ENR Market Outlook€¦ · • The U.S. Treasury yield curve began to invert at the short end of the curve in early December, signalling the growing possibility of a recession later

January 2019 ENR Market Outlook

Executive Summary:

• A global bear market arrived with a vengeance in December as the United States joined most international

bourses amid economic growth fears, plunging global bond yields, central bank quantitative tightening, ongoing

U.S.-Chinese trade tensions and the growing likelihood of an earnings recession in 2019. In December, the Dow

and S&P 500 Index suffered their worst December since 1931;

• In 2018, the S&P 500 Index declined 6.2%, the MSCI World Index fell 10.44% and the MSCI Emerging Markets

Index plunged 16.6%;

• According to Deutsche Bank, 90% of the 70 asset classes tracked are posting negative total returns in USD terms

through the end of November. That’s on track for the highest share since 1920 when 84% of 37 asset classes

were negative. In 2017, a raging global bull market, just 1% of asset classes delivered negative returns. With

December ranking as the worst December since the Great Depression, market statistics will be revised to show

even greater losses for global asset classes;

• All major regions of the world are now officially in a bear market with the S&P 500 Index the last major bourse

to join the malaise. However, since late October, the MSCI Emerging Markets Index and the MSCI EAFE Index of

major international markets ex. USA have begun to outpace Wall Street;

• The U.S. Treasury yield curve began to invert at the short end of the curve in early December, signalling the

growing possibility of a recession later in 2019 or in 2020. An inverted yield curve has accurately forecasted a

U.S. recession on every occasion since 1975. The difference or spread between 2 and 10-year Treasury bonds

remains positive but has compressed considerably since September;

• Markets might be discounting an earnings recession and not an outright economic contraction. It’s hard to

fathom the United States tumbling into a recession with wage growth percolating, business investment

increasing and government spending rising. Still, market events in December are a warning to investors as

‘buying on the dips’ has failed to work for stock investors for the first time in this post-2009 bull market.

Investors who purchased equities after big market declines earlier in February and October are sitting on losses;

• Several U.S. indices have recorded their largest percentage declines from all-time highs since the financial crisis.

The Dow Jones Transportation Average, NASDAQ, S&P Small-Cap 600 Index and S&P Mid-Cap 400 Index have all

posted losses in excess of 20% from all-time highs in 2018; the S&P 500 Index skirted with bear market territory

before reversing modestly the last week of the year;

• Overseas, the MSCI World Index (includes 60% invested in U.S. stocks), MSCI EAFA Index and the MSCI Emerging

Markets Index have all plunged 20% or more from all-time highs;

• Including dividends, the only major U.S. index to post a gain in 2018 belonged to the Dow Jones Utilities Index.

On a sector basis, the NYSE Arca Pharmaceuticals Index has also posted a small gain, including dividends;

• According to Ned Davis Research, the average non-recession bear market lasts about seven months. That implies

we’ll probably start bottoming this spring. However, if a recession follows later in 2019 or in 2020, all bets are

off for a springtime market bottom. In that case, a recession-induced bear market can inflict more pain as

evidenced by 2008, 2000-2002, 1981-82 and 1973-74. Those secular bear markets shredded portfolios in excess

of 30% and in some cases, like 1973-74, 2000-2002 and 2008, more than 40% off previous market peaks. If an

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2 ENR Market Outlook

economic recession is currently in the process of being discounted by markets, then we’re only about half way

through this carnage;

• According to research from Bloomberg and Gluskin Sheff’s David Rosenberg, there’s nowhere to hide in an

economic recession although defensive sectors tend to beat cyclicals. The average performance during

recessionary bear markets for utilities is -12.7% compared to -41.8% for technology stocks – the worst group in

recessions;

• Despite huge market losses since October (the worst quarter since Q3 2011), U.S. consumer confidence remains

near all-time highs. Though December is poised to remain strong amid buoyant holiday sales, the consumer is

probably approaching a peak in spending as stock market values and declining home prices across many areas of

the country spark a spending retrenchment in 2019;

• A government shutdown, now in its second week, has also harmed investor sentiment as economic data has

been curtailed by Washington;

• The European Central Bank (ECB) will join the Federal Reserve in 2019 in quantitative tightening or eliminating

monthly asset purchases. One of the primary triggers for this bear market since December is the loss of Federal

Reserve quantitative easing and its resultant drop in market liquidity. The ECB will terminate its asset purchases

later this year after spending almost $3 trillion over the past four years to support euro-zone bond markets. The

last major central bank still printing is the Bank of Japan. The ECB, however, is pulling out of the market at the

same time several European economies contracted in the third quarter, including Germany;

• Almost half of U.S. chief financial officers believe a recession will strike the American economy this year.

According to the Duke University/CFO Global Business Outlook survey released on December 12, all the

ingredients are in place for a recession: a waning expansion that commenced in 2009, heightened market

volatility, the impact of growth-reducing protectionism and the ominous flattening of the yield curve which has

predicted recessions accurately over the past 50 years;

• India outdid China in deal-making in 2018 with a combined value of $93.7 billion minted in mergers acquisitions

of Indian companies – up 52% from the previous year and the highest tally since the economy started opening

up in the 1990s, according to Dealogic. The value of overseas purchases in India has overtaken those in China.

The year’s largest deal was done by Walmart. The biggest global retailer took a $16 billion stake in Indian e-

commerce firm, Flipkart;

• The U.S. commercial property sector is flashing a bear market signal. The gap between long-term borrowing

rates and what some types of commercial properties on average yield is the narrowest it has been since 2008,

according to Trepp LLC and The Wall Street Journal. In the past, this tightening spread has often presaged a drop

in property prices, sometimes with dire results. The last time the indicator flashed red was back in 2007;

• The U.S. dollar has softened over the past month as markets begin to discount the possibility of a Fed pause in

2019. A weaker dollar would be a boon to international markets tied to dollar financing, U.S. global

multinationals and dollar-based investors in foreign markets. In our view, the USD bull market that commenced

in late 2011 is approaching its nadir for this cycle;

• Gold was a standout in the fourth quarter as global volatility surged. Gold gained more than 5% in Q4 and

regained safe-haven status while other traditional havens failed, including the Japanese yen and Swiss franc.

Supported by a big rally in Treasury prices (falling yields), gold still posted a loss in 2018 but considerably



narrowed its decline by the end of December. Palladium was the biggest winner among metals in Q4, soaring

11% on fears of supply shortages;

• Since December we’ve become bullish on Treasury securities for the first time in years. The growing risks of a

yield curve inversion, slowing global GDP and the rising costs of tariffs will reduce earnings growth in 2019. The

risks of deflation, not inflation, is now a primary concern for markets as crashing oil prices, recent weak business

spending and a drop in durable goods and nondefense capital goods, excluding aircraft, all portend to a slowing

U.S. economy this year;

• Emerging markets, tumbling throughout 2018, appear to have formed a bottom since late October and have

outpaced Wall Street over the past eight weeks. The same goes for non-U.S. major markets as defined by the

MSCI EAFE Index, though lagging behind developing markets. Since October 31st, the MSCI EAFE Index has shed a

cumulative 5% and the MSCI Emerging Markets Index has risen 1%. The S&P 500 Index, however, is down more

than 7.6% over the same period;

• The ENR Global Contrarian Portfolio logged its worst year since inception and only its third annual loss in

history. Though we dramatically cut stock market exposure in November and December, and declined 77% less

than benchmarks in a vicious December; 2018 is worth forgetting;

• The Federal Reserve is likely to ‘pause’ on rate hikes in March and possibly for the remainder of 2019 in order to

avoid a potential systemic event. Signs of credit risk have emerged, including leveraged loans, junk bond prices

tied to oil-related debt in shale and record levels of corporate debt on U.S. and international balance-sheets;

• Global equities are severely oversold and a snapback rally is imminent. Investors are advised to selectively buy

high quality companies at these bombed-out levels but also maintain a high cash balance and portfolio hedges

for growth-based portfolios; however, we would not purchase inverse-index ETFs at this stage of the sell-off;

• Investors should also focus on value and international markets, which remain historically inexpensive, compared

to the United States and should receive a boost for a lower USD this year. Dividend stocks also look attractive

again in a renewed environment of slower growth and lower rates;

• Emerging markets have been upgraded to BUY this month. The backdrop for emerging market assets has

improved markedly since last fall ahead of a Fed pause on interest rates in March, a stimulus package looming in

China and potentially, a weaker dollar this year;

• Please join us on Thursday, January 31 at 1.30pm EST for our ENR Global Investment Outlook in 2019 investor

conference call. Please call or email now to get a copy of our PowerPoint presentation ahead of the call. Email

[email protected] or call toll-free at 1 877 989 8027.

Global Equities

Focus on Global Value and Dividends in 2019

After suffering its first calendar year loss since the 2008 financial crisis, the S&P 500 Index joined the rest of the world in

the basement in the fourth quarter. The last three months of the year proved to be the worst quarterly return for U.S.

and international stocks since Q3 2011. For global investors, 2018 ranked as the worst year since 2008, too. One

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interesting anomaly, however, has been the divergence in performance between major markets and emerging markets

(EM) since October; the S&P 500 Index has plunged 7.6% but the MSCI Emerging Markets Index has gained over 1%.

That’s an important dispersion in relative performance at a time of tightening credit, a strong dollar and generally higher

global interest rates. But can emerging markets be discounting a new chapter in Federal Reserve monetary policy for

2019? In other words, are we possibly at the end of tighter U.S. monetary policy later this winter? We think the odds

are quite favorable the Fed will leave rates alone in March and possibly, for the remainder of the year, especially if the

Treasury market continues to send recession signals.

Indeed, the yield on the benchmark 10-year Treasury bond has plunged from a 2018 high of 3.24% last fall to 2.69% now

– a sizable rally. The bear market in bonds isn’t over for most segments of the credit space (e.g. high-yield, leveraged

loans) but perhaps it’s over for Treasury securities. The yield curve remains positive (difference in spread between 2s

and 10s) but still nervously close to flatlining at just 17 basis points or 0.17%.

The $64,000 question now is whether the United States and the rest of the world tip into recession later this year or in

2020? According to The Wall Street Journal and LPL Research, "the average maximum fall in U.S. earnings recessions

dating to the 1950s was 24% below the stock market peak. It is significantly less in the absence of a U.S. economic

recession. The S&P 500 is down about 15% from its peak in September, so some of this cycle’s earnings downgrades are

already priced in.”

Therefore, investors must be cognizant of the fact that stocks can fall further. The markets might decline another 10%

or more before bottoming-out in a bear market. But if the United States and China can ink a trade deal, and if the Fed

pauses on interest rate hikes and the dollar weakens this year, markets will recover. Inflation is benign and though

wages are climbing at their fastest pace in ten years, other inflation gauges like energy and housing have declined or

crashed. Investor sentiment as measured by Investors Intelligence, shows more bears than bulls for the first time since

February 2016. Sentiment is now clearly bearish in what was previously a wild, exuberant market following Trump’s

election triumph.



After trailing growth investing for the past ten years, value investing should re-emerge as a winner in 2019. That’s

because the preconditions for a sustainable value-led bull market typically arrive amid volatile markets, an economic

slowdown or recession, and periods of growing economic uncertainty. A corporate earnings recession is also historically

positive for value investing. The last time value-based equities outpaced growth stocks, from 2000 to 2002, saw a painful

three-year bear market that wiped-out 45% of the S&P 500’s total market-cap. But many value stocks appreciated.

International Stocks a Big Bargain

The ENR Market Outlook Portfolio already began to load-up on value-based ETFs last fall. As of January 2nd, we hold a

combined three value ETFs, including iShares Edge MSCI International Value Factor (NYSE-IVLU), Vanguard Mid-Cap

Value ETF (NYSE-VOE) and the iShares Russell Top 200 Value Index (NYSE-IWX). Though all three ETFs declined less than

their respective benchmarks last year, the last three months of the year proved challenging for all strategies. We

continue to strongly recommend these ETFs in 2019 – all significantly below their all-time highs. And for the first time

since 2014, we’re also plugging emerging market stocks. More on how to ride EM shortly.

The destruction across global markets has resulted in some of the best absolute values in years, particularly for beaten

down foreign stocks. For example, the iShares Edge MSCI International Value Factor ETF (NYSE-IVLU) is an excellent

product that was recently launched in 2015. The Fund invests in non-U.S. major markets with the biggest weighting in

Japanese stocks at 38% and the balance mostly in Europe. I like Japan. Corporations are returning cash to shareholders

after years of hoarding capital and now offer some attractive dividends. Japanese corporate earnings have begun to

outpace the S&P 500 Index recently, too. The European portion of the portfolio includes big holdings in the UK, France

and to a lesser extent, Germany, Spain and Italy. These markets have been slammed.

The median stock in IVLU’s portfolio of 97 companies trades at just 0.89x price-to-book value ratio or an 11% discount to

book. The trailing P/E is just 8.6x earnings and the dividend is 3.32%. Historically, these are cheap valuation numbers.



The Fund levies 0.30% in annual expenses. For long-term investors, I think foreign markets will make comeback. IVLU

declined 14.7% in 2018.

Though international bourses have trailed New York for most of the past ten years, value stocks in the United States

have been equally poor performers recently. The iShares Russell Top 200 Value Index (NYSE-IWX) declined 6.4% last

year or slightly more than the S&P 500 Index, including dividends. This low-cost product (0.20%) holds a selection of 133

high quality U.S. multinationals, including Berkshire Hathaway, J.P. Morgan Chase, Johnson & Johnson, Exxon-Mobil

Corp. and Pfizer Inc.

Financials, which performed poorly over the last 12 months, represent the largest weighting of this ETF at a combined

25% of the portfolio followed by healthcare at 20% and energy at 11%. Basically, financials and energy at 36% ranked

among the worst-performing sectors of the market in 2018 and are also the cheapest. Only oil services fared worse.

Mid-cap stocks have been massacred, too. Down 12.5% in 2018, the super low-cost Vanguard Mid-Cap Value ETF (NYSE-

VOE) has crashed almost 17% off its September all-time high. Mid-cap stocks, like small-caps, are much more volatile

than larger companies but also harbor the potential for stronger earnings growth. The ETF has a strong long-term track

record (+7.34% pa since 2006) and charges just 0.07% per year in expenses – 94% less than its competitors. VOE trades

at 13.6 times trailing earnings, 1.9 times price-to-book and yields 2.35%. Again, financials dominate this ETF at a

combined 24.6%.

The ENR Global Contrarian Portfolio recently purchased the iShares Emerging Markets Dividend ETF (AMEX-DVYE) for

the first time. Though not especially cheap for a U.S.-listed ETF (0.49% TER), it does have a few important attributes that

we find quite helpful in a volatile market environment.

DVYE provides a rich yield, sports less volatility than its benchmark and in 2018 declined only 0.27% (that’s right, one-

third of one percent) in a horrible year for emerging market investors. Last year, the MSCI Emerging Markets Index



tanked more than 16%. DVYE paid-out a 5.28% cumulative dividend in 2018, helping to tremendously offset losses. We

think that’s an impressive result in an otherwise disastrous year for EM investors.

From a valuation perspective, EM equities are attractive. EM stocks have been selling at a big discount for years vis-à-vis

major markets, particularly the United States. The asset class has suffered boom and bust cycles regularly and this one

has been no exception. From their peak exactly 12 months ago in January 2018, the MSCI Emerging Markets Index has

collapsed 23%.

The ETF holds a total of 99 stocks sporting an average price-to-earnings ratio of just 9.22 times trailing earnings and

trading 25% above book-value at 1.25 price-to-book. The trailing 12-month dividend yield is a juicy 5.62%.

A helpful development for EM would obviously be a resolution to the U.S.-China trade dispute. We’re hopeful a deal will

get done in 2019. Should the Trump administration finally come to terms with China and mint a beneficial trade deal,

global markets would probably up-crash, or skyrocket after months of negativity and deteriorating economic data in

China. And EM assets would benefit the most.

BUY the iShares Emerging Markets Dividend ETF (AMEX-DVYE) at market up to $40. Place a 25% stop-loss on your entry

price.

Contrarians Love Europe and Japan

The last decade has handsomely rewarded investors in U.S. stocks. In fact, only two other bourses in the world have

managed to match or exceed the return of the American broader market since 2008: Oslo, Norway and Mumbai, India.

Over the last ten years the S&P 500 Index has gained 13.12% per annum. Supported by massive central bank asset

purchases -- courtesy of the Fed -- strong corporate earnings, super low interest rates and a strong dollar, U.S. stocks



blew away the competition. But long periods of outperformance end. In the 1980s, Wall Street trailed Japan and Europe

in dollar terms and again in the 2000s, foreign markets posted stronger results. In the 1980s, Tokyo smashed everything

as the Nikkei blasted all the way to 39,000 before topping out in January 1990.

Foreign stocks have been a lousy investment since the financial crisis. Unlike the S&P 500 Index, international equities

have lagged almost every year since the credit crisis. Over the last decade, the MSCI EAFE Index (Europe, Australia and

the Far East) has gained only 3.05% per year; the MSCI Emerging Markets Index is up 5.10% annually. It’s no wonder

investors have pumped much more money into U.S. domestic equities than overseas since the onset of this bull market.

Plus, the dollar has been strong for most years, further diluting returns for USD-based investors offshore.

But we think 2019 might be different. Despite big political hurdles in the United Kingdom ahead of Brexit, unstable

Italian politics, and ruptures in the Franco-German alliance following Merkel’s departure and Macron’s low approval

rating, Europe is a contrarian investor’s dream. Few investors like Europe.

Based on trailing valuations (not forecasts), the S&P 500 Index trades at 21.5 times trailing, 3.29 price-to-book-value and

yields 2%. Despite the big sell-off since October, U.S. stocks are far from cheap. The MSCI EAFE Index, on the other hand,

trades at just 12.9 times earnings, 1.48 times price-to-book and yields 3.35%. By every measure, foreign stocks are very

cheap. And the emerging markets are even cheaper as outlined earlier.

Charging just 0.31% in annual expenses, the iShares MSCI EAFE ETF (NYSE-EFA) has been hammered since peaking 12

months ago, down 20%. The ETF, holding 24.5% in Japan, 17% in the UK and the balance mostly in Europe and to a lesser

extent, Hong Kong and Australia, declined more than 18% last year. The ETF holds 926 large-cap stocks in high quality

companies like Nestlé, Novartis and Roche Holdings in Switzerland; HSBC Holdings PLC, Royal Dutch Shell PLC and BP PLC

in the United Kingdom; and Toyota Motor of Japan among just a few names. It’s a very high-quality basket of

international blue-chip stocks.



It’s time for international markets to shine after a long period of poor absolute and relative returns compared to the S&P

500 Index. If the Federal Reserve decides to pause on rate hikes in 2019, a weaker dollar will boost foreign markets, too.

And any resolution to the U.S.-China trade skirmish would be incredibly bullish for all risk assets.

BUY the iShares MSCI EAFE ETF (NYSE-EFA) at market up to $61.50. Place a 25% stop-loss on your entry price.

Market Outlook Stock Portfolio:

Security Listed Symbol Entry Price

Date Current Yield

Current Price

Gain/ Loss

Advice

iShares Emerging Markets Dividend

NYSE DVYE $37.53 Dec 31/18 4.40% $37.53 NEW BUY

iShares MSCI EAFE NYSE EFA $58.91 Dec 31/18 2.18% $58.91 NEW BUY

Akzo Nobel Amsterdam AKZA € 79.42 Oct 4/18 3.31% € 70.40 -11.61% BUY

iShares Currency Hedged MSCI Japan

NYSE HEWJ $33.74 Oct 4/18 1.48% $28.32 -15.72% BUY

iShares Edge MSCI Intl Value Factor

NYSE IVLU $24.34 Sep 10/18 2.63% $21.99 -8.47% BUY

Vanguard Mid-Cap Value ETF

NYSE VOE $110.74 Jul 5/18 3.36% $94.79 -12.98% BUY

iShares Russell Top 200 Value Index

NYSE IWX $52.46 Jan 2/18 2.22% $47.62 -6.81% BUY

BCE, Inc.⁴ TSE BCE CAD 57.97 Mar 8/17 5.56% CAD 53.75 2.12% BUY

Apple Inc¹ NASDAQ AAPL $92.79 May 9/16 1.84% $157.87 77.06% BUY

Flughafen Wien AG Vienna FLU € 32.00 Aug 7/18 2.00% € 34.50 6.36% HOLD

Verizon Communications

NYSE VZ $47.93 Apr 5/18 4.35% $55.29 17.84% HOLD

PayPal Holdings NASDAQ PYPL $40.10 Jan 3/17 0.00% $83.79 108.95% HOLD

Pfizer Inc.³ NYSE PFE $32.92 Jan 3/17 3.34% $43.62 40.52% HOLD

Nestlé SA² VTX NESN CHF 65.15 Dec 7/16 2.94% CHF 79.80 26.27% HOLD

Diageo ADR NYSE DEO $113.71 Jul 4/16 2.94% $142.03 32.56% HOLD

General Dynamics NYSE GD $131.37 Mar 31/16

2.39% $156.82 26.37% HOLD

Disclaimer: The ENR Global Contrarian Portfolio owns Nestlé, iShares Emerging Markets Dividend ETF and PayPal Holdings. ENR Medium Risk Portfolio owns Nestlé and Pfizer. ENR Aggressive Growth Portfolio owns PayPal Holdings.



Fixed-Income

Back from the Brink: Treasury Yields Plunge After turning bullish on Treasury securities for the first time in years last month, prices continue to rally sharply as

growth fears strangle risk assets worldwide since December. From a multi-year high of 3.24% just a few months ago, the

yield on the benchmark ten-year Treasury bond has sunk to 2.57% -- a sizable rally by every measure. Our advice to buy

the iShares 20-Year + Treasury Bond ETF (NYSE-TLT) at the beginning of December has paid-off smartly. We continue to

recommend TLT as an effective deflation hedge and possibly, a hedge to economic recession later this year or in 2020.

Long-term bonds provide the biggest bang for your portfolio, if longer term interest rates continue to decline. In our

view, the Fed will not hike rates for the remainder of 2019.

We remain bearish on high-yield and corporate debt securities, despite higher yields recently. Leveraged loans should

also be avoided. Historically high levels of corporate debt on American and international corporate balance-sheets pose

risks to debtholders. Default rates will start to rise this year, consistent with a slowing global economy and declining

demand for riskier debt. In December, loan funds suffered record outflows after the Fed signaled it would slow the pace

of interest rate hikes this year.

Hedging a stock portfolio against downside market risk has historically been accomplished with long-term bonds. If the

bond market is accurately warning of an impending economic slowdown next year, or a recession, long-dated Treasury

securities offer the most upside.




Date Current Yield

Current Price

Gain/ Loss

Advice

iShares 20+ Year Treasury Bond

NYSE TLT $117.57 Dec 4/18 2.80% $120.75 2.70% BUY

iShares TIPS NYSE TIP $113.53 Dec 7/16 3.00% $109.33 0.86% HOLD

iShares Floating Rate

NYSE FLOT $50.69 Oct 5/16 2.18% $50.35 3.52% HOLD

Disclaimer: The ENR Global Contrarian Portfolio holds the iShares 20-Year + U.S. Treasury Bond ETF. The ENR Aggressive Growth Portfolio holds the iShares 20-Year + U.S. Treasury Bond ETF. The ENR Low Risk Portfolio holds the iShares 20-Year + U.S. Treasury Bond ETF and the iShares Floating Rate Bond ETF. The ENR Medium Risk Portfolio holds the iShares 20-Year + U.S. Treasury Bond ETF iShares Floating Rate Bond Fund.

Foreign Exchange

U.S. Dollar Index Rallies 4.3% in 2018 The U.S. dollar has now completed its seventh year of a bull market advance. In 2018, the USD steamrolled every

currency in the world and posted its best year since 2014. Supported by a hawkish Federal Reserve following seven

interest rate hikes since December 2015, the central bank is poised to soften its rhetoric next year as the American

economy slows, Chinese-U.S. trade wars remain a wildcard and Brexit dominate its outlook. Also, with signs from the

bond market showing concerns about economic growth, the Fed will be compelled to take its foot off the brakes. If this

narrative is correct, the dollar will increasingly soften vis-à-vis most currencies next year. Since November, it has begun

to correct versus most majors and many emerging market currencies, too. And since the end of September, gold prices

have climbed almost 4% as bond yields decline.

2019 Currency Sandwich

Fed under Pressure to Pause in 2019; Dollar Vulnerable

Since bottoming in mid-2011, the U.S. Dollar has enjoyed a secular bull market supported by the highest nominal

interest rates in the major markets, a strong economy and regional economic disturbances in the euro-zone and

elsewhere supportive of dollar strength. But that narrative is going to change in 2019 as the Federal Reserve increasingly

comes under pressure to pause on rate hikes amid an ugly global market shakeout since December, and the bond

market perhaps discounting an impending recession later this year or in 2020. Since mid-December, the Treasury yield

curve has started to invert with three and five-year Treasury bonds yielding less than a two-year Treasury note. This

inversion might spread to the all-important 2s and 10s. Since 1975, every yield curve inversion involving the 2s and 10s

has resulted in an economic recession. It’s a development worth heeding.

A yield curve inversion occurs when longer dated bonds yield less than shorter dated bonds, an anomaly coined an

‘inversion’ and highly predictive of a recession within 18-24 months following the event. It points to a slowing economy.

The last inversion occurred in February 2006; within 22 months, the worst recession/depression hit the global economy



since the 1930s. Below is the all-important Treasury yield curve. The difference between two-year and ten-year T-bonds

continues to compress and remains a worrying trend for the economy and financial markets. The spread is just 16 basis

points.

The Fed has been too aggressive raising rates since December 2015; though barely positive in real terms, the Federal

Funds rate at 2.5% is probably near a peak for this cycle. If that’s true, then the U.S. dollar is peaking. The Fed is clueless.

Take a close look at the bond market, plunging commodities, crashing oil, equities in a freefall. It’s almost as if the Fed

and its broad members live on another planet. The Fed has no business raising rates now. A lower dollar would do

wonders not just for foreign companies and sovereign governments who borrow in dollars, but also U.S. multinationals.

Approximately 37% of revenues derived by S&P 500 Index companies are earned abroad; a weaker dollar helps to boost

sales.

In 2018, the dollar rallied against almost every currency, except the Japanese yen. The ENR Global Currency Sandwich,

including gold, declined 3.32% in 2018 versus a rise of 4.32% for the USD Index. In 2017, the ENR Global Currency

Sandwich gained 6.8%. The worst-performing units last year included the Canadian dollar and the Polish zloty, down

7.8% and 7.5%, respectively.

2018 ENR Global Currency Sandwich (Equally-Weighted):

• Gold Bullion (-2.1%)

• EUR (-4.4%)

• Canadian dollar (-7.8%)

• Polish zloty (-7.5%)

• Swiss franc (-0.8%)

• Japanese yen (+2.76%)



For 2019, the ENR Global Currency Sandwich includes gold, the Japanese yen, Swiss franc, Norwegian krone and the

New Zealand dollar.

Gold should remain a core in every currency portfolio because it’s outside the confines of the credit system and nobody

else’s liability, unlike paper money. If the Fed pauses on rate hikes next year, gold will find a strong bid. Lower rates are

bullish for gold and other raw materials. Consequently, gold was one of the best performing assets in the tumultuous

fourth quarter, rising more than 7% and trading just shy of $1,300 an ounce.

Finally, the year ended with the highest number of bullish bets on the dollar since 2015, according to the CFTC. A

December survey by Bank of America Merrill Lynch said investors cited holding dollars as the market’s most crowded

trade. The last time markets were this one-sided bullish on the USD was back in late 2016, just ahead of a major

correction in 2017.

2019 ENR Global Currency Sandwich (Equally-Weighted):

Objective: The ENR Global Currency Sandwich attempts to buy-and-hold currencies with the best upside potential

against the American dollar over the long-term, including gold. The following are currency sandwich participants for

2019:

• Gold Bullion

• Swiss franc

• Japanese yen

• Norwegian krone

• New Zealand dollar



Commodities

Commodities Slammed in Worst Year since 2011

Awful. There’s no better way to describe the damage done to raw materials in 2018 – the worst year for hard assets

since 2011. Last year, the benchmark Reuters-CRB Index declined 12.4%. Energy, the largest constituent weighting in

commodities index’s, also suffered steep losses. West Texas intermediate crude plunged 25% and Brent crude, an

international benchmark for oil, fell 20% last year. Natural gas prices finished the year almost unchanged.

We continue to like select energy names for long-term investors. Some aggressive names, like Pioneer Natural

Resources Co. (NYSE-PXD), were stopped-out this week. Shale producers are most vulnerable in an environment of

plunging oil prices and in most cases, leveraged balance-sheets tied to the oil cycle. The ongoing sell-off in oil and oil-

related securities is almost a rerun of 2014 when oil prices last crashed to bottom at $27.30 a barrel.



At these levels, the large-cap oil majors and shale giants should be accumulated. Royal Dutch Shell B ADR (NYSE-RDS-B)

remains our top choice because of a resurrected balance-sheet focused on shareholder value, rising annual dividend

payouts, a stock buyback and a fat 6.2% dividend yield. RDS-B now trades 21% below its 52-week high in New York.

Uranium is also an interesting speculation here. We plugged Uranium Participation Corp. (Toronto-U) last October and

the stock price has corrected about 10%. Uranium demand is finally starting to rise. The commodity provides a truly

negative correlation to most other assets and is bombed-out; Uranium Participation Corp. trades 76% below its all-time

high in 2007.

The gold stocks have posted a strong run over the past seven weeks and should be accumulated. If global equities

mount a comeback, even briefly, gold miners will probably sell-off. Gold and gold stocks are overbought on a short-term

basis but should be accumulated on intermittent weakness ahead of a dollar correction or bear market. In 2018,

Newmont Mining (NYSE-NEM) declined about 5.5%.



Market Outlook Commodity Portfolio:


Date Current Yield

Current Price

Gain/ Loss

Advice

Royal Dutch Shell⁵ NYSE RDS-B $65.51 Nov 5/18 6.27% $60.20 -6.67% BUY

Uranium Participation Corp

TSE U CAD 4.63 Oct 4/18 0.00% CAD 4.44 -9.37% BUY

Newmont Mining NYSE NEM $17.99 Dec 31/15 1.62% $34.23 95.47% BUY

Pioneer Natural Resources Co.

NYSE PXD $170.17 Mar 8/18 0.25% $130.40 -23.18% SELL

iShares S&P GSCI Commodity Trust

NYSE GSG $16.34 Jan 2/18 0.00% $13.93 -14.75% HOLD

Shareholder Disclaimer:

1. ENR or its employees or its access persons own shares of Apple Inc. 2. ENR or its employees or its access persons own shares of Nestlé

3. ENR or its employees or its access persons own shares of Pfizer Inc.

4. ENR or its employees or its access persons own shares of BCE Inc.

5. ENR or its employees or its access persons own shares of Royal Dutch Shell B.

Thank you for your continued support.

Eric N Roseman January 3, 2019 Montréal, Canada

Documents

ENR Market Outlook€¦ · • The U.S. Treasury yield curve began to invert at the short end of the curve in early December, signalling the growing possibility of a recession later