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My 2016 Report Card (The Good, The Bad and The Ugly)

What a crazy year this has been. We are living in an upside-down world where despite terrible fundamentals, Brexit, Trump's election, the Italy vote, and the Fed raising rates, sentiment keeps pushing the market higher and higher. Instead of the crash we expect and deserve, we get an apparently endless rally. Nothing makes sense. Nothing has gone as expected.

Well, that's not true. Sixty-eight percent of the stocks in my forecast last year still did exactly what I expected them to do.

A rising tide lifts all boats, so some of the toxic stocks I pointed out last year haven't crashed yet, or haven't fallen as far as I expected. (Some have gone up, though only negligibly.) However, you'll still see a generous amount of red in our shorts column (one stock dropped 75% this year) and an even more generous amount of green in our longs column.

I hope you've made some money on these – especially on the long plays. Drop me a line in the comments and let me know how you did.

I try to pick stocks that are so good or so bad that even a year-long nonsense rally can't conceal their true colors. Judge for yourself how well I've done.

Here's my report card…

Here's How Our Plays Did in 2016

This has been a challenging year, but we still haven't made out too badly.

We've seen our gold plays settle back a bit from their recent highs, though most of them are still up 40% or more. Because the world is going to have to deal with its burgeoning debt crisis via inflation and currency devaluation, gold remains a vital investment for every citizen. Obviously gold won't rise in a straight line, but over time it will appreciate significantly. It has weakened considerably since the election based on the misperception that President-elect Trump will be pro-growth and that growth will somehow be sufficient to repay our debts without inflation. While it may weaken further, I view its current price as very attractive because I view gold as a long-term investment, not as a "trade."

The best way to view the current gold sell-off is as "fake news." If gold trades lower, you should buy more! Gold is an investment in monetary disorder and the incompetence and corruption of central bankers and governments. Anyone who thinks that Donald Trump is going to put an end to that is smoking dope (which is now legal in California, which is a good thing because west-coasters are going to need a lot of weed to dull the pain when that loony state goes bankrupt due to the reckless financial promises of its Democratic politicians). Everyone should be buying gold at these prices to save themselves – not for a "trade" but as long-term protection against a future where the value of your paper dollars is destroyed even further than it has already been destroyed. And in addition to buying gold outright, you can own gold by investing in the shares of gold-mining companies that remain undervalued.

As far as the toxic stocks in our shorts column, they are still overvalued and going down. I'll have more information on them in my upcoming 2017 outlook, so stay tuned.

Remember, these are just the stocks I predicted would go up or down a year ago in my 2016 forecast. These don't include other plays we put on in Sure Money during the year, they are not a reflection of how the related options may have performed, and of course, they are separate from our Zenith portfolio.

The prices of AA and SH have been adjusted to reflect their reverse stock splits earlier in the year.

 

Going Up (Long) Symbol Price 12/29/2015 Price 12/22/2016
Alcoa Inc.AA$22.68$29.20 (up 28.7%)
Annaly Capital Management Inc.NLY$9.40$10.26 (up 9.14%)
Central Fund of Canada Ltd.CEF$10.04$11.38 (up 13.35%)
Chimera Investment Corp.CIM$13.88$17.48 (up 25.94%)
CBOE Market Volatility IndexVIX$16.10$11.42 (down 29%)
Global X Gold Explorers ETFGLDX$16.79$25.99 (up 54.79%)
Market Vectors Junior Gold Miners ETFGDXJ$19.64$28.43 (up 44.75%)
Navient Corp.NAVI$11.49$16.54 (up 43.95%)
ProShares Short S&P ETFSH$41.08$36.29 (down 11.7%)
Sprott Physical Gold TrustPHYS$8.76$9.23 (up 5.36%)

 

Going Down (Short) Symbol Price 12/29/2015 Price 12/22/2016
Alphabet Inc.GOOG$776.60$790.98 (up 1.85%)
Amazon.com Inc.AMZN$693.97$765.56 (up 10.31%)
Chipotle Mexican Grill Inc.CMG$489.94$391.02 (down 20.2%)
Deutsche BankDB$24.87$18.48 (down 25.7%)
Facebook Inc.FB$107.26$117.25 (up 9.31%)
Fitbit Inc.FIT$29.35$7.35 (down 75%)
iShares Nasdaq Biotechnology ETFIBB$343.00$266.28 (down 22.4%)
Netflix Inc.NFLX$119.12$125.50 (up 5.35%)
SPDR S&P 500 ETFSPY$207.40$225.01 (up 8.5%)
Standard Chartered plcSTAN.L581p662.58 (up 14.04%)
Starbucks Corp.SBUX$61.13$57.03 (down 6.7%)
Tesla Motors Inc.TSLA$237.19$207.74 (down 12.4%)

If you owned these stocks in a hedge fund, you would have done very well last year. Losses on individual positions were relatively small and there were some big winners. You should always use stop losses (I use 20%) on all positions to avoid big losses on stocks. Options require a more active and sophisticated approach that I will describe in future pieces as well as in Zenith.

The Market Can't Stay This High Forever (and It Won't)

The post-election rally has been driven exclusively by sentiment; it has little to do with fundamentals. The stock market was overvalued before Donald Trump's election, and it is even more overvalued now. The market remains heavily weighted in favor of the so-called FANG stocks – AMZN, FB, GOOG and NFLX. Excluding NFLX (which is not in the S&P 500), the three other FANGs plus MSFT and AAPL have a combined market cap of $2.3 trillion or roughly 12.5% of the total $19 trillion valuation of the S&P 500 index. The market has only traded more expensively during the dot-com bubble by most measures. Today, the S&P 500 Market Cap/GDP Ratio is at 125%, near a historic high, and the Shiller Cyclically Adjusted Price Earnings Ratio is at 27.02 compared to its historical mean of 16.71. If you believe in the return to the mean and that markets don't grow to the sky, you should not be chasing stocks at these levels.

Respected research house Evercore ISI surveyed institutional investors before and after the election and found a sharp change in market psychology caused by Donald Trump's election victory. The firm wrote that, "Post-election, investors believe the world has changed. Whether or not Trump's pro-growth agenda is enacted or succeeds, investors we surveyed seem to buy into it. For example, the consensus of investors we surveyed yesterday put the S&P at the end of next year [2017] at 2425; a similar survey we conducted on Nov. 3 put the S&P at 2087." Major brokerage houses are also boosting S&P 500 targets. Goldman Sachs is looking for the index to hit 2400 by the end of next year (of course, the firm may be talking its book considering the new administration is teeming with ex-Goldman bankers). RBC just came out with a 2500 target for the S&P 500. No doubt the Barron's survey of top strategists will show these oracles fighting to come up with the highest price target and not a single one calling for the market to decline. Considering every president who succeeded a two-term president in recent history saw a recession early in his first term, investors and strategists could be setting themselves up for disappointment in 2017.

I'll have my full 2017 outlook – including my forecast for what's going up, what's going down and how to profit – for you early in January.

Sincerely,

Michael

The post My 2016 Report Card (The Good, The Bad And The Ugly) appeared first on Sure Money.

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About the Author

Prominent money manager. Has built  top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.

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