The Daily Prophet: Stocks Reach New Highs, So Time to Bash Tech

(Bloomberg View) -- The Standard & Poor's 500 Index reached a new high today, which is another way of saying that all anyone in the markets wanted to talk about was how overvalued technology stocks are. Shares in a handful of tech companies -- Facebook, Amazon.com, Netflix, Google's parent Alphabet and Apple, account for more than a quarter of the benchmark's advance this year. 

The tech-powered rally has catapulted the sector's price-to-earnings ratio to 24.4, or 41 percent above the average over the past 10 years. Even so, there's little evidence of irrational exuberance for tech stocks, according to Bloomberg Intelligence equity strategists Gina Martin Adams and Peter Shung. The sector's proportion of the S&P 500's price is in line with that of its share of the index's earnings per share. That's a switch from the late 1990s, when tech's share of the price was twice the level of its EPS. With valuations slightly below those of the market at-large, a renewed bubble in tech stocks appears unlikely.

Tech leadership is as much about investors rotating out of value sectors tied to the inflation theme as it is linked to enthusiasm for the sector's stocks themselves, the BI strategists say. Funds tracked by Bank of America own the highest percentage of technology stocks on record compared to their benchmark. Active funds are now 71 percent overweight in the so-called FANG group of companies after making the biggest move from value to growth since 2008, Bank of America found.

WOE CANADA
Will the last investor to leave Canada please turn off the lights? Despite having the fastest-growing economy in the Group of Seven, the number of investors turning bearish on Canada seems to increase almost daily. In a year when stocks are rising everywhere, Canada's benchmark index is the second-worst-performer in the developed world after Israel, according to Bloomberg News' Kristine Owram and Theophilos Argitis. It's a similar story in currency and bond markets. Besides the potential for Canada to come out on the short end of the stick in trade negotiations with the Trump administration, investors are concerned about the outlook for oil prices and a housing market that some say is on the verge of a correction -- or worse. “I'm starting to believe that there could be some real problems with Canada,” the activist investor Carson Block, the founder of Muddy Waters LLC, told Bloomberg News' Danielle Bochove. Canada's real estate market has “been pushed by foreign money” to the kind of “buying frenzy” the U.S. experienced a decade ago, Block said.

IT WAS FUN WHILE IT LASTED
Emerging-market assets have won over investors amid improving prospects for growth and their resilience in the face of President Donald Trump's protectionist rhetoric and geopolitical risk. The MSCI Emerging Markets Index rose 2.8 percent in May, taking its rally to 17 percent for 2017, compared with the 9.2 percent advance the MSCI World Index. Developing-nation equities have added almost $4.5 trillion in market value since the rally started in January 2016, according to Bloomberg News' Eric  Lam and Lilian Karunungan. Some bulls say it's time to ease up. Credit Suisse forecasts developing-nation equities will underperform in the short-term, while Deutsche Bank Wealth Management said it's not as positive on emerging-market bonds as a year ago. Goldman Sachs said strong returns have partially eroded a previously compelling valuation signal, and BNP Paribas said the best gains in markets such as India and Indonesia may already be behind us.

RUSSIA SAYS HEDGE FUNDS HAVE IT ALL WRONG
After soaring about 31 percent from the end of the 2015 through the end of March, Russia's ruble has since stalled. Much of the malaise has been due to concern that the nation's economy would have a hard time weathering a drop in oil to below $50 a barrel.  Well, Russia Economy Minister Maxim Oreshkin just issued those doubters a challenge. “We're actually ready to live forever with the oil price at $40 or below,” Oreshkin said in a Bloomberg Television interview at the St. Petersburg International Economic Forum. “All macroeconomic policy is now based on the assumption of the oil price of $40.” In fact, Oreshkin says he's baffled by the bullish turn on oil taken by hedge funds. According to Bloomberg News' Olga Tanas, U.S. Commodity Futures Trading Commission data show bets on rising West Texas Intermediate prices jumped the most this year just as Saudi Arabia and Russia were mustering support for the deal they struck in Vienna last month. “The oil price within one or two years might be much lower, and those funds which are on the other side of the deals on hedging for one, for two years -- they are taking huge risks,” Oreshkin said.

NEW MONTH, SAME SAD STORY
After a miserable May, iron ore opened the new month on a down note. Futures in Asia fell to the lowest level in seven months as rising concern about increased supplies steamrolled positive signs, including data from China that may signal record steel output in the top producer, according to Bloomberg News' Jasmine Ng. In Singapore, the SGX AsiaClear contract sank as much as 2.2 percent to $54.30 a metric ton on Thursday, the lowest since October, after an 18 percent drop in May.  The commodity has been on a wild ride this year -- coming close to challenging the $100 level in February before collapsing over the next three months -- as investors sought to gauge the impact of greater supply and the outlook for steel demand in China. Iron ore's latest leg down has happened even after a manufacturing gauge for the world's largest steel industry rose to the highest in a year, suggesting another month of bumper production.

TEA LEAVES
Friday brings the U.S. Labor Department's monthly jobs report, which is the most closely-watched of all the government's economic indicators because of its potential to move markets and influence monetary policy. It's also very hard to predict. The consensus is for the government to say that 180,000 jobs were created last month, but the bond strategists at BMO Capital Markets point out that the May data has a history of falling far below forecasts, including the one from a year ago, which misses the consensus by 122,000 and helped derail the Federal Reserve's plan to raise interest rates that June. In recent years, payrolls fell below forecasts by 105,000 in 2010, 111,000 in 2011 and 81,000 in 2012, they write in a research note. In 2013, 2014 and 2015, the number of jobs added beat the consensus estimate by 12,000, 2,000 and 54,000. Oh, and Fed policy makers are widely seen raising rates when they meet the week of June 12 -- maybe.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is editor of Bloomberg Prophets.

To contact the author of this story: Robert Burgess at bburgess@bloomberg.net.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.

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