Equities

Recently, the insurance group has enjoyed yet another mini relative performance burst of strength, supported by the modest uptick in bond yields. However, we doubt that a sustainable outperformance phase can ensue. Pricing power momentum has rolled over. Total home and auto sales growth has decelerated close to nil, suggesting a slowing in new written premiums. In the meantime, insurance companies have been bizarrely aggressive in terms of hiring. Insurance headcount has vaulted higher in the last several quarters. A more onerous cost structure is not compatible with headwinds to top-line growth. As a result, we doubt that excellent value will be realized. Downgrade to neutral and please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are BLBG: S5INSU - AIG, CB, MET, MMC, PRU, TRV, AFL, AON, ALL, PGR, WLTW, HIG, PFG, L, CINF, LNC, XL, AJG, UNM, TMK, AIZ.

Data processing stocks have marked time since we took profits and downgraded to neutral in mid-February. Increasingly, this lateral move looks to be a consolidation rather than a trend change. This group fits into our consumption vs. capital spending theme, and outperforms when economic growth slippage is the dominant driver of a disinflationary macro backdrop. Data processing sales went through a rough patch, but the seeds of a recovery have been sown. Top-line performance is highly correlated with consumer sector transaction volumes. Resilient consumer confidence, a high savings rate, decent job growth, and rising incomes all imply that spending should remain an economic bright spot. The relative performance consolidation has allowed the industry to grow into premium valuations, at a time when the high margin and recurring revenue nature of the industry's operating profile stands out in a disinflationary world struggling to grow at trend, let alone above it. Please see yesterday's Weekly Report for more details on the upgrade. The ticker symbols for the stocks in this index are: BLBG: S5DPOS - V, MA, PYPL, ADP, FIS, FISV, PAYX, ADS, GPN, WU, XRX, TSS.

The monetary policy sweet spot won't end for equities until interest rates climb above the equilibrium rate - that won't happen even with a rate hike in December. But even though equity markets will continue to cheer a go-slow Fed in the short run, the sustainability of these gains will be dubious until a healthier environment for earnings takes hold.

Stocks are flirting with new highs, courtesy of a gradualist Fed and the reduced threat
of incremental near-term U.S. dollar strength.

Special Report

At last year's BCA New York Investment Conference, I made five controversial predictions. This week's <i>Special Report</i> looks at how they have panned out.

The Fed delivered a "hawkish hold." Remain tactically short U.S. equities and position for a stronger dollar. Meanwhile, the Bank of Japan laid out a radical overhaul: The new framework is consistent with price-level targeting and debt monetization. Long-term investors should position for a weaker yen and higher Japanese equity prices. Also, stay structurally underweight Japanese bonds: Zero is a resting point, rather than a final destination, for 10-year JGB yields.

In a Special Report published on September 6, we made the case that the transportation sector was already discounting a deep recession, and that only a stabilization rather than acceleration in economic prospects was required to realize good value. As part of that report, we upgraded the S&P air freight & logistics group to overweight. Global revenue ton miles have returned to positive growth, which should ultimately restore pricing power. The sustainability of the increase in air traffic is decent, given that inventories in the key manufacturing regions of the world are contracting, which is a positive sign for future activity levels. On the domestic front, non-store retail sales are handily surpassing overall retail sales at the fastest clip since the tech bubble burst, and are signaling that a relative valuation re-rating phase is looming (bottom panel). Meanwhile, the air freight group has a low earnings hurdle to surpass, as evidenced by relative forward earnings growth estimates, and confirmed by upbeat results from FedEx earlier this week. Bottom Line: We reiterate our recent shift to overweight. The ticker symbols for the stocks in this index are: BLBG: S5AIRFX - UPS, FDX, CHRW, EXPD.

The sharp spike in HIBOR will be short lived. The RMB "carry trade" has been largely unwound. The RMB will not experience the intense selling as seen in the past year. H shares are still trading at substantial discounts to A shares, which will inevitably continue to draw domestic investors. Strategically, H shares remain a better bet than their domestic counterparts.

Special Report

A playable pair trade opportunity has emerged on the back of shifting capital spending patterns: long communications equipment/short machinery.

We put the odds of an oil-production freeze agreement between OPEC and Russian officials next week in Algiers at slightly better than a coin toss.