Mid-Year Top Performers: Landon Whaley

Landon Whaley CEO, Whaley Capital Group

At the start of the year, MoneyShow featured its annual Top Picks report asking the leading advisors for their favorite investment ideas for 2016. In the report 85 stocks and funds were recommended. This interview is part of our series highlighting the top performing advisors as of mid-year.

Steve Halpern:  Our special guest today is Landon Whaley, editor of the Whaley Report.  How are you doing today, Landon?

Landon Whaley:  I'm doing well, Steven, thank you for having me.

Steve Halpern:  Well, congratulations are definitely in order.  In our 2016 annual top picks report, you chose Market Vectors Gold Miners ETF (GDX), as your top investment for the year.  Since then, the ETF is up 101%, putting you among the top two performers out of 85 participants.  First, could you tell our listeners about this ETF and explain its makeup.

Landon Whaley:  Absolutely.  I'm really glad you asked that question.  You know, it seems like with each passing day, ETFs are getting more and more esoteric, so I can't stress enough how important it is to understand exactly what's inside, not only your wallet, but your ETF.  It's critical that investors educate themselves on what these ETFs hold before ever risking a dollar.  

GDX is an ETF for gold mining companies with an average market cap of $8 billion, so this particular ETF holds the biggest mining companies in the world.  It has a total of 50 stocks across seven countries.

But it's important that investors be aware of the concentration within the ETF.  60% of those companies are located in Canada, and of the 50 stocks, 70% of the assets are held in just the top 15, so the other 35 stocks have very little impact on the price performance of GDX.  

This is pretty typical of a sector industry ETF when the price movement is being dictated by a handful of stocks, even though there may be hundreds more listed in the holding.

Steve Halpern:  Now, could you review your original rationale for picking this ETF at the start of the year.

Landon Whaley:  Sure.  When I made the pick back in late December, I was focused on the fact that my 3G investing framework had gold as one of the more bullishly positioned markets in the world, and I knew that gold miners, specifically GDX, would be a great way to get a leveraged return on gold moving higher.  

Just a quick word for those who are not familiar with my 3G framework, the G stands for gravity, and I focus my analysis on the three most critical forces or gravities that impact markets, and those are fundamental, quantitative, and behavioral, so back in December, my fundamental gravity was very bullish on gold.  

Global growth had been slowing, and with the exception of the Fed, every central bank in the world was engaged in further easing.  Both of these factors were pushing yields across the world lower and lower.  

Gold performs very well when yields are falling or when yields remain low for an extended period of time, and that's the exact environment we had when I made the pick.  

In addition, the other two gravities were extremely bullish.  Quantitatively, gold had held up very well in the aftermath of the Fed rate hike in mid-December and had been trading sideways for two months.  Behaviorally, no one was talking about gold and positioning in the future's markets was extremely bearish.  

Whenever I see this type of divergence between what investors should be doing and what they're actually doing, I know there's a huge opportunities for gains, so putting this all together, gold was a bullish trade with an extremely high probability of being profitable, and it just turned out that I was right.

Steve Halpern:  Let's review some of the developments since then that have led to this fund's strong gains.

Landon Whaley:  I'll be honest.  Things have played out even better than I expected.  Over the last six months, global growth has continued to slow, and central banks are easing at a ridiculous pace.  I could rattle off two dozen critical data points from the Eurozone, China, and beyond that are all falling to levels not seen since the financial crisis.  

We aren't immune to slowing growth here in the US earlier.  80% of the critical indicators that I monitor are worse than they were back in January, durable goods, industrial production, and even the labor market's condition index are all hitting levels only seen during the recession.  This is just to name a few.  

I could go on and on but, Steven, the real juice behind the GDX trade came when the ECB and the Bank of Japan unleashed negative rates like the Titans unleashed the Kraken.  For the first time ever, the amount of negative yield in government debt has surpassed 10 trillion.  That's trillion with a "T".  
We now have one-third of all government debt with negative yields, and if you exclude US government debt from the equation, half of all government debt worldwide has a negative yield, so if falling or lower yield environments are good for gold, then an environment of negative yields is utopia for gold.

Steve Halpern:  So, looking ahead to the second half of 2016, do you remain optimistic on the gold mining sector, as well as GDX as an investment.

Landon Whaley:  I'm very optimistic for both gold miners individually, as well as GDX specifically, and I think it has to be.  Unless you think global growth is going to suddenly snap back and hit an escape velocity allowing central banks around the world to reverse negative rates and begin raising, then the fundamental backdrop will remain very bullish for GDX.  

That said, investors are going to have to deal with pullbacks along the way because GDX is going to get periodically overbought, and investors are going to become more and more bullishly positioned in GDX, but frankly those pullbacks are opportunities to initiate trades if you missed out so far or to add to a current position if you see if.  

The bottom line is that as long as global growth slows and negative rates are still in play, then GDX is a market that you have to belong.

Steve Halpern:  Now, within this overall environment, before you go, perhaps you'd be kind enough to highlight another ETF name or two that investors should be looking at for the second half of the year.

Landon Whaley:  Sure.  I tell you, the only other market that I love as much as I love gold and gold miners.

I hate to be a broken record here because I selected long-dated Treasuries -- and specifically the iShares Barclays 20+ Year Treasury Bond ETF (TLT) -- as my other pick to start the year, but I still like long-dated Treasuries for the balance of the year and TLT as the ETF to capture that market.  

Again, the negative interest rate Kraken that's been released has now forced the US to have a monopoly on positive yielding debt.  We now account for over 60% of all positive yielding government date, 90% of all debt less than a year, and 75% of all positive yielding debt less than five years.  

What this means in general terms is that if the Fed stays put with its current policy or raises rates further, it's going to force other central banks to offset the tightening conditionings.  

This forces yields more negative, which, in turn, forces investors looking for yield into the safest asset class, which is US Treasuries.  This self-reinforcing cycle is just getting started and is extremely bullish for TLT.

Steve Halpern:  Again, our guest is Landon Whaley of the Whaley Report.  It's always fascinating to talk to talk to you.  Thank you so much for your time.

Landon Whaley:  Thank you, Steve, I appreciate it.

By Landon Whaley, Editor of the Whaley Report