Jun 5, 2017

Jim McGovern's Top Picks: June 5, 2017

BNN Bloomberg

Jim McGovern , BNN

Jim McGovern, CEO of Arrow Capital Management

Focus: Global equities and macro strategy
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MARKET OUTLOOK
The Trump bump (i.e. reflation trade) has been totally unwound post-election. The recent slowing in Q1 GDP growth and the lack of progress on corporate tax reductions, red tape and infrastructure spending have weighed, particularly on the banking sector. Looking at the data on the slightly longer framework reveals that the real economic growth is still accelerating year over year. The good news is that inflation and inflation expectations have been tempered by slower-than-expected wage gains and lower energy prices. This is a very positive backdrop for consumer and technology companies. On the other hand, commodity-related markets, currencies and equities are all for sale and areas where we have focused our short activity. China, the world’s second biggest economy, continues to slow into the 19th Plenum later this fall — credit worries remain an issue here, as well as in other markets. This backdrop is negative for resource-driven markets — especially Australian and Canadian equities — which we are short via ETFs and futures. Both markets also have problematic consumer debt levels and inflated housing market issues.

TOP PICKS

INVESCO (IVZ.N)
This in one company of a small group of large mutual fund managers experiencing organic growth. With solid levels of growth in assets-under-management in their ETF PowerShares franchise and alternatives, IVZ has a strong competitive advantage over other managers, in an industry starved for net new assets. In addition, we like the firm’s progress in fixed income with improved performance, and IVZ’s active equity business should ride the wave of declining correlations, which has historically led to active management outperformance. With 45 per cent of the firm's AUM in active equities, rising performance will slow the pace of low-cost ETF growth and allow the firm to beat consensus estimates. We continue to think that IVZ is an attractive acquisition. Our target price is $40.

SHORT: EURO/USD (CASH OR FUTURES)
In our portfolio we also trade commodities and foreign exchange. This trade is a play on two likely outcomes. First, we believe ECB head Mario Draghi will not materially change his QE policy as the European economy is set to slow in 2H/17. Secondly, we expect the early 2018 Italian elections to begin creating volatility starting in late Q3/17. The COT data shows that the euro is the most overbought it has been since 2009, so our timing looks good. Our target for the euro and the U.S. dollar is 105 for year’s end.

SHORT: CAPITAL ONE FINANCIAL (COF.N)
Capital One is a U.S. financial holding company with the third-largest credit card portfolio in the U.S. The company also operates in mortgage, commercial and auto lending. The lending mix is credit cards (41 per cent) and auto (21 per cent) of which approximately 35 per cent is in the sub-prime category (or FICO scores <660). We expect charge-offs to continue to rise as consumer indebtedness rises and margins compress due to intense competition in both verticals. We would "hedge" this position with long positions in the network companies like Visa or Mastercard. Our target is $60 or tangible book value.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
IVZ	N	N	Y
COF	N	N	Y
EURO/USD	N	N	Y

PAST PICKS: OCTOBER 3, 2016

LONG: ALBEMARLE (ALB.N) – Still own and have been adding to it. One of favourite lithium plays along with SQM and Lithium Americas. The company recently reported earnings above expectations.

Then: $84.83
Now: $113.61
Return: +33.92%
TR: +34.78%

SPDR GOLD TRUST ETF (GLD) – We actually own futures, not the ETF, and actively trade them; we are still long gold but at a reduced weight. It is a play on falling U.S. rates and the falling USD which has played out more recently. Reflation trade is likely to return in 2H 2017.

Then: $125.32
Now: $121.73
Return: -2.86%
TR: -2.86%

FOOT LOCKER (FL.N) – Covered our short for a profit on the recent quarterly earnings miss and reduced guidance. This short took a long time to play out as FL benefits from a very good business arrangement with Nike. The shares remain "cheap" but all mall-based retailers are suffering and we expect the structural shift to greater online activity to weigh on similarly positioned companies.

Then: $67.52
Now: $57.60
Return: +14.69%
TR: +13.65%

TOTAL RETURN AVERAGE: +15.19%