The Last Time We Saw This, Investors Doubled Their Money in Six Months

By Justin Spittler

Gold couldn’t catch a bid in December 2015. It was down more than 30%, and trading at the lowest price in nearly six years. Gold stocks, which are leveraged to the price of gold, were doing even worse. The average gold stock was 80% off its highs. Most investors wanted nothing to do with gold. But not Doug Casey. Doug knew gold would rebound. It was only a matter of time. He even told Kitco, one of the world’s biggest gold and silver retailers, on December 18, 2015, that he was buying gold hand over fist:

My opinion is if it’s not the bottom, it’s close enough to the bottom. So, I have to be an aggressive buyer of both gold and silver at this point.

Doug’s timing was nearly perfect.…
The day before, gold bottomed. It went on to gain 30% over the next six months. The average gold stock more than doubled in value over the same period.

I’m telling this story because an opportunity just like this is shaping up before our eyes. Only this time, it’s in the energy market.

Energy stocks have been beaten to a pulp.…
You can see what I mean below. It shows how the Energy Select Sector SPDR ETF (XLE) has done since the start of the year. This fund invests in 36 major U.S. energy companies, including Exxon Mobil and Chevron. You can see that XLE is down 13% this year. That makes energy stocks the worst-performing sector in the S&P 500.

Energy stocks are now off to “one of the worst beginnings to the year ever,” according to Morgan Stanley. As if that weren’t enough to scare away most investors, look at the ugly chart below. It compares the performance of XLE with the SPDR S&P 500 ETF (SPY), which tracks the S&P 500. When the line is rising, energy stocks are doing better than the broad market. When it’s falling, energy stocks are underperforming the S&P 500.

Energy stocks have been lagging the broad market for nearly a decade.…
As a result, energy stocks now make up just 5.9% of the S&P 500. That’s half of what the sector’s weighting was in 2011. Not only that, the 36 energy stocks that make up XLE are now worth less than the combined value of Apple and Alphabet, the parent company of Google.

Situations like this don’t last forever.…
Eventually, the pendulum swings the other way. The trick is knowing when that will happen. That’s obviously easier said than done. Plus, you have to understand that markets rarely change direction on a dime. Instead, they usually go through a bottoming process that can take weeks or longer. And it looks like energy stocks may have begun that process.

Energy stocks took off last week.…
XLE jumped 2.5% on Friday. That was the biggest one-day jump in energy stocks since last November. This week, XLE is up another 1.4%. Now, it would be easy to dismiss this as “noise.” But if energy stocks keep rallying, XLE could “break out.” The chart below shows the performance of XLE over the last 12 months. You can see that it’s been in a downtrend since late 2016.

You can see that XLE hasn’t broken out of its downtrend yet. But it could do that sooner than most investors think.

Energy companies are starting to make money again.…
Revenues for energy companies in the S&P 500 surged 34% during the first quarter of 2017. That was more than quadruple the S&P 500’s 7.6% jump in revenues. Wall Street now expects U.S energy companies to post an 18% rise in revenues when the second quarter is all said and done. Not only that, analysts expect the sector to report a more than 400% spike in second-quarter profits. For perspective, second quarter profits for the rest of the S&P 500 are expected to rise just 3.7%.

Once “the market” figures this out, watch out.…
Energy stocks are going to skyrocket just like gold stocks did in early 2016. Keep in mind, the bottoming process could take weeks or even months. So, wait for energy stocks to “carve a bottom” before diving in. That’s when stocks stop falling, trade in a tight range for a period of time, and then start heading higher. Stocks that carve a bottom often keep soaring. Just look at what GDX did after it carved a bottom early last year.

By waiting for energy stocks to carve a bottom, you’ll greatly limit your downside…without giving up a chance at big returns. I'll let you know when the time is right to invest in the energy sector. In the meantime, keep an eye on XLE and other energy funds like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Once they carve out bottoms, it will be a good time to buy.

The article The Last Time We Saw This, Investors Doubled Their Money in Six Months was originally published at caseyresearch.com.

The Time of Maximum Pessimism Is the Best Time to Buy

By Nick Giambruno

“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”—Sir John Templeton


As you may have heard, Doug Casey and I traveled to Cyprus in search of crisis driven bargains… and we found them. This has been previously outlined in the articles here and in our specific investment picks in Crisis Investing in Cyprus.

Speaking of those picks, we outlined eight companies on the Cyprus Stock Exchange that we thought were fundamentally sound, but unjustly beaten down by the crisis. And thus far they have performed exactly as we thought they would.

The eight stocks that Doug and I identified are all up since the publication of Crisis Investing in Cyprus. Two of them have more than doubled, including one that’s up 335%ⁱ.

While those returns are nothing to bat an eye at, we believe there is still a lot more room for upside, and that it’s not too late to get in.

The top three catalysts for an economic recovery are still at the very earliest stages of being played out. And if the returns to date on our picks are any indication, we expect them to go much higher once these catalysts are fully under way.

Additionally, for the vast majority of people, there is still an aura of “maximum pessimism” surrounding Cyprus, which is what makes it an excellent contrarian investment. However, it’s clear this sentiment—and the current buying opportunity—won’t last forever.

Here are the three main catalysts to watch for.

Catalyst #1 Elimination of Capital Controls

Cyprus was the first eurozone country to implement official capital controls (but probably not the last). The restrictions put in place during the crisis are still there, though they are being gradually eased.

The first step toward the relaxation of capital controls occurred last week, and it’s possible that they will be fully lifted later this year. While it remains to be seen whether that will actually happen, there has been tangible progress in that direction.

Additionally, Cyprus has been meeting and exceeding its benchmarks set by the Troika (the IMF, the European Commission, and the European Central Bank), including the privatization of inefficient state-run enterprises and quickly enacting reforms, such as cutting government spending. This progress and the gradual relaxation of the capital controls are reasons for guarded optimism.

A couple of points to clarify about the capital controls:

First, they do not apply to new money brought into Cyprus (nor the capital gains and income generated from that money). That money can be taken out of the country without restriction. Second, the bank deposit confiscation only applied to cash balances above the guaranteed amount of €100,000 at the two troubled banks, Laiki Bank and Bank of Cyprus. Relatively sound institutions were not affected. Also, there was no forced selling or conversion of securities held in brokerage accounts. All of the brokers whom we met with held the majority of their cash in institutions outside of the country for additional protection.

Of course, the government could always come up with a new edict or decree, but we view that as unlikely at the moment, since they’re actively encouraging new investments in the island.

Catalyst #2 Offshore Gas Bonanza

In 2011 there was a discovery of a massive gas field about 100 miles south of Cyprus. The resources there are estimated to be worth tens of billions of dollars (not insignificant for a country with a $23 billion GDP)—and are enough to turn Cyprus into an energy exporter. Though it could be a number of years before these resources are monetized, it gives Cypriots a lot to look forward to over the intermediate term.

 

 

Catalyst #3 Relisting of the Bank of Cyprus

Previously the Bank of Cyprus and Laiki Bank accounted for a large chunk of the volume traded on the Cyprus Stock Exchange. Laiki Bank is now defunct, with its good parts having been folded into a restructured Bank of Cyprus—whose shares have been suspended from the stock exchange.
The restructured Bank of Cyprus is expected to start trading again sometime midyear, which will be an important catalyst in rejuvenating the stock market.

This is not to say the Bank of Cyprus is completely out of the woods. Far from it. While it has restored its capital base following the bail-in, it still has major issues with non-performing loans (NPLs).

That said, the Bank of Cyprus is the cornerstone of the Cypriot financial system, which is a major pillar of the Cypriot economy, and it has the backing of the Troika. The IMF believes that, despite the NPLs, the bank will be able to maintain an adequate capital base through at least 2016.

Owning a country’s premier bank—especially after it’s been chastised by a near-death experience—can be a profitable speculation.

It’s Not Too Late to Snatch These Bargains

While our eight investment picks are all up since the publication of Crisis Investing in Cyprus, including two of which that have more than doubled (including one that is up 335%ⁱ), that doesn’t mean it’s too late to get in.

The fact that we’re still at the very early stages of these three catalysts, combined with the continued “maximum pessimism” sentiment tells us that there’s still a lot more upside potential.

With features that make it a popular tourist and retirement destination combined with the potential economic boon from exploiting the offshore gas reserves, the Cypriot economy has a good chance to recover over the medium term.

When you weigh it all together, it’s clear that now is the time to start deploying speculative capital.
In order to invest on the Cyprus Stock Exchange, you’ll need a local brokerage account. Our preferred Cypriot broker can open accounts remotely for online trading, with no minimum balance requirements, and they still accept American clients.

This is information that you won’t find anywhere else. And there’s nobody better to guide you through it all than legendary crisis investor Doug Casey.

You can find out more about Crisis Investing in Cyprus by clicking here.
ⁱReturns denominated in euro terms from 11/6/2013 through 3/4/14

The article The Time of Maximum Pessimism Is the Best Time to Buy was originally published at International Man.

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