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A Division of Arbor Research & Trading 

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What We Do:​ ​Group-think and a herd mentality plague conventional financial market research, undermining the 
utility of traditional surveys and economic data in understanding our interconnected world. A
​ rbor Data Science​ offers a 
potent blend of innovative models, alternative data and domain knowledge to give our clients a new perspective on the 
global economy and financial markets. Our philosophy is to put the right data and tools in the hands of decision makers. 
 
The New Wave of Economic Indicators​.​ ​Arbor Data Science​ team of data scientists leverage 
alternative data sources, including: social media, Google searches, news trends, government speeches, and more, to 
anticipate changes in economic growth and financial market performance. Arbor Data Science uses search trends to gain 
insight into the consumers and business owners. This lens into the purchasing and investing decisions of consumers and 
businesses offers direct insights into economic activity without the lag of officially-reported dat​a.  
 
Tracking Some of Our Calls:​ Below are examples of the performance of some of the analysis and 
research we have produced over the last 3 months. Using alternative data and our in-house expertise, these calls have 
been across equities, commodities and Fixed Income markets. 
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“Rotation Out of Financials”​ - By Peter Forbes - D​ ecember 7th, 2018 
Summary:​ “The financial sector is in investors crosshairs as a rotation out of cyclical sectors continues. Asset managers 
and insurers have underperformed so far, but banks and diversified financials are more exposed to contacting leverage.” 
Link:​ ​https://datascience.arborresearch.com/rotation-out-of-financials/ 
Result:​ ​S15BANXX Index (S&P composite bank Index) and S15DIVF Index (S&P Diversified Financials Index) fell 19.08 
and 15.9% respectively between Nov 28th to Dec 24th. 

 
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“Positioning For 2019 Weekly Round-Up”​ -​ By Ben Breitholtz and Peter Forbes - ​January 2nd, 2019 
Summary: “​ Energy and U.S. 10-year TIPS breakevens due to rebound 
  U.S. 10-year yields to rise,  
Yield curve grind sideways-to-flatter  
U.S. high yield OAS to tighten  
The S&P 500 and MSCI World ex-US have stabilized with most of the global weakness 
already priced in.” 
Link:​https://datascience.arborresearch.com/arbords/subscriber/weekly-roundup/2019/01/Weekly_Roundup-Positioning
For2019-1-2-2019.pdf 
Result: ​Jan Performance: 
  Oil +14.4%  
10yr Tip breakeven +19 basis points 
10yr yield just 1bp higher  
2/10s curve unchanged in Jan  
High yield OAS tightened 19.6%  
S&P +7.86%   
  MSCI World ex-US: +7.02% 
 

 
 
 
 
 

 
 
 
WTI Performance January 2019: 

 
 
 
 
 
 
US HY OAS Index Performance January 2019:

 
 
S&P Performance January 2019: 

 
 
 
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“U.S. 10-Year Notes Enjoy Best Risk-Adjusted Rally in History” -​ By Ben Breitholtz - J​ anuary 3rd, 2019 
Summary: “​ U.S. 10-year notes have gained over 5.5% since the low on November 8th, 2018. ​The reward-to-risk ratio or 
risk-adjusted return for the past 30 trading days is the HIGHEST ON RECORD​. We show how U.S. 10-year notes have 
performed following similar instances when its reward-to-risk ratio pushes above 8.5. Six out of these eight instances saw 
U.S. 10-year notes post negative returns 50 trading days later by an average of -2%.” 
Link: ​https://datascience.arborresearch.com/u-s-10-year-notes-enjoy-best-risk-adjusted-rally-in-history/ 
Result: ​10yr yield rose from 2.55 on January 3rd to 2.785 on January 18th. 
 

 
 
U.S. 10YR Yield 3rd January to 18th January 2019: 

 
 
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“Even Your Grandma is Afraid a Recession is Imminent”​ -​ By Ben Breitholtz - J​ anuary 2nd, 2019 
Summary: “​Investors’ fears of a recession or bear market have grown the most since the period before the great 
recession. The environment of ultra-low U.S. Treasury volatility & heightened equity volatility will persist deep into 2019.” 
Link:​ ​https://datascience.arborresearch.com/even-your-grandma-is-afraid-a-recession-is-imminent/ 
Result: ​By Feb 26th the U.S. 30-year bond’s yield 35 trading day range had been its narrowest (12 bps) since Dec 1989​. 
 

 
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“Investors’ Rush to Safety Reaches Extreme” ​- ​Ben Breitholtz - J​ anuary 14th, 2019 
Summary: “​ We show the spread between flows for risk and safe asset ETFs along with the three-month spread between 
the S&P 500 Technology index and U.S. 10-year note. The amazing divergence in performance at -30.3% is one heck 
of an extreme. Past spreads in excess of two standard deviations have been followed by rebounds in technology 
equities.”​Link: ​https://datascience.arborresearch.com/investors-rush-to-safety-reaches-extreme/ 
Result: ​S&P Tech Index +18.5% from January 14th to 12th March 

 
 
S&P Tech Index January 14th to 12th March 2019: 

 
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“Search Trends Still Favor Resilient Eurozone Growth” -​ ​Peter Forbes - J​ anuary 24, 2019 
Summary: “​ Last week we argued that the concerns over eurozone growth looked overblown. We’ve revamped our 
eurozone GDP model based on Google Search Data and it still paints a resilient picture for growth in the first half of 
2019.” 
Link: ​https://datascience.arborresearch.com/search-trends-still-favor-resilient-eurozone-growth/ 
Result: ​Eurozone PMI improved (above expectations) to 51.9 in Feb after 51.1 in December and 51 in January 
 

 
 
Eurozone PMI 2018-2019:  

 
 
 
 
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“Investors Too Pessimistic on Inflation” - ​By Ben Breitholtz - ​January 28, 2019 
Summary: “​ We want to highlight our view U.S. inflation expectations have grown too pessimistic 
relative to realized economic growth and alternative data.” 
Link: ​https://datascience.arborresearch.com/investors-too-pessimistic-on-inflation/ 
Result:​ U.S. 10yr TIP Breakeven spread moved 17bps wider since January 28th 
 

 
 
U.S. 10yr TIP Breakeven Spread 28th January to 12th March 2019: 

 
 
 
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“How Markets Respond to Global Synchronized Slowing”​ -​ By Ben Breitholtz - J​ anuary 31, 2019 
Summary: “​ We compare recent reactions to global synchronized slowing to those from the past. 
The majority of markets are following the script. In an update to our January 2nd piece “Positioning for 2019”, we think 
Tip breakevens and oil will continue to perform through quarter end” 
Link: ​https://datascience.arborresearch.com/how-markets-respond-to-global-synchronized-slowing-update/ 
Result: ​Oil +6.3% January 31st to 12th March 
 

 
 
Oil Performance January 31st to 12th March 2019: 

 
 
 
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“Gold Held Aloft by Political Chaos“ ​- By Peter Forbes - F​ ebruary 3rd, 2019 
Summary: “​ The bottom line is that gold continues to look exposed, held aloft by the uncertainty about public policy and 
government spending. These issues may persist and even intensify in the coming weeks, but other factors are eroding 
this potential hedge on political chaos.” 
Link: ​https://datascience.arborresearch.com/gold-held-aloft-by-political-chaos/ 
Result: ​Gold -$32.69 since February 3rd   
 

 
 
Gold 4th February to 7th March 2019: 

 
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“News Sentiment Too Bearish on S&P 1500 Companies” ​- By Ben Breitholtz - February 6th, 2019 
Summary: “​ News sentiment of S&P 1500 companies has grown too bearish, favoring a continued rebound in equities and 
weaker U.S. 10-year note.” 
Link: ​https://datascience.arborresearch.com/news-sentiment-too-bearish-on-sp-1500-companies/ 
Result: ​S&P 1500 +2.2% and US 10yr +4.5bps since February 6th 

 
S&P 1500 6th February to 12th March 2019: 

 
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“​Bond Investors are Set to Finally Awake” ​- B


​ y Ben Breitholtz, - ​February 26th, 2019 
Summary: “​ Long-end Treasuries are expected to see higher volatility in the weeks and months to follow after the tightest 
trading range since December 1989.” 
Link:​ ​https://datascience.arborresearch.com/bond-investors-are-set-to-finally-awake/ 
 
“U.S. 10-Year Yields More Apt to Break Higher Than Lower” ​- By Ben Breitholtz - F​ ebruary 28th 2019 
Summary: “​ The U.S. 10-year note yield continues to grind sideways, but past ultra-tight ranges of this length have 
habitually given way to higher volatility. Our bias is for a breakout to higher yields in the weeks to come.” 
Link: ​https://datascience.arborresearch.com/u-s-10-year-yields-more-apt-to-break-higher-than-lower/ 
Result:​ ​Calls In Progress 
 
Weekly Roundup

March 11, 2019

Benjamin Breitholtz and Peter Forbes

A Division of
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A Summary of our Current Major Themes

US economy playing follow the leader


- All major regions are producing data below one-year average
- Leading indicators have shifted so world economy is leading the US, so the global economy is in the driver's seat not the US
- Soft (survey) data is US is leading hard data lower but continued deterioration in hard data is needed to signal a real down turn
in US economy
- An increasing ECB balance sheet vs that of Federal Reserve means Eurozone economic performance is the most important
- Our deep dive into business and consumer search trends (Google) across the Eurozone makes us more optimistic than most
that a rebound is indeed a possibility in the months to come.

US Treasuries Avoid chasing a bullish breakout


- Investors have already priced in no hikes along with the Fed, meaning further declines in U.S. Treasury yields will likely need the
pricing in of a cut.
- Remarkable Easing in Financial Conditions Leaves Treasuries Looking Exposed
- Seasonality suggests nominal and real spreads should see an end to recent convergence, bringing the difference currently at
15.4 basis points to well above 50 basis points. All in all, this is a steepening -friendly outlook.
- The seasonality of three -month flows across all money market funds since 1990 strongly suggests a peak is in the making.
The coming period has typically been of the ‘risk -on’ variety, meaning flows into equities and out of U.S. Treasuries.

Energy the Canary in the Coal Mine for Credit Markets


- Discussions of free cash flow remain at the best level in years. Discussions of capital expenditures have also been dented as
funding challenges arose. This will be the key advantage for well -funded integrated majors.
- Unfortunately, many of these energy companies have been unable to reduce high leverage ratios. The energy industry’s total
debt -to -assets ratio remains elevated near 24% relative to a healthier 16% ahead of the financial crisis.
- Investment grade corporates in the energy industry have become the most sensitive to rising U.S. 10 -year real yields since
2018.
- Returns in the riskier neighborhoods of the energy sector, independent producers and oil field services firms, will be tightly tied
to funding costs, real yields especially.
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U.S. Economy Playing


Follower the Leader With
the Global Economy
All major regions are producing below
one-year average economic data
changes for the first time since March
2016. Citigroup’s economic data change
indices measure incoming data releases
relative to one-year average growth
rates.

The Eurozone was first to break below


average (i.e. zero) on April 24th, 2018. The
U.S. finally followed suit on December
6th, 2018, causing equity markets and
FOMC rate hiking to tumble into month-
end.

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Here’s where the dynamic between U.S. and
global economies gets interesting. The
correlation between the U.S. and World
economies using OECD composite leading
indicators has shift to the world leading
the U.S.

The U.S. economy had been the leader


from the early 1970s through the financial
crisis. But, the global average (ex-U.S.) took
command in October 2008 with a
significantly higher correlation to the U.S.
economy three months forward. In other
words, the global economy is in the
driver’s seat, not the U.S.

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U.S. hard economic data is rivalling its
worst momentum post-crisis, while soft
data bears the brunt of the damage.

A continued deterioration in hard data


like industrial production, durables
goods, personal spending, and more is
needed to signal a real slowdown in the
United States.

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So why are the S&P 500 and Stoxx 50
both up 10% year-to-date?

Investors have been making a bet in


recent weeks on the Eurozone and global
economy rebounding into the summer
months.

The chart shows three-month changes in


the Eurozone economic data change
index and S&P 500 lagged by two
months. Stable to higher equity prices
suggest investors are more optimistic on
the global economy than the ECB or
OECD. On the flip side, a drawdown in
equity markets would signal lost hope for
a rebound.

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A bigger and bigger ECB balance sheet
relative to the Federal Reserve will make
the Eurozone’s economic performance
that much more important.

The rolling one-year correlation of both


Eurozone and U.S. economic data to the
S&P 500 are shown in the top panel of
the chart below. Note how the
Eurozone’s correlation has run
significantly higher during periods of
diverging balance sheets like we have
now.

The U.S. will ultimately follow the path of


the global economy.

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Still No Reason for Panic Over Eurozone Growth

Interest in Credit & Borrowing Supports a Eurozone Growth Bounce

Search Trends Still Favor Resilient Eurozone Growth

Our deep dive into business and


consumer search trends (Google)
across the Eurozone makes us more
optimistic than most that a rebound is
indeed a possibility in the months to
come.

Please see these recent posts:

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U.S. Treasuries –
Avoid Chasing a
Bullish Breakout
The Federal Reserve and investors are finally
on the same page in expecting no hikes over
the next 12 months. The chart offers the
comparison between market-based (OIS) and
Fed-speech implied expectations for the next 12
months.

Our natural language processing of Fed


communications is used to estimate the number
of hikes to come in basis points based on
historical relationships from 1994 through 2007.

Investors have already priced in no hikes


along with the Fed, meaning further declines
in U.S. Treasury yields will likely need the
pricing in of a cut.

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Our classification model for pauses or
the end to tightening cycles has
jumped to a probability of 64%.

The random forest model incorporates


major economic and inflation data
releases, markets returns, and volatility.

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Remarkable Easing in Financial Conditions
Leaves Treasuries Looking Exposed

The chart shows a scatter plot of three-


month (13-week) changes in the credit
subindex against three-month total returns
for the Bloomberg Barclays Treasury index
with data back through 2011.

Treasuries have been more reluctant to


embrace easier financial conditions as yields
have remained stubbornly low. The Treasury
index is higher by 2% over the past three
months, very near the upper range of
historical performance.

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The U.S. real 2-year 10-year spread is
coming out of inversion for the first time
since a brief stint in early October 2018.

Short-end real yields have collapsed (2y


from 1.9% to 0.8%) since the Fed capitulated
in very late December 2018.

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The seasonality of the difference between
U.S. nominal and real 2-year 10-year spreads
has been very strong since the financial
crisis. We show this seasonal component in
the bottom panel, which will reoccur each
year.

The top panel offers the actual difference


between the nominal and real spreads along
with a forecast based on its seasonality.
Seasonality suggests nominal and real
spreads should see an end to recent
convergence, bringing the difference
currently at 15.4 basis points to well-above
50 basis points. All in all, this is a
steepening-friendly outlook.

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The ‘great de-risking’ to end 2018 fueled
heavy steepening positioning in ETFs with
investors’ voracious demand for ultra-short
duration safety. But, risk-on flows have since
ensued in 2019, leading to a flattening bias.

On the contrary, futures positioning (large


speculators) maintains a hefty steepening
position. Past divergences with ETF
positioning significantly flatter than
futures have been followed by
steepening, but predominately by the U.S.
real 2-year 10-year spread.

Remember, history shows ‘going with’


futures positioning and fading ETF flows
is advantageous.

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The seasonality of three-month flows across
all money market funds since 1990 strongly
suggests a peak is in the making. The
coming period has typically been of the
‘risk-on’ variety, meaning flows into
equities and out of U.S. Treasuries.

The bottom panel shows the seasonal


component, which repeats every year. We
have highlighted the current point in this
seasonal historically to show money market
flows do indeed decline in the weeks and
months ahead.

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Energy, the
Canary in the Coal
Mine for Credit
Markets
Spot prices have risen comfortably above
the $21-48 range of breakeven prices for
Permian shale producers. So have prices for
crude oil swaps, a key hedging tool for
producers. The next chart shows crude oil
swaps for 2019 through 2021 are all trading
north of $55 per barrel. Those marginal
producers who are inclined to hedge can do
so at attractive prices.

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We use data from Sentieo to track the
discussions of analysts and management in
earnings calls and presentations. While
expectations for margins, free cash flow and
capital investment were running high into the
end of 2018, some cracks are starting to
appear.

The chart shows the six-month average ratio of


positive to negative mentions of three topics
(margins, free cash flow, and capital expenditures)
for companies on the oil & gas industries.

The chart highlights weakening but still strong


expectations for margins as prices have
stabilized. Discussions of free cash flow remain at
the best level in years. Discussions of capital
expenditures have also been dented as funding
challenges arose. This will be the key advantage
for well-funded integrated majors.

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The zombie infestation has become
increasingly concentrated to the energy
industry, which held 35% of all zombies
through 2017. WTI crude oil’s plummet in
2014 has left a serious mark.

Unfortunately, many of these energy


companies have been unable to reduce
high leverage ratios. The energy
industry’s total debt-to-assets ratio
remains elevated near 24% relative to a
healthier 16% ahead of the financial
crisis.

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Investment grade corporates in the
energy industry have become the most
sensitive to rising U.S. 10-year real yields
since 2018.

The scatterplot highlights the deeply


negative slope of returns by independent
energy, integrated energy, oil & field
services, refining, rails roads, and
transportation.

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The surer bet for production growth in
the Permian is with the integrated
majors, but less uncertainty means lower
returns.

Returns in the riskier neighborhoods of


the energy sector, independent
producers and oil field services firms, will
be tightly tied to funding costs, real
yields especially.

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Contact Us
Give us a call for more information about our services and products

Ben Breitholtz – Data Scientist


ben.breitholtz@arborresearch.com

Pete Forbes – Data Scientist


peter.forbes@arborresearch.com

Arbor Research & Trading, LLC


1000 Hart Road Suite 260
Barrington, IL 60010
847 756 3575

Neil Tritton- Director, Arbor Research & Trading UK, Ltd


neil.tritton@arborresearch.com
0207 100 1051 or 07808 294378
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