Will Gold Miners Glitter Again?

This week ushers in a wave of 3rd quarter earnings for many of the large cap gold stocks in Canada.  We reference the term large cap loosely as the gold bear market of the last 4 years has wiped out the market capitalization of many gold miner darlings. In some cases 75% or more from their peak values.  During that bloodletting, the damage was not just financial; in fact the real damage was psychological.  Today, even the idea of buying a gold stock is immediately regarded with disdain, considered highly speculative and very much considered a losing proposition.

So why care or bother to pay attention?

Often the perspective of many investors is that the biggest profit opportunity is when a sector goes from “being bad to good”. Alternatively, over my many years of experience I have often found that there are opportunities for greatest returns when conditions in a sector have moved from being “very bad” to just being “less bad”.

So going into the earnings I will be looking for a few things:

  1. U.S. Dollar has not hurt gold - The U.S. Dollar rally has actually added a very interesting twist.  In its natural correlation, gold prices should have considerably weakened during the dollar bull advance, instead, gold has stayed rather stable.  In fact today’s gold price of $1180.00 is just $20.00 lower than its price in January of 2014 starting price near $1200.00.  This has seen gold prices in Canadian dollars soar above $1500.00 an ounce, which is a 2 year high.  Since much of the world’s gold production is not in America, the rising U.S. dollar is actually helping profitability.
  2. Production Costs – The miners have been diligently executing deep cost cuts.  Driven by that rising U.S. dollar, cost cutting has been accelerated by the decline in costs in both energy and consumables.
  3. Negative Analyst Sentiment – Most analysts remain very cautious as they do not want to stick their necks out on the chopping block.  Many remain focused on the ability of the companies to generate free cash flow which impacts the company’s ability to pay dividends or repay debt.

While the analysts are factually correct, I want to emphasize my starting point, often the greatest returns are when a sector goes from being “very bad” to being “less bad”.  With a broad acceptance that the stock market is forward looking 6 months to a year, by the time the companies are actually reporting meaningful free cash flow, it is likely they may already be trading at much higher prices.

There are two schools of thought.  One believes that gold will cease to have any meaningful value in our society and that many gold miners will cease to exist. The other believes that through history, all markets go through extensive bull and bear market phases and if you purchased shares at compelling prices at the end of bear markets, it represented a generational opportunity.

Which one do you believe?

If you are in the camp that all bear markets end and create opportunity, then this may represent a compelling time to take a risk.  The problem with trying to catch a bottom is that even if a stock declined from $40.00 down to $10.00, the stock can still temporarily decline from $10.00 to $5.00 and still draw an investor down 50% on their investment.  This is where speculating with call options represent a true asymmetric proposition.

Let’s look at an example using a long-term option on Yamana Gold (TSX:YRI)

  • Yamana Gold is trading at $3.50 at the time of writing.
  • We buy a deep-in-the-money $2.50 January 2018 call option which is asking $1.80. This represents $1.00 of intrinsic value and $0.80 of time value.
  • Two years down the road, if we exercised the option, we would own the shares at an average cost base of $4.30 ($2.50 strike + $1.80 option cost).

Let’s explore the two scenarios:

Over the two years (Jan 2018), the stock returns to its 2014 peak prices in the $9.00-$10.00 range, which will value the option (purchased at $1.80) to having a value in the $6.50-$7.50 range.

Alternatively the stock proceeds to decline back to its lows near $2.00 later this year. In this case the option would still have a time value trading near $0.70-$1.00

Obviously your personal big picture bias on the prospects of gold will influence your decision. However the key observation for me is oriented around the fact we can define and contain risk with the option and have leveraged gains if in fact gold miners do recover.

2 Ways To Use a Weekly Option For Teck Resources Earnings

Teck Resources Ltd (TSE:TCK.B) is set to report earnings before the market opens on Thursday, October 22nd. This is according to the earnings calendar found on the TMX Money website.  This great little resource can be found here.

Back on August 1st, Patrick Ceresna built a case for taking advantage of buying shares of TCK.B at what appeared to be a significant discount.

He outlined the following considerations:

  • Though there has been a contraction of earnings, the company is currently still profitable
  • The company pays a nice dividend, but with a 152% payout ratio (source: yahoo finance), implies that the dividend is at risk of being reduced or cut all together
  • From its $20.58 February high, TCK.B has materially dropped, hitting a $8.77 low in July

In his article, he outlined a Covered Call strategy whereby the investor could buy the shares at their current price of $9.35 and sell a January 2018 call.  With the shares now at $8.34, this is still an interesting opportunity and I encourage you to take a look at the article if you haven’t already.

With that said, I’ll be speaking at the World Money Show on behalf of the Montreal Exchange on Saturday, October 31st.  Details and Registration HERE.  My topic is on Canadian Weekly Options. Since there are are weekly option available on TCK.B, and with earnings set to be released this Thursday, I thought it would be interesting to look at 2 ways an investors might be able to participate.

The Chart

Below is a snap shot of the weekly chart. Note the 2009 lows comparative to where the stock is trading presently.  As the old saying goes “..a stock is never to low to go lower” (Reminiscences of a Stock Operator) but, that low reflects an important long term support and the shares have recently tested and bounced

Weekly Chart


Buy the stock, Buy a put

For the investor that feels there is a possibility that TCK.B is going to move higher on earnings, shares could be purchased (as of Friday, October 16) at $8.34.  The challenge, of course, is the risk associated with poor earnings.  To hedge this, a short term put could be purchased with the specific goal of limiting and identifying the risk in holding the shares through the earnings report.

The $8.00 strike put expiring on October 23 was asking $0.33 per contract (as of Friday, October 16).  An investor who purchases the the stock at $8.34 and purchases the put for $0.33 has limited their risk to a total of $0.67 or a maximum of 8%, regardless of how bad the report is.  If the stock takes off to the upside, the break-even is the share price paid plus the put premium.  In this case $8.67.  If the stock sells off due to a bad report, the investor has until the close of trading on expiration Friday to decide whether to exercise their right to sell the stock at $8.00 or sell the put for its market value (ideally a profit) and continue to hold the shares with the expectation that the price will turn around.

Buy a Call

The purchase of a call option would offer the investor the same risk/reward profile as the previous strategy without having to put up the money to buy the shares.  If an investor felt there was going to be a jump in the shares on earnings, the call option would allow for participation with a limited and identifiable risk exposure. The $8.00 call expiring on Friday, October 23 (the day after earnings) is asking $0.70.  Th $0.70 premium represents the maximum risk to the investor if the shares drop in value.  The break-even point on expiration is $8.70. If the shares are trading beyond that, the investor profits.  The interesting thing about this approach is that the investor has two choices on the expiration date (day after the earnings).  If the stock is trading above $8.00, they can exercise their right and take possession of the shares. They would become a shareholder and subsequently benefit from any further price increase as well dividend payouts.  If a short term profit from a positive earnings report was all they were after, they could sell the call before the close on the expiration Friday and lock in the profits.  If the shares are below $8.00, the call would expire worthless and the investor would lose their premium.

In both strategies, the investor is able to take advantage of an event driven opportunity without having to pay the time premium associated with a longer dated option.  Both the protective put and the long call have 7 days of time value, versus 30 days of time value for the next expiration date available.  This allows the investor to build a strategic position around the TCK.B earnings at a reduced price.

Creating Income from Franco-Nevada

To say that the gold mining sector has underperformed over the last 3-4 years is a significant understatement.  The sentiment in the group has never been more negative as some darling gold miners have lost more than 90% of their value.   Yet, in that environment, one gold company has been able to stand strong like the Rock of Gibraltar - Franco-Nevada.

Franco-Nevada is a gold-focused royalty company.  Instead of developing and operating mines, they focus on a diversified portfolio of royalties from highly favourable properties.  This has allowed the stock to materially differentiate itself.  There unique business plan, has over the last few years been tested against some the most perilous market conditions, and the company has thrived.  This includes the stock testing all time new highs at the start of the 2015 year.

While I am not interested in cheer-leading the stock, it was solely my objective to differentiate Franco-Nevada from the overwhelmingly negative sentiment overshadowing the entire gold and silver mining sector.

While virtually flat on the year in regards to performance, the stock has experienced considerable volatility having traded as high as $74.00 and as low as $50.00.  At its current price of $58.75, the stock is sitting pretty close to the mid-point of its year range.  From my perspective, this is a perfect stock for investors seeking covered call income.  The stock has proven to be able to weather the storm and continue to deliver to investors.  At the same time, the volatility offers the potential for covered call income worthy of consideration.

In the example:

  • Investor buys 1000 shares of Franco-Nevada at $58.75 for $58,750.00.
  • Investor sells 10 April $60 strike covered calls for $5.60 or $5,600 in cash proceeds.

What has the investor accomplished?

The investor has generated a 9.53% cash flow for the obligation to potentially have to sell the stock at $60.00 over the next 6 months.  That is close to a 20% annualized premium.  While the risk of an early exercise is a possibility, the investor is likely to enhance that income return with the 1.90% dividend the company pays annually.

In addition, if the stock was to decline while the investor is holding it, the stock would need to decline below $53.15 in order for the investor to be in a loss,  when taking the premium income into consideration.

If the investor was to be exercised and the stock was sold at $60.00,the investor would have realized a 11.66% realized gain in just 6 months.

In today’s market environment, where it is hard to find any safe haven, or any sound income, a covered call on Franco-Nevada may be a respectable consideration.

Is Air Canada Stock About To Take Flight?

I was reviewing the most active options widget found on the M-X website and came across Air Canada (TSE:AC).  Unusual or increased options activity can indicate the potential for some action in the underlying stock.

My next step was to take a look at the news to see if there was any indication as to why there might be an increased interest in the shares.  Interestingly enough, CNW Group, a news wire company, published a story entitled “Air Canada Buys Back 3,185,735 Shares at a Total Cost of 36.7 Million” Read full story here. This article was picked up by the likes of Yahoo Finance, MarketWatch and several other outlets.

Below is the quote that likely moved investors to act:

“Air Canada believes that, from time to time, the market price of its Shares may not fully reflect the underlying value of its business and future prospects. In such circumstances, Air Canada may purchase for cancellation outstanding Shares, thereby benefiting all shareholders by increasing the underlying value of the remaining Shares.” Source: Isabelle Arthur of Air Canada Corporate Finance

While the number shares repurchased only represents about 3.49% of shares outstanding, this kind of corporate action can lead to greater investor confidence and a subsequent interest in owning the shares.

When a story that centers around corporate fundamentals suggests an opportunity, I always like to add credibility by comparing the technicals. Afterall, we are dealing in a world of probabilities so the more evidence supporting a directional bias, the higher the probability that there will be a follow through.

With this in mind, the below chart does offer some evidence of a bullish opportunity as indicated by my annotations:

1. Support at long term major trend line
2. Break above 200 bar moving average
3. Bullish flag forming (wait for break above upper trend line to confirm)

air canada

Given the general or systematic risk in the market these days, using a call option to take a shot at the possibility of move higher is a great strategy.  If shares of Air Canada (TSE:AC) continue higher, the investor can benefit from the increased value in the option or exercise their right to own the shares at the strike price selected…provided the stock is trading above it.  However, if Air Canada shares fall victim to broader market weakness, the loss on the call option is defined and limited to the premium paid.  Unlike the owner of the shares who assumes an unidentifiable and unlimited risk should the shares decline in value.

For example,

With the shares currently trading at $12.10, an investor could purchase a January 2016 call with a strike price of $12.00.  The Ask price for the call is $1.65.  This represents the maximum risk on the position.  The break even on the trade is reach when the shares are trading at $13.65.  This is determined by simply adding the cost of the call to the strike price.  The investors expectation should be that the shares will be trading above this level.  According to the Financial Times, the average 12 month price target of analysts polled is $18.13 See full details here. Remember, this is no guarantee, but does offer some insight.

To conclude, the most active options “widget” found on the  M-X.ca home page is a great resource for ideas. However, you need to do your homework to ensure that the company fundamentals and further technical analysis support taking action.

Have We Seen the Market Bottom?

The last two weeks have seen material volatility as we had a serious market decline and substantial rebound in stocks.  Much of the blame has been pointed toward China, but there is no denying the material declines in all global markets.  The VIXC, which is the Canadian measure of implied volatility on the Canadian markets spiked intraday to 38.14, which is the highest reading since the market crash in August and October of 2011.

Back in both 2010 and 2011, these types of spikes in the VIXC marked the capitulation phase of the market decline and lead to intermediate bottoms in the markets which proved to be great buying opportunities for investors.

So the question on all investors minds – is this a buying opportunity again?

While I always heed to the more cautious side of the outlook, I remain initially sceptical.  There are a number of precipitating factors that differentiate this situation from 2010 and 2011.  In both the cases of the 2010 crisis in Europe and the 2011 U.S. Debt Ceiling crisis, the problems were abroad and Canadian stocks were simply caught in the tide of global uncertainty.  2015 is shaping up to be a far different situation.  The Canadian markets are overshadowed by a plunge in commodity prices driven by a global slowing of growth.  This is overshadowed by broad deflationary pressures.

The scenario has now made the announcement off a technical recession almost a certainty, leaving many question marks as to if the heavily indebted Canadian consumer can withstand the fallout. The key question that needs to be answered, which has yet to reveal itself lies in concluding if the:

Canadian stock market is simply in the midst of a correction or is it in the midst of a bear market!

This is why rushing to buy this dip can prove to be a bear trap.

In a number of our prior blogs, we have advocated the purchase of protective puts to reduce a portfolio’s volatility.  That was in a period where the options were relatively cheap.  Today, the material rise in the VIXC is reflecting the new expectations for increased volatility, making the puts far more expensive at a time when the market has already considerably dropped from its year highs.

For those that remain pessimistic over the short-term, the collar strategy represents a volatility neutral strategy where the increased covered call premiums are helping finance the more expensive put premiums.  Overall, there is a diminishing payoff in further hedging, but may still have merits, particularly if investors need the psychological reassurance on limiting risk.

Seeking Income

Individuals invest for many reasons. Investing being the key word in that sentence. Investing is about making medium to long term commitments with a specific goal in mind. And it is more than simply saying I want to make money!

In fact setting an objective can be the hardest decision individuals make. I should know I have spent twenty years as a money manager trying to get people to think about goals, risk management and time lines. And then to look at securities in terms of what they bring to the overall portfolio in terms of risk and potential return.

Generally speaking, capital appreciation is the most commonly cited objective. Yet, when you examine where you are in your life cycle, capital appreciation may not be the appropriate choice. Retirees for example, should be seeking income that they can draw from their portfolio.

To that point, options can play a role. Covered call writing that is often talked about in this space is an important income enhancement strategy that produces tax-advantaged income. So do dividends which should be a focus for income producing investors. The trick is to stay focused on the income being generated from the dividends rather than noise induced swings in the value of the shares.

With that in mind I wanted to look at options enhancements using stocks that pay above average dividends. The first is BCE Inc. the Canadian telecommunications giant. BCE Inc. (Symbol BCE, Friday’s close $53.76) is a mature company which is what makes it interesting for this strategy. Investors buy it for the dividend (current annual divided is $2.60 yielding 4.83%) not so much for the long term capital appreciation.

BCE also has a liquid options market which allows us to sell covered calls to further enhance the cash flow from this security. In this case, you could buy the shares at $53.76 and write the January 54 calls at $1.45. The six month return if the shares are called away in January is 5.56% including the two quarterly dividends that will be paid out during the holding period. Return if unchanged is 5.12%.

Another company with an excellent dividend is Algonquin Power & Utilities Corp. (AQN, Friday’s close $9.74). AQN is a renewable energy and regulated utility company providing regulated water, electricity and natural gas utility services.

Year-to-date, the share price has bounced between $8.50 and $10.50. The stock had a major setback in March when the share price fell from $10.20 to $8.50 in a matter of days. The result of a notice from CRA that the government intended to reassess the company’s 2009 through 2013 income tax filings in relation to a unit exchange transaction that occurred on October 27, 2009, whereby unit holders of Algonquin Power Income Fund exchanged their trust units on a one-for-one basis for common shares of APUC (the “Unit Exchange”).

Not to get into the nuts and bolts of government oversight suffice it to say smaller companies can be subject to shocks that are hard to forecast. Still, the shares have rebounded nicely from that point and the 5.177% dividend yield looks reasonably safe. AQN has options and with the choppy action earlier in the year, the premiums provide a reasonable buffer.

To that end, you could buy AQN at $9.74 and write the January 10 calls at 45 cents. Six month return if exercised is 9.14%, return if unchanged 6.47%. Both returns include dividends.

Oil Woes

Despite the noise surrounding the recent price action in oil, nothing much has changed. Note our blog published January 23, 2015 (Has Oil Bottomed?) I posited that oil would likely remain in a trading range between US $40 and US $60 per barrel for 2015. So far that is exactly as it has played out.

Make no mistake this is a supply driven story with energy producing countries engaged in a race to the abyss. Revenue shortfalls in countries like Venezuela and Nigeria has caused civil unrest and political instability which may well lead to military coups. Saudi Arabia is behind the curve but has similar issues. The country will have to borrow significant funds in order to maintain the political handouts that have, so far, curtailed any major uprising.

Global demand continues to grow albeit at a temperate pace. Not surprisingly we are seeing robust demand from India whose economy typically thrives in a low cost energy environment. Bottom line global demand is not likely to cause any spikes in oil but it is strong enough to keep oil from falling below US $40 per barrel.

I suspect the pain at the US $40 price point would be enough to cause OPEC and US producers to significantly reduce output. Starring down the abyss has a way of crystalizing one’s thought process.
Energy companies that are bound within a relatively narrow trading range make for excellent covered call candidates. Particularly when buying shares at the lower end of the range and selling covered calls at the mid-point of the range. I posited the energy covered call strategy in January and made three recommendations which would have all been called away earning the maximum potential return.

I suggest we apply the same approach this time. Take a look at Suncor (TSX: SU recent price $36.93) where you buy the shares and sell the SU Dec 38 calls at $1.75. Another possibility is buying shares of Imperial Oil (TSX, IMO, $47.41) and writing the November 48 calls at $2.60.

Managing a Collared Position

Managing a Collared Position


1.       The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached. (investopedia.com)

I  wanted to dedicate this blog to exploring the choices investors have when managing an existing collar position after a stock has moved considerably lower.  For this example, we have no better opportunity to debate the alternative choices,  than using the Canadian Pacific collar example  we published in our March 30th post.  Click to read: http://optionmatters.ca/blog/2015/03/30/have-the-rail-stocks-been-derailed/

Back in March I was expressing my concerns about the impact the oil industry would have on the Canadian railway stocks and expressed concerns about the short term risks in the stocks.  In particular we focused on the Canadian Pacific Railway which at the time was trading at $229.24.  Here is the trade that was opened:

-investor has owned the CP shares for many years and has a considerable capital gain if the shares are sold

- The stock is trading at $229.24 (March 27th, 2015)

- Investor buys the October $230.00 put for $17.50 or $1750.00 debit for every 100 shares

- Investor then proceeds to sell an October $255.00 covered call for $7.50 or $750.00 credit for every 100 shares

- The net cost of the collar is $10.00 or $1000.00 for every 100 shares

Currently as we write this blog, Canadian Pacific Railway is trading at $198.00 (July 9th 2015). The investor has successfully secured the $230.00 sale price out to October.  While the investors shares are over $30.00 lower in price, the net value of the options collar is $32.50 (the protective put is worth $33.00 and the covered call is valued at $0.50).  With the stock and options combination having almost no time value remaining, the position is virtually delta neutral.  Further to that, the protective puts delta is very close to -1, which means that almost all further downside risk that the stock may experience is entirely hedged. 

So what should our investor do? 

First off, the investor does not have to do anything immediately as the collar position was opened out to the October expiration.  But it is worth discussing the choices the investor has if they felt compelled to act.

In the first scenario, the investor feels that the Canadian economy will continue to struggle and that railway stocks are vulnerable to sustained weakness.  If the investor simply would like to close the position, they can sell the stock and the options having hedged the drop beyond the cost of the collar. 

Alternatively, what if our investor was bullish and felt that this 20% decline in the stock from its highs was just an opportunity.  Under that situation, the investor can position themselves to monetize the money made on the put protection to reduce the investors average cost base.  When an investor elects to do this, they can always purchase a new, lower strike put as protection.  Let’s demonstrate as an example:

- the CP shares are trading at $198.00

- Investor sells to close the October  $230.00 put for $33.00

-Investor buys to open the October $190.00 put for $7.00

The investor has extracted a $26.00 net debit from the options which they use to reduce the average cost base (breakeven) of their original position.  In addition, the investor now has 100% of the upside of the stock and has a new protection in place to remove all risk below $190.00 a share. 

As stated above, the investor can simply do nothing and defer making a decision until October, but dependent on their expectations on the stock, it may be appropriate to take action when and if it is timely to do so. 

Interested in a potential 50% Return on Teck Resources?

Before we get into the juicy numbers of the options trade, it is important to put some perspective on Teck Resources and where it is at.  Teck Resources is one of Canada’s premier basic material stocks.  The company has global operations in copper, coal, zinc, lead, molybdenum, gold, silver and various chemicals/fertilizers.  The recent drop, (more like crash) in commodity prices has challenged its growth and earnings, driving the stock to lose close to 50% of its market value over the last 3 months.

Ouch to say the least.  Here are the current facts:

  • Though there has been a contraction of earnings, the company is currently still profitable
  • The company pays a nice dividend, but with a 152% payout ratio (source: yahoo finance), implies that the dividend is at risk of being reduced or cut all together
  • From its $20.58 February high, TCK.B has materially dropped, hitting a $8.77 low in July

With the full understanding that the stock is now pricing in an array of risks, an investor willing to undertake those risks has an interesting income opportunity using a long-term covered call.

Covered Call Strategy:

The Covered Call Strategy involves buying (or owning) the shares of a stock and selling (to open) a call option against the stock.  A short call generates an income (equivalent to the option’s premium received) with the obligation that the investor must potentially sell the stock at the strike price throughout the life of the option, if he or she is assigned.

Here is an example of the strategy, with an investor buying 1000 shares:

  • Buy 1000 shares of TCK.B ($9.35 on July 30th 2015) or $9,350.00
  • Sell (to open) the long-term January 2018 $9.00 covered call (bidding $3.35 July 30th 2015) or $3,350 credit
  • The investor has to outlay $6.00 ($9.35 - $3.35) or $6,000 to open the trade
  • The investor has now an average cost base or break-even of $6.00 with an obligation to potentially have to sell the stock at $9.00 over the next 30 months to January 2018
  • In addition, over those 30 months the investor will collect any dividends the company continues to pay

What is compelling about this trade is that the investor can make 50% return without the stock having to actually go up in price.  How? Let’s review.  

Our investor has outlaid $6,000.00 that, if exercised would be sold at the $9.00 strike or $9,000.00 for a $3,000.00 gain.  While 30 months is a long time, how many investors would consider gaining this type of return without needing a stock to appreciate in value?

In all fairness, let’s present the risk scenario.  For the illustration purposes, let’s assume that the commodity markets continue to deteriorate and Teck Resources loses a further 50% of its value and drops from $9.35 to $4.67 while our investor owns the shares.  Under those circumstances, the investor is losing paper profits as the stock has dropped $1.33 (or 22%) below their $6.00 break-even.  While that would be a disappointment, it is not remotely as severe a loss as an investor that purchased the shares outright at $9.35 and held as a buy and hold investor.

While this trade may represent too much risk for some, others that like the company and believe the prices at these levels are attractive can make a very handsome return if proven right.

CANADA – Recession Worries!

Probably the most noteworthy event in the first half of 2015 was the surprise rate cut issued by the Bank of Canada (BoC) in the first quarter. It was designed to provide “insurance against a downturn” in light of the sharp decline in oil prices.

The BoC was right to be concerned. Unfortunately policymakers underestimated the impact lower oil prices would have on the Canadian economy. GDP was negative for the first half of the year and is closing in on recession territory.

Most of that weakness was the result of an abrupt decline in business investment particularly within the energy and commodity sectors. Precious metals, base metals and textiles are all down on the quarter which economists attribute to slowing global demand and a strong US dollar. The latter point is particularly relevant as there is typically a high correlation between commodities and the greenback.

The challenge for many investors is syncing the positive employment numbers (unemployment holding steady at 6.8%) and inflation data which is within the BoCs’ 2.0% target. However when you take away the volatile food and energy components, core inflation is closer to 0.9%.

Unfortunately both of these metrics are lagging indicators. It is only be a matter of time before the effects of an economy moving away from its potential shows up in this data series. That is unless there is a change in business conditions or some kind of intervention by the BoC.

Like others I was of the opinion that Canadian manufacturing would pick up due to lower oil prices softening the impact lower energy prices would have of the economy. That has not played out as expected for reasons that have longer term implications.

The US has been gradually shifting more of their business to Mexico. While a stronger USD makes Canadian goods more competitive, those same forces are amplified when applied to the decline in the Peso. Couple that with lower labor costs and Mexican exports are simply more competitive.

To put some meat on this skeleton Canada’s share of US imports from North America has fallen from 75% in the 1990’s to 50% this year. The end result is that Canadian exporters will benefit from a weaker loonie and a strengthening US economy but its’ impact will be less than in previous expansions. So despite the view that a rising tide lifts all boats it looks like Canada will be getting a smaller piece of a bigger pie.

With respect to interest rates the BoC like their counterparts in the US, have stated that any decisions on interest rates will data dependent. Considering weak GDP data, lackluster business outlook, low inflation and weak manufacturing data one could surmise that another rate cut may be in the offing. Perhaps sooner than later.

One way to play Canada is to look in the consumer staples sector and search for companies that have a domestic focus. One that comes to mind is Alimentation Couche-Tard Inc. (TSX: ATD.B, recent price $58.00). This company operates a chain of convenience stores most of which are located in Quebec. Buying the ATD.B Feb 58 calls at $4.25 look interesting for aggressive traders.