Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Continuing a theme from earlier this month, BMO senior economist Robert Kavcic compares the yield from fixed income and dividend stocks to an income property,
“The economics of real estate investment get tough on a relative basis given that investors can secure a better yield in dividend stocks, or sit tight in risk-free cash/government bonds. The comparison to dividend stocks is an especially interesting one because both offer long-term capital appreciation potential, and both will see their payouts grow over time at least in-line with inflation. But, dividend investors also benefit from a much lower tax burden; they have access to instant and partial liquidity; and face minimal transaction costs. At the same time, payout risk is generally low compared to rental laws that are tilted heavily in favour of the tenant, along with inefficient backlogs at the Landlord and Tenant Board. Real estate investment should command a risk premium (which it historically has), but current pricing does not offer one”
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Wells Fargo equity analyst Christopher Harvey sees bond yields and Chinese growth as two of the biggest drivers of recent market weakness,
“Rising Rates Still a Near-Term Risk. In early August we noted the market’s increased sensitivity to rates and expected a tougher tape until 10yr went sub-4.05 per cent; since then, the SPX is down 2.9 per cent and the 10yr rose to 4.3 per cent. We estimate that all-in 10yr rates (i.e., UST + IG spread) have another 15 basis points of upside (i.e., risk for equities) before firming… Bear in a China Shop. Given the recent soft Chinese economic data, it is no surprise that firms with the most direct sales exposure to China have (on average) seen the most stock pressure. The 18 non-Info Tech SPX members that disclosed more than 15 per cent of their sales to China have underperformed the benchmark by over 500 basis points month-to-date (down 8.9 per cent vs. down 3.5 per cent). We also found that Info Tech sector companies with more than 20-per-cent sales exposure to China underperformed the S5INFT [S&P 500 Info Tech] index by over 200 basis points month-to-date (down 10.0 per cent vs. down 7.8 per cent)”
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BofA investment strategist Michael Hartnett’s weekly Flow Show report – entertainingly entitled No Mr. Bond, I expect you to die - was typically blunt and informative,
“Tale of the Tape: US 30-year mortgage 7.6 per cent (23-year high), Equity Risk Premium 39 basis points (19-year low), US-China yield spread 150 basis points (16-year high), US real yield 2.0 per cent (14-year high), EM FX popping despite v high real yields; near-term simple … clean thrust in 10-year more than 4.3 per cent, China renminbi higher than 7.3 = risk-off = SPX 4.2k tested; if critical bond/FX levels defended via Jackson Hole…correction postponed. The Price is Right: equity put/call ratio surges to 1.03 (highest since SVB )…a bad sign if stocks can’t hold here; SPX now down 2 per cent in Q3, SOX, NYFANG, [Magnificent 7 stocks] off more than 10 per cent from highs, and fresh upside in yields flips script from “good” to “bad” rise in rates…industrials, discretionary, homebuilders most vulnerable. The Biggest Picture: the ‘Yul Brynner’ of our self-proclaimed ‘Magnificent Seven’ is Microsoft … if ringleader can’t maintain new highs, equity and credit narrative could flip from ‘buy-the-dip’ in H1 to ‘sell-the-rip’ in H2″
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Diversion: “Scientists played Pink Floyd for people, then used their brain activity to recreate the song” – CBC
Scott Barlow