Jim McGovern is CEO and managing director, Arrow Capital Management. His focus is North American large caps, ETFs & macro strategy.
Top Picks:
Albemarle (ALB-N) (Long)
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.
Albemarle raised their guidance modestly in the previous quarter. The company is very quiet on pricing, so it is always a bit of challenge to predict, but we see an improvement in pricing in Q3, Q4 and expect pricing will be very solid in 2017.
The company does not break out pricing, but we think they received $7,500 – $8,000 per ton 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 of the ETFs.
*SHORT* Foot Locker (FL-N)
The thesis of being short FL is a multi-year one. While the shares are not expensive at 15 times 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 is expected to do $8-billion in sales in 2016. Furthermore, NKE recently reported underwhelming U.S. sales forecasts at only a 1-per-cent rise, which will likely impact FL in the near term. As FL diversifies away from NKE to brands like Under Armor 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 a challenge. In some ways, this call is akin to what Amazon has done to brick-and-mortar book retailers.
Past Picks: June 28, 2016
iShares TIPS Bond ETF (TIP-N)
Then: $116.52 Now: $116.41 -0.09% Total return: +1.11%
iPath Bloomberg Grains Total Return Sub-Index ETN (JJG-N)
We cut our position in half at $30, and all three components (wheat, corn and soybeans) fell 20-25 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 a larger global crop outlook in the U.S. and elsewhere. We will likely add back by purchasing futures on soybeans at prices in the $900-950 level.
Then: $33.32 Now: $28.33 -14.98% Total return: -14.98%
Albemarle (ALB-N)
Then: $78.29 Now: $84.82 +8.34% Total return: +8.78%
Total Return Average: -1.70%
Market outlook:
As a macro investor/trader that benefits from rising volatility, 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 Nov. 8, OPEC production cut details in November, the Italian referendum in early December and of course the Fed's Dec. 13-14 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 pickup 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.