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Greetings from CGWM Central

Gunther Kruger - May 12, 2020
After a few weeks of letting the markets and economic developments play out, we wanted to send you an update on where things stand and where we see them going.

Greetings from CGWM Central.


The majority of our team has decided to come back to the office, given the sparsity of cases in Alberta. We continue to maintain our social distancing and the downtown core remains largely depopulated. It has been some weeks since we last gave you our update and we thought we would take this opportunity to do so now.


Consensus earnings forecasts for 2020, in light of the Covid-19 shutdown, have lowered to $127 EPS from a previous $175 at the beginning of the year (a 27% decrease). Based on that perhaps optimistic forecast, the market is attributing a 23x current earnings multiple to those forecast earnings. The 20-year norm is 16x. In addition, the 2021 earnings forecasts call for EPS of $166 per share, although our own chief strategist Tony Dwyer finds those overly optimistic and is calling for 2021 earnings of $150.


Based on these numbers the market is currently attributing a valuation multiple of between 18x to 20x next years’ earnings. The market is clearly pricing in a V shaped recovery, but we remain acutely aware that we are in unchartered territory when it comes to restarting a global economy. So far in the reporting of Q1 earnings, 40% of S&P 500 companies have pulled their guidance. To quote one of our most read economists, David Rosenberg, “They have nothing but fog in front of them.” You may think that the market might want to dial down expectations in the face of the great unknown, but this is not happening to date.


In addition to what we would consider a market that has “gotten ahead of itself”, the market lacks breadth (a wide array of companies across a wide spectrum of sectors). The 10 largest stocks now represent 44% of the NASDAQ market cap at a 47x P/E multiple on 2020 earnings. Three quarters of this index remains in negative terrain. Microsoft, Apple, Amazon, Alphabet and Facebook have collectively risen 10% for the year while the rest of the market is down 13%. These five mega caps now account for 20% of the overall market cap (source: David Rosenberg). Here in Canada, Shopify has overtaken the Royal Bank of Canada as the company with the country’s largest market capitalization. The last 2 companies to do so were Nortel and Valeant Pharmaceutical, not a good omen for Shopify.


Market volatility, in both directions, continues to be prevalent, to a degree not seen since the early 1930’s. While we hate to make analogies to the 1930’s we should point out that from November 1929 to April 1930 the Dow rebounded 48%, recouping most of the crash loss. The bear market didn’t actually end until 2 years later after peeling off 89% of its value (source: David Rosenberg).


The US Federal Reserve announced a massive $2.3T stimulus package on April 9 and this has gone a long way to backstop corporate and municipal credit markets and to provide for much needed liquidity and stability to a market under stress. Still, since then, credit areas that would point to a sharp economic rebound have shown little or no improvement:

  • the 10-year US Treasury Yield is lower
  • the 2-10-year US Treasury yield curve is flat
  • the Barclay’s High Yield Debt yield has seen only small improvement


So, what does this all mean?


We are optimists by nature, but we are realists by vocation and training. We’d love to be able to pronounce that the shutdown is over and that we’re entering an era of renewed prosperity for all. In fact, we sincerely hope this is the case as there are many signals that global lockdowns are ending, and people are slowly but steadily going back to work. Shanghai Disneyland has reopened. Restaurants and shops have re-opened in Germany. In hard hit Spain, half of the population will enter Phase 1 of their lockdown exit. Provinces across Canada have announced their respective plans for economic restarts’, and this has been met with relief (for the most part). The US has, as has become usual, divided in a divisive election year.


But stimulus packages and government CERB packages have limited shelf lives and it will remain to be seen how quickly 33 million unemployed US and 2+ million Canadian workers are re-engaged, how quickly supply chains can be re-stablished, how quickly surplus oceans of excess oil and gas get depleted, and how quickly cash strapped and still Covid-wary customers come back. Supply won’t likely be the issue, it will be demand.


We are happy that markets have rebounded some 31% from their March 23 panic lows (25% of which happened in the first 2 weeks thereafter), such as the rebound is. There are many valid reasons for much of it. As legendary investor Warren Buffet puts it, he “would never want to bet against America.” We notice that he’s also currently sitting on a whole lot of cash too. The ongoing recovery of the Global Economy (which today is in dire straits) is still an unfolding story and while we have every confidence that it will, in the end, have a happy ending, it may be a longer and more circuitous route to fiscal health than markets are considering today. No one, least of all yours truly, really knows for sure.


As these factors will have an impact on your respective portfolios, and we continue to retain a cautious but guardedly optimistic stance. As ever please feel free to call us should you have any questions or if we can be of help throughout these extraordinary times.


The comments and opinions expressed in this newsletter are solely the work of KrugerLaine Group not an official publication of Canaccord Genuity Corp. and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the KrugerLaine Group does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.