A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Markets are holding up well amid a steady increase in reasons to be bearish and reduce portfolio risk. For one, I don‘t believe global investors are prepared for the next U.S. earnings season, when results are expected to show a year-over-year profit decline.
There remains hope for an earnings recovery in the second half of 2019, but a Morgan Stanley research report released Monday argued that periods of reduced profit guidance tend to be followed by more periods of reduced profit guidance,
“Our earnings recession call is playing out even faster than we expected. … Consensus numbers have already baked in no growth for 1H19 (1Q projected growth is actually negative) with a hockey stick assumed in 2H19 that brings the full year growth estimate to ~5%. History says be skeptical of the inflection forecast. … Since the early 00s, we have seen this kind of inflection happen a few times, but these inflections were all related to 1) comping against negative or slower EPS growth or 2) tax cuts mechanically lifting the growth rate. Neither of those forces are at play this year. In fact, it’s the opposite making the achievability of these estimates even more unlikely.”
In a separate report, Morgan Stanley U.S. equity strategist Michael Wilson calls the trend in earnings guidance “some of the worst we’ve ever observed in terms of breadth and velocity”.
“@SBarlow_ROB MS' Wilson: Consensus dreaming, no 2H earnings recovery on tap” – (research excerpt) Twitter
“@SBarlow_ROB MS’ Sheets : “against renewed optimism there is real fundamental weakness, both in growth and earnings trends” – (research excerpt) Twitter
As if this weren’t enough, prominent global equity strategist Andrew Garthwaite (Credit Suisse) wrote a report Monday arguing that investors need to take the risks associated with rising corporate debt levels more seriously,
“Many clients seem to have underestimated the rise in US leverage with Net debt/EBITDA hitting new highs. This is especially a concern as EBITDA is currently not depressed, with EBITDA falling on average 18% the last three times it peaked, which would take leverage even further. .. We continue to worry that spreads look vulnerable for the following reasons: The quality of credit has deteriorated significantly within both IG and junk (e.g. 51% of investment grade are now one notch above junk). As mentioned above, leverage in the US is unusually high. Equity markets are questioning the terminal value of disrupted business models (e.g. in autos) but credit markets are not doing this.”
“ @SBarlow_ROB CS: Markets too sanguine on credit” – (research excerpt) Twitter
Oh, there’s also a global gasoline glut that threatens oil prices. Morgan Stanley notes that crack spreads – the profits refiners make on each barrel of oil – are declining quickly which means they will demand less oil in the future,
“While US distillate cracks have consistently been strong, averaging over $18/bbl YTD or 10% above normal, US gasoline cracks have continued their dismal trend, averaging $2.79/bbl YTD or over 70% below the 5 year average of ~$10/bbl. This, combined with sharply narrower crude spreads, weighs on our margin outlook for the quarter and leads us to lower our 1Q19 EPS [guidance for refining companies] by 45%.“
“@SBarlow_ROB MS: Gasoline cracks” – (research excerpt) Twitter
Ok, this all sounds bad and it is, but progress in U.S.-China trade negotiations would lighten the market mood considerably. Still, current trends in global economic growth and profit forecasts are not great.
Tweet of the Day: “@SBarlow_ROB Merrill Lynch global Fund Manager Survey for Feb, summary:” – (research excerpt) Twitter
Diversion: “ Canada’s forests actually emit more carbon than they absorb — despite what you’ve heard on Facebook” – CBC