Finlight Research - Market Perspectives - Jan 2015

Market Perspectives
January 2015
Jan. 6th, 2015

www.finlightresearch.com
Is the plunge in oil prices the new black swan?
Although the junk bond market is nowhere near as large

as the home mortgage market, widespread defaults from
energy-related debt could cause a crisis, which could
make wider ripples throughout the financial edifice
Peter Schiff
2
FinLight Research | www.finlightresearch.com
Executive Summary: Global Asset Allocation

As 2015 starts, the story remains one of continuing global weakness, but
positives in the US.
The Fed is now faced with the challenge of finding a low-drama course to
higher rates
Deflationary risk in the Eurozone is significantly higher than 6 months ago.
Inflation data should be supportive of expectations for ECB QE operations to
begin in January

The divergence theme continues to propel the dollar higher

The bull market remains intact. But, with no significant selloffs to rebalance
sentiment, greed is flourishing out of control.
Between slowing growth, coming rate hikes, falling oil, and the strength of the
dollar, we still believe equity markets are on borrowed time.
But expansionary monetary policies, low interest rates and abundant liquidity
are still keeping us from moving to an underweight on equities. We
remain neutral on global equities and think earnings growth should be the
only driver of markets from here.

Volatility is finally back This is for certain!

We dont agree with those who continue to assert that lower oil prices are
good for the US economy and the stock market, as the benefits to consumers
is supposed to outweigh the decline in the energy sector (less than 10% of
corporate earnings and market valuation).
We remain underweight government bonds and corporate credit overall
(but with an intra-asset class preference for IG vs HY, and Eurozone nonfinancials IG vs US IG), and Overweight US dollar (supported by divergence
Fed policy from that of the ECB and BOJ).
We summarize our views as follows
3
Our Top Bets for 2015
For the coming months, we bet on the continuation of many of recent trends: lower government
yields, wider credit spreads; stronger dollar and lower commodity prices. However, we dont feel
comfortable with the rally in equities. We still believe Fed-levitated equity markets are on
borrowed time. The ECB will be the big factor for 2015's first half. We may change our view on
equities if the 2075-2125 band on the S&P500 is breached to the upside.
Our main convictions are:

US dollar strengthening: The divergence theme should continue to propel the dollar higher
against DM (Targets: EUR-USD at 1.15, then 1.10 in Q4-2015 and parity in early 2016, USDJPY = 124)

Lower oil prices: We target 08 lows (around $35 on WTI) as long as the OPEC doesnt decide
to stop the bleeding

A significant flattening of the US yield curve: This dynamic is usual during Fed tightening
cycles. The re-pricing of Fed expectations is likely to take place very soon in the short end of the
curve. While US yields in the short end are expected to go higher, the medium to long end of
the curve will be supported by abundant liquidity.

Gold still heading down (or trading sideways, in the best case): As markets continue to
price an exit from Feds ultra accommodative stance, as dollar strengthen and real rates go up,
gold prices should continue to fall (target: $1000-980/ounce)

Be long vol: We reiterate our preference for risk diversifiers (pure alpha generation strategies)
over return enhancers. Gamma trades are back. We like Vol. Arb strategies (specially those that
trade volatility globally - all assets / all regions) and CTAs (as a long vol strategy and a good
diversifier).
4
MACRO VIEW
The Good

The recently reported U.S. Q3-GDP statistics showed growth accelerating to +5%, the highest
rate since 2003.

Rising wages and lower crude prices helped push consumer sentiment up to levels not seen
since before the financial crisis
The Bad

Plunging oil prices appears to be unsettling for many investors and fueling much of the negative
sentiment.

Chinese manufacturing gauge points out the country's economy is slowing its growth

Greece is still a great concern for the Eurozone and even the world economy

U.S. manufacturing data slowed during December

Construction spending declined in November (0.3% instead of the projected +0.3% gain),
mostly because of the continued softness in the private sector. housing this year stands out as a
contrary caution within the US economy.
The Ugly

Main systemic risk resides in China : Chinas economy is supported by approximately six
trillion dollars of 'shadow debt', which may eventually create major systemic issues.

We are building a boom-bust economy that is increasingly dependent on central bankers
inflating policies. The end game is clear even if the timing is anything but.
5
The Big Four Economic Indicators

The overall picture had been one of slow recovery, but there is no indication of a recession using the
indicators monitored by the NBER.
However the trend has accelerated over the past two months. This improvement is to some extent due
to the impact of the decline in gasoline prices the deflator (PCE Price Index) used for inflation-adjusted
metrics
6
Personal Income

Real Personal Income (excluding Transfer Receipts) rose 0.62%, its largest monthly gain in 22 months,
and is up 2.84% year-over-year.
Personal Income (excluding Transfer Receipts) per capita (adjusted using the Civilian Population Age 16
and Over) is close to its pre-crisis levels.
7
Consumer Sentiment

Rising wages and plunging oil prices helped push the consumer sentiment up to levels not seen since
before the financial crisis.
The University of Michigans Consumer Sentiment Index stands at 93.6 in December. The last time it
exceeded the 90 level was 2007.
8
ISM Manufacturing

U.S. manufacturing data slowed during December. Manufacturing is still growing but shows slowing
growth
The ISM manufacturing index suggests a slower expansion in December (55.5) than in November
(58.7). The employment index was at 56.8 (up from 54.9% in Nov), and the new orders index was at
57.3 (down from 66.0 in Nov.).
9
GS Global Leading Indicator (GLI)
GLI is now in Slowdown phase,

defined by positive but decreasing
momentum.
7 of the 10 underlying components

of the GLI worsened in November
Weve been thinking for a while

that the current acceleration
remains quite modest for a
typical
expansion
phase.
Available data is more indicative of
a stable macro environment rather
than one with a growth pulse.
More data are still needed to

confirm our fears about the current
economic situation.
10
EQUITY
The equity bull market remains intact. The prevailing bullish sentiment is in favor of further stock
advances. But, with no significant selloffs to rebalance sentiment, greed is flourishing out of
control.
Between slowing growth, Fed's balance sheet and zeroed interest rates finally starting to normalize,
falling oil, and the strength of the dollar, we still believe Fed-levitated equity markets are on
borrowed time.
2015 will be the first time in about 9 years that the stock markets have to deal with rate hikes, right at
the time they are the most vulnerable.
At current valuation levels, the risk-return profile for equities appears less attractive and should imply
some cautious. Rationally, the upside on stocks is exhausted by a limited multiple expansion and
margins being at peak levels. But the current environment of unprecedented monetary stimulus
across the globe is making rationality irrational.
11
EQUITY
We are still puzzled by the incredibly high correlation between Treasuries and the S&P 500, mainly
explained by the belief that lower rates are good for stocks. We should keep in mind that lower rates
could also be a translation of faltering growth and lower inflation expectations. And this is hardly good
for equities.
Another reason for cautiousness: Defensive sectors, Small Caps, Treasury yields, high yield, nearly
all commodities are still not confirming the excitement in equity indices
We see more disturbing signs in market internals as fewer stocks are participating to the upside
momentum and as volatility is moving to a higher regime.
The effects of declining oil prices and US dollar strengthening on equity markets are not
obvious to assess.
We dont agree with those who continue to assert that lower oil prices are good for the US economy
and the stock market, as the benefits to consumers is supposed to outweigh the decline in the energy
sector (less than 10% of corporate earnings and market valuation). The sharp decline in oil prices is
simply killing the growth from a sector that have generated a double-digit growth over the last years.
We think that analysts underestimate the impact of a strong dollar on earnings growth for those
Multinationals that generate a lot of earnings in foreign currencies;
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EQUITY
Bottom line :

We remain Neutral equities. At this stage, expansionary monetary policies, low interest rates and
abundant liquidity are keeping us from moving to an underweight on equities. Even bad news for
the economy (in Europe, Japan and China) appear as good news for stocks, as they allow for
further stimulus.
We may revise our view to OW after a clean break of the 2075-2125 range on the S&P500, and to
UW below the trend from Nov. 12 lows
We think it is wise to incrementally "de-risk" your portfolios by focusing on higher quality / more
defensive / more favorably priced companies
We remain Neutral on Europe vs. US, even if ECB eases further. We look for the ECB to
introduce purchases of corporate and/or sovereign bonds in in Q1-2015. But, we think that markets
are too reliant on the ECB. If the ECB loses the markets confidence, European stocks would
underperform severally.
We remain OW on Japan (always on an FX hedged basis) on the back of an aggressive BoJ
intervention, a weaker yen and good earnings growth.
We remain UW in US small caps vs large caps, and UW EM stocks vs US large caps
The coming rate hikes (probably in Q2-2015) will depress all asset prices for at least part of next
year, in our view
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Earnings
the forward 4-quarter estimate is now at

$126.80
The PE ratio on the forward estimate is now

16(x).
The estimated earnings growth rate for Q4 2014

is 2.6%, down from 8.4% on Sep 30. Downward
revisions to earnings estimates impacted all 10
sectors, but specially the energy sector.
For Q4 2014, 87 companies have issued

negative EPS guidance and 21 companies have
issued positive EPS guidance.
Profit growth is still expected to accelerate to

+9% in 2015, despite the recent drag from the
energy sector.
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First Reason for Cautiousness: Volatility
Volatility seems to have

moved to higher regime.
The death-cross seen in

October indicates a reversal
in the medium-term trend.
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Second Reason for Cautiousness: Junk Bonds

Credit spread in the high-yield bond sector has been rising steadily since mid-2014.
The hidden fear in the junk bond market has been confirmed by the appearance of a death cross in
early December.
Is High Yield the canary in the coal mine?
16
Third Reason for Cautiousness: Crude oil and other commodities

The prices of nearly all commodities have fallen dramatically since mid-2014. The CRB index has
overall declined by 30%.
The plunge in oil prices is very intriguing as it appears to be anticipating the end of Feds QE (probably
perceived as an effective tightening).
The last time that stocks were up, and commodities (and bond yields) were down substantially
was 1998..
17
Large Specs Positioning
Large speculators increased their net long position in S&P500 index to $17bn (as of Dec 31), the
largest since July 13., suggesting near term caution.
18
Equity Vol

S&P500 long-dated volatility has been rising with the market hitting new all-time highs
The last time, we saw this phenomenon was in 2007
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S&P500 A Short-Term Perspective
Despite the recent consolidation, there is still

no significant damage to the underlying
bullish momentum.
It will remain so as long as the uptrend line

from Oct. 11 (currently at 1860) is preserved.
The index appears to be capped by a rising

ceiling line since early 2013. Each time the
ceiling line was touched, the index went down
towards its 26w-MA line (currently around
2000).
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S&P 500 A Short-Term Perspective
All exhaustion patterns

have been ignored to date.
Technically, the S&P500

seems to be forming a
mega-phone pattern
At this stage, we favor a

top formation within the
2075-2125 range
Our view will prove wrong

if the uptrend going
through the highs since
mid-2013 (~2100) is clearly
broken.
A similar pattern is forming

on the Dow.
21
Trading Model S&P500

Our prop. Short-Term trading model went massively long on Jan. 6th at 2002.61 on the index.
The model targets 2021 and 2083 on the upside. Above 2083, it reverses its position and
becomes modestly short with 2061-2041 as targets.
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FIXED INCOME & CREDIT
Nothing new compared to our previous reports. While we are neutral on German yields, we think
US yields are too low for the current growth and inflation outlook. We still look for the bear
market on USTs to resume but the timing looks more and more uncertain.
Actually, since end of Sep. 14, weve been questioning our underweight positioning, as U.S.
10-year yields was ticking below the 2.40-2.30 range. Weve decided then to move to Neutral each
time the 10y yield goes below 2.25. As a result, weve been Neutral UST since end of Nov. 14. The
10y UST yield continues its slide below 2.00
Falling inflation expectations and disappointing growth largely explain the level of Eurozone yields. We
expect the coming ECB QE in government bonds to keep German bond yields at very low levels.
We have been OW Eurozone vs. US and UK over the whole year. We are aware that the ECB is
probably planning to buy government bonds during Jan. 15. But given the record levels reached by
yield gap between Treasuries and Bunds, we decided to change our position to Neutral.
We expect the Fed to start tightening from Q2-2015 and will hike rates more than is currently
priced in: The markets are still only pricing in about one hike from the Fed next year. Based on Feds
speech, we expect 3 or 4 hikes instead. Thus, the re-pricing of Fed expectations is likely to take
place very soon in the short end of the curve.
While US yields in the short end are expected to go higher, the medium to long end of the curve will be
supported by abundant liquidity. We expect a significant flattening of the US yield curve.
23

In 2H-2014, credit markets shifted into a higher volatility regime, led by the sell-off in oil and other
commodities and the deterioration of market liquidity. We expect higher volatility to be the new normal
for credit markets in 2015. Spreads widened considerably more in the US than in Europe.
High Yield (specially US) has fared poorly relative to most other areas of the investable
landscape. We see investors moving up the quality spectrum, selling high yield bonds and growth
sectors and getting into investment grade bonds, govies and defensive sectors. This is probably a
sign we are moving into the final stage of the bull market and economic expansion
We remain UW on corporate credit, due to valuation, to position within the credit cycle, to the
expected rise in government bond yields and given the weak total return forecast
Within the credit pocket, and over the very short-term, we continue to prefer Eurozone
corporates (especially IG and non-financials) to US corps, because of the coming ECB massive QE
However, we are aware that markets are too reliant on the ECB. If the ECB loses the markets
confidence, European credit would underperform
In the medium-term (6 months), we expect the pattern of European outperformance to reverse during
2015.
We still prefer IG over HY on a risk-adjusted basis as we expect higher volatility on spreads
We remain OW on HICP breakevens (through forward 1yx1y for example) given the potential for a
sovereign bond QE
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Bottom line : Neutral Govies, Neutral Eurozone vs. US Govies, Long flatteners on the US yield curve,
UW credit, OW Eurozone vs US IG credit, Neutral TIPS and OW HICP Inflation, UW High Yield vs
High Grade, Neutral on EM corporates
25
Fed-ECB: Two Different Worlds

The world seen by Yellen is fundamentally different from that seen by the Draghi.
2 year US rates finished 2014 near their 52-week highs
2 year Bunds established new 52-week lows (always in negative territory!)
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Long-term USTs

USTs are still delivering the same bullish message for yields (but probably not for the economy)
Long-term Treasuries (20+ years, represented by the TLT ETF) are about to break out to new all-time
highs Is that a sign that risk appetite is getting shaky?
27
Long-term USTs
30 year UST yields are heading to

all-time lows

The long-term downtrend on the 30

year UST yields is intact.
The 30y yields have bounced against
it in Jan. 14 and they are now testing
their all-time lows.
The break of the Jun 2012 lows

(~2.44) seems imminent.
28
Eurozone Implied Inflation
US Breakeven inflation rates at their

lowest level since 2009.
The plunge in oil prices is obviously

dragging down inflation expectations
in the Eurozone.
We keep, however, our OW position

on HICP breakevens (through
forward 1yx1y) given the potential for
a sovereign bond QE
29
US & Euro Credit
The yield gap between US and Euro IG

credit has now reached its 06 highs
(~200 bps), mainly driven by divergent
central bank policies.
As the ECB plan to buy corporate bonds

directly (and even if not, its purchases of
asset-backed securities and covered
bonds may lead to investors adjusting
portfolios towards this asset class) looks
imminent, we keep our preference for
Eurozone corporates (especially IG and
non-financials) to US corps, because of
the coming ECB massive QE
However, we are aware that markets are

too reliant on the ECB. If the ECB loses
the markets confidence, European credit
would underperform severally.
In the medium-term (6 months), we
expect the pattern of European
outperformance to reverse.
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Peripheral vs Core Euro Credit
The peripheral credit premium prices a 100%

ECB success in mitigating weaker-thanexpected economic data in the Eurozone We
remain UW peripheral risk.
Peripheral credits is very vulnerable to any

stress due to a loss of confidence in the ECB
backstop
If growth and inflation continue to fall despite the

ECB intervention, then markets will remember
their old worries and peripheral credit will
plunge
31
US & Euro Credit
Barclays Research shows a high correlation

between the European B/BB ratio and US
high yield fund flows (probably due to the
fact that US-based global high yield
managers are exposed to many single-Bs
cross-border issuers)
We still prefer IG over HY on a riskadjusted basis as we expect higher

volatility on spreads and more outflows from
US HY.
32
EXCHANGE RATES
Policy divergence between the US on one hand, and Japan and the Eurozone on the other, should
continue to provide an environment supportive of the dollar

We continue to expect the USD to strengthen against the major crosses, especially EUR and JPY
Things are going very fast. Our targets on EUR-USD (1.21-1.20) and USD-JPY (119.30) have been
already reached.
The US Dollar Index (~91.5) has reached a post-Lehman high. The next important targets are 92.50 and
96.00. Our ultimate target stands at 101-102 over the medium-term.
Inflation and manufacturing activity in the Eurozone remain suppressed. Government bond yields in the
are pricing in further stimulus spending. The EUR-USD underlying structure still looks very heavy.
we remain UW EUR-USD as long as the pivot stays below 1.21 and move Neutral above to play the
correction towards 1.25-1.30
Although a short-term consolidation is plausible (specially if the ECB deceives on its QE size), we still
target 1.16-1.15 over the ST, 1.10 in Q3-2015 and parity early 2016

BoJ intervention has weighed (more than expected) on JPY. We remain OW USD-JPY as far as the
pivot stays above 119.30. Our ultimate target remains at 124-125 over the medium-term
33
EUR-USD
Our ST target of 1.21-1.20 was finally

reached.
We remain UW EUR-USD as long

as the pivot stays below 1.21 and
move Neutral above to play the
correction towards 1.25-1.30
Our ST target is now 1.16-1.15
Our medium-term view remains

biased towards a strengthening of
USD (target ~ 1.12-1.10 then parity in
early 2016)
Fundamentally, Greek election is

another reason to be short EUR/USD
34
USD-JPY
Things are going very fast.

Our target of 119.30 was
reached.
After reaching a local high

around 120.80, a
consolidation towards 117116 seems underway (as
expected).
Our medium-term target ~

124-125.
35
COMMODITY

Over the short-term, the trend remains bearish. We watch for a bottoming process.
USD strengthening remains a big headwind to commodities
Our OW positioning on commodities (with a dispersion in views across the different sectors) has been
bearable as we favored commodity futures with steep backwardation (for positive carry).
Unfortunately, roll returns have turned negative in most commos.
We are now UW commodities. We continue, however, to like owning the GSCI index, and think
that commodities hold value as cross-asset portfolio diversifiers.
Bottom Line :
In 2014, Aluminum, Zinc and Nickel prices moved to the upside. All other metals went down led by
Copper. Copper continues to look very weak. It is currently breaking the trend across the lows since
Oct. 11 as well as the Jun. 10 lows. Going through these lows would give a very negative signal on
base metals as a whole.
Demand for base metals globally eased significantly in 2H-2014 and has not yet recovered. We
expect price weakness to continue in early 2015. Many factors are weighing on base metals: US
Dollar strengthening, the Chinese slowdown, weaknesses in construction / housing sectors in major
economies (mainly affecting Copper and Nickel) We remain Neutral on base metals (but we
prefer Aluminium, Zinc and Nickel to Copper)
36
COMMODITY
2014 was a tough year for grain market bulls as grain prices plunged during Q3 (as crops were more
than perfect). Corn, wheat and soybeans recovered partially during Q4. Buying them on weakness
during the winter could provide a good opportunity, depending on 2015 crops.
At this stage, We remain UW on agriculture (except on Cocoa and Coffee), as we think supply will
continue to grow relative to demand. We still anticipate that agriculture prices will revert to 2009
levels. Within the Agri complex, weve been OW Cocoa and Coffee for a while now. We like Cocoa for
its long-term underlying demand driven by consumption in Asia. The recent pullback in coffee prices
provides a better entry opportunity into this market after the sharp surge weve seen in prices
because of the drought in Brazil. Sugar is headed back to its long-term lows, which may present
opportunities as Brazil (world's top sugar producer) may cut production in 2015.

Precious metals are vulnerable to higher US real yields and stronger dollar
Our strategy on gold remains unchanged: We remain UW above 1150-1170 band. We will move
Neutral below 1150 and switch progressively to OW (accumulate) as the spot slides down
towards 1000-980, which is likely the final leg down.
Our first target on silver (~17) has been reached. The spot has been very close to our second target
at 14.70. We still think that Silver (like gold) is probably ready for its final leg down towards 12.50. At
current levels, we move Neutral but, like for gold, we will switch progressively to OW (accumulate) as
the spot breaks the first material resistance around 14.70 and slides down towards 12.50
Although Gold/Silver ratio looks extremely high, we expect gold to continue outperforming silver over
the short-term.

37
COMMODITY
Weve decided to keep our OW bias on energy as long as the $80 support zone is not clearly broken
by the WTI. But it was. Weve stopped our losses and moved to Neutral, waiting for a clean break
below $ 59.5-60 band to switch to UW. Its done now. We are UW oil and target 08 lows (around
$35) as long as the OPEC doesnt decide to stop the bleeding
38
Commodity Positioning
Aggregate positioning on commodities

(as implied from CFTC futures and
option positioning data) is close to its
July 2009 lows
No signs for a base yet!
39
Crude Oil - WTI
Current oil price weakness may be explained (but only partially) by the supply pressure weve seen
for over a year. The excess supply has lifted global crude oil stocks by approximately 200-225 million
barrels (or more than 0.6 million barrels per day) over the past twelve months. One of the biggest
factors in producing an excess supply has been the success of the U.S. shale oil production
Although this global inventory build is similar to the one weve seen in 2012, the decline we are
witnessing (more than 50% over 6 moths) is much deeper than the 2012 correction (~30% peak-totrough move over a 4-month period).
Source: EIA & Zeits Energy Analytics
40
Crude Oil - WTI
The lower demand for oil might account for about $20/barrel of the decline in prices since mid-2014,
but hardly more
An another reason for the sharp decline in oil prices could be the large volume of productive capacity
that is currently off-line due to disruptions, and that could come back on the market at anytime
As said before, the plunge in oil prices remains very intriguing as it appears to be anticipating the end
of Feds QE (probably perceived as an effective tightening).
41
Crude Oil - WTI
At current prices, some of the

higher-cost producers will be forced
out.
That is probably one of OPECs targets

when they decide not to stop the
bleeding by cutting production
42
Crude Oil - WTI
We expected the $59.50-$60.00

band to slow the descent. But we
were wrong
As mentioned in our previous

report, we moved UW as soon as
the 59.5-60 band was breached
down.
Oil has broken the ultimate 76.4%

retracement
of
the
entire
2008/2011 rally at 51.80, and is
now targeting 08 lows (around 35)!
43
Base Metals
The LME Index shows a similar

gloomy picture after the break of
the trendline across the lows since
June 2010.
Like for crude oil, the index is

probably headed down towards the
08 lows. 2700 is the level to be
watched closely in order to confirm
the downside move.
44
ALTERNATIVE STRATEGIES
The HFRI Composite Index gained +3.6% for 2014. This is well below the long-term average performance
of +10.7%, as hedge fund managers maintained conservative exposures with equity markets near record
highs.
Weve been OW Equity Market Neutral, CTA, Global Macro over the whole year 2014, and OW Vol
Arbitrage since Jun. 14

2014 was the year of CTAs revival after years of underperformance. Macro strategies (represented
by HFRI Macro - Total Index) had posted a 6.4% gain for 2014. Macro strategies were led by
Quantitative, Systematic Diversified CTA strategies (HFRI Macro: Systematic Diversified/CTA Index
is up +11.2% for 2014) that took advantage from trending behavior in oil, commodities, currencies
and Govies.

HFRI Equity Market Neutral Index gained 3.9% in 2014.

Relative Value Arbitrage (RVA) gains in Dec. 14 were led by HFRI RV: Convertible Arbitrage Index
(+1.1% MoM, 2.5% YoY), and HFRI RV: Volatility Index (+0.6% MoM, 5.0% YoY). The recent spike
in realized volatility boosted gamma trades.

Global macro strategy was our (only) bad bet. The strategy experienced a difficult H2. It suffered
(HFRI Macro: Discretionary Thematic Index ~ -0.8% YoY) on short duration trades and long EuropeUS equity spread
45
ALTERNATIVE STRATEGIES
For 2015, we reiterate our preference for risk diversifiers (pure alpha generation strategies) over return
enhancers.
We maintain our previous positioning and remain OW on:

Equity Market Neutrals both for their intelligent beta and their alpha contribution. On several
occasions in 2014, our preference for variable bias and market neutral managers has proven to pay
off (compared to long bias) on the back of adequate short positioning.

CTAs and Global Macro as a diversifier and tail hedge.

Vol. Arb strategy and prefer funds that trade volatility globally (all assets / all regions). This strategy
has shown a great ability in terms of protecting capital during adverse periods, and a volatility that
compares favorably with the hedge fund industry
46
Bottom Line: Global Asset Allocation

As 2015 starts, the story remains one of continuing global weakness, but
positives in the US.
The Fed is now faced with the challenge of finding a low-drama course to
higher rates
Deflationary risk in the Eurozone is significantly higher than 6 months ago.
Inflation data should be supportive of expectations for ECB QE operations to
begin in January

The divergence theme continues to propel the dollar higher

The bull market remains intact. But, with no significant selloffs to rebalance
sentiment, greed is flourishing out of control.
Between slowing growth, coming rate hikes, falling oil, and the strength of the
dollar, we still believe equity markets are on borrowed time.
But expansionary monetary policies, low interest rates and abundant liquidity
are still keeping us from moving to an underweight on equities. We
remain neutral on global equities and think earnings growth should be the
only driver of markets from here.

Volatility is finally back This is for certain!

We dont agree with those who continue to assert that lower oil prices are
good for the US economy and the stock market, as the benefits to consumers
is supposed to outweigh the decline in the energy sector (less than 10% of
corporate earnings and market valuation).
We remain underweight government bonds and corporate credit overall
(but with an intra-asset class preference for IG vs HY, and Eurozone nonfinancials IG vs US IG), and Overweight US dollar (supported by divergence
Fed policy from that of the ECB and BOJ).
We summarize our views as follows
47
Disclaimer
This writing is for informational purposes only and does not constitute an
offer to sell, a solicitation to buy, or a recommendation regarding any
securities transaction, or as an offer to provide advisory or other services
by FinLight Research in any jurisdiction in which such offer, solicitation,
purchase or sale would be unlawful under the securities laws of such
jurisdiction. The information contained in this writing should not be
construed as financial or investment advice on any subject matter.
FinLight Research expressly disclaims all liability in respect to actions
taken based on any or all of the information on this writing.
48
About Us
FinLight Research is a research-centric company focused on Asset Allocation from a top-down

perspective, on Portfolio Construction, and all related quantitative aspects and risk management issues.
Our expertise expands along 3 axes:
Asset Allocation with risk control and/or risk budgeting techniques
Allocation to alternative investments : Hedge funds, rule-based strategies (momentum, value,

carry, volatility), real assets (real estate, infrastructure, farmland, timberland and natural resources).
Private equity and venture capital should be the next step
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Finlight Research - Market Perspectives - Jan 2015

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Finlight Research - Market Perspectives - Jan 2015

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Market Perspectives

Jan. 6th, 2015

Is the plunge in oil prices the new black swan?

Although the junk bond market is nowhere near as large

Executive Summary: Global Asset Allocation

The divergence theme continues to propel the dollar higher

Volatility is finally back This is for certain!

Our Top Bets for 2015

Our main convictions are:

The Big Four Economic Indicators

GS Global Leading Indicator (GLI)

GLI is now in Slowdown phase,

7 of the 10 underlying components

Weve been thinking for a while

More data are still needed to

the forward 4-quarter estimate is now at

The PE ratio on the forward estimate is now

The estimated earnings growth rate for Q4 2014

For Q4 2014, 87 companies have issued

Profit growth is still expected to accelerate to

First Reason for Cautiousness: Volatility

Volatility seems to have

The death-cross seen in

Second Reason for Cautiousness: Junk Bonds

Third Reason for Cautiousness: Crude oil and other commodities

Large Specs Positioning

S&P500 A Short-Term Perspective

Despite the recent consolidation, there is still

It will remain so as long as the uptrend line

The index appears to be capped by a rising

S&P 500 A Short-Term Perspective

All exhaustion patterns

Technically, the S&P500

At this stage, we favor a

Our view will prove wrong

A similar pattern is forming

Trading Model S&P500

FIXED INCOME & CREDIT

FIXED INCOME & CREDIT

We still prefer IG over HY on a risk-adjusted basis as we expect higher volatility on spreads

FIXED INCOME & CREDIT

Fed-ECB: Two Different Worlds

30 year UST yields are heading to

The long-term downtrend on the 30

The break of the Jun 2012 lows

Eurozone Implied Inflation

US Breakeven inflation rates at their

The plunge in oil prices is obviously

We keep, however, our OW position

US & Euro Credit

The yield gap between US and Euro IG

As the ECB plan to buy corporate bonds

However, we are aware that markets are

Peripheral vs Core Euro Credit

The peripheral credit premium prices a 100%

Peripheral credits is very vulnerable to any

If growth and inflation continue to fall despite the

US & Euro Credit

Barclays Research shows a high correlation

We still prefer IG over HY on a riskadjusted basis as we expect higher

Our ST target of 1.21-1.20 was finally

We remain UW EUR-USD as long

Our ST target is now 1.16-1.15

Our medium-term view remains