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All market strategists and economists who never change from a bullish or bearish forecast will be right eventually but that doesn’t mean reading their research reports is a productive activity for investors.

The best pundits are able to change their minds, moving from bull to bear and back again with enough accuracy and clarity to enhance investors’ long term risk-adjusted returns.

No market strategist has been able to call the beginning and end of every bull market. Some, however have been much better than others. Credit Suisse’s U.K.-based Andrew Garthwaite, for instance, was bearish on equities ahead of the financial crisis and was also able to predict the onset of the market recovery in March 2009 (by focusing on tightening U.S. corporate bond credit spreads).

Morgan Stanley strategist Andrew Sheets published a report called “What Would Make Us More Optimistic?” on Sunday that represents an effort to pave the way for an eventual strategic about-face from his current bearish stance. Mr. Sheets was admirably transparent in the report, about both why he is bearish and also the specific data points that would change his mind. No reasonable investor can call him a ‘permabear’ after reading it – the intellectual flexibility is on display.

Mr. Sheets is located in London and I’ve followed his work, and that of his New York-based colleague Michael Wilson, since early 2018. While most sell-side strategists were touting ‘synchronized global growth’ and sharply higher markets at the time, Morgan Stanley correctly forecasted high levels of equity market volatility and a ‘rolling series of bear markets’ that came to pass.

In simple terms, Morgan Stanley’s current pessimistic outlook arises from deteriorating global manufacturing activity as measured by Purchasing Managers’ Indexes (I share this concern, by the way) and consensus corporate profit forecasts for the fourth quarter and 2020 they believe are far too high, and ripe for lower guidance.

The most recent research report cites recovering manufacturing data, progress on U.S./China trade negotiations, looser-than-expected central bank monetary policy, and more attractive stock valuations as the factors that would turn Mr. Sheets and Mr. Wilson more bullish.

Morgan Stanley’s flexibility and clear outline to resumed bullishness do not, of, course, make them automatically right about where stock prices are heading. The key point for investors is to avoid stubborn strategic advice, and to emphasize pundits that are able to change their minds at the right time in a believable way.

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

Warren Buffett is buying bank stocks. Why aren’t others?

Stock investors have had little love for U.S. banks over the last year. With one notable exception. Warren Buffett’s Berkshire Hathaway has been building its position in banks over the last year. It is now among the five biggest shareholders in Bank of America, JPMorgan Chase, Wells Fargo, Goldman Sachs, U.S. Bancorp and Bank of New York and owns big stakes in others. Its latest disclosure of its holdings showed that the firm had added to its positions in some of those companies in the second quarter. Stephen Grocer of The New York Times explains what may be behind Buffett’s thinking. (for everyone)

Five things investors should do after a harrowing week in the markets

Amid last week’s market turbulence and recession-predicting bond yields, Gordon Pape has some advice. (for subscribers)

The exodus of investors in the oil patch gains steam

The Canadian energy sector is sinking to unprecedented depths, as an exodus of investors and foreign companies from the oil patch gathers momentum. With the sector’s downslide now effectively five years running, several exploration and production (E&P) companies have recently seen their stocks dislodge from crude oil prices and sink to record lows. There’s little in sight to break the fall. Tim Shufelt reports. (for subscribers)

Others (for subscribers)

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: CEOs are buying these two stocks

Others (for everyone)

Where’d all the stocks go? Nasdaq’s CEO on shrinking market

Chinese investors hold key as global funds turn super bearish on copper

The Globe’s stars and dogs for last week

Ask Globe Investor

Question: Many personal finance writers recommend dividend reinvestment plans (DRIPs). But a common theme among financial advice givers is to not buy individual stocks but rather invest in exchange-traded funds (ETFs) to spread the risk. Is there such a thing as ETF DRIPs?

Answer: Yes. In addition to offering DRIPs for common shares, most discount brokers let you reinvest dividends from ETFs without incurring commission charges.

Broker-operated DRIPs are easy to set up online or with a quick phone call to your broker. Choosing the DRIP option may require you to enroll all of the securities in your account, although some brokers let you pick and choose only the stocks and ETFs you wish to DRIP.

Check the broker’s website for a list of DRIP-eligible securities, or contact the broker directly if you can’t find the information online.

Before you take the plunge, however, you should be aware that broker DRIPs generally purchase only whole shares. For example, if you receive a distribution of $25 from an ETF with a unit price of $17, you will purchase one additional unit and receive the remaining $8 in cash. Because many ETFs make monthly distributions, the dividend may in some cases be too small to purchase even a single unit.

To make an ETF DRIP worthwhile, you should aim to initially purchase a sufficient number of units so that most of the distribution is reinvested and not all received in cash. I also recommend that you have a plan for “soaking up” any excess cash. Most discount brokers offer high-interest savings account products that you buy and sell like mutual funds; these are a great place to park idle cash that would otherwise earn nothing.

Another option for reinvesting ETF distributions is to choose a broker that offers commission-free ETF trades. There are several brokers to choose from, each with advantages and disadvantages. Scotia iTrade, for example, lets you buy and sell ETFs with no commissions, but the list of eligible securities is small at about 50 ETFs. Questrade lets you buy ETFs for free, but you’ll pay the standard commission when you sell. Wealthsimple Trade lets you buy and sell stocks and ETFs for free, but for now it’s only available for non-registered accounts and tax-free savings accounts. A few other brokers also offer commission-free ETF transactions.

If your goal is to reinvest all of your cash, having the option to purchase ETFs with no commissions is a big advantage. Simply wait until enough cash builds up to purchase at least one ETF unit, and then enter a buy order. It’s more work than a DRIP, but it will make sure all of your money is working for you.

Whatever method you choose, investing in ETFs will provide diversification, and reinvesting your dividends will harness the power of compounding – one of the most important components of a successful long-term investing plan.

--John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

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