Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
The best research report I read yesterday was by Merrill Lynch's chief quantitative strategist Savita Subramanian who suggests the current market environment and forecast represents a revenge for value investors. Ms Subramanian writes that the top performing valuation techniques in 2016 were (my emphasis),
"Low Trading Price (distress), High EPS Estimate Dispersion (uncertainty), and High Beta (risk). The low beta bubble we called out last year deflated, and valuations of low vs. high beta stocks have all but normalized. Note that risk rallies are typically short-lived and give way to Value cycles. Over the last 20 years, there have been four beta rallies of consequence, and each one has been followed by a period of Value outperformance."
Jefferies research concurs with this view in a report released this morning, "a combination of a change in inflation expectations and poor positioning (negative term premiums) have encouraged an unwinding of the quality, yield theme in favor of low PE and low PB stocks."
The problem here is that we are in the midst of an unwinding of the pro-growth, post-U.S. election market rally with bond yields falling. This correction in the reflation trade might only be temporary but it's confusing out there.
"@SBarlow_ROB RELEVANT (ML) "Note that risk rallies are typically short-lived and give way to Value cycles" – (Research excerpt) Twitter
"@SBarlow_ROB Enjoying Jeffries strategy lately. Here on unwinding of quality trade in favour of low PE, PBV" – (research excerpt) Twitter
See Also "@SBarlow_ROB Good advice from @KenVeksler " – (research excerpt) Twitter
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Bloomberg argues that the loonie's value is set to re-connect with movements in the oil price, but I'll believe it when I see it.
The past few years have seen the Canadian dollar track relative bond yields (Canadian two year bond yields minus two year U.S. Treasury yields) far more closely than oil.
"Oil Currencies Uncoupled From Crude Swings Likely to Renew Link" – Bloomberg
"The year ahead is going to get nasty for the loonie" – Barlow, Inside the Market (Dec. 23, 2016)
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Yesterday, crude prices were rising in the belief that OPEC was cutting production as they agreed but the commodity prices is lower today on fears that they're not,
"Hard evidence of [OPEC] export reductions has yet to emerge, two weeks into the month in which the cuts by the Organisation of Petroleum Exporting Countries (OPEC) and other producers, such as Russia, were supposed to start. Many analysts expect compliance of 50 percent to 80 percent at best. "As the Saudis hint at even deeper reductions in February, assumptions are rife that its enthusiastic approach to output cuts is an admission that cheating is expected on the part of other producers," said Stephen Brennock of oil brokerage PVM."
"Oil set for weekly fall on doubts over extent of OPEC cuts" – Reuters
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FT Alphaville's Alexandra Scaggs highlights the mass confusion over U.S. policy direction, listing conflicting excerpts from the president elect and his cabinet appointees.
"The week in politics (so far)" – Scaggs, FT Alphaville
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Tweet of the day: "@markritson The digital duopoly. Courtesy @businessinsider " – Twitter
Diversion: In the category of 'technology we hope the military doesn't implement',
"Scientists turn mild-mannered mice into killers : Rodents made to hunt and bite — or become placid — by switching neurons on or off" – Financial Times
Scott Barlow