A strong U.S. dollar is this year’s main macro theme for Matt Skipp, president and chief investment officer at SW8 Asset Management.
“We want to be long stocks in Canada and the U.S. that benefit from a rising U.S. dollar, and short stocks that will be hurt from it,” the hedge fund manager said during a conference call yesterday.
In Canada his main long positions are in technology, precious metals and uranium. He suggests the pullback in the Canadian dollar has been priced into most sectors, with forestry being the biggest beneficiary.
“Our favourite sector in Canada remains technology and we’re still avoiding too much exposure to base materials and energy…. Copper stocks have had an amazing run lately, but we think oversupply and Chinese demand will be an ongoing problem for most base metal companies in 2014,” says Skipp.
His U.S. long picks are in technology, insurance, and hospitality; shorts are mainly in home improvement and consumer discretionary.
While Skipp’s outlook for this year is “moderately bullish,” he sees plenty of warning signs.
“U.S. markets have flatlined out of the gates; consumer discretionary stocks are down over 5%; disinflationary trends…in different developed economies are a problem for equity valuations if they persist; [and] the tapering process has begun and the Fed is hinting that another $10 billion is coming off at the January meeting.
“All of these issues have the potential to derail a massive stock market rally that will be 5 years old if it lasts until March of this year,” says Skipp, adding he expects “equities will make one last parabolic move to the upside before valuations get really stupid.”
After a lackluster 2013 (SW8 was down 8.8%) , Skipp says he’s off to a good start this year. “Highlights so far include the basket of beaten-up junior gold and silver stocks that we started accumulating in December—quality, well-financed names that have faced an unrelenting wave of selling all year, culminating in one final tax-loss-related downdraft in December.
“At the start of the month we had an 11% weighting in small-cap gold, companies like Premier Gold [Mines] and Rio Alto [Mining]. Most of the names we’ve bought have made a significant move higher and we’ve been taking profits aggressively,” he explains.
His uranium positions have also been doing well. Prior to the start of the year he had no exposure, but he’d been watching prices closely the last few quarters. “A series of recent positive catalysts convinced us to add a few names,” he says, citing Cameco Corp. and Denison Mines Corp.
He’s also added Chemtrade Logistics Inc. “on the belief that its acquisition of General Chemical [Corp.] should be very accretive to cash flow and could push the stock up 20% from current levels.”
Skipp says the beauty of managing sub-$50 million is “you really don’t need to pre-position well in advance of a market move—up or down we can wait for it to happen and then react. We will wait for the markets to roll over before we start layering on any significant short exposure.”