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You’re valuing your equity holdings wrong

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

Many investors and most of the financial media reflexively refer to trailing price-to-earnings ratios as the primary measure of a stock's "cheapness" or "expensiveness."

The assumption is that stocks with lower PE ratios are more of a bargain and will outperform. Morgan Stanley analysts believe this is a big mistake, and that future investment return have nothing to do with high or low PE ratios,

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"More useful valuation metrics: What's better at explaining future returns? Price/book and price/sales ratios for equities, REER and spot/PPP for FX, outright spreads and spreads per leverage for credit. Surprisingly ineffective valuation metrics: The trailing price/earnings ratio for equities is surprisingly ineffective. Real yields differentials for FX is another."

In 2016, Merrill Lynch chief quantitative strategist Savita Subramanian analyzed 25 years of data on U.S. stocks to find the valuation measure that best predicts future performance for each sector. I have a link to the summary table on my desktop because I refer to it constantly. I posted the table on Twitter this morning and for readers who have never clicked on a twitter link before, I suggest this is a good place to start.

"@SBarlow_ROB MS: TTM PE Ratios don't work" – (research excerpt) Twitter
"@SBarlow_ROB Savita Subramanian: what valuation measure works for each U.S. sector " – (summary table) Twitter

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Speculative crude investors have doubled down in futures markets by setting new records for bullish positioning,

"Money managers boosted their bets on rising West Texas Intermediate prices to a record on speculation that the Organization of Petroleum Exporting Countries and its partners will manage to ease a global supply glut. Oil has traded above $50 a barrel since OPEC and 11 other countries started trimming supply on Jan. 1, which has in turn helped fuel a revival in U.S. shale drilling. American explorers have almost doubled the number of rigs targeting oil since May, according to Baker Hughes Inc. The mixed signals have locked WTI in its narrowest range since 2003 this month."

He's anonymous, but the Oil Merchant on twitter is among my favourite sources of insider information on crude markets. He believes that the oil price is coiled like a spring but unfortunately offers no opinion on whether the upcoming big move in the commodity price will be higher or lower.

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"Investors See Oil Break Out of Narrow Range With Record Bets" – Bloomberg
"Oil gains as bullish bets on rising prices hit record high" – Reuters
"@EnergyRosen The longer the price remains within a range, the more violent the move is when we break out of the range." – Twitter

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An interesting Bloomberg feature argues that the rise in Canadian banks' foreign credit liabilities are a measure of international asset flows into the domestic housing market,

"The nation's lenders have more than doubled their external debt since the end of the recession -- an amount in excess of C$500 billion ($382 billion), according to international investment position data released by Statistics Canada … 'It's a situation where it's not a problem until it is a problem,' said Doug Porter, chief economist at Bank of Montreal. 'I would say that in the last couple of years we've been flirting with a problem.'"

"Foreigners' Bets on Canada's Housing Market Start With Its Banks" – Bloomberg

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Tweet of the day: "@adnanchian A heavy disconnect between political uncertainty and market measures of riskiness. " – Twitter

Diversion: I don't buy the thesis (long story) but fou d this interesting, "How We Got So Angry: In Age of Anger, Pankaj Mishra traces the roots of global rage. " – Bloomberg

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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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