Equities
The S&P retail drug store index has been undermined by concerns about the opaque pricing structure of its pharmacy benefits management arms, which has pushed relative valuations to extremely attractive levels. While it is difficult to forecast whether any major concessions will be made to appease health insurers, this focus is masking an increasingly upbeat picture for the rest of the core business. Consumers are allocating a record share of their spending to pharmacy-related items, continuing a trend in place for more than two decades. It is rare for relative performance to deviate from relative spending trends for long, as the latter provides a clear indication of the industry's ability to deliver better-than-market profitability. Importantly, drug retailers have retrenched in recent years, paving the way for solid same-store sales growth. Shorter-term performance indicators are even more upbeat, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5DRUG - CVS, WBA.
The euro area's NPL problem is unlikely to be solved quickly, constraining bank profitability and the capacity to lend. There are three important repercussions for investors.
This week we are offering our "practical guide" for investors' looking for exposure to Chinese assets, identifying various ETFs listed outside of China.
A bearish outlook for refiners is becoming a more mainstream thesis, but there likely is one more meaningful relative performance downleg before it will be time to book profits. Refined product consumption has been solid for much of the past year. As a result, refiners have operated at full tilt in order to produce enough gasoline to meet demand. However, overproduction has occurred, compounded by accelerating refinery production outside the U.S. Increased import competition is a serious threat. Saudi Arabia, China and India have all ramped up refined product output this year on the back of cheaper OPEC oil supplies; consequently, exports are flooding the global market, depressing relative demand for U.S. oil product exports, which are falling steadily. Consequently, U.S. refiners will need to both cut refinery production and selling prices in order to rebalance the market. That is a toxic combination for any low margin, high volume cyclical industry. Against a structural backdrop of rising global refining capacity, rich valuations need to be reset. Stay underweight The ticker symbols for the stocks in this index are: BLBG: S5OILR-MPC, PSX, TSO, VLO.
The strong July employment report may tempt investors to lean into bank stock relative performance weakness, under the assumption that signs of solid domestic growth will finally alter the interest rate structure in a positive fashion. However, before acting too quickly, it is important to keep in mind that the bulk of the deflation impacting the U.S. is being transmitted through a strong U.S. dollar, which acts as an overall corporate profit drag. Thus, to the extent that the currency continues to appreciate (shown inverted and advanced, top panel), it will be difficult for inflation expectations to recover from depressed levels and/or the long end of the yield curve to rise. Bank stocks and inflation expectations have been tightly linked since the financial crisis. In addition, the employment report revealed that banks are slowly adding headcount, even though overall financial hours worked are plunging. The implication is dwindling productivity gains, which will ensure that the group remains a value trap. Stay underweight. The ticker symbols for the stocks in this index are: BLBG: S5BANKX-JPM, WFC, BAC, C, USB, PNC, BBT, STI, MTB, FITB, KEY, CMA, HBAN, ZION, RF, PBCT.
With 88 days to go until the U.S. presidential election our client meetings are starting to steer towards "all Trump, all the time." In this report we present evidence that Trump's electability is correlated with the chief global safe haven, the 10-year Treasury. Markets may be overreacting, however. Trump has a chance, but Clinton is the clear favorite. We also bust five myths about China's political system, in a continuation of our coverage of rising geopolitical risks in East Asia.
A technical breakout in communications equipment relative performance is being fundamentally-driven. New orders for communications equipment have perked up, led by a re-acceleration in telecom services capital spending (second panel). The telecom service sector has enjoyed the strongest revenue growth of all sectors this quarter, and free cash flow is growing at a mid-teens rate (middle panel). That is driving a pickup in investment, a positive omen for equipment demand. In addition, there is pent-up demand for communications gear following more than a decade of underinvestment. Even telecom equipment exports have recovered, signaling an undercurrent of global demand in an otherwise lackluster world economy. This is powering double-digit sales gains. That is translating into solid output growth and rising productivity. The implication is that dirt cheap valuations are primed for a re-rating, and we moved this group onto our high-conviction overweight list in yesterday's Weekly Report. The ticker symbols for the stocks in this index are: BLBG: S5COMM - CSCO, MSI, HRS, JNPR, FFIV.
Despite our reservations about the broad tech sector, which has bounced under the leadership of only a handful of stocks, we are encouraged by the outlook for the communications equipment sub-component. This extremely undervalued group is enjoying a broad-based technical breakout, based on fundamental improvements. Our industry relative advance/decline line has touched new highs at the same time that the share price ratio has broken decisively above its multiyear downward sloping trend-line on an upsurge in momentum. That alone is indicative of a major trend change, a view that is driven by positive macro forces, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5COMM - CSCO, MSI, HRS, JNPR, FFIV.
Last week's blowout jobs report had the beautiful combination of strong growth and flat/rising underemployment rates. This supports our expectation of a Fed hike in December rather than one in September.Accelerating growth when the economy is approaching full employment suggests that the equity bull market is not over, though we are entering a more volatile phase.
Media stocks have churned in the past few years, but we view this as setting the stage for outperformance and not a precursor to a decline. While the manufacturing side of the U.S. economy continues to struggle in a world of excess capacity and ongoing deflationary pressures from abroad, the ISM non-manufacturing survey suggests that services activity remains in good shape. Media companies tend to thrive when the service sector is outperforming goods producers, because it heralds top-line outperformance. Our proxy for media productivity, sales/employment, is enjoying a nascent reacceleration, which should support relative forward earnings momentum. Importantly, the relative performance consolidation phase has allowed earnings to catch up with the share price ratio, creating enough value to generate another leg up as earnings get re-rated. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5MEDA-CMCSA, DIS, TWX, FOXA, CBS, OMC, VIAB, FOX, IPG, SNI, DISCK, NWSA, TGNA, DISCA, NWS.