Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi global strategist Matt King is concerned that supply chain issues will lead to out of control inflation and a boom/bust cycle that central banks will find difficult to mitigate,
“From shipping to supermarkets, the past year has forced investors, issuers and consumers alike to come to terms with the risk of disruption. The widespread assumption is of a return to previous equilibria once bottlenecks ease. But ‘transitory’ is already taking longer than originally forecast - with problems spreading from one sector to another in an apparently unpredictable fashion. This raises the threat of a return to a boom-bust cycle which central banks find hard to control, and which is certainly not reflected in asset prices. In both physical and financial markets, when price-insensitive demand meets inelastic supply, today’s exponential price rise has a tendency to be followed by tomorrow’s crash.”
“@SBarlow_ROB Citi’s King re “the threat of a return to a boom-bust cycle which central banks find hard to control”” – (research excerpt) Twitter
The Financial Times reports that hedge funds are loading up on uranium exposure as energy shortages continue in China and Europe,
“The price of raw uranium, known as yellowcake, rose to its highest level since 2012 at $50 a pound last month. The move has attracted new investors into the market for the first time since before the financial crisis, when buying by investors drove the price from $20 a pound to a record high of $136 a pound in June 2007. “We’ve been patiently waiting for something to happen for a long time,” said Ben Cleary, of Tribeca Investment Partners in Singapore, whose fund is up 345 per cent net of fees this year. ‘Clearly there’s speculative money coming back into the sector, there were massive price moves in September,’ ... Sean Benson, founder of London-based Tees River… argues in an investor letter, seen by the FT, that a deficit of supply relative to demand and a ‘very supportive’ climate change agenda mean that ‘the current uranium cycle is better than the last on every fundamental metric.’”
“Hedge funds snap up uranium in bet on green energy shift” – Financial Times (paywall)
Global supply chain tensions are also a theme at BofA Securities this week as quantitative strategist Savita Subramanian called the upcoming U.S. earnings season “a make or break quarter,”
" 3Q: Expect an in-line quarter, but guidance could be ugly. S&P 500 3Q earnings kick off this week. Following another huge beat in 2Q, 3Q EPS has risen 3% over the past three months to $49.06 (+27% year-over-year); typically the estimate falls by 4% into the quarter. Consensus forecasts imply the 2-year growth rate falling sharply to +16% vs. +27% in 2Q amid supply chain issues and the delta variant-driven slowdown. While there are reasons to be cautious, earnings misses are extremely rare: since 2009, there have been only two quarters (out of 50) when earnings missed consensus (2Q11 & 1Q20). We expect earnings to come in in-line with consensus and revise our 3Q EPS down by $2 (to $49) and 4Q by $1. But the main focus will be around guidance (which started to soften) and we believe 2022 EPS will be revised lower.
" @SBarlow_ROB BofA: ‘Expect an in-line quarter, but guidance could be ugly” – (research excerpt) Twitter
The increasingly bearish Michael Wilson, chief U.S. equity strategist at Morgan Stanley, warns that “winter is coming” for investors,
“Winter is coming but timing unclear. Fire has arrived with the Fed’s more aggressive pivot to tapering last month. Higher rates and a stronger USD have led to multiple compression, a process that remains unfinished, in our view. Whether the final chapter of the mid-cycle transition ends with a 10% or 20% correction in the S&P 500 will be determined by how much earnings growth decelerates or has to outright decline (i.e., the Ice). We are gaining confidence in a sharper deceleration but the timing is more uncertain. … We continue to see downside risk to earnings revisions breadth as 3Q earnings season kicks off—a headwind for price. We see higher labor and raw material costs, supply chain issues, and demand pull forward being key risks. Importantly, our work shows that year-over-year change in earnings revisions breadth tends to lead forward earnings growth by 26 weeks. Further, the Y/Y change in earnings revisions breadth has already started to decelerate, pointing to notable downside to earnings growth as we look ahead 6 months. We recently reiterated our preference for services (the Consumer Services industry group) over goods (the Retailing and Consumer Durables industry groups) within the overall Consumer Discretionary sector.”
“@SBarlow_ROB MS’s Wilson ... .still not bullish” – (research excerpt) Twitter
Diversion: “Former U.S. Navy Nuclear Engineer Allegedly Tried to Sell Submarine Secrets via Sandwich” – Gizmodo
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