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    Market Perspectives

    Feb 2014

    January 31st, 2014

    www.finlightresearch.com

    Eh Janet! Pause the taper

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    MACRO VIEW

    The Good World industrial production is pointing to the right direction So far this season, companies have posted nice better than expected EPS numbers. Eurozone composite output PMI climbed to a 31-month high of 53.2 in January from 52.1 in

    December, with the manufacturing and services sectors improving. German investor confidence remains strong. Moody's upgraded Ireland's rating to IG and Standard & Poor's removed Portugal from its credit

    watch list. GIIPS bonds and stocks are at or near multi-year highs, driven by hunger for yield.

    The Bad A global economic perfect storm is building momentum as the consequence of converging bad

    news from Europe (deflation risk and mild recovery), China (signs economic weakness and anintensifying fight with shadow banks), Emerging Markets (Forex turmoil and fears of an eventual debtcrisis) and the US (mixed economic picture and sub-par recovery)

    China released its report on manufacturing output, which is now clearly slowing, actually turnednegative.

    New home sales fell 7.1% month-over-month in December to an annualized pace of 414,000 units.

    Housing starts continue to fall, and December pending home sales report was much weaker thanexpected

    The Ugly Emergence of China risk.

    2FinLight Research | www.finlightresearch.com

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    Big Four Economic Indicators

    The global picture is that of a slow recovery. Among the 4 indicators, two (Real Retail Sales andIndustrial Production) have already reached their all-time highs. Nonfarm Employment remains on apositive trend. Only Real Personal Income is still struggling.

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    Industrial Production

    Manufacturing activity in the US and Eurozoneeconomies continues to recover

    Manufacturing activity in the U.S. rose at a 6.8%annualize rate in Q4-2013

    Industrial production in advanced economies rose ata 4.2% annualized pace in the six months ended Nov2013.

    Industrial production in EM has been growing at a 4-5% pace for the past several years.

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    Real Personal Income

    At 1.2% YoY, Real Personal Income (less transfer payments) remains one of the big laggards

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    Real Retail Sales

    Retail sales continue to disappoint as consumers have pulled in spending. MoM real sales came in at -0.07%.

    Although real December sales were a bit disappointing, this indicator rose 2.6% YoY

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    Unemployment

    At 1.6% YoY, nonfarm employment seems to struggle to make a new high

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    Unemployment

    Seasonally adjusted initial claims was 348,000 (+19,000 from the previous week). The 4-week movingaverage was 333,000. We do not want to read too much into this latest increase in claims because theclaims data can be especially volatile around federal holidays.

    When Viewed at as a percentage of the Civilian Labor Force, weekly Initial Claims seem to havereached a bottom in Sep 2013.

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    Unemployment

    Unemployment pushed through 12% in Europe, is increasing in Italy, Spain and France, but falling in theUS

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    Capital Goods Orders

    December capital goods orders weredisappointing. New orders number came inat -4.3% MoM

    They have been relatively flat for the past

    year, failing to establish a new high. Year-over-year new orders were up a mere 0.1%.

    If we exclude transportation, "core" durablegoods came in at -1.6% MoM and 2.9% YoY.

    If we exclude both transportation anddefense, durable goods came in at -0.5%

    MoM but up 13.3% YoY (simply explained bythe -11.7% drop in Dec 2012 due to the FiscalCliff).

    Corporates remains reluctant to invest

    despite their record profits

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    Conference Board Economic Indicators

    In December 2013, the U.S. Leading Economic Index (a composite of ten forward economic indicatorsthat is produced monthly by the Conference Board) continues to strengthen, in a sign of continuedeconomic strength.

    The Coincident Economic Index (measuring the current state of the economy) also continues to rise.

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    Consumer Confidence

    Consumer Confidence strengthens In January. At 80.7, itcontinues its upward move from its interim low of 72.0 inNovember but remains below its 82.1 interim high in June2013

    Consumers' assessment of the present situation continuesto improve, with both business conditions and the jobmarket rated more favorably

    Looking ahead six months, consumers expect the economyand their earnings to improve.

    The University of Michigan Consumer Sentiment preliminarynumber for January came in at 80.4, declining from the 82.5December final.

    It remains 4.7 points below its interim high in July 2013

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    Small Business Sentiment

    Small business sentiment represented by the Small Business Optimism Index continues to closely trackthe consumer confidence.

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    European Macro

    The Eurozone recovery is going on with an improvingmomentum (consumer sentiment, composite PMI)

    Eurozone composite PMI looks consistent with 1% realGDP growth and 10%+ EPS growth!

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    Inflation - US

    Inflation data (whatever the measure you use) shows continued weakness in price pressures

    The inflation trend is clearly to the downside since the end of QE2 in 2011

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    Inflation - Eurozone

    The threat of a deflation trap is real in eurozone economies.

    ECB's task in striking the right monetary policy balance for Europe is complicated by the economic/fiscal divergence between its northern and southern member countries

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    Housing: Is Bear Market Back?

    Most housing measures have softened since theincrease in rates around the middle 13

    New home sales fell 7.1% month-over-month inDecember to an annualized pace of 414,000 units.Housing starts continue to fall and the extreme coldare expected to be weighing on housing data.

    The monthly supply increased to 5.0 months

    Existing home sales for December were reportedwith a 1% gain over November, after November'soriginal reported numbers were revised lower by

    5.9%.

    Two other warning shots: The trend in sales: The annualized pace of

    sales for Q4 declined 27.9% vs. Q4-2012 on aseasonally adjusted basis, probably due to rising

    mortgage rates The trend in prices: December's average price

    was 6% below June's peak price. Decembersmedian price was 7.5% below June's medianprice.

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    Housing: Is Bear Market Back?

    December pending home sales reportwas much weaker than expected: Pendinghome sales index was down 8.7% inDecember (the largest monthly decline sincethe end of the homebuyer tax credit in 2010)

    The Case-Shiller 20-city composite indexincreased 0.9% in November (up 13.7% yoy)showing a solid trend of house priceappreciation through November. This isone of the rare positive data but we expect

    Case-Shiller to cool off at some point

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    Chinas PMI

    China's flash PMI points to contraction, for the first time in six months.

    The HSBC/Markit PMI last reading stands at 49.6 compared to last month's 50.5.

    Among the subindexes, new orders, new export orders (already in contractionary territory) andemployment showed a faster rate of decline than in December

    The weakness of forward-looking components points to further deceleration in activity ahead.

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    Is that really an EM Crisis?

    At this stage, contagion is not yet a realconcern. We are still dealing with domesticdebt problems

    If we enter a real crisis, well likely see creditspreads in Ems blowing up to 800-1200 bps.Spreads are still below 400 bps.

    The EM Bonds / US High Yield ratio (as ameasure of risk appetite in EM) is holding, so far,a key relative support level

    Few countries to keep an eye on in order tocapture any contagion risk: China, India,Brazil and perhaps Australia as they are BIGand combine all the required ingredients(important current accounts deficit, price bubbles,

    dependence on Chinese growth) Compared to 97 crisis, the key players here are

    more important economies running much largercurrent account deficits

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    EQUITY

    We have been for a limited correction (5% to 10%) on equities.

    A healthy correction is under way, driven by a combination of Fed's tapering, emerging market currencycrisis and the clouds over China.

    Thus far, the pullback is a normal bull market correction until new evidence appears

    Current valuation appears lofty both for the aggregate market as well as the median stock

    From here, any further upside on the S&P 500 should be driven by profit growth rather than P/Eexpansion

    Bottom line (and for the same reasons than a month ago):

    We keep our bet on a limited correction (and move our target region up), with a test of 1757 - 1722(the former seems more reasonable!) level on the S&P 500

    We keep our UW (deflationary) Europe and EM vs. US and Japan (even if we expect EM weaknessto favor lower US yields, stronger JPY and weaker Nikkei).

    We still prefer more defensive high-yielding stocks.

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    Equity Earnings

    So far this season, companies have posted nicebetter than expected EPS numbers.

    As of Jan 23, nearly 25% of the S&P 500 Indexconstituents have reported earnings

    In aggregate, over 68% of reported Q4 2013 earningshave beaten estimates, but only 57% of companies haveexceeded revenue estimates

    According to S&P Capital IQ, earnings estimate willincrease from $107.82 in 2013 to $121.09 in 2014(+12.3%)

    Source: Bespoke

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    Equity Earnings

    Earnings estimates from Standard and Poor are far more optimistic. As reported earnings are estimatedto rise 21% from September 2013 to September 2014, when operating earnings are estimated to rise 15%

    Historically, these high estimates seem incompatible with an improving federal budget.

    The picture is even clearer when we look at de-trended data

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    Equity Earnings

    Profit margins have been running at a high level12.6% of GDP) over the last 2-3 years

    10y interest rate seems to lead profit margins by 15 months. Given this lead time and the 10y all time lowyield of 1.53% in July 2012, we think that a top has been already reached on profits (probably around Oct2013)

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    S&P500 vs EPS

    Earnings estimate for 2014 implies an S&P500 around 1700 - 1750

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    Equity Valuation

    Goldman equity strategist David Kostin declares in his 'Weekly Kickstart* note that the market isgetting pricey:

    The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the

    median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free CashFlow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7)nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggeststhe S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using AsReported earnings.

    Reflecting on our recent client visits and conversations, the biggest surprise is how many investors expect theforward P/E multiple to expand to 17x or 18x. For some reason, many market participants believe the P/E multiplehas a long-term average of 15x and therefore expansion to 17-18x seems reasonable. But the common perception iswrong. The forward P/E ratio for the S&P 500 during the past 5-year, 10-year, and 35- year periods has averaged13.2x, 14.1x, and 13.0x, respectively. At 15.9x, the current aggregate forward P/E multiple is high by historicalstandards.

    Most investors are surprised to learn that since 1976 the S&P 500 P/E multiple has only exceeded 17x during the1997-2000 Tech Bubble and a brief four-month period in 2003-04. Other than those two episodes, the US stockmarket has never traded at a P/E of 17x or above.

    * US Weekly Kickstart: Valuation fact vs. fiction

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    27FinLight Research | www.finlightresearch.com

    Equity Valuation

    Valuation appears lofty both for the aggregate market as well as the median stock

    According to these chart from GS, representing PE historical distribution since 1976, the only times that(1y-forward) PE ratios have been higher than where they are now were during the tech bubble.

    The picture get worse when viewed on a median basis. At 16.8x, the current multiple is near record levels

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    Equity Valuation

    P/E multiple expansion cycles historically peak at 15x

    From here, any further upside on the S&P 500 should be driven by profit growth rather than P/Eexpansion.

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    Equity Long-Term Indicators

    All long-term valuation indicators we track suggestthat today's market is at lofty valuations.

    We track on a monthly basis:

    1- The Tobin's Q is the ratio of price to

    replacement cost, which is in many ways similar tobook value.

    2- Price to 10 Year Inflation Adjusted Earnings(known as Shiller PE)

    3- Price to Peak Earnings (known as Hussman PE)

    4- Market Capitalization to GDP (known as theWarren Buffet indicator), which can be thought ofas price to sales ratio for the whole economy.

    Source VectorGrader

    1

    2

    34

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    Equity Outlook

    The long-term outlook for the S&P 1500remains bullish as 78.4% of the 1500 stocksin the index have bullish long-term trends. Nomarket top seems to be forming yet.

    The intermediate-term outlook is also strong.But the short-term is getting weaker.

    On the short-term, the consumerdiscretionary and material sectors seem tobe leading the way down.

    Values reflect the percentage of members with rising moving averages: 200dMA is used for long-term outlook, 50d MA is used for intermediate outlook,and 20d MA is used for short-term outlook.

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    31FinLight Research | www.finlightresearch.com

    S&P 500 Breadth and Momentum

    With the market's decline past week, most indicatorshave started their decline.

    There are half way to the formation of an intermediatebottom.

    Source Financial Senseon Seeking Alpha

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    32FinLight Research | www.finlightresearch.com

    Equity S&P 500

    Is the correctionalready finished?

    When we look at the

    Bollinger bands, itseems so!

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    33FinLight Research | www.finlightresearch.com

    Equity S&P 500

    The S&P500 (here the Mar. 14future) is finding support on thecurrent level where converge mid-Dec low and the 55-dma.

    If this support doesnt hold, itwould induce a break of themedium-term uptrend support line,with initial target at 1735, and then1700. This is our prefer scenariobut things will depend on Monday(Feb. 3rd) market mood

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    34FinLight Research

    Trading Model - SPX

    Our prop. Short-Term trading model stopped its shorts on Jan. 2nd ! It took long positions on Jan. 27th,at 1790 on the index!

    The model targets 1792 and 1847 and stops its losses at 1757, 1740 and 1722

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    Risk Aversion

    At -0.42, the RAI remains in neutral territories. The correction is not significant. Equity 6m-momentumis still too high to be sustainable.

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    36FinLight Research | www.finlightresearch.com

    Investor Sentiment

    According to the weekly survey from AAII , bullish sentiment among individual investors declined forthe second straight week.

    Source: Bespoke, AAII survey

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    37FinLight Research | www.finlightresearch.com

    Equity Emerging Markets

    EM equities underperformance has been around 40%since Oct 2010

    EM relative valuations to DM have improvedsubstantially over the past 2-3 years. Soon, the ratio

    of forward P/Es will get to 1Stdev below its historicalmedian.

    Outflows from EM equities continue at a strongpace. Cumulative outflows YTD from EM equity ETFsamount to $4bn.

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    38FinLight Research | www.finlightresearch.com

    Chinese WMPs

    A wave Of Chinese Trust defaults may be underway

    Wealth management products (WMPs) are off-balance-sheet vehicles invested in a pool ofsecurities like trust products, bonds, stocks that offer higher yields than bank deposits.

    WMPs are sold to provide credit for local governments and raise funds for other economic actors

    (coal-miners).

    WMPs are sold by private investment firms and marketed by banks as low-risk investments

    On Jan 16, Reuters reported that Industrial & Commercial Bank of China (ICBC, Chinas largeststate-owned bank and the world's largest bank by assets) said that it has no plans to use its ownmoney to repay investors in a troubled off-balance-sheet investment product (WMP) that it helpedto market

    This a 3 billion yuan ($495 million) trust product (expected to mature on Jan. 31) sold to raise fundsfor coal-miner Shanxi Zhenfu Energy Group which is now unable to repay the debt that funds thepayments on that WMP.

    As of today Jan 29th, this default seems to be avoided as ICBC invited investors to sell their rightsto unidentified buyers to recoup the principal (and only the principal).

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    Chinese Banks

    According to official data, commercial banks' non-performing loan ratio rose to 0.97% in Q3-2013(8th consecutive quarter). But the real situation is probably much worse.

    The downside move should not stop yet. Chinese banks have to face big challenges introduced bydeposit rate deregulation, and opening up of the banking sector to private investors

    Newsflow regarding WMPs defaults and an increase in interbank rates adds to the concerns forChinese banks.

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    China Banks & Sovereign CDS

    A tail risk hedge may be to buy protection on China sovereign CDS outright (negative carry) orversus Asia ex-Japan.

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    FIXED INCOME & CREDIT

    We keep our core strategic view for higher long-end yields going forward.

    Turmoil in Emerging Markets continued to provide support for DM fixed income through flight to qualityflows. But, we expect the selloff on Treasuries to resume very soon.

    Last month, we said But given the sharp upward move in treasury yields over the past month, we

    tactically stay neutral govies (but keep an eye on the 3.00% threshold on 10y UST) on the short-term andwait for a better spot to go short / UW. Our tactical view has payed: 10 UST yield ended Jan. at 2.64which is an important support.

    But given the continued downside pressure we see on this level, we prefer to wait either for aclean breakdown (targeting 2.54) or for a clear rebound (to put on our short positions).

    We continue to OW Eurozone vs. US and UK given disinflationary risks in Europe.

    We are neutral on TIPS

    As a tail hedge, we suggest receiving the 10y bund swap spread

    Last month, and in order to express our short duration bias, we took 2y/10s curve steepeners. We prefer

    to realize our profit as the curve slope is beginning to turn after it reached its limit range (around 260 bps) Weve been overweight peripheral vs. core govies. We take profit and switch to neutral as we see lasting

    spread compression to be very limited if any. Weve been OW EM sovereigns vs High Grade. We stop losses and switch to neutral.

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    FIXED INCOME & CREDIT

    Fund flows data show continued inflows into both high yield and investment grade retail funds over thepast week

    We stay neutral on credit as a whole

    European HY has been hit hard this month. Although spreads could widen further (we target 340 bps oniTraxx Xover, 90bps on iTraxx Main), we remain constructive on the short-term.

    We are OW High-Yield (BB and B) vs Investment Grade, and more specifically OW European HY vsUS High Yield

    Bottom line : neutral Govies, Neutral credit, neutral TIPS, keep our OW High Yield vs High Grade

    FinLight Research | www.finlightresearch.com

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    US Treasuries

    Over January, Treasury yields havebeen driven lower by the flight-to-qualityinduced by turmoils in EMs

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    US Treasuries Investor Positioning

    According to CFTC data and Citi Research, netpositioning for HFs, as CFTC spec positions on UST,are now in neutral territories.

    35% of Treasury duration is owned by the Fed.

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    US Treasuries

    At 2.64, the 10y USTyield stands on (or justbelow) an importantsupport

    daily oscillators areoversold but the currentpattern shows a strongdownside pressure.

    We have to keep an eyeon the current level,watching for signs of aclean break (next notablepivot below stands at the

    200-dma at 2.54%.) orrebound

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    TIPS

    TIPS demand picture will remainweak as long as the perspective ofa strong economic recovery is noton the radar

    The TIPS ETF shares outstandingshowed some liquidation ofpositions

    Weve been OW TIPS because weexpected wider breakevens. Thepicture is now less clear and weprefer ta take a neutral stance.

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    Sovereign Spreads in Europe

    Weve been overweight peripheral vs. core govies. We switch to neutral. We think that the outperformance of the periphery of Europe vs the core has played out now. One of the reasons for that is the slower economic growth we should see in the periphery in 2014. The narrowing of sovereign spreads should be less sustainable moving forward. Beyond the 200bp level

    we see lasting spread compression to be very limited (about 30-40bps?)

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    Corporate Credit - US

    The EM crisis and the increase in global risk concerns impacted the CDX indices this week. US IG andUS HY widened respectively to 73bps and 350bps, levels not seen Oct 2013

    CDX.IG underperformed CDX.HY as IG (rather than HY) is usually used to hedge for non-US risks,because most of its members have a foreign exposure (through revenues for example)

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    Corporate Credit - US

    HY has been hit hard this month. CDX.HY widening and S&P500 selloff remained aligned

    C C di E

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    Corporate Credit - Europe

    iTraxx Xover outperformed CDX.HY. More generally, European HY credits have behaved remarkablywell compared with most other risky assets

    Supply/demand technicals remain strong with substantial inflows in retail funds, even during the last twoweeks.

    Hi h Yi ld I Ri k Off h i i ?

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    High Yield: Is Risk-Off showing up again?

    An indicator to keep an eye on: Relative performance of HY versus Treasuries is a good barometer formarket stress.

    Emerging Sovereigns

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    Emerging Sovereigns

    CDX.EM has underperformed CDX.IG and CDX.HY in the last sell-off. The average rating of CDX.EM is BB+ when those of CDX.IG and CDX.HY are BBB+ and B+

    respectively. This average rating is not expected to change over the short-term, but the EM index is relatively

    concentrated on some touchy names like Turkey, Venezuela, Argentina and Brazil. This is enough to

    explain the underperformance, specially when investors used CDX.EM to hedge and/or express views.

    EXCHANGE RATES

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    EXCHANGE RATES

    We keep our view for a stronger USD index in 2014 based on higher US rates and non-USfundamental weakness Add to dollar longs.

    Stresses emanating from EM extended the dollar rally and induced the underperformance of EM andcommodity-linked currencies.

    JPY continuous strengthening versus USD, over the last few weeks, seems to be the new theme tofollow.

    On the EUR, we still target a pull back to 1.31-1.25. On USDJPY, we have to keep an eye on the current level (102.04), watching for signs of a clean break

    (next target would be 105.50) or a rebound .

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    EUR USD

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    EUR-USD

    Our view is unchanged. We still target a pull back to 1.31, then to 1.25. As was expected in our previous report, a material top has formed in EUR-USD chart, after the spot

    failed to go through the 1.38 resistance area We ended January at 1.3486, clearly below the interim low from Jan. 20, thus entering negative

    territory. Next target would be the 200 dMA (around 1.338)

    EUR-USD

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    EUR-USD

    Yield differential between US and Germany implies a forex in the 1.20 1.25 range

    USD-JPY

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    USD-JPY

    Last month, after our initialtarget for wave 5 was met at104.71, we kept our ultimatetarget of 107-108 and set astoploss at 103.70, which was

    activated on Jan 11th

    .

    We end January at 102.04 andthere are still a number ofsignals arguing for continuedweakness

    We have to keep an eye onthe current level, watching forsigns of a clean break (nexttarget would be 105.50) orrebound .

    EM Currencies

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    EM Currencies

    EM currencies remain under pressure

    Transmission between the Fed decision to taper and EM currencies takes to canals: Tapering hurts risk appetite, which hurts riskier EM assets. It also implies higher US bond rates, which increase EM borrowing costs

    EM Currencies

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    EM Currencies

    EM currencies are now testing again a key technical support level. This support seems to hold for the moment.

    COMMODITY

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    COMMODITY

    We started 2014 by going OW on commodities, as we think that a more positive fundamental picture isgradually developing. Commodities are outperforming other assets so far this year, despite the difficultmacro-economic environment (China, EMs, higher US$).

    We expect the GSCI index to deliver 5% to 10% thanks mainly to backwardation (of the 24 major

    commodity markets, ten are now in backwardation); institutional money, higher prices on energy and astabilization in precious metals. Agriculture prices should trend modestly lower on higher supply

    Over the short run, We remain OW on commodities Risks are skewed to the downside for energy markets. We switch from OW to Neutral.

    We stay UW precious metals (targeting 1180-1150 on gold and 18-17 on silver) because of risingreal interest rates. Technically, the bias seems skewed to another significant move lower. Reaching a base will give a buying signal not only on physical gold but also on gold miners.

    On MT, we stay UW copper. The downside risk due to increasing supply is too significant to be ignored.We target 6600, and ultimately 6000.

    COMEX gold inventories should be watched very closely given the stunning move we witness onCOMEX registered gold stocks. Today, if less than 1% of COMEX outstanding contracts go to deliverythere will not be enough gold to meet the delivery requirements!

    FinLight Research | www.finlightresearch.com

    Commodities vs EM FX

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    Commodities and EM FX seem to be the victims of the same headwinds: probably the USD moveup

    Crude Oil

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    We find that risks areglobally skewed to thedownside for energymarkets

    At 106.40, the Brent is

    getting closer to itsimportant support at104.43, convergence of its200-wma and the uptrendfrom Jun. 2012 lows.

    The story is similar forWTI. Keep an eye on the200-wma.

    Comex Gold Stocks

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    Registered gold (eligible metal also available for delivery on futures) stocks are going downsharply. The cover ratio is around 111 meaning that there are 111 owners per every ounce ofregistered gold stored at the COMEX. The recent upward move is simply stunning!

    Gold

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    Has the gold found a new bottom? In order to answer this question, we would wait for the end ofLunar New Year celebrations in China.

    The post celebrations period usually sees excess inventory sales that may weight on gold prices.Last year, gold prices went down more than 6% between Feb 6 and Feb 22.

    Source: Dave Kranzler

    Precious Metals - Gold

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    Our theoretical price (implied by US$, sovereign CDS and Real Rates) stands now at 1135, versus amarket price at 1241 (as of Jan. 31). Our fair price should continue its downward movement as US$and real rates go up.

    Gold

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    The trend on Junior gold miners is beginning to go upwards, but it sis clearly not enough to point toan effective long-term rebound.

    Natural Gas

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    Natural gas soars to the highest level in three andhalf years (+29% in 2 weeks), as frigid winter gripsthe US

    This is clearly not a reason to jump in!

    There is plenty of gas to replenish supplies, anddrillers will likely ramp up production and prices willgo down again.

    As shown on the chart, approximately half the naturalgas wells were shut-in because of falling prices.Plenty of capacity is waiting for a better time to get

    back on the scene.

    Base Metals

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    Iron ore prices have been dropping amid forecasts for a reduction in Chinese steel production.Chinese iron ore stockpiles rose to 88.6 million tons in December (21% yoy, source: mining.com)

    Chinese copper consumption remains resilient. Copper stockpiles in LME warehouses have fallen50% since Jun 2013. Much of that copper has been moving to China according to industry expertstalking to WSJ. For now, copper is trading sideways in a consolidation pattern. We will watch for a

    bearish break (support near 7 000) before initiating a short.

    ALTERNATIVE INVESTMENTS

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    We are always OW on AI as we expect a 10% return in the coming year versus 5% on a traditionalbalanced portfolio (stocks + bonds+ cash).

    Our overweight position focuses on Commercial Real Estate (even if the current message is still mixed)

    We are OW Equity long-short market-neutral, Convertible arbitrage, CTAs and Global Macro

    FinLight Research | www.finlightresearch.com

    Hedge Fund Positioning by Strategy

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    Based on BoA exposure analysis:

    Market Neutral funds have slightlydecreased their market exposure to 8% net

    long. They also reduced their growth / smallcap / low quality bias

    Equity Long/Short market exposureincreased to 22% net long, but still belowthe 35-40% benchmark. They alsoneutralized their growth preference.

    Hedge Fund Positioning by Strategy

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    Based on BoA model, Global Macro funds:

    reduced their long exposure to S&P500 andNASDAQ and increased their large cap bias

    increased their long exposure to US Dollar andcommodities.

    increased a little their long exposure to 10-year.

    covered their short EM exposure

    Hedge Fund Positioning by Asset Class

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    CFTC data show that large speculators: decreased their net longs in the S&P 500 and

    Russell 2000 but slightly increased their longposition in NASDAQ

    increased gold long exposure, and slightlydecreased their long position in Silver. Both goldand silver net positions are still in buy zone

    Hedge Fund Positioning by Asset Class

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    CFTC data show that large speculators: increased Crude longs and decreased their

    shorts in Natural Gas and Heating Oil futures. WTIappears in sell zone

    decreased their longs in EUR to now hold shortexposure, reduced their Yen shorts (but stillstanding in the crowded short zone)

    increased their 10-yr short position. Theydecreased their long position in 30-yr and 2-yrcontracts.

    Bottom Line : Global Asset Allocation

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    Macro data in DMs were mixed over the month Continued EM turmoil may weigh on market sentiment/risk

    premium.

    Whatever the EM countries in focus, the main systemic risk

    remains China. China accounts for around 15% of world GDP

    Our global view depends on whether we think that: 1- the causes of this selloff temporary and contained, 2- or instead that the current turmoil will last and spread out.

    At this stage, we opt for hypothesis (1) and remain long risk,

    with some tail hedges.

    We summarize our views as follows