Finlight Research - Market perspectives - Dec 2015

Market Perspectives
December 2015
Dec. 7th, 2015
www.finlightresearch.com
Hi(Bear)nation?

“Market tops are a process, not an event”
– Old Wall Street adage
“There is no means of avoiding the final collapse
of a boom brought about by credit expansion.
The alternative is only whether the crisis should
come sooner as the result of a voluntary
abandonment of further credit expansion or later as
the final and total collapse of the currency itself”
– Ludwig von Mises
Founder of Austrian School of Economics
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FinLight Research | www.finlightresearch.com

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Executive Summary: Global Asset Allocation
The outlook for the global economy is darkening and the upside on
assets looks more limited. De-risking is the strategy we promote as medium
term risk-reward is turning less favorable and markets appear unprepared for
the imminent interest rate hikes.
High valuations and rising rates, especially in the US, will present challenges
for risky assets. We remain cautious on risky assets and expect lower
asset returns and higher volatility to make the essence of next year.
Concerns remain over deflationary pressures, Chinese growth, Emerging
Markets, CNY devaluation, corporate profit growth, HY credit and falling
commodity prices. Markets seem unprepared for interest rate hikes.
We expect equity market volatility to drift higher through 2016 as a result of all
these macroeconomic uncertainties
We stick with our tactical positioning: Neutral on equities (A massive top
forming could not be excluded on the S&P500), UW Govies and Credit, OW
US Dollar, UW Emerging Markets and commodities
We reiterate our view: A perfect storm is building… It combines historically
overvalued stocks with stretched government bonds and corporate credits.
Unlike previous storms (2000, 2008), investors would be left with almost
no place to hide
We summarize our views as follows
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MACRO VIEW
The Good
US Personal Income is growing at a healthy rate (0.4% MoM and 5.3% YoY)
November US Jobs Report was strong with 211,000 jobs added and unemployment rate holding
at 5%
Eurozone business activity grew at its fastest pace in more than 4 years, with the flash
Eurozone PMI Composite coming out at 54.4 in November
The Bad
US ISM manufacturing showed contraction in November
S&P 500 Q3-2015 profits are down 3.3%YoY. This is the second consecutive quarter of
negative earnings growth and the worst decline since 2009
Both the Conference Board and the University of Michigan Consumer Confidence / Sentiment
decreased sharply.
The Ugly
Main systemic risk resides in China: The Chinese debt burden is extremely high (Mckinsey
stated that between 2007 and 2014, debt to GDP ratios have soared from 158% to 282%) and
the credit cycle is probably starting to turn. We are probably in the early stages of a bursting
credit bubble.
The fixed-income / credit edifice is highly vulnerable to China’s need to liquidate Treasury
reserves in order to maintain its currency peg, as capital outflows increase and market widely
expects further devaluation in the USD-CNY
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The Big Four Economic Indicators
There is nothing new under the sun…
The current picture is characterized by relatively strong Employment and Income, a weak Industrial
Production and uncertain to weak Real Sales.
The average of these indicators suggests that the economy is still trending sideways. But setting a new
high still seems possible over the short term.

7
Industrial Production
Industrial Production has been plateauing over the last 12 months

8
Personal Income
Personal Income is growing at a healthy rate (0.4% MoM and 5.3% YoY). When we exclude Transfer
Receipts, Personal Income in October rose 0.47% MoM (4.5% YoY) and 0.41% MoM (4.3% YoY) in real
terms.
In October, Disposable PI increased 0.35% ( 3.36% YoY) in nominal terms and 0.29% (3.14% YoY) in
real terms

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Retail Sales
Seasonally adjusted (nominal) sales in October increased 0.05% MoM (1.7% YoY). Core Retail Sales
(ex Autos) came in at 0.2% MoM and only 0.5% YoY.
The big picture remains the same : retail sales and capex momentum are heading south

10
Consumer Sentiment
The Conference Board's consumer confidence
plunged to a multi-month low of 90.4.
Both consumer sentiment readings clearly
appear in a downtrend.
Source: Thomson Reuters

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GS – Global Leading Indicator (GLI)
The Nov. Final GLI came in at
1.3%yoy. Its MoM momentum
came at 0.13% (up from 0.07% last
month)
GLI stands now in the Expansion
phase, but its momentum is still
very weak and small fluctuations
can move it back to the Slowdown
phase
Four of the ten underlying
components of the GLI improved in
November.
We continue to think that the
acceleration we’ve been
witnessing since Jan. ‘15 is quite
modest for a typical expansion
phase

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Global Economic Growth
Global GDP has been revised to the downside. But most analyst expect it to bottom around current
levels…
Actually, the picture is clearly dependent on Chinese (and other EMs : India-Brazil-Russia)
growth…

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Housing Bubble II?
The open gap between real house
prices and real earnings is pointing
towards a new bubble in US
housing.
The current gap is even wider
than the one seen just before the
2008 housing crash.
Housing
bubble I
Housing
bubble II?

14
EM Leverage - Chinese Credit Bubble
The significant buildup in leverage in their private sector makes EMs vulnerable to any global
tightening in credit conditions
But most of EM leverage is obviously concentrated in China.

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Market Uncertainties
Global volatility remains in an uptrend,
mainly driven by uncertainties about Fed
policy and global growth, monetary
divergence, weakening US and Chinese
macro momentum and increasing
geopolitical risks
On equities, the Volatility of volatility
(VVIX) has even made an all-time highs
this year (since its launch in 2006).
We keep a long volatility bias in
equities, commodities and credit

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EQUITY
We think that the equity bull market is aging, and has only modest further gains from here, certainly
with higher volatility. Equities undoubtedly benefitted from the expansion of the Fed’s balance sheet and
this is finished!
The recent S&P500 relief rally was impressive, but one cannot discount the possibility of a massive
top forming around 2135 (80% chance), as:
US profit margins are showing increasing evidence of peaking. On Price/Sales metric, equities are
trading at the top of the historical range.
Earnings / revenues have declined for 2 quarters and aren’t expected to grow before Q1-2016. A
resumption of earnings growth going into 2016 will be necessary for equities to move higher.
Fed eminent tightening, plateauing margins and higher wages are not good news either.
Credit market has entered its late-cycle stage
Recent data shows more evidence of lower productivity, lower potential GDP growth and (later)
higher inflation risk. This is a bad scenario for stocks
Our alternative scenario from here (20% chance) : The S&P500 breaks the 2135-2140 resistance,
opening the way to 2225. This scenario is supported by the fact that the index is above all its key moving
averages and that seasonality is positive
Stocks seem more vulnerable than ever to any external choc. The Federal Reserve has waited so
long to raise rates, pushing valuations and profit margins higher than usual at the beginning of rate
increase cycles.

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EQUITY
Bottom line :
De-risking should continue…
We remain tactically Neutral on equities due to limited return potential post the relief rally.
We’ll stay so as long as the S&P500 remains in the 2020 – 2140 range. We may revise our
positioning to OW (to UW) if a break to the upside (to the downside) occurs.
We remain Neutral on Europe and Japan vs. US despite the policy divergence between the
Fed and the ECB/BoJ and continued improvement in corporate profitability and balance sheets in
Japan. According to the 12 month forward P/E, Europe is trading at 15 year highs, relative to
the US. Weak demand from China is expected to continue to weigh on Japan's production.
We remain UW in US small caps vs large caps.
We remain UW EMs vs DMs, given incoming Fed hikes and USD strengthening. Negative
spillovers from China will also likely have a strong impact on other EMs.

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US Earnings
For Q4 2015, 83 companies have issued negative
EPS guidance and 26 companies have issued
positive EPS guidance
The 12-month forward P/E ratio for the S&P 500
now stands at 16.1, well above historical averages:
5-year (14.0), 10-year (14.1)
Q3 2015 earnings (revenues) decline stands at -
1.5% (-3.9%) for the 99% of the companies in the
S&P 500 that reported to date.
FactSet's data shows a current forecast of a 4.3%
decline (YoY) for Q4-2015 earnings (and +1.0%
increase if the Energy sector is excluded) and a
3.0% decline in revenues.
If this earnings decline becomes effective, it will
mark the first time the index has seen 2 consecutive
quarters of year-over-year declines since Q1/Q3-
2009.
No earnings/revenue growth is projected before
Q1-2016

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European Earnings
The bottom-up consensus forecast for 2015 earnings growth is now at -1% for the MSCI Europe
(because of -14.5% growth for UK), at +7% for Europe ex-UK and +11% for Eurozone.
Current IBES estimates for 2016 earnings are at their lowest levels since 2008
For 2016, the consensus forecast is for 6.5% earnings growth from the MSCI Europe. This is the
second lowest level seen since 1988.
MSCI Europe

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S&P500 – Breadth
Market performance is driven by very few stocks
S&P500 is again near its highs when half of its components are trading below their major
averages

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S&P500 – A Long-Term Perspective
Margin Debt hit a record high in
April.
Like in previous bullish periods,
Margin Debt initially grew at a rate
similar to the market before
accelerating at the end of 2013.
Is that a top formation signal?

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S&P500 – A Long-Term Perspective
Another way to look at Margin Debt is to
analyze the Credit Balance: sum of
Free Credit Cash Accounts and Credit
Balances in Margin Accounts minus
Margin Debt
Credit Balance is getting less negative
after hitting a new all-times low.
Could this record low act as a
precursor to a major market decline
as in 2000 and 2008?

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US Equity vs. Credit
Another warning signal is given by
US High Yield.
Historically, credit spreads were a
leading indicator of the current
positioning within the business cycle.
Over the last 18 months, an important
gap has been building between equity
and credit (even when the Energy
sector is excluded).
Who’s right ? Stocks or credit spreads ?

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S&P500 – Investors’ Sentiment
Investors’ Intelligence Bulls-Bears gap (currently at +16%) provides a useful contrarian indicator with a
significant correlation to:
subsequent 6 month returns on stocks. The current levels seem compatible with positive return over
a 6 month period.
Asset managers’ net long position on S&P500 futures. Current positioning doesn’t seem excessive

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European vs. US Equities
Recent improvements in earnings in
Europe ex-UK relative to the US are
expected to continue .
This should provide some support to
outperformance from Continental
Europe and Eurozone

26
The weakening of the Euro usually
favors European stocks.
But since mid-year, the relative
performance of Euro Stoxx50 vs
S&P500 has decoupled from the
USD-EUR
The lag occurred despite:
Favorable macro in Europe
Outperformance of Eurozone
earnings vs US earnings for the
first time in 5 years
Expected rate hike in the US

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But… we think that any outperformance of Europe will be capped for valuation reasons:
Eurozone forward P/E, in absolute terms as in relative terms vs S&P500, is already trading in
reach territories.
Europe is trading at 15 year highs, relative to the US
Thus, we keep our Neutral stance on Europe vs. US
MSCI Eurozone
12m-Forward PE
MSCI Eurozone
12m-Forward PE vs S&P500

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S&P 500 – Tech. Perspective
The move since Jul. ‘10 low is
probably missing a last leg
higher.
This point will be confirmed by a
break out through 2135-2140.
A clean break would open the door
towards 2225 (our alternative
scenario – 20% chance)
At this stage, we keep an eye on
the Nasdaq Composite. The
uptrend continuation on the
S&P500 will be confirmed by the
Nasdaq breaking above its 2000
cycle high (5133)

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S&P500 – A Short-Term Perspective
Our prop. Short-Term trading model has switched to mildly short on Dec. 4th S&P500 close
(@2091.69). It has limited conviction, at this stage…
The model has been in drawdown since Aug 20th, as it was massively long when the sell-off
occurred. It became almost flat at the close of Aug 26th (@1940.51) and, since, has made up most of
its losses partially.
The model has boosted its return generation since Oct. ‘14, exhibiting a pattern similar to the one
we’ve seen after Jun. ’07. Even the last drawdown is similar to the one started on Jun 6, 2008

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FIXED INCOME & CREDIT
There is plenty of evidence that the Fed is ready to hike rates at the next meeting.
We expect negative total returns on USTs. We still look for the bear market on USTs to resume.
We remain tactically Neutral on USTs as far as the 10-year yield stays below 2.35. We wait for a
material break either above 2.35 or below 2.00 to change our positioning
We think that the risk is still biased to the upside on yields. Our ultimate target on 10y yields stands
at 2.75 by H1-2016
We keep our short duration position in 2y USTs
On German Bund, we remain Neutral. as long as the 10-year yield stays above the 0.40 – 0.45 area.
We will switch to UW again as the 10-year yield breaks above 0.85-0.90 or below 0.45
We expect US Treasuries to underperform relative to Bunds and JGBs
While we think the risk of high inflation is low, we expect an increase in the market pricing of long-term
inflation in the US. Inflationary signs should be watched closely as they will foreshadow a steepening
decline in Govies.
We remain Neutral HICP Inflation as we expect breakevens to trade sideways in the Eurozone
We move from Neutral to OW on TIPS breakevens given their historically-low levels but still expect
US TIPS breakevens to widen modestly in H1-2016

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More signs tend to show that the US credit market is already in the late-cycle stage. Credit quality
is deteriorating, but at a measured pace. Financing gap has turned strongly negative, making
corporates more and more dependent on external sources of liquidity.
But low cost of funding and continued investor demand have kept the asset class afloat…
As said in a previous report, we feel concerned about the credit market liquidity as the rate of
turnover in corporate bonds has steadily declined since 2009, despite the huge inflows.
We do not think investors are getting paid enough to own less-liquid credits
We feel cautious about the significantly negative CDS-Cash basis, especially on HY, induced by
supply fears and the increasing use of CDS indices to get (through protection selling) exposed to
the credit market with a reasonable liquidity.
We remain UW on corporate credit, due to valuation, to rising volatility, to position within the credit
cycle and given the weak total return forecast
Higher US Treasury yields should be supportive of IG spreads, but large bond supply (due in part
to large M&A activity) would be negative. Over the short term, we expect yields effect to dominate: IG
credit spreads would rally into the early part of 2016, before resuming their uptrend
We still prefer IG over HY on a risk-adjusted basis as we expect volatility on spreads to remain
elevated and we believe IG corporates better positioned to absorb the impact of rising rates

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European credit looks to be in a Goldilocks scenario. European growth is picking up but is not too
hot yet and default rates are expected to remain low (around 2% - 3% versus 5% in the US) over next
year
Nevertheless, we feel cautious about EUR HY despite the prospects of further easing by the ECB.
Next QE may drive a rally in European credit over the near term, but long positioning is getting
crowded, liquidity scarce and volatility higher.
Within the credit pocket, we remain Neutral on USD vs. EUR HY spreads, but we prefer USD on a
total return basis, despite its higher beta to energy sector
We still prefer US IG over Eurozone.IG, as we think that more attractive spread valuations and
higher carry should fuel a stronger bid for US credit.
Bottom line : UW Govies, Neutral US vs Eurozone Govies, remain long flatteners on the US yield
curve and short duration in 2y USTs, UW credit, Neutral Eurozone vs US HY credit, UW Eurozone vs
US IG credit, OW TIPS and Neutral HICP Inflation, UW High Yield vs High Grade, Neutral on EM
sovereigns

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US Govies – 10y UST
Tactically, we’ve remained
Neutral on 10-year USTs, waiting
for a clean break either above 2.35
or below 2.00 to change our
positioning
We think that the risk is still
biased to the upside on yields.
The decline since 2007 seems to
flatten, suggesting that a long-term
low is already in place
In order to confirm our bearish
view, a clean break above 2.35-
2.40 is required. It will open the
way towards 2.52 and then our
ultimate target at 2.75 (H1-2016)

34
German Govies – 10y Bund
On German Bund, we remain
Neutral. as long as the 10-year
yield stays above the 0.40 – 0.45
area.
We will switch to UW again as the
10-year yield breaks above the
downtrend from ’11 at 0.85-0.90
(with 1.05 – 1.15 as a target) or
below 0.40-0.45

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US Govies – Trading the Curve
Historically, when the Fed hikes,
the yield curve flattens.
We remain long flatteners on the
US yield curve, targeting 50 to
75bps flattening over H1-2016.
Fed hike

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US TIPS
10-year TIPS breakevens reached multi-
year lows in Sep. ’15 before bouncing.
Breakevens are pressured by cheaper
energy, strong dollar and soft core CPI and
these unfavorable conditions may last for a
while.
But given their historically-low levels, the
risk on TIPS breakevens seems biased to
the upside. We think that going long TIPS
and short USTs provides a nice
risk/reward tradeoff.
Thus, we move from Neutral to OW on
TIPS breakevens
Source: Bloomberg

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Where do we stand in the Credit Cycle?
More signs tend to show that the US credit market is already in the late-cycle stage:
Default rates has bottomed out (since mid-2014)
Profit margins are plateauing
Rising leverage and dividend payouts to shareholders
M&A activity reaching new peaks
Source: Invesco

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US Credit
Being in the late-cycle stage of the credit cycle may explain the abnormally high levels reached by credit
spreads (IG as HY)
Current spreads are close to recessionary levels

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US Credit vs Equity
Since mid-2014, we’ve bet on equity
outperformance over credit for 2 reasons :
releveraging and buybacks (and other
shareholder friendly activity)
Now that we are in the late-cycle stage, and
given the risk we see on margins and
earnings, we think that the case for
equities over credit is over in the US.
We still see more (but small) upside in
equities vs. credit in the Eurozone where
recovery is still in the early stages and ECB
is likely to deliver further support. But any
bad development in US market will weigh
seriously on the equity vs. credit
outperformance in Europe.

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US Credit
The US corporate financing gap
(cash flow less spending on capex
and dividends) has turned strongly
negative
Corporates are becoming more
dependent on external financing when
funding conditions are deteriorating.
Up to this point, these have been
balanced by a very low cost of funding
and continued investor demand for the
asset class.

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European Credit
Fundamentals are deteriorating for European credit, also:
Revenues are stagnant, and EBITDA is down YoY
IG (debt weighted) net leverage has reached pre-crisis levels
European IG Net
Leverage
European IG Revenue
and EBITDA Growth

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EXCHANGE RATES
The dollar rally is not over. We reiterate our bullish view on USD over the medium-term and expect a
rival of the appreciation cycle of the '90s
Historically, USD cycles have been persistent, lasting 5-6 years in the appreciation phase. We thus
see further medium term USD gains against the major crosses (especially EUR and JPY) and
expect a cyclical low in EUR/USD somewhere in mid-2016 (probably before the ECB tapering)
Besides the Fed’s hawkish stance, US dollar continues to be supported by the fears of a global growth
recession
The DXY index has finally broken above its downtrend from Mar. ‘15 in an impulsive move. Our target
of 100 was reached but not preserved. Despite the sharp correction, we continue to think that the
picture is still bullish as long as the 98.3 support is preserved. Ultimate target ~ 102
Our positioning on EUR-USD remains driven by (almost) the same trading rules:
Our previous threshold of 1.0820 was broken to the upside. We switched from UW to
Neutral again.
From here, we’ll move to UW again as soon as 1.08 is broken to the downside. Next target =
1.0480-1.520
We will move to OW if the uptrend from March is reintegrated and/or there is a clean break above
the 1.1088 resistance

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EXCHANGE RATES
On USD-JPY, we remain Neutral for the moment, as the spot failed to hold a break above 124-125
resistance.
We think the pair has already reached the peak of this year and is likely to see a downward
trend in 2016 (target ~115 – 113). Main reason for that: increasing current account surplus
and expected unwinds of foreign assets by Japanese investors.
We remain neutral as far as USD-JPY in the consolidation range (115-125). Below, we move
UW. Above, we switch to OW.
We remain UW EM and Commodity FX, given the Fed’s hawkish stance

44
US Dollar Index
The uptrend in rate differentials
between US and G10 is
expected to persist.
As a consequence, US Dollar
TWI will continue to strengthen,
probably through the end of 2016

45
US Dollar Index
Our previous target at 100 was
reached, just before the recent
sharp correction
We continue to think that the
picture would remain clearly
bullish as long as the 98.3
support is preserved.
We expect a range consolidation
before moving higher with a
target at 102.

46
EUR-USD
EUR-USD has been moving
closely with the 2-year real yield
differential between Eurozone
and US.
Given the eminent rate hike
cycle the US, we expect the
EUR to continue its weakening.

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EUR-USD
According to our strategy, we
moved Neutral as the spot
broke above 1.0820.
We keep however our bearish
bias and think that the long-term
downtrend will resume soon.
We’ll move to UW again as soon
as 1.08 is broken to the
downside. Next target = 1.0480-
1.520
We will move to OW if the
uptrend from March is
reintegrated and/or there is a
clean break above the 1.1088
resistance.

48
COMMODITY
In 2015, commodities experienced their worst losses since the 2008 crisis
Prospects for commodities are looking shaky. Commodity weaknesses (supply glut in oil,
weakness in EM/China and associated tail risks of a global growth recession, US dollar
strengthening…) are likely to continue.
We don’t see any sustainable recovery without a pick-up in global growth or a substantial
shrinkage in supply
The expected Fed rate hike would put more pressure on the asset class as higher interest rates put a
higher cost on holding commodities
The next leg up in the US$ will put more pressure on commodity prices
Over 6 to 12 months, return forecasts are negative for commodities as a whole. We remain neutral-
to-underweight commodities overall .
From a longer-term perspective, owning commodities makes sense in an asset allocation because of
their structural low correlations to other assets and strong inflation hedging abilities,

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COMMODITY
Bottom Line :
Energy: We remain of the view that the oil market is oversupplied, still think it is too early to expect
major upside for the price and that the risks remain substantially skewed to the downside.
Fundamentals are also negative from both a macro and micro perspective.
The price war between the lower-cost producers (Saudi Arabia), and the higher-cost producers
(shale) should last for a while.
Oversupply will take some time to peter out
The interim low around 42 was finally broken, increasing the probability of seeing the last leg lower
we’ve been waiting for. We moved to Neutral again.
From here, we keep exactly the same tactical rules:
Move to UW if the August low (~38) is breached. Target : 35, then 28-30. It’s worth noting that
cash costs are estimated at around $20/bbl
Move to OW above 42 and trade the 42-52 range
Go Neutral again if the WTI goes above 56.5
Go OW if the it breaks above 63

50
COMMODITY
Precious Metals: As expected in our previous report, a rebound occurred on the important support area
of 1070.
Gold is now mainly trading on Fed’s action and its subsequent impacts on US dollar, real yields and
commodity prices.
The main factors suppressing gold / silver prices in the near term are: higher US real yields, stronger
USD, outflows from gold ETPs and weaker gold flows to Asia.
We believe prices will likely trough in mid-2016 as these factors begin to fade.
In the meanwhile, gold / silver are still due for a final leg down. Our ultimate target remains at 980- 1000
on gold and 12.5 on silver.
Our positioning rules remain unchanged:
Neutral between 1120 and 1070.
OW below and above.
We will wait for 1050 to progressively start accumulating Gold.

51
COMMODITY
Base Metals: Risks to prices for industrial metals are skewed to the downside in the near term. The
main reasons (growth disappointments in China and broader EM) behind the bear trend we’ve seen
since 2011 are still alive… We remain Neutral on base metals
Large-scale supply adjustments are required in order to restore a better balance to the physical
markets and to stabilize prices.
We expect base metals to trade lower for longer in order to match supply with demand.
Despite our neutral stance on industrial metals, we’ve been avoiding holding Copper and Iron ore
Agriculture: GSCI Agri was down -1.35% in Nov. We remain Neutral because of excess supply. We
see a limited downside to grain prices from here when upside seems very interesting.

52
Commos – YTD Performance
In 2015, commodities experienced
their worst losses since the 2008
crisis
The bullish trend we see on US
dollar should continue to weigh on
the asset class as whole.
.

53
Base Metals - Copper
Despite our neutral stance on
industrial metals, we avoided
holding Copper and Iron ore…
For months now, we’ve been
saying: “On the MT, we do not
like holding Copper (our target of
5000 has been reached), nor Iron
ore, as it appears highly
overvalued relative to the dollar,
the global growth and the Chinese
demand. We see more
weakness…”
Our Nov. 10% expected downside
in iron ore (~40) and 5% in copper
(~4800) were both reached and
exceeded.
Given the impulsive move we’ve
seen recently, reasonable
targets stand down at 4400 on
Copper and 35 on Iron Ore

54
Crude Oil – Downside Risk
Oil inventories are at record levels.
The risk to reach the limits of storage capacity is real. It would significantly increase if the demand
fall and/or the supply surprises to the upside
An additional price decline is still needed to clear the excess supply.

55
Crude – Tech. Perspective
Over the medium term, we stick
with our view that there is still
potential for a last leg lower
In September, we decided to
move to OW and to trade the 42-
52 range
We move to Neutral again as
the WTI breaks below 42.
From here, we keep exactly the
same strategy :
Move to UW if the August low
(~38) is breached. Target :
35, then 28-30
Move to OW above 42 and
trade the 42-52 range
Go Neutral again if the WTI
goes above 56.5
Go OW if the it breaks above
63

56
Gold – Tech. Perspective
We stick to our view that Gold (like
Silver) are still due for a final leg
down (over a 6month horizon)…
Our ultimate target remains 980-
1000
Technically, gold is trapped in a
falling converging wedge
The $1014 (61.8% Fibonacci
retracement of the entire 2000-
2011 rally) level remains the
threshold to watch.
Below we’ll probably see an
impulsive acceleration to the
downside.
Our positioning rules remain
unchanged: Neutral between
1120 and 1070. OW below and
above.
We will wait for 1050 to
progressively start accumulating
Gold.

57
ALTERNATIVE STRATEGIES
The HFRI Fund Weighted Composite Index gained 0.5% in November (+0.3% YTD), reversing
declines from Q3. Gains were lead by Macro (+2.1% MoM) as a result of their long USD and long
equity positions and CTAs (+3.1% MoM, despite losses in commodities, especially shorts in oil and
grains)
We stick to our preference for risk diversifiers (pure alpha generation strategies) over return
enhancers. Our strategy has been clearly rewarding during the last months including September.
CTAs, Global Macro, Volatility Arbitrage and Market-Neutral Equity funds successfully navigated Q3
challenging period. Through November:
The HFRI Macro Index leads all HF strategies with a YTD gain of +0.8%
The RV Volatility Index leads relative-value strategies for 2015 with a gain of +6.5%
Market neutral strategy performed well over the year with 4.1% YTD.
We believe that diversifying portfolios with an increased allocation to alternatives is particularly
attractive at this stage of the cycle, given the current macroeconomic and interest rate uncertainties
We think that the widening gap between the Fed and ECB monetary policies (and its subsequent
impacts on US dollar, commodities and Govies) is supportive for CTAs and Global Macros on which
we remain overweight

58
ALTERNATIVE STRATEGIES
We are not changing our recommendations on alternatives which we consider to be suited to current
market conditions. We maintain our OW positioning on:
Equity Market Neutrals both for their “intelligent” beta and their alpha contribution.
CTA’s and Global Macro as a diversifier and tail hedge. These strategies should outperform as
FX and commodity current trends are likely to persist.
Vol. Arb strategy and prefer funds that trade volatility globally (all assets / all regions). This is our
way to take advantage from the higher volatility regime.

Bottom Line: Global Asset Allocation
The outlook for the global economy is darkening and the upside on
assets looks more limited. De-risking is the strategy we promote as medium
term risk-reward is turning less favorable and markets appear unprepared for
the imminent interest rate hikes.
High valuations and rising rates, especially in the US, will present challenges
for risky assets. We remain cautious on risky assets and expect lower
asset returns and higher volatility to make the essence of next year.
Concerns remain over deflationary pressures, Chinese growth, Emerging
Markets, CNY devaluation, corporate profit growth, HY credit and falling
commodity prices. Markets seem unprepared for interest rate hikes.
We expect equity market volatility to drift higher through 2016 as a result of all
these macroeconomic uncertainties
We stick with our tactical positioning: Neutral on equities (A massive top
forming could not be excluded on the S&P500), UW Govies and Credit, OW
US Dollar, UW Emerging Markets and commodities
We reiterate our view: A perfect storm is building… It combines historically
overvalued stocks with stretched government bonds and corporate credits.
Unlike previous storms (2000, 2008), investors would be left with almost
no place to hide
We summarize our views as follows
59

60
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.

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…
Allocation with a factorial approach built on the understanding (profiling) of the risk/return drivers of
the different asset classes
FinLight Research is an innovation-oriented company. We target to fill the gap between the
academic research and the investment community, especially on real assets and alternatives. We survey
on a continuous basis the academic literature for interesting published and working papers related to
quantitative investing, non-linear profiling, asset allocation, real assets...
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Our Standard Offer
Provide tailor-
made quantitative
analysis of your
portfolios in terms
of asset allocation,
risk profiling and
risk contribution
Provide tailor-
made quantitative
analysis of your
portfolios in terms
of asset allocation,
risk profiling and
risk contribution
•Risk Profiling
Offer a turnkey 3-
step factor-based
process in GAA
with factor
selection, risk
budgeting and
dynamic portfolio
protection
Offer a turnkey 3-
step factor-based
process in GAA
with factor
selection, risk
budgeting and
dynamic portfolio
protection
•Factor-based GAA Process
Provide assistance
with alternative
investments
(including real
assets) in terms of
profiling, and
integration in a
GAA
Provide assistance
with alternative
investments
(including real
assets) in terms of
profiling, and
integration in a
GAA
•Alternative Investments
Provide assistance
with asset
allocation and
related risk control
and/or risk
budgeting
techniques
Provide assistance
with asset
allocation and
related risk control
and/or risk
budgeting
techniques
•Global Asset Allocation
(GAA)
62

Finlight Research - Market perspectives - Dec 2015

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