data


Best wishes for an outstanding 2017.

Barry Dawes
BSc F AusIMM MSAA

I own or control in portfolios all the stocks mentioned here.

Contact me on bdawes@mpsecurities.com.au  or +612 9222 9111



About Martin Place Securities

Martin Place SecuritiesMartin Place Securities is Australia's Boutique Resources Investment Firm, specialising in emerging mining, resources and energy companies.

MPS was founded in October 2000 to provide a link between Australian resource sector opportunities and investors from major financial centres in Europe, North America and China. We are well known for identifying and financing early stage prospects that develop into successful growth companies.

MPS provides services in Corporate Advisory, Stockbroking, Investment Research and Education.

   


Contact

Barry Dawes
E: bdawes@mpsecurities.com.au
T: +612 9222 9111


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