Blue Marble Research Research. Events. Asset Management. The Macro Strategist A Synthesis of Key Global Macro Economic, Thematic, and Financial Market Trends Vinny Catalano, CFA May 11, 2015 Upcoming Blue Marble Research Events Markets at a Glance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arket Forecast Series August 6: New York Society of Security Analysts 2015 Topical and Educational rd Nov. 6: 3 Annual Global Infrastructure conference Fall tbd: Private Equity seminar Recent and Upcoming Media Appearances, Videos and Audio Segments see beyondthesoundbite.blogspot.com for additional information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ote: See page 8 for a complete list of weekly winners and losers In This Week’s Report Observations on the Global Economy and Markets Featured Market: United Kingdom (EWU) (4 years) Valuation: Primary Models US Economy: Key Economic Indicators Market Metrics Model Growth Portfolio Market Performance Data: Markets at a Glance Global Performers – Best to Worst Research. Events. Asset Management. vinny@bluemarbleresearch.com 1 Blue Marble Research Research. Events. Asset Management. Observations On The Global Economy and Markets Conventional Thinking In Unconventional Times “BOTH financiers and economists still get the blame for the 2007-2009 financial crisis: the first group for causing it and the second for not predicting it. As it turns out, the two issues are connected. The economists failed to understand the importance of finance and financiers put too much faith in the models produced by economists. If this seems like an ancient debate, and thus irrelevant to today's concerns, it is not. The response of central banks and regulators to the crisis has led to an economy unlike any we have seen before, with short-term rates at zero, some bond yields at negative rates and central banks playing a dominant role in the markets. It is far from clear that either economics or financial theory have adjusted to face this new reality.” http://www.economist.com/blogs/buttonwood/2015/05/finance-and-economics So writes The Economist in a recent commentary articulating several key aspects of those concerns expressed in prior Blue Marble Research reports. The points noted in the commentary, along with those related to the changed market structure and the interconnected, interdependent conditions of the global economic and financial markets, as well as other areas of exceptional circumstances, should not be ignored and dismissed just because earnings and interest rates tilt the valuation models toward a bullish reading. Now, all of this would not be an issue were it not for the fact that the most bullish among us show little to no signs of concerns related to the current extraordinary circumstances. In the events I have conducted and participated in and in the numerous readings and commentaries I have read, the bullish story by some can only be described as one living in the land of sanguinity. “Climbing a wall of worry” is the justification for the rising tide of global equities. Yet, as The Economist commentary goes on to note, “The use of quantitative easing (QE) to stabilise economies has made it a lot easier to service debts and indeed has prompted many to argue that deficits are irrelevant in a country that borrows in its own currency and has a compliant central bank. Very little of the pre-crisis debt has been eliminated; it has just been redistributed onto government balance sheets.” Shouldn’t this be a concern on multiple levels, one that trumps the standard valuation process so many traditionally-oriented investors rely on? Shouldn’t this (and many other exceptional factors) be taken into account and cause one reliant on traditional financial and valuation models to have pause? For some, the answer is yes but they are far in the minority. Investment Strategy Implications Last Friday’s US employment data along with the conservative party’s win in the UK virtually guarantees a further upward run into the target 2150 to 2250 for the S&P 500, mostly like this summer. At that point, an assessment as to the quality and strength of that run will help determine the probabilities of a serious market correction this fall. Until then, investors are advised to participate to the fullest extent prudently possible in the expected run up to all-time highs in equity prices ever mindful of the extraordinary circumstances the current environment presents and how much more risk there is embedded in it. *** Research. Events. Asset Management. vinny@bluemarbleresearch.com 2 Blue Marble Research Research. Events. Asset Management. Primary Valuation Models Market Models: Modified Fed Equity Valuation Model, Earnings Estimates Modified Fed Model Current Levels Analysis S&P 500 2116.10 Exp. Return 11% Zone Calculation 10 Yr. Tsy 2.15% 19.57 Ave. P/E Ratio 2349 Ave. S&P 500 price level Data as of May 8, 2015 11.00% Ave. potential return 5.14% Ave. Earnings Yield 2.15% 10 yr US Tsy rate Earnings yield minus 10 yr US Tsy rate 2.99% 5 wk trend 1-May 24-Apr 17-Apr 10-Apr 3-Apr S&P 500 2108.29 2117.69 2081.18 2102.06 2066.96 EY 5.16% 5.14% 5.23% 5.18% 5.26% Wkly change Est. Ave. P/E -0.05% 19.57 -0.18% -0.16% 0.15% -0.13% 0.03% 19.50 19.59 19.25 19.44 19.12 10 yr EY-10 yr 2.12% 3.04% 1.92% 3.22% 1.85% 3.38% 1.95% 3.23% 1.90% 3.36% The model's math : The earnings yield is found by taking the 10 year US Treasury rate then increasing or decreasing it progressively to achieve an 11% average expected return which coincides with the estimated consensus operating earnings for the next 12 months. (The est. next 12 months consensus operating earnings for the S&P 500 is $120.) This figure is then subtracted from the current 10 yr rate to achieve the spread result e.g. the higher the spread, the more bullish the conclusion. Comment and Analysis The oscillation continues with price, earnings and interest rates pushing valuation levels above and below the upper end of the range for strong P/E expectations and the upper end of the range for normal times for the earnings yield to 10 year US Treasury rate spread. S&P 500 operating earnings: Actual and Forecast Quarterly Rolling P/E at Yr over yr Time Period Quarterly 12 mos current px % change 1Q12A $25.39 2Q12A $25.69 3Q12A $26.05 4Q12A $26.36 $103.49 1Q13A $26.62 $104.72 4.84% 2Q13A $26.72 $105.75 4.01% 3Q13A $27.91 $107.61 7.14% 4Q13A $29.43 $110.68 11.65% 1Q14A $27.60 $111.66 3.68% 2Q14A $29.72 $114.66 11.23% 3Q14A $30.04 $116.79 7.63% 4Q14A $30.56 $117.92 17.95 3.84% 1Q15E $26.73 $117.05 18.08 -3.15% 2Q15E $28.99 $116.32 18.19 -2.46% 3Q15E $30.39 $116.67 18.14 1.17% 4Q15E $31.91 $118.02 17.93 4.42% 1Q16E $28.33 $119.62 17.69 6.00% 2Q16E $30.73 $121.36 17.44 6.00% 3Q16E $32.21 $123.19 17.18 6.00% 4Q16E $33.82 $125.10 16.92 6.00% A = actual, E = estimated Annual 2012 $103.49 2013 11.65% $110.68 2014E 3.84% $117.92 2015E 4.42% $118.02 2016E 6.00% $125.10 Yr end to yr end % change 6.95% 6.54% 0.08% 6.00% Note: Earnings estimates for 2014 and 2015 are based on projections provided by S&P Capital IQ. Estimates for 2016 are made assuming an 6% year over year growth rate. Conclusion Friday’s US employment data along with the UK election results helped push valuation levels back to the higher end of their valuation ranges. And so it goes – provided earnings do deliver as the year progresses, which the table below suggests is embedded in the thinking of many investors in the mid and small cap areas. *** Featured table: US Size Earnings Growth Expectations Research. Events. Asset Management. vinny@bluemarbleresearch.com 3 Blue Marble Research Research. Events. Asset Management. Macro Economic Analysis: Pulse of the US Economy !"#$%&$'()*)+,($-*.,(/0)12 %&$'()*)+,($3""4$56"/.7$8/#$99$:$8/#$9;<$=>9; B)*2"*2C2 B)*2"*2C2$D/*E" F1,)1 # # # 8)*./#<$8/#$99<$=>9; !"#$%&"'#()#*+","$-+#-,.-+%/"'0#%'*#*12*+/*. G@<A# # GH<?##/"#G@<H# # GH<B# # A<B#> A<H#> A<;#> A<=#> 6A<B#>#/"#A<P#> A<;#>#/"#A<K#> 6A<B#>#/"#A<?#> 6A<?#>#/"#;<A#> A<G#> A<=#> A<;#> 6A<?#> K6C12./#<$8/#$9@<$=>9; I'".F+*'#I'-+*#C,.*1#6#3-,%E#W*$%,.X#787#+9%,:* I'".F+*'#I'-+*#C,.*1#6#3W#*1#M"".#%,.#*,*':4 IIC#6#3W#*1#M"".Y#*,*':4#Z#/'%.*#0*'J-+*0 A<B#> A<;#> A<B#> 6A<;#>#/"#A<=#> A<A#>#/"#A<B#> A<;#>#/"#A<B#> A<B#> A<B#> A<B#> R1,./#<$8/#$9;<$=>9; C,.F0/'-%E#I'".F+/-",#6#787#+9%,:* U%2%+-/4#(/-E-\%/-",#O%/*#6#[*J*E 7%,FM%+/F'-,:#6#787 U",0F$*'#)*,/-$*,/#LO*F/*'08(#"M#7-+9N A<A#> KP<=#> A<B#> GH<P# 6A<?#>#/"#A<=#> KP<;#>#/"#KP<K#> A<A#>#/"#A<=#> G?<H##/"#GP<A# 6A<@#> KP<=#> A<;#> GH<G# 1+. / B/ B/ B-- 5(0C/G B)*2"*2C2 B)*2"*2C2$D/*E" F1,)1 F1,)1$D"H,2". =I9$J =I9$J ;<=#>#/"#?<@#> A<B#> 6A<;#> ;LI@ ;LIA ;LIL$ ;MI;$ HK<H##/"#HG<;# H=<A##/"#HK<H# HG<B# H@<H# 3".*"2./#<$8/#$M<$=>9; !",M%'$#2'".F+/-J-/4#6#Q8Q#+9%,:*#6#)RRO (,-/#E%T"'#+"0/0#6#Q8Q#+9%,:*#6#)RRO :9IO$J ;I>$J :9IO$J @IM$J 6B<H#>#/"#6;<B#> ?<P#>#/"#H<@#> 6B<B#> =<;#> 6B<;#> =<B#> K6C12./#<$8/#$L<$=>9; U",0F$*'#U'*.-/#6#787#+9%,:* P=>I;$Q P9;IO$Q V;=<A#D#/"#VBA<A#D V;H<H#D V;=<P#D R1,./#<$8/#$A<$=>9; !",M%'$#I%4'"EE0#6#787#+9%,:* (,*$2E"4$*,/#O%/*#6#[*J*E I'-J%/*#I%4'"EE0#6#787#+9%,:* I%'/-+-2%/-",#O%/*#6#E*J*E RJ*'%:*#]"F'E4#S%',-,:0#6#787#+9%,:* RJ#^"'_`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conomic Comment and Analysis The second quarter erosion in the MERSI continues while the absolute level of growth remains well within the range of slow and steady progress. Conclusion Slow and steady as she goes. Diffusion indices (PMI and ISM) along with the employment data show an expanding US economy with little to no signs of meaningful deterioration. Results may be below expectations but growth at a slower pace than expected is not a contraction. *** Featured chart: US Personal Income (10 years) Research. Events. Asset Management. vinny@bluemarbleresearch.com 4 Blue Marble Research Research. Events. Asset Management. Market Metrics A Weekly Scan of Key Trends and Momentum of Major Markets Long term (4 years): EAFE (EFA) – Mega Trend positive, momentum both positive: MACD and DMI Short term (6 months): EAFE (EFA) –Trend neutral, momentum mixed: MACD negative, DMI positive Divergences: EAFE (EFA) versus various EU countries – Divergences minimal, Italy (EWI) and Spain (EWP) the laggards Research. Events. Asset Management. vinny@bluemarbleresearch.com 5 Blue Marble Research Research. Events. Asset Management. Model Growth Portfolio (MGP) Last Week’s Portfolio Performance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d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` 23556 53?;6 53526 53826 $ 53556 23556 ]0<//U 53556 53556 E537?6 53526 53516 * * 535B6 531B6 * * /</YU >"@A9@B*%C"$^9Ba*@'49%4 EF>$1//$?4<$)9&"5$=@9H32$>9@3A95'9$ EF>$1// /<VYU 6'4#$*&b743"&$@"37@% )=> 6'4# /<V.U /<YY !*N(D,$$,$D*V%%(.*S,]*/%*#Q*V>),:*17^*251J [&b$6"3 /<c.U EF>$1// /<VYU )=> /<V.U Z"3 X/</1U Z"3 /</1U Performance Data: Year to Date Returns – Absolute and Risk-adjusted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esearch. Events. Asset Management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vinny@bluemarbleresearch.com 6 Blue Marble Research Research. Events. Asset Management. MGP Comments A trade off for the MGP with the absolute performance trailing the broad market by 5 basis points while the risk-adjusted results beat the broad market by 5 basis points. On an individual position the strong underweight in Financials had the biggest impact at -12 basis points. All others were plus or minus a few basis points. Model Growth Portfolio: Re-balancing It’s hard to justify much change when performance results are satisfactory. Matching the market on an absolute basis and beating it on a risk-adjusted one suggests the strategy in place is the appropriate one. That being said, an increase in the overall equity exposure in anticipation of a further rise in the global equity markets into this summer seems advisable. Accordingly, an initial 2% position in IJR (S&P 500 small cap) is being recommended at this time. (see item below) *** Featured Portfolio Position: S&P 500 Small Cap (IJR) Market Intel From a Mega Trend perspecitve, IJR is bullish, however, both momentum indicators (MACD and DMI) are neutral. While this might be concerning, the expectation of a further run up in equity prices should erase the weak momentum trends. Valuation IJR has a slightly above market P/E of 21, which is not surprising given the growth expectations (see page 3) and risk profile of the sector. Risk IJR has an above market beta of 1.11, again consistent with the higher growth and risk profile for the sector. Dividend Yield The modestly below market dividend yield at 1.31% versus the S&P 500’s 1.91% is a pleasant surprise. Conclusion IJR is a good summer run-up to all-time highs play with many US domestic traders comfortable with the idea of being in a US centric sector with above expectations in growth and a strong US dollar environment. Research. Events. Asset Management. vinny@bluemarbleresearch.com 7 Blue Marble Research Research. Events. Asset Management. Market Data: All Markets Weekly Performance – Best to Worst Note: All indices listed should be assumed to be US related unless obviously otherwise. All results are price based only and in US dollars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`A[):& P&)68*'A)A& H&;)8Q)O H($8Q)O85:%[AR PB''&668-111 Q)#)$()#8+%66): U):;&8Q)O8X)6B& >&:%'O)J&8a8+&`&#'& TN)668Q)O T%6):8*#&:;< TaW8G118U%[8X%6)A(6(A< TaW8U%[8X%6)A(6(A< "#$B'A:()6' CT8b8TaW8G11 H&A)6'8)#$8H(#(#; 456 *"+, =>? C?5 5*F *99 *9M 5CP *9, *QS "KK KP= 5HU *9C H,, =FK "U= TUX PTF FU= ">Z FSK +K> 5P*V =FT *"PU ">" *TP T,QU *95 ">V =F> "F5 VF" "S= +"> TV]] ZK= FUX "*X W"? "S* FPZ *9^ P9P "S" =+? *9" P*M 5U+ FUW *9+ ZCP HF" *=5 =!. "^Z X?_ FUK ^F" 46@ =!G "]P ,*= "^V "9H =FQ "X* "Z> "^P V9Z TWUX TWUX FU" TW] FH* 7%,/ 25.70 12.07 14.13 63.50 59.97 37.19 31.69 17.45 43.65 352.14 18.30 53.30 19.65 57.04 151.66 32.91 15.76 20.24 24.76 35.43 35.80 22.36 12.65 119.80 40.16 43.24 20.36 20.18 30.38 50.16 79.33 59.72 94.44 130.62 181.85 30.99 25.39 73.45 46.94 21.52 172.45 99.17 13.14 90.62 118.90 67.10 15.63 60.08 113.97 49.17 34.42 47.15 60.71 73.50 38.87 128.11 80.48 51.57 47.83 67.66 100.88 76.36 93.29 169.95 122.64 82.22 95.16 121.75 116.54 86.85 37.58 37.58 56.58 211.62 28.64 ')-#) .(/& '0/1 3((8& 9:%;<( 9:%;<( -./0. 1/02 3/.24 !!/20 1/3@ 3/3.4 !3/D! 1/.3/124 2!/D!/D0 -/004 G0/33 !/2. -/0!4 32/-! 1/@0 -/D!4 31/0@ 1/01 -/G@4 !D/1. 1/.! -/.!4 .-/2. !/1! -/3D4 3../11 0/!. -/3D4 !D/00 1/.-/3G4 G-/!1 !/-1 -/314 !@/-1/.3 -/-.4 GG/00 !/!2 -/104 !.0/G0 3/10 -/1D4 3-/-@ 1/2!/@-4 !G/.D 1/-@ !/0D4 !@/0D 1/3D !/024 -./3. 1/.!/D34 3./03 1/21 !/D-4 3G/-G 1/GG !/G24 --/11/3. !/G.4 !-/.D 1/!0 !/..4 !!0/!1 !/D1 !/..4 3@/2! 1/GG !/3@4 .-/2D 1/GD !/3.4 -1/1@ 1/-D !/3-4 !@/@1/-2 !/3!4 31/11 1/30 !/-D4 .@/G2 1/21 !/-!4 D0/.! 1/@!/!D4 G@/1. 1/20 !/!G4 @3/30 !/12 !/!.4 !-@/-! !/.! !/1@4 !D@/@1 !/@G !/104 31/22 1/33 !/104 -G/!1/-D !/1D4 D-/20 1/DD !/124 .2/.G 1/.@ !/1G4 -!/31 1/-!/134 !D1/2@ !/D2 !/134 @0/-1 1/@D 1/@@4 !3/11/!1/@-4 0@/0! 1/0! 1/@14 !!D/0D !/13 1/0D4 22/G. 1/G2 1/0.4 !G/G1 1/!3 1/0.4 G@/G@ 1/.@ 1/0-4 !!3/10 1/0@ 1/D@4 .0/0! 1/32 1/D.4 3./!0 1/-. 1/D14 .2/03 1/31/204 21/31 1/.! 1/204 D3/1! 1/.@ 1/2D4 30/21/-G 1/224 !-D/-@ 1/01/2.4 D@/@0 1/G1 1/234 G!/-G 1/31/2-4 .D/G. 1/-@ 1/2!4 >A1BC ?1DE ?1>EF !11/-D 1/2! 1/2!4 DG/@1 1/.2 1/2!4 @-/D3 1/G2 1/214 !20/@G !/11 1/G@4 !-!/@D 1/2D 1/GG4 0!/D0 1/.. 1/G.4 @./22 1/G1 1/G34 !-!/!2 1/G@ 1/.@4 !!2/11 1/G. 1/.D4 02/.G 1/.1 1/.24 3D/.! 1/!D 1/.G4 3D/.! 1/!D 1/.G4 G2/33 1/-G 1/..4 -!1/D1/@1 1/.34 -0/G1/!1/.-4 !" !! !@ !6 @7 !" @K @? @8 @4 @" @! @@ @6 67 63 6K 6? 68 64 6" 6! 6@ 66 377 373 37K 37? 378 374 37" 37! 37@ 376 337 333 33K 33? 338 334 33" 33! 33@ 336 3K7 ")" 3KK 3K? 3K8 3K4 3K" 3K! 3K@ 3K6 3?7 3?3 3?K 3?? 3?8 3?4 3?" 3?! 3?@ 3?6 387 383 38K 38? 388 384 38" 38! 38@ 386 347 Research. Events. Asset Management. #$%&'()$*(+%,-./ :;<='$% A$*$B'C'(D'B GHI()$* L=$<M%,<M(N$CC'.(O&%CP #$%&'(( J,-(R%$BC*,%.C ),BC;O'%(JHC<%'.H,B$%S TH&/(DH'=I 2$.'%(>'C,;%<'C R,.$=(2,%=I(W.,<M(0BI'X TH&/(DH'=I WO$==()$*(1$=;' U%HY$.'(Z[;H.S W*$HB W-HCC(E%$B< G'.$=C(R,.$=(>'.;%B E%$B<' VH= GHI()$*(1$=;' ZO'%&HB&(G$%M'.C(L,BI +=,_$=(0B`,(R'</ W.''= 0BY'C.O'B.(+%$I'(),%*5 0B`,(R'</ +=,_$=(R'='<,O GH<%,()$* G$=$SCH$ Z;%,aJ,==$% ),$= )/HB$(a(>'$=(ZC.$.' 0B`,(R'</(c(R'='<,O ),OO,IH.S(0BI'X WcU(TH&/(L'.$ ZO'%&HB&(G$%M'.C(WO$==()$* L>0)(0BI'X 0B`,%O$.H,B(R'</B,=,&S ),**'% U%'`'%%'IC J,==$%(0BI'X G'IH$ 0C%$'= R0UC 0BY'%C'(>;CC'==(K777 +=,_$=(0B`%$C.%;<.;%' 6789:;<:&=>9?8@A T,B&(Q,B& 0BIH$(WO$==()$* U'%; )$B$I$ ^=.%$(W/,%.(L$CH<(G$.'%H$=C W'OH<,BI;<.,%C R$H-$B )/HB$(a(T$=.'%(^WF( WHB&$*,%' W,=$%(ZB'%&S ^.H=H.H'C ZO'%&HB&(GHI(Z$C.(c(b`%H<$ 0BY'%C'(WO$==()$* E%,B.H'%(G$%M'.C ZO'%&HB&(bCH$(U$<H`H< VH=(W'%YH<' ^W(R%'$C;%S(K7(S'$% ZB'%&S VH=(Z[;H*(c(W'%YH<'C +,=I(GHB'%C bCH$(U$<H`H<('XaA$*$B Q,%'$ b;C.%$=H$ W,;./(b`%H<$ VH=(c(+$C(ZcU )/HB$(a(WcU )/HB$(a(ERWZdFHB/;$(K4 )/HB$(WO$==()$* R'='<,OO;BH<$.H,BC 012 :#> EFD GJD L#Q 116.43 50.26 81.16 276.32 370.04 2116.10 0DR F#D TD+ UTV 1R A:Q 0AW UWU Z2U EFE >A\ Z2] ^WV 0AA ZGL 012 W#F #]J 345 0FU 02) Z2G EFZ QV# RbV F#Q JL) WUTL Z2F LQE 0D2 AA) U+F ^^U ULW 0W# R0U >2G 0+E 66= Z2T W)0E ZU^ Z2) WG: #=E Z2R U+A Z2W Rb: F#^ +bE WLL E>: +GE V0T R#R F#Z 0Z\ +JF ZUU Z2D Z2b Z\b 0ZV +F) EF0 TbV 0D\ 157.09 76.60 91.08 25.30 63.96 39.44 117.56 11.98 36.32 104.46 8.10 27.54 20.42 131.48 112.92 99.88 35.76 119.01 109.32 64.86 78.11 13.68 110.14 13.68 25.53 43.03 18.22 35.48 47.60 40.68 108.39 35.13 14.71 24.91 26.53 18.30 113.25 14.84 43.63 42.87 23.86 44.42 30.68 28.93 26.16 56.57 16.44 33.57 13.57 47.04 44.03 71.08 50.66 13.92 93.04 38.57 122.51 81.76 53.22 19.97 46.84 59.98 22.94 69.04 77.20 95.64 50.51 33.39 29.87 33456! 4757! @75@4 K!45K! ?"@5"8 )*"(!+), 34"54K !"5?4 675!6 K45KK "?5!6 ?65?8 33!5?3 3356" ?"5K! 3785?K @576 K!543 K7587 3?35?! 33K5@? 665@K ?45!8 33@564 3765K! 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C(+)a753" a75?3 a75KK a75K3 a75K3 a758! a7538 a75?7 a753K a7584 a7588 a75!? a7548 a753" a357@ a7584 a3586 a3533 a75!? a75?7 a75!" a353@ a7543 a354@ a35@" aK583 a35K6 a3577 a7568 75879 75?69 75?@9 75?@9 75?@9 (+.-/ 75?"9 75??9 75?K9 75?K9 75K!9 75K49 75K39 753!9 75389 753?9 753K9 75339 75379 757@9 757@9 757"9 757"9 75749 75749 75779 75779 75779 a75739 a757!9 a753"9 a753"9 a75K!9 a75K@9 a75?39 a75?69 a75839 a75849 a758!9 a758@9 a754K9 a75489 a754"9 a75"79 a75"K9 C(+D./ a75"!9 a75"69 a75!39 a75!K9 a75@79 a75@K9 a75@89 a75@!9 a75@@9 a75649 a75669 a357K9 a35749 a35389 a35349 a35349 a35K79 a35?89 a35?49 a358@9 a35"79 a356?9 aK53!9 aK5K89 aK5?49 aK58"9 aK5869 aK5639 a?5749 vinny@bluemarbleresearch.com 8 Blue Marble Research Research. Events. Asset Management. Key Assumptions and Methodologies As always: Investors are advised to take in to consideration the volatile nature of the markets. Accordingly, any portfolio adjustments should be exercised with the greatest of care. This report is limited to a once per week publishing schedule. However, investors are not so restricted enabling entry and exit points that, if properly implemented (e.g., sell into rallies during the first wave of a bear), should result in better performance results. Pick your spots to ease in and out of positions. Exploit the situation to the best of your ability. Be practical with your tactical. Essential to all analytical tools are the key assumptions that underlie them and the methodologies employed. The following describes the major key assumptions to the analytical tools and the methodologies employed in this report. Macro Economic Analysis (MERSI – Macro Economic Reports Surprise Indicator) Earnings (cash flows) are one of the key fundamental-analysis inputs upon which valuation (and therefore investment) decisions are made. The fundamental premise of the MERSI is that, in the aggregate, current earnings expectations incorporate the consensus view. Therefore, whenever macro economic reports come in above or below consensus expectations, economists might change their outlook and/or earnings come in above or below expectations, which in turn will likely cause individual company analysts to adjust that macro economic component of their industry and company forecasts thereby resulting in higher or lower earnings forecasted and/or higher or lower expected growth rates. Since this process occurs with a meaningful lag, investors can gain a competitive advantage by anticipating changes to earnings and/or growth rate forecasts as the above or below consensus reports are filtered into the forecasts. Valuation Models The Market Derived models – DCF and Modified Fed – both use the market’s present price and attempt to derive what the fundamentals would have to be in order to match the market’s current price level. Note: Because the equity markets are a discounting mechanism and assuming that they are somewhat efficient, the Market Centric approach employed by the following two valuation models starts with what the market says is fair value – which is its current price. From this investors then ask the following questions, “Does the data and implied conclusions fit the overall analysis? What does the market say the fair value should be? Do I agree with that conclusion?” By starting with the market, this process is, in effect, a form of reverse engineering the valuation process. About the models: The Best Fit Market Model takes a direct and simple approach to determining valuation – take the current price level of the S&P 500 and match it against operating earnings and P/E levels (both current and future). The Modified Fed Model is a bit more complex in that it looks at the interplay between price, earnings, and interest rates. Modified Fed Model Key Assumptions: 1 - Equity Markets adhere to the weak form of the Efficient Market Hypothesis and are generally efficient. Therefore, on any given day the market values itself based on its historical expected return of 11% (average of 10% and 12%). 2 - Risk is dynamic and changes according to credit spreads, volatility, and investor sentiment. 3 - Markets are dynamic and in a constant state of change. Valuation levels are, therefore, calculated daily to relfect this state of constant change. 4 - Changes in interest rates effect valuation levels, which are reflected above in the form of the average P/E ratio. 5 - Light Blue shaded areas signify zones approximating a 12% expected/required return for large cap stocks. Market Intelligence: Key Assumptions and Rules Long Term Indicator: Mega Trend Near Term Indicators * Price relative to the 50 and 200 day moving averages Momentum & MACD * 50 day moving average relative to the 200 day moving average * Momentum confirmaton/non-confirmation * Slope of the 50 moving average and 200 day moving average * MACD mvoing averages crossover * Direction Guide: Deteriorating = 50 day downwardly sloped, 200 day flat to downwardly sloped; Intact = 50 and 200 day upwardly sloped or flat to upwardly sloped. * Direction Guide: Improving = 50 day upwardly sloped, 200 day flat to upwardly sloped. Mega Trend Moving Averages Principle * Price relative to its 50 and 200 day exponential moving averages. * 50 day moving average relative to its 200 day exponential moving average. * Slope of the 50 moving average and 200 day exponential moving average. Short Term Indicator: Slow Stochastic * Overbought >80, Oversold <20 *Data source: Yahoo Finance. Note: Percent from moving averages may differ from that sourced from BigCharts.com, which is the primary source used in the analysis portion above. Usefulness of indicators Mega Trend helps identify the longer term direction. Both near and short term indicators help with timing *** Methodologies Combining both fundamental and technical analysis, the report seeks to capitalize on the benefits each discipline provides. Using its GEM (government, economy, and the markets) and Global Thematic analysis, the report is a weekly examination of the key macro trends and themes impacting the investment markets. The research methodology provides a comprehensive approach to investment strategy by incorporating the critical variables within each area of analysis. The purpose of the report is to provide insights to investors and other interest parties. The investment goals of the insights are: Earn a positive return, Minimize risk, Outperform the market. The Macro Strategist Report predominantly employs ETFs (Exchange Traded Funds) in its Model Growth Portfolio (MGP), as they provide the sectors and styles exposure needed to build a cost-effective diversified portfolio. Research. Events. Asset Management. vinny@bluemarbleresearch.com 9 Blue Marble Research Research. Events. Asset Management. About “The Effective Investor Report” The Effective Investor Report is a weekly investment strategy perspective produced by Blue Marble Research and part of the Blue Marble Research Advisory Service. The Effective Investor Report is designed to provide investors with a guide toward sound investment strategies. Published 48 times a year, The Effective Investor Report is available on an annual subscription basis of $250 per year. *** The information found within this report was prepared from data we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Such information and any views or opinions expressed herein are not to be considered as an offer to sell or a solicitation of an offer to buy securities of the sectors or styles covered by this report. Opinions expressed are subject to change without notice. Past results are no indication of future results. The portfolio recommendations contained in this report are meant as an investment guide. All investors are advised to consult their financial advisors when making investment decisions. Some of the sectors and styles mentioned in this report are the recipients of trends and themes that might vary from those noted in this report. Vincent Catalano certifies that all of the views expressed in this research report accurately reflect his personal views regarding any and all of the subject securities or issuers. Neither Vincent Catalano nor any member of his family hold positions listed in the Model Growth Portfolio. Accounts managed by Blue Marble Research Advisory typically do hold most to all of the positions listed in the Model Growth Portfolio. Information regarding the portfolio management services of Blue Marble Research Advisory is available upon request. Some of the data used in this report come from various sources including but not limited to the Wall Street Journal On-line, Big Charts, Standard and Poors, and Finance.Yahoo.com. Note: The Model Growth Portfolio (MGP) and the S&P 500 performance data are reflected on a price change basis only. Dividends and their reinvestment are not factored into the returns. Asset allocation decisions and their effects are not factored into the returns. Returns are calculated on weekly chain-linked basis and may differ from the returns calculated using other methods. Market weightings are adjusted when portfolio changes are made. Transaction expenses and other fees are not included in the return results. Special Note re alpha: Throughout its existence, the MGP has always maintained a below average risk level. The alpha listed is not a risk adjusted number but the absolute return difference between the MGP and the S&P 500. If the MGP reflected its true risk, the MGP alpha would be considerably higher than noted. *** Copyright © 2015 Blue Marble Research Advisory. All rights reserved. Research. Events. Asset Management. vinny@bluemarbleresearch.com 10