Where to Invest in 2017, and What to Avoid

As I sat in the airport, about to leave Cabo for the rainy reality of Northern California, I wanted to take a victory lap for last year’s prediction of Oil being the best asset class. I mean, up 45%! Not bad, huh? Sadly, the person who sat next to me, shamelessly looking at my nascent newsletter and reading my opening line, wise-cracked, “You know what the best asset for 2016 was??? BitCoin!!!” And, with that prose from the 25 year-old from Calgary (fresh off a night in local prison no less), I had my humble pie and reworked my article from the get-go. So, here we go again…

We are about to enter the first year of the Rule of Trump. Will 2017 bring about a new era of global conflicts taking place on Twitter? Will The Donald launch the end of globalization through a barrage of trade embargoes, tariffs, and the like? It certainly seems that, unlike 2016, the world seems to be one of uncertainty and confusion.

However, with uncertainty comes a dose of realism. Because, in investing, there is no such thing as certainty. I mean, who would have thought, going into 2016, that the UK would be leaving the EU and that Donald Trump would be coming into office in about two weeks? You could have gotten great odds in Vegas on that pair trade.

So, with the certainty that nothing is certain and that the only constant is change, I will undertake to make a few predictions for 2017…ideas that I’m certain have the potential to happen, with time being the ultimate arbitrator as to whether or not they actually come to pass.

The first prediction is that Donald Trump is more bluster than wrecking ball and that, at his core, a sense of realism and desire to get shit done is his true driving force. Therefore, I am not going to suggest that our trade with China hits a brick wall. Nor, that his efforts to create a pro-business climate in the US will die in a hopelessly deadlocked morass of congressional bickering.

Instead, the optimist in me is strong going into 2017, and I believe that President Trump will be pushing hard to make a lot of people happy and to try to unwind years of large scale overregulation that has permeated Washington DC. No walls will be built, some major reforms will start taking place, and, above all else, our economy begins a shift away from large government, driven by strong stimulus packages to make a lot of businesses feel positive effects.

So, with that in mind, I see the following macro trends taking place. Interest rates continue to tick higher on the back of a strong economy and less financial stimulus. The USD dollar stops its climb, as the strong US economy starts to bring emerging markets along with it. However, stocks shouldn’t do too much overall due to their high P/E’s and larger expectations of late. Finally, I predict that commodities have the best year of the lot.

Some of these predictions I’ve discussed in earlier newsletters, and some I’ll be speaking about in more detail soon. But, overall I believe that there will be a bifurcation in the marketplace and top down macro will determine sector winners and losers in the stock market this year, with the rising tide lifting all ships effect of Trump’s victory a distant memory by year end.

Within that larger picture, here are my predictions for the best and worst places to invest in stocks for 2017, with specific comments on the best and worst. Winners: oil, industrials, metals. Worst: housing, defense, big-pharma (but not biotech).

The Case for Oil: Yes, I’m going back to the well (pun intended) to pick oil as my favorite investment in 2017. By doing so, I’m placing a big bet on the ability of OPEC to stick to its guns and actually reduce production as they have stated they will. Now, betting on OPEC is not a sure thing; they always cheat. However, I don’t believe that the smaller players have the cash to increase production and, for the first time, this deal is really being driven by the 500 pound gorilla in the space, Saudi Arabia. I fully expect compliance with the cuts for at least one year, resulting in a commodity price of over $65 per barrel by year end. Realize that, even at that price, a good portion of global production is under water, so it’s not like producers will be investing like crazy at that price. Therefore, I think $65 is actually a sustainable level that will be hit and hold. Will OPEC stay firm and the rally last beyond 2017? Probably not, but let’s enjoy this ride as it seems to have legs for the time being. For some specific stock ideas in Oil, please see this article or check out our top pick, Earthstone)

The Case for Industrials: uhhhh…Trump! We are looking at fiscal stimulus in a big way. Combine that with a lot of “Make America Great” rhetoric pushing companies to manufacture domestically and the ground is set for this group to do well. They have moved in advance, yes, but I think this is a sea-change event and will go on.

The Case for Metals: See the above and throw in a weaker dollar. I don’t think rates will go up quicker in the US than elsewhere. They are simply too low abroad. So, as economies around the world start to improve, expect other currencies to perform. Stronger emerging economies along with a weaker dollar, points to an improved metals market. Gold is my top pick, but the whole space looks poised to perform.

The Case Against Housing: There is a triple whammy coming at the housing market. First off, higher rates is never a good thing for this industry. Secondly, the rental market is rolling over in many major cities. This trend will likely intensify in 2017, creating stronger incentives not to buy, but to rent instead. Finally, housing has had a nice run since 2009. In my memory, real estate seems to roll over every 7 years or so, almost like clockwork. We seem very ripe for a pullback, and housing starts are indeed starting to roll over (see chart below), for the first time since 2009.

The Case Against Defense: Simply put, I believe expectations have gone too far, and I think that Trump will end up A) not fighting with Putin, but cooperating to a big degree, and B) choosing other battles to fight in Congress in 2017. Even if I’m wrong on the latter half of this, spending takes so long to happen for defense, that the stocks can pause for this year, regardless. The chart confirms this…after rallying more than 45% from it’s low in March, ITA (a defense industry focused ETF) appears to be rolling over.

The Case Against Pharma: When Obama created the Affordable Care Act, the core thesis was reduced drug costs as the US Gov. would be a large buyer with purchasing power. Instead, in typical DC fashion, the lobbyists kept drug costs unchanged to pass their bill. Hence, the one good aspect of Obama-Care got derailed before it left the station. Trump is different from Obama. Beholden to no one, he will push through policies that slash payments for existing medications. The results will be painful for large pharma and generic manufacturers, but positive for biotech as new drugs will be the cure for the margin squeeze. Combine this with a streamlined FDA, and expect biotech acquisitions to be in vogue in 2017, while major pharma scrambles to salvage their multiples.

Thus endeth my predictions for 2017. I hope that each of you had a great 2016 investing, a happy and healthy holidays, and wish you all the most success in 2017!!!

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