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Why investors should avoid dividend stocks

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

I have previously been agnostic about the short-term outlook for crude prices – they seemed driven more by speculative futures positioning than anything else – but constructive on the two- to three -year outlook. The mid-term optimism was based on the abrupt halt in exploration and development spending from 2014 to 2016, which I expected would eventually cause some supply scarcity.

This optimism, however, was dependent on continued growth in global crude demand in the 1.2 to 1.4 million barrels per year range. Merrill Lynch recently published a report putting this demand growth in question,

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"Why is global oil demand growth running at half the rate of the last two years? We can point to cyclical, secular, and one-off factors. While one-off factors including a warm winter and India's demonetization will pass, we do not see a big oil demand acceleration from here on due to negative secular and cyclical trends… tighter monetary policy is a cyclical headwind for oil, while a secular demand rotation into liquid petroleum gases and out of gasoline/diesel will remove support from WTI crude oil prices. The rising supply and softer demand backdrop has resulted in higher-than-expected inventory levels."

"@SBarlow_ROB ML: Global oil demand is losing momentum ' – (research excerpt) Twitter
"@SBarlow_ROB Barclays: Crunch time for oil demand ' – (research excerpt) Twitter

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Citi economist Dana Peterson is predicting two rate hikes by the Bank of Canada before the end of the year,

"The new call does not reflect a wholesale change in our view about Canada, but rather a seismic shift in the BoC's assessment of the degree of accommodation required in an economy that appears to have recovered from the oil price shock. Three senior officials of the BoC (Poloz, Wilkins, Patterson) have all suggested over the past few weeks that the degree of monetary stimulus may need to be reduced (see Canada: Two and Done? Poloz May Elucidate Rate Path After Cryptic Quip). Markets have responded by advancing rate hike expectations from the end of 2018 to 42bp of tightening by end-2017. The dramatic shift in market pricing suggests that the Bank should hike in Jul in order to remain credible."

"@SBarlow_ROB Citi: 2 hikes for Canada in 2017" – (research excerpt) Twitter
"@SBarlow_ROB ML sees one BoC hike in 2H " – (research excerpt) Twitter

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Are all Canadians panicked about the housing market? Or just in Vancouver and Toronto where all the media editors are?

"Canadians of all income levels are panicked about house prices: poll" – Maclean's

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U.S. investor Meb Faber has been skeptical about the chasing yield investment strategy. Over the weekend, he referred to a summary of his views written earlier in the year. I'm not entirely in agreement, but the post is a good template for investors to examine their current income-related holdings,

"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. Once you have a preferred value methodology, AVOIDING dividend stocks in the strategy could results in additional post tax alpha of approximately 0.3% to 4.5% for taxable investors."

"Dividend Stocks Are The Worst" – Meb Faber

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Tweet of the day: "@ForexLive It's a holiday in Canada today. Here's a great chart showing CAD shorts getting killed bit.ly/2tsBwq8 " – Twitter

Diversion: "Seven signs of over-hyped Fintech" – London School of Economics

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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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