A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Morgan Stanley’s global strategy mid-year outlook, entitled Easy is Over, provided a compelling argument that market dynamics have already changed,
“Cyclically, we expect PMIs to decline and inflation to rise over the coming months, the opposite of last year’s dynamic and a pattern historically associated with weaker returns … we think that this bull market has limited runway which has not been extended by tax changes, technology or other factors. We think it is in the midst of a topping process, following a ‘normal’ historical pattern where credit peaks first, yields peak second and equities peak last … Earnings have been strong enough to offset the valuation declines, leaving all four major equity regions roughly flat year to date. Exhibit 20 provides a summary of these returns by region and the contribution from earnings and valuations. It’s remarkable how uniform this derating has been, with every region seeing forward EPS move higher but offset by an equal percentage move lower in P/Es.”
The “higher profits, lower valuations” trend is extremely important in my opinion. It means good growth results will not be rewarded by higher equity prices because of forward looking risks. It is a valid theory as to underpinnings of weak domestic bank stock performance this year.
“@SBarlow_ROB MS’s Wilson: “Better earnings, lower multiples”” – (research excerpt) Twitter
“@SBarlow_ROB The global equity story for 2018 --> EPS up, PEs down (MS)” – (chart) Twitter
“@SBarlow_ROB MS: ‘Tricky handoff’ checklist of changing market conditions” – (table) Twitter
“Morgan Stanley says the ‘easy’ investing days are over, lowers stock weighting and raises cash allocation” – CNBC
=====
Much more positively, the head of Blackstone Canada is bullish on the short-term future of the S&P/TSX Composite relative to the S&P 500,
“A lot of things would have to go pretty badly for the valuation discount that was starting to show up in the TSX to get worse. [At the beginning of April] the market was cheap and I think there was some room for the TSX to play catch up… Energy stocks, cyclicals, are leading the market higher”
“Silver lining? A lot would have to go wrong for the TSX outlook to worsen: BlackRock’s Reiman” – BNN Bloomberg
=====
Oil prices continue to rocket higher but Reuters decided to play party pooper,
“Physical markets for oil shipments tell a different story[ from the commodity price rally]. Spot crude prices are at their steepest discounts to futures prices in years due to weak demand from refiners in China and a backlog of cargoes in Europe. Sellers are struggling to find buyers for West African, Russian and Kazakh cargoes, while pipeline bottlenecks trap supply in west Texas and Canada. The divergence is notable because traditionally, physical markets are viewed as a better gauge of short-term fundamentals.”
“Investors see big oil surge, but physical markets suggest caution” – Reuters
“Oil hits multi-year high on tight supply, Iran sanctions” – Reuters
“Oil may return to $100, but it would feel different” – Bloomberg
Related: Further evidence that the oil futures curve determines short term direction of inventory levels,
“@SBarlow_ROB Oil inventories and the 1-12 Brent curve” – (chart) Twitter
=====
Tweet of the Day:
Diversion: “For the Comedy Iconoclasts of ‘SCTV,’ a Joyful Reunion Tinged With Loss” – NY Times
Scott Barlow