Daily roundup of research and analysis from what The Globe and Mail’s market strategist Scott Barlow
The results of BofA Securities’ extremely popular monthly survey of portfolio managers was published Tuesday morning,
“Bottom line: investors are bearish (e.g. cash levels jumped to 5.3%) but not extremely bearish (e.g. investors remain long cyclical stocks vs bonds); we remain negative on credit & stock returns in ‘22 as we believe FMS investor probabilities of a credit event (3%), recession (12%), and bear market (30%) are too low … On Macro: weakest global growth expectations (-20%) + highest saying it’s ‘late-cycle’ (48%) since Mar’20 … but only 12% expect ‘recession’; majority still view inflation as ‘transitory’ (52%) … On Regions, Sectors & Styles: big rotation to cash, UK, EM & energy (biggest OW since Mar’12) from US stocks, industrials & tech … Biggest UW of tech since Aug’06; banks remain #1 global sector OW as preference for value>growth hits new high. FMS Contrarian Trades: upcoming recession scare best played via long bonds-short commodities … Just 5% predict T-bills or 30-year Treasury to be best performing asset of 2022; bulls betting on return of Goldilocks go long US tech-short global energy & banks.”
My takeaways are that portfolio managers are bearish but not bearish enough because odds of a recession are higher (according to BofA) than they believe, tech stocks are surprisingly underweight and potential economic slowdown is a risk for investors in materials and cyclical stocks.
“”Bulls betting on return of Goldilocks go long US tech-short global energy & banks” - contrarian trade idea from BofA’s global PM survey” – (research excerpt) Twitter
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BMO chief economist Doug Porter explains why domestic gasoline prices are hitting record highs,
“Canadian gasoline prices pushed above C$1.60/litre (or to around US$4.80/gallon). That’s an all-time high for the national average, and doesn’t yet take on board Monday’s latest pop in global oil prices (to around $95 for WTI). Note that pump prices are at a record high even though crude oil prices are nowhere close to record highs. What gives? First, the Canadian dollar has famously not benefited from the pop in oil, providing zero shock absorber for consumers. So, in Canadian dollar terms, crude prices are in fact the second highest ever now (albeit still below the 2008 spike, see red line in chart). Second, taxes have risen at the pump in recent years, especially (but not exclusively) the carbon tax. Third, the combination of retail and refining margins has widened in the past 15 years. However we got here, gas prices are poised to add further to the inflation mix. It’s only mid-February, but pump prices are already 8% above their January average (versus a meaty 6.5% m/m rise a year ago). This was supposed to be the period where base effects became easier for CPI, helping trim headline inflation. Instead the bar just keeps rising "
“BMO: ‘More pain at the pump’ as Canadian gasoline prices hit record highs’” –(research excerpt, chart) Twitter
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Citi mining analyst Oliver Nugent sees current conditions as a ‘powder keg’ for nickel prices,
“Our new 0-3m nickel price target is $26k/t (+10% from spot) as we see a continued deficit of class-1 units in 1H’22 keeping stock cover critical if not drawing further. This sets the market up for some explosively bullish price action as the market gains conviction in China credit easing and turns its focus from the Fed tightening cycle. Sanctions on Russian metal are not our base case but offer another potential path for higher prices. We also update our medium term price deck owing to our higher EV sales outlook and resulting tighter supply-demand balances. Our base case is for prices to peak in mid-2022 as higher Indonesian matte supply alleviates scarcity conditions.”
“‘Powder keg’ conditions for nickel prices, but not for long” – (research excerpt) Twitter
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Goldman Sachs chief U.S. equity strategist David Kostin reported on the U.S. earnings season (my emphasis),
“With 82% of S&P 500 market cap reported, 4Q 2021 EPS appears to have grown by 26% vs. 4Q 2020. This compares with consensus expectations for 20% growth at the start of the reporting season. Consensus estimates show year/year EPS growth slowing to a single-digit pace in early 2022. For full-year 2022, consensus expects S&P 500 EPS of $226, representing 8% annual growth and matching our top-down forecast … S&P 500 net profit margins in 4Q 2021 were better than expected (12.1% vs. 11.5%) but nonetheless dipped from the record high of 12.5% reached in 3Q 2021 … In addition to reported 4Q results, management guidance drove large stock moves during the 4Q season. Roughly half of the 153 S&P 500 companies providing FY1 guidance this quarter guided below consensus. The median stock providing below-consensus guidance underperformed by 199 bps during the day following guidance, compared with 187 bps of outperformance for the median stock guiding more than 5% above consensus.”
Personally, I’m watching profit margins and earnings guidance most closely. In the latter case, Morgan Stanley advises that negative guidance and subsequent market punishment will become more common as global manufacturing growth slows.
“GS’s Kostin: Earnings guidance not great” – (research excerpt) Twitter
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Diversion: “The U.S. Army Has a New Dystopian Plan to Deal With Climate Catastrophe” – Gizmodo
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