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The Bull Bear Debate Rages!

Richard Croft
February 19, 2013
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5 minutes read
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Lloyd Blankfein CEO and Chairman of Goldman Sachs believes we are on the cusp of a major bull market. Citing in a CNBC interview low interest rates, a “terrific” energy situation which can drive manufacturing and create jobs, and an ongoing turnaround in housing as reasons to be bullish!

Pervasive negative sentiment among individual investors and the news media may also be a positive sign. Says Blankfein; “A million things can go wrong but what people under-assess is things could go right… the equity markets [at all-time highs] may have it right!”

The question is whether governments can actually get out of the way. So much hinges on their ability to offload politics and get to work on the things that are best for the economy. Approving the Keystone – XL pipeline which underpins Blankfein’s “terrific” energy comment being a classic example!

With all due respect to Mr. Blankfein my position has not changed since the beginning of the year. Governments are the problem and until I see something that indicates a willingness to help rather than hinder, I believe we will remain locked in a trading range with an upside bias punctuated with sharp sell-offs triggered by headline seeking fear mongering politicians.

Headline risk could come as early as this week leading up to the February 24th and 25th
Italian elections! It is unlikely that any one party will win a majority which raises the specter of a coalition government that could derail hard fought reforms.

With the benefit of 20/20 hindsight it may be that worries about a Greek default were misplaced. The Eurozone always had the capacity to deal with Greece… the only risk was whether it was politically palatable.

Italy on the other hand may be too big to fix! The only solution may be a currency devaluation which would compel the country to exit the Eurozone so that it could transition back into Lira and out of Euros. And that may not work because markets are well aware of the problem and the potential solution. Well capitalized investors have a way of wringing profits from the headline induced variants that lead to an eventual end game.

On the North American front we are edging closer to sequestration which would require the US government to arbitrarily cut expenditures across the board. Headlines will posit that such actions could carve ½% to 1% from GDP. How much will hinge on which politician is promoting which phobia!

That’s why I believe we will continue to see a trading range environment with a bias to the upside susceptible to pullbacks based on government interference. As the trading range contracts we have seen option premiums decline to some of the lowest levels of the year. That would suggest option buying strategies as the appropriate way to play the current environment.

If you come down on the bullish side of the fence I would look at buying calls on sectors that should lead an economic recovery. That would point us towards financial services where you could look at buying longer term calls – say July or August expiration – on any of the major Canadian banks.

Bull call spreads would also be effective in this market. For example, buying the Bank of Montreal (BMO, Friday’s close $62.61) July 64 calls and selling the BMO July 66 calls for a net debit of 70 cents with a maximum profit of $2.00.

Another approach is to use straddles on the broader markets – i.e. the iShares S&P TSX 60 index fund (TSX: XIU Friday’s close $18.34) – say buying the XIU April 18.50 calls and puts for a net cost of 60 cents. Trade the straddles based on government induced sell-offs or should the market follow Mr. Blankfeins’ lead take profits as prices move higher.

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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