Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
Market news today is dwarfed by concern for the residents of Fort McMurray as they battle huge wildfires. All credit to local officials and emergency personnel who managed to evacuate 80,000 people with, so far, no loss of life. This is a tremendous achievement under the highest degree of pressure imaginable.
"Wildfire rages through Canadian city, forcing mass evacuation" – Reuters
"'It was raining ash': Wildfire sparks exodus from Fort McMurray" – Globe and Mail
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The Wall Street Journal's Marketwatch site is famously dismal so investors can take the "oil prices have nowhere to go but down" conclusion with a grain of salt. It is, however, uncomfortable that oil prices are following a very similar seasonal pattern to 2015, a year that wasn't a lot of fun for energy sector investors. From Marketwatch,
"'If ... we begin to see a slew of Fed speakers getting more hawkish, the U.S. dollar may start to gain from its very low levels. This may mark the turning point for the mid-February rally in commodities,' the IG analyst says. And given how oil and stocks have often been joined at the hip, this could mean trouble for stocks in the near term, he adds.
"Our call of the day couldn't agree less, saying that slick black commodity hasn't really earned the last few months' gains and get ready for sub $40-a-barrel."
"Why oil prices have nowhere left to go but down" – Marketwatch
"@auaurelija this time is different? #oil twitter.com/auaurelija/sta… pic.twitter.com/BhQFcJGci9 " – (seasonal oil chart) Twitter
"@Reuters U.S. energy CEOs ready for new drilling as oil prices plot upward path reut.rs/1SLxyhN ' – Twitter
Related: "How severe is the current energy sector default cycle?" – Bond Vigilantes
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The CEO of Prudential Financial is concerned that investors are adding on too much risk in an effort to generate higher returns in a slow-growth world. I share this fear, particularly where pension funds are concerned. Bonds, which make up a large portion of fund assets, have yields so low that it makes it very difficult to generate the returns necessary to meet future liabilities. Over time, the steady increase in portfolio risk will present considerable financial problems,
"David Hunt, chief executive officer of Prudential Financial Inc.'s $1 trillion asset manager, said the search for 10 percent returns can be dangerous for investors. 'The fact that people are unrealistic is actually creating risky behavior in the way that they are putting money to work,' Hunt said Tuesday in a Bloomberg Television interview. Seeking such a yield "is wishing for a world that we don't see enough evidence out there to bet on yet. We do think that's what's driving some of these risky allocations and the big shift into alternatives, which we also are worried are not going to ultimately end up generating the returns that they promised."
Few pension and insurance fund managers are immune from this trend. The CPPIB, for instance, added a sizeable position in Chinese real estate in 2015.
"This $1 Trillion Money Manager Warns of Hunt for Huge Returns" – Bloomberg
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We're back to "risk on/risk off" (RoRo) market conditions, which sucks. Asset prices are again showing high levels of correlation as speculative money slops between fear and greed and there is little attempt to distinguish between sort high and low quality investments within sectors. FT Alphaville's David Keohane detailed the trend,
"The RoRo 'paradigm' can be defined by three key features: 'Risk-on' assets are positively correlated with each other 2. 'Risk-off' assets are positively correlated with each other 3. 'Risk-on' assets are negatively correlated with 'risk-off' assets… the crux of our explanation for RORO is a highly-volatile market consensus.'"
"This re-correlated world" – Keohane, FT Alphaville
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Tweet of the Day: @CNBC SocGen: Banking industry will never see pre-crisis profitabilty again cnb.cx/1NUFzRf" – Twitter
Diversion: Advanced analytics and the NFL draft – "The First Draft of History" – MMQB
Scott Barlow