Full episode: Market Call Tonight for Thursday, August 2, 2018
Richard Croft, president and chief investment officer at R N Croft Financial Group
Focus: Options and ETFs
Did the European Union blink?
It may be possible that Trump’s tariffs/trade war is getting results. He's pressuring friends and foes to strike deals more favorable to the U.S. and he may be winning. Trump has a strong U.S. economy as a tailwind and the performance of the stock market since his election has been stellar. He may be playing, as he has suggested, with “house money.” Maybe it makes sense to try something different because the U.S. has been banging its head against a wall for 50 years without any success — at least as he sees it.
Don’t get me wrong: Trump’s personality rubs most people the wrong way. Trying to negotiate using the "art of the deal" doesn’t work well with career politicians. Painting them into a corner can have unintended consequences, where looking weak is worse than striking a reasonable deal. That’s very different from the pure economics that go with private deals in a capitalist system.
But like it or not, Trump appears to be negotiating – or threatening – trade relationships (deals struck with both friends and foes) hoping that one or more of his adversaries will blink. If he gets one to blink through continued pressure, there's a thought that others will fall like dominoes. It's a very high-stakes game, but it's the one aspect of this exercise that isn't priced into the market.
To that point, the European Union may have been the first to blink when their trade representative met with Trump last week. On the surface, the EU seems ready to make a deal and Trump was quick to imply that tariffs would be eliminated if a deal can be struck. He was also happy to share with the American people that the EU would be buying lots of Liquid Natural Gas and soybeans from the U.S., which is good for the energy sector and the farmers, which clearly fall into Trump’s hardened base. The stock market rallied on the news.
Of course, getting a deal with the EU doesn't just happen because of overtures from a highly ranked trade representative. Negotiations must pass muster with 28 political leaders, all of which have a very different agenda. This is something Canada is well aware of as we await Italy’s ratification of the recently negotiated European trade deal. Interestingly, shortly after the EU/Trump love-fest in Washington, French President Macron was quick to point out his commitment to protecting France’s agricultural community. So much for soybean sales to the EU.
The point is trade negotiations can take a long time to execute. My suspicion is that the bottlenecks that are sure to occur with the EU may lead to a deal on NAFTA sooner than later. For one thing, negotiations are already a long way down the road and as near as I can see, the major sticking point is the five year sunset clause that Canada and Mexico oppose. That should not stifle the process because, as the U.S. has already done with the current deal, they could initiate a reopening of NAFTA should it become necessary.
If we get a NAFTA deal, that should lift the financial markets, coming into play during the fourth quarter.
COVERED CALL IN APPLE (AAPL.O)
- Buy AAPL: $201.50
- Sell AAPL December 210 calls: $6.45
- Return if exercised* : 7.42%
- Return if unchanged* : 3.20%
- Downside breakeven: $195.05
* Return over five months.
COVERED CALL IN NETFLIX (NFLX.O)
- Buy NFLX: $338.50
- Sell NFLX December 360 calls: $21.50
- Return if exercised* : 12.70%
- Return if unchanged* : 6.35%
- Downside breakeven: $317.00
* Return over five months.
- Buy MTUM: $111.80