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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

The title of RBC bank and lifeco analyst Darko Mihelic’s recap of the federal budget’s potential effects on his sector is Tax collector is not grabbing as much as we feared, but we still have concerns.

Some details,

“First, the overall tax burden does not appear to be as high as originally outlined (about $400 million less per annum). Secondly, we feared that a new era of tax powers may be bestowed upon the regulator that could end up being awkward with unintended consequences but instead, a one-time “windfall tax” is being applied to 2021 earnings. Negatives: The tax rules ensnare the smaller companies in our coverage universe we previously thought would escape the higher tax rate (IAG, CWB and LB). Secondly, a windfall tax (and even the higher tax adjustment targeting banks and lifecos) may still set a dangerous precedent that long term investors will be hard-pressed not to notice. Banks’ earnings move with the economic cycle. By ignoring the earnings downside during a recession and punishing banks when earnings recover, an expectation may build for future cycles, ultimately harming valuations over the longer term.”

“RBC on the Canadian banks: ‘Tax collector is not grabbing as much as we feared, but we still have concerns” – (research excerpt) Twitter


Morgan Stanley global strategist Andrew Sheets has upgraded government bonds from underweight to neutral. This is a bigger deal than it looks is on the surface because it implies bond yields have stopped climbing,

“With the US 10yr reaching our US rate strategists’ year-end target of 2.60%, and our cycle indicator increasingly extended, we raise our UST weight from -3 [per cent] to 0 … We fund this from our OW in cash. While cash has helped investors avoid larger losses almost everywhere else, it now looks more balanced vs. bonds on our framework … This is a strategic shift; we aren’t trying to time the market. That said, we have hit our US rate strategists’ year-end targets, our economists expect US CPI to peak with next week’s reading, bond vs. equity … and the market has rapidly priced in more aggressive Fed expectations.”

The short summary of this upgrade is “Mr. Sheets believes rate risks are priced into bonds” .

“MS’s Sheets upgrades government bonds to equal weight” – (research excerpt) Twitter


BofA Securities chief investment strategist Michael Hartnett is Wall Street’s most bearish strategist, at least as far as I’ve seen.

His views are notable for their extremism but it’s important for investors to recognize that he is an outlier (so far). Here are some point form-ish excerpts from his weekly report on client asset flows,

“Our View: “inflation shock” worsening, “rates shock” just beginning, “recession shock” coming. ISM <50, EPS growth <0% by year-end; cash, volatility, commodities, crypto to outperform bonds, stocks…SPX <4000 in ‘22, … stagflation = long defensives & inflation assets, short cyclicals & deflation assets… inflation causes recessions, inflation out-of-control & price action v recessionary; homebuilders -30%, semis -23%, small cap -20%, retail -20% … we say big slowdowm coming but acknowledge consensus shifting v v quickly in this direction.”

“BofA’s Hartnett is so bearish” – (research excerpt) Twitter


Diversion: “America’s Epidemic of Bad Behaviour” – Derek Thompson, Plain English (podcast, open Spotify)

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