Oct 3, 2016

Jim McGovern's Top Picks: October 3, 2016

BNN Bloomberg

Jim McGovern , BNN

Jim McGovern, Chief Executive Officer, Arrow Capital Management
Focus: North American large caps, ETFs and macro strategy
_______________________________________________________________

Market Outlook
As a macro investor and trader that benefits from volatility rising, we are very optimistic on the fourth quarter. There are a number of events that should contribute to increasing market anxiety: the U.S. elections on November 8th; OPEC production cut details in November; the Italian referendum in early December; and of course the FED’s December 13 to 14th meeting. Each in turn brings opportunity to trade across FX, rates, commodities and equities. Our broad theme is a continued slowdown in economic activity globally. While we have seen a few positive bounces in the global economy thanks to the additional stimulus from China and actions by the ECB, we believe most of that is in the past and that 2017 will be challenging. Against that backdrop, there is the chance that the FED will raise rates given the pick-up in wage growth and the fact that GDP is running at non-emergency levels in the 1.5 per cent to 2 per cent range. We believe this would be a mistake and will look to take advantage of the opportunities presented.

Top Picks

LONG: Albemarle (ALB.N)
A repeat pick. We are long-term bullish on the lithium market and ALB is one of the best ways to invest. It is the largest player in the market. The company is seeking to capture 50 per cent of the incremental growth in the lithium market going forward. Their bromine and refining solutions segments continue to face headwinds, but these are starting to abate.

Lithium Activity

June 2016: Sale of the Chemetall Surface Treatment business to BASF in a cash transaction valued at approximately $3.2 billion — to close by end of this year.
September 2016: Announces acquisition of the lithium hydroxide and lithium carbonate conversion assets and supporting business functions currently operated by Jiangxi Jiangli New Materials Science and Technology Co — to close by end of Q1 2017.
Sept 2016: Acquired lithium exploration property in Argentina.
Previous Quarter: They raised their guidance modestly.
Upcoming quarter: Company is very quiet on pricing so it is always a bit of a challenge to predict, but we see an improvement in pricing in Q3 and Q4, and expect pricing will be very solid in 2017.

The Company does not break out pricing, but we think they received 7,500 to 8,000 / t of LCE in Q2. We expect a beat in Q3 and possibly another raise in guidance.

SPDR Gold Trust ETF (GLD)
This is not exactly a surprising recommendation, but given our negative outlook for the global economy and the likelihood for continued monetary easing worldwide, it acts as a hedge against currency debasement. The price has come off from earlier highs and a good amount of the force has come out of the market. We are active in the options market for gold to leverage our thinking, but feel retail investors are best served with a core position in one the ETFs.

SHORT: Foot Locker (FL.N)
The thesis of being short on FL is a multi-year one. While the shares are not expensive at 15x this year’s earnings, their biggest supplier, Nike (70 per cent), has made their direct-to-consumer business a key priority. Nike expects DTC, which includes Nike retail stores, to double from $8 billion to $16 billion in sales by 2020, primarily driven by online sales going from $1.5 billion to $7 billion. This will negatively impact middlemen like FL which, for perspective, is expected to do $8 billion in sales in 2016. Furthermore, NKE recently reported underwhelming U.S. sales forecasts at only +1 per cent, which will likely impact FL in the near-term. As FL diversifies away from NKE to brands like UA and Adidas, this will add pressure on their very low SG&A levels. The company also has to invest a great deal more in their online strategy, which will be an issue. In some ways, this call is akin to what Amazon has done to bricks-and-mortar book retailers.

Disclosure	Personal	Family	Portfolio/Fund
ALB	N	Y	Y
GLD	N	N	Y
FL	N	N	Y

Past Picks: June 28, 2016

iShares TIPS Bond ETF (TIP.N)

Then: $116.52
Now: $116.41
Return: -0.09%
TR: +1.11%

iPath Bloomberg Grains Total Return Sub-Index ETN (JJG.N)
Cut position in half at $30 — all three components (wheat, corn and soybeans) fell 20 to 25 per cent during the interim. The thesis was a positive outlook for soybean prices (less so for wheat and corn). Allocating to grains adds a low correlation play to diversify a global macro portfolio. Soybean prices fell on larger global crop outlook in the U.S. and elsewhere. We will likely add back by purchasing futures on soybeans at prices in the $900 to $950 level.

Then: $33.32
Now: $28.33
Return: -14.98%
TR: -14.98%

Albemarle (ALB.N)