P A G E 1
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BTIG Equity & Derivatives StrategyThe Year of Living DangerouslyOctober 2019
Please Read: Important disclosures and analysts’ certifications appear in the appendix
Julian Emanuel(212) [email protected]
Michael Chu, CFA, CMT(212) [email protected]
P A G E 2
BTIG Equity & Derivatives Strategy: Key Points
S&P 500 Estimates• 2019 Year-end Price Target: 3,000• 2019 EPS Estimate: $168• 2020 EPS Estimate: $179
Broader, Deeper, More Volatile – Cyclical Bear, Secular Bull• (Almost) One Year Later:Yes, Virginia, that was a (Non-Recessionary) Bear Market• Peak Everything vs. Still (?) Strong: Further upside is a state of mind, stabilizing data, and political will• Minding the Megaphone: The message of higher highs + lower lows = Something’s Gotta Give?
RISK and REWARD in The Year of Living Dangerously• Options Market Memos: VIX Floor, S&P 500 Ceiling; Fear of the Future, Europe Sleepwalking?• Bricks in the “Wall of Worry”: Inflation, Rates/Fed/Yield Curve, Growth Here and Abroad• Fed Wars: How much can be done? MMT?• Politics: Gridlock (and Impeachment proceedings) widens the range of outcomes• Trade Wars: If it ain’t broke, hopefully it gets fixed anyway• In Search of Alpha: Leadership tends to narrow in late cycle• Growth & Value: Can a shift “accommodate” the Bull?• Bonds – The Biggest Bubble Ever?: Keynes vs. Stein• Other Markets/Assets/”Wars”: Will RoW play catchup?; on USD, Gold and Bitcoin
BTIG Sector Recommendations – Focus on Value and Valuation• Overweight: Energy, Financials, Health Care• Underweight: Consumer Discretionary, Consumer Staples, Utilities• Neutral: Communication Services, Industrials, Materials, Real Estate, Technology
P A G E 3
S&P 500 Estimates
P A G E 4
S&P 500 Year-End Estimates
Source: Factset, BTIG
2016 2017 2018 2019e 2020e
Price Level ($) 2,238.83 2,673.61 2,506.85 3,000.00 --
% Growth 9.54% 19.42% -6.24% 19.67% --
EPS ($) 119.32 133.61 161.57 168.00 179.00
% Growth 0.47% 11.98% 20.93% 3.98% 6.55%
Forward P/E (BTIGe) 17.1x 16.8x 16.5x 14.9x --
Trailing P/E 18.8x 20.0x 15.5x -- --
P A G E 5
Broader, Deeper, More Volatile – Cyclical Bear, Secular Bull
P A G E 6
Yes, Virginia, That Was a Bear Market
• The S&P 500 fell into a “technical bear market”, down 20.2% from the 9/21/18 peak to the 12/26/18 trough. Thedecline fell just short of that mark on a close-to-close basis, and went unreported by the financial media – similar tothe 2011 “Debt Default Bear” and 1998’s “LTCM Bear”.
• “Fall’s Fall” gave way to a seasonal surprise, uncharacteristic weakness in December. Tax loss selling, Passive selling,Hedge Fund liquidation, a government shutdown, a “tone deaf” Fed.
• While 4Q2018 VIX fell short of its February 2018 “Volmageddon” highs near 50, less-liquid Small Caps reflected ahigher level of fear as Russell 2000 volatility hit a 4 year high. Small Caps continue to be a conspicuousunderperformer in 2019YTD, perhaps fearful of the slow growth message of plunging long-term interest rates.
“Fall’s Fall” to Seasonal Surprise – S&P 500 “Technical Bear”
Source: Bloomberg, BTIG
Small Is Less Beautiful in 2019
Source: Bloomberg, BTIG
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
Jul '18 Oct '18 Jan '19
S&P 500
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
0.50
0.51
0.52
0.53
0.54
0.55
0.56
0.57
Jan '19 Mar '19 May '19 Jul '19 Sep '19
Russell 2000/S&P 500 US 10Yr Yld
P A G E 7
-80
-60
-40
-20
0
20
40
60
80
100
Oct '17 Jan '18 Apr '18 Jul '18 Oct '18 Jan '19 Apr '19 Jul '19
Citi Econ. Surprise - US
Surprising Strength to U.S. Econ – Or Calm Before the Storm?
Source: Bloomberg, BTIG
Peak Everything vs. Still (?) Strong (Part 1: GDP)
• The 4Q2018 Bear Market was rooted in fears of peak profits, peak margins, peak earnings, peak growth, peakemployment, peak confidence, peak China ... “Peak Everything”.
• Expectations are reset, shifting the perspective to “Still (?) Strong”.
• U.S. GDP is expected to grow at 2.3% (BTIGe 2.2%) in 2019, 1.7% (BTIGe 1.9%) in 2020, supported by rates historicallylow in the grander scheme, an accommodative Fed, and a strong labor market. While the Trade War issues weighs ongrowth, is there a pre-Election 2020 Deal in sight? Perhaps only politicians know for sure.
U.S. Interest Rates, in the Grander Scheme
Source: Bloomberg, BTIG
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1990 1994 1998 2002 2006 2010 2014 2018
US 10Yr Yield
P A G E 8
Peak Everything vs. Still (?) Strong (Part 2: Earnings)
• With the Trade Wars 18 months old, earnings estimates continue to drift lower, from $178.30 in August 2018 to$164.47 currently; BTIGe $168. YoY growth remains positive. 2020 consensus $181.58, looks too high (BTIGe $179) but2020 is not a concern until closer to year end in this Trade War year, 2019.
• Question remains: where is the risk to 2019 consensus? Upside pending trade deal(s) or further downside with anunresolved China situation?
• Perhaps only politicians know for sure.
Record EPS – Growth, Still
Source: Factset, BTIG
Earnings – Where to Now?
Source: Factset, BTIG
-3.0%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
24.0%
90
100
110
120
130
140
150
160
170
180
2011 2012 2013 2014 2015 2016 2017 2018 2019
YoY % (rhs) S&P 500 EPS (lhs)
160
165
170
175
180
185
190
195
200
Jul '18 Oct '18 Jan '19 Apr '19 Jul '19
S&P 500 2019 EPS Est. S&P 500 2020 EPS Est.
P A G E 9
Recession Red Flag, or Red Herring?
• Risk of recession remains elevated as trade tensions and anemic growth abroad dominate.
• While consumer confidence remains high in the present, the view of the future is historically downbeat, as was thecase in 1998.
• Questions remain: How accommodative is the Fed? Can Trade War damage be repaired near term, or not until 2020 orbeyond? And how does Presidential Impeachment proceedings affect the calculus?
• Perhaps only politicians know for sure.
Recession Prob. Above 20% – Red Flag or Red Herring?
Source: Bloomberg, BTIG
Goodbye Yellow Brick Road?
Source: Bloomberg, BTIG
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1960 1970 1980 1990 2000 2010 2020
Prob of Recession in 12 Mo
-150
-100
-50
0
50
100
150
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Conf. Board Expectations - Present Situation
P A G E 1 0
Trade War-Weary, Economic Canaries Still Sing – For Now
• Jobless Claims remain near generational lows.
• C&I Lending moderating but not materially. Credit markets still near tights with record September issuance.
• ISM bent but not broken – particularly Services, 85% of the U.S. Economy.
• Is the Services/Manufacturing divergence setting up to resemble 2016’s “Recession That Wasn’t”?
Initial Jobless Claims
Source: Bloomberg, BTIG
C&I Lending
Source: Bloomberg, BTIG
ISM Manufacturing & Services
Source: Bloomberg, BTIG
150K
200K
250K
300K
350K
400K
2013 2014 2015 2016 2017 2018 2019
Initial Jobless Claims
1.4T
1.6T
1.8T
2.0T
2.2T
2.4T
2.6T
2013 2014 2015 2016 2017 2018 2019
C&I Lending
464850525456586062
2013 2014 2015 2016 2017 2018 2019
ISM Manuf ISM Non-Manuf
P A G E 1 1
New “Canaries” Worth Watching?
• The IPO market has begun to underperform, replete with mispriced and scuttled deals.
• History (4Q2018, 1Q2016) says this does not necessarily need to be a concern, but memories of 2000 are renewed.
• On an even deeper level, memories of the 1980’s and 1990’s are resurfacing with the Fed’s Repo market/liquiditychallenges.
IPOs Not “Working” as of Late
Source: Bloomberg, BTIG
Repo – Frequent Spikes, Esp. at the Turn
Source: Bloomberg, BTIG
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
400
450
500
550
600
650
Jan '19 Apr '19 Jul '19 Oct '19
FTSE Ren US IPO (lhs) S&P 500 (rhs)
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
Oct '18 Jan '19 Apr '19 Jul '19 Oct '19
USD GC Overnight Repo Rate
P A G E 1 2
Ursa Majors and Ursa Minors
Ursa Majors and Ursa Minors
Source: Bloomberg, BTIG
Start End Bear Market High to Low New High Mo to Recession/Date Date Length (Mo) Perf. Date New High Non-Recession9/16/1929 11/13/1929 1.9 -44.6% 9/22/1954 300.2 Recession4/10/1930 6/1/1932 25.7 -83.0% 12/9/1952 272.0 Recession9/7/1932 2/27/1933 5.7 -40.6% 5/26/1933 8.6 Recession7/18/1933 10/19/1933 3.0 -29.4% 10/22/1935 27.1 Non-Recession2/6/1934 3/14/1935 13.3 -31.8% 9/10/1935 19.1 Non-Recession3/10/1937 3/31/1938 12.7 -54.5% 2/5/1946 106.8 Recession10/25/1939 6/10/1940 7.5 -31.9% 7/10/1944 56.5 Non-Recession11/12/1940 4/28/1942 17.5 -34.2% 3/29/1943 28.6 Non-Recession5/29/1946 10/9/1946 4.3 -26.6% 6/9/1950 48.3 Non-Recession6/15/1948 6/13/1949 11.9 -20.6% 1/9/1950 18.8 Recession7/15/1957 10/22/1957 3.2 -20.7% 9/16/1958 14.0 Recession12/12/1961 6/26/1962 6.5 -28.0% 9/3/1963 20.7 Non-Recession2/9/1966 10/7/1966 7.9 -22.2% 5/4/1967 14.8 Non-Recession11/29/1968 5/26/1970 17.9 -36.1% 3/6/1972 39.2 Recession1/11/1973 10/3/1974 20.7 -48.2% 7/17/1980 90.2 Recession11/28/1980 8/9/1982 20.4 -27.3% 11/3/1982 23.2 Recession8/25/1987 10/20/1987 1.8 -35.9% 7/26/1989 23.0 Non-Recession7/16/1990 10/11/1990 2.8 -20.4% 2/12/1991 6.9 Recession7/20/1998 10/8/1998 2.6 -22.4% 11/24/1998 4.1 Non-Recession3/24/2000 10/10/2002 30.5 -50.5% 7/13/2007 87.6 Recession10/11/2007 3/6/2009 16.8 -57.7% 4/10/2013 66.0 Recession5/2/2011 10/4/2011 5.1 -21.6% 2/27/2012 9.8 Non-Recession9/21/2018 12/26/2018 3.2 -20.2% 4/29/2019 7.3 Non-RecessionAverage 10.6 -35.1% 56.2Recession 14.2 -42.0% 86.1Non-Recession 7.2 -29.2% 26.9
• The economic “Canaries” sing, “No Recession”. Not yet. BTIG does not forecast a recession prior to Election 2020.
• Non-Recessionary Bear markets over the past century have lasted 7 months and averaged -29% downside.
• 4Q2018’s “technical bear” hit the lower end of past Ursa Minors’ duration and drawdown range. Do new highs meanthe worst is behind us? Perhaps only politicians know for sure with the 2020 Election in sight.
P A G E 1 3
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
2017 2018 2019
S&P 500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1990 1995 2000 2005 2010 2015
S&P 500 200WMA
Will the Thin Blue Line Hold in 2020?
Source: Bloomberg, BTIG
The Market’s Megaphone
Source: Bloomberg, BTIG
Minding the Megaphone
• The S&P 500 “V” rebounded from its Bull market support line from the 2009 lows, also along the psychologicallyimportant 200-Week Moving Average.
• Can the rally that began on Boxing Day 2018 extend into 4Q019 (with memories of last year’s Fall Fall still fresh) andinto 2020, a Presidential Election year?
• More volatility, both upside and downside, has resulted in a “broadening pattern” or “Megaphone”. While this canmark the end of a major trend, higher lows could keep the old Bull young.
P A G E 1 4
Inflation, Fed, Bonds – Something’s Gotta Give
Led Weight (Irrational?) Zeppelin
Source: Bloomberg, BTIG
Does the Bull Die Without Reflation?
Source: Bloomberg, BTIG
• The Fed, fixed on its 2% inflation target, lifted stocks and expectations together in 1H2019. The Trade War has dousedthese expectations – a threat to the equity rally.
• The Fed cut on 7/31 and again on 9/18 to little effect. Is it all about the Trade War?
• And the 10-Year Yield, suppressed by global growth fears and European rate weakness , is a battleground for whethergrowth will continue and Fed policy will be effective.
• Can Central Banks reflate? Are ultralow bond yields “The Biggest Bubble Ever”? Something’s Gotta Give.
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
1.3%
1.4%
1.5%
1.6%
1.7%
1.8%
1.9%
2.0%
2.1%
2.2%
Jan '18 Apr '18 Jul '18 Oct '18 Jan '19 Apr '19 Jul '19 Oct '19
US 5 Yr Breakeven (lhs) S&P 500 (rhs)
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
3.4%
Jan '18 Jul '18 Jan '19 Jul '19
US 10 Yr Yield (lhs) Germany 10 Yr Yield (rhs)
P A G E 1 5
S&P 500 Valuation, From Wall to Wall
Source: Bloomberg, BTIG
VIX and the Six (Year Cycle)
Source: Bloomberg, BTIG
High Stakes in The Year of Living Dangerously
• While markets have seen upside in 2019 with expectations reset and the Fed supportive, baggage carried from 2018 –Trade War, U.S. political tension, Brexit uncertainty, to name a few – will continue to pose risks.
• The Trade War is the most worrisome. Should the situation further deteriorate into an “Economic Cold War” multiplesmay revisit their lower levels seen prior to 1990, during the Cold War. Fix China, and Europe still needs solving.
• Talk of 70% top tax rates, anti-business sentiment rising, “Socialism” and Impeachment in 2019’s lexicon, multiplecompression threatens from within the U.S. And Modern Monetary Theory (MMT)? A recipe for a weaker U.S. Dollar,Higher Interest Rates and lower valuations. It is Never “Different This Time”.
• These risks should continue to underpin volatility, which ebbs and flows but shifted cyclically higher in February 2018.
0
10
20
30
40
50
60
70
80
90
1990 1995 2000 2005 2010 2015
VIX
5x
10x
15x
20x
25x
30x
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
S&P 500 Trailing 12M P/E Period Average
P A G E 1 6
RISK and REWARD in The Year of Living Dangerously
P A G E 1 7
Another “Year of Living Dangerously”
Source: Bloomberg, BTIG
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0 60 120 180 240 300 360 420 480
S&P 500 from 6/1/1990 S&P 500 from 6/1/1998S&P 500 from 8/1/2018
Options Market Memos (Part 1)
S&P 500 Average 1-Year Volatility
Source: Bloomberg, BTIG
• The Fed stopped (hiking), abruptly pivoted, then reversed (to easing) on 7/31 and again on 9/18, as politicalindependence is questioned.
• Growth has been slowing (especially in China and Europe), political risks are rising. A perfect recipe for highervolatility.
• Maybe we shouldn’t be surprised by 2018-19’s new high/Bear Market/new high in the span of one year (ok, 7 months!)– it happened in 1998 and in 1990-91 as well.
• Higher volatility is a frequent occurrence in the latter stages of Bull markets.
Avg 1yr Volatility
StartEnd/Current
1yr Prior toMarket Top
2yrs Prior to
Market Top6/1/1932 3/10/1937 17.5 18.23/31/1938 11/9/1938 35.3 22.44/11/1939 10/25/1939 26.7 36.24/28/1942 5/29/1946 14.8 10.46/13/1949 8/2/1956 13.2 11.610/22/1957 12/12/1961 8.1 9.86/26/1962 2/9/1966 6.3 5.210/7/1966 11/29/1968 9.8 8.45/26/1970 1/11/1973 8.0 9.610/3/1974 9/21/1976 12.2 19.53/6/1978 1/6/1981 16.1 11.18/12/1982 8/25/1987 15.2 12.812/4/1987 7/16/1990 13.6 12.310/11/1990 3/24/2000 18.9 20.010/9/2002 10/9/2007 12.1 10.73/9/2009Avg. (ex current): 15.2 14.5
P A G E 1 8
8
13
18
23
28
33
38
43
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
2018 2019
S&P 500 (lhs) VIX (rhs)
Options Market Memos (Part 2)
Sizing Up Past Summer Slides
Source: Bloomberg, BTIG
VIX Floor, S&P 500 Ceiling – Still a Very Fine House
Source: Bloomberg, BTIG
• Those who cannot remember the past are condemned to repeat it – George Santayana
• Since volatility pivoted higher at the end of 2017, the VIX has consistently held its floor while the S&P 500 cannot breakthrough the ceiling.
• Complacency (VIX sub 14) has had a price – flat to down near-term returns. The current “Seasonal Slide” is nodifferent.
• Will the “Summer Slide” which began at the 7/26 high continue to range trade, or are new lows in store? Washingtonand Beijing hold the keys. The rest of the world watches, nervously.
Jan-Aug Max Date
Jan-AugMax
FollowingMin Date
Mo. toMin
FollowingMin
% Chgto Min
New HighDate
Mo. toNew Highfrom Prev.
7/17/1985 196.07 9/26/1985 2.3 179.45 -8.5% 11/11/1985 3.88/27/1986 254.24 9/29/1986 1.1 228.08 -10.3% 12/3/1986 3.28/25/1987 337.89 10/20/1987 1.8 216.46 -35.9% 7/26/1989 23.08/27/1989 352.73 1/30/1990 5.1 319.83 -9.3% 5/14/1990 8.6
7/16/1990 369.78 10/11/1990 2.8 294.51 -20.4% 2/12/1991 6.98/29/1991 396.82 12/2/1991 3.1 371.36 -6.4% 12/23/1991 3.8
8/4/1992 425.14 10/5/1992 2.0 396.8 -6.7% 11/20/1992 3.58/7/1997 964.17 10/28/1997 2.7 855.27 -11.3% 11/21/1997 3.5
7/20/1998 1,190.58 10/8/1998 2.6 923.32 -22.4% 11/24/1998 4.17/19/1999 1,420.14 10/18/1999 3.0 1233.66 -13.1% 11/16/1999 3.97/14/2003 1,015.41 8/6/2003 0.7 960.84 -5.4% 9/2/2003 1.6
8/3/2005 1,245.86 10/13/2005 2.3 1168.2 -6.2% 11/18/2005 3.57/16/2007 1,555.90 8/16/2007 1.0 1370.6 -11.9% 10/5/2007 2.68/21/2012 1,426.68 11/18/2012 2.9 1343.35 -5.8% 12/11/2012 3.78/26/2014 2,005.04 10/15/2014 1.6 1820.66 -9.2% 10/31/2014 2.28/15/2016 2,193.81 11/6/2016 2.7 2083.79 -5.0% 11/21/2016 3.28/29/2018 2,916.50 12/26/2018 3.9 2346.58 -19.5% 4/17/2019 7.6
All Avg. 2.5 -12.2% 5.2Same Yr New High Avg. 2.3 -10.1% 3.6
P A G E 1 9
Options Market Memos (Part 3)
• Volatility itself remains volatile in both Equities and Fixed Income. Where are the opportunities?
• While U.S. equities remain rangebound, S&P 500 Skew 18 months out continued to steepen (expensive downside putsrelative to upside calls) as investor caution into and through Election 2020 is elevated. Can this degree of caution -skew often being a contrary indicator at extremes – help drive market upside if outcomes on a variety of geopoliticalissues between now and then prove more favorable than expected?
• The Euro has been remarkably calm this year, but the upcoming 10/31 Brexit deadline could reawaken volatility fromhistoric lows. Other catalysts include a growing embrace of stimulus. The ECB announced it will resume QE, and willGermany follow the Netherlands’ lead for more aggressive fiscal stimulus in addition to its budget-neutral climateinitiative?
SPX 18-Month 90-110% Skew, % Vol
Source: Bloomberg, BTIG
EURUSD 1M ATM Implied Vol
Source: Bloomberg, BTIG
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
Jan '18 Apr '18 Jul '18 Oct '18 Jan '19 Apr '19 Jul '19 Oct '19
SPX 18M 90%-110% Impl. Vol. Skew
0%
5%
10%
15%
20%
25%
30%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
EURUSD 1M ATM Impl. Vol.
P A G E 2 0
What Keeps Us Up at Night
Consumer Confidence with 12 & 36 Mo. Moving Averages
Source: Bloomberg, BTIG
10/2 Yield Curve – The Chilling Effect of “Absolute Zero”
Recessions ShadedSource: Bloomberg, BTIG
• With growth heading lower in the U.S. and elsewhere, and the 10/2 Yield Curve presciently predicting past recessions,the Fed is listening – and cutting – very carefully.
• With 10/2 at “Absolute Zero”, will the curve steepen, can recession be averted and are ultralow bond yields here tostay?
• Is the White House now as sensitive about the 10/2 Yield Curve as it is about the level of the Dow Jones IndustrialAverage with the 2020 Election looming?
• Near-record Consumer Confidence has begun to plateau, fatigued by reversal-prone trade rhetoric. Brokenconfidence has accompanied every recession since 1970, and the importance of reaching a trade deal cannot beunderstated.
-300bp
-200bp
-100bp
0bp
100bp
200bp
300bp
400bp
1980 1985 1990 1995 2000 2005 2010 2015
US 10-2Yr Yield Curve
20
40
60
80
100
120
140
160
1975 1985 1995 2005 2015
Conf. Board Cons. Confidence 12MMA 36MMA
P A G E 2 1
0
100
200
300
400
500
600
700
800
900
1,000
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
2017 2018 2019
S&P 500 Bbg Story Keyword Search: Trade War
Trade Tension Flares Fan Market Flames
Source: Bloomberg, BTIG
Words Matter – More & More
Political Risk Rising with Impeachment?
Source: Bloomberg, BTIG
• When the Trade War is making headlines, stocks decline.
• Will the “Seasonal Slide” bottom over a “Trade Truce” or do politicians continue to push toward 1987 style policy andasset market brinkmanship?
• The U.S. economic data remains reasonably strong; the consumer and his/her confidence is paramount.
• Impeachment proceedings against President Trump add a new facet to already contentious U.S. politics. Do they riskweighing on consumer and investor sentiment?
0
200
400
600
800
1,000
1,200
1,400
Jan '18 Apr '18 Jul '18 Oct '18 Jan '19 Apr '19 Jul '19
Bbg Story Keyword Seard: Impeachment
P A G E 2 2
The Fed: Wishes, Wars & Politics
MMT – Been There, Done That
Source: Bloomberg, BTIG
Above 2%? Panacea or Pandora’s Box?
Source: Bloomberg, BTIG
• The Fed wants to manage risk, desires inflation, needs political independence.
• Two cuts with little effect as Repo woes and Manufacturing woes take center stage.
• Is there more beyond repo “liquidity management”? Will that be viewed as QE? Is 2% inflation something really to bedesired? What can the Fed do to counteract Trade Wars?
• MMT is likely good for Germany, but ... MMT “light” has existed since Reagan. Institutionalization of MMT beckonsthe 1970s.
• Economic Nationalism, “Green New Deal”, all have the potential for stoking inflation.
0%
2%
4%
6%
8%
10%
12%
1960 1970 1980 1990 2000 2010
Core PCE YoY
60
80
100
120
140
160
180
0T
5T
10T
15T
20T
25T
1975 1980 1985 1990 1995 2000 2005 2010 2015
US Debt Outstanding (lhs) US Dollar Index (rhs)
P A G E 2 3
Debunking the Myth that Gridlock Is Good for Stocks
Midterm Results Under Unified Government
Source: Bloomberg, BTIG
• In the Rearview: The longest government shutdown ever, Mueller, Budget and the Debt Ceiling no longer an issue.Yet acrimony remains high as the flames of Impeachment are fanned – 2019’s rally is in spite of, not because ofgovernment. The statistics bear it out.
• Gridlock in general underperforms Unified government (5.6% vs. 9.0% annual return, 1928-2017), but the range ofoutcomes is wide, particularly when Unified becomes Divided government, as is now the case into the next Election.
• Trade Wars, investigations and intensifying social class frictions promise to keep politics a central issue for stocks atleast until November 2020.
Midterm Control Control Next Yr.Date Pre-Midterm Post-Midterm Return 11/4/1930 Republicans Divided -47.1%11/6/1934 Democrats Democrats 41.4%11/8/1938 Democrats Democrats -5.2%11/3/1942 Democrats Democrats 19.4%11/5/1946 Democrats Divided 0.0%11/7/1950 Democrats Democrats 16.3%11/2/1954 Republicans Divided 26.4%11/6/1962 Democrats Democrats 18.9%11/8/1966 Democrats Democrats 20.1%11/7/1978 Democrats Democrats 12.3%11/8/1994 Democrats Divided 34.1%11/7/2006 Republicans Divided 3.5%11/2/2010 Democrats Divided 0.0%
P A G E 2 4
0B
200B
400B
600B
800B
1,000B
1,200B
1,400B
2001 2006 2011 2016
China Holdings of US Treasuries
China Holdings of U.S. Treasuries
Source: Bloomberg, BTIG
Trade WarsUpending the World Order Is Messy Business
It’s a Wonderful Life
Source: Bloomberg, BTIG
• Global trade, the greatest engine of prosperity in human history as the last 40 years have shown, is being redrawn.
• Part of 4Q2018’s U.S. market selloff and 2019’s May, August and October volatility spikes is China’s weaknessinevitably washing ashore. The world can ill afford a “hard landing” in China. Especially if it means China selling U.S.Treasuries to “cushion the downside”.
0T
10T
20T
30T
40T
50T
60T
70T
80T
90T
1980 1985 1990 1995 2000 2005 2010 2015
World GDP US GDP China GDP
P A G E 2 5
6.00
6.20
6.40
6.60
6.80
7.00
7.20
2008 2010 2012 2014 2016 2018
USD/CNY
British Pound – Plaza Accord Low in Sight
Source: Bloomberg, BTIG
FX – The New Geopolitical Battleground
Chinese Yuan – 8?
Source: Bloomberg, BTIG
• After months in hibernation, FX returns to center stage. China is a “currency manipulator” – Currency War on! TheU.S. Dollar moves toward multi-year highs.
• And Boris Johnson in the PM post in the UK – Outcomes less clear than ever.
• Could GBP/USD, EUR/USD and EUR/GBP all go to 1.00? Not if Washington can help it – at all.
• Does Treasury Secretary Mnuchin have his finger on the “Sell Dollars” Intervention Button?
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
1975 1980 1985 1990 1995 2000 2005 2010 2015
GBP/USD
P A G E 2 6
Tech Bubble Narrowing Leadership
Source: Bloomberg, BTIG
Bull Market Over for Some Stocks?
Source: Bloomberg, BTIG
• Percentage of stocks above their 200DMA’s, a market breadth indicator, fell sharply during 2018’s February-Marchselloff, plunged in 4Q2018 and remains weak in 2019 despite the S&P 500 new highs. Leadership tends to narrowin late stage Bull markets – as seen leading up to the 2000 Tech Bubble and 2007 GFC tops. Many stocks havealready made multi-year tops.
• Sector and stock selection become increasingly important – Alpha over Beta. Active over Passive? Buy Low, SellHigh?
• Are Bond Proxies (Utilities, Staples, Software) “Onward Ever Upward”? Will Value ever cease being a “trap”?
Not All Boats to Be Lifted?
20
25
30
35
40
45
50
55
60
65
Jan '99 Apr '99 Jul '99 Oct '99 Jan '00
% NYSE Stocks Above 200DMA
Pre-GFC Narrowing Leadership
Source: Bloomberg, BTIG
20
30
40
50
60
70
80
90
Oct '06 Jan '07 Apr '07 Jul '07 Oct '07
% NYSE Stocks Above 200DMA
0
10
20
30
40
50
60
70
80
2016 2017 2018 2019
% NYSE Stocks Above 200DMA
P A G E 2 7
Growth vs. Value – Growth Spurt
Source: Bloomberg, BTIG
Value and Growth, Correlation and Causation?• In 20 years, there have been two major trend changes between Value and Growth, March 2000 and May 2007.
• Multi-year Bear Markets commenced almost immediately (2000 – Tech Bubble Burst; 2007 – Financial CrisisBegins).
• “Mini turns” such as 3/2001, 10/2002, 3/2009, 9/2011 attributable to FX inflections and stock market bottoms.
• 2007 notable because of the “Quant Fund Quake”. In 2019-20,could a Trade War and an Election cycle tilt in favorof Value over Growth as FAANG comes under scrutiny? Could Passive become too Aggressive?
• Will a turn in the correlation between stocks and bonds (think pre-1998 as well as February 2018) cause a “FactorFlameout”?
• Does a reversal in ultralow long-dated global government bond yields, “The Biggest Bubble Ever”, cause Growthto underperform? Was September a “dress rehearsal” for further Value/Growth reversion?
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Russell 1000 Growth/Value Ratio
P A G E 2 8
The Biggest Bubble Ever?
Source: Bloomberg, BTIG
Greed First, Fear Later
Source: Bloomberg, BTIG
Global Government Bonds: The Biggest Bubble Ever? (Part 1)
• Markets can stay irrational for longer than you can remain solvent – John Maynard Keynes
• Without “anchored expectations” of disinflation/deflation or outright societal chaos, how can the idea of a lenderpaying money to lend to a borrower make rational economic sense?
• Perhaps only the Index benchmarked funds or the passive algorithms know the answer?
• After a 30+ Year global bond bull market, are the buyers of German 10-Year Yields at -0.55%, Italy 10-Year at 0.90%,Austria 100-Year sub 1% or the U.S. 10-Year ($22T Debt, Election 2020 ahead) at 1.6% the same people who boughtDutch Tulips in 1637, Japanese stocks in 1989, or Dot.Com stocks in 2000?
10K
15K
20K
25K
30K
35K
40K
1986 1987 1988 1989 1990 1991 1992 1993
Nikkei 225
5T
7T
9T
11T
13T
15T
17T
19T
2017 2018 2019
Bbg Global Agg. Neg. Yielding Debt (MV)
P A G E 2 9
German 10-Year Yields vs. Breakevens – Extreme Divergence
Source: Bloomberg, BTIG
Japanese 10-Year Yield
Source: Bloomberg, BTIG
Global Government Bonds: The Biggest Bubble Ever? (Part 2)
• That which cannot go on forever, won’t – Herbert Stein
• Eventually bubbles pop; Homebuilder stocks topped in 2005, House Prices in 2006, the Financial Crisis Stock top was10/2007.
• A catalyst is needed. On the positive side: Successful Central Bank reflation, an end to the Trade Wars, a smoothBrexit, or “The Golden Ticket” – German fiscal stimulus.
• Negative catalysts include further sales of U.S. Treasuries by China and the recognition of systemic sovereign risks(No deal Brexit?), particularly in Europe.
• Did August’s parabolic yield plunge and September’s sharp reversal pop the Bubble?
0.6%
0.7%
0.8%
0.9%
1.0%
1.1%
1.2%
1.3%
1.4%
1.5%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
Feb '18 May '18 Aug '18 Nov '18 Feb '19 May '19 Aug '19
Germany 10Yr Yield (lhs) Germany 10Yr Breakeven (rhs)
-0.35%
-0.30%
-0.25%
-0.20%
-0.15%
-0.10%
-0.05%
0.00%
0.05%
2019
Japan 10Yr Yld
P A G E 3 0
Treasury Yield Non-Confirmation
Normalized to 7/8/2016, U.S. 10-Year Yield all-time closing lowSource: Bloomberg, BTIG
Nasdaq Divergence Foreshadowed GFC Low
Normalized to 11/20/2008, Nasdaq GFC closing lowSource: Bloomberg, BTIG
Global Government Bonds: The Biggest Bubble Ever? (Part 3)
• Technical analysis helps to put parameters around the irrational and the unsustainable.
• Extreme moves often end in notable divergences.
• Could the U.S. 10-Year Yield not trading below its 2016 low despite new 30-Year Yield lows in 2019 signal a changecoming?
• Nasdaq’s refusal to make a new low in March 2009 despite further S&P 500 weakness was a sign of reversal – the endof the GFC Bear Market.
-20%
0%
20%
40%
60%
80%
100%
Jul '08 Oct '08 Jan '09 Apr '09
Nasdaq 100 S&P 500
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2014 2015 2016 2017 2018 2019
US 30Yr Yld US 10Yr Yld
P A G E 3 1
Other Markets – Buy Low, Sell High?
International Markets & S&P 500 Valuation Heat Maps
Data as of 10/1/2019Note: Annual numbers are the average month-end NTM P/E estimates for the corresponding year.1MSCI EAFE proxied with EFA. 2MSCI EM proxied with EEM.Source: Factset, BTIG
• Investors have soured on Europe, Japan, China and EM broadly.
• Could even the slightest daylight between Trump and Xi catalyze international equities?
• Could a “clean Brexit” and pumping ECB ignite the “biggest losers” – European Banks?
• Or is the chaos of a “no-deal Brexit” the entry for European equities investors have been waiting for?
• Japan, long sensitive to recovering U.S. growth, higher yields, and weaker FX looks attractive as the ultimate“cyclical” market.
S&P 500MSCI
EAFE 1STOXXEurope Nikkei
MSCIEM 2 S&P 500
MSCIEAFE 1
STOXXEurope Nikkei
MSCIEM 2
2000 22.3 -- 23.4 -- -- 2000 -- -- 1.1 -- --2001 20.2 -- 18.4 28.1 -- 2001 -- -- -1.9 7.9 --2002 17.5 13.9 15.6 30.3 -- 2002 -- -3.7 -2.0 12.8 --2003 16.3 11.9 12.9 21.2 11.6 2003 -- -4.4 -3.4 4.9 -4.72004 16.1 13.7 12.6 19.2 11.0 2004 -- -2.4 -3.5 3.1 -5.12005 14.8 13.3 12.5 18.7 10.6 2005 -- -1.5 -2.2 3.9 -4.12006 14.0 13.5 12.8 20.3 11.5 2006 -- -0.5 -1.2 6.3 -2.62007 14.4 13.2 13.1 18.4 13.2 2007 -- -1.3 -1.3 4.0 -1.22008 12.3 10.1 9.7 14.4 10.6 2008 -- -2.2 -2.6 2.1 -1.62009 13.5 13.2 11.6 31.0 13.0 2009 -- -0.2 -1.9 17.6 -0.52010 12.7 12.1 11.3 17.6 11.8 2010 -- -0.6 -1.4 5.0 -0.92011 12.0 10.7 10.0 13.7 10.3 2011 -- -1.3 -2.0 1.8 -1.62012 12.3 11.1 10.5 13.4 10.1 2012 -- -1.2 -1.8 1.1 -2.22013 13.8 13.1 12.7 17.3 10.4 2013 -- -0.8 -1.1 3.5 -3.42014 15.2 13.9 14.3 16.9 10.7 2014 -- -1.3 -0.9 1.7 -4.52015 16.2 15.2 15.4 17.9 11.5 2015 -- -1.1 -0.8 1.7 -4.72016 16.4 14.3 14.2 15.9 11.8 2016 -- -2.1 -2.2 -0.4 -4.62017 17.6 14.8 15.1 16.8 12.4 2017 -- -2.8 -2.5 -0.8 -5.22018 16.4 13.6 14.1 15.4 11.5 2018 -- -2.8 -2.4 -1.0 -4.9
Current 16.6 13.7 14.2 15.9 12.0 Current -- -2.9 -2.5 -0.7 -4.6Average 15.5 13.0 13.7 19.3 11.4 Average -- -1.8 -1.8 4.2 -3.2
P A G E 3 2
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Gold
Gold – Attractive Hedge in an Uncertain World?
Source: Bloomberg, BTIG
60
70
80
90
100
110
120
130
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
US Dollar Index
U.S. Dollar – Something’s Gotta Give
Source: Bloomberg, BTIG
Dollar Decision Due, $2,000/oz. Gold in 2020?
• Everyone wants a weak currency. Does President Trump tweet the loudest? Does the Fed have the mostammunition to ease?
• Gold, the barbarous relic, where speculators became net short in 2018 for the first time in a generation, couldeventually reclaim the all-time highs. After a great run in 1H2019, a bit of “digestion”, as the Bond Bubble “pops”,is in order. Yet in a world of geopolitical uncertainty, Trade, Currency and Fed Wars, the seeds of inflation beingplanted, and as an alternative for rational investors unwilling to pay borrowers for the right to lend, $2,000/oz. in2020 or post the U.S. Election, in 2021, is in sight.
• All That Glitters is not just stocks and bonds.
P A G E 3 3
0K
2K
4K
6K
8K
10K
12K
14K
16K
18K
20K
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Bitcoin
Bitcoin – Boom Bust, Boom Bust, Boom?
Source: Bloomberg, BTIG
Nasdaq Volatility in the Reboot Era
Source: Bloomberg, BTIG
Bitcoin – Yes, Bitcoin. Is this NASDAQ 2002?• Boom Bust, Boom Bust, Boom? – Bitcoin has crashed numerous times past. It is now largely ignored and volatility
has collapsed, similar to tech stocks in the early – mid 2000s.
• If Block Chain is indeed technologically important, could cryptocurrency in general and Bitcoin in particular, riseonce more? History seldom repeats but often rhymes.
• Bitcoin’s rise YTD has exceeded our expectations, but bodes well for the future. Similar to Gold, after a great runin 1H2019, a bit of “digestion”, as the Bond Bubble “pops”, is in order.
10%
20%
30%
40%
50%
60%
70%
2001 2002 2003 2004 2005 2006
Nasdaq 100 200D Realized Vol.
P A G E 3 4
BTIG Sector Recommendations – Focus on Value and Valuation
P A G E 3 5
Sector Recommendations Overview
• Preferences driven by sector specific as well as broader macro dynamics – selectivity is crucial.
Overweight Neutral Underweight
Energy Comm. Services Materials Consumer Discretionary
Financials Industrials Real Estate Consumer Staples
Health Care Info Tech Utilities
P A G E 3 6
Financials Prefer Curve Steepening
Source: Bloomberg, BTIG
Overweight
Energy, Financials, & Health Care
Energy• Sector at historical low S&P 500 weighting• Oil Futures curve in backwardation• Accommodative Fed anchors inflation expectations• Producers’ commitment to cuts to assure markets
(despite U.S. pressure)?
Financials• “Biggest Bubble Ever” popped, historically low
(negative) yields headed higher?• Accommodative Fed encourages yield curve
steepening• Price-to-Book valuation inexpensive relative to
historical average
Health Care• Favorable demographic trends• Attractive absolute, relative valuations• Monitoring U.S. Health Care debate
WTI Crude vs. U.S Crude Oil Inventory
Source: Bloomberg, BTIG
Health Care – Affordable?
Source: Bloomberg, BTIG
300K
400K
500K20
70
120
2014 2015 2016 2017 2018 2019
WTI Crude Oil (lhs) US Crude Oil Inventory (rhs, inv.)
-200
20406080
0.148 0.153 0.158 0.163 0.168 0.173 0.178US
10-2
Yr Y
ield
Cur
ve
S&P 500 Financials/S&P 500
-5
0
5
10
15
1995 2000 2005 2010 2015
Health Care - S&P 500 NTM P/E Spread
P A G E 3 7
Consumer Confidence on the Cusp?
Source: Bloomberg, BTIG
Underweight
Consumer Discretionary, Consumer Staples, & Utilities
Utilities• Absolute, relative valuations at historical highs• “Biggest Bubble Ever” popped, historically low
(negative) yields headed higher?• Regulatory headwinds from environmental and
pricing concerns?
Consumer Discretionary• Absolute, relative valuations elevated, both highest
among sectors• Multiples at risk if volatility returns, as seen in Q4
2018? Trade War casualty?• Retail Sales remain slower as consumer sentiment
has plateaued
Consumer Staples• Absolute, relative valuations elevated• “Biggest Bubble Ever” popped, historically low
(negative) yields headed higher?• Input costs pressures, result of Trade War
Utilities & 10-Year Yields
Source: Bloomberg, BTIG
Consumer Staples & 10-Year Yields
Source: Bloomberg, BTIG
1%2%2%3%3%4%
0.18 0.20 0.22 0.24 0.26 0.28U
S 10
Yr Y
ield
S&P 500 Cons. Stap./S&P 500
1%2%2%3%3%4%
0.085 0.095 0.105 0.115 0.125
US
10 Y
r Yie
ld
S&P 500 Utilities/S&P 500
80
90
100
110
120
130
140
2015 2016 2017 2018 2019
Conf. Board Cons. Confidence
P A G E 3 8
Neutral
Communication Services, Industrials, Materials, Real Estate, & Technology
Industrials• Absolute, relative valuations below historical
averages• On the Trade War front line• Dollar headwind to abate with accommodative
Fed?• Manufacturing slowdown – inventory-stocking
pause or something more?
Manufacturing Gears Slipping
Source: Bloomberg, BTIG
Communication Services Valuations Below Peaks
Avg. month-end NTM P/ESource: Factset, BTIG
Communication Services• Valuation, while rising, below dot-com levels of
former Tech, CD, and Telecom sectors• Long-term Growth vs. Value trend intact despite
recent pressure• Could increased regulatory scrutiny dampen
investor sentiment?
Information Technology• Valuations, while rising, still below Dot.Com and
pre-GFC levels• Software relatively expensive within Tech• Long-term Growth vs. Value trend intact despite
recent pressure• Could growing regulatory scrutiny dampen investor
sentiment?
Technology Is the Bull Market
Source: Bloomberg, BTIG
0x
10x
20x
30x
40x
50x
Comm. Svcs.Current
Cons. Disc.High (1999)
Info. TechHigh (2000)
Telecom High(1999)
-5.0%
0.0%
5.0%
10.0%
45
50
55
60
65
2015 2016 2017 2018 2019
ISM Manuf (lhs) Indu Prod YoY (rhs)
0%
500%
1000%
1500%
2000%
1990 1995 2000 2005 2010 2015
S&P 500 Info TechS&P 500
P A G E 3 9
Neutral (Cont’d)
Communication Services, Industrials, Materials, Real Estate, & Technology
Real Estate• Absolute valuation at historical high, relative
valuation elevated• Continued home and land price improvement• “Biggest Bubble Ever” popped, historically low
(negative) yields headed higher?
Real Estate & 10 Year Yields
Source: Bloomberg, BTIG
Commodities & Materials – Shell Shocked
Source: Bloomberg, BTIG
Materials• Absolute, relative valuations elevated• On the Trade War front line• Accommodative Fed anchors inflation expectations• Dollar headwind to abate with accommodative
Fed? 75
80
85
90
95
100
0.115
0.125
0.135
0.145
0.155
0.165
2015 2016 2017 2018 2019
Materials/S&P 500 (lhs)Bloomberg Commodities ex-Energy (rhs)
1%2%2%3%3%4%
0.065 0.070 0.075 0.080 0.085 0.090 0.095 0.100
US
10 Y
r Yie
ld
S&P 500 Real Estate/S&P 500
P A G E 4 0
S&P 500 and Sector, S&P 600 Valuation Heat Map
Data as of 10/1/2019
Note: Annual numbers are the average month-end NTM P/E estimates for the corresponding year. 1Financials numbers are Price/Book, historical numbers include Real Estate. 2Real Estate numbers are Price/Funds From OperationsSource: Factset, BTIG
S&P 500ConsDisc
ConsStap Energy
HealthCare Industrials Materials Tech
Comm.Services Utilities Financials 1
Real Estate 2
S&P 600Small Cap
1996 14.3 14.2 16.9 15.5 18.8 15.0 12.2 14.6 14.4 12.1 1.6 -- --1997 16.8 15.5 20.1 17.6 22.3 16.9 14.4 17.7 16.5 12.4 2.2 -- 14.31998 20.0 20.3 22.2 20.3 28.3 17.8 14.7 25.0 21.5 15.0 2.7 -- 16.91999 23.0 23.8 20.9 25.3 27.6 20.3 16.2 36.3 27.1 14.5 2.8 -- 15.92000 22.1 20.7 17.1 18.3 26.8 20.6 9.5 40.6 23.3 15.1 2.7 -- 15.82001 20.2 23.5 18.0 15.2 25.2 20.0 13.7 34.7 23.6 13.3 2.5 -- 15.92002 17.4 20.1 16.5 18.1 20.1 17.6 15.0 30.4 16.1 10.1 2.1 10.7 16.72003 16.3 18.1 15.9 14.7 17.8 17.5 15.4 26.8 14.9 11.7 1.9 11.0 16.02004 16.0 17.0 17.1 14.2 17.5 18.2 12.7 22.5 17.9 13.5 1.9 13.2 16.82005 14.7 16.4 16.6 11.6 17.2 16.3 11.3 19.2 14.7 14.9 1.7 15.1 16.02006 14.1 16.0 16.7 9.8 16.6 15.4 10.5 18.4 14.1 14.1 1.8 17.6 15.82007 14.4 16.9 17.0 11.3 15.8 15.5 11.5 19.3 15.1 15.7 1.7 17.6 16.42008 12.4 15.3 14.8 9.5 12.4 12.4 10.8 14.6 11.9 13.5 1.1 12.7 14.32009 13.5 19.6 12.7 13.5 10.7 13.4 23.4 15.0 13.0 11.1 0.9 11.3 15.82010 12.5 14.0 13.4 11.2 10.8 14.5 12.7 12.8 14.3 11.8 1.0 16.6 15.82011 12.0 13.9 14.0 10.9 11.2 13.2 10.8 11.9 16.2 13.2 0.9 17.5 15.32012 12.3 14.6 15.2 10.7 12.1 12.5 11.8 11.8 17.8 14.3 0.9 18.1 15.02013 13.9 16.7 16.5 12.2 14.8 14.5 13.9 12.8 15.8 14.9 1.1 18.0 17.12014 15.2 17.6 17.7 14.0 16.5 15.8 15.5 14.9 13.5 15.7 1.3 18.0 17.92015 16.2 18.4 19.3 26.4 16.7 15.4 14.5 15.5 12.9 15.7 1.3 18.7 18.22016 16.5 17.4 20.1 56.5 14.9 16.1 15.9 16.2 13.6 17.3 1.2 18.6 18.02017 17.7 19.6 19.9 28.0 16.2 18.1 18.1 18.4 13.1 17.9 1.3 18.2 19.62018 16.3 20.3 17.6 17.6 15.7 16.2 15.5 17.8 12.7 16.4 1.4 17.5 17.1
Current 16.6 21.0 19.8 15.7 14.5 15.6 17.0 19.3 17.3 20.1 1.3 20.0 16.7Average 16.0 17.8 17.2 17.5 17.7 16.2 13.9 20.3 16.3 14.1 1.7 15.9 16.4
P A G E 4 1
Summary
3,000 year-end 2019 price target
Overweight: Energy, Financials, Health Care
Underweight: Consumer Discretionary, Consumer Staples, Utilities
Late stage cyclicality: Steeper yield curve, higher stocks and volatility
P A G E 4 2
APPENDIX A: Investment Risk
The past does not determine the future, though it’s certainly an influencing factor. While investment cycles do reoccur, sodoes fundamental change.
The primary risk we identify of the strategies discussed in this analysis is mean reversion, of both volatility and leaders versuslaggards.
Exogenous factors capable of disrupting our analysis can always intervene. Extreme events such as war, natural disasters andcataclysmic accidents, as well as far less dramatic but still unanticipated events are always capable of invalidating, or at leastsubstantially distorting the time framework of any investment strategy based on mean reversion. As these risks, which mayoccur alone or in combination, cannot by definition ever be properly accounted for in our view, we highlight them here.
In the case of volatility-reliant strategies, the risk is actually the lack of any material change, a no surprises, steady-state‘more of the same’ kind of financial environment, in which the market shrugs off potentially destabilizing risks andopportunities, seemingly no matter how large they may grow on the horizon.
In the case of low volatility-reliant strategies, the risk is that volatility is higher than anticipated in either direction, resultingin either an actual loss or diminished profit vs. a ‘do nothing’ approach.
10/14/2019
P A G E 4 3
APPENDIX B: Analyst Certification and Other Important Disclosures
Analyst CertificationI, Julian Emanuel, hereby certify that the views about the companies and securities discussed in this report are accurately expressed and that I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report.I, Michael Chu, hereby certify that the views about the companies and securities discussed in this report are accurately expressed and that I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report.
Regulatory DisclosuresRatings DefinitionsBTIG LLC’s (“BTIG”) ratings, effective June 12, 2017, are defined as follows: BTIG LLC’s (“BTIG”) ratings, effective June 12, 2017, are defined as follows: BUY – A security which is expected to produce a positive total return of 15% or greater over the 12 months following the
recommendation. The BUY rating may be maintained as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the target to fall outside of the 15% return.
SELL – A security which is expected to produce a negative total return of 15% or greater over the next 12 months following the recommendation. The SELL rating may be maintained as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the target to fall outside of the 15% return.
NEUTRAL – A security which is not expected to appreciate or depreciate meaningfully over the next 12 months. NOT RATED – A security which is not rated or covered by BTIG. UNDER REVIEW – Effective immediately, coverage of the following securities is Under Review. Ratings, price targets,
disclosures, and estimates for the companies listed below are suspended and should no longer be relied upon.
10/14/2019
P A G E 4 4
Distribution of Ratings and Investment Banking Clients BTIG must disclose in each research report the percentage of all securities rated by the member to which the member would assign a “buy”, “neutral” or “sell” rating. The said ratings are updated on a quarterly basis. BTIG must also disclose the percentage of subject companies within each of these three categories for whom the member has provided investment banking services within the previous twelve months. Stocks under coverage as of the end of the most recent calendar quarter (September 30, 2019): 299
Distribution of BTIG’s Research Recommendations (as of September 30, 2019): BUY: 65.6%; NEUTRAL: 33.1%; SELL: 1.3%
Distribution of BTIG’s Investment Banking Services (as of September 30, 2019): BUY: 28.6%; NEUTRAL: 12.1%; SELL: 0.0%
For purposes of FINRA ratings distribution rules, BTIG’s stock ratings of Buy, Neutral and Sell fall into Buy, Hold and Sell categories, respectively.
Equity and Derivatives Strategy DisclosureThis report is a product of the BTIG Research Department's Equity and Derivatives Strategy team. Views expressed may differ from the views of the BTIG research analysts covering the stocks and/or sectors mentioned in this report. Such analysis and/or strategies may be directionally counter to another BTIG LLC analysts’ published rating/price target for the stock. Anysuch, this analysis is distinct from and does not affect the BTIG LLC analyst’s fundamental equity rating for such stocks, whichreflects a stock’s expected return as discussed in BTIG LLC’s “Analyst Stock Ratings” disclosures. This report may discuss companies not currently covered by BTIG LLC.
P A G E 4 5
Equity and Derivatives Strategy Disclosure (continued)Structured securities, options and other complex instruments discussed in this report may involve a high degree of risk and thus may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Because of the high degree of emphasis on tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated option transactions. Please refer to the additional information in the “Options Statement and Risk Disclosure” section located immediately below.
Options Statement and Risk DisclosureOptions involve risk and are not suitable for all investors. There is no guarantee that the strategies promoted will accomplish the stated objectives. Options trading is considered speculative and it is possible to lose a portion of, all of your initialinvestment, or funds in excess of the principal invested. Prior to buying or selling an option, clients must read a copy of Characteristics and Risks of Standardized Options (ODD) http://www.theocc.com/about/publications/character-risks.jsp. Copies of the ODD are also available from BTIG, LLC, available at [email protected]. Because of the importance of tax considerations to all options transactions, investors considering options should consult with a tax advisor as to how taxes affect the outcome of contemplated options transactions. Transaction costs may be significant in option strategies that call for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request; please contact your BTIG Salesperson for further information.
Disclosures in Research Reports Covering Six or More CompaniesAll current required disclosures can be obtained by contacting BTIG at 825 Third Avenue, 6th Floor, New York, NY 10022 or on our website at http://www.btigresearch.com
Other DisclosuresAdditional Information Available Upon Request
Prices of the most recent market close unless otherwise specified.
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