A melt-up before the meltdown? Global asset allocation and market perspectives

Market Perspectives
June 2016
Jun. 7th, 2016
www.finlightresearch.com
A melt-up before the meltdown?

“That means the Fed still has a 'China
problem': any effort it makes to tighten policy
will, once more, activate the feedback loop
and suck capital from China with what are now
predictable consequences”
– David Lubin (Citigroup)
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FinLight Research | www.finlightresearch.com

Executive Summary: Global Asset Allocation
Activity indictors, like PMIs in the G3 and China, continue to suggest global
stagnation.
The probability of the occurrence of a stress scenario on a global scale is still
high. We see warnings from fundamental, behavioral and credit signals.
Valuations of both stocks and bonds are at or near record high levels
The S&P 500 Index is likely to break out to new highs, and thus exacerbate
already stretched valuation levels. Earnings remain perhaps the most
important issue, at this stage.
Over the last few weeks, we saw the Fed suddenly going from Dovish to
Hawkish, and then reintroducing a more dovish narrative after the large miss
on US non-farm payrolls >> More uncertainty is building, but not yet
visible in implied volatilities.
We make minor adjustments to our asset allocation this month. Given
the high equity valuations and the poor growth outlook factored in credit
(specially US), we now prefer the latter (mainly IG).
We reiterate our view that a perfect storm is building… It combines
historically overvalued stocks with stretched government bonds. Unlike
previous storms (2000, 2008), investors would be left with almost no
place to hide
We reiterate our view that we are sailing a cyclical bull within a secular
bear. The current cyclical bull may go higher for longer. But, rising volatility
and stalling earnings growth may indicate we are in the late stage of the
cycle.
We summarize our views as follows
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MACRO VIEW
The Good
US consumer spending rose at the fastest rate in seven years, with a +1.0% MoM
US Q2 GDP growth is forecasted at 2.9% by the Atlanta Fed model
The Michigan sentiment index is back at healthy levels
Thanks to Utilities, US Industrial production jumped by +5.8%, the most in 18 months
The IFO Business Climate Index for Germany came in at its highest reading this year (107.7 in
May, beating market expectations of 106.8)
The Bad
Non-Farm Payrolls were a huge miss at 38,000 (vs 170,000 expected), but unemployment rate
went lower, at 4.7%, because a severe drop in the labor force
The sharp decline in US core durable goods orders (-0.8% MoM and by -8.7% YoY) signals a
continuing decline in capital investment and in business confidence
The Caixin manufacturing PMI index slipped to 49.2, for the 15th consecutive month of
contraction.
The Ugly
Main systemic risk resides in China: China is not recovering but rather just re-leveraging.
Chinese debt bomb is ticking. Debt is used to create the illusion of growth. And that hardly ends
well. Further US dollar strengthening would oblige China to devalue its pegged yuan and
accelerate foreign capital outflows.
Brexit: The decision by the U.K. to depart from the EU has the potential to become
meaningfully disruptive to global financial markets. Recent polling shows that the « leave » vote
is gaining momentum.
4

5
The Big Four Economic Indicators
Industrial Production has been the weakest link in the economic recovery since the GFC
The current picture is characterized by relatively strong Employment and Income, a weak Industrial
Production (down in 9 of the last 12 months) and Real Retail Sales hovering around a flat line.
The average of these indicators has been trending lower since Nov. ‘14, suggesting that the economy is
still moving sideways.

6
Consumer’s Sentiment
The Michigan sentiment index is back on its highs in nearly a year.

7
US GDP
US GDP growth for Q2-2016
is seen at 2.9% by the Atlanta
Fed model
This forecast was upgraded
from 2.5, making a summer
rate hike more likely
But other weak US data,
particularly the softer payrolls,
make the rate hike more
probable in July than in June.

8
US Credit Conditions
According to Senior Loan
Officer Opinion Survey data,
banks have reported
tightening lending standards
for 3 consecutive quarters.
The last time we saw a similar
move was in late 2007/early
2008.
Tightening of credit is usually
seen as a long leading
indicator for recession
Banks are currently tightening
their credit conditions to large
firms, driving down the C&I
loans expansion with a lead
time of about 18 months
But we’re still far from levels
of tightening associated
with the past recessions

9
Chinese Economy
We expect China to allow further depreciation of the yuan
The Caixin/Markit PMI fell to 49.2, suggesting the same negative fundamentals are still in action.
At this stage, an additional depreciation of the yuan seems a much needed stimulus for the
manufacturing sector and exports.
The question is: Are markets going to react to such a depreciation like in August 2015 or early 2016? Not
sure, but the risk is real…
Source: Alhambra Investment Partners

10
Chinese Evergreening Credit
Evergreening credit is due to
corporates borrowing new credit to
repay interest and principal due.
Around $1.2 trillion in new debt were
issued by Chinese firms during 2015
just to pay interest on their existing
obligations
According to a Deutsche Bank
analysis, evergreening credit has
been increasing since 2009. It now
represents approximately 6-9% of
total system credit, and 10-15% of
corporate credit.
The danger with evergreening debt
is that it would likely turn into
nonperforming assets if economic
conditions deteriorate.
We still see further problems
ahead

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EQUITY
We see this bull market as old, tired, but not finished. We still expect a final leg higher. Technicals
are supportive for a re-test of the highs and even for a (limited) breakout ride…
An ultimate surge to the upside, before succumbing to the gravity of valuations.
Earnings are perhaps the most important issue at this stage.
Any breakout to the upside will prove to be unsustainable in the absence of a real improvement in
corporate earnings prospects
Earnings reports are mixed:
US earnings recession continues. S&P 500 consensus forward earnings estimates seem to be
stabilizing, suggesting the yearlong earnings recession may be ending. But for that, the dollar should
not strengthen a lot from here.
Earnings reports are slightly beating (significantly reduced) expectations
.
To sum up, we see limited upside from here, but the S&P 500 may challenge its old highs before
turning decisively south (unless we get a new round of QE). The bounce will soon become an
opportunity to sell into
Several signs may be interpreted as a reminiscence of what happened in the late-stage of previous
economic expansions:
Large amounts involved in M&A activity and buybacks
Elevated levels reached on Debt/EBITDA for non-financial companies. U.S. corporate debt to
earnings ratios are at a 12-year high

12
EQUITY
Our scenarios remain unchanged.
Our main scenario from here (80% chance) : A massive top forming around 2135 – 2170 :
US profit margins are showing increasing evidence of peaking. On Price/Sales metric, equities
are trading at the top of the historical range.
A resumption of earnings growth going into 2016 will be necessary for equities to move higher.
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 (20% chance) : The S&P500 breaks the 2135-2170 resistance, opening
the way to 2225. Such a breakout would need a new round of QE and/or a new impulse to earnings
growth

13
EQUITY
Bottom line :
De-risking should continue. A higher allocation to cash is sensible in this late-stage stock bull.
We adjust our positioning rules on the S&P 500 as follows:
We remain OW (as we did since the index broke above 1903) as long as the 2020 level
is preserved. We still target new highs around 2150-2170
We will turn Neutral if the spot breaks below 2075
We will switch to UW as soon as the 2020 – 2035 range is materially broken to the downside.
Any clean break below the ‘09 trend would make us move massively UW
We like the low US beta. We remain Neutral on Europe and Japan vs. US despite the policy
divergence between the Fed and the ECB/BoJ
Small-caps have been strengthening, suggesting risk appetite is growing But, we remain UW in
US small caps vs large caps.
We remain OW defensive, high dividend and value stocks vs. cyclical stocks.
We remain UW EMs vs DMs despite the recent EM outperformance. We expect another (last) leg
of USD strengthening. Negative spillovers from China (and RMB one-off devaluation) and Brazil
will also likely have a strong impact on other EMs.

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US Earnings
The S&P500 stands within an earnings
recession. For Q2 2016, the estimated
earnings decline is -4.8% YoY (-1.5% if
energy is excluded).
If the index reports a decline in Q2
earnings, it will mark the first time the
index has seen 5 consecutive quarters
of YoY declines since 2008/2009
For all of 2016, the estimated S&P 500
growth rate is now projected at 0.8% for
earnings and 1.8% for revenues.
For Q2 2016, 81 companies have issued
negative EPS guidance and 31
companies have issued positive EPS
guidance
Analysts still expect earnings growth
and revenue growth to return in the
second half of 2016

15
US Earnings
The proportion of S&P 500
companies with negative expected
forward 12-month EPS is at its
highest levels since 2009.
Spikes in this measure have
historically induced a similar move,
six months later, in companies
reporting negative actual EPS (over
Last Twelve Months – LTM).

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Equity Buybacks
Buybacks continue to influence earnings
According to Deutsche Bank, S&P 500 companies spent $485bn or 2.7% of market cap on net buybacks
in the 4 quarters through 1Q16, contributing 2.2% to S&P EPS growth
But to what extent are buybacks able to continue at the same stance, given the charts below?

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Equity Buybacks
But their impact on stocks prices is
clearly fading…
Since end of 2015, the stocks that
have the largest buyback programs
have underperformed the S&P 500
by some 8%
Source: ycharts.com

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Investor Sentiment
After an extremely weak reading of 17.8% (a level that breached the lowest levels reached during the
financial crisis) a week ago, the American Association of Individual Investors (AAII) Bullish Sentiment
bounced to 30.2%
Practically none of these new bulls came from the bearish side, as Bears remained stable at 29.4%
(vs. 29.1% a week ago)
Many are pointing to this contrarian
indicator as a sign of an imminent surge
in stock markets
But one has to keep in mind that this
contrarian indicator has been a
bullish sign when stocks were near
local bottoms..
Instead, the S&P50 is now near its all-
time highs
Extremely low bull sentiment numbers,
when they occur close to a recent
market top, do not signal a bottom, but
they may predict that a bull-trap is
forming.

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Investor Sentiment
Based on StockCharts.com analysis, this
type of counter-trend pattern (very low
bullish sentiment with market flirting with
the top) also occurred:
in 2011 (before a 19% drop)
and again in mid-2015 (before a 13%
drop)

20
Risk Appetite
The CNN Money Fear & Greed Index (components of which are: Put/Call ratio, Stock Price Strength,
Stock Price Breadth, Market Momentum, Junk Bond Demand, Safe Heaven Demand, Market Volatility)
has been at "greed" or "extreme greed" levels for the past 3 months
We see a dichotomy between this “greedy” sentiment and the fading medium-term upside momentum.
A reversal of this sentiment indicator would be followed by a reversal of the stock market uptrend
Source: http://money.cnn.com/data/fear-and-greed/
Source: CNN Money
CNN Money Fear & Greed Index

21
S&P500 – A Long-Term Perspective
Equity markets still appear at lofty valuations, whatever the valuation metric we use.
We see only a few quarters (during the dot.com bubble) with higher valuations
Valuation metrics are virtually useless when it comes to timing market tops and bottoms, but
they do tend to have pretty reliable predictive value when it comes to long-term returns
All these indicators suggest a cautious long-term outlook and weak long-term return expectations
These measures are consistent with flat (0%) 12 year S&P 500 nominal total returns

22
S&P500 – A Long-Term Perspective
Price-to-sales (P/S) ratio is
another metric pointing to lofty
valuations.
The median P/S ratio on the S&P
500 stands at 2.2, well above the
2007 and 2000 levels
The median P/S at those levels
suggests that the majority of
large caps are too expensive,
unlike the bubble of 2000 when
overvaluation was concentrated
in the Tech sector.
Source: Ned Davis Research

23
S&P 500 – A Medium-Term Perspective
Reminder: we’ve turned
from Neutral to OW on the
S&P500 as the index broke
above the 1903 level
For now, we stay OW, as
we expect a final leg up
(target ~ 2160 - 2170!).
Important levels to watch are
2075 and then the 2020 –
2035 range
From here, we will turn
Neutral if the spot breaks
below 2075
We will switch to a UW
stance as soon as the
2020 – 2035 range is
materially broken to the
downside.

24
S&P500 – A Short-Term Perspective
Our prop. Short-Term trading model has turned long on May 4 S&P500 close (@2051.12) and
massively short on Jun 6 (SPX @ 2109.41)
The model is now short SPX again, targeting 2104 and 2062.

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FIXED INCOME & CREDIT
GOVIES
The last jobs report was weak enough to discourage ideas of a June hike and drive treasury yields
down. The market is now pricing the odds of a rate hike at a +15% probability of a +25bp move in
June, and around a +30% chance of a move in either June or July
Treasuries have been range-bound for the past 4 months, and we see no obvious catalyst to break out
of this range
For now, government bond yields are back on the range lows. Valuations appear to be so stretched
that it seems reasonable to keep away from the asset class.
But, the fundamental picture and geopolitical risks are likely to keep yields low over the near term.
In the Euro area, 10Y Bund yields are also stuck close to record lows, because of lack of conviction on
a sustained pick up in inflation and the ongoing ECB and BoJ easing
Tactically, however, we remain Neutral on 10y USTs as long as the 1.97 level is preserved. Above,
we’ll move to UW again. Our ultimate target on US 10y yields was revised down to 2.45 by H2-2016
We expect realized rates volatility to move up from its current (low) level, given the uncertainties
surrounding the pace of Fed’s hikes, the easing interventions of the ECB, global growth data and the
trend in inflation.
We maintain our relative view of US Treasuries underperforming Bunds and JGBs

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INFLATION-LINKED
Downward pressures are fading on inflation expectations in the US (less in Europe). The recent
oil price rebound has lifted inflation expectations towards the Fed’s 2% target
Breakeven may have structurally bottomed here. Reflation should gain the upper hand in H2-2016
We remain Neutral HICP Inflation as we expect breakevens to trade sideways in the Eurozone
We have been OW 10y-TIPS breakevens since Dec ‘15. We now choose to turn Neutral as we
look for breakevens to end the year near their current levels. The Fed rate hike we expect in July, the
lower oil prices and the faster pace of dollar appreciation we see from here, the retail demand appears
that seems to have weakened, all argue for tighter breakevens.
Inflationary signs should be watched closely as they will foreshadow a steepening decline in
Govies.
CORPORATE CREDIT
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…
We keep our bias towards higher quality. Any unpriced rate hike (and/or dollar strengthening) would
weigh on low quality bonds (High Yield and EM debt)

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Given the large carry differential between the US and other DM markets and negative yields on Govies
in Europe / Japan, we expect the foreign bid to be very supportive for US HG credit, especially if less
M&A induces a lower primary bond supply.
The aggressive QE in Europe and Japan is also weighing on spreads and pushing HG credit higher
For high-yield bonds, the rally has extended alongside a 6-month high for Oil prices, stocks flirting with
their highs, higher market inflows, a drop in rates, a drop in market volatility and an attenuation of global
fears (global growth, CNY devaluation, equity earnings…).
We remain concerned about the outlook for the US HY market, where default rates continue to
move up and balance sheets are deteriorating. Renewed weakness in oil prices will bring this issue
under the spotlights again. At current low levels of implied volatility, investors might consider hedging
their US HY holdings with puts.
Credit markets underperformed equities over the past month. But we still see a better value in
corporate debt (specially IG) than in equities, as spreads already price a worse growth environment.
We prefer to trade up in quality. 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 and bad news from China
We remain UW on HY and Neutral on IG, due to valuation, to rising volatility, to position within the
credit cycle and given the weak total return forecast for credit as a whole.

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We expect volatility to go up again and think that an additional liquidity premium is needed to make
HY attractive. A high volatility justifies wider spreads, in our view, even if default risk remains benign.
We expect the focus on liquidity to remain. As said in previous reports, 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.
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.
Within the HY pocket, and on a risk-adjusted basis, we find that BBs still offer the best return per
unit of volatility.
We stick with our preference for US IG over Eurozone.IG, as we missed the recent ECB QE effect
and as:
we think that more attractive spread valuations and higher carry should fuel a stronger bid for US
credit.
We think that the ECB effect is already priced in and would be balanced by an increased corporate
supply
we see a gap between what the ECB is technically allowed to buy, and what it is really doable
given liquidity constraints

29
EM DEBT
The dollar strengthening that we expect would erase some of the gains in EM debt
We remain Neutral on EM bonds, because of all the macro challenges facing the EM economies at a
time when the Fed is likely to be more hawkish
For long-term investors, EM bonds denominated in local currencies offer the most value,
especially for currencies that suffered the most against USD
Bottom line : We change nothing to our previous positioning: Neutral Govies, UW US vs Eurozone
Govies, remain long flatteners on the US yield curve and short duration in 2y USTs, UW credit mainly
through HY and Neutral on IG, Neutral Eurozone vs US HY credit, UW Eurozone vs US IG credit,
Neutral 10y-TIPS and Neutral HICP Inflation, UW High Yield vs High Grade, Neutral on EM sovereigns
with a little preference for local bonds

“You have a better chance of observing
another era like the previous 40-year one on
the planet Mars than you do here on good old
Earth… The bond market's 7.5% 40-year
historical return is just that - history. In
order to duplicate that number, yields would
have to drop to -17%!
Tickets to Mars, anyone? ”
– Bill Gross
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31
US Govies – 10y-UST
We change nothing to our
previous positioning.
Tactically, we remain
Neutral on 10y USTs as
long as the 1.94 level is
preserved. Above, we’ll
move to UW again.
We think a base should
develop somewhere inside
the 1.65-1.77 range.
Our ultimate target remains
at 2.45 by H2-2016
The critical level to watch is
1.65. Below, we may switch
to OW again.

32
US Govies – Curve Flattening
We have been long flatteners (2-10y) on
the US yield curve since Dec. ’14, playing
the view that “when the Fed hikes, the yield
curve flattens”
The difference 2-10y UST spread is now at
100bps, almost exactly in the middle of its
30 year range.
We keep our flattening bet (targeting a
50bp flattening in H2-2016) as we think that
the market is not prepared for 2 further rate
hikes in 2016

33
European Credit Fundamentals
Despite the recent rally in European credit, mainly justified by Brent crude prices (getting above
$50/bbl for the first time since Nov. ‘15) and some modestly positive headlines, credit fundamentals
seem to be deteriorating for both HY and IG…
Revenue and EBITDA growth slowed to just 1.9% and 2.2% YoY respectively
Net leverage increased to 3.9x

34
Credit vs Equities
IG Credit (like HY) has
underperformed equities over the past
month, with the S&P 500 flirting with
its highs and CDX.IG getting wider.
We still see a better value (and
protection) in corporate debt
(specially IG) than in equities, as
spreads already price a worse growth
environment.
This growing valuation gap
between the 2 asset classes is
translated in fund flows: According
to data from Lipper, HY and IG bond
funds have accumulated a combined
$37 billion of inflows YTD, when $56
billion has exited equity funds.

35
EXCHANGE RATES
We’ve already moderated our view for the dollar as the (dovish) Fed has kept pressure on it, capping
any higher yields attempts. But still believe in a stronger USD medium term, particularly versus
Euro and Chinese yuan
The long-term dollar bull trend is not over. We continue to believe the USD should rally from
current levels as the Fed normalizes its policy and the ECB / BoJ both move the other way.
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 expect a
cyclical low in EUR/USD somewhere in H2-2016 (before the ECB tapering)
Besides the Fed being in hiking mode, we expect the US dollar to be supported by the fears of a global
recession, higher short rate differentials between the US and its G10 peers, weaker-than-expected
inflation dynamics and “Brexit” risks in Europe. The risks to our view reside in delayed Fed action
and disappointing ECB action. But we think that most of that is already priced in.
According to our positioning rules, we’ve moved to UW on EUR-USD as it broke below 1.13.
Our positioning rules are adjusted as follows:
Move to Neutral within the 1.14 - 1.165 range
Move to OW if the spot breaks above the 1.165 resistance to target 1.18
Remain UW below 1.14. Target = 1.08 and then 1.04 to parity over 2H

36
EXCHANGE RATES
We remain Neutral on USD-JPY, “watching for signs of near-term stability or basement somewhere
between 108 and 106”.
Only a clean break above 111 could make us turn to OW
On the other side, a break below the 105.75 – 106.00 area could make us switch to UW as it may
open downside risks to 102. Such a breakout would indicate that Japan's fiscal and monetary
stimulus is doomed and induce a risk-off behavior globally.
The more dovish tone from the Fed has certainly halted the USD’s rapid rise, giving EM currencies
some respite
We anticipate that pressure on EM currencies will resume and continue until we see a more
constructive / fundamental improvement for global growth and commodities supply/demand
imbalances.
We remain UW EM and Commodity FX

37
EUR-USD
In our previous Monthly Report,
we said “The picture on EUR-
USD is not clear. But, given our
view on the DXY index, we
expect a downtrend to develop
from here… To gain confidence
in such a scenario, the spot
needs to break below 1.13.”
According to our positioning
rules, we moved to UW after the
clean break below 1.13.
We will move to Neutral above
1.14, and to OW if the spot
breaks above the 1.165
resistance to target 1.18
Over the medium-term (2H-
2016), we maintain our downside
projections towards 1.08-1.04-
parity.

38
USD-JPY
We change nothing to our
previous positioning. We remain
Neutral on USD-JPY
Only a clean break above 111
could make us turn to OW
On the other side, a break below
the 105.75 – 106.00 area could
make us switch to UW as it may
open downside risks to 102

39
COMMODITY
The S&P GSCI total return indices gained 5.2% in May, despite the firmer US dollar.
Fundamentals appear to be firming for commodities. The main risks remain Fed rate hikes and
new signs of weakness in China.
We remain UW commodities over 3-6 months as we believe the recent rally might be short-lived
The supply side has adjusted but still has a way to go in many commodities before erasing
current imbalances. In order to get more cuts in supply, we think there needs another leg
down in prices to force capitulation
US dollar strengthening should resume. Dollar will dictate both direction and velocity in commos
Despite the dovish tone from the Fed, the tightening cycle will continue in the US (with at least 2
hikes over 2016). Higher rates are usually bearish for commos as they put a higher cost on
carrying them in inventories
China’s investment slowdown continues
We don’t see any sustainable recovery without a pick-up in global growth or a substantial
shrinkage in supply. It is likely that supply destruction will be the main catalyst for the next recovery
in prices.
The downtrend in commodities looks about to bottom out. We see one last leg down in energy
and metals.

40
COMMODITY
Bottom Line :
Energy:
The recovery in oil prices have continued over May despite the firmer US dollar. Supply disruptions
(outage in Canada, unrest in Nigeria, Libya), the drawdown in US inventories and the drop in US oil
production appear to be the main catalysts
A technical look at oil prices suggests near-term profit taking in energy-related positions is likely a
good idea. As the contango disappears, the incentive to buy and store crude decreases.
Oil remains a wild card but a bottom may be forming with supply/demand imbalances coming to an
end by mid-2017
Fundamentals (oversupply, global inventories, mild growth and demand, restarting of production in parts
of Canada shut down by wildfires, increase in exports from Iraq) continue to put pressure on prices.
We think that the bottom is in for oil, but we don’t expect a significant rally from here. A pullback from
current levels (~$50 for WTI) seems even needed to digest some of the recent gains.
We expect the spot to test again the 25-30 area before putting in a permanent rebound
We expect oil to remain within the US$25-45 range for a while, and volatility to persist.
Our positioning rules on crude are:
We remain Neutral as long as the spot stays within the spot stays within the Feb channel
(currently at 42 – 50)
Turn UW below the channel support
Move to OW above the channel resistance or below 29.

41
COMMODITY
Precious Metals:
Outlook for precious metals continues to be dominated by the potential hiking pace of the Fed and
the subsequent impacts on US dollar and real yields.
We regard the recent rally in gold to be without fundamental basis, mainly due to dollar weakening and FED
dovish tone.
The recent Fed uncertainty has opened further upside potential for gold
But, at the end, the stronger US dollar and higher real rates should drive gold prices lower
At this stage, we think that gold / silver are still due for a final leg down. Our ultimate target was
raised to 1000 – 1040 on gold and 12.5-13 on silver.
We remain Neutral on gold, and watch for a clean break above 1295 to become OW again
Our positioning rules are adjusted as follows:
Neutral between 1200 and 1295
Turn UW if the spot breaks below 1200
Go OW below 1070 and above 1295 (to target 1380 – 1420)

42
COMMODITY
Base Metals:
Metals prices have rebounded even as fundamental conditions have not improved. The recent
price increases are more a technically-driven move, mainly linked to the last round of Chinese easing.
So when China's stockpiling ends, these metals will go south
We continue to expect industrial metals price weakness due to a combination of excess supply and
weak demand
From our point of view, lower prices are still needed to oblige producers to cut production and to
rebalance oversupplied markets. Thus, we remain UW on base metals.
From a longer-term point of view, we believe that metals prices are headed for multi-year declines
as the current China-driven super-cycle appears to have peaked
Agriculture:
The recent sharp rally in grains may not have far to go, because of glutted markets especially on
soybeans and corn.
We see more weather events weighing on grain harvests specially in Latin America (like soybean in
Brazil due to dry weather). Some grains might appear in deficit but global stocks are still at record levels
We choose to remain Neutral, waiting for a better entry price on crops.

43
Precious Metals - Gold
We regard the recent rally in
gold to be without
fundamental basis
The move was mainly justified
by the dollar weakening and
FED dovish tone.
But the Fed would have to step
in during the summer, providing
the fundamental basis for a
dollar strengthening, and gold
weakness.
Our positioning rules are
unchanged:
Remain Neutral between
1200 and 1295
Turn UW if the spot breaks
below 1200
Go OW below 1070 and
above 1295 (to target 1380
– 1420)

44
Crude – Market Positioning
The rally we recently saw in oil prices could be explained by lower production mainly due to: outage in
Canada, unrest in Nigeria, Libya, sharp drop in the number of US rigs.
But the sharp reduction in the WTI short speculative position (which are back to their lows) has,
no doubt, contributed to the upside move.

45
Crude – Tech. Perspective
Another factor that has supported oil
prices so far has been the persistent
contango on futures curve. This
configuration has been favorable for those
able to buy the spot and to store it.
Huge armada of supertankers (as floating
storage) have formed around the world
with some 200 Mln barrels of (offshore) oil
waiting to be delivered. Just have a look to
the maps on:
http://fingfx.thomsonreuters.com/gfx/rngs/1
/1253/1888/index.html
But, cantango is now vanishing,
making offshore storage uneconomic
and thus untenable.
In the absence of a sustained demand,
these storages would have to be emptied
at lower prices an the downturn in oil
should resume.

46
Crude – Technical Indicators
The uptrend since Feb’ 16 has been going on for a long time now and has induced some overbought
conditions (MFI, RSI). The MACDs suggest the market is stretched, but have yet to turn down.
The 10-week Momentum indicator is near its multi-year resistance
Oil is probably forming a topping around the $50 level. We will be on the lookout for a reversal
pattern.

47
Crude – Tech. Perspective
According to our positioning
rules (please see our previous
report), we’ve been Neutral
since the WTI broke above 39
mid-March.
We remain Neutral as long as
the spot remains within the
Feb uptrend channel
We’ve adjusted our tactical rules
as follows:
Remain Neutral as long as
the spot stays within the
spot stays within the Feb
channel (currently at 42 –
50)
Turn UW below the channel
support
Move to OW above the
channel resistance or below
29.

48
ALTERNATIVE STRATEGIES
The HFRI Fund Weighted Composite Index posted gains of 0.4% in May, weathering uncertainty
about the timing and frequency of near term rate hikes by the Fed. Gains were led by Event Driven (on
accelerated M&A activity) and Relative Value Arbitrage strategies (on moves on U.S. yields).
CTAs continued to struggle in May, losing money for a third consecutive month. CTAs
performance (-2.1% MoM, +0.1% Ytd) was hit by their FX (USD shorts) and fixed-income clusters, as
markets proved largely directionless.
Global Macro funds advanced +0.3% in May (-0.7% Ytd), benefitting from the return of risk appetite,
the appreciation of the US dollar against most currencies and their short US duration positions. We
expect Global Macro funds to be the prime beneficiaries from a change in the Fed’s stance (to
hawkish) as they remain long USD and short on commodities..
Equity Long-Short posted +0.8% in May (+0.4% Ytd). Performance still lags the market, however, as
most managers have kept their positioning cautious despite the strong market rally from mid-February
In a world where most assets seem highly correlated, the potential for diversification has been limited.
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.

49
ALTERNATIVE STRATEGIES
We stick to our preference for risk diversifiers (pure alpha generation strategies) over return
enhancers.
These strategies offer an interesting risk/return tradeoff, help buffer market shocks and offer
decent returns in rangy markets
We think that the divergence 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
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.
Vol. Arb strategy (HFRI RV: Volatility Index: +2.1% MoM, +1.7% Ytd) and prefer funds that trade
volatility globally (all assets / all regions). This is our way to take advantage from the higher
volatility regime.

50
Managed Futures / CTAs
CTAs as represented by the SG CTA
Index, has returned roughly to where
it was about 6 months ago, giving
back most of the 10% it gained from
Oct. ‘15 to Feb. ’16
Don’t worry… Be happy… ☺
It’s hard for systematic models to
capture moves that materialize out of
nowhere, and to make money when
the market refuses to provide the
directional volatility it needs.
Markets remain choppy, but our
conviction is that a trend will emerge
over the next few months.
Managed Futures
Source: SG CTA Index

51
Equity Long/Short
L/S Equity funds remain defensive
During Jan-Feb, Equity L/S increased their exposure to cyclicals.
But since the beginning of March, Equity L/S cut their net exposure to Cyclicals and
reallocated to Defensive again (like during 2015).
The cyclical-to-defensive ratio remained low in May.

Bottom Line: Global Asset Allocation
Activity indictors, like PMIs in the G3 and China, continue to suggest
global stagnation.
The probability of the occurrence of a stress scenario on a global scale is
still high
Valuations of both stocks and bonds are at or near record high
levels
The S&P 500 Index is likely to break out to new highs, and thus
exacerbate already stretched valuation levels. Earnings remain perhaps
the most important issue, at this stage.
Over the last few weeks, we saw the Fed suddenly going from Dovish to
Hawkish, and then reintroducing a more dovish narrative after the large
miss on US non-farm payrolls >> More uncertainty is building, but not
yet visible in implied volatilities.
We make minor adjustments to our asset allocation this month.
Given the high equity valuations and the poor growth outlook factored in
credit (specially US), we now prefer the latter (mainly IG).
We reiterate our view that a perfect storm is building… It combines
historically overvalued stocks with stretched government bonds. Unlike
previous storms (2000, 2008), investors would be left with almost no
place to hide
We reiterate our view that we are sailing a cyclical bull within a secular
bear. The current cyclical bull may go higher for longer. But, rising
volatility and stalling earnings growth may indicate we are in the late stage
of the cycle. We summarize our views as follows
52

53
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...
54

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