Developed Countries

One way to benefit from the global growth soft-patch is to go long global gold miners/short S&P oil & gas E&P stocks on a tactical three-to-six month basis. Since our Monday inception three days ago, this pair trade is already up 9%. The relative moves in the underlying commodities that serve as pricing power proxies are the key drivers of this share price ratio (top panel). Given the massive currency debasement potential that has gripped Central Banks the world over, such a flush liquidity backdrop will boost the allure of the shiny metal more so than crude oil. Meanwhile, global manufacturing PMIs are foreshadowing recession and our diffusion index has plummeted to the lowest level since 2011 (diffusion shown inverted, middle panel). In the U.S. specifically there is a growth-to-liquidity handoff and the ISM manufacturing survey’s new order versus prices paid subcomponents confirms that global gold miners have the upper hand compared with E&P equities (bottom panel). Bottom Line: We initiated a tactical long global gold miners/short S&P oil & gas E&P pair trade on a three-to-six month time horizon with a stop at the -10% mark. The ticker symbols for the stocks in these indexes are: GDX:US and BLBG – S5OILP – COP, EOG, APC, PXD, CXO, FANG, HES, DVN, MRO, NBL, COG, APA, XEC, respectively. Please refer to this Monday’s Weekly Report for additional details.    

Following up from our earnings preview from the July 8thWeekly Report, the latest ZEW Indicator of Economic Sentiment made for grim reading. BCA’s global ex-U.S. ZEW took a turn for the worse and is challenging seven year lows. Given that roughly 40% of SPX revenues are internationally sourced, deteriorating global ex-U.S. sentiment will dampen sales and profit prospects. Using national accounts data, the chart shows that corporate profits sourced overseas are on the verge of contraction. While part of this reflects the income translation drag from the appreciating greenback, persistently scarce final demand abroad also weighs on earnings. Bottom Line: Stay cautious on the prospects of the broad equity market on a cyclical three-to-twelve month time horizon.

Overweight The tide has shifted and on Monday we upgraded the S&P hypermarkets index to an above benchmark allocation. While valuations are stretched, trading at a 50% premium to the overall market on a 12-month forward P/E basis (not shown), our thesis is that these Big Box retailers will grow into their pricey valuations in the coming months. The chart shows three macro variables that signal brighter times ahead for the relative share price ratio. The drubbing in the 10-year U.S. treasury yield reflects a souring macro backdrop, melting inflation and a steep fall in U.S. economic data surprises. The ISM manufacturing index that continues to decelerate and is now closing in on the boom/bust line corroborates the bond market’s grim message. Tack on the Fed’s expected four cuts in the coming 12 months, and factors are falling into place for a durable rally in relative share prices. Bottom Line: Boost the S&P hypermarkets index to overweight. Please refer to Monday’s Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG – S5HYPC – WMT, COST. ​​​​​​​

  Since the Christmas Eve lows essentially all of the 26% return in equities is explained by valuation expansion. The forward P/E has recovered from 13.5 to nearly 17.2 (bottom panel), but there is limited scope for further expansion as four interest rate cuts in the coming 12 months are already priced in lofty valuations. Now profits will have to do the heavy lifting. Meanwhile, more than half of the S&P 500 GICS1 sectors are forecast to have contracted profits last quarter, and three sectors could not lift revenue versus year ago comps, according to I/B/E/S data. In our most recent Weekly Report we also highlighted that BCA’s global manufacturing PMI diffusion index has cratered to below 40%, the NY Fed’s recession probability model continues to tick higher, and that non-financial ex-tech corporate net debt-to-EBITDA has hit all-time highs. Bottom Line: Once the euphoria around the looming Fed easing cycle settles, there will be a massive clash between perception and reality that will likely propagate as a surge in volatility. We continue to remain cautious on the prospects of the broad equity market on a cyclical three-to-twelve month time horizon.