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Strong and Weak Investing Themes for 2020

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Strong and Weak Investing Themes for 2020 Feb 22-20 Good Afternoon to All Clients and Guests The stock market was very volatile this week torn between some decent economic numbers and the continued uncertainty about the Corona Virus and its containment. But investors may also be sensing the increasing possibility that Bernie Sanders could be the favorite to win the Democrat nomination (which could be decided in very short order). If Bernie wins the nomination the polls are saying he has a decent chance against Trump and the near record high equity markets have certainly NOT priced this in!! While the zooming equity markets are ignoring the potential “President Sanders risk” it appears that the smarter bond market may have their finger on the future economic pulse here. The 30 year US T bond was at 3% one year ago and this week touched a record low of 1.89%!!! The 10 year has also dropped significantly over the same period with many parts of the yield curve now being inverted once again. This tells me that there is a massive flight to safety (over a possible Socialist President or Corona economic side effect or deflation etc.) and that the odds of weakening economic growth necessitating further rate cuts are very high over the next 3-12 months (which bonds love). It is also worth noting for the bond naysayers that the return on the long bond over the last 12 months has been an impressive 28%!! Curran’s portfolio of bond holdings also did extremely well last year which is all part of the “invested but defensively so strategy” that I am currently using. On that note I thought I would cover some of the themes we are working around in all client accounts STRONG INVESTING THEMES FOR 2020 #1 A Focus of Dividend Payers -virtually 100% of our 30 core equity positions pay dividends (even our gold position) and all are dividend growers! -history tells me that these type of stocks beat the market averages over any one cycle hence the positioning -but additionally, dividends will be crucial for overall returns for the next 1-5 years (my prediction) as we expect lower equity returns once this bubble deflates and we get reversion to the mean #2 Is a Time For High Renewable Energy Exposure -our renewable energy stocks have soared over the last couple of years -I am planning to add another position shortly and will communicate this to all clients very soon -renewable energy focused stocks will benefit for all sorts of reasons going forward but the main one is the explosion of interest in GREEN FUNDS and ESG Investing Funds (Environmental, Social and Corporate Governance) -renewable energy discussion was all the craze at the recent Davos meeting and when you hear Blackrock CEO Larry Fink state that “I do believe that the demand for ESG is going to transform all investing” you know there is a future move afoot and from the macro perspective I want to participate -but I prefer that we buy our own individual equities (over ESG funds or Green Funds) as we can be more selective and pick great dividend payers in addition to cap gains potential!! #3 Infrastructure Stocks Will Do Well -with the next recession we will see a severe limitation on the Monetary Policy tools (e.g. rate reductions, QE4,5, 6?) available to the Fed and other Central Banks as they have “shot most of their best bullets” over the last two years STOKING the longest and frothiest bubble in our history… -so with the next recession we will see more of a focus on Fiscal Policy (especially if the Democrats get in????) such as a huge ramp up in government spending programs -in fact my hunch is that no matter who sits in the White House 2021 we are going to see massive government spending programs and infrastructure will be a big beneficiary -all my clients are well positioned to avail of this going forward #4 Health Care---Medical Devices over Big Pharma -I like medical device companies over big pharma companies for several reasons -our medical device companies have more moat protection and they basically have an oligopoly presence…vs pharma where competition is always a threat -they are also less prone to government intervention on pricing especially going forward -and it is hard to do without these devices (vs meds) if the hip or knee is worn out…. -and finally of course the elder boom (oldest now 70) will make the demand very positive for the next decade ahead (I also like REITS that play into this elder boom as clients know) #5 Cloud Computing Massive Future Growth -cloud computing is in for massive growth over the next 5 years and I will be adding two core position in the very near future to all client accounts -I will cover this more in a Client email #6 Gold Stocks -I have never been a gold bug but it is hard to ignore gold right now (and silver and palladium) -typically gold zooms when the US dollar is falling and here we have the US dollar up and YET gold is still zooming!! -That is a very positive endorsement for gold and is now at a 7.5 year high DESPITE the high US dollar -I also love the endorsement by Jeff Gundlach who recently stated that gold was his “highest conviction idea” for 2020 over the weakening US dollar going forward “as foreigners start to divest from the US dollar” -we doubled our gold exposure several months ago as you all know and I will keep revisiting our % exposure going forward #7 Bonds Remain Core -almost everyone needs bonds in a diversified portfolio!!! -they provide a safety ballast in rough seas and always provide positive returns in Bear markets (vs equities) -they also provide me with another source of cash to buy low re equities -there is also the possible capital appreciation factor as future markets have two rate cuts priced in this year…. -BUT you must have the right bonds (e.g. not high yield right now) #8 Consumer Staples and Utility Stocks -both of these sectors have had a great 2019 and suspect we will see the same in 2020 -there will come a time for us to take some profit here but not yet #9 Blockchain Stocks and PET Stocks I have both of these on my radar right now and once I make a decision I will forward comments PET stocks do great in recessions, empty nester boomers love their pets, and millennials also love their pets…so all in all great fundamentals in this sector going forward -I have covered Blockchain and Bitcoin a couple of years ago when Bitcoin was trading at 19,000 I believe and correctly called it a bubble stock-sector….but now I need to revisit the BlockChain -more on this later WEAK INVESTING THEMES FOR 2020 #1 Avoid High Beta Stocks Right Now -my bet is that high beta stocks like the current tech sector will get hit VERY hard with the next down turn -love the products or services but NOT the stocks right now -valuations way too high and this is being exacerbated by the ETF market cap weighted passive craze (as it will on the downside) #2 Low Canadian Financial Exposure -despite the EXCELLENT enclosed report on the Canadian Housing market I am way underweighted Cdn Financials….too much risk for me with this much mortgage debt….esp. when rates eventually climb up #3 Suggest a Low US exposure -many, many reasons to be under exposed to the overall US markets right now -P/S ratio of 2.35 x is higher than dot.com bubble!! -Buffett Yardstick Market Cap: GNP more expensive than 2000!! -this explains why Warren is sitting on $128 billion in cash -30 year T bill under 2%= fear -gold at 7.5 year high = fear -share buy backs peaked in 2018…has been a major support for markets and now declining -Cass Freight Index in steady decline since 2018!!! -record insider selling in January… -etc. etc. -BofA Merrill Lynch recently stated that “US stocks have never been more overvalued relative to the rest of the world” -history tells me that extended periods of country out performance (now 10 years for the US) are ALWAYS followed by underperformance -hence I prefer European and Emerging markets right now (and of course our Canadian home bias’s for dividend producing stocks) #4 Low US Dollar Exposure -famed CIO Greg Jensen at Bridgewater likes gold these days as “the status of the US dollar as the worlds Reserve Currency could be threatened” going forward -as well I already referenced Jeff Gundlach earlier on the same -my bet is for a lower US dollar over next couple of years #5 Avoid High Leveraged Companies At All Cost -there are many problems with Central Banks dropping rates to zero or close to zero but one of the biggest is that this allows survival and proliferation of “Zombie companies”…these are not healthy for the overall economy -and have companies ever taken advantage of CHEAP debt-- total US Corporate debt is now at $10 Trillion…47% of the GDP which is the highest ever…Corporations have accumulated massive levels of debt and mostly to use in Share Buy Backs and little on Capex spending -the problem is that the quality of this massive debt bubble is very weak and with the next recession we will see a surge in defaults -you want to avoid highly indebted companies at all costs -I am guessing that this Corporate Debt bubble (brought on by the FED) will be the epicenter of the next financial crisis!!!!!!!!! CONCLUSION ON INVESTING 2020 Overall I remain in the cautious and defensive investing camp taking my cue from the “smarter” bond market signal! However, as all clients know, I did tactically reduce our cash holdings in late 2019 (and added selective equities) because of the abrupt FED about-face and surge in QE4.
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