Richard Croft.
Richard Croft, President, RN Croft Financial Group. His focus is options and ETFs.
Top Picks:
BMO Series 33 preferred shares (BMO.PR.Y)
The BMO Series 33 floating rate preferred (BMO.PR.Y) was issued in June with a $25 par value, is rated PFD-2 and at its current price of $18.85 has a yield of 6.723 per cent (i.e. 45 cents quarterly dividend). The dividend is fixed until August 25, 2020 at which time it will be reset at +2.71 per cent over five-year Government of Canada bonds.
Use this as a proxy for the iShares Floating Rate Index ETF (XFR).
This ETF holds a basket of floating rate preferred shares which will be a defensive position in a rising interest rate environment. Because investors benefit from the dividend tax credit this ETF is an excellent alternative for bond investments. The ETF yields only 1.05 per cent but provides diversification across a number of companies, maturity spectrums and ratings. The ETF is designed to track the FTSE TMX FRN Index.
Bank of Nova Scotia Covered Call (BNS.TO)
Buy BNS at $59.71; Sell BNS April 62 calls at $2.00 per share. Recent purchases between $58 and $64 per share
- Six month return if exercised 9.46 (including dividends)
- Six month return if unchanged 5.63% including dividends
- Downside breakeven - $56.35 accounting for dividend
Wells Fargo (WFC.N)
Last purchased around $42 (U.S.) per share
Buy Wells Fargo. This is the largest mortgage originator in the U.S. It's a stable business but has been beaten down on concern over loan margins and exposure to the U.S. oil patch. As the Fed begins to raise rates, loan margins will improved and WFC only has 2-per-cent loan exposure to the oil patch. This bank along with Bank of America are, in our opinion, two of the best players among U.S. financials.
Past Picks: June 29, 2015
HealthCare Select Sector SPDR (XLV)
This ETF was a play on demographics, specifically an aging population and rising health care costs. The recent week performance is attributable to a major sell-off in the biotech space but year-to-date XLV has out-performed the S&P 500. I continue to believe that XLV will outperform over a longer time period.
Then: $74.13 Now: $69.14 -6.73% Total return: -6.39%
BMO Equal Weighted U.S. Bank Index ETF (ZBK.TO)
U.S. banks rallied leading into September as the debate raged about whether or not the U.S. Federal Reserve would raise rates. When the Fed chose not to raise rates, U.S. banks fell back and continue to struggle in light of weak loan margins. A rate hike will come and the banking sector will rally on the back of that news. Still one of the best sectors to hedge against higher rates. ZBK was not hedged to the Canadian dollar and as a result fared better than ZUB, which hedges currency exposure.
Then: $18.71 Now: $17.71 -5.29% Total return: -4.95%
Covered call on Canadian Natural Resources (CNQ.TO)
Buy CNQ at $34 per share; Sell CNQ January 34 calls at $3.00 per share
Stock is currently at $31.03 while the January 34 calls are trading at $1.00. The net value of the position is $30.03 just slightly below the cost. Continue to hold and re-write the calls at the January expiration.
Then: $30.85 Now: $30.65 % Total return: -3.57%
Total Return Average: -4.97%
Market outlook:
It may be that investors are underestimating the strength in the North American economy. Analysts make baseball references suggesting that a five-year rally from the March 2009 bottom is equivalent to the seventh inning of a ball game. And while that may be true, I would argue that we are playing a fifteen-inning game.
It is apparent that the rapid and sharp sell-off in oil hammered GDP in the first half of 2015. That surprised many economists since savings at the gas pump should be a net benefit to the economy. The problem was velocity. Because the price of oil declined so quickly, consumers simply did not believe it would stay at such depressed levels. Rather than spending their windfall consumers simply socked away the so-called oil dividend. Fast forward to the present and a consensus is emerging that lower oil and gas prices may be the new norm. Under this scenario consumer sentiment may shift meaning more spending less saving.
Recent studies support that thesis. One of note came from the J.P. Morgan Institute that examined consumer spending patterns. Rather than dissecting surveys which is the traditional way of gauging consumer sentiment, the J.P. Morgan institute study looked at real time purchases based on more than 25 million credit cards issued by the bank. I give more weight to real spending patterns than to a survey about what consumers may be thinking at a point in time. Much like, say, the actual results of an election rather than polls leading up to the vote. According to the J.P. Morgan study, consumer spending was picking up with most of the benefits flowing to the service sector indicating a pickup in discretionary spending. The general view is that the pickup in consumption is being subsidized by lower gas prices. Add that to a resilient real estate market and 2016 is setting up to deliver better than expected growth.