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Fading the Trump Hysteria

Patrick Ceresna
January 5, 2017
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5 minutes read
Fading the Trump Hysteria

The stock markets are first and foremost a behavioral exercise. Investors are always trying to price in the future – 6 to 9 months in advance. To put that statement into perspective, one must recognize that the market is therefore driven by perceptions and assumptions more than it is about realized certainties.

That brings us to where we are today- a market that was Trumped!

In hindsight, which is always 20/20, the environment was set up right. For a better part of six months, money managers were inundated with BREXIT fears and election uncertainty. This positioned most money managers to be defensive, siding for low beta/bond proxies, bonds and above average amounts of cash. All that the money on the sidelines needed was a spark to ignite it.

Then came the shocking election results that invigorated the animal spirits in complacent investors and fortified portfolio managers. Once everyone realized that the trump election was not going to crash the markets, the rally was on. The primary fuel – career risk.

The result – a massive global asset class and sector rotation. Those money manager’s overweight bonds, bond proxies and the defensive names quickly found themselves on the wrong side and needed to quickly (not easy when you manage billions) to get in the financials, cyclicals and energy. This great squeeze became a self-fulfilling prophecy as managers were forced to chase.

I will go on record saying that Trump is bad for Canada.

At minimum, he is not good for Canada.

  1. Trump’s protectionist policies are not directed at Canada, but we certainly risk being collateral damage.
  2. His drive for tax cuts and fiscal spending has fueled the inflation risk trade which has spurred a global rise in yields. In Bank of Canada’s own words: A large and persistent rise in global risk premiums and the ensuing increase in interest rates would lead to tighter financial conditions, a drop in confi­dence, weaker growth and rising debt-service burdens, both globally and in Canada. Since the 2007–09 global financial crisis, Canada’s external assets and liabilities have both grown rapidly. On the liability side, this rise is mostly attributable to the purchase of Canadian debt securities by foreign buyers. There is a risk that these foreign portfolio investment inflows—which have put downward pressure on borrowing costs for Canadians—could reverse and thus exacerbate the increase in risk premiums. This repricing of risk would prove to be even costlier if fixed-income market liquidity turns out to be fragile. (December 2016 FSR pg.15)
  3. The global uncertainty also serves to disrupt China and the Emerging Markets, which are some of our largest trading partners.

I ask a simple question – What if after the inauguration in January, the markets realize that for all the bullish news they are pricing in, that there are growing risks that act as a headwind preventing any meaningful progress?

At minimum, it could drive sector rotation as the big traders realize the easy money in financials has been made and they move to deleverage by rotating out of cyclicals and into the low beta defensive names that have been trounced over the last 6 months.

The Trade

While there are many ways to play this, the simplest approach is to buy one of the biggest and best defensive names in Canada – BCE.

bcedec2016

Back in July, BCE traded at a high of $63.40 and proceeded over the following 5 months to decline to lows 10%+ lower at $57.00. It is currently trading at $58.05 (December 28, 2016). While owning the stock outright, is considered safe and blue chip to most equity investors, if one was inclined to by protection, a January 20th, $57.00 protective put would cost $0.28 a share to hedge the risk that you are early in the trade. Interested in reading more about what a protective put is? Read this strategy guide.

Patrick Ceresna
Patrick Ceresna http://www.bigpicturetrading.com

Derivatives Market Specialist

Big Picture Trading Inc.

Patrick Ceresna is the founder and Chief Derivative Market Strategist at Big Picture Trading. Patrick is a Chartered Market Technician, Derivative Market Specialist and Canadian Investment Manager by designation. In addition to his roll at Big Picture Trading, Patrick is an instructor on derivatives for the TMX Montreal Exchange, educating investors and investment professionals across Canada about the many valuable uses of options in their investment portfolios. Patrick is also co-host to the MacroVoices weekly podcasts. Patrick specializes in analyzing the global macro market conditions and translating them into actionable investment and trading opportunities. With his specialization in technical analysis, he bridges important macro themes with the attempt to understand when those trends are beginning and understanding where they likely to go. With his expertise in options trading, he seeks to create opportunities that leverage returns, while managing/defining risk and or generating consistent enhanced income. Patrick has designed and teaches Big Picture Trading's Technical, Options and Macro Masters Programs while providing the content for the members in regards to daily live market analytic webinars, alert services and model portfolios.

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