A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Last week’s strong rally was fun, but the preponderance of credible market strategy emphasizes that markets are not out of the woods yet.
Morgan Stanley’s Andrew Sheets – who along with colleague Michael Wilson were the most accurate forecasters in 2018, in my opinion – published a report Monday called “New Year, Same Problems." Mr. Sheets noted that pessimistic investor sentiment and now-cheaper valuations were positive signs, but that fundamentals are not yet pointing to a sustainable rally,
“Thursday’s US ISM manufacturing print was bad, printing materially below consensus and with the fourth-largest monthly drop in new orders since 1985. This only adds fuel to the idea that US growth is slowing … The way we forecast US weakness to materialise is also a problem. It is heavily backloaded, making it more difficult for the Federal Reserve to change course now… Meanwhile, 1Q19 should see a very sharp deceleration in global nominal $ GDP … Earnings revisions across major markets have turned sharply lower in recent months, and of US companies issuing 4Q estimates, 46% have lowered guidance per Bloomberg”.
Mr. Sheets would be more encouraged if China does more economic stimulus, the U.S./China trade dispute cools, and the upcoming U.S. earnings seasons sees non-horrifying results.
“ @SBarlow_ROB MS (Sheets): buy signals” – (research excerpts) Twitter
Merrill Lynch’s Monday report on European asset flows had a very similar title to Morgan Stanley’s – “ New year, same issues”,
“The outflow trend continues uninterrupted across fixed income and equity funds for another week. Record inflows into money market highlight risk-off mode. Risk assets remain under pressure as uncertainty reins. With macro continuing to disappoint as econ prints keep coming below consensus, we expect further widening in credit land. We also expect further beta underperformance amid challenging liquidity backdrop.”
“@SBarlow_ROB ML: outflows continue, tough environment for beta” – (research excerpt) Twitter
Citi U.S. equity strategist Tobias Levkovich believes U.S. profit forecasts, already lowered, will drop further,
“Consensus bottom-up estimates have fallen back for 2019 from projected 12% EPS growth in September to less than 8% currently, with the likelihood of further slippage to 5%-6%. Notably, in our December institutional client survey, we found the buy-side forecasting a 4% earnings boost, implying that fund managers already believe that overall numbers are too high... In the most recent selloff, we believe earnings revisions have been the most important contributor to share price weakness). .. the earnings backdrop needs to change or bad news has to get priced in.”
“@SBarlow_ROB C: "we believe earnings revisions have been the most important contributor to share price weakness " – (research excerpt) Twitter
I missed this when it came out originally, but in November 2018 CNBC reported that Volkswagen is planning to sell an electric vehicle for under US$25,000 in the near future. This will be an alarming shock to Tesla, who’s cars are a lot more expensive. Not coincidentally, the Financial Times published a story last month detailing predictions that internal combustion engine driven car sales already peaked in 2018,
““We will probably see the peak of combustion engine car sales in 2018 based on global sales through October, plus estimates for November and December,” said Felipe Munoz, global automotive analyst at Jato Dynamics, a supplier of automotive data… the global car market in recent months has been characterised as “disastrous” by one analyst and a “nightmare” by another, owing to the US-led trade war, Brexit, financing issues among Chinese consumers, the embargo on Iran and new emissions targets in Europe.”
“Combustion engine car sales to hit peak demand in 2018, say analysts” – Financial Times (December 30, 2018, paywall)
“Volkswagen reportedly planning to sell electric Tesla rival for less than $23,000” – CNBC (November 8, 2018)
“Canadian auto sales are ‘well and truly winded’” – Report on Business (January 7, 2019)
Tweet of the Day:
The last time cyclicals were this cheap vs the S&P 500 on a forward P/E basis? Never. pic.twitter.com/7OOPxOsa9p— David Schawel (@DavidSchawel) January 6, 2019
Diversion: “Scientists Have Been Studying Cancers in a Very Strange Way for Decades: By growing cells in unrealistic liquids, they may have inadvertently skewed the results of their experiments “ – The Atlantic