Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading today on the Web
The consensus view is that the Bank of Canada will announce a 25-basis-point increase in policy rates tomorrow. This will be an interesting test as the bank attempts to cobble together a 'beautiful deleveraging' where Canadians slowly reduce debt loads without causing the domestic economy to grind to halt. The big question is the extent to which the major banks follow a hike with higher mortgage rates – they may not move them at all.
This is only speculation, but my suspicion is that debt-leveraged house flippers will be group most affected by a single hike. This is healthy – those buying houses to sell them in a few months must have known they were dancing on the edge of a financial volcano for the past year anyway.
"Mortgages won't be only problem for many Canadians as rates rise" – CBC
" Canadian Home Buyers Losing Steam, and Cash, as Rate Hike Looms" – Bloomberg
" 'Rate tantrum': Bank of Canada's Poloz has some explaining to do" – Report on Business
"Loonie falls ahead of rate decision as markets brace for possible 'buy the rumour, sell the fact' " – Bloomberg
***
The Financial Times exhumes one of the most notorious quotes of the financial crisis, Chuck Prince's "But as long as the music is playing, you've got to get up and dance. We're still dancing" to suggest that a similar level of irresponsibility is present in current markets,
"According to Harry Colvin of Longview Economics, the U.S. equity bull market is now the second longest since 1896. It is also the third largest, delivering a cumulative 328 per cent total return to early July. Like just about every other market in this world of hyperactive central banking it looks very expensive. The cyclically adjusted price/earnings ratio is at a level previously only seen before the 1929 Wall Street Crash and in the dot-com bubble of the late 1990s. With the Fed likely to raise rates further this year and actively discussing how to shrink its balance sheet, the more nervous dancers may be tempted to make an exit."
"A decade on investors are once more dancing furiously" – Financial Times
***
The momentum investing strategy – which emphasizes buying stocks where price and earnings estimates are rising quickest while largely ignoring valuations – was popular in the late 1990s before the technology bubble burst and momentum managers' portfolios got uniformly blown to pieces.
Momentum investing regained popularity in recent years but the algorithm-based momentum chasers are having a very difficult 2017,
"CTAs, the majority of which bet on price trends using futures contracts across asset classes, are known for being volatile strategies, billed for their low correlation to equities. Hit by choppy trends, especially in fixed income and the dollar, they're are now finding it difficult to live up to return and diversification expectations, said Pravit Chintawongvanich, head of Derivatives Strategy at Macro Risk Advisors."
"Quant Funds That Chase Trends Are This Year's Biggest Losers" – Bloomberg
**
Tweet of the Day: "@ReformedBroker No one capitulates like a sell-side analyst whose firm's banking biz with a covered company is at an end." – (story attached) Twitter
Diversion: "First Object Teleported from Earth to Orbit" – MIT Technology Review
Scott Barlow