Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi global strategist Robert Buckland has provided a valuable service for investors by compiling a list of stocks with dividends adjusted for balance sheet risk.
In “CDS-Adjusted Dividends: A Place To Hide,” Mr. Buckland used the price of credit default swaps (insurance against default on corporate bond issues) to assess the market’s view of financial risk for each company. This, in turn, gives a reading on the probability that dividends will be cut.
The result is a list of 30 stocks from around the world with the most dependable yields. Examples include Subaru from Japan, Sanofi SA from Europe, and IBM from the U.S.
***
Investors should brace themselves for a horrific stream of economic and corporate data for the next few months.
Unemployment in the U.S. and Canada will be among the most important data series’ to watch, but the short-term reports will almost certainly set the wrong kind of records,
“On Thursday, the Department of Labor will release Unemployment Insurance Weekly Claims. The consensus is initial claims will increase to 750,000, but that is way too low. Based on early reporting from various states, initial weekly claims will probably be several million this week. The all time high for initial weekly unemployment claims, Seasonally Adjusted, was 695,000 in Oct 82. The high during the great recession was 665,000 in Mar 09. The previous record will be obliterated this week due to the sudden economic stop.”
“A few Comments on Weekly and Continued Unemployment Claims” – Calculated Risk
“Ottawa receives 500,000 new applications for Employment Insurance as coronavirus-related layoffs increase” – Parkinson, Report on Business
“Brace for earnings numbers like you’ve never seen before” - Yahoo! Finance
***
CIBC interest rate strategist Ian Pollick has been a valuable resource in recent weeks.
In a Friday research report, Mr. Pollick discussed the roll of leverage in creating recent credit market volatility (my emphasis),
“The proximate ‘trigger’ behind the collapse in risk and yields was not just concerns about the trajectory of the global economy. Rather it had more to do with a concurrent system-wide ‘margin call’ that fed on itself as covenants in [over the counter] derivative contracts were triggered. Additional collateral was required to maintain positions and as the value of this collateral declined further it created a dearth of liquidity, highlighting the inability of the financial system to absorb shocks ….
"And it was not just in large markets like the United States that saw events like this develop. Bond market liquidity (measured as the depth of the top bids and offers in broker markets) is operating at a tenth of its usual level in Canada. Further consider that relative to the size of our economy the Canadian financial system has cross-asset derivative exposure at multiples of domestic GDP; the notional amount of outstanding interest-rate derivatives alone are worth some C$13.7trn or 6.5x the value of real GDP.”
“@SBarlow_ROB WOW! From CIBC's Pollick: "Bond market liquidity (measured as the depth of the top bids and offers in broker markets) is operating at a tenth of its usual level in Canada." – (research excerpt) Twitter
***
Also from Citi, U.S. equity strategist Tobias Levkovich attempts to answer “The Five Questions” facing investors.
These are “Why is this selloff different than past drawdowns? … What are the right earnings numbers that we should be thinking about for 2020 and 2021 so that a valuation judgement can be made?... Where does the S&P 500 bottom? … Which groups can rebound more significantly once stocks recover? [and] Are there going to be structural changes?”
As for which sectors will lead the rebound, he wrote, “The question indicates our sense that the investment community’s mindset is not bearish as they look for upside opportunities. We suspect that some of the most beaten-up names can rebound significantly as banks did in 2009-10 or dot-coms in 2002-03. Areas like airlines, cruise lines, oil patch names, maybe banks and industrial cyclicals can experience meaningful advances once we get through this slump.”
“@SBarlow_ROB Levkovich from "The Five Questions" – (research excerpt) Twitter
***
Diversion: “Hey Siri, Do I Have Coronavirus?” – Gizmodo
Tweet of the Day:
Scott Barlow