ADE Monthly Commentary

Market Update

On the cusp of a breakout?

...and the fun begins

What is Belt and Road?



The past month has seen a resumption of many of the primary trends from 2016.

The Dow Industrials has recently made new all-time highs above 20,000 but has become overbought as bullish sentiment has again become pervasive. In my opinion, a minor correction within this larger push higher should ensue reasonably soon. Most likely, it would be an opportunity to put capital to work. As long as a correction stays above 18,000, I would favor a resumption of the upward trend with a push to further new highs later this year. A decline below that level would open the door to a much more substantial market correction that could turn into a full fledged bear market.

The U.S. dollar has been in a minor correction since its January 3rd high. The correction ended February 2nd and has been advancing ever since. I will watch this pattern intensely. I decline below the February 2 low will have me thinking the dollar is heading much lower. But, as long as it stays above that level, the path for the dollar seems to be higher.

The U.S. Treasury bond market seems to be in a countertrend rally. It appears that the lows in interest rates from summer of 2016 may mark a generational low in rates. But, markets do not move in a straight line. Interest rates are not headed straight up. In mid January, rates stopped rising and have actually been coming down. I think they may continue heading lower over the next month or so before resuming their upward trajectory. I find little reason to own bonds at these levels in a substantial portfolio position and would use this bounce to potentially lighten exposure even further.

The Gold and silver correction from last summer appears to have run its course. Gold and silver bottomed back in December at $1,122.98 and have rallied substantially to its current $1230 level. I continue to believe this is just the beginning of a much larger trend through 2018. This current rally in my opinion should head to at least last August levels if not toward $1,450 oz. before starting a period of consolidation. My expectation is that this current rally concludes by May before consolidating generally sideways this summer.

Emerging market stocks have rebounded substantially since their election related correction and have now erased all their losses. The emerging market stock index is now breaking out to 52 week highs.


Here is a longer term chart of the emerging market stock index since the 2008 waterfall. As you can see, since the 2011 high there wasn’t much to talk about. A five year support line was broken in late 2015. However, since bottoming in January 2016, the emerging market stock index has rallied over 35% and is now pushing back up on that long-term trend line. The last time it did so, (July 2016) it failed. A break above this trend line would increase my confidence substantially that the worst in emerging markets is behind us and a potential multi-year rally could be in the cards.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

A shorter-term chart shows just how powerful this recent rally has been. Emerging markets are generally more volatile than developing markets but also contain more than 50% of the world’s GDP according to the international monetary fund (IMF).

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

I continue to believe emerging market stocks may continue to surprise to the upside and for those whose risk tolerance, time horizon and goals warrant exposure should continue allocating capital while they are still unloved.


Roughly 8 weeks ago, the prevailing mood in the gold and silver markets was decidedly negative. In fact, according to many sentiment measures it was lower than in early 2016 when gold was roughly $100 oz. lower. The turn in sentiment from the FOMO that existed last July to the despair of mid January was just startling. But, both of those turned out to be contrarian indicators. In my opinion, the main reason for the recent rally in the metals was because very few were expecting it to rally. The financial markets often have a habit of doing the opposite of what the majority expect and this was no different. Gold is currently hovering around $1,230 oz. and Silver is just a shade below $18 an oz.

I continue to believe that the positive price action in gold, silver and the mining companies since the bottom in early 2016 is the foundation of a multi-year rally into at least 2018. Here is my current wave count of the volatile gold and silver mining stock index. Investing in mining companies is not for the faint of heart. These companies are extremely volatile, so patience and emotional control is needed if one chooses to invest in this sector. Nothing moves in a straight line. After a multi-year correction, the mining stocks have rallied significantly off the lows in the first wave that completed last July. They then had a multi-month correction in a wave 2 pullback that ended in December. They now appear to be in the beginnings of a wave 3 rally that in my opinion should exceed last year’s highs.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Whether this will be a three or a five wave rally is still to be determined. That will likely be decided this summer. I lean toward an interpretation of this market that we are in a five wave advance and are currently only in the third wave. Typically, third waves are the strongest as people begin to take notice of the trend change.

In addition to the positive price action, a major factor in my belief is the sheer disbelief by many in my industry. The miniscule allocation to these mining companies and to the precious metals in general means there could be a lot more upside ahead. Most measures of inflation are picking up. Political uncertainty seems here to stay. Currency wars are heating up around the globe. All of these are generally reasons why investors would hold a portion of their portfolio in these assets.

“Normal” economic times occur roughly 77% of the time according to FPI research. “Normal” is defined as slightly rising inflation and rising economic growth. The second most often occurring situation is “stagflation”. Most recently in the 1970s and according to FPI research, happening 12% of the time, stagflation is a period of muted or contracting economic growth and rising inflation. If inflation is beginning to rise, its impact on the economy may be felt in 2017. While stocks are often much better to have in a portfolio than fixed rate bonds if inflation picks up, historically they have only maintained purchasing power in times of inflation, not increased it. Precious metals on the other hand, often had their best performance when inflation was rising or when 10 year Treasury rates were below the rate of inflation. Currently both are occurring. I continue to believe an allocation to precious metals and mining companies as a prudent diversifier and inflation hedge makes sense in this economic environment.


Since last June, I have been discussing infrastructure investments as a possible addition to a portfolio. After the election, it appears many others jumped on the bandwagon. Assets related to U.S. infrastructure improvement have performed very well since the election and could be poised for further growth.

Could international infrastructure investment also benefit from a newfound tailwind? In continuing my research on the Monsoon Region and emerging markets in general, I came across a Fortune Magazine article and research done by the Mercator Institute for Chinese Studies about an initiative by China called One Belt, One Road. This foreign-investment project was announced in 2013 by Chinese President Xi Jinping and is designed to boost China’s trade and diplomatic ties with more than 60 countries in Europe, Africa and the Middle East. Essentially, they are trying to expand China’s influence in the region by rebuilding the old Silk Road trade routes. China plans to invest $1 trillion through the program over the next ten years into infrastructure related projects. Interestingly, that is the same number the Trump administration has promoted for U.S. infrastructure upgrades. Of the $100 billion annually to be spent, roughly 50% will be used for raw materials such as concrete, copper and steel according to Price Waterhouse Coopers. Another 30% to 40% will be earmarked toward engineering, construction and technological equipment.

One Belt, One Road is the largest international spending project in China’s history. Adjusted for inflation, the project is 12 times the size of the Marshall Plan that rebuilt Europe after World War II. China has huge state owned infrastructure companies that have built up much of China in the past decade. However, as we all now know, China’s construction boom has slowed significantly since its peak in 2011. Belt and Road aims to keep those companies building in partnership with leading companies from around the world. Rachel Duan, president of GE Greater China recently stated, Belt and Road is “a very big deal for GE”. She runs an $8 billion division whose main directive is to partner with Chinese companies across 34 current joint ventures. GE currently has operations in 60 of the 65 countries associated with Belt and Road.

How large is the need for infrastructure upgrades in the Monsoon region surrounding the Indian Ocean? Joe Nagai, managing partner of McKinsey’s Hong Kong practice, says the need for infrastructure upgrades in emerging markets in Asia and Africa is $2 trillion to $3 trillion per year. That is some serious opportunity for joint projects.

What is the Belt and the Road? The “Belt” is the land-based component of the strategy. It is designed to improve the network of railroads, bridges, oil pipelines and other projects connecting China to Kazakhastan, Russia and Europe bringing much needed investment to areas where austerity has been in place since the financial crisis. The “Road” is actually the sea based investments designed to improve relevant ports along shipping lanes extrending to Indonesia, North Africa and the Middle East.

As I have thought more about my thematic focus on infrastructure and the monsoon region, it occurred to me that these two themes are very interrelated. As China aims to improve its standing as the 2nd largest economy in the world, it is integrating itself further with economic allies in the region. These investments could pay-off in a big way for the Chinese economy and those in the region as trade becomes much more efficient. While investment in that area of the world can be downright scary, I continue to believe that often the best opportunities are where others are afraid to set foot.

"There's only one reason a share goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you've got to look for where the public is most frightened and pessimistic."

"Looking for a good investment is nothing more than looking for a good bargain."

- Sir John Templeton


  • Rather than trying to “beat the market”, focus on beating inflation and the rate on cash.  Plan for safety and liquidity while seeking positive returns.


  • Equity valuations are very rich but masked due to the distortion of the Treasury curve. Volatility is returning to the markets and I think long/short managers are best positioned to capture this volatility by owning companies with strong businesses, barriers to entry, and good valuations and selling short weaker companies with high debt loads that have risen sharply with the broad market rally. I think this strategy of hedged equity may have the potential to produce attractive risk-adjusted returns if and when investors begin to question the valuations of companies. Stock investing involves risk including loss of principal. No strategy ensures success or protects against a loss. Long positions may decline as short positions rise, thereby accelerating potential losses to the investor.


  • Monsoon country investments. Attempting to take advantage of demographic, educational and investment possibilities in the countries surrounding the old spice routes of the Indian Ocean. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

  • In 2013, the Affordable Care Act began implementation. There will be many winners and losers in the healthcare industry as a result of the biggest change in the healthcare industry’s history. With the largest portion of the U.S. population entering their golden years, healthcare needs will become even more important. Long/short Healthcare seems to be a very attractive way to invest in a sector with lots of potential and lots of potential pitfalls. Investing in a specific sector involves additional risk and will be subject to greater volatility than investing more broadly.


  • A potential U.S. infrastructure upgrade cycle may be around the corner. Moving from our current grade of D+ to B would require an investment of $3.6 trillion by 2020.


  • Supply problems remain high across the energy asset class. While there isn’t a current shortage of energy on the planet, it is taking more and more energy and capital to discover, drill, transport and refine it. Long term Demand should continue to grow globally, particularly in China, India, and other developing countries.


  • Potential food shortages due to inclement weather and higher demand from the emerging Asian middle class could result in a boon to agricultural land and potash fertilizer companies. International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.


  • The rise of E-Commerce has coincided with an increased desire for efficient warehouse distribution real estate. As e-commerce moves toward even faster delivery, positioning of distribution becomes even more important.


  • Precious metals mining companies have been extremely beaten down over the past four years. Mining is an industry that spans hundreds of years. Companies that mine for commodities are often highly cyclical, meaning they have sustained moves both up and down. When investing in the mining space it is important to be a contrarian. Ideally, you would want to accumulate miners when sentiment is poor around them and sell them when sentiment is positive. Historically this has been a good strategy.


No strategy ensures success or protects against a loss.



Colin B. Exelby
Celestial Wealth Management



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