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Dealing with the Summer Heat

Richard Croft
June 11, 2012
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President Obama held a press conference on Friday and spoke about the state of the US economy. Although in reality it looked a lot like a political soap box for Obama to illustrate how the approach taken by his administration differs from the Republican line of attack.

Of course with any political showboating there are some nuggets of truth. Certainly Europe is in recession and its problems will impact the US. Read that to mean the rest of the world. Asia is slowing! Perhaps more than we might have imagined. Especially in light of China’s efforts to stimulate its economy leading to speculation that it may not be able to orchestrate a soft landing.

For Canadian investors these talking points carry a greater weight as a global slowdown has the biggest impact on commodity producers… which is the principal component of our economy. Read base metals, potash and oil.

As commodity prices continue to weaken so too do the margins of the major Canadian companies involved in these markets. Suncor (TSX: SU, Friday’s close: $29.03), Potash (TSX: POT, $39.36) and Teck Resources (TSX: TCK.B, $32.10) being a list of the casualties du jour.

We are even seeing some of the fallout among Canadian banks, most of which fell on Friday while US banks were in recovery mode. This tells us two things: 1) if you want to invest in Canada there is no place to hide and 2) when things begin to turn, look for the Canadian market to outperform.

Keeping with that theme, investors should develop strategies that benefit from the probability of a narrow trading range throughout the summer and the possibility of strength leading into year end.

Assuming you own shares look at writing covered calls through September and then in the fall as the option expire hold your positions for a year-end rally. For specifics, consider writing the Suncor September 32 calls at $1.00 or better, the Potash October 44 calls at $1.40 or better and the Teck August 35 calls at $1.00 or better.

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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