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Market Outlook 2017: Where to Invest – and What to Avoid – in the New Year

As we head into 2017, markets are still rallying on the back of Donald Trump's unlikely ascendance to the White House.

But, as with most rallies, the rising tide is not going to lift all boats; some will remain in choppy seas for the foreseeable future, while others will sink to the bottom.

While markets seem to favor a Trump presidency, there's still plenty of uncertainty that's giving investors pause.

Today, I'll show you what I see coming over the horizon as we approach 2017. I'll show you which sectors are going to continue to benefit in the Donald Trump era, and which will be lost at sea.

Before I tell you which sectors are going to be good to your money, I want to make sure you know where not to invest.

So let's get started by talking about what investments you should steer clear of in 2017… unless you want to make a couple of speculative bets that could make you a bundle.

Avoid These Investments at All Costs

China

While the full-year numbers have yet to be tallied, economists expect China's economy to have grown by 6.7% in 2016, down from 6.9% in 2015.

I expect 2017 to be even worse, with the growth rate falling to at most 6.5%.

If that number sounds familiar, it's because it is the lowest that President Xi Jinping has said the ruling party will tolerate, as it must stay at or above 6.5% in order to achieve the country's stated goal of doubling GDP and per capita income from 2010-2020.

The Chinese yuan is already suffering thanks to the election of Donald Trump. And the specter of the Federal Reserve continuing to raise interest rates is pushing safety buyers into the dollar.

This has led to massive capital outflows from China and intervention from the country's central bank.

China's current housing boom is actually a bubble that's ready to pop at any moment. And the government can't spend its way back to double-digit growth numbers (for lots of reasons – chiefly, there's a long list of interventionist policies from 2015 that haven't seen the light of day as of yet, and probably won't thanks to turnover in local party leadership positions in the coming year).

This will continue in 2017. Stay out of China (unless you want to go short – more on that below) at all costs.

Additionally, there's a good chance President-elect Trump will kill TPP. Some analysts worry that will turn Asia towards China and away from the U.S.

But that argument doesn't fly.

The emerging markets economies in Asia and hard-charging Asian economies that aren't technically emerging (because they're already players on the world stage) would gladly fall in with China on trade deals, but that's not going to help them if China falters further.

In fact, they are already so dependent on China, they're increasingly looking to the U.S. for trade deals. They'll negotiate them separately with the U.S., which is what President-elect Trump would rather do as opposed to let TPP benefit multinational corporations in Asia and disadvantage American workers.

Killing TPP will be a plus for American workers and strengthen manufacturing growth here at home.

Speculative Short Play

The best way to play China's decline is to buy ProShares UltraShort FTSE China 50 (NYSE Arca: FXP), a leveraged ETF that seeks two times the inverse (-2x) of the daily performance of the FTSE China 50 Index.

Keep in mind that the leverage that allows for greater returns will also contribute to tracking errors with the benchmark; the longer you hold it, the less likely your returns will correspond to the index.

That means it pays to pick your entry point carefully.

Good news is, FXP is just a shade above its 52-week low, trading around $32. Any negative news out of China could send this inverse ETF into the stratosphere.

I recommend buying FXP at market and using a 20% stop.

Emerging Markets

There's some chatter out there that 2017 will see a rebound in emerging markets… but don't believe the hype.

First, if history tells us anything, picking the next big emerging market is like drafting professional athletes – there's all this untapped potential, but whether they're successful depends on a number of factors that are out of our control.

Remember the BRICs?

Brazil's battling a shrinking economy and political turmoil following the impeachment of former President Dilma Rousseff.

Russia's economy is in shambles thanks to Western sanctions following its invasion of the Crimean Peninsula.

The cash crisis in India – the result of Prime Minister Narendra Modi's ban of the country's 500 and 1,000 rupee notes – has ground commerce to a halt and is threatening its economic boom.

China, formerly the 800-pound gorilla of emerging markets, isn't running full bore any more. China's once-extraordinary, almost other-worldly impressive growth numbers continue to slide – and that's just the beginning.

One elephant in the room for emerging market success is – like most other things – the election of Donald Trump. During the campaign, Mr. Trump promised to rip up various trade deals if the terms were unfavorable to American interests. Being effectively locked out of the American marketplace will cost these emerging economies serious dollars.

The other elephant in the room is rising "populism" across the globe.

Europe is seeing the rise of populists pushing back on the "Union" and state control by Brussels. One populist issue – the destiny of state banks – is a tough nut to crack – they need the backing of the European Central Bank, which leans on all member countries for its legitimacy and is the only reason big banks across Europe aren't imploding along with the euro.

At the same time, they want to break free of the euro and be able to devalue their own currencies to become more competitive on the world stage, which would help them export their way out of high unemployment and high structural debt.

If you don't see where that leads, or what that means for emerging markets, I have two words for you: currency wars.

If Europe implodes and countries fall back on their own currencies, there will be currency wars, globally. Emerging market economies will falter first and fall the hardest.

Capital flight out of emerging markets has always been a problem. Back in August 2015, we all saw how quick – and how devastating – it can be.

Donald Trump's election was just the latest evidence of a growing global populist movement.

Its spreading – and emerging markets' currency vulnerabilities are right in its path.

Just take a look at what happened to the iShares MSCI Emerging Markets Index (NYSE Arca: EEM) following the election…

chart

The Euro/European Financials

It doesn't appear as though the European Union is going to just rip off the Brexit Band Aid – this is going to take a lot more time than anyone thought and could get more contentious than we've seen so far.

But at the end of the process, neither British taxpayers nor the Bank of England will be a backstop to the European Central Bank, and the euro is going to suffer for it.

And Brexit was just the beginning. With a wave of nationalist rhetoric sweeping across the globe, we're seeing more talk of Western European countries considering cutting ties with Brussels.

Italy, the Eurozone's third-largest economy, is currently beset by political turmoil following a Dec. 4 referendum on constitutional reform that proposed to give more authority to Italy's lower parliamentary house, which would shift power from the country's regions to the central government.

The country voted "no"- meaning they didn't want to change the corrupt, self-serving, do-nothing system of government in Italy that shockingly has seen 60 (about to be 61) different governments since the end of World War II. That's how mired the Italians are in their own mess.

Now, a new government is going to have to accommodate the 5-Star Movement, a populist bloc claiming 30% of the population as supporters.

It's entirely possible that Italy would vote to exit the European Union, just like the Brits did. After all, looking across the pond at the Brits, faring as well as they are after the Brexit, the possibility of Italians following suit is more than just a threat… It's a bet worth taking.

France, according to some polls, could be next to go. A reported 55% of French citizens want to leave the European Union. It's possible the French will beat the Italians to the exit door.

Political instability in France or Italy would send tremendous shocks through the system. And European banks, many of which are already in crisis or teetering on the brink (I'm looking at you, Deutsche Bank, and almost every big and mid-sized Italian bank), would implode.

Whatever happens, any safe-haven status the euro has enjoyed is going to shift over to the yen and especially the dollar (more on that below).

Speculative Short Play

The best way to play European banks right now is to short iShares MSCI Europe Financials (NASDAQ: EUFN), an ETF that tracks the investment results of an index composed of developed market European equities in the financials sector.

Sell short EUFN and use a tight 10% stop on this very speculative play.

And while we wait for the euro drama to play out, take a long position on the ProShares UltraShort Euro (NYSE Arca: EUO), an ETF that seeks a return that is -2x the return of daily performance of the U.S. dollar price of the euro.

When the euro goes as I know it will, you will be well positioned to rake it in. Buy at market and use a 20% stop.

Passive Investing Strategies

Over the past couple of weeks, I've been telling you that passive investing strategies run by robots for "average Joe" investors – tracking the market rather than trying to beat it – are becoming increasingly popular but could be heading for a cliff if all the lemmings are in the same ETFs. Simply tracking the market – moving into and out of the same investment vehicles as everyone else at the same time as everyone else – just isn't going to cut it in 2017. 2017 is going to be dangerous on account of it ultimately being a real "stock pickers" market.

Money managers, pundits, and experts have been spending the last decade or so convincing ordinary investors that attempting to beat the markets is not a profitable strategy. There are too many smart, accomplished traders out there the experts say you'll never beat.

But they'll change their tune soon enough. In fact, in a very short time, experts are going to talk about new-wave passive investing the way they talk about "buy and hold" – an outmoded strategy that just doesn't work the way it used to.

Right now, I'm working on a new way to invest that will combine the best tenets of Modern Portfolio Theory, Random Walk Theory, and Efficient Frontier Theory to create the perfect portfolio for today's markets. Call it your own personal hedge fund.

I'll have more on that for you very soon. In the meantime, avoid new-wave passive strategies like the plague.

Healthcare Stocks

There's nothing the markets hate more than uncertainty. Candidate Donald Trump campaigned on a policy of repealing and replacing President Obama's signature healthcare law, the Affordable Care Act. Early indications suggest there is no guarantee he'll make good on his promise. In short, nothing is set in stone – and the markets have responded accordingly.

While healthcare ETFs like Health Care Select Sector SPDR ETF (NYSE Arca: XLV), Vanguard Health Care ETF (NYSE Arca: VHT), and Fidelity MSCI Health Care ETF (NYSE Arca: FHLC) enjoyed an initial bump in the post-election rally, all have begun to slip as the question has emerged: What will Donald Trump actually do?

Take a look at these charts for XLV, VHT, and FHLC – they're eerily similar:

chart chart

chart
Look at the pattern – all jumped after the election, only to sink back down on Nov. 10, when news surfaced that Trump was already walking back his promise to repeal and replace the law.

One of two things could happen in the next few months:

  1. Trump could leave the law – a financial boon to a few healthcare companies, which benefited from an untapped market of nearly 21 million uninsured Americans – in place, tweaking it here and there to allow for more competition across state lines. Fixing what's broken could boost insurance stocks.
  2. Trump could repeal and replace Obamacare with some as yet undetermined legislation or regulation, which would pull 21 million people off the rolls… and billions in subsidies out of the pockets of the insurance companies. That could spell doom for some insurance stocks.

While it's dangerous to place any big bets on what might happen, one thing's for sure, there are going to be lots of healthcare winners and losers in the not-too-distant future, which is why being a good stock picker in 2017 will be critical to making a fortune.

Get Into These Opportunities

Commodities

As the United States prepares for a Trump presidency, we're already seeing a recovery in what has been a severely beaten-down commodities sector. That should continue; as America gears up for an infrastructure rebuild the likes of which we haven't seen since the 1940s, demand for commodities will follow suit.

From the World Bank:

Metals and minerals prices are expected to rise 4.1 percent next year, a 0.5 percentage point upward revision due to increasing supply tightness. Zinc prices are forecast to rise more than 20 percent following the closure of some large zinc mines and production cuts in earlier years. Gold is projected to decline slightly next year to $1,219 per ounce as interest rates are likely to rise and safe haven buying ebbs.

Agriculture prices are expected to increase 1.4 percent in 2017, slightly less than expected in July, as food prices are projected to climb more gradually than anticipated (1.5 percent) and beverage prices are seen dropping by a greater extent (0.6 percent) on expectation of a large coffee output. Among food prices, grains prices are forecast to rise a steeper-than-anticipated 2.9 percent next year, while oils and meals prices are anticipated to rise a slower-than-expected 2 percent.

Here are the best opportunities in commodities right now…

The smartest take on commodities for 2017 will be in metals suited for coming infrastructure upgrades, like zinc. Buy PowerShares DB Base Metals Fund (NYSE Arca: DBB), an ETF that seeks to track changes in the DBIQ Opt Yield Industrial Metals Index ER.

It's balanced in zinc, copper, and aluminum – metals that have all been performing well after lows in early 2016.

Get in now at market and use a 20% stop.

For a more speculative play, you can go right to the source…

Teck Resources Ltd. (NYSE: TCK) recovered well after commodity prices bounced back from their lows at the beginning of the year, and the company is looking forward to a strong first quarter thanks to rising prices and its own cost-cutting efforts.

TCK should have a good year thanks to rising zinc prices – a full 31% of the company's gross profits come from zinc, so a 20% rise (per the World Bank) should do wonders for TCK's bottom line.

To ride zinc's coming highs, buy TCK at market and use a 20% stop.

Energy

Energy should see a continued recovery in 2017. OPEC just cried uncle and voted to limit oil production. And they got non-OPEC producers to tag along, which is the first time that's happened since 2011. That means that as the demand for crude rises, American producers – who have taken it on the chin for the past 18 months – should benefit greatly.

Meanwhile, we can expect that the Trump administration will be kind to coal, oil, and natural gas producers, cutting both corporate taxes and environmental restrictions.

Here's the single best energy play right now…

The best energy play right now is Valero Energy Partners (NYSE: VLP) – it's part of the Trump-designed future, but it hasn't been overbought during the post-election rally.

VLP owns and operates a variety of oil and gas assets, mostly in the Midwest, Texas, and Southeastern U.S.

Valero Energy Partners is a master limited partnership that was spun out of Valero Energy Corp. (NYSE: VLO) in 2013. As an MLP, Valero Energy Partners pays out most of what it earns as dividend income to holders. That suits Valero Energy just fine because they have a majority interest in VLP and want their dividends to flow just as much as we do.

VLO isn't a bad stock to own and has a good dividend yield too, but VLO has gone up considerably as the price of oil has risen and is subject to an oil price pullback.

That's why we're going with VLP and not VLO.

The first thing that strikes us about VLP is that it hasn't gone parabolic along with the oil and gas producers. That's because it's an infrastructure play and not a high-flying explorer that wins big when oil prices soar and struggles when they sink.

Sure, the price of oil rising is good for the whole industry, but there's no guarantee that OPEC members or non-OPEC producers won't cheat on their recently agreed-to production cutbacks to support higher prices for crude.

A sure thing, however, is that President-elect Trump wants America to be energy independent. No matter what the price of oil and gas is, they have to be transported around the country if we're going "domestic."

To me, that makes Valero Energy Partners a smart bet.

The stock's had a hard time and is trading close to its 52-week lows, which is fine with me today. The chart shows support at its recent lows – and if it has just made a double-bottom and can get above $42 and hold there, it has an excellent shot of heading back towards $50, and then some.

Meanwhile, the dividend yield on VLP is 3.8%, which is a good payout and easily handled by the company from its cash flow and profits.

I like buying VLP at market and holding it for its big dividend.

Infrastructure Stocks

I've talked about this at length already, telling you in November that the best way to profit from the coming Trump-fueled infrastructure boom is to play to win no matter what happens:

That means buying solid companies with a history of getting government contracts, a history of making money and, for me, a history of paying dividends.

There are plenty of other companies whose stocks may become high-fliers, but we're just at the starting gate, and it doesn't make sense to speculate on what we don't know.

By getting into infrastructure stocks that have been lagging, which usually means investors will rotate into them to catch their move up and out of the doldrums, that also have a decent dividend yield, is the smart way to start building your rebuilding portfolio.

I like Caterpillar Inc. (NYSE: CAT), Deere & Co. (NYSE: DE), Emerson Electric Co. (NYSE: EMR), Cummins Inc. (NYSE: CMI), and Nucor Corp. (NYSE: NUE) all for their dividend yields and because they are proven winners.

Too bad they have have already been bid up substantially; however, winners can keep going up.

One way to get into high fliers is by selling put options with strike prices 5% to 10% below where the stocks are trading now. If they go down, you get to buy them lower at cheaper prices because you collect option premium money when you sell puts you don't own, and that cash lowers your cost basis if you buy at the strike price. If the stocks keep going up, you just get to keep the money you take in when you sell put options.

I'll show you exactly how this works below.

The U.S. Dollar

Warts and all, the U.S. dollar is still the world's no.1 safe haven in terms of currency. With Donald Trump at the helm, chaos in the Eurozone, shenanigans in China, and an absolute disaster brewing in Japan, that perception isn't going to change any time soon.

In fact, I believe that as crises continue to pop up around the world, the dollar's recent surge will continue unabated. In fact, the strong Japanese yen could reverse course, letting a crisis ensue that could result in trillions of dollars' worth of yen sellers plowing their proceeds into the U.S. dollar.

Why? Several reasons…

Wages are up in the U.S. Consumer confidence is on the rise. Second-quarter GDP numbers were revised upwards to 3.2%. The latest non-farm payrolls report was more than encouraging.

What's more, interest rates are headed back up, which means the yield on Treasuries will rise right along with them. That will move the needle on the dollar, for sure.

How high the dollar goes will depend on a number of factors, but most significant will be the Federal Reserve's schedule of interest rate hikes. If the central bank initiates regular quarterly rate hikes geared toward normalizing the markets (whatever that means), then the dollar's going to continue to be bid up.

If 2017 looks like 2016 – when, you'll recall, the Fed lost its collective nerve and put off rate hikes following the market crash in January and February -the dollar's appreciation could falter somewhat, but should continue to climb, just not as quickly.

Whatever happens, I believe the dollar's uptrend (after nearly two years of consolidation) will remain intact.

One way to play the dollar's strength…

PowerShares DB US Dollar Bullish ETF (NYSE Arca: UUP) ETF tracks changes in the Deutsche Bank Long US Dollar Index Futures Index – Excess Return, plus the interest income from the Fund's holdings of primarily U.S. Treasury securities and money market income less the Fund's expenses. It's the best way to track the value of the dollar relative to six major world currencies, including the euro, yen, British pound, Canadian dollar, Swedish Krona, and Swiss franc.

I like buying UUP at market and using a 20% stop.

U.S. Financials

On the campaign trail, Donald Trump made no secret of his disdain for 2010's Dodd-Frank Wall Street Reform and Consumer Protection Act.

The law brought the most significant changes to financial regulations since the reforms passed in response to the Great Depression, changing the American financial regulatory environment that affects all federal financial regulatory agencies and almost every part of the nation's financial services industry.

Dodd-Frank is one of those pieces of compromise legislation that satisfies almost no one. Opponents on the left felt the law didn't go far enough (and would not prevent another financial crisis), while opponents on the right argued that it placed an undue burden on financial institutions.

Whatever the case, Donald Trump has vowed to repeal the bill, which would free the big banks from its most stringent reforms.

And that's good news for bank stocks, which continue to rally. Take a look at the charts for a few of America's biggest banks…

chart

chart

chart

Again, you should notice a pattern – all have benefited from the election of Donald Trump.

Even Wells Fargo & Co. (NYSE: WFC), whose stock has been plagued by scandal this year, has bounced back considerably, and now sits within 5% of its 52-week highs.

And I expect as Trump takes office and begins the herculean task of dismantling the web of regulations currently hampering the big banks, this trend will continue.

Here's how to play the big American banks…

Right now, the big banks are enjoying the "Trump Bump," and have been bid up quite a bit in the last eight weeks, so they're a little expensive.

The best way to play them is to try to pick them up on the cheap.

Here's how to get bank stocks on the cheap…

Just as with infrastructure stocks, I like selling puts as a way to reduce your overall cost – both by targeting the stock at lower levels and collecting a premium on the puts you sell.

I recommend targeting the best dividend-yielding American banks and selling puts with a strike price 5% to 10% below where they're currently trading.

For example:

For JP Morgan Chase & Co. (NYSE: JPM), which was recently trading around $84.73 and yielding a decent 2.25%, you could target the following puts:

If you're looking for a close to 5% dip, you could have gone for the JPM March 17, 2017 $80 puts (JPM170317P00080000). They're were trading around $2.00, meaning you would be credited $200 for every contract you sell.

If you were  assigned JPM stock at $80 when your puts expired, your cost basis per share would have been a mere $78.

If you want to try to really pick up the stock on the cheap, you'd go for the JPM March 17, 2017 $77.50 puts (JPM170317P00077500). They were recently trading at $1.40, meaning you'd be credited $140 for each contract you sell.

If you were assigned JPM stock at $77.50 when your puts expired, your cost basis per share would have been just $76.10.

That's all there is to it – and if you're not assigned stock when the puts expire, you keep the premium you received when you sold them.

Just make sure you stay domestic, avoid Citi, and don't chase them right now.

My outlook for 2017 is very positive – and this list of opportunities is just the beginning.

We'll have lots of chances to hit home runs holding great long positions and also shorting collapsing currencies, countries, and companies.

Happy New Year!

Sincerely,

Shah

The post Market Outlook 2017: Where to Invest – and What to Avoid – in the New Year appeared first on Shah Gilani's Wall Street Insights & Indictments.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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