Could the Economy be Better than Expected?

Let’s assume for a moment that the North American economies are performing better than expected. Not a real leap considering that most analysts think the broader North American economy is walking on air, with looming US debt ceiling and sequestration debates and their fast approaching January 15th deadlines notwithstanding.

In fact, the real surprise could be some grand plan agreed to by the three branches of the US government which could eliminate the need for additional quantitative easing, and in a perfect world, return us to a point where good news is actually seen as good news.

In that light, Canadian exporters would do quite well. Given that Canada is leveraged to the US recovery, and for the last two years Canadian stocks have lagged their US cousins, it may be time for us to play catch up!

Assuming there is always a bull market somewhere – where have I heard that – traders’ might want to look at some Canadian companies that would benefit from a pickup in exports. Think about transportation companies like Canadian National Railways (TMX: CNR, Friday’s close $60.21) or Canadian Pacific (TMX: CP, $164.26) as starting points.

Covered calls might be the better approach for more conservative traders, say buying CNR and selling the March 62.50 calls at $1.15. The three month return if exercised is 5.8% if unchanged 1.9% and downside breakeven at $59.06. Another approach for more aggressive traders is to simply buy the June 62.50 calls at $2.00. Maximum potential is unlimited, maximum risk is the cost of the call.

With CP, consider buying the shares and writing the March 170 calls at $5.50. The four month return if exercised is 7.1%, if unchanged 3.5%, and downside breakeven at $159.76.

Another transportation company that I rarely mention is Air Canada (TMX: AC.B, $7.93) which,because of its low price, might appeal to some as an option substitute. There are no options on the company, probably because the stock itself acts a lot like an option. Not a buy and hold trade by any stretch but maybe as a short term trade over say the next three months!

Keeping with the airlines, Westjet (TMX: WJA, $28.06) may actually be a better choice. This company has options which open the door to a cash secured put position. Say writing the WJA April 28 puts at $1.65. This trade obligates you to buy the shares at $28 per share until the April expiration. If the stock is above that price in April the options will expire worthless. If you have to buy the shares your net cost will be $26.35 (i.e. $28 strike price less $1.65 option premium = $26.35).