Equities

The GAA DM Equity Country Allocation model is updated as of July 29, 2016. The non-U.S. (level 2) model made some changes by increasing the overweight in Sweden and Italy while reducing the overweight in Netherland and Germany such that now Germany is in underweight position.

The odds of an inflation "mini-scare" are rising, although deflationary tail risks from abroad cannot be dismissed.

It is dangerous to equate recent equity strength with economic vitality, as history shows that liquidity-fueled equity advances favor non-cyclicals over deep cyclicals. Take profits in gold, buy rails and sell industrial machinery.

In July, the model outperformed both global equities and the S&P 500 in local-currency terms, while underperforming in U.S. dollar terms. For the monthly of August, the model made no changes to overall risk exposure.

The recent rally in risk assets is walking a very fine line. If the Fed turns more hawkish, or U.S. growth slows, it could fall over.

The S&P restaurants index continues to deflate in relative performance terms and downside risks remain intact. The top panel of the chart shows that the Restaurant Performance Index (RPI, courtesy of the National Restaurant Association) has taken a turn for the worse. Historically, momentum in the RPI has been an excellent leading indicator of relative share prices. The RPI is picking up the downtrend in top-line performance, as measured by restaurant retail sales. The latter warn that relative forward earnings momentum is headed lower. To make matters worse, slow traffic is limiting pricing power gains, which are lagging badly behind a soaring wage bill (fourth panel). Bottom Line: While we have recently boosted the S&P consumer discretionary index to overweight, stick with a below benchmark allocation in the S&P restaurants sub-index. The ticker symbols for the stocks in this index are: BLBG: S5REST - MCD, SBUX, YUM, CMG, DRI.

We are delighted to announce the launch of our newest sector publication, Energy Sector Strategy (NRG). The new Energy Sector Strategy will be complementary to BCA's Commodity & Energy Strategy (CES) and U.S. Equity Strategy (USES) services. NRG will expand our energy-related research into more granular investment themes that are beyond the scope of CES/USES and extend these conclusions to specific equity investment recommendations. The U.S. horizontal rig count (unconventional/shale drilling) has begun to recover in response to oil prices rising off of an oversold trough, but still remains well below the level that would be sufficient to prevent continuing production declines. Capital availability and rising service costs will be moderating factors on the pace of a drilling recovery, but the completion of drilled but uncompleted wells (DUCs) will allow operators to bring on some additional production faster and cheaper than organic drilling programs. Without the impact of the DUCs, we estimate U.S. shale production would continue to decline through mid-2017; with an aggressive DUC completion program (100 wells per month over the course of a year, starting now), overall production would stabilize 3-6 months sooner and at a higher level (300,000-400,000 b/d) than drilling alone. In this environment, we recommend financially strong oil shale producers who will be able to ramp-up reinvestment fastest (EOG, PXD, PE, FANG), as well as the completion and service companies (HAL, SLB, SLCA) that will benefit from the increased oilfield investment more than drillers. To learn more about this new service, please contact Chris Cook (Chrisc@bcaresearch.com).

A collection of 10 important charts to monitor closely through the summer months.

The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.

With the broad market breaking out to new highs courtesy of flush liquidity conditions and rising risk appetite, the momentum-driven biotech group stands an excellent change of reclaiming previous relative performance highs. We upgraded the S&P biotech index to overweight a month ago because value had been fully restored and underlying fundamentals remained solid. For instance, demand-driven pharmaceutical pricing power gains remain intact, which is driving productivity improvement. Increased profit potential should attract renewed capital inflows and translate into higher share prices, especially now that the supply of biotech stocks is ebbing fast: biotech IPOs have cratered. Importantly, drug industry M&A activity remains robust, suggesting that the S&P biotech index has the potential for a re-rating. We reiterate our recent upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5BIOT- AMGN, GILD, ABBV, CELG, BIIB, REGN, ALXN, VRTX.