Richard Croft, president of Croft Financial Group 

Focus: Options and ETFs
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MARKET OUTLOOK

AFTER TRUMP?
Surprise! To say that Trump’s ascension to the presidency caught the markets off guard would be an understatement.

By midnight on the evening of the election, U.S. index futures were down limit in overseas trading. Yet by the time North American markets opened Wednesday morning, the indexes had recovered most of the overnight losses. 

So many questions! How could the polls have been so wrong? What caused such a striking recovery in the markets, given the negativity that besieged Trump in the run-up to the election? And of course, what will a Trump presidency look like for Canadian investors?

Why pollsters failed to accurately gauge sentiment among the U.S. electorate is up for debate. What we do know is social media had a much better handle on the pulse of the electorate, which means that the alternative media will play a critical role in future polling. We suspect this will be good for tech companies involved in that space.

Interestingly, the post-election underperformance of tech companies on both sides of the border tells us something about what to expect in the future. For one thing, the so-called Trump upswing looks more like a sector rotation than a broad rally.

Institutional investors seem to be moving from over-weighted positions in tech, energy and precious metals into financials and consumer discretionary. We have also seen a move away from dividend-paying stocks such as telecommunications (note BCE Inc.) and utilities, which tend to do better in a slow-growth low interest rate environment. 

TO THE FUTURE
Having reviewed the activity immediately following the election, what about the future? For insight into that, we need to examine Trump’s economic and fiscal policies — leaving aside for a moment the political backdrop around immigration and international affairs.

What we know is that Trump intends to repeal much of Obamacare, which should stimulate small business. That would be good for small-cap companies that have been hampered by the costs related to the program. More importantly, with Republicans controlling both Congress and the Senate, he has the support to make the requisite changes.

In terms of fiscal policy, we know that Trump intends to embark on a mandate to cut taxes, upgrade infrastructure and pare back the harsh regulatory environment — positions that have widespread support among Republicans.

These initiatives also play directly into the Federal Reserves’ playbook. On numerous occasions in testimony before Congress, Fed Chairman Janet Yellen has advocated for fiscal stimulus, maintaining that the Fed had few remaining tools to invigorate the economy with monetary measures. The infrastructure spending plays directly into that wheelhouse and all but assures a Fed rate hike in December.

Deregulation has implications for a broad swath of corporate America from the environmental impact on the energy sector, notably clean coal and the Keystone pipeline.

Most importantly, deregulation is relevant to the banking sector which by all accounts has been hampered by excess regulation since the financial crisis. Talk about a perfect storm for U.S. banks. Higher interest rates will improve margins, while less regulation will make it easier to lend and fiscal stimulus will create more demand for loans. Make no mistake — this will play well for Canadian banks.

The reaction in the financial sector has been swift to the point that some analysts think banks have already priced in much of the potential upside. I don’t agree. While there may be some short-term pullback, longer term, there is more to come, particularly if the fiscal stimulus has the intended impact to loan demand.

Initially, tech companies and the auto industry have been weighed down under the perception that U.S. jobs have been lost because production has been moved offshore. That’s true to a point. However, lower corporate taxes and a proposed one-time tax holiday for companies who repatriate offshore capital will be a net benefit to both industries. In time, the market will recognize the benefits and reward these companies with higher share prices.

THE DOWNSIDE
A Trump presidency is not without risk, not the least of which is the president-elect’s view on trade pacts like NAFTA and the Trans Pacific Partnership Agreement, which are not likely to be approved. 
NAFTA is particularly disconcerting for Canada, although most of the impact will be felt in Mexico. Trump has always said that he is not against free trade; he simply wants fair trade. Given that Canadian costs are in line with those in the U.S., I suspect that Canada will feel much less impact from any proposed changes, which probably explains the relative stability of the Canadian dollar vis-à-vis the U.S. greenback.

The wildcard is Trump’s personality and how that will play out on the world stage. Much depends on whether the personality of President-elect Trump differs from “Candidate Trump.” On that front, we can only hope that he is the man his family says he is rather than the man whose caustic observations and social-media rants took center stage during the campaign. We can only hope that Trump’s handlers keep his Twitter finger in his pocket.

TOP PICKS

SYNTHETIC LONG POSITION: BANK OF AMERICA (BAC.N)

• Buy BAC January 2018 – 25 calls at US$2.12 (debit)
• Sell BAC January 2018 – 25 puts at US$4.35 USD (credit)
• Net credit to establish BAC position US$2.23 net credit

SYNTHETIC LONG: MORGAN STANLEY (MS.N)

1. Buy MS January 2018 – 45 calls at US$4.90 (debit)
2. Sell MS January 2018 – 45 puts at US$6.75 (credit)
3. Net credit to establish MS position US$2.85 net credit

BUY LONG-TERM CALL: ROYAL BANK OF CANADA (RY.TO)​

• January 2018 – 90 calls at $4.50)
   

FUND PROFILE: CPC OPTION WRITING FUND

PERFORMANCE AS OF DECEMBER 6, 2016:

• 1 month: Fund 0.94%, Index* 2.95%
• 6 months: Fund 0.81%, Index* 5.58%
• Since inception (February 18, 2016): Fund 11.07%, Index* 12.55%

* Mx Covered Call Index

TOP HOLDINGS AND WEIGHTINGS

1. Enbridge Income Holdings Fund Inc.: 5.52%
2. Bank of Nova Scotia: 4.59%
3. Bank of Montreal: 4.40%
4. Royal Bank of Canada: 4.30%
5. JPMorgan Chase: 4.15% 

WEBSITE: http://www.croftgroup.com