Uses WR 2014 10 27

U.S.
EQUITY STRATEGY
WEEKLY REPORT
Growth Validation Required
October 27, 2014
Periodical Portfolio Strategy
In this Issue: FF Subdued global economic growth warrants a change in our style bias to growth vs. value.
FF Deflationary Strains
Favor Growth FF Despite hefty foreign sales exposure, packaging profit margins are positively correlated
Vs. Value..................4
FF Containers &
with the U.S. dollar and share price weakness should be bought.
Packaging:
A Strong U.S. Dollar FF A strong U.S. dollar will provide a long-term tailwind to the financial sector, particularly
Winner?.................. 7
consumer finance companies.
FF Financials, Consumer
Finance And The
U.S. Dollar............ 10 Recent Changes
FF Switch to a Growth over Value bias.
Table 1
12-MONTH FORWARD FORWARD P/E RATIO*

SECTOR EARNINGS GROWTH
EXPECTATIONS (%) CURRENT HISTORICAL MEAN**
Materials 16.6 15.6 15.5

Consumer Discretionary 15.4 17.0 17.9
Financials 13.6 13.3 12.7
Editorial Board Health Care 11.7 16.2 18.2
David Abramson Technology 11.5 14.7 21.4
Director of Research S&P Total 10.9 15.0 14.9
Matthew Pugsley Industrials 10.7 15.1 16.3
Consulting Editor
Telecom Services 7.7 13.2 16.9
Anastasios Avgeriou
Managing Editor Consumer Staples 7.5 17.9 17.5
Emin Baghramyan Energy 4.6 12.9 14.8

Senior Editor Utilities 3.6 16.3 13.6
Dulce Cruz SOURCE: THOMSON REUTERS / IBES
*BASED ON 12-MONTH FORWARD EARNINGS
Research Analyst **SINCE 1995
editor@bcaresearch.com • TEL 514.499.9550 • www.bcaresearch.com Copyright © 2014 BCA Research Inc. All Rights Reserved. Refer to last page. 1
Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

BCA Research Inc. U.S. equity Strategy - Weekly report October 27, 2014
CHART 1
The current BCA House View Matrix will Inflation Expectations Hold The Key
be published on the last page of all BCA
2000 U.S.: S&P 500 2000
reports from 21/10/14-28/10/14.
1800 Broken 1800
trendline
E quities are enjoying a rebound from oversold

levels. Whether this short-covering bounce
morphs into sustained new highs is contingent
1600 1600
1400 1400
on investors regaining optimism in the global
economic growth outlook. So far, the corporate
sector is not exuding confidence. Third quarter TRADE-WEIGHTED US$*
profit season has been mixed, with a number

88 88
of companies already showing the negative
impact of U.S. dollar strength. This will worsen
as hedges roll off in the coming quarters. 84 84
Investors have been willing to overlook foreign

growth weakness because the Fed has still been
80 80
printing money and the ECB was expected to
follow suit. But now the Fed is almost certain
% U.S.: 5-YEAR INFLATION SWAP RATE %
to terminate its QE program.
2.6 2.6
Meanwhile, the ECB has begun its private asset
purchase program, but it is not yet clear as to 2.4 2.4
whether the scope, scale and potency of this

2.2 2.2
different kind of balance sheet expansion can
shore up inflation expectations. The latter are 2.0 2.0
struggling to find a floor (Chart 1), in the U.S.

1.8 1.8
as well. Deflationary global undertones mean
that the Equity Risk Premium is likely to grind % EURO AREA: 5-YEAR INFLATION SWAP RATE %
higher unless growth begins to surprise to the 2.0 2.0

upside on the back of easier monetary policy.
1.8 1.8
On this front, the outlook is cloudy. Our global 1.6 1.6
leading economic indicator (LEI), excluding 1.4 1.4

the U.S., is already below the boom/bust line
1.2 1.2
and continues to lose momentum (Chart 2), led
1.0 1.0
by persistent emerging market (EM) weakness © BCA Research 2014
(Chart 2). That is meaningful, as EM accounts 2012 2014

*SOURCE: J.P. MORGAN CHASE & CO.

CHART 2 for a larger share of S&P 500 revenue than

Global Weakness Warns... the euro area. Foreign purchasing manager
U.S. S&P 500
surveys are sending a similar signal. The
1800 200-DAY MOVING AVERAGE 1800 Global ZEW sentiment index, an excellent
leading indicator of business confidence,
1400 1400
warns that the path of least resistance for
1000 1000 growth is lower still (Chart 2).
While the U.S. has so far managed to shrug

U.S.: S&P 500: FORWARD EPS* off global woes, earnings expectations rarely
sail through persistent foreign weakness
120 120
without stumbling (Chart 2). There is still
100 100 too much optimism embedded in the earn-
ings outlook, particularly in globally-exposed
80 80 sectors.
Chart 3 shows that forward EPS growth

GLOBAL LEI EXCLUDING U.S.
2 2 expectations are slightly more upbeat in
globally-exposed than domestic sectors,
1 1
despite U.S. growth momentum outpacing
0 0
the rest of the world. Excessive optimism is
-1 -1
consistent with still elevated readings in our
-2 -2 Global Economic Sentiment Index (Chart 3).
EMERGING ASIA LEI Recent U.S. dollar appreciation will be

3 3 an earnings headwind for global sectors
2 2
(U.S. dollar shown inverted, bottom panel,
1 1
Chart 3). While many global sectors were
0 0
hardest hit during the recent broad market
-1 -1
sell-off, and could rebound sharply, this is
-2 -2
a chance to fade strength rather than buy
GLOBAL PMI EXCLUDING U.S.** (LS) weakness.
% GLOBAL ZEW ECONOMIC SENTIMENT (RS) %
55
40 In sum, there is little profit help on the ho-
50
20 rizon to carry equities to durable new highs.
45
0
We expect the broad market to be biased to
40
-20
trading in a range rather than continuing to
35
grind higher. More total return potential will
-40
© BCA Research 2014
be generated from alpha than beta. Defensive
06 08 10 12 14 and domestic sectors are best positioned.
*SOURCE: THOMSON REUTERS / IBES, SMOOTHED
**GDP-WEIGHTED AVERAGE OF U.K., JAPAN & EURO AREA;
MANUFACTURING & SERVICES PMIs

CHART 3 Last week we recommended buying home-

...Of Wobbly Profits builders to take advantage of the stimulative
U.S. S&P 500
effect of lower bond yields, and this week, we
200-DAY MOVING AVERAGE are shifting our style bias in favor of growth
1800 1800
stocks and highlighting two beneficiaries of
U.S. dollar strength.
1400 1400
1000 1000 Deflationary Strains

Favor Growth Vs. Value
Global economic growth is becoming increas-
BCA GLOBAL ECONOMIC SENTIMENT INDEX
ingly scarce. Ironically, sub-par growth is a
2 Extreme Optimism
2 catalyst for a re-rating in the growth vs. value
style preference.
0 0 Table 2 shows a sector weighting breakdown

for each of the major style indexes. The
growth composition is heavily weighted in
-2 Extreme Pessimism -2
sectors with stable and recurring cash flow
U.S.:
streams, such as health care and technology.
% S&P GLOBAL*: FORWARD EPS GROWTH** % Value indexes are much less geared to the
S&P DOMESTIC*** FORWARD EPS GROWTH**
health care and technology, and have a higher
20 20
weight in shorter-cycle manufacturing-driven
sectors (Table 2).
10 10
These divergent sector profiles mean that

0 0 growth indexes should outperform given their
natural hedge against intense global defla-
-10 -10
tionary pressures. Sinking commodity prices
U.S.: amidst a sharp slowdown in emerging mar-
S&P GLOBAL* / S&P 500: FORWARD EPS** (LS)
kets (EM) economic activity will challenge
.30 TRADE-WEIGHTED US$**** (INV, RS) 75
production-oriented business models. There
.28 80 is already evidence that the global economic
slowdown is undermining value relative to
.26 85
growth-oriented profitability.
.24 90
For instance, our pricing power proxies for
.22 95 the growth and value indexes confirm that
global macro dynamics favor a growth tilt
06 08 10 12 14
(Chart 4). Our Cyclical Macro Indicators
*GLOBALLY EXPOSED INDUSTRY GROUPS
**SOURCE: THOMSON REUTERS / IBES
***DOMESTICALLY EXPOSED INDUSTRY GROUPS
****SOURCE: J.P. MORGAN CHASE & CO.

Table 2 CHART 4
Sector Composition Growth Stocks Thrive On Volatility
S&P 500 GROWTH S&P 500 VALUE U.S.:
SECTOR SECTOR % SECTOR %
S&P GROWTH / VALUE (LS)
WEIGHT WEIGHT
VIX INDEX* (ADV, RS)
INFORMATION 1.6
28 10 60
TECHNOLOGY
HEALTH CARE 17 11
CONSUMER 1.4
16 7
DISCRETIONARY
INDUSTRIALS 12 9
40
FINANCIALS 9 24 1.2
CONSUMER
8 11
STAPLES
ENERGY 5 14
1.0
MATERIALS 4 3 20
TELECOM SERVICES 1 4
UTILITIES 0 7
U.S. GROWTH / VALUE**:
CYCLICAL MACRO INDICATOR (LS)
3
(CMI), weighted by sector composition in each 1.3 VALUATION INDICATOR (RS)
of the benchmarks, are also strengthening,

2
reinforcing that growth earnings are on track
1.2
to outperform. The CMIs are consistent with a
1
move to premium growth vs. value valuations
(Chart 4, middle panel). 1.1
0
At the same time, slowing EM investment

-1
1.0
spending implies that global savings will ex-
pand further, sustaining downward pressure on -2
global interest rates. Low bond yields push up
valuations for longer duration sectors, which are % U.S. GROWTH MINUS VALUE**: %
RELATIVE PRICING POWER***
heavily represented in growth benchmarks. It 2 2
is no surprise that growth consistently outper-
1 1
forms value when the Fed is on hold (Chart 5).
0 0
This backdrop is inherently more risky for fi-
nancial assets in general, because markets are -1 -1
overly reliant on liquidity rather than economic -2 -2

growth for support. As a result, it is natural
-3 -3
to expect higher equity market volatility as
expectations for changes in the liquidity back- -4 -4
drop ebb and flow. Growth stocks have a more
96 98 2000 02 04 06 08 10 12 14 16
defensive bias than value stocks, and often
*SOURCE: CHICAGO BOARD OF OPTIONS EXCHANGE; SMOOTHED
move with the VIX index (Chart 4). Thus, the **SECTOR-WEIGHTED COMPOSITE, BASED ON SECTOR WEIGHTINGS
IN THE S&P 500 GROWTH & VALUE INDEXES
next few years should become more growth ***SHOWN AS A 6-MONTH RATE-OF-CHANGE, ANNUALIZED, SMOOTHED
stock-friendly.

CHART 5 CHART 6
Disinflationary Winner Competing Forces
U.S. S&P 500: GROWTH / VALUE (LS)
1.6 U.S. S&P 500: GROWTH / VALUE 1.6 TRADE-WEIGHTED US$* (INV, RS) 75
1.2
1.4 1.4
80
1.1
1.2 1.2
85
1.0 1.0 1.0

90
.9
% U.S. EXPECTED FED FUNDS RATE IN 6-MONTHS % 95
6 6 U.S.: S&P GROWTH / VALUE (LS) %

GLOBAL 10-YEAR GOVERNMENT
1.3 BOND YIELD (INV, RS)
4 4
2
1.2
2 2
1.1
3
Ann% EMERGING MARKETS: REAL CAPEX* Ann% 1.0

Chg Chg
4
12 12 .9
8 8 © BCA Research 2014
4 4 04 06 08 10 12 14
0 0
-4 -4 On the downside, continued U.S. dollar ap-

preciation will undermine foreign sourced
Ann% U.S. CORPORATE SECTOR PRICE DEFLATOR Ann% earnings. The growth vs. value share price
Chg Chg
ratio has often declined when the U.S. dol-
3 3 lar has firmed (Chart 6, top panel). This
headwind is not insurmountable, however,
2 2
because it is occurring alongside a decelera-
tion in global output growth. The confluence
1 1
of a strong dollar amid weaker global growth
0 0
will be a bigger headwind for value compa-
nies while the more services-driven growth
2000 02 04 06 08 10 12 14 industries should benefit disproportionately
*INCLUDES 20 EM COUNTRIES, MARKET-CAP WEIGHTED
from benign bond yields (Chart 6, yields
shown inverted).

Bottom Line: The intensification in disinfla- CHART 7
tionary pressures around the world is creating An Opportunity Exists In Packaging Stocks
%
the conditions for growth stocks to outperform U.S.: S&P CONT. & PACKAGING / S&P 500 (LS)
.13 GLOBAL 10-YEAR BOND YIELD* (RS)
value shares. We are shifting our style bias
accordingly.
2
.11
Containers & Packaging:
A Strong U.S. Dollar Winner? 3
Packaging stocks are a high-conviction over- .09
weight that have not yet lived up to our billing.

The group has been dragged down with the
4
materials sector on the back of deflationary .07
pressures. However, it has started to outper-

form the materials sector, as is typical when
5
the latter is falling, and the odds are high of .05
a resumption broad market outperformance.

The S&P containers & packaging index is a dis- 2000 02 04 06 08 10 12 14 16
inflationary winner. Chart 7 shows that relative *INVERTED & ADVANCED
performance has closely followed the trend in

global bond yields, inversely, for more than a decade. Importantly, as discussed in our last Weekly
Report, while global trade has been flat in value terms for several years, that is masking steady
growth in the volume of global exports (Chart 8).
Therefore, goods price disinflation, or even outright deflation, should be viewed as a positive catalyst
for packaging providers, as they rely on the volume of product sold. Moreover, a large portion of
packaging clients operate food and beverage businesses, which are insulated from the global busi-
ness cycle. Indeed, real exports of food and beverages continue to grow at a robust clip (Chart 8),
despite the stronger U.S. dollar and softening foreign demand.
On the domestic front, growth in real consumer spending on food and beverages has cooled in
recent months, reflecting the prior increase in food prices. However, the strengthening U.S. dollar
has reduced raw food prices, which should spark an uptick in consumption (Chart 9).
All of this implies that packaging providers should enjoy solid utilization rates, a critical driver of
profitability for any manufacturing-intensive business. Indeed, food shipments tend to lead relative
forward earnings momentum (Chart 9).
But won’t a stronger U.S. currency undermine foreign sales prospects? After all, companies in the
index garner more than half of their revenue from abroad, on average. While the rate of sales growth
may decelerate, that should be more than offset by an increase in profit margins.

CHART 8 CHART 9
Volumes Are Robust Domestic Consumption Rebound Ahead
U.S.: S&P CONTAINERS & PACKAGING / S&P 500 U.S.: S&P CONTAINERS & PACKAGING / S&P 500
40-WEEK MOVING AVERAGE .12 40-WEEK MOVING AVERAGE .12
.12 .12
.10 .10 .11 .11
.08 .08
.10 .10
.06 .06
.09 .09
.04 .04
GLOBAL EXPORT VOLUME INDEX*

.08 .08
140 140
U.S.:
REAL PCE ON FOOD & BEVERAGES* (LS)
120 120 CRB** FOODSTUFFS* (ADV, RS)
% %
100 100 6
30
3
80 80
0 0
GLOBAL EXPORT PRICE INDEX*

-3
140 140
-30
-6
120 120
-60
-9
U.S.:
100 100 RELATIVE FORWARD EPS GROWTH*** (LS)
% Ann%
FOOD MANUFACTURING:
Chg
SHIPMENTS (ADV, RS)
80 80 10
12
5
Ann% U.S. REAL EXPORTS OF FOOD & BEVERAGES* Ann% 8
Chg Chg
0
10 10
4
-5
5 5
0
0 0 -10
-4
-5 -5 -15
-10 -10
04 06 08 10 12 14 16
*SHOWN AS A 6-MONTH RATE-OF-CHANGE, ANNUALIZED
2000 02 04 06 08 10 12 14 **SOURCE: COMMODITY RESEARCH BUREAU, INC.
*SMOOTHED ***SOURCE: THOMSON REUTERS / IBES

CHART 10 CHART 11
Strong Dollar Will Spur Margin Expansion Significant Cost Relief
%
U.S. S&P CONTAINERS & PACKAGING: U.S.: S&P CONTAINERS & PACKAGING / S&P 500
OPERATING MARGINS (LS) 40-WEEK MOVING AVERAGE
TRADE WEIGHTED US$* (ADV, RS) .12 .12
110
13
.10 .10
100
12
.08 .08
11 90 U.S.:
US$/ WTI CRUDE OIL PRICE (LS) US$/
Bbl NATURAL GAS PRICE (RS) Mmbtu
10
120 12
80
8
9 80
4
96 2000 04 08 12 16
40
% U.S. EMPLOYMENT: METAL, GLASS & PAPER %

Chart 10 shows that operating margins have CONTAINERS / TOTAL NON-FARM
.20 .20
consistently followed the trend in the greenback
for more than two decades. The most plausible
explanation for this extremely close relationship .18 .18
is that the bulk of commodity input prices de-

preciate during periods of U.S. dollar strength. .16 .16
Packaging manufacturing is an energy-inten-

.14 .14
sive process, and the recent relief in energy
prices should provide meaningful profit mar- U.S. S&P CONTAINERS & PACKAGING / S&P 500:
PRICE / SALES
gin relief (Chart 11). Moreover, the industry
.7 .7
continues to control labor costs, as headcount
has been contracting for ten years (Chart 11).
.6 .6
This relentless focus on productivity should
Mean
ultimately be rewarded in the coming years,
.5 .5
as any industry that manages to expand profit
margins when overall corporate sector profit-
.4 .4
ability is being squeezed is likely to receive a © BCA Research 2014
premium valuation. 04 06 08 10 12 14

Bottom Line: Using history as a guide, the S&P CHART 12
containers & packaging index (AVY, BMS, BLL, Long-Term Financial Tailwinds
U.S.:
OI, MWV, SEE) is set to enjoy sustained profit .4 S&P FINANCIALS / S&P 500 (LS)
TRADE-WEIGHTED US$* (RS) 130
margin expansion. We are maintaining a high-
conviction overweight.
.3 110
Financials, Consumer 90
Finance And The U.S. Dollar .2
Global deflationary stress has caused bond 70

U.S.:
yields to plummet and the yield curve to flat-
CONSUMER CREDIT (LS)
Ann%
ten. Nevertheless, the S&P financial sector has Chg
TRADE-WEIGHTED US$* (RS)
outperformed in the past two months, despite 120
broad market volatility. Does this mean the 16
financial sector is vulnerable to a pullback, in

100
relative performance terms? We doubt it. 8
There are a number of variables to consider.

0 80
First, the U.S. output gap is closing, implying
upward pressure on credit demand and improv-
ing credit quality as the business and consumer 84 89 94 99 04 09 14
%
U.S.:
sectors enjoy healthy income growth. S&P FINANCIALS / S&P 500 (LS)
.4 10-YEAR TREASURY YIELD (INV, RS)
2
Second, the surge in the U.S. dollar is a bullish
catalyst. Chart 12 shows that financials and the 4
.3
trade-weighted currency move in tandem over
long periods, because the latter keeps inflation 6
low and supports domestic purchasing power, .2

8
two preconditions for loan growth.
Third, sector valuations remain well below aver- U.S.:

FINANCIALS: VALUATION INDICATOR (LS)
age, providing protection against deflationary TRADE-WEIGHTED US$* (RS)
115
strains abroad. It is notable that relative valu- 1
ations are also linked with the U.S. dollar, im- 105
plying that investors should expect a re-rating 0

95
(Chart 12, bottom panel).
-1 85
Finally, since the Great Recession, the financial

75
sector has been positively correlated with Trea- -2 © BCA Research 2014
sury yields. But that has not always been the 92 96 2000 04 08 12 16
case. Up until the middle of the last decade, *SOURCE: J.P. MORGAN CHASE & CO.

yields were inversely correlated with financial CHART 13
sector relative performance. Lower yields were End Of Consolidation

Ann%
U.S. :
mostly driven by falling inflation expectations .6 S&P CONSUMER FINANCE / S&P 500 (LS)
Chg
S&P / CASE-SHILLER HOME PRICES (RS)

rather than a decline in the real component 20
.5
(Chart 12, third panel). Ergo, falling yields
10
represented a cheaper cost of capital, which .4
spurred credit demand.
0
.3
More recently, yields have dropped as a con-

.2 -10
sequence of a decline in inflation expectations
and the exogenous effect of an excess global
U.S. : Th
savings glut rather than as a direct reflection of S&P CONSUMER FINANCE / S&P 500 (LS)
.6 200
slower U.S. growth. If U.S. yields are lower than UIC* (INV, RS)
domestic economic activity would otherwise .5 300
dictate, this should be stimulative for growth

.4 400
and by extension, financial sector activity, off-
setting any profit drag from the narrowing yield .3 500
curve. Consequently, financial sector relative
.2 600
performance could reestablish a negative cor-
relation with Treasury yields. U.S.:
S&P CONSUMER FINANCE / S&P 500 (LS) Ann%
CONSUMER SPENDING ON DURABLES** (RS)
In terms of specifics, consumer lenders look .5
Chg
well positioned. A strengthening U.S. dollar 6

has historically been a significant positive .4
influence on consumer credit demand. Rising 0
purchasing power and downward pressure on .3

-6
the cost of financing create ideal conditions
for consumer borrowing. Chart 12 shows that .2
-12
consumer installment credit and the currency
have moved hand in hand for the past several
% U.S. CONSUMER SPENDING: DURABLES / GDP %
decades.
9 9
We used this year’s consolidation in the S&P
consumer finance group to return to an over-
weight position in August. The cooling resi- 8 8
dential property market had pressured relative

performance (Chart 13, top panel), owing to
fears that the downturn in house price inflation 7 7
would spur a rise in the personal savings rate.
02 04 06 08 10 12 14
*UNEMPLOYMENT INSURANCE INITIAL CLAIMS, SMOOTHED
**SMOOTHED

CHART 14 CHART 15
Solid Loan Demand The Market Should Reward Stability
U.S.: S&P CONSUMER FINANCE / S&P 500 U.S.: S&P CONSUMER FINANCE / S&P 500
40-WEEK MOVING AVERAGE 40-WEEK MOVING AVERAGE
.5 .5 .5 .5
.4 .4
.4 .4
.3 .3
.3 .3
.2 .2
Ann% U.S. REAL WAGES & SALARIES Ann% .2 .2

Chg Chg
4 4
Bn$ U.S. REVOLVING CONSUMER CREDIT* Bn$
2 2
Consistent
10 10
0 0
5 5
-2 -2
0 0
-4 -4
-5 Choppy -5
% U.S.: %
STRONGER DEMAND FOR LOANS*
INCREASED WILLINGNESS TO MAKE LOANS* -10 -10
25 25
-15 -15
0 0
04 06 08 10 12 14
*SHOWN AS A 1-MONTH CHANGE
-25 -25
But that risked overlooking the impact of
-50 -50
a recovering labor market (second panel,
U.S.: Chart 13, unemployment claims are shown
HOUSE PRICE INFLATION** (LS)
Ann% %
Chg
PERSONAL SAVINGS RATE** (INV, RS) inverted). Better income growth has already
2
spurred a rebound in consumer durable goods
10 3
spending (Chart 13, third panel), and the
4
5 recent decline in bond yields should rein-
0
5 force this trend. Spending on durables has
6 often provided a good leading indication for
-5
consumer credit appetite. Significant pent-up
7
-10 demand still exists (bottom panel, Chart 13),
and catalysts to unlock this potential are vis-
2000 02 04 06 08 10 12 14
*CONSUMER LOANS, SOURCE: SENIOR LOAN OFFICER SURVEY
ible: real wages & salaries growth is accelerat-
**SMOOTHED
ing (Chart 14, second panel), and lenders are
making funds more readily available.

The implication is that consumer credit growth should stabilize at a decent level. Since the Great
Recession, consumer installment debt has grown in fits and starts. If investors gain comfort that
finance receivables will be more consistent, that should support premium valuations (Chart 15),
especially in view of the financial sector’s historically bullish performance when the U.S. dollar is
rising.
Risks to our positive view include a narrowing yield curve and a return to a more savings-oriented
consumer. But lower mortgage rates should spur the housing recovery, lower energy prices will free
up purchasing power and tighter labor markets will boost consumer income expectations, mitigat-
ing any rise in the savings rate.
Bottom Line: A strengthening U.S. dollar is a bullish catalyst for the financial sector in general and
the S&P consumer finance index (AXP, COF, DFS, SLM) in particular. Stay overweight.

Current Recommendations
Sector
OVERWEIGHT NEUTRAL UNDERWEIGHT
Health Care Facilities - Oct 21, 2013

S&P HEALTH CARE
Managed Health Care - Mar 19, 2012 Pharmaceuticals - Sep 8, 2014 Biotechnology - Jan 7, 2013
September 8, 2014
Health Care Equipment - Sep 27, 2004
S&P utilities
Electric Utilities - Jun 23, 2014
June 23, 2014
Coal & Consumable Fuels - Jun 9, 2014

Integrated Oil & Gas – Apr 7, 2014
overweight
S&P ENERGY Oil & Gas Exploration & Production –

Energy Equipment & Services – Jan 27, 2014
March 17, 2014 Mar 17, 2014
Oil & Gas Refining And Marketing –
Oct 14, 2013
Consumer Finance - Aug 25, 2014
Insurance (Composite) - Jul 21, 2014 REITs - Jul 21, 2014
Investment Banks And Diversified
S&P FINANCIALS
Banks - May 6, 2013
December 12, 2011
Regional Banks - Dec 12, 2011
Asset Management & Custody Bank Index -
Oct 25, 2010
Data Processing - Oct 6, 2014

Semiconductors - Sep 22, 2014
Communications Equipment - May 27, 2014
S&P TECHNOLOGY Semiconductor Equipment - Sep 22, 2014
Computers & Peripherals - Sep 26, 2011
December 5, 2005
Software - Jul 19, 2010
neutral
S&P TELECOMMUNICATION
SERVICES Integrated Telecom Services - Aug 11, 2014
August 11, 2014
Machinery - Sep 2, 2014

S&P INDUSTRIALS Railroads - Apr 29, 2013 Construction & Engineering - Jun 23, 2014 Aerospace & Defense - Oct 29, 2007
September 2, 2014 Air Freight & Logistics - Jan 28, 2013 Electrical Components & Equipment -
Jun 23, 2014
Chemicals - Aug 11, 2014

S&P MATERIALS
Containers & Packaging - Dec 9, 2013 Steel - June 2, 2014
June 2, 2014
Agricultural Chemicals - Mar 17, 2014
underweight
Auto Components - Feb 10, 2014 Cable & Satellite - May 27, 2014
S&P CONSUMER Homebuilding - Oct 20, 2014 Computer & Electronics Retail - July 22, 2013 Movies & Entertainment - Jul 29, 2013
DISCRETIONARY Restaurants - Oct 6, 2014 Publishing & Printing - May 14, 2012 Home Improvement Retail - May 21, 2013
December 10, 2012 Hotels - May 20, 2014 Advertising - May 14, 2012 Retail - Jan 22, 2013
Leisure Products - Jan 17, 2006 Household Appliances - Mar 4, 2004
Drug Retail - Sep 15, 2014 Household Products - June 30, 2014 Hypermarkets - Jul 23, 2012
S&P CONSUMER STAPLES
Packaged Foods - Mar 3, 2014 Soft Drinks - May 5, 2014 Retail (Food Chains) - Nov 8, 2010
July 23, 2012
Tobacco - May 29, 2007
DENOTES UPGRADE IS PROBABLE DENOTES DOWNGRADE IS PROBABLE

Current Trades
BLOOMBERG RETURN (%)* SINCE
TOP 10 HIGH-CONVICTION CALLS FOR 2014 TICKERS JAN. 13, 2014
OVERWEIGHTS
S&P 500 Railroads / S&P 500 S5RAIL <Index> / SPX <Index> 17.5
S&P 500 Software / S&P 500 S5SOFT <Index> / SPX <Index> 7.5
S&P 500 Utilities / S&P 500*** S5UTIL <Index> / SPX <Index> 5.7
S&P 500 Heath Care Equipment / S&P 500*** S5HCEP <Index> / SPX <Index> 2.2
S&P 500 Investment Banking & Brokerage / S&P 500 S5INBK <Index> / SPX <Index> -2.1
S&P 500 Containers & Packaging / S&P 500 S5CONP <Index> / SPX <Index> -3.5
S&P 500 Oil & Gas Refining And Marketing / S&P 500** S5OILR <Index> / SPX <Index> -7.4
UNDERWEIGHTS
S&P 500 Food Retail / S&P 500 S5FDRE <Index> / SPX <Index> -1.8
S&P 500 Movies & Entertainment / S&P 500 S5MOVI <Index> / SPX <Index> -4.1
S&P 500 Home Improvement Retail / S&P 500 S5HOMI <Index> / SPX <Index> -7.7
* RETURNS ARE UNIFORM ACROSS OVERWEIGHTS AND UNDERWEIGHTS. A POSITIVE NUMBER INDICATES A PROFIT AND A NEGATIVE NUMBER SIGNIFIES A LOSS.
** As of SEPTEMBER 8, 2014.
*** As of July 7, 2014.
BLOOMBERG INITIATION RETURN

OPEN LONG / SHORT POSITIONS TICKERS DATE (%)
S&P 500 Technology / S&P 500 Telecom Services S5INFT <Index> / S5TELS <Index> 03-DEC-12 32.3
S&P 500 Financials / S&P 500 Consumer Staples S5FINL <Index> / S5CONS <Index> 14-NOV-11 19.6
S&P 500 Utilities / S&P 500 Materials S5UTIL <Index> / S5MATR <Index> 16-JUN-14 7.1
S&P 500 Software / S&P 500 Data Processing S5SOFT <Index> / S5DPOS <Index> 02-APR-13 4.5
S&P 1500 Health Care Facilities / S&P 500 Biotech S15HCFA <Index> / S5BIOTX <Index> 03-FEB-14 1.9
S&P 500 / S&P 600 SPX <INDEX> / SML <INDEX> 28-JUL-14 0.9
S&P 500 Industrials / S&P 500 Consumer Discretionary S5INDU <Index> / S5COND <Index> 04-MAR-13 -0.7
S&P 500 Banks / S&P 500 REITs S5BANK <Index> / S5REITS <Index> 22-SEP-14 -9.8
S&P 500 Packaged Foods / S&P 500 Food Retail S5PACK <Index> / S5FDRE <Index> 31-JAN-11 -13.3
INITIATION BLOOMBERG RETURN

closed TRADES DATE TICKERS
Closing Date
(%)
S&P 500 Industrials / S&P 500 Utilities 03-DEC-12 S5INDU <Index> / S5UTIL <Index> 03-FEB-14 22.0
S&P 500 Semiconductors / S&P 500 13-JAN-14 S5SECO <Index> / SPX <Index> 07-JUL-14 11.6
S&P 500 Hypermarkets / S&P 500 13-JAN-14 S5HYPC <Index> / SPX <Index> 09-OCT-14 3.7
S&P 500 Banks / S&P 500 Insurance 03-SEP-13 S5BANK <Index> / S5NSU <Index> 22-SEP-14 1.7
S&P 500 Oil & Gas Refining And Marketing / S&P 500 13-JAN-14 S5OILR <Index> / SPX <Index> 30-JUN-14 -6.5
S&P 1500 Auto Components / S&P 500 Homebuilding 07-OCT-13 S15AUTC <Index> / S5HOME <Index> 03-FEB-14 -7.9

Size And Style Views
Favor large over small caps and growth over value.
Recent Insights
October 21
FF Homebuilding: A Little Help From The Bond Market
FF Air Freight: Already Discounting A Global Recession
October 22
FF Financials And The U.S. Dollar: A Long-Term Point Of View
FF Demand Resilience In The Computer Hardware Industry
October 23
FF No Rush To Check Out Of Hotels
FF Semis: Stay On The Sidelines
October 24
FF The Air Is Coming Out Of Aerospace & Defense Stocks
FF Continue To Prefer Tech To Telecom

BCA House View Matrix
6-12 MONTHS 2-3 YEARS
October 21, 2014
U.S. EQUITIES Downgrade to flat, medium conviction. Flat, medium conviction. Recent returns
Global growth headwinds constrain the have far exceeded our long-term expecta-
profit outlook. Continue to favor domestic tion of 5-6% returns per year.
and defensively-geared over global and
deep cyclically-exposed sectors, as well as
large over small cap.
U.S. TREASURY BONDS Neutral duration, medium conviction. Odds Manage duration exposure tactically, rather
on side of positive U.S. economic surprises, than staying structurally short, low convic-
counterbalanced by upward pressure on tion. Lower U.S. potential growth means
savings in the EMU zone and emerging Treasury yields will not sustainably trade
markets. above current levels discounted in the
forward curve.
U.S. DOLLAR Neutral, low conviction. A lack of growth Flat, low conviction. A lower dollar makes
outside the U.S. is dollar bullish, but there sense for the U.S., but other major curren-
is a limit to how much the U.S. economy cies are hardly attractive.
can handle.
CHINA Chinese authorities will not let the economy Bullish, medium conviction. Aggressive
spiral downward, but the main policy focus supply-side reforms should improve eco-
is structural reform. The main risk is a policy nomic efficiency and the structural appeal
mistake as credit growth slows. of Chinese equities.
EUROPE The bank stress test, tensions with Bullish, medium conviction. Structural valu-
Russia, rising risk premiums, and the ations now approaching fair value.
efficacy of ECB response create near-term
uncertainties.
JAPAN Japanese equities would trend higher if the Bullish bias (equities). However, much
BoJ eases aggressively. But this might first depends on whether the policy shift is
require a market riot. JGBs “fully priced”. sustained once growth and inflation recover.
Geopolitical factors to monitor:

FF Oil supply: considering increased Libyan exports this year, supply risks going forward are to the downside
FF East Asia tensions: risks are rising, high conviction
FF EM domestic politics: risks are rising, low conviction
FF DM domestic politics: risks remain subdued, U.S. midterm election is a potential positive catalyst, medium
conviction
The BCA House View Matrix will be published in our reports – for a period of one week – after the monthly view meeting of our
Editorial Board.

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U.S.

12-MONTH FORWARD FORWARD P/E RATIO*

Materials 16.6 15.6 15.5

Emin Baghramyan Energy 4.6 12.9 14.8

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

E quities are enjoying a rebound from oversold

profit season has been mixed, with a number

Investors have been willing to overlook foreign

whether the scope, scale and potency of this

struggling to find a floor (Chart 1), in the U.S.

higher unless growth begins to surprise to the 2.0 2.0

On this front, the outlook is cloudy. Our global 1.6 1.6

leading economic indicator (LEI), excluding 1.4 1.4

(Chart 2). That is meaningful, as EM accounts 2012 2014

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

CHART 2 for a larger share of S&P 500 revenue than

While the U.S. has so far managed to shrug

Chart 3 shows that forward EPS growth

EMERGING ASIA LEI Recent U.S. dollar appreciation will be

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

CHART 3 Last week we recommended buying home-

1000 1000 Deflationary Strains

0 0 Table 2 shows a sector weighting breakdown

These divergent sector profiles mean that

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

of the benchmarks, are also strengthening,

At the same time, slowing EM investment

overly reliant on liquidity rather than economic -2 -2

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

1.0 1.0 1.0

6 6 U.S.: S&P GROWTH / VALUE (LS) %

Ann% EMERGING MARKETS: REAL CAPEX* Ann% 1.0

8 8 © BCA Research 2014

-4 -4 On the downside, continued U.S. dollar ap-

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

Bottom Line: The intensification in disinfla- CHART 7

Packaging stocks are a high-conviction over- .09

weight that have not yet lived up to our billing.

pressures. However, it has started to outper-

a resumption broad market outperformance.

The S&P containers & packaging index is a dis- 2000 02 04 06 08 10 12 14 16

inflationary winner. Chart 7 shows that relative *INVERTED & ADVANCED

performance has closely followed the trend in

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

.10 .10 .11 .11

GLOBAL EXPORT VOLUME INDEX*

GLOBAL EXPORT PRICE INDEX*

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

% U.S. EMPLOYMENT: METAL, GLASS & PAPER %

is that the bulk of commodity input prices de-

Packaging manufacturing is an energy-inten-

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247

Bottom Line: Using history as a guide, the S&P CHART 12

Global deflationary stress has caused bond 70

outperformed in the past two months, despite 120

broad market volatility. Does this mean the 16

financial sector is vulnerable to a pullback, in

There are a number of variables to consider.

low and supports domestic purchasing power, .2

Third, sector valuations remain well below aver- U.S.:

plying that investors should expect a re-rating 0

Finally, since the Great Recession, the financial

Ryan Rietz JANNEY CAPITAL MANAGEMENT LLC 258247