March 2018 ENR Market Outlook
Executive Summary:
• The threat of widespread protectionist trade measures by the United States threatens the global macro economy
and might trigger a Black Swan event in 2018. The bullish backdrop driven by big U.S. corporate tax cuts and less
financial regulation might be offset by an all-out global trade war, possibly tipping the global economy into
recession, if NAFTA is dissolved and trade tariffs legislated against America’s largest trading partners;
• President Trump has targeted steel (25%) and aluminum (10%) tariffs, hoping to protect American jobs and deflect
foreign dumping. Driven by his ‘America First’ agenda, the President doesn’t have the right facts. Despite
pandering to the steel electorate, U.S. consumers, including the auto sector, command significantly more
registered votes and will be adversely impacted by rising prices as companies offset rising inputs;
• Canada, America’s oldest and most trusted ally, will suffer the brunt of steel (16% of imports) and aluminum (46%
of imports) tariffs, resulting in widespread Canadian layoffs and retaliation across other industries;
• Despite his tough talk on China’s unfair trade activity and dumping below market prices, including her massive
$375 billion-dollar trade surplus with the United States, the President’s trade tariffs will barely hurt China,
responsible for just 2% of U.S. steel imports and a bit more for aluminum;
• President Trump Tweeted on March 2 that ‘trade wars are easy to win,’ but history suggests this is not the case.
Tariffs are a significant negative for the U.S. dollar as evidenced from 2002 to 2004 when President George W.
Bush imposed steel tariffs. Over that 24 months period, the USD Index crashed 31%;
• After suffering their first losing month in February since October 2016, global equities have mostly bounced back,
recapturing about 75% of their losses. Stocks posted their worst weekly decline in percentage terms since August
2011. In February, the MSCI World Index fell 4.3%, the S&P 500 Index declined 3.9% and the MSCI Emerging
Markets Index fell 4.7%;
• The February global market swoon, triggered by computer trading models, record-high NYSE margin debt and
rising interest rates, saw a positive correlation among most asset classes, offering few safe-havens. Though rare,
bonds, stocks, commodities, most foreign currencies and gold all declined the week of February 5. The Japanese
yen ranked among the top-performing currencies against the dollar in February, rising 2.3%;
• In our view, the Japanese yen is the most under-owned major currency in the world. Though the yen has rallied
6% in 2018, it has not discounted the growing likelihood of QE tapering at the Bank of Japan. On March 2, the
Bank of Japan suggested it could start moving away from ultra-loose monetary policy as early as next year;
• A victim of the February panic, Credit Suisse and Nomura Holdings-sponsored volatility products were crushed,
losing more than 80% of their value the week of February 5. The Velocity Shares Daily Inverse VIX Short Term ETNs
were subsequently closed. The ETNs were bets that volatility in the stock market would remain low; when
amplified by leverage, it’s a one-way street to the poorhouse when volatility erupts;
• China will launch a crude futures oil contract on March 26 as Beijing seeks to extend its influence over the pricing
of oil barrels sold in Asia. In 2017, China became the world’s largest consumer of crude oil, surpassing the United
States for the first time at 8.4 million barrels per day. It’s no surprise China is creating her own benchmark for oil.
The long-term threat to the dollar is now real as more settlement contracts are settled in yuan at the expense of
the American dollar;
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
• The German Bundesbank announced it would include the Chinese renminbi (RMB) in its reserves, marking the first
time the German central bank will include the Chinese currency in its vast foreign-exchange mix. The move comes
after the RMB became the fifth currency in 2016 to join the International Monetary Fund’s Special Drawing Rights
(SDR) basket – a collection of reserve currencies that serve as an alternative to the USD;
• Germany’s largest union, IG Metall, representing a wide swath of members across the country, won a 4.3% wage
increase in February – one of the largest in years. Inflation remains very low in the euro-zone but rising wages in
Germany might portend to escalating labor costs elsewhere in the region as the recovery continues;
• We remain constructive on high quality equities in 2018 but have aggressively raised cash balances across all
managed-accounts since late in the fourth quarter. The stock-market cycle is mature and soaring consumer
confidence coupled by record-high margin debt portend to growing risks for investors. Interest rates might
continue to rise as the Fed tightens accompanied by higher wage inflation. The United States has introduced ‘Tail
Risk’ this month vis-à-vis rising trade tensions and the possibility of import tariffs. Also, the resignation of globalist,
Gary Cohn, from the White House, is a negative development for markets;
• The global macroeconomic picture, however, remains bullish provided trade tensions don’t escalate, and interest
rates don’t spike much higher from current levels. A weak USD is also positive for risk assets. The inflation scare,
if it truly materializes, might be a 2019 event. Nevertheless, investors should embrace a regular market cycle of
volatility as a combination of new domestic and international events test the bull markets’ resolve;
• The S&P 500 Index has roughly quadrupled off the March 2009 market low and the yield on the benchmark ten-
year Treasury bond has tumbled from over 4% in late 2008 to a low of 1.33% in mid-2016. Both asset classes
appear to be stretched based on valuations and vulnerable to a significant correction;
• We continue to 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
and offer poor risk-adjusted values. Spreads for most credit products trade at their narrowest gap since late 2007.
We prefer floating rate investment-grade bonds, Treasury-Inflation-Protected Securities (TIPS) and short-term
Treasury bonds. Treasury bills are also increasingly attractive compared to bonds because short-term money-
market rates keep rising. LIBOR or 90-day London Interbank Offered Rates now yield 2.03% -- the highest in almost
a decade;
• For clients seeking a portfolio strategy with a negative correlation to stocks and bonds, we’re pleased to offer the
recently launched ENR Crisis Investing Portfolio. The portfolio includes a mixture of surplus currencies with strong
balance sheets; gold; gold stocks; high frequency trading firms; publicly-trade options and futures exchanges;
diversified managed futures, and a short-selling stock fund. This is an ideal late-cycle market product for investors
looking to diversify away from the market and possibly, earn profits in the next recession or bear market. Please
call our office for more information.
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
Global Equities
Cashing in on Tax Cuts and Stock Buybacks in 2018
One of the biggest secular trends in the stock-market since the end of the financial crisis nine years ago remains firmly
entrenched: the bull market in stock buybacks. Though an ageing bull market threatens investors in 2018, the secular
advance in share buybacks received a big boost in late December following the passage of the Trump tax cuts. More than
ever, U.S. corporations are buying back stock and raising share prices – again.
A stock buyback, also known as a "share repurchase", is a company's buying back its shares from the marketplace. The
idea is simple: because a company can't act as its own shareholder, repurchased shares are absorbed by the company,
and the number of outstanding shares on the market is reduced. When this happens, the relative ownership stake of each
investor increases because there are fewer shares, or claims, on the earnings of the company.
Some pundits call this exercise accounting ‘trickery’ because it only serves the purpose of manipulating the share price
and enriching shareholders. And Forbes calls it ‘The Greatest Deception.’ As Senator Elizabeth Warren argued last year,
“stock buybacks create a sugar high for the corporations. It boosts prices in the short run, but the real way to boost the
value of a corporation is to invest in the future, and they are not doing that.” The UK Government is launching an inquiry
into buybacks, due to concerns that they “may be crowding out the allocation of surplus capital to productive
investment.”
Though there’s some merit in the above assertions, they’re not entirely accurate, either. I turned to the Harvard Business
Review (Sept 15, 2017) for some hard evidence on buybacks, if any:
“The claim that the need to buy back stock forces firms to cut investment puts the cart before the horse. A more plausible view goes like this: First, firms allocate funds to investment based on the opportunities that are available. If they have spare cash left over after taking all value-creating investment opportunities, then they may use it for buybacks. This highlights a logical error in the UK Government’s quote above: “surplus capital” is, by definition, capital left over after all productive investments have been made.
The evidence suggests this view is more accurate. A comprehensive survey of financial executives concluded that “share repurchases are made out of the residual cash flow after investment spending.” Other studies find that CEOs repurchase more stock when growth opportunities are poor and when they have excess capital. It is the exhaustion of a firm’s investment opportunities that lead to buybacks, rather than buybacks causing investment cuts.
Moreover, the claim that buybacks weaken companies long-term isn’t borne out by the data. Firms that buy back stock subsequently beat their peers by 12.1% over the next four years. Rather than eroding long-term firm value, buybacks create value by ensuring that surplus capital is not wasted. For several years, Yahoo was valued at below the sum of its parts, partially due to concerns that it would waste its cash on poor acquisitions; more broadly, a large-scale study found that, in poorly governed firms, $1 of cash is valued at only $0.42 to $0.88. This highlights the value that can be unlocked simply by not frittering away corporate resources.”
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
The way I see it, any time an investor gets a gift from the market, it’s worth taking. Making money in stocks isn’t easy. I’ve
been tracking the trend in stock buybacks for years and looking for a correction in the primary trend before making a
recommendation. The latest market sell-off in February provides such an entry point. And big corporate tax cuts provide
even more fuel to this already long rally in buyback shares.
Buybacks are once again on a roll after a brief respite last year.
President Trump’s corporate tax cuts are very bullish for U.S. economic growth, domestic consumption and stock prices.
According to Goldman Sachs, U.S. companies are on track this year to return a record $1 trillion-dollars to shareholders as
Trump’s tax cuts prompt boards to boost stock buybacks and dividends at a faster rate than their capital expenditures,
R&D budgets or wage bills. Goldman estimates that share buybacks would grow 23% in 2018 to $650 billion-dollars while
J.P. Morgan is predicting an $800 billion-dollar shopping spree on stock buybacks in 2018 – exceeding last year’s total of
$530 billion-dollars. So far this year, through March 2, U.S. corporations have unveiled a record $187 billion-dollars in new
buybacks, according to Birinyi.
Stocks with higher buyback yields and new announcements tend to outperform their peers, especially during corrections
and recessions. Since 2000, those stocks have outperformed peers by 150 basis points during corrections and 200 basis
points during recessions, claims J.P. Morgan. They’re also less volatile than their peers in all market conditions, as buybacks
tend to stabilize price weakness.
Stock buyback exchange-traded-funds (ETFs) are still relatively new to index investors. Currently, only three are trading
and only one really has any liquidity at all. The oldest buyback ETF – also home to the best long-term track record – is the
PowerShares Buyback Achievers Portfolio (NASDAQ-PKW). Launched in December 2006, it’s produced great returns for
investors following a disciplined strategy of purchasing select share buybacks (see chart below).
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
The PowerShares BuyBack Achievers Portfolio is based on the NASDAQ U.S. BuyBack Achievers Index. The Fund will
normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to track
the performance of companies that meet the requirements to be classified as BuyBack Achievers. The NASDAQ U.S.
BuyBack Achievers Index is comprised of US securities issued by corporations that have affected a net reduction in shares
outstanding of 5% or more in the trailing 12 months. The Fund and the Index are reconstituted annually in January and
rebalanced quarterly in January, April, July and October.
Based on relative valuations, the Fund trades at 17.2 times trailing earnings compared to 25.2 times trailing earnings for
the S&P 500 Index or a big 32% discount. The U.S. broader market trades at an even higher multiple of 32.56x using the
Shiller P/E Ratio, which is inflation-adjusted over ten years. Yes, buyback stocks are less expensive than the broader market
but make no mistake, the best time to purchase shares was back in 2009, not in 2018 after a 300%+ bull market advance.
But for investors, there’s a ‘margin of safety’ here because the share count is being reduced and the flow of money
repurchasing stock is extremely bullish and about to get even more powerful as tax repatriation continues this year.
Since 2006, the PowerShares BuyBack Achievers Portfolio has returned 9.61% per annum compared to 8.65% for the S&P
500 Index. Over the past ten years, PKW has gained 11.72% compared to 9.78% for the S&P 500 Index. However, the Fund
has slightly trailed the broader market over the past five years but still generated a respectable return of 15.84% per
annum compared to 15.94% for the S&P 500 Index. PKW also trailed the benchmark over the past three years by a wider
margin of three hundred basis points.
Annual expenses are 0.63% for PKW. The Fund has ample liquidity on most days. Top five holdings now include Goldman
Sachs Group, Citigroup, Charter Communications, Walt Disney and American Express.
BUY the PowerShares BuyBack Achievers Portfolio (NASDAQ-PKW) up to $61.50. Apply a 20% stop-loss on your entry
price.
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
Rising Rates and Stock Sector Performance
I find it interesting that S&P 500 Index sectors or groups issuing the largest dividend increases after just two months in
the calendar year are also the worst performing in 2018. More than 20% of the companies in the S&P 500 Index have
boosted their dividends to shareholders this year, partly due to last year’s $1.5 trillion-dollar tax cut. The biggest boosters
are real estate, telecommunications, utilities, energy and consumer staples – also at the bottom of the performance
tables. Overseas, it’s basic materials and energy leading the way with big payouts.
According to Jim Paulsen at the Leuthold Group, stocks that trade like bonds would probably be at a disadvantage as
interest rate rise; better known as ‘bond proxies’ since 2009, stocks that pay above-average market dividends have been
under severe pressure since the fourth quarter and especially since January. Paulsen tracked the performance of the S&P
500 Index sectors since 2010 and discovered that relative returns for bond-like equities trailed the overall market
considerably during weeks when the ten-year Treasury bond yield rose. The groups that trailed the most were utilities,
telecommunications and consumer staples.
As for market winners, inflation-based assets have historically led the pack. These include commodities and basic
materials, according to Paulsen.
In a similar report produced by Goldman Sachs, the bank surveyed which sectors are the most correlated with bond
yields, and vice versa. Goldman Sachs revealed that in addition to basic materials and oil and gas, banks were the top
gainers under a period of tightening monetary policy since 2005. Autos, insurance and industrials also posted strong
gains as interest rates climbed. The worst sectors were food and beverage, healthcare, telecoms, media, retail, REITs and
utilities.
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
Surge in Volatility Threatens Bull Market
ENR Market Outlook Portfolio The ENR Market Outlook Portfolio consolidated in February and remains largely under pressure this month as a
combination of negative events relating to trade dampen bullish sentiment. The equity markets are waking up to the idea
that interest rates are higher amid rising inflation and Fed tightening. Coupled with the bearish implications of a possible
global trade war and the growing dissolution of NAFTA this spring, the backdrop has rapidly deteriorated for investors as
we conclude the first quarter shortly. Bonds are also under pressure, and for the first time in years, have possibly de-
coupled from stocks in the first bout of volatility in more than two years. Many of the companies we own that pay
dividends of 3% or more have come under selling pressure since January as the yield-curve steepens.
For investors, the good news is that more than 20% of the companies in the S&P 500 Index have boosted their payouts to
shareholders so far in 2018 while no firms have cut dividends – the first time this has occurred since 2011, according to
S&P Dow Jones Indices. We’d argue that bond yields are still historically low and would have to rise significantly higher
from current levels to deepen the carnage already inflicting dividend stocks. In February, the yield on the two-year
Treasury bond (2.25% now) surpassed the dividend yield on the S&P 500 Index (1.90%) for the first time since 2008.
Consumer staples are bearing the brunt of the selling since late 2017. The sector, home to big brands in the food and
beverage space, has largely been slow to adapt to changing consumer tastes and fresher foods. Global revenues are
declining, competition is rising from smaller rivals and for some companies, cost-cutting can only go so far. Long viewed
as bond surrogates over the past several years, consumer staples correlate strongly to bond yields.
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
We own some of these companies, including Kraft-Heinz (NASDAQ-KHC), Procter & Gamble Corp. (NYSE-PG) and Nestlé
(Zurich-NESN). Each of these blue-chips now trades at a 52-week low with dividends looking increasingly attractive. With
the exception of KHC, now rated a HOLD, we’re upgrading P&G and Nestlé to BUY this month. Both companies have activist
investors pressuring management to improve results – a big plus for investors. KHC is much cheaper compared to 12
months ago but will have to make a huge acquisition to boost margins, and that won’t necessarily help the stock price
over the near term. HOLD KHC.
In addition to the PowerShares BuyBack Achievers Portfolio (NASDAQ-PKW), we continue to recommend high-value U.S.
companies with international sales. These include Procter & Gamble Corp. (NYSE-PG) and Newell Brands (NYSE-NWL).
Both companies are near their lows.
In the United Kingdom, the worst-performing major market in Europe this year, Diageo (NYSE-DEO) has also softened
since the start of the year. DEO is the world’s largest liquor company with tremendous brands like Smirnoff Vodka,
Tanqueray Gin, Bailey’s Irish Cream, Johnny Walker, Guinness, Captain Morgan Rum and others. It’s generating strong
revenue growth and unlike traditional consumer staple stocks, provides an almost ‘essential’ group of brands to the public
through conventional and digital marketing. By ‘essential,’ I mean core spirits that are priced for the masses and almost
always served at every function or celebratory event in the world.
In Canada, another high dividend-paying stock, BCE Inc. (Toronto-BCE), remains under pressure as interest rates rise. BCE
trades just above its low over the past 52 weeks and yields a fat 5.3% dividend. The company is Canada’s largest
telecommunications company, and in my opinion, also home to the best home entertainment vis-à-vis Bell Fibe. I
personally own BCE in my retirement plan and recently bought more.
This month, we’re selling the SPDR EURO Stoxx 50 ETF (NYSE-FEZ) and the iShares Global Infrastructure Index ETF (NYSE-
IGF).
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
Market Outlook Stock Portfolio:
Security Listed Symbol Entry Price
Date Current Yield
Current Price
Gain/ Loss
Advice
PowerShares Buyback Achievers
NASDAQ PKW $59.30 Mar 6/18
0.64% $59.30 New BUY
Newell Brands Inc. ⁸ NYSE NWL $27.60 Feb 5/18 3.47% $26.74 -2.28% BUY
Diageo ADR NYSE DEO $113.71 Jul 4/16 2.58% $131.89 21.77% BUY
Europcar Groupe Paris EUCAR € 10.25 Jan 2/18 1.46% € 10.26 2.28% BUY
iShares Russell Top 200 Value Index
NYSE IWX $52.46 Jan 2/18 2.13% $50.98 -2.82% BUY
Nestlé SA⁴ VTX NESN CHF
65.15 Dec 7/16
3.18% CHF
73.50 10.10% BUY
BCE, Inc.⁶ TSE BCE CAD
57.97 Mar 8/17
5.14% CAD
56.30 6.74% BUY
Procter & Gamble³ NYSE PG $77.38 Jul 6/15 3.50% $79.11 11.84% BUY
iShares Global Infrastructure Index ETF
NYSE IGF $39.57 Nov 7/16
3.13% $42.45 10.49% SELL
SPDR EURO Stoxx 50
NYSE FEZ $39.07 May 8/17
2.47% $40.05 4.55% SELL
The Kraft Heinz Company
NYSE KHC $77.17 Oct 3/17 3.74% $66.83 -12.59% HOLD
BAE Systems plc OTC BAESY $30.25 Dec 4/17
3.31% $32.14 6.25% HOLD
Global X MSCI Greece ETF
NYSE GREK $9.41 Nov 2/17
2.10% $10.29 9.35% HOLD
Daimler AG Frankfurt DAI € 64.94 Sep 11/17
4.71% € 67.35 6.51% HOLD
PowerShares KBW Regional Banking ETF
NASDAQ KBWR $53.35 Jun 28/17
1.57% $58.01 9.13% HOLD
Huntington Ingalls Industries⁷
NYSE HII $193.55 May 30/17
1.01% $258.34 34.16% HOLD
PayPal Holdings NASDAQ PYPL $40.10 Jan 3/17 0.00% $78.32 95.31% HOLD
Pfizer Inc.⁵ NYSE PFE $32.92 Jan 3/17 3.65% $35.96 14.16% HOLD
Apple Inc¹ NASDAQ AAPL $92.79 May 9/16
1.44% $174.94 93.09% HOLD
General Dynamics NYSE GD $131.37 Mar 31/16
1.53% $221.12 73.19% HOLD
Dollarama Inc² TSE DOL CAD
71.60 Feb 12/16
0.30% CAD
148.96 124.44% HOLD
Disclaimer: The ENR Global Contrarian Portfolio owns Newell Brands, Inc., Power Shares KBW Regional Banking ETF, Huntington Ingalls Industries, Nestlé, Apple Inc., General Dynamics, Dollarama and Procter & Gamble Corp. ENR Low Risk Portfolio owns Pfizer, Nestlé and Procter & Gamble Corp. ENR Medium Risk Portfolio owns Newell Brands Inc., Huntington Ingalls Industries, Apple Inc., General Dynamics, Procter & Gamble Corp and Pfizer. ENR Aggressive Growth Portfolio owns Power Shares KBW Regional Banking ETF, Huntington Ingalls Industries, Apple Inc., General Dynamics, Nestlé, PayPal Holdings and Dollarama.
Fixed-Income
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
Credit Stress Remains Contained – for Now
The above heading might be construed as ‘famous last words’ nine months from now. I suppose time will tell if the current
acceleration of overdue credit card debt stings the market later this year or in 2019. Over the past five years there’s been
a massive issuance of corporate debt, auto loans and student loans – numbers that run well into the trillions of dollars.
Despite the return of volatility since early February across world markets, credit markets are operating efficiently and
spreads between the riskiest bonds and Treasury securities haven’t widened very much. But a growing concern is the
trend in LIBOR. The 3-month LIBOR rate (London Interbank Offered Rate) is home to more than $350 trillion dollars of
debt and derivatives contracts; for the first time since 2008, this important money-market rate has broken above 2% to
close at 2.05% yesterday.
Companies holding excessive leverage are vulnerable to a financing shock, if refinancing rates continue to rise. This
includes not only American entities but also those abroad. The lowest interest rates in a generation since 2009 have
compelled global borrowers to issue tremendous levels of debt. That might not be a problem now but as market stress
accelerates and the Fed continues to tighten, the odds favor some sort of bond market dislocation.
A few months ago, I pointed out the alarming composition of the investment-grade bond market in the United States;
more than half of all investment-grade debt included in popular bond indexes are rated BBB – just one notch above junk
or high-yield debt. That’s not good. And it’s not any better in Europe, either. European corporate debt has been dominated
the last few years by covenant lite loans or debt securities with weak to no investor protection in the event of a default.
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
Then there’s the debt issuance bonanza still underway in the emerging markets and even the frontier markets. Countries
like Kenya, Senegal, the Dominican Republic – all issuing bonds at near record low interest rates. The most exotic segment
of the emerging markets sector has raised about $140 billion dollars’ worth of debt compared to almost zero a decade
ago. I don’t have to tell you what happens when rates cross a certain threshold.
According to Gillian Tett (Financial Times) and the Bank for International Settlements, global debt-to-gross domestic
product is now 40% higher today compared to ten years ago. That is partly due to rising government borrowing in the
west and a Chinese debt binge. But leverage has crept higher into the corporate world.
In the fourth quarter, U.S. consumer debt (ex. mortgage debt) rose 5.5% from a year earlier to $3.82 trillion dollars. That’s
the highest amount since 1999 when the Federal Reserve Bank of New York started tracking data. Also, consumers’ non-
housing debts accounted for just over 29% of their overall debt burden – also the highest amount on record. Overall,
households in the United States are paying about 5.8% of their disposable income to stay current on non-mortgage debts,
according to the Fed. That’s the highest figure since the ends of 2008. Debt installment servicing gets worse as rates rise.
Despite a stronger economy, segments of middle America are struggling to repay loans.
Bonds, however, have been oversold for weeks and should muster a rally, even if only temporary. Sentiment is very
bearish. Futures markets show the most bearish positioning on record in data going back to 2003. Treasury market
volatility, as measured by the Bank of America Merrill Lynch MOVE Index, recently hit its highest level since last April.
We continue to recommend Treasury-Inflation-Protected Securities (TIPS) and floating rate investment-grade corporate
debt with very short duration. As LIBOR rates rise, we also continue to like Treasury bills much more than a money-market
fund. Latest three-month T-bills yield 1.68%.
This month, sell the Vanguard Intermediate-Term Corporate Bond Fund ETF (NYSE-VCIT).
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
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 2.13% $112.09 0.70% BUY
iShares Floating Rate
NYSE FLOT $50.69 Oct 5/16 1.45% $50.92 2.54% BUY
Vanguard Intermediate-Term Corporate Bond ETF
NYSE VCIT $85.66 Jan 3/17 3.34% $84.44 2.09% SELL
Disclaimer: The ENR Low Risk Portfolio holds the iShares TIPS Bond Fund and the iShares Floating Rate Bond ETF. The ENR Medium Risk Portfolio holds the iShares TIPS Bond Fund and the iShares Floating Rate Bond Fund.
Foreign Exchange
USD Vulnerable to Protectionist Rancor The U.S. dollar started 2018 deeply oversold and trading at a three-year low. The number of bears committed to shorting
the currency hit multi-year highs as February commenced, according to the CFTC. The dollar was long overdue for a big
counter-trend rally, especially under the support of a new Fed chairman committed to additional interest rate hikes. And
we advised against dumping dollars. Now we’re not so sure.
The Trump administration has extended its tough trade talk this month by planning to introduce a 25% tariff on imported
steel and 10% on aluminum. Though the President has regularly chastised China for unfair pricing and dumping, the real
burden of planned tariffs will be consumed by Canada – by far the largest exporter to the United States. Canada sends
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
16% of steel exports to the United States and more than 40% of her aluminum production. It’s no surprise the Canadian
dollar has been hit especially hard, wiping out its gains versus the USD since 2016 (see chart below). The United States has
extended its protectionist threats in March by threatening to slap duties on European Union car imports. China sends just
2% of her official steel exports to the United States and is basically unaffected by potential tariffs.
The war of words is beginning to hurt investor sentiment, driving stock and bond prices down, including most
commodities. Investors, rightly worry that a global trade war will result in higher prices and possibly, an economic
slowdown, have started cutting risk exposure.
On March 7, White House senior economic advisor, Gary Cohn (former Goldman Sachs president) and the lone globalist
and free-trader at the White House, resigned. We fear NAFTA will fail to survive amid the ongoing negative sentiment in
Washington, further threatening financial markets. Canada and Mexico would suffer significant economic losses if NAFTA
fails. And so would wide swaths of the American economy, deeply engrained in the production chain.
Prior to this new phase in tough American trade rhetoric, the U.S. dollar was soft because of a combination of factors,
mainly soaring deficits tied to tax reform, rising wages and a ballooning budget deficit. While the U.S. economy is poised
to grow this year, its fiscal policy has undercut confidence in the dollar – despite rising interest rates. Now, a seemingly
strong anti-trade policy at the White House is further dampening the dollar.
Trade wars are also dollar-bearish. President Trump Tweeted a few days ago that trade wars are ‘easy to win,’ but history
strongly suggests otherwise. The U.S. dollar might continue declining. Between 2002 and 2004, President Bush imposed
steel tariffs, resulting in a weak dollar performance. The USD Index has already declined more than 13% since peaking a
year ago.
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
Sandwich Up 2.5% in 2018
Swiss Franc and Zloty Lead the Charge vs. U.S. Dollar
The ENR Global Currency Sandwich, including gold, declined 0.4% over the last four weeks, mainly on weaker gold prices
and a strong dollar. The USD’s rally, however, appears to have been temporary, currently overshadowed by rising trade
tensions worldwide. The dollar remains oversold but from a fundamental perspective, harbors a growing list of bearish
laundry, including deficits, rising inflation, record-high consumer confidence (usually preceding an economic peak) and
possible trade-tariff retaliation.
The Canadian dollar is the only member of our six-unit basket in the red this year, down 2.4%. The CAD is hostage to NAFTA
and fresh trade tariffs on steel and aluminum, if legislated by Washington this month. However, we’ve seen strong returns
so far in the Japanese yen (+6%), the Swiss franc (+3.5%), EURO (+3.2%), Polish zloty (+2.9%) and gold (+2%).
If you have no foreign exchange exposure, then consider placing half of your trade now and the remaining half following
a U.S. dollar rally, if it occurs. The dollar has been oversold for months and is poised for a rebound. Use any intermittent
dollar strength as an opportunity to build your portfolio of foreign currencies.
2018 ENR Global Currency Sandwich (Equally-Weighted):
• Gold Bullion
• EUR
• Canadian dollar
• Polish zloty
• Swiss franc
• Japanese yen
Commodities
King of the Permian Basin ‘On Sale’ in 2018
It’s impossible to predict oil prices. Oil majors, shale producers, natural gas and LNG companies all have varying price
forecasts every year and almost none of these predictions are accurate. I gave up predicting oil years ago when I stopped
publishing my commodity service after nine years with The Sovereign Society. Though we did very well with oil companies
amid a secular bull market for hard assets from 2000 to 2010, I could never get the oil price right. And don’t look to the
financial press for guidance, either; they don’t know. From one day to the next, oil prices are expected to rise and a few
days later, they fall. It’s truly a mug’s game.
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
Instead, let’s try to focus on the big picture over the long-term. What we do know is that the oil industry has dramatically
cut production since 2014’s oil price crash and net supply has declined on the back of OPEC production cuts and less
production of American shale. Though U.S. shale production has recovered sharply since 2017, demand for oil should
remain strong, despite the secular forces of renewable energy.
According to the International Energy Agency, the United States is projected to become the world’s number one oil
producer by 2023 – outproducing Russia. Amazingly, the United States has gone from being one of the largest net
importers of crude oil only 10 years ago to number two spot in 2017, behind China. From 2005 to 2015, the United States’
reliance on petroleum imports fell from 60% to 25% of total consumption while exports increased by over 300%. Since
2015, imports and exports have both increased slightly, although imports began to decrease in mid-2017. The Energy
Information Administration projects that U.S. import reliance for oil will continue to fall over the coming decade.
Energy stocks have underperformed over the past decade because oil prices declined from a high of $125 a barrel to $61
now. A decade ago, oil traded above $100 a barrel. The decline has been a serious headwind. But there have been
significant divergences across companies. The leaders in shale have done well. Exploration and production companies
(E&P) are trading at some of the lowest multiples relative to the integrated oil companies in a decade. The U.S. oil industry
has become the lowest-cost producer globally. Investors can still find great companies to buy that will grow their
production, earnings, and cash flow by 20% a year for the next five or 10 years in a flat $50-to-$60 oil-price environment.
Pioneer Natural Resources Co. (NYSE-PXD) is one of the largest and most profitable shale producers in the United States
with primary operations in the Texas Permian Basin and Eagle Ford Shale. Unlike most E&P producers, it’s growing its
annual production by 20% -- a leader in the sector. It’s also a top performer. Over the last ten years, PXD has gained 13.74%
per annum compared to a loss of 2.66% per year for the E&P sector, according to Morningstar. The company sports a $29
billion-dollar market capitalization and has seen its stock price fall 12% over the past year. We think this is a great entry
point. From its all-time high in 2014, Pioneer’s share price is down 27%.
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
16 ENR Market Outlook
BUY Pioneer Natural Resources Co. at market up to $195. Place a 20% stop-loss on your entry price.
This month, we’re selling Inter-Pipeline Ltd. In Toronto.
Market Outlook Commodity Portfolio:
Security Listed Symbol Entry Price
Date Current Yield
Current Price
Gain/ Loss
Advice
Pioneer Natural Resources Co.
NYSE PXD $170.17 Mar 8/18 0.19% $170.17 New BUY
iShares S&P GSCI Commodity Trust
NYSE GSG $16.34 Jan 2/18 0.00% $16.22 -0.73% BUY
Randgold Resources
NASDAQ GOLD $61.93 Dec 31/15
1.23% $82.00 35.09% BUY
ETFS Physical Platinum
NYSE PPLT $88.54 Nov 2/17 0.00% $91.93 3.83% BUY
Inter Pipeline Ltd TSE IPL CAD
25.67 Jun 28/17
7.35% CAD
22.14 -81.74% SELL
Newmont Mining NYSE NEM $17.99 Dec 31/15
0.66% $38.17 114.26% HOLD
Gran Tierra Energy
TSE GTE CAD 3.18 May 30/17
0.00% CAD 3.28 8.10% HOLD
Schlumberger NYSE SLB $69.75 Dec 31/15
3.07% $64.95 -0.43% 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 Nestlé
5. ENR or its employees or its access persons own shares of Pfizer Inc.
6. ENR or its employees or its access persons own shares of BCE Inc.
7. ENR or its employees or its access persons own shares of Huntington Ingalls Industries.
8. ENR or its employees or its access persons own shares of Newell Brands Inc.
Eric N Roseman March 8, 2018 Montréal, Canada