Anno Domini 2016 is behind us. It is the high time to see which Independent Trader predictions were on point and which ones were off and why. As always, you can find my prediction from a year ago in italics. Below every single one there is a follow-up comment.
“My belief is that 0,25% interest rates are not here to stay. Yellen will go back to solution she prefers – zero interest rates and printing – and act like a hero with the excuse of dying economy.“
Paul J. Isaac's Arbiter Partners returned -19.3% in the third quarter of 2021, according to a copy of the hedge fund's quarterly investor correspondence, which ValueWalk has been able to review. Following this performance, the fund's return sits at -1.6% for the year to the end of September. In comparison, the S&P 500 returned 15.9%, Read More
Commentary: Although the FED announced four rate hikes, 2016 was very stable in terms of interest rates. In mid-December a 0.25% hike – this was something I predicted in November. The FED did not cut rates making this prediction inaccurate.
Officially, another round of QE never happened. When looking deeper in the books, the US continuously purchase assets through ESF with FED’s money. The evidence is in UST yield fall (increase in price) when the whole world was selling American debt. In my opinion, the FED continues printing at a scale bigger than QE 3 but hides it from the public eye. A similar situation happened in 2009 and 2010 when the central bank created out of thin air 16 trillion USD ( the equivalent of the US GDP) and then borrowed this money to Wall Street banks and institutions in Europe.
“The biggest problem for the FED is now a debt of shale sector. Its yield stays now around 19%. Bankruptcies can cause a domino effect and it is possible that this will flood financial sector due to chain effect. Either the FED starts buying junk shale bonds or it has to take the risk of their insolvency on itself. Both ways it’s the taxpayer that loses.”
Commentary: First half of 2016 was filled with many bankruptcies in the energy sector but the domino-effect was halted. The FED gave guarantees to banks financing shale gas and oil extraction. Later, the ECB decided to go on corporate debt buying spree. Additional injection of capital prevented the capital flight from corporate bonds market (also in the US) as a result the can has been kicked down the road. Eventually, taxpayers from America and Europe will find government’s hand in their pockets.
“I believe that share prices at the end of 2016 will land lower than we see them now. The boom that peaked around in August 2015, was one of the longest in the history of last 80 years. Moreover regarding P/E (price/equity), CAPE (price/earnings over last 10 years), P/S (Price/Sales) – indicating extremely high share prices. Margin debt levels (very high) is another gauge of very expensive stocks.”
Comment: The beginning of 2016 was bad for equities but after a bad start, the year was good for stocks. Bulls enjoyed the US market encouraged by Trump’s win and inflation pressures it created. At the end of the day, stocks drained capital from the bond market and S&P is now 11.5% higher than 12 months ago.
“Across a big range of stocks that are bound to be affected the biggest losers will be in my opinion FANG – Facebook, Amazon, Netflix and Google). This group’s P/E is 351 – astronomically high comparing even to the dot-com bubble. FANG’s severe overestimation confirms the fact that last 6 months was filled with insiders (members of the board of directors or supervisory boards) only selling their shares.”
Comment: FANG companies managed to improve their positions. What is more, companies behind this acronym are responsible for 90% of all S&P 500 gains in the last 24 months. I still stand by my prediction because fundamentals have not changed – these stocks are overpriced and investors should stay away from them. Verification of their price is still an open case.
“When it comes to developing markets against general opinion 2016 will do better than already developed ones. The purpose is simple: developed markets delivered less value this cycle in comparison with their developing brothers. On top of that slump in developing economies started earlier and they experience cheaper stocks today than developed markets do.”
Comment: In 2016 emerging markets indeed grew faster than developed counterparts. EEM (EM ETF) gained 12.3%, while VTI (DM ETF) only 10.5%. The emerging world still looks more attractive compared to overpriced stocks in the US, Japan or Western Europe.
Numerous times I called Russian market as undervalued. Last 12 months were very good for both RSX and RSXJ, they jumped by 45% and 100% respectively.
“I advise you to stay back from all types of bonds. Globally we reach the zenith of the 35-year cycle of yield drop and a correlated increase in the price of bonds.”
Comment: During last quarter of 2016 we witnessed bonds falling hard. I mentioned before capital drain accelerated after the presidential elections in the US.
a) European Government bonds
“If I should estimate future movements I would say that before 2016 ends bonds made in Spain, Italy, France, Belgium and Portugal for sure will rise.”
Comment: Among countries I listed above, Italian and Portugal’s debt had seen their yield going up. In the case of Spain, France and Belgium yield decreased. This market is extremely distorted due to the ECB interventions.
b) The US bonds
“I am of opinion that in Q4 2016 yield of 10-year treasury bonds is able to situate itself marginally lower than it is now.”
Comment: Yield of 10Y UST fell drastically until August when it landed at 1.35% (compared with 2.27% when 2016 started). Later this year trend has changed and slow growth became much faster after the presidential election. Today we see yield at 2.36%.
c) Corporate bonds
“Corporate bonds yield recently climbed from 7 -15%. Shale bonds have to offer impossible 19% to attract capital. Normally we all should short shale bonds. Especially low oil and gas prices put stress on producers. Unfortunately, many companies are able to use revenues only to pay the interest rates of their debt. Increasing the debt. This debt will never be paid back!
Sector of shale gas is strongly highlighted as one that can give the US energy security. This is big enough argument for the FED to save the whole sector to buy out from commercial banks all worthless shale bonds. With one condition being to further finance bankrupted shale producers. Simply put: we are financing sector which is already insolvent by saving financial institutions that irresponsibly credited those energy companies. It does resemble 2008 and buyout of mortgages.
Using Mark Faber’s words it is hard to predict anything without knowing what crazy thing central banks will do.”
Comment: Just like I predicted, the FED joined the game. Institutions financing energy sector were given guarantees by the central bank and this calmed the market.
“Optimal solution for gold would be stock market crash and reactionary QE4 from the FED. A scenario like this may leave gold at a level of 1500-1600 USD/oz at the end of 2016. Whatever central banks do, looking at the gold price in the USD – it will be higher than now. The absolute majority of currencies experienced their minimums at the end of 2013 and we are not going to see them anytime soon.”
Comment: Gold saw its price gaining below 10%.
“(…) I see silver at the end of 2016 at 22USD/oz.”
Comment: We saw silver climbing from 14 USD/oz to 21.5 USD/oz. At the end of the year price returned to 16 USD/oz area.
“I am not entirely sure what to think of mining companies.
One side of the story is that this group of assets is extremely underestimated with great potential of growth. Still with prices of precious metals climbing those of mining companies had different fate since begging of the year. I remember ending of 2008 and similar situation when XAU (Gold & Silver miners) index lost 60% because of panic.
With that in mind, severe stock exchange panic can lead to a situation where gold and silver go up and mining companies receive a discount. I want to say that this setup may only happen at the beginning of the market slump when investors sell every kind of shares in fear. Only after a second look, the search for valuable assets is due. We can count mining companies with <1bn USD capitalisation as very good candidates for that role.
I am far from being super-optimist with regard to mining companies but I will not sell their ETFs in my portfolio.”
Comment: During the first half of the year GDXJ (small mining companies ETF) jumped by over 150% only to close the year with additional 65%.
“Base metal prices (copper among others) in my view still have not touched the bottom but possibility of further lows is now minimal. Likewise, after acute dip we have seen in second half of 2015 the ascent could be equally sharp. We may call them one the few assets ending 2016 in the black.”
Comment: It was a very good year for commodities – industrials are now 20% more expensive.
“Without the intervention of central banks buying shale debt production can drastically fall. I cannot believe in countries dependent on expensive oil will calmly sell under 30 USD. Lastly, you still can disrupt supplies and spread fear in the market causing sudden hikes and then hedge production on better terms.
Personally, I think that in 2016 price will come back to 70 USD despite oversupply.”
Comment: According to my predictions, 2016 pushed the price of oil higher. The price of a barrel is now 46% greater but when compared with February bottom, the oil price has doubled. Ultimately, we never saw 70 USD/bbl but the rise in price is still impressive.
“As of now, I consider their potential as being higher than industrial resources. Regardless of agricultural resources price falling less brutally than industrial resources (now we are marginally lower than 2009 levels), 2016 we can see some weather anomalies taking its toll. Example being El Nino anomaly. In the past, both floods in South-East Asia and droughts in Australia immediately affected prices of agricultural resources.
Independently from weather conditions today’s prices are a fraction of those in 1974-1980. I will definitely write an article about that soon. I feel that agricultural resources should bring very nice profit.”
Comment: We saw the first half of 2016 adding 15% to their price. Year ended with the price of agricultural commodities being marginally higher than 2016.
“Global real estate prices are still expensive thanks to central banks and historically low-interest rates. Between March 2009 and January 2015 Global REIT Index (mirroring real estate for rent) expanded 230%. Whole 2015 we noted slow decrease which in my mind will snowball with crisis and financial market troubles speeding up. Although REIT’s prices in many developing countries are very attractive the potential of falls is huge.
In other words, I stay away from real estate market. What can make it interesting is freezing credit lines, higher interest rates and general panic in the financial markets.”
Comment: REITs ended the year a little in the red. This result looks very poor given the level of risk (huge nose dive potential) and how well other asset classes performed – I am looking at your precious metals and industrial commodities.