“So much is going wrong all at once,” was the assessment by TrendMacro’s Chief Investment Officer Donald Luskin in a recent research note. Mike Wilson of Morgan Stanley struck an equally pessimistic tone in his note to clients: “We are in a bear market.” “While 2018 is clearly not a year of recession, the market is speaking loudly that bad news is coming.” Some of it has already arrived. U.S. stocks, led by technology companies, slipped again on Monday in a move that wiped out November index gains. FAANG stocks (Facebook, Amazon, Apple, Netflix and Google (Alphabet)) were hit hardest. In recent months, the quintet of technology companies has lost a combined total of roughly $927 billion relative to the individual 52-week highs — a market cap evaporation approximately equal to Apple’s current value. Although the sharpest pain was felt in technology, most other sectors joined in the pullback with only real estate and utilities barely avoiding losses. “[We] think the US/China trade war is at the existential center,” wrote Luskin. Yet despite cautious and at times conflicting language from the White House, Luskin remains optimistic that the prospects for a trade deal are improving. In his view, the recent developments indicate the policy process is “reaching its most productive state.” Nevertheless, investors hoping for an end-of-year rally are quickly running out of time. To make matters worse, the outlook for 2019 is far from promising. Jan Hatzius of Goldman Sachs expects economic growth to “slow significantly next year.” He’s not alone. MARKET RISKS Of all the market risks, author and investor Jim Rogers is most concerned about Washington, DC: “That’s where the greatest risks are.” “First of all, we have a central bank that has no clue what it’s been doing and, probably, what it will do in the future. We certainly have an executive, and legislative, branch that has no clue about what they’re doing,” he explained to Remy Blaire in a recent Sprott Media interview. “When things go wrong, they’re going to make more mistakes. Be careful.” Chris Gaffney of TIAA Bank World Markets is most concerned about risks to growth. “The main risk is growth … a slowing global economy. As the Fed continues to raise interest rates, if we start to see a slowdown, that could certainly accelerate. China is of particular interest now.” THE SEARCH FOR ALTERNATIVES The challenge facing investors is the absence of clear alternatives. The stock pullback, which began quietly below the surface, has now engulfed the market’s biggest names. Roughly 40% of S&P 500 stocks have fallen into bear market territory, and now, with mega cap technology names participating in the pain, the major indexes have begun to suffer. But where can investors seek refuge? With interest rates still expected to rise, many investors lack confidence in the bond market. At the same time the absolute level of rates, though higher than before, discourages an outright move to cash. Real estate, a popular alternative, has fared well in recent years. Yet as interest rates rise, particularly on the popular 30-year fixed mortgage, demand suffers — a trend reflected by the recent drop in homebuilder confidence. Emerging markets provide yet another possibility, albeit a volatile one. The group, which has struggled this year, has outperformed U.S. stocks in recent weeks. The MSCI index of emerging market shares gained 0.5% on the session led by Chinese stocks. Even Bitcoin, which began its historic run following last Thanksgiving, has offered no relief. The world’s largest and most well-known cryptocurrency shot above $19,000 before returning the entire gain plus an additional 30%. It now sits below $5,000, its lowest level in more than a year. The sharp reversal has been damaging to both crypto-speculators and the technology companies, particularly the semiconductor companies, that helped fuel the adoption. OPPORTUNITIES ABROAD For speculative opportunities, Rogers suggests looking abroad. “Just like your parents taught you, buy low and sell high. China’s down 60% from its all-time high. Japan’s down 50% — I’m not buying Japan. I don’t own Japan. Russia is hated — I own Russian shares; I own Russian bonds; I own the currency.” “There are places that are down, and down a lot. And if your mother was right, these are the places you should be looking.” In particular, Rogers has been looking to Zimbabwe for opportunity. “Zimbabwe’s a disaster. A man, in 1980, took over and became a dictator pretty quickly thereafter and proceeded to ruin the country for the next 37 years.” Now, things are set to change. “They threw him out last year and I know things are going to change. They may get worse, but I would suspect Zimbabwe is now an interesting place to look.” Nevertheless, Rogers recommends caution. “If you can’t find Zimbabwe on a map, if you don’t know where Ghana is, please do not invest in either of those countries. Only invest in what you, yourself, know a lot about. If you don’t know that Ghana has a lot of cocoa and a lot of gold, please don’t pay attention.” It’s true. These opportunities aren’t for everyone. Steve Todoruk, an investment executive at Sprott, would rather pass. Nonetheless, he agrees there are some interesting opportunities in West Africa, particularly in the Republic of Mali. “For very special gold deposits in Mali, I’m prepared to take a certain amount of political risk, but the deposit has to be extra special.” TIME FOR COMMODITIES The general underperformance of commodities relative to stocks may signal a speculative opportunity. “Sugar, believe it or not, is down something like 80% from its all-time high. [T]here’s not much in the world, in life, that’s down 80% over the past 40 years,” said Rogers. Regarding oil and the possibility of OPEC action, Rogers added, “I have learned not to pay too much attention to [OPEC] … if you’re going to figure out the price of oil.” “Oil is making a complicated bottom. We’re going to look back one day and say, ‘2015, ‘16, ‘17, ‘18, ‘19 oil made its bottom and it went up again.’ … So be careful, don’t sell your oil.” Gold, the historical alternative, has been surprisingly quiet given the stock market volatility. Gaffney believes dollar strength and rate hiking cycle are primarily responsible. “Investors really haven’t moved back in to the precious metals as a safe haven. We did expect to see some of that buying occur as this volatility has hit the markets. But there are a number of factors that continue to weigh on the price of gold, mainly a stronger U.S. dollar and interest rate expectations … we do expect the Fed to continue raising rates.” So, is it time to buy commodities? Rogers believes it is. “It is the time to buy commodities again. I would say to you, write it down — commodities are going to do better than stocks.” Roger that. Read in browser »
Sprott U.S. Media, Inc. is a wholly owned subsidiary of Sprott Inc., which is a public company listed on the Toronto Stock Exchange and operates through its wholly-owned direct and indirect subsidiaries: Sprott Asset Management LP, an adviser registered with the Ontario Securities Commission; Sprott Private Wealth LP, an investment dealer and member of the Investment Industry Regulatory Organization of Canada; Sprott Global Resource Investments Ltd., a US full service broker-dealer and member FINRA/SIPC; Sprott Asset Management USA Inc., an SEC Registered Investment Advisor; and Resource Capital Investment Corp., also an SEC Registered Investment Advisor. We refer to the above entities collectively as “Sprott”. The information contained herein does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Forward-Looking Statement This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested. Past performance does not guarantee future results. The views and opinions expressed herein are those of the author’s as of the date of this commentary, and are subject to change without notice. This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested. Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.