Week of November 15th, 2015

“Investors are really just looking for the bigger topic out there of will the

Fed raise rates and when.” Jonathan Corpina

Senior Managing Partner Meridian Equity Partners

MARKET OVERVIEW After a 4-week long growth in the stock market, both the S&P 500 and the Dow Jones Industrial Average declined more than 3% for the week, down to 2,023.24 and 17245.97 respectively. Many believe that such a decline is a result of an increasing speculation on a rate hike in December. The price of U.S. oil tumbled near $40 a barrel due to speculation on increasing supplies and slackening demand. The S&P GSCI index declined 4% and reached a low since August. The CRB Index is within a fraction of a point of its August low.

Forward earnings are also not promising. The S&P puts 2015 earnings at $106, and many believe this is an overestimation due to the sharp decline in the retail sector. The current S&P 500 puts stocks at 19.15 times this year’s earnings and 21.44 times GAAP reported earnings. Earnings are 6% to 7% below 2014. Last year’s forecast for the earning was at $131.00, a 23% overestimation.

MACROECONOMIC OVERVIEW The PPI index came in well below expectations due to a large drop in business service prices. Excluding food and energy, the drop of 0.3% was below the previous market expectation, putting the year-over year rate of core producer price inflation at 0.1%, much lower than the target that the Federal Reserve is trying to hit. The overall

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US Treasury Yield Curve

Year Month

Week Present

1m 3m 6m 1y 2y 3y 5y 10y 30y

Nov-06 0.04 0.08 0.32 0.47 0.9 1.23 1.73 2.34 3.09

Nov-13 0.03 0.14 0.31 0.5 0.86 1.2 1.67 2.28 3.06

index is down 1.6% from a year ago. We are at the highest deflation level since the total collapse of commodity prices at the depth of the financial crisis. On the other hand, the unemployment rate is at 5.0%, lower than the natural rate of unemployment designated by the Federal Reserve. The typical expectation is that such condition would be inflationary, but that has not been the case so far. Energy continuing to fall and lower economic activity in China could be the potential causes of this situation.

FIXED INCOME OVERVIEW The U.S. Government bonds strengthened after the demand increased from last week, pushing the 10-year Treasury yield from 2.322% down to 2.319%. Lower U.S. stocks and crude oil prices helped a rebound in bond prices by increasing the demand for fixed-income assets. The 30-year bonds were sold at a yield of 3.07%, the highest since 4 months ago, yet it was below expectation, showing a sign of stronger-than-anticipated demand. James DeMasi, chief fixed-income strategist at Stifel Nicolaus & Co. in Baltimore, said he doesn’t expect long-term bond yields to rise significantly from here. The market seems to expect that the long-term interest rate will be contained despite a short-term rate hike due to subdued inflation expectations. ECB President Mario Draghi said he will consider lowering rates further soon, although the EBDs are already operating negative deposit rate policies, at -0.20%, Swiss policy rate is minus 0.75%; Sweden’s policy rate is -0.35%. The Bank of England has suggested that U.K. interest rates may not increase in the next 1-2 years. The Bank of Japan promised additional easing if necessary “without hesitation.” The People’s Bank of China cut benchmark interest rates to a record low of 1.50%. Rates in other emerging countries are also expected to decline.

TRANSACTION HIGHLIGHTS Fossil Group to Buy Startup Misfit for $260 Million Watchmaker Fossil Group has agreed to acquire Misfit, a startup that specializes in making wearable fitness trackers, for $260 million. “We believe it isn’t about function. It is about function and design and branding. We see tremendous growth opportunity and that a lot of our jewelry and watches could be connected devices,” said Greg McKelvey, chief strategy officer and digital officer at Fossil Group. Likewise, Sonny Vy, chief executive and co-founder of Misfit, agrees, stating the following: “If you don’t have a brand it is hard to be legit in this space.” Fossil plans to incorporate Misfit’s technology into products that look like traditional watches starting as soon as next year. Furthermore, Misfit will also continue producing its own products. The acquisition could breathe new life into Fossil’s products and generate more revenue for the publicly traded company. For Misfit, it will be able to take advantage of Fossil’s brands as well as its massive distribution and manufacturing capability.

Misfit, which was launched in 2011, raised about $63 million in three rounds of venture capital funding. It launched its first product in 2013 with a line of round-face fitness and sleep monitors. Misfit has also secured partnerships with Speedo and Swarovski. Fossil, launched in 1984, sells 50 million watches and accessories every year in 150 countries. The company has over 400 retail locations, 4,000 wholesale locations, and 13,000 employees worldwide. The acquisition was funded with a combination of cash and bank debt. Molson Coors to Pay Off SABMiller $12 Billion for 58% Stake of its Joint Venture Canadian-American brewer Molson Coors is paying SABMiller $12 billion for a 58% stake in its US joint venture with SABMiller. This payoff allows Molson Coors to avoid a premium by helping to ease antitrust pressure on the recent $106 billion purchase of SABMiller by Anheuser-Busch InBev. In order to take full control, Molson Coors is paying a multiple of 12x 2014 EBITDA, which is in line with the average multiple seen by other large brewers. Molson Coors is effectively taking advantage of the forced seller position that SABMiller is in due to its recent acquisition by Anheuser-Busch InBev. The SABMiller deal with Anheuser-Busch InBev could certainly be blocked by regulators if SABMiller held its stake in the Molson Coors-SABMiller US joint venture. The joint venture was created 7 years ago to combine their businesses in the United States. Product lines include Miller Lite, Blue Moon, and Coors Light. Molson Coors is a North American brewing company formed in 2005 from the merger of Molson of Canada and Coors of the United States. It is the world’s 7th largest brewer by volume and its market cap is around $17 billion. SABMiller is a multinational brewing and beverage company based in London. It is the world’s 2nd largest brewer by revenue and its market cap is around $100 billion. Shares of Molson Coors gained more than 1% after the WSJ reported. The acquisition will be financed with cash, debt, and stock.

DATA & INDICATORS

UPCOMING RELEASES

Date Time (ET) Statistic For Actual Market Expects Prior

10-Nov 8:30 AM Export Prices ex-ag. Oct -0.30% NA -0.50%

10-Nov 8:30 AM Import Prices ex-oil Oct -0.30% NA -0.20%

10-Nov 10:00 AM Wholesale Inventories Sep 0.50% 0.10% 0.30%

11-Nov 7:00 AM MBA Mortgage Index 7-Nov -1.30% NA -0.80%

12-Nov 7:00 AM MBA Mortgage Index 7-Nov - NA -0.80%

12-Nov 8:30 AM Initial Claims 7-Nov 276K 269K 276K

12-Nov 8:30 AM Continuing Claims 31-Oct 2174K 2155K 2169K

12-Nov 10:00 AM JOLTS - Job Openings Sep 5.53M NA 5.38M

12-Nov 11:00 AM Crude Inventories 7-Nov 4.22M NA 2.85M

12-Nov 2:00 PM Treasury Budget Oct -$136.5B -$130.0B -$121.7B

13-Nov 8:30 AM PPI Oct -0.40% 0.10% -0.50%

13-Nov 8:30 AM Core PPI Oct -0.30% 0.10% -0.30%

13-Nov 8:30 AM Retail Sales Oct 0.10% 0.30% 0.00%

13-Nov 8:30 AM Retail Sales ex-auto Oct 0.20% 0.40% -0.40%

13-Nov 10:00 AM Mich Sentiment Nov 93.1 92 90

13-Nov 10:00 AM Business Inventories Sep 0.30% 0.00% 0.10%

13-Nov 10:30 AM Natural Gas Inventories 7-Nov 49 bcf NA 52 bcf

Date Time (ET) Statistic For Market Expects Prior

16-Nov 8:30 AM Empire Manufacturing Nov -6 -11.4

17-Nov 8:30 AM CPI Oct 0.20% -0.20%

17-Nov 8:30 AM Core CPI Oct 0.20% 0.20%

17-Nov 9:15 AM Industrial Production Oct 0.10% -0.20%

17-Nov 9:15 AM Capacity Utilization Oct 77.50% 77.50%

17-Nov 10:00 AM NAHB Housing Market Index Nov 64.5 64

17-Nov 4:00 PM Net Long-Term TIC Flows Sep NA $20.4B

18-Nov 7:00 AM MBA Mortgage Index 14-Nov NA -1.30%

18-Nov 8:30 AM Housing Starts Oct 1173K 1206K

18-Nov 8:30 AM Building Permits Oct 1137K 1103K

18-Nov 10:30 AM Crude Inventories 14-Nov NA 4.22M

18-Nov 2:00 PM FOMC Minutes 28-Oct - -

19-Nov 8:30 AM Initial Claims 14-Nov 272K 276K

19-Nov 8:30 AM Continuing Claims 7-Nov 2164K 2174K

19-Nov 8:30 AM Philadelphia Fed Nov -1 -4.5

19-Nov 10:00 AM Philadelphia Fed Nov NA -4.5

19-Nov 10:00 AM Leading Indicators Oct 0.60% -0.20%

19-Nov 10:30 AM Natural Gas Inventories 14-Nov NA 49 bcf

OPINIONS “Investors are unsure of the implications of a Fed hike, so you’re going to see more volatility. One day, investors may like income-generating stocks like [real-estate investment trusts] or utilities, and one day they may not, depending how the probability of a rate increase fluctuates.”

Wayne Lin Portfolio Manager

QS Investors “It would take extraordinary market turbulence to knock [Fed officials] off course.”

Lou Crandall Chief Economist Wrightson ICAP

“Given the Fed’s PR campaign surrounding a first hike in 2015, failure to follow through could make it the central bank who cried wolf.”

Sean Snaith Director

Institute for Economic Competitiveness at the University of Central Florida “It’s a pretty horrible day. There are conflicting calls on when the Fed will move, which has made markets [in Asia] jittery.”

Evan Lucas Market Strategist

Brokerage IG