Briefing highlights
- Two views of the stock market
- A Doug Ford scene I'd love to see
- Markets, loonie at a glance
- Tweets of the week
- Carney to stay at BoE
- HBC in German joint venture
- NAFTA talks to resume in Washington
- China seeks sanctions against U.S.
Pop goes the bubble
It’s the question on every investor’s mind in this long-running bull market: When will the bubble pop?
That it’s going to pop doesn’t appear to be at issue.
It’s the timing that’s key, and Citigroup Inc. is sharing with clients a compelling debate between two of its top strategists.
Rob Buckland, global head of equity strategy, thinks we could be at the beginning of the end. Matt King, global head of credit strategy, in turn believes the end may well be soon.
“Matt and Rob agree that we are in a maturing phase of the cycle, with debt rising faster than profits, and that the next stage of the cycle is likely to be the bursting of the bubble, but they differ as to exactly where we are in the current phase,” said Mark Schofield, managing director of the Citi global strategy and macro group.
“Rob sees us at the start of this phase, in which equities continue to do well until credit spreads really widen,” Mr. Schofield said in a report summing up the debate.
“Matt, on the other hand, thinks we are nearing the end of the maturing process and that the bubble could burst soon. Matt believes that the relative outperformance of credit spreads compared to this stage of previous cycles is down to the distorting effect of QE, and, indeed, that it may be the reversal of this that proves to be the straw that breaks the camel’s back.”
By QE, he was referring to what’s known as quantitative easing, an asset-buying stimulus scheme among central banks that are trying to get us back to normal after the financial crisis, the beginning of which happens to have been 10 years ago this week, when Lehman Bros. collapsed and sent the world into a tailspin.
Stocks, of course, have staged an impressive comeback, and obviously investors are trying to get a sense of when their luck could run out.
“Forecasting market turns is not a precise science (or art) and it is the behaviour of market participants through the transition phases that will ultimately determine whether a correction turns into a bear market or not,” Mr. Schofield said.
But you can try to discern “whether or not the conditions are in place for a sustained bear market move.”
As Mr. Buckland sees it, his “bear market checklist” indicates that just four of 18 signals are now “flashing,” compared to the 17.5 in 2000 and 13 in 2007.
Mr. King believes things have been skewed by quantitative easing, and that as such programs run down “it is quite easy to imagine how four could become eight or nine signals flashing sell.”
Mr. King explained it further in a separate report, outlining the phases on the hands of a clock:
At 12 o’clock, when recessions are deep, companies restructure, sell assets, kill dividends and raise equity, after which credit spreads rally. Markets are still depressed, though, because profits are still slumping and share issues have diluted the pool.
Fast forward to 3 o’clock: The economy recovers and corporate profits rise.
After 6 o’clock, you get “lower-quality earnings growth,” with rising stock values propelled by acquisitions or stock buybacks. While stocks still rally, “deteriorating balance sheets start to drive credit spreads higher.”
(Hey, Canada’s Anne Murray and others actually sang something similar, when you think about it: “At 6 o’clock their mommies and daddies/Will take them home to bed/Because they’re tired little teddy bears.”)
Then the clock strikes 9, after which “the resultant balance sheet deterioration comes to a head, creating a crisis in which profits cannot be sustained, and both equities and credit sell off.” Which usually means a recession.
“Rob thinks it’s early in Phase 3, perhaps around 7 o’clock; Matt seems to think it’s 8:59,” Mr. King said.
“But then the risk for Matt of being too early is largely one of foregoing a little extra carry in credit; the risk for Rob is of missing out on the considerable gains to be had as his late-cycle bull market narrows.”
Mr. King noted that U.S. corporate earnings per share and economic growth are strong, and historically have been up until the fourth phase in earlier cycles. Price-to-earnings ratios, he added, are “more elevated” than in any fourth phase but for March, 2000.
“Finally, on timing, the average Phase 3 lasts just over two years,” he said.
“Matt would say that, on fundamentals, this Phase 3 started in 2012, so Phase 4 is well overdue. Rob would say that, on market action, this Phase 3 started earlier this year, so could last another 18 months.”
Read more
- Follow our Inside the Market
- Ian McGugan: U.S. markets on top of the world, but on a shaky foundation
- Ian McGugan: Don’t use the longest bull market as a reason to sell
- Scott Barlow: ‘At these levels, there’s a 70% chance of the S&P 500 being down 12 months from now’
- David Berman: As S&P 500 nears record bull run, investors torn between celebrating or cowering
A scene I'd love to see
“Sorry, did you say not<i>with</i>standing, or not particularly <i>out</i>standing?”
Toronto Mayor John Tory, left, and Ontario Premier Doug FordTijana Martin/The Canadian Press
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Markets at a glance
Tweet of the week
Carney to stay at BoE
The Bank of England is getting to keep Mark Carney for a while longer as Brexit looms.
The Chancellor of the Exchequer, or finance minister, asked the former Bank of Canada governor to stay on until 2020 “to support a smooth exit of the United Kingdom from the European Union and an effective transition to the next governor,” the British central bank said.
Bank of England governor Mark CarneyPOOL New/Reuters
“I recognize that during this critical period, it is important that everyone does everything they can to support a smooth and successful Brexit,” Mr. Carney said in a statement.
“Accordingly, I am willing to do whatever I can in order to promote both a successful Brexit and an effective transition at the Bank of England.”
Read more
- Paul Waldie: Carney’s Bank of England tenure in the spotlight as Brexit approaches
- Konrad Yakabuski: Carney’s longer Bank of England stint is Canada’s loss
HBC in German joint venture
Hudson’s Bay Co. has struck a deal with its main European competitor to merge their German department store chains in a move that will generate $616-million, The Globe and Mail’s Jeffrey Jones reports.
HBC, owner of Galeria Kaufhof, said it is forming a joint venture with Signa Holding GmbH, which runs Karstadt Warenhaus, bringing together Germany’s two top department stores chains.
HBC will own 49.99 per cent of the retail operations, and Signa will get a 50-per-cent stake in the joint venture’s combined real estate holdings. HBC, which also Hudson’s Bay, Saks Fifth Avenue and Lord & Taylor banners, will get $616-million in proceeds from Signa in the deal.
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Trade in the spotlight
Global trade issues are in the spotlight again – not that they ever left – as NAFTA talks resume in Washington and China upping the ante in its trade fight with the U.S..
As The Globe and Mail’s Steven Chase and Alexandra Posadzki report, Foreign Affairs Minister Chrystia Freeland is back at negotiations to remake the North American free-trade pact and join a two-way deal between the U.S. and Mexico.
NAFTA talks are hung up on some key issues under President Donald Trump’s threat to come on board or face crippling tariffs on Canadian auto exports.
At the same time, China now plans to seek the World Trade Organization’s okay to hit the U.S. with sanctions.
Read more
- China seeks WTO permission to impose sanctions on U.S. over dumping duties
- Steven Chase, Alexandra Posadzki: NAFTA talks will resume Tuesday despite impasse over Chapter 19, dairy industry
- Campbell Clark: What would a bad NAFTA deal look like?
- The crisis 10 years on: Look back in anger and ahead in anguish as Trump threatens to ruin Canada
Michael Babad