A Portolio Manager's Greatest Fear

Answer: The overnight, out-of-the-blue, outrageous, and shocking Corporate Announcement in your largest stock position!

In the 38 years that I have been trading, investing, and managing money, I've seen my fair share of shocking corporate announcements. And I have been on the wrong side of a few of them, but I fortunately have managed to dodge most of them. When I was younger I employed the less-than-optimal trading strategy of "placing all your eggs in one basket, and then watch the basket very carefully". Lessons of time and money have prevailed and I now "diversify" a little more, although "overweight" situations are probably still more common than they should be in my current investment approach (i.e. gold stocks).

On Thursday morning, February 4th, I woke up early as I usually do and reviewed all my positions for potential overnight activity. I remember feeling great with my massively "overweight" allocation in precious metals mining shares, as everyone one of them had posted 25% to 50% gains since I bought them in mid-January 2016. In my head I was thinking "Master of the Universe" after what looked like a brilliant call on the U.S. Dollar (down) and Gold (up) earlier this year (in this column and with my portfolios). To capitalize on my bullish view on gold and silver stocks, I could have taken the easy and safe route with purchases of the most popular ETFs (GDX, GDXJ, and SIL), but I reached deep into my "master of the universe" stock picking talent and bought 6 of my favorite names in this hated sector. Those 6 names were AG, CDE, EXK, IAG, SSRI. and PPP. Yes, PPP !?

After the close late Wednesday, February 3rd, Primero Mining Corp. (symbol PPP) announced that its Mexican subsidiary, Primero Empresa Minerva had received a legal claim from the Mexican tax authorities (better know as SAT) seeking to nullify the Advance Pricing Agreement (better know as the APA) issued by the SAT to Primero Mining Corp in 2012. This APA confirmed Primero's basis for paying taxes on realized silver prices for the years 2010 to 2014. Mexico's SAT did not identify any different basis for Primero to pay its taxes, but Primero's management and its legal counsel indicated to investors that they strongly believe this latest "legal claim" by Mexico is "without merit" (and they will fight it "vigorously").

Of course, even though I held 6 different names in my precious metals portfolio, Primero was my largest allocation. Given that Gold and Silver prices were up sharply again Thursday morning (in a strong uptrend), I remember thinking early Thursday morning that PPP may actually open unchanged or just slightly lower, but the market would then quickly shrug off this negative corporate "tidbit", especially given that the Mexican government was looking at increased taxes on Primero's silver sales, and PPP is mostly focused on Gold mining. Primero traded as high as $2.73/share intra-day on Wednesday, February 3rd, but closed suspiciously weak that day at $2.63/share. After the overnight negative news, PPP opened at $2.10/share and promptly went south to close out the week at $1.62/share which was down 41% from Wednesday's intra-day high. I consider myself fortunate to sell my billion shares of PPP at $2.04/share. And when I was selling my entire stake in PPP, paranoia began to take hold and I started to think that Mexico would soon go after every mining company to nullify ALL its ATA agreements in a semi-Nationalist attempt to secure (steal) much-needed additional revenue for this impoverished State. Of course, all my mining stocks have Mexican properties, so by Thursday's close I had blasted out of every mining stock I own. Most gold/silver mining stock portfolios posted gains of at least 5% on Thursday, February 4th, but my 6-stock portfolio actually lost 3% that day. We can all think of worse war stories (i.e. October 1987, May 2010), but it still hurt none-the-less. "Master of the Universe"? Perhaps not yet!

Bottom Line: 

1. While I don't have any horses in the race right now, I still think Gold/Silver mining shares will be among the big winners of 2016 (assuming they aren't nationalized).

2. My computer trading system has triggered some interesting buy signals in the U.S. stock market (see charts below). I am not sure right now if I will attempt to participate on the long side, but there is no chance that I will be shorting the S&P 500, the Russell 2000, or the Nasdaq Composite anytime soon.

3. While central banks across the globe look like they are no longer omnipotent, I strongly suspect that they have a few more tricks up their sleeves to boost financial assets prices in attempt stimulate economic growth.

Primero Mining (PPP) Daily Chart with 200-Day Moving Average Line

Phildelphia Gold/Silver Mining Stock Index (XAU) Monthly Chart

Russell 2000 Weekly Chart with Computer-generated Buy & Sell Signals and 200-week MA

S&P 500 Stock Index Weekly Chart with Computer-generated Buy & Sell Signals

NY Composite Index Weekly Chart with Computer-generated Buy & Sell Signals

Negative Interest Rates & Their Impact On Financial Asset Prices

In an unexpected move very early this past Friday morning (Jan 29th), the Bank of Japan announced that it will cut the rate on current accounts that commercial banks hold with the BoJ to minus 0.1%, adding that it will push this rate even lower if necessary. With this move to a negative interest rate policy (NIRP), the Bank of Japan now joins a half dozen central banks in major countries across Europe with interest rates also below zero. 

When I was a fresh young student at the University of Chicago Graduate School of Business 40 years ago, interest rates below zero were thought to be theoretically impossible. However, here we are in the real world and clearly the impossible is now becoming commonplace. In recent Q&A's following scripted speeches, Federal Reserve Chairman Yellen and influential NY Federal Reserve President William Dudley both said that a negative interest rate policy here in the United States was possible if financial conditions deteriorate enough to warrant such action.

San Francisco Federal Reserve Bank President John Williams told reporters this past Friday that he now sees slightly slower growth, slightly higher unemployment, and about a tenth of a percent lower inflation this year than he had expected in December, when the Fed raised rates for the first time in nearly a decade. The Federal Reserve probably needs to keep U.S. interest rates lower for longer given headwinds from weak global economic growth, a stronger dollar and an unexpectedly sustained drop in oil prices, according to Williams."Standard monetary policy strategy says a little less inflation, maybe a little less growth ... argue for just a smidgen slower process of normalizing rates," Williams said. "We got a little stronger dollar, some mixed data on the economy, some weakness in (fourth-quarter U.S. GDP growth), all of those coming together kind of tell me that we probably need a little bit more monetary accommodation this year than I was thinking in the middle of December." 

All the "ducks" are starting to quack now! The hawkish views that were so "unanimous" following the Fed's interest rate hike in December have quickly receded to the point where almost no one expects more than a single interest rate hike from the Fed for the remainder of 2016, and voices can already be heard around the water coolers on Wall Street that the Fed might actually have to cut rates before year-end. And a 4th round of QE may also be a possibility now!

What does this mean for investors?

For U.S. equity prices, probably flat to higher over the rest of this year. Corporate earnings disappointments coincident with an economy on the verge of (or already in) recession will negatively impact share prices which will tend to offset any potential easing of monetary policy by the Federal Reserve.

For U.S. bond prices, Treasuries will probably represent a reasonable flight-to-safety option, and Treasuries will have scarcity value if talk of another round of QE escalates. Corporate bonds will be plagued by the stigma of  potential bankruptcies in the energy sector, but overall the better credits should do well.

For foreign exchange traders, the U.S. Dollar has been "king of the hill" for almost five years now. After bottoming out in May 2011, the U.S. Dollar Index is up 37% since then. When the BoJ "shocked" the financial markets this past Friday with a negative interest rate policy, the U.S. Dollar Index jumped about 1%. My own feeling is that Fed governors and other Fed presidents like Williams this past Friday will join in a united chorus of dovish speeches over the very near term which will knock down the U.S. Dollar in foreign exchange dealings over the next several quarters. And if QE4 is actually announced by the Fed, then the U.S. Dollar could plunge! 

What's left?

Oh yes, GOLD, precious metals, and related mining shares. I believe that the 4 1/2-year bear market in gold, silver, and related investments is over! Gold prices are already up 5.48% in 2016 (despite a stronger U.S. Dollar!), which far eclipses almost every other investment in terms of performance. The S&P 500 Index is down 5.07% so far this year, and most other major U.S. stock indexes are down even more. Among sector indexes, the NYSE Biotech Index is actually down 24.00% and the KBW Bank Index is down 12.62% year-to-date so far in 2016!

In the interest of full disclosure, my current allocation to precious metals mining shares is approximately 40% in the accounts I manage. This relatively high sector allocation is up from zero % to start the year.

If a picture is worth a 1,000 words, please take a look at the latest monthly chart of the Philadelphia Gold/Silver Stock Index (symbol XAU) which shows a monthly chart buy signal just triggered by my computer trading system for the first time in 18 years (since January 1998). A monthly chart buy signal was also triggered in the Major Gold Miners ETF (symbol GDX) this month (among other buy signals in gold and silver related mining shares).

Philadelphia Gold/Silver Stock Index (XAU) Monthly Chart with Computer-generated Buy & Sell Signals

Major Gold Miners ETF (symbol GDX) Monthly Chart with Computer-generated Buy & Sell Signals