A Year End Rally?

Richard Croft
November 27, 2014
3 minutes read

We have a short week of trading in light of US thanksgiving. Just enough time to position your portfolio for a year-end rally?

A year-end pop seems to be the consensus opinion among the largest US hedge funds. Mind you that may be hype or at a minimum wishful thinking. Fact is many large hedge funds have under performed a passive and much less costly investment in the S&P 500 composite index. They will need a year-end rally in order to justify their fees.

While I tend to discount the blather that comes from the hedge fund community I think this time they may be right. Consider the macro picture; the decline in the price of oil has given US consumers a massive tax cut coming into Black Friday. If history is any guide that should lead to a boost in spending. With two thirds of US GDP dependent on consumer spending that may well push year over year US GDP above 3%.

If you buy into the premise of a strengthening US economy, Canadian investors must be aware of the impact on currencies. If oil prices continue to decline and if the European Central Bank and Japan central bank resume their quantitative easing programs, the US dollar will rally into the new year. Now Canada will be hedged somewhat as we will ride the coat tails of the stronger US economy. But the decline in oil prices will prevent any rally in the Canadian dollar. At best the loonie will track the US dollar although it is more likely that it will decline slightly in the months ahead.

The easiest way to play this US story is to buy a non-hedged S&P 500 ETF. The Vanguard S&P 500 ETF (TSX: VFV) comes to mind.

Another consideration for Canadian investors is how this playbook will impact commodity prices; particularly gold. A higher US dollar would slow any rise in gold and gold stocks especially if there is little evidence of inflation.

My trade here is to execute a bear call spread on a Canadian gold stock such as Goldcorp (TSX: G). Goldcorp recently traded at $23.20. Look at writing the Goldcorp December 24 calls around 70 cents while buying the Goldcorp December 27 calls at 15 cents. This will produce 55 cents net credit which if I am right should expire worthless at the December expiration.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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