McElligott at RBC – Grossing Down


–good commentary from Charlie at RBC:

OVERNIGHT: Generally higher equities (Estoxx / DAX still holding at highs while Spooz dip ‘red’—highlighting the ‘relative value’ of EU equities against US as they break-out, see Mark Orsley’s piece today) and bonds (bull flattening, with US1 +0.4% vs TY1 +0.2%), with lower rates dragging USD lower against most of G10 and especially against EMFX (20 of 24 EM currencies higher against Dollar).

The pause in the rates trajectory continues to be extraordinarily ‘tame,’ as many have been anticipating a sharper ‘counter-trend rally’ which has yet to occur.  One thought here is the ongoing situation with Chinese outflows, with data overnight showing their FX reserves dropping the most in 10 months…as such we see the Yuan at 8 year lows against the Dollar.  The rhetoric and twitter-barbs from Trump regarding the potential to paint China as a currency manipulator, along with the Taiwan phone-call faux paus, continue to agitate the situation.

It is certainly reasonable to believe that this source of UST selling will continue to keep USTS rallies ‘limp,’ and still in front of a very pro-growth / reflationary Trump policy mix to come: lower corporate and individual taxes, industry deregulation, trade policy (tariffs will drive up domestic prices as cheaper international goods competition is removed) and a fiscal policy shift away from monetary policy will all conspire to take rates higher in the year + window ahead.

COMMENTARY: I’ll keep this simple…we continue to see obvious re-risking in the form of “buy everything” price-action, as investors push further out onto the risk curve against a shift away from the 5+ year narrative of “secular stagnation” towards positioning that allows capture of “reflation animal spirits.

Add-in the market ‘comfort’ of knowing that both the BoJ (Iwata reiterating that they can accelerate / expand purchases overnight) and the ECB (extension expectations tomorrow) will continue providing a QE-monetary policy “backstop” to keep the grind higher in rates from getting ‘disorderly’ in the medium-term.  This is critical to avoiding ‘VaR shocks,’ as well as avoiding a drag to the broad economy through ‘financial tightening.’

More of the same “price is news” on reflation positioning-pivot—a look at market metrics:

–USD 5Y5Y inflation swaps making 2-year highs last week and holding

–UST 5Y Zero coupon inflation yields at 26-month highs last week and holding

–UST 30Y Breakeven yields at 26-month highs last week and holding

–WTI Crude 17-month highs this week and holding

–XLF/XLU ratio at 8-year highs

–Global Cyclicals to Defensives index ratio at 2-year highs

–IWM/TLT ratio at 3-year highs

–U.S. Growth / Value ETF ratio at 2.5-year lows

And to the macro data-points (note: much of this is expressed in the charts section below):

–G10 Economic Surprise Index at 3-year highs

–US Consumer Confidence printing at 9-year highs

–CEO Confidence Index 3rd highest print since July 2007

–Global Manufacturing PMI’s at 27-month highs

–Global Services PMI’s at 1-year highs

–49-month highs in G10 Inflation Surprise Index

As such, we are seeing ‘real money’ client portfolio rotation stay ‘front-footed’ on adding risk.  That said, and for a multitude of reasons, we are also seeing signs of tactical profit-taking into year-end from some of the leveraged-fund universe—where the performance (or outright ‘survival’) focus has been well-documented.  The desire there is to ‘lock’ gains, survive and advance into next year.  Thus, some evidence of ‘grossing down’ behavior continues in pockets, as shorts outperform while a smattering of ‘winning’ longs are sold.

CROSS-ASSET RISK THERMOMETER: Moving ‘right and up’ on the risk-curve.

EQUITIES THEMATIC—SAME AS IT EVER WAS: Small Cap / High Beta / Cyclicals / Value / High Short Interest / Inflation / Domestic Exposure / Weak Balance Sheet over Low Vol / Defensives / Anti-Beta / Growth / Quality / Strong Balance Sheet.

EQUITY FACTORS—IF IT AIN’T BROKE, DON’T FIX IT: Size (long small cap over short large cap) and Value (long value, short growth) continue to crush it, while momentum / quality / anti-beta hammered as per the ‘cyclical reflation’ regime.

greg blotnick
greg blotnick



greg blotnick
greg blotnick

CS – “Sticking With Small Over Large”

Small caps set to benefit more under Trump administration

tax rate the key driver (and lack of foreign revenue)

Greg Blotnick IWMs

IWM’s “have become a show me story. The main DRIVER supporting small cap is Economic Indicators & Policy, as small tends to lead when real US GDP is 2-3% range. Small caps also benefit from protectionism due to lower international exposure (19% of revenues in the R2000 vs. 31% for the S&P 500) and the pursuit of a lower corporate tax rate in Washington (we estimate the R2000’s effective tax rate is 32% vs. 26% for the S&P). The small/large trade has also been positively correlated with interest rates since the Financial Crisis, meaning further increases in yields are likely to be accompanied by small cap outperformance. Retail Money Flows initially favored small cap post-Election, with inflows returning, but have started to trend positive for large again in the latest ICI update (we are watching trends here closely). Importantly, Valuations no longer support small over large, as our model is nearly back to neutral (though not expensive yet). On Investor Sentiment, a higher VIX should not derail small cap outperformance for the year as a whole, as long as the average for the year remains subdued (i.e. <25).


OpCo: Revisiting Yield Vehicles In Context of Rising Rates

Revisiting Yield Vehicles In Context of Rising Rates & Slower Replacement Cycle

“With yieldco and yield-based vehicles selling off sharply post-election on expectations for rate increases, we believe it appropriate to consider the new landscape for these names in further detail. First, we expect increased yields for comparable assets to be a headwind as investors have more options with similar current income.

Second, the potential for softer regulation and non-enforcement may make accretive acquisitions increasingly difficult due to fewer projects being built, even for platforms with strong ROFO lists. Third, we believe slowing growth expectations would likely de-risk Street expectations and provide support for these names.

We continue to highlight HASI as a top pick given management’s history of managing through cycles and maintaining investment flexibility across multiple asset classes. We continue to be constructive on CAFD and NEP given their access to projects to support growth and PEGI given relatively attractive valuation.”

greg blotnick - opco
greg blotnick – opco



Small caps saw the most PE expansion since April ‘09 – BAML

Small caps saw the most PE expansion since April ‘09

  • In November, the forward PE for small caps hit a 20-month high, jumping nearly two multiple points to 18.4x from 16.6x as the Russell 2000 rallied 11%. This was the biggest monthly rise since April 2009 and more than double the multiple expansion of any other size segment during November. As a result, small caps now trade at a double digit premium to their historical median since 1985 across all of the five valuation metrics we track, led by PE to growth at a 60% premium. The current PE is 21% above its historical median of 15.2x since 1985, and near the cycle-high of 19.1x in 2014. Overall, valuations across size segments expanded in November as all size segments posted gains for the month.
  • Small caps now trade above their historical premium to large. Based on forward PE, small caps went from trading in-line to large caps to trading at a 9% premium in November, higher than the historical 7% median premium since 1985 (for the first time since mid-2015) but well below the most recent 30% peak in 2011.
Greg Blotnick – Small Caps

Market Strategy – Canaccord

The lack of security features on Internet of Things (IoT) devices could have fatal consequences, according to expert testimony at a recent House Energy and Commerce Committee hearing. As reported by Technology Review, computer security experts testified that computers used in hospitals and other sensitive facilities to control elevators and ventilation systems feature poor security. As a result, these connected devices are vulnerable to hacking, like the webcams, camcorders, and baby monitors that were attacked to cause a widespread Internet outage in the eastern U.S. in October. However, an attack on a hospital could have far more serious consequences than lost Internet access,

and result in the loss of life. While the Dept of Homeland Security and National Institute of Standards and Technology have issued guidelines on securing IoT, some believe the government needs to create a regulatory body to test and approve IoT devices and set universal device standards. The growing adoption of IoT devices will continue to underscore the importance of security, thus benefiting IT hardware and supply chain companies with strong security offerings, including HPE and IBM, as well as those companies manufacturing IoT devices.


JPM – Early Look – 12/5/2016

  • Market update – the Italian referendum outcome, while “bad” as far as risk sentiment is concerned, was also very consistent w/market expectations (the magnitude of the loss may have been a bit larger than anticipated but regardless “No” was expected to emerge victorious and contrary to other recent political events like Brexit or Trump, Renzi’s resignation isn’t likely to represent a seminal shift in either Italian or European politics).
Greg Blotnick - Lights
Greg Blotnick – Lights


  • Markets saw brief weakness following the Italian referendum news but have quickly reversed – the EUR hit 1.05 but has since rebounded to 1.06+ (it is flat-to-down small), US futures touched 2179 but have since rebounded to ~2200 (up ~7-9 points), and Eurozone equities are up ~1%.  Asian markets finished in the red, a function of timing (i.e. they closed before the post-referendum dislocation abated) and to a lesser extent the Taiwan/China news from the weekend (Trump talked to the Taiwan president late on Fri in a significant breach of protocol and decorum and he followed that up w/a tweet Sun night critical of China; while Trump’s team and the media are playing down the Taiwan call, the Washington Post said it was premeditated and deliberately provocative).  With Italy out of the way the calendar of major macro events left on the 2016 thins even further (other than the ECB on 12/8, FOMC on 12/14, and 2017 guidance from industrials such as GE, there aren’t many scheduled catalysts left this year).  However, the recent Trump trade/foreign policy comments does represent an underappreciated source of risk while his fiscal/regulatory agenda may be moderated/delayed as it makes its way through Congress (in fact the Taiwan developments and the Trump trade-related comments/events of the last week are arguably more incremental than the Italian referendum in that the former hasn’t been a big area of focus while the latter was very expected).
  • Calendar – the focus for Mon 12/15 will be on the US non-manufacturing ISM (10amET), Fed speakers (Dudley, Evans, and Bullard), and some analyst meetings (BDC, HA, BSFT, JCI, JUNO, Roche, and SLG).
  • Eurozone equities – the SX5E and SXXP saw brief weakness at the open before quickly rebounding (each is now up ~1%).  All the major sub-groups are higher but autos, insurance, luxury, and retail are outperforming.  Real estate, energy, and utilities are lagging (but each is still trading higher).  The Italian FTSEMIB is underperforming the rest of Europe (but is only down small).  The SX7P bank index is up ~0.75% although Italian banks are lagging.  Luxury stocks are outperforming (Swatch, Christian Dior, Richemont, etc.)
  • Treasuries/sovereign bonds – TSY yields are up small (2 and 10yr yields are up 2 and 3bp, respectively).  In Europe, Italy is the big focus – 10yr BTP yields are up ~12bp to 2.01% (keep in mind though that they are lower than the recent high of 2.13% set back on 11/24).  10yr yields are largely higher across the board in Italy (even Bunds where 10yr yields are up ~5.5bp).
  • FX – the DXY rose overnight after the Italian news but has faded from its highs and is now up ~20bp.  The EUR hit ~1.05 overnight but has since bounced to ~1.06 (flat-to-down small).  The JPY was flat at the time of the Japanese close but has since come for sale (it is off ~60-70bp vs. the USD).  The NZD is down ~80bp after the unexpected resignation of the country’s PM.
  • Asia – most of the major Asian markets finished in the red: Japan (TPX -0.75%, NKY -0.82%), HK (Hang Seng -0.26%), HSCEI -0.71%), mainland China (SHCOMP -1.21%, Shenzhen -0.78%, CSI 300 -1.69%), Taiwan (TAIEX -0.31%), Korea (KOSPI -0.37%), Australia (ASX 200 -0.8%), and India (up ~0.5%).  India was the only major market to see gains.  If the Asian bourses could have stayed open for a few more hours they likely would have performed better but unfortunately they had to close in the hours immediately following the referendum.  Asia-specific news was pretty quiet although the Trump/Taiwan/China news from the weekend did seem to weigh on sentiment a bit.  The services PMIs didn’t have a huge impact on trading.
  • Japan – it was an extremely quiet session to start off the week with a Risk-Off mood after a “no” vote in Italy. NKY traded lower as $/¥ couldn’t reclaim its ¥114 level after the dip over the last weekend post US NFP and ahead of the referendum. The rotation into Beta has run out of steam with Banks -1.8%, Insures -0.8%, Other Financials -1.4% lagging. On the flip side, Cyclicals remained strong as all commodity-related including Shippers +0.3%, Trading cos +0.3%, Machinery +0.1% rose on the back of iron ore, crude, and coking coal. In single stocks, SUMCO +3.8% rose on news Chinese Group may acquire wafer maker Siltronics as consolidation reignited hope for wafer price hikes. CHUGAI fell 2.2% on Shire’s report of adverse events FEIBA when used with a biosimilar to ACE910 for hemophilia (Roche/Chugai). SQUARE ENIX rose +3.5% on weekend Final Fantasy 15 sales updates. FAST RETAILING fell -2.2% on WTE SSS in November showing the divergence in 1H and 2H November results in the sector. Within retails, Ryohin Keikaku -0.3%, Adasria -4.4% slumped on inline Nov. SSS while only United Arrows +0.9% bucked the weak trend.
Greg Blotnick - Metals
Greg Blotnick – Metals
  • Hong Kong/China – HSI headed slightly lower -0.26% following a series of macro headwinds (Italy and Trump/Taiwan).  SHCOMP underperformed on fear of trade/currency war with the US (Trump’s Sun night tweet didn’t help).  Sector wise Rails -2.1%, Steel -1.9% and Infrastructure -1.7% plays were hit the most while Macau gaming stocks +2.1% were the clear outperformer. Macau ripped on ongoing re-rating and headed back towards 52-week highs; JPMorgan’s DS Kim raised PTs across the board to model the secular growth (Galaxy +2.5% Wynn +3.5% Sands +2.05%). For the HK insurers, Daily reported that China Unionpay card Nov overseas insurance deals plunged, AIA +0.55% reacted negatively and came off its highs. In the HK props CKP -1.26% fell hard after the announcement it will acquire aircraft leasing operations from CK Hutch -0.43%. Additionally CK Infrastructure -0.31% made a firm offer to acquire Duet Assets for A$3/ share, or a 28% premium. In the auto space, BYD -3.42% broke down on further speculation of EV subsidy cuts; Brilliance +1.31% pushed higher on growth expectations.  Lonking reacted very positively to the positive profit update up 7.50% in a red tape.
  • US macro updatetying all the recent moving pieces back to the SPX results in a relatively unchanged outlook.  Improving nominal growth (a trend underway well before the election), anticipation of the Trump/Ryan fiscal/regulatory agenda, favorable seasonality, and performance anxiety/chasing from people left behind by the post-11/8 rally are acting as tailwinds but headwinds include higher yields, a stronger USD, very elevated political expectations, and growing headline risk around trade/foreign policy.  Central banks have been an afterthought lately but two important decisions will be made in the next two weeks as Draghi and the ECB (on Thurs 12/8) announce the fate of the post-Mar APP (the market is anticipating a 6 month extension at the current EU80B pace) while Yellen and the Fed (on Wed 12/14) not only hike rates (which is widely expected) but update their 2017 dot and growth forecasts to account for the myriad recent economic developments (improved nominal growth, 4.6% UR, the potential for stepped up fiscal stimulus, etc.).