Last week, the biggest news across global markets was oil’s continued slide, with Brent now down roughly 20% from its April high. While crude’s descent is concerning, we believe the drop has been driven by supply concerns. Importantly, industrial commodity prices have maintained post-election gains, while risk metrics have remained subdued.
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Brookfield Asset Management (BAM) completed the spinoff of Trisura Group (TSU.CN) on June 22, 2017. Trisura is an international specialty insurance provider operating through the following four business lines: (i) surety premiums, (ii) risk solutions, (iii) corporate insurance, (iv) reinsurance. A link to the latest investor presentation can be found here.
The biggest pushback that we’ve received in recent meetings is that China’s deleveraging efforts are going to cause a global slowdown. In our view, the key question is whether or not China’s economy is going to slow faster than what’s currently baked into consensus and risk asset prices. We briefly discuss eight reasons why China will decelerate in-line with (if not surpass) current consensus expectations, and that policymakers will most likely avoid a ‘hard landing’.
Transitioning Back to the ‘Value Trade’. As we discussed in last Monday’s (6/5/17) note, Get Ready for Another Rotation Whipsaw, fading optimism for tax cuts and regulatory reforms sparked a massive rotation beneath the market’s surface. More specifically, following the U.S. election, the ‘Value Trade’ was in full effect, with investors positioning for a pickup in domestic growth, higher oil, and rising rates. However, the economy’s failure to reaccelerate immediately created a sharp rotation into the ‘Growth Trade’, with a focus on secular growers and areas poised to benefit from an improving global outlook. Importantly, we see three catalysts driving investors back into the ‘Value Trade’ in the months ahead.
While no two accounting/earnings related stock ‘blow-ups’ are perfectly identical, history rhymes and serves as guide in avoiding future blow-ups. Indeed, flexibility throughout the grey shades of accounting allows for aggressive managements to achieve desired financial results. This note is one in our series that highlights various companies experiencing a financial restatement or accounting/earnings “blow-up” in recent years. To that end, we’ll explain the timeline of events, key financial statement items impacted, how investors reacted, and whether a proper financial statement review and analysis would have signaled elevated accounting/earnings risk exposure ahead of time. Previously, we reviewed the accounting issues and restatements that occurred at Hertz Global, Logitech, Valeant, Diamond Foods, ProQuest, comScore and VeriFone.
The most recent companies with a CEO change include: NCI Building Systems (NCS), Haliburton (HAL), Perrigo (PRGO), LKQ (LKQ), Herbalife (HLF), Patterson (PDCO), Callon Petroleum (CPE), BancFirst Corporation (BANF), Lancaster Colony (LANC), TiVo (TIVO), UniFirst (UNF), SpartanNash (SPTN), FLIR Systems (FLIR), Ford Motor (F), Cree (CREE), Haliburton (HAL), Ralph Lauren (RL).
We track the share price performance of thematic stock baskets relative to a sector neutral benchmark. Year-to-date, the top performing themes (in order) are companies with high international revenues, our top stock idea model (SIM), companies with high EPS growth, companies with high sales growth, and low capex companies. Year-to-date, the worst performing themes have been stocks with low P/E’s, stocks with high short interest, banks with high incremental return on tangible assets, value stocks, and net-net’s. Click here for more information.
Scaling the ‘Wall of Worry’
• Washington Dysfunction, China’s growth deceleration, Fed tightening, high valuations, slowing U.S. auto sales,
and rising geopolitical risks are clearly all concerns that could make investors bearish.
• However, we expect investors to keep climbing the proverbial ‘wall of worry’ in the months ahead.
• Despite these concerns, we remain bullish in an environment where the overall global growth picture is
improving and S&P 500 companies are demonstrating the best earnings and revisions since the depths of
the financial crisis.
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