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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Citi global strategist Robert Buckland published his monthly presentation Friday which included his top investment recommendations. One of the more novel and interesting suggestions was a list of global yield-generating stocks where risk is adjusted by the company’s credit default swap (CDS) pricing. The higher the cost of corporate debt insurance, the higher the risk of dividend cuts, and this is factored into Citi’s ranking for each company.

The addition of CDS is interesting because it provides a real-time market assessment of credit risk and the sustainability of dividends. There are, unfortunately, no Canadian equity picks. The U.S. names are Cisco Systems , UPS, Dominion Energy Inc., Caterpillar Inc., Southern Co., ConocoPhilips, American Electric Power Co. Inc., General Mills , Exelon Corp., General Dynamic Corp., HP Inc., Johnson Controls International, First Energy Corp., Equity Residential, Hartford Financial Services Group., International Paper Corp., Omnicom and Aliant Energy Corp.

“ @SBarlow_ROB Citi: Their fave income strategy - CDS-adjusted dividend yield” – (full table) Twitter


BMO economist Doug Porter noted record low North American bond yields,

“While the recovery in financial markets grinds on for most assets, government bond yields are sending a different signal on the outlook. A few weeks back we warned to “watch this space” during a mild upturn in yields amid a spate of supply. The back-up did not last long, and some Canadian government yields are now at or close to all-time lows. For example, the 10-year GoC drifted below 0.5% on Monday, a new closing low. “

There’s only two ways to read this – either bond yields are no longer an effective indicator of future growth expectations, or bond investors are filly fading the recovery in equities.

“@SBarlow_ROB BMO_: bond yields near record lows on both sides of the border” – (research excerpt) Twitter

In the meantime, the low government bond yields are being reflected in Canadian mortgage pricing. Effective rates on Canada 10-year mortgages just hit a decade low, according to broker and columnist Robert McLister,

“With rates near perma-lows, according to some, people aren’t exactly lining up to lock in for 10 years. That’s especially true with penalties being so large on 10-year fixed terms, that is, until a mortgage passes its five-year anniversary—at which point the Interest Act limits penalties to three months’ interest. Nevertheless, effective rates on 10-year fixed mortgages just hit a record low today, according to RateSpy’s records. The cheapest 10-year is now just 2.84% through select brokers. The offer applies to all loan-to-values and all deal types (purchase, switch or refinances). The property must be owner-occupied and located in Ontario.”


U.K.-based Morgan Stanley strategist Neil McLeish is clearly not concerned about the deflation signals emanating from bond markets. As a firm, Morgan Stanley is bullish on the recovery and expects that economically sensitive equity sectors will be the next to join the rally,

“The good news for investors is that cyclicality, in all its forms, remains attractively priced as this caution still pervades global markets… With the S&P 500 trading at over 20 times forward earnings, isn’t (more than) everything already in the price? We think not. As Andrew Sheets points out, the median US and European stocks still trade nearly 30% below their 52-week highs… Many investors I speak to concede the point about highly dispersed valuations but lack the confidence to move far beyond ‘safer’ asset classes, given a deep seated lack of conviction in how the cycle will play out … Market consolidations like the one witnessed in the first half of May are possible at any time – as no doubt at some point is a proper correction. However, our primary focus remains pro-cyclical.”

If I was thinking about playing this theme, and I’m starting to, the first place I’d start looking is copper miners.

“@SBarlow_ROB MS: buy cyclicals” – (research excerpt) Twitter


Newsletter: “ Quarantined investors create ‘perfect storm of stupid’ (Plus, a TSX stock skyrocketing on the shift to remote working)” – Globe Investor

Diversion: “ Here’s what we have to do to show a coronavirus vaccine works” – M.I.T. Technology Review

Tweet of the Day: “ @jsblokland The performance of #deflation v #inflation assets” – Twitter

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