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Research and analysis roundup from The Globe and Mail’s market strategist Scott Barlow

Goldman Sachs is warning clients of a "high risk’ of market correction,

“'We believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high,' said Peter Oppenheimer, analyst at Goldman Sachs, in a note … [Mr. Oppenheimer] pointed to China’s economic rise and greater integration in the world economy. The Chinese economy is six times larger now than it was during the Sars outbreak of 2003, and Chinese tourism alone accounts for about 0.4 per cent of global GDP.”

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“Coronavirus puts stocks at ‘high’ risk of correction, Goldman warns’ – Financial Times (paywall)

“@RobinWigg Punchy note from Goldman Sachs' chief global equity strategist Peter Oppenheimer. Argues the impact of the coronavirus may be underestimated, and coupled with elevated valuations it leaves equities "vulnerable to a correction" – (research excerpt) Twitter

***

I am generally uncomfortable with strategists using 1999 markets as a metaphor for the current environment – valuations are nowhere near as excessive – but Dan Suzuki from (former Merrill Lynch chief quantitative strategist) Richard Bernstein’s firm made some sobering points in a February 18th research report,

“As we approach the 20th anniversary of the Tech Bubble peak, valuations have returned to levels not seen since. Is irrational euphoria coming back? A broad-based look at sentiment and valuation suggests that capital is becoming more abundant (i.e. optimism is building), which is generally a headwind to future returns (returns are greatest when capital is scarce). Many investors justify today’s higher valuations based on interest rates being low, but the questions investors need to ask are: (1) Why are rates low? (2) Will they stay low? and (3) What does the empirical data suggest? If rates are low because they are discounting lower long-term growth prospects, it probably doesn’t warrant paying a higher multiple. Also, if current rates do not stay low for at least the next decade (a very underappreciated risk in our view), then the low rate argument loses credibility. But most important is the empirical data. History suggests that adjusting valuations for interest rates adds no value in predicting future stock returns; in fact, it makes predictions much worse.”

“Perception vs. Reality: Valuations” - RB Advisors

See also: “@carlquintanilla JPMORGAN: “... the ratio of the S&P 500 technology to energy sector is now the same as during the tech bubble. .. We caution investors that this bubble will likely collapse, i.e. this time is not ‘different’, with valuations reverting closer to 2010-2020 average”” – (research excerpt, chart) Twitter

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The dominance of light truck sales continue the demise of passenger vehicle production in Canada according to BMO,

“North American vehicle production edged down 4.8% in 2019, brought down by the continued demise of the passenger car segment. Of the NAFTA group, Canada’s performance was the most varied, with most of the surge in light truck production coming from Toyota’s RAV4. The closure of GM’s Oshawa plant will cut roughly half of that gain going forward.. With USMCA coming into force in 2020, look for more light truck production to eventually shift to the United States and Canada due to the new labour content restrictions.”

“@SBarlow_ROB BMO: conventional passenger cars are already dying ‘ – (research excerpt, chart) Twitter

***

BofA Securities clients have been selling ETFs to buy individual stocks lately in another sign of euphoria,

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“Last week, during which the S&P 500 rose by 1.6%, clients returned to net selling after buying for four straight weeks. Selling was driven primarily by big outflows from ETFs, while single stocks continued to see inflows for the sixth week… lients bought single stocks in five of the 11 sectors last week. Comm. Svcs. led the inflows with record weekly buying in our data history since 2008. Health Care also saw near-record inflows”

“@SBarlow_ROB B of A: "Selling was driven primarily by big outflows from ETFs, while single stocks continued to see inflows for the sixth week" – (research excerpt) Twitter

***

Column: “B of A likes TD Bank as sector recovers from ‘abysmal’ 2019” – Barlow, Globe Investor

Diversion: “Welcome to the era of woke capitalism” – Macleans

Tweet of the Day:

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