Could the Economy be Better than Expected?

Richard Croft
December 9, 2013
3 minutes read

Let’s assume for a moment that the North American economies are performing better than expected. Not a real leap considering that most analysts think the broader North American economy is walking on air, with looming US debt ceiling and sequestration debates and their fast approaching January 15th deadlines notwithstanding.

In fact, the real surprise could be some grand plan agreed to by the three branches of the US government which could eliminate the need for additional quantitative easing, and in a perfect world, return us to a point where good news is actually seen as good news.

In that light, Canadian exporters would do quite well. Given that Canada is leveraged to the US recovery, and for the last two years Canadian stocks have lagged their US cousins, it may be time for us to play catch up!

Assuming there is always a bull market somewhere – where have I heard that – traders’ might want to look at some Canadian companies that would benefit from a pickup in exports. Think about transportation companies like Canadian National Railways (TMX: CNR, Friday’s close $60.21) or Canadian Pacific (TMX: CP, $164.26) as starting points.

Covered calls might be the better approach for more conservative traders, say buying CNR and selling the March 62.50 calls at $1.15. The three month return if exercised is 5.8% if unchanged 1.9% and downside breakeven at $59.06. Another approach for more aggressive traders is to simply buy the June 62.50 calls at $2.00. Maximum potential is unlimited, maximum risk is the cost of the call.

With CP, consider buying the shares and writing the March 170 calls at $5.50. The four month return if exercised is 7.1%, if unchanged 3.5%, and downside breakeven at $159.76.

Another transportation company that I rarely mention is Air Canada (TMX: AC.B, $7.93) which,because of its low price, might appeal to some as an option substitute. There are no options on the company, probably because the stock itself acts a lot like an option. Not a buy and hold trade by any stretch but maybe as a short term trade over say the next three months!

Keeping with the airlines, Westjet (TMX: WJA, $28.06) may actually be a better choice. This company has options which open the door to a cash secured put position. Say writing the WJA April 28 puts at $1.65. This trade obligates you to buy the shares at $28 per share until the April expiration. If the stock is above that price in April the options will expire worthless. If you have to buy the shares your net cost will be $26.35 (i.e. $28 strike price less $1.65 option premium = $26.35).

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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