Shesa's DECEMBER 2016 INVESTMENT BLOG

            18 December 2016

DECEMBER 2016 INVESTMENT BLOG

Shesa Nayak

U.S. Stock Market Commentary: The stock market has been consistently rising since Donald Trump was elected as the president of USA. All the major indexes have been creating new records without any major down trend. The Federal Reserve raised interest rate first time for the year and 2^nd time in a decade. The question comes in mind is, would this end the year in a bullish manner? What to expect next year - 2017? I will pen my view but first let’s take a look to the Stock Market Indexes.

Note: There are some technical difficulties being faced while putting the blog in Google+. The tables are not represented properly, while viewing in the computer. If you face the same problem, please use your phone to read the blog. That has correct view. Apologize for any inconvenience. 

	2016				52 Week Change
U.S. Indexes	4-Jan-16	Friday Close	Year-to-Date Change	YTD % Change	52 Week High	Change from 52 Wk High (%)
DOW Jones	17425.03	19,843.41	2,418.38	13.88	19,966.40	-0.62
S&P 500	2043.94	2,258.07	214.13	10.48	2,277.53	-0.85
NASDAQ	5007.41	5,437.16	429.75	8.58	5,486.75	-0.90

Economic Reports and Interest Rate

Please visit the following link to view the economic report:

http://www.marketwatch.com/Economy-Politics/Calendars/Economic

Source: Marketwatch.com.

Interest rate

As expected, the Federal Reserve raised interest rates on DEC 14, first time in 2016 and the second time in a decade. At the Federal Open Market Committee (FOMC) meeting last week, committee members voted unanimously to raise 25 cents, from 0.50% to 0.75%. The Fed also projected that next year there is a possibility of 3 quarter-point rate increase. It means that the anticipated interest rate would be about 1.5% by the end of 2017, provided economy improves as expected.

The question now is, what does a rate hike mean for the stock markets? Let’s take a look of the best-performing sectors after the Fed raising interest rates in the first 6 months and after 1 year.

Top Performers after Interest Rate Hike

Sectors	6 Months after rate hike	1 Year after rate hike
Information Technology	16%	31%
Energy	-2.5%	24%
Healthcare	-1%	12%
Consumer Discretionary	2%	11.5%
Utilities	4%	22%
Financials	-6%	12%
Telcom	5%	6%
Industrials	1%	18%
Metals	-1.5%	7%

Source: Investment U, Oxfordclub. The figures are approximate. The data projected since 1994.

We could see that IT sector is the front-runner in the first 6 months as well as after one year of rate hike. Also, we see good performances of other sectors like Energy, Utilities, Industrial, health care etc.  Now let’s see another analysis.

Stock Market behavior in the 1^st year after Presidential election

Donald Trump will be taking over as President of United States on Jan 20, 2017. If past history is any evidence, markets have consistently rallied in the first year of a new administration, irrespective of who or what party takes over the white house. Most probably, because of high expectation from new president and the fact that the uncertainty goes away about who or which party will lead the county. As a matter of fact, usually the first year of election has seen some tremendous rally. Now let us see some historical facts.

In 2013, the S&P gained 32.39%, the Nasdaq soared 40.12% and the Russell 2000 was up 38.82%.  In 2009, the S&P gained 26.46%, the Nasdaq soared 43.89% and the Russell gained 27.17%. Usually, growth and momentum stocks performed even better.

We’re exiting 2016 on a high note wherein all stock indexes are at its peak. This provides a great platform for the stock market. However, there are also very high expectations that Donald Trump would be great for the economy. Only time can tell how economy friendlier he will be and whether he would be able to execute on his promises and able to bring the necessary reforms. If he meets the expectation then economy and stock market would boom else market could see a big correction.

Bottom Line: I can conclude from above two analysis (i) Return after interest rate hike and (ii) Stock market behavior on the 1^st election year. If history is of any evidence and trend is our friend then the investment should be made accordingly for better return on investment. I am cautiously optimistic. We will know once the new government takes over, till than fingers crossed.

Possible leading Sectors for 2017:

All the major indexes have hit all time high, namely DOW, S&P500 and NASDAQ. However, biotech sector have lagged due to fear of elimination of Obama care by new president elect Donald Trump. I believe that, in 2017 the pharmaceutical industry can potentially benefit. It has been surrounded by concerns of increased regulation over pricing of medications after the tweet from Hilary Clinton in August. Most probably, there won't be so much of a concern now, given that Trump administration's pro-business stance.

The emerging markets index is up 6.7 percent, whereas Latin America index is up 25 percent over the same period. China and India in particular are of interest to me. China seems to be bouncing back slowly but surely, based on the economic reports. India may have short-term impact due to demonetization and GDP growth may come under pressure but in long run GDP growth can go well over 8%. That means investors may see good potential of growth in emerging markets and they will be sending their capital to these countries. I already have few ETF, MF and stocks from these countries. I may keep adding to those.

Defense, Financials and Infrastructure could do well due to Trump’s emphasis into those sectors. However, these sectors have already run ahead with the anticipation that Donald Trump’s presidency would bring them spectacular result! Hence, I would be little careful at this time.

Information Technology is one of the leaders after interest rate hike based on the data that I presented earlier. I have a few mutual funds but may have to add some more in the future.

Update: What’s happening to Gold?

Gold is beaten down again from. It has collapsed from about $1370 before the election, to about $1134 as I write, that’s down 17%. Why has it happened? A few reasons:

• U.S Dollar is at 13 years high and as we know it becomes expensive to buy Gold using other currencies. 
• The investment community has become negative on the precious metal. 
• Stock market is booming at the moment with very high expectation from the president elect Donald Trump. So not much interest on gold.
• The government of India gas put restriction on how much gold a family can have and need a declaration if they poses more than the limit.

On positive note:

• Every time the Fed hikes, the hurdle for the next hike is higher. Gold has mostly done well in the raising interest rate environment. See my last month’s blog for more details. 
• The new ‘gold standard’ developed as part of a three-party collaboration between AAOIFI, the World Gold Council and Amanie Advisors was announced Tuesday, December 6th. We may see some impact starting January when it will be implemented. See my last month’s blog for more.
• Though, the stock market is on a roll, the uncertainty in the global market remains and obviously Dollar can’t go up for ever.
• India gold buying may stabilize once de-monetization impact is subsidize. 
• In my view, we may see gold price bump up to about $1350 by end of 2017. Also, we may see some short covering in next few weeks/months. Only time can tell… 

What about Oil Price?

If you recall, oil struggled at $26.05 a barrel in February 2016, the low point of oil and I could remember sending an email to my invest group members saying that too much of pessimism on oil price and possibly this could be the bottom. I guess that was the bottom. I am not fortuneteller but probably I was right on that. The oil prices now sits at $52.03, a 1.5-year high. It means almost 100% move. Recently, all OPEC and non-OPEC countries agreed to cut oil production. The OPEC cut production by 1.2 million barrels a day and subsequently the non-OPEC countries, including Russia, committed to cutting an additional 558,000 barrels a day. As such, we are seeing the oil prices moving up. The impact could be seen more as we move towards summer. I believe we could see oil prices reach $65-70 in 2017. Some investment in this are is worth considering. Personally, I have some USO and ERX with me but nothing in my blog portfolio.

Now let’s discuss about this month’s inclusion to Blog Portfolio.

Rio Tinto (RIO):

Rio Tinto is one of the world's leading global mining and metals firms located in U.K. The company mines and produces aluminum products, copper, gold, silver, nickel, diamonds, iron/iron ore, thermal coal, cooking coal etc. It operates underground mines, mills, refineries, smelters, and power stations, including hydropower; it also owns and operates railways, ships and ports.

Recently, the prices of copper, zinc, tin and coal prices have increased benefiting RIO on its top and bottom line. However, 70% of Rio's earnings are generated from iron ore providing RIO a significant benefit as the iron ore price has gone above $80, up about 85% comparing to last year. This significant increase is attributed to the growing infrastructure growth in China and anticipation of growth in U.S. Since the election the stock market has rallied because of investors’ hope that Donald Trump will simplify the tax code, slash the corporate tax rate and remove any of the business impediments, resulting in better economy growth. If you remember, Trump also promised to spend $1 trillion to upgrade the nation's highways, ports, bridges, tunnels and airports. That would require more iron, steel and other metals. This bodes very well for Rio Tinto. Moreover, it’s also expanding heavily as it committed to a $5.3 billion expansion of a Mongolian copper mine. This planned mine will have 125 miles of underground and anticipated to be World’s 3^rd largest copper mine producing significant amount of copper.  

Why do I like RIO? In addition to aforesaid facts, the company has also a strong balance sheet and the share price seems in expensive. Though, the stock price has gone up more that 30% in last couple of months, it’s still cheap and lot of room for growth. It has a forward earning PE of 10.68 comparing to S&P 500 average PE of about 20. The company has 112% profit growth and expected to be back on track for Revenue growth. The last couple of years were very challenging for the mining and metals companies. But now that growth is gradually returning to normal we should see bounce in stick price. It has also good forward dividend yield of 3.90%.  Now let’s look at the fundamentals:

Market Cap: 69.4 Billion

Revenue: $32.35 Billion

Quarterly Revenue Growth: -13.8%

Quarterly Earnings Growth: 112.5%

Net Profit: 41 million

Earnings Per Share (EPS): 0.02

PE Ratio: 1761

Forward PE: 10.68,           Price to Sales: 2.15

Institutional Holding: Not available            

Return on Equity (ROE): -1.64%

Total Cash:  8.38 billion

Debt: 21.34 billion, Beta: 1.22

52 Week High: 42.61, Low: 21.89

Dividend: 3.76%, Forward: 3.90%.

Book Value: $20.84

I have already added RIO to my portfolio since last few months. Thus far, it has done very well. I may add more if there will be any correction. Please note that, this is a volatile stock; so it’s a good idea not to buy all position at once, rather keep adding when the price comes down. The stock is currently trading at $38.76, a discount of 9% from its 52-weeks high. One should not to forget to take profit if the stock goes up. Coincidentally, putting a 25% trailing stop would be advisable to mitigate any major loss.

Risk(s): RIO is a U.K based company and we are not sure how the economy will behave after BrExit. The projected growth of China and U.S is still uncertain. The stock market has gone up to new highs after the election, too much, too soon. Any market correction could impact all the stock markets and RIO is no exception.

Shesa’s Blog Portfolio

Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	% Change	My Opinion (see disclaimer)
STOCK
AAPL	54.09	115.97	1/25/13	114%	HOLD
BIDU	86.43	164.93	4/18/13	91%	HOLD
SLW	21.8	17.36	10/1/13	-20%	BUY
FB	47	119.87	11/13/13	155%	HOLD
TSLA	135	202.49	11/13/13	50%	HOLD
MA	78.06	103.43	12/12/13	33%	BUY below $95.
AMZN	311.73	757.77	4/12/14	143%	BUY below $730.
MO	52.03	67.04	9/13/15	29%	BUY
BABA	67.28	88.67	2/21/16	32%	BUY
JBLU	20.44	22.18	4/24/16	9%	BUY
JD	23.45	25.61	5/22/16	9%	BUY
ABX	22.21	14.28	7/4/16	-36%	HOLD
XON	26.37	28.35	7/4/16	8%	BUY
LUV	36.89	49.93	9/5/16	35%	HOLD - Profit taking
FSLR	37.58	35.11	10/8/16	-7%	BUY below $33.
RIO	38.76	38.76	12/18/16	0%	NEW BUY
ETF
GDX	26.88	19.08	4/1/13	-29%	BUY
INDA	31.94	26.83	3/15/15	-16%	BUY
INCO	34.46	32.57	5/15/15	-5%	BUY
IHF*	139.1	126.79	8/16/15	-9%	HOLD
XLY	77.76	82.69	8/16/15	6%	HOLD
PJP	69.43	56.61	10/18/15	-18%	BUY below $55
EEM	32.5	35.15	11/15/15	8%	BUY
MUTUAL FUND
FBIOX	117.73	180.07	3/1/13	53%	Accumulate
PRHSX	55.17	60.01	2/2/14	9%	HOLD
FSCHX	135.91	149.19	4/12/14	10%	Accumulate
FSCRX	27.3	31.98	10/25/14	17%	Accumulate
GASFX	28.31	28.57	12/20/14	1%	Accumulate
PRMTX	63.38	74.66	12/20/14	18%	Accumulate
MINDX	26.94	25.74	6/14/15	-4%	Accumulate
MCDFX	14.11	14.06	12/9/15	0%	HOLD
FSRPX	95.46	111.29	1/15/16	17%	Accumulate
FBSOX	38.78	41.8	3/20/16	8%	Accumulate
TGLDX	33.73	30.95	11/20/16	-8%	BUY
* Indicates dividend adjusted

Positions closed since last Blog: NONE

Company Updates

BABA, JD: BABA and JD.com had reported record sales on Nov. 11, single day sales exceeding black Friday and Monday U.S. sales. We will know more when they declare results in Jan/Feb.

That’s all for today. Wish you good investing! Stay tuned for my JAN 2017 blog. Thanks for your time. If you want to get alert on my action then please subscribe to shesagroup_invest@googlegroups.com. Also, feel free to send me your comments and suggestions or alert request to shesa.nayak@gmail.com

Disclaimer: This blog is meant to provide my personal opinion rather than professional recommendation to buy/sell any stock, ETF, mutual fund or any other security(s). As an investor, it’s your hard earned money and you decide what is best for you. The above are merely my own opinions and some of the information provided may not be correct. Please contact a professional money manager to buy/sell any security. I do not earn any commission by writing the blog. I have position(s) on whatever security I write on my blog and avoid recommending any security that I do not own or follow.

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