A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Merrill Lynch quantitative strategist Savita Subramanian sees U.S. equities attractively priced relative to low bond yields, but investors have not yet priced in the possibility of a recession,
“The market's multiples on earnings look elevated relative to history, but still look cheap on growth, cash flow and relative to bonds. Stocks look particularly attractive in the new low-rate environment: 60% of S&P 500 stocks' dividend yields eclipse the 10-year treasury yield… Our tactical sector framework now favors more defensive sectors than cyclical sectors …
"Our economists now forecast a 1-in-3 chance of an economic recession in 2020, which is usually accompanied (or preceded) by an EPS recession. Historically, the median peak-to-trough EPS decline during EPS recessions was 21%, which points to a trough S&P EPS of $129.78, if we start to see earnings decline from here. The market is currently trading at 22x this implied trough EPS, the most expensive valuation since the Tech Bubble. We remain cautious given rising macro risks, while light positioning in the market and lower interest rates keep us neutral.”
“@SBarlow_ROB ML: "The market is currently trading at 22x this implied trough EPS, the most expensive valuation since the Tech Bubble" – (research excerpt) Twitter
“ Two indicators to help investors decide if they should batten down hatches” – Barlow, Inside the Market
“To buy the dip in stocks or not to buy, that is the question” – Bloomberg
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Citi strategist Robert Buckland is far more optimistic than Ms. Subramanian, recommending investors buy the dip,
“Global equities can fall another 10% if markets follow the template of the 2015-16 correction, led by cyclical stocks. However, our Bear Market Checklist is telling us to buy into this dip. PMIs have fallen to levels last seen in 2015-16. This is feeding into EPS. The 2019 global EPS growth forecast is already down to 2.5%, well below the 7% expected at the start of the year. Global EPS contracted by 15% in 2015-16, with commodity stocks hit hard… our Bear Market Checklist (BMC) is telling us to buy into this dip, just as it did in 2016. It currently shows just 3.5/18 red flags, similar to the 4/18 back then. We give an amber flag a half point and a red flag a whole point”
“@SBarlow_ROB Citi's bear market checklist says 'buy the dip' – (research excerpt) Twitter
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The same financial expert that discovered the Bernie Madoff fraud has alleged a massive accounting scam at General Electric,
“GE, which dismissed the claims as meritless, saw its shares fall as much as 15 per cent after publication of a 170-page report by Harry Markopolos. He alleged that the industrial conglomerate’s accounts concealed a $38bn fraud in its insurance and oilfield services businesses. “I think that they’re a bankruptcy waiting to happen,” Mr Markopolos told CNBC”
“GE shares tumble after Madoff investigator alleges $38bn fraud” – Financial Times (paywall)
“GE CEO Larry Culp bought nearly $2 million worth of the company’s stock after fraud accusation” – CNBC
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Tweet of the Day:
Diversion: I enjoyed this interview with Francis Ford Coppola, “Detroit-born Francis Ford Coppola’s masterpiece has been tweaked to be even more vivid” – Detroit News
Scott Barlow