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Invest Smarter

MARKETS - TRADES
Investment Ideas
for Q1 / 2016

By Bradley Parkes

Q4 / 2015
INVESTMENT IDEAS
Note: Distribution dates have been
changed to the following:
First week of January, April, July
and October.

SHORT IDEAS

LONG IDEAS

GOLD (HGD.to)

OIL (HOU.TO)
DJIA (HOU.TO)
China (FXI.N)
US Consumer Discretionary
(XLY.N)

PREVIOUS BONUS
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Trends & Analysis visit:
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Long DOW - With AAPL a new component in the DOW and


with capital flows to the US from (Africa, Asia, Europe...) the
S&P500 and DJIA are likely going to peak at a level considered obscene...DJIA = 22,000. This trade is the break down of
European socialism and will violate cheap/expensive market
metrics as money flees to where it seems safe. It may not
seem rational.

PREVIOUS EDITION IDEAS:


IDEA

Opening Price
Sept 1/2015*

Closing Price Dec.


31/2015*

Return (in CAD)

Short - GOLD (HGD.to)

$15.11

$11.84

-15%^^

Short - EUR (EUO.N)

$31.85

$35.30

10.84%

Long - DAX (EWG.N)

$34.61

$36.21

4.64%

Long - Japanese Stocks


(EWJ.N)

$15.92

$16.76

5.24%

Long DJIA (DIA.N)

211.38

240.58

13.8%

Long US Consumer
Discretionary (XLY.N)

$95.89

$108.08

12.71%

CAD/USD

0.7611

0.7232

PREVIOUS IDEAS
SHORT IDEAS
- GOLD (HGD.to)
- EUR (EUO.N)

LONG IDEAS

Total Q4 Return**

4.90%

*All Foreign listed ETFs have been converted into CAD on the day of purchase and sale using the exchange rate
available that day.
**Assuming an equal weighting of each investment and bought at the open of the period and sold at the close
of the period. USD based investments have been converted using the CAD/USD exchange on the first and last
day of the period.
^^ Stopped out at the maximum mandatory -15% loss.

Your best work involves timing. If someone wrote the best hip hop
song of all time in the Middle Ages, he had bad timing.

RESULTS
The way I want to do this is we will act as if
we closed out each position at the end of the
quarter. However each position has a maximum 15% loss and that position should be
closed if a position goes 15% against us. My
discount broker charges me $9.99/trade so
transaction costs should not alter the returns
too much. The reason we close out each quarter is that I never want to be able to claim that
I sold that six weeks ago before it declined.
Each one of my ideas should be good for at
least a quarter and likely longer. Should the
idea still have merit we will re-enter the idea
at the beginning of the next quarter.

Q1 / 2016

The portfolio returned 4.9% in Q4, following


a 9.35% return for Q3/2015. For the half
year (plus one month) since the portfolio was
initiated the return has been 14.7%. If you
had hit the highs, you could have returned
more, but that is a fools lie. Nobody does
that. This is a quarterly hold idea generator. If
I were trading this portfolio it might have been
different. This portfolio is a real return portfolio
and so allocating assets to maximize returns
requires catching tailwinds. A strong tailwind
this quarter was the Canadian Dollar. This tail
wind may subside in the coming quarters,
however, when adjusting the US benchmarks
to Canadian Dollars the portfolio has outperformed from inception.

- DAX (EWG.N)
- Japanese Stocks (EWJ.N)
- DJIA (DIA.N)
- US Consumer Discretionary
(XLY.N)
- CAD/USD

RESULTS FROM INCEPTION


Q1 / 2016 - IDEAS
New ideas in green and re-entered
ideas in blue:

SHORT IDEAS
- GOLD (HGD.to)

LONG IDEAS
- OIL (HOU.TO)
- DJIA (HOU.TO)
- China (FXI.N)
- US Consumer Discretionary
(XLY.N)

The above chart shows the return on $1 Canadian invested since inception
vs. various benchmarks. All foreign benchmarks have been converted to
Canadian Dollars. The portfolio returns represent investing and reallocation of assets to new ideas only at the beginning of the quarter. This is the
buy and hold return.

Details
We plan on closing the SHORT Euro trade.
This trade to me seems like a one sided bet.
I once read a great parable (I think from the
great Dennis Gartman) about how crowded
trades are like boats with everyone on one
side eventually causing it to tip. There may be
more downside to the Euro short trade but
my gut says the easy money has been made
for now. I think the contrarian idea of the year
could be a rally in the EUR/USD cross.
We also plan to close the LONG Consumer
Discretionary. This trade performed well,
however, I believe the seasonality of trade has
worked through. It seems the US economy is
weakening a little and sentiment may become
a little more defensive over Q1/2016. This
should benefit the consumer staple sector. It
is likely we rotate back into the discretionary

Q1 / 2016

trade, after sentiment stabilizes and we approach the fat phase of the rally (phase 3).
We also plan to close the LONG DAX. This
is trade has been a loser over the past two
quarters, even with the currency tailwind. If
the EUR has any sort of bounce over the first
quarter of 2016, the DAX should struggle to
rally. A stronger EURO would likely cause
the peripheral markets (further out on the risk
spectrum) to rally vs. the German DAX, which
is the hiding place for money, for if the EURO
disappeared you would be given Marks.
This trade may be revisited should there be
evidence that the potential contrary trade of
2016 does not appear likely.
The trades we will be entering or re-entering, will be SHORT gold, LONG oil, LONG
DJIA, LONG China and LONG US Consumer
Staples. Please see the charts below for each
trade.

SHORT GOLD:
TRADE IDEA REASONING
The head and shoulders pattern identified in
the last edition resulted in our price target
being hit ($1075) and more, however, gold finished the year on a bounce higher. The chart
is still pointing down although there may be
a rally in to 2016. Since we do not try to pick
tops and the investment policy is to buy and
sell only at quarter beginning/ends, one should
not worry about a short term rally as we expect in April the price of gold to be lower. I still
maintain that until we see sub $1000, one gold
bug newsletter writer committing suicide and
half the TSXV becoming biotech companies
gold cannot bottom. Gold is the effeminate
metal, it has emotions and until it cries you
cannot buy.

Image Credit: StockCharts.com

LONG WTI OIL:


TRADE IDEA REASONING
There are a number of reasons I want to
attempt to pursue WTI oil from the long
side. The above chart I found in a fantastic
report by Matthew Frailey of Breakpoint
Trades. It appears to show WTI oil creating a descending triangle. This technical
pattern tends to be bullish and it is further
confirmed with a rising RSI and MACD,
while new lows are being made. The apex
of the triangle is in the low $30s suggesting
this trade could be close to turning higher
and reversing the second half of 2015s
weakness.
The second reason I feel oil could be bought
here is the seasonality of oil prices. The
below chart shows that WTI oil has a tendency to bottom in mid-December and rally
into the spring.

Image Credit: Breakpoint Trades

Q1 / 2016

LONG WTI OIL (cont):


The third reason crude may be putting in
a short term bottom is that the global PMI
(Purchasing managers Index) has appeared to
bottom and this has been beneficial for oil in
the past.
The final reason I plan to discuss here has to
do with sentiment. Earlier in the report I mentioned the boat analogy to describe a crowded
trade. Sentiment is very negative towards
oil. Any positive piece of news could cause a
short squeeze.
Image Credit: SeasonalCharts.com

Image Credit: U.S. Global Investors

Q1 / 2016

LONG DJIA:

Image Credit: StockCharts.com

TRADE IDEA REASONING


The two charts below were included in the
Q3/2015 report. In that report I wrote:
That until the orange line is broken,
which is the 2014 low YES the 2014
low, are things that bad? On the weekly
chart you have a huge hammer in the
Japanese Candlestick lexicon. Those tend
to happen at bottoms.
So far that is how the DJIA has traded. I
continue to believe the DJIA will be the
beneficiary of global capital flight. Until Europe
stabilizes, Asia enters a new upcycle and commodities put in a long term bottom, the DJIA
is where large money will hide. One concern
I do have is that a series of lower highs have
been made.
However, historically the fourth year of the
presidential cycle has been the second best
performing year of the four year cycle. The
below chart from CitiGroup shows the average and median gains of the fourth year only
trail the third year. However, the third year
did not perform as expected in this cycle, and
that gives me some pause on expecting the
pattern to repeat.

Q1 / 2016

Image Credit: Business Insider Inc.

LONG CHINA:

Image Credit: StockCharts.com

TRADE IDEA REASONING


China had some big news last quarter. The
IMF has decided to include the Renminbi into
the basket that makes up the Special Drawing
Rights (an accounting currency used by the
IMF and the Panama Canal). This is a small
vote of confidence in the reforms China is
making to become more transparent and
open.
The sentiment on China is quite negative. Partially this is rational. China will never grow for
an extended period of time above 7% EVER
AGAIN! China has a debt problem, China
has a demographic problem and many other
well-advertised problems. But who cares? A

Q1 / 2016

big tree growing at a slower rate, still blocks


more sun than a small tree growing fast (that
is my attempt at a Sun Tzu type metaphor).
However, America had many difficulties in
becoming the globes largest economy. A civil
war, multiple depressions, two World Wars
however, this did not derail the long term
trend and a slowing China and its problem has
not derailed the long term trend.
The excellent free newsletter Daily Wealth,
written by one of the smartest guys in the
room, Steve Sjuggerud, has written repeatedly how as China is included in the MSCI
International Indexes hundreds of billions of
dollars will flow into China to create the passive indexes, followed by managers chasing

the index and will increase the allocation, as


most managers are under allocated towards
the Chinese market. The Renminbi has been
devalued since we sold out of our Chinese
position and it is likely to get weaker before
getting stronger, adding a tailwind to our
position.
The Chinese have likely been overstating their
GDP numbers. If one makes the assumption
China has been growing at 3-4% over the past
12 months, it could be the trough has been
reached and the devaluation, tax cuts and
stimulus announced over the second half of
the year will benefit the Chinese market.

LONG CONSUMER STAPLES:


TRADE IDEA REASONING
The fat phase of the rally (stage 3 in Dow
Theory parlance) is likely still ahead, however,
I feel that Q1/16 could be a little subdued and
that sentiment may become a little defensive.
The fat phase will kick in when everyone
decides they need to be in the market and
sets the public up for a top. The markets job
is to frustrate the most people all at once. It
rallies when the masses are underinvested
and tops when everyone is in. However, that
is still in the future, as not everyone is in. In
Q1, the market will continue to digest the first
rate hike, while the DJIA ends its consolidation pattern, after a volatile 2015. During this
period I think staples will outperform.

Image Credit: StockCharts.com

Q1 / 2016

ECONOMIC DISCUSSION
ISM MANUFACTURING
Economic data over the past quarter has
been volatile, maybe weakening a little, but
this should probably keep the FED conservative. The last issue discussed a weak NY
Empire Index, this month it was a weak
ISM index, with the ISM index showing
lower highs since the recession.

Image Credit: Federal Reserve Bank of St. Louis

LIGHT TRUCK SALES


Light truck sales, an indicator I believe is an
excellent warning signal for recessions, has
continued to trend higher, however, the chart
may be rolling over. This indicator has peaked
approximately 6-12 months prior to recessions.

Image Credit: Federal Reserve Bank of St. Louis

Q1 / 2016

ECONOMIC DISCUSSION (cont)


WAGE GROWTH
On the positive side, wage growth has
continued to be above trend, the spike last
quarter has moderated, but the growth rate
is still higher than at any time since before
the Great Recession.

Image Credit: Federal Reserve Bank of St. Louis

AVERAGE HOURLY EARNINGS


This suggest to me the FED still has a bias
towards raising rates, but will likely be on hold
in March. The USD tends to peak on the first
rate hike, but ends higher 12 months later.
This is classic buy the rumour, sell the news
type action.

Image Credit: Federal Reserve Bank of Richmond

Q1 / 2016

ECONOMIC DISCUSSION (cont)


DXY INDEX
So far the DXY Index has had difficulty crossing ~101. If this level holds, some reprieve will
be given to the commodity complex.

Image Credit: Charles Schwab & Co.

Image Credit: StockCharts.com

Q1 / 2016

2016 OUTLOOK
A YEAR OF TRANSITION
2016 is going to be a year of transition and
extremes. There are so many political, geopolitical and economic events colliding.
-Will Trump stay strong in the pools?
-Will the far right in Europe continue to gain
strength?
-Will Iranian and Saudi relations continue to
deteriorate?
-Will Saudi Arabia alienate the rest of OPEC?
-Will Russia retaliate on Turkey and will Article
5 in NATO be invoked?
These are just some of the possibilities.

MARKETS
Markets will be volatile.
America is the likely to remain the destination
for capital. This should push markets higher,
well past fair valuations as this is capital fleeing the battlefield.
Europe is recovering, but will flare up. I believe
by the second half of the year the periphery
will begin to outperform the core nations.
Asian markets are maturing. Chinas inclusion
to the SDR and the MSCI, in combination with
the devaluation of the Renminbi will drive
money into Chinese equities. The rest of the
region will likely remain lackluster, other than
some smaller markets.

Q1 / 2016

Inflation may be the surprise of 2015. I think


we are at an inflection point. Wages are rising
in the US, while Europe is stabilizing. Core
inflation is at the FEDs 2%, and any increase in
the price of oil will pull headline inflation higher. War is heating up and war and inflation are
connected.
Oil has been testing 2008 and 2004 lows. I
believe oil drifts higher, but the largest price
effect will be the renewal of the terror
premium.

Gold should bottom below $1000 sometime


in mid-2016 and finish somewhere north of
$1200. A new gold bull is on the horizon.
Copper will make a new low in early 2016.
This cycle is bottoming. The green revolution
will need a lot of copper to wire all those solar
installations.

Surprises and Contrary Bets

Image Credit: ECIA

A new year is upon us. Even the least jovial of


us can enjoy the rebalancing of their portfolio.
For myself I like to think of what could surprise
me in the New Year and three topics come to
mind:

2750/2750 = ~10%), the current level is only


10% higher than the top of the range over the
past 5 years. 10% does not seem like as large
of glut as the headline Unprecedented Oil
Stockpile.

1) Geopolitical risk and a new risk premium


in the price of oil
2) Creeping headline inflation
3) A rally in the Euro

There are a number of geopolitical risks that


could quickly destroy this margin.

1) The price of oil appears to trade in utopia.


Supply will never disappear and the glut is
permanent. This glut is measured as high as
2-3 million barrels per day. Global demand is
just north of 93 million barrels per day, making
this an oversupply of 3-5%. Global stockpiles
are 10-15% higher than they historically are
in this calendar month. Below is a chart of
OECD Total Oil Stockpiles. The 2015 number
is certainly higher than the 2010-2014 range,
but when you review the numbers (3000-

Q1 / 2016

Venezuela Supreme Court rejecting opposition party Super Majority...is there a coup in
the works?
Iran testing missiles near US carriers.
New Iranian sanctions on ballistic missile
program, Iran not deterred...does the nuclear
deal fall through?
Iraq threatening war against Turkey, if Turkey does not remove their troops.
Russia accusing Turkey of aiding ISIS.
Kuwait sending troops to Saudi to protect
border.
Rebels in Yemen firing missiles at refineries

in Saudi...what if the next Patriot missile is not


as successful?
The roll of a risk premium is to make marginal
production ready to come online due to a shutdown of cheaper but geopolitically riskier supplies. With the negative sentiment and lower
for longer thesis, there appears to be either no,
or even a negative risk premium in oil. If any of
the potential geopolitical risks accelerate, there
could be a huge short covering in oil.

2) Core inflation has been trending around the


FEDs 2% target, yet headline inflation has
been subdued due to declining energy prices.
However, as year over year energy price
comparisons become less of a boat anchor,
any surprise to the upside will pull the headline
number higher.

Surprises and Contrary Bets


In the past El Nino events have affected
odd parts of the supply chain causing input
inflation that passes through the production
process. Will any of the potential geopolitical
risks amplify this possibility?
3) What if everybody who wants to own the
dollar does and everyone who plans to short
the EURO already short? Earlier in this document the crowded trade analogy of a capsizing boat was used and the Charles Schwab
sell the news dollar and rate hike chart
shown. On the CS chart, the dollar tends to
sell off for 3-6 months following the first rate
hike. But what if there is only one rate hike
and traders got a little too excited? Any positive news in the EU area and negative news in
America could cause a strong short covering
rally, as long USD is a crowded trade.
None of these Contrary Bets are certain, but
they are something that is worth watching
as you never know.

Image Credit: ECIA

Disclosures:
Investors should carefully consider the investment objectives, risks, charges
and expenses of any investment. The above does not constitute investment
advice or recommendations, just crazy ideas I have when I cannot sleep.
There is no guarantee that any investment (or this investment) will achieve its
objectives, goals, generate positive returns, or avoid losses. The information
provided should probably be disregarded and potentially treated as a contrarian advice, with the expectations that I am 100% wrong on everything. Please
consult someone with a higher level of intelligence than the author with respect
to investing money.

Q1 / 2016