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A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web

U.S. portfolio manager Meb Faber was obviously needling conventional wisdom with his piece entitled "Dividends are the worst."

Dividend and income investments have been arguably the most lucrative investment strategy of the past five years, and the magic of compound interest remains. But in an era of rising bond yields that has resulted in underperformance in some equity income market sectors, Mr. Faber's observations are worth reading, if only to re-assess and test the sustainability of existing portfolio weightings,

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"The basic summary is that: Dividend yield investing is rooted in value investing. Historically, focusing on dividend yields rather than value, has been a suboptimal way to express value. If you have to focus on dividends, you MUST include a valuation screen or process to avoid high yielding but expensive, junky stocks. The hunt for yield has caused dividend stocks to reach valuations levels never seen before relative to the overall market. Since dividend stocks are currently expensive, we prefer a shareholder yield approach combined with a value composite screen."

"Dividend Stocks Are The Worst" – Meb Faber Research
Related: "The Asymmetry of Reaching for Yield at Low Spreads" – Econompic

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"Reflation or not reflation" remains the single most important question for investors in 2017.

Unfortunately, prominent strategists are not helping provide the answers. Morgan Stanley published a report citing the possibility that as far as growth expectations and higher yields go, the first quarter of 2017 could be "as good as it gets,"

"Growth momentum, easy year-over-year comps for earnings and inflation and US policy optimism should keep the dream of 'sparkle' and reflation alive. However, we remain sceptical that these trends are long-lasting. For all three, 1Q17 may be as good as it gets. ... We continue to favour equities over credit over government bonds. We think the best 'reflation' trades (higher stocks, higher yields, higher breakevens) are in Europe and Japan, not the US, due in part to expectations of continued USD strength.'

However, Richard Bernstein, former chief quantitative strategist at Merrill Lynch at founder of RB Advisors, argues that growth skeptics are overthinking things, and that it's 'checkers not chess' and the reflation trade is set to continue,

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"Right now we view the markets as being more checkers than chess. The stock and bond markets' performances are currently based on a rather simple construct: when in the past has Washington, DC ever proposed significant fiscal stimulus when the economy was NOT in recession? Answer: never. Adding significant fiscal stimulus to a healthy, albeit not robust, economy is virtually unprecedented. Many have ascribed the markets' performances solely to a post-election surprise, but the performance trends seen after the election actually began in the first quarter of 2016."

"@SBarlow_ROB MS: "1Q17 might be as good as it gets" – (research excerpt) Twitter
"It's checkers not chess" – RB Advisors (full report)

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There is plenty of important news from the global oil patch this morning. The Energy Information Agency predicted a sharp rise in U.S. shale production, which sounds like an overhang for further crude price increases, but HSBC is predicting a global supply deficit for crude – hugely supportive of the commodity price- starting in the middle of this year.

"@JavierBlas2 #Shale Watch: @eia sees US #oil production up year-on-year by April (first annual growth since Oct 2015) #OOTT #OPEC " – (includes chart) Twitter

"US oil output to rise 1.3% in 2017, EIA says" – Financial Times

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"@chris1reuters #Oil market faces 600,000 bpd supply deficit in 2017 as #OPEC output cuts leave supply below demand, says @HSBC " – (includes chart) Twitter

"Big Oil Hits Sweet Spot as Projects Reap Rewards of Recovery" – Bloomberg

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Tweet of the Day: "@bySamRo Gundlach warns of 'vulnerability' if earnings don't pick up" – (includes chart) Twitter

Diversion: "The bombshell report that Russia can blackmail Trump, explained" – Vox

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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