Finlight Research - Market Perspectives - Dec 2016

Market Perspectives
December 2016
Dec. 9th, 2016
www.finlightresearch.com
Don’t call me Trump. Just call me the Wizard of Oz!

“Buying bonds amounts to picking up pennies in front of a
steamroller…” – An anonymous hedge fund manager
2
FinLight Research | www.finlightresearch.com

Executive Summary: Global Asset Allocation
The recent string of economic data has been generally better than
expected.
The Trump’s rally is still going on. Nevertheless, we don't believe it
has any substance. No details are available about the incoming
Trump Administration’s regulatory and policy changes, but markets
have rallied on the general view of lower taxes, more spending and
faster growth, downplaying the risks to other Trump's policies (trade
barriers…).
The end of the 35 year bull market in bonds is looming. Reflation
momentum is picking up. Is that a bull signal for the economy? Not
sure…
Rotation out of bonds is under way. But opportunities in other risk
assets (equity, credit, commodities…) are limited given the current
valuations.
Credit is priced for a benign environment for several years. But we
thinks it is moving out of the 'sweet spot‘ as we progressively get out of
ultra-accommodative CB policy, ultra-low rates and ultra-low volatility.
We still feel concerned with the major loss of liquidity we’ve seen in
recent years. A higher market volatility would be the natural
consequence.
The VIX stands near its all-time lows despite the political / economic
turmoil we expect in the future.
We summarize our views as follows
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09/12/2016 16/11/2016 14/10/2016
View View View
Dec'16 Nov'16 Oct '16
Equity OW N N
S&P 500 OW OW OW
Euro Stoxx 50 UW UW UW
NIKKEI 225 N N N
MSCI Emerging Markets UW UW UW
Fixed Income UW UW N
T-Note 10Y UW UW UW
Bund 10Y OW OW OW
US TIPS OW OW OW
Euro HICP N N N
Credit N N N
Inv. Grade N N N
US High Grade OW OW OW
EUR High Grade UW UW UW
High Yield UW UW UW
US High Yield OW OW OW
EUR High Yield UW UW UW
EMSovereigns N N N
Forex N/A N/A N/A
EUR-USD UW UW UW
USD-JPY OW OW OW
Commodity N UW UW
Energy N UW N
Base Metals UW UW UW
Precious Metals UW N N
Agri N N N
Alternatives OW OW OW
Return Enhancers UW UW UW
Risk Diversifiers OW OW OW

MACRO VIEW
The Good
November picture looks strong. At 53.2, ISM Manufacturing recorded its best levels since Feb.
‘15. ISM non-Manufacturing strengthened to 57.2.
3Q US GDP was revised upward to 3.2%.
At 107.1, the Conference Board consumer confidence index for November is at a new cycle high
The Bad
According to the Fed's Senior Loan Officer Opinion Survey, Commercial Real Estate lending
standards tighten for the 5th quarter in a row. This is usually a leading indicator of lower CRE
property prices.
Subprime auto loans deteriorates: During the Q3, delinquencies of 90-plus days jumped up to
3.6% of total auto loan balances.
The Ugly
Main systemic risk resides in China: Chinese debt bomb is ticking. Debt is used to create the
illusion of growth. The Chinese banking sector is going to end up needing a bailout. A yuan
devaluation seems unavoidable and would impose a strong deflationary shock on the world
economy.
The risk of a hard Brexit should be monitored closely
4

5
The Big Four Economic Indicators
The current picture is characterized by relatively strong Employment and Income, a weak Industrial
Production (probably in recovery mode since its Mar ‘16 lows) and Real Retail Sales finally showing
signs of improvement
The average of these indicators has been trending lower since Nov. ‘14, suggesting that the economy is
still moving sideways. Industrial Production has been the weakest link in the economic recovery since
the GFC. But the picture has been getting mildly better since June.

6
GS – Global Leading Indicator (GLI)
The GLI picture looks better
since mid-2016.
The November Final GLI
came in at 3.5% yoy (up
from 3.0% in October). Its
MoM momentum came at
0.39% (up from its last
month’s 0.29%)
Seven of the ten underlying
components of the GLI
improved, with minor
declines in the 3 others.
Despite the better shape of
GLI momentum, we
continue to think that the
acceleration we’ve been
witnessing since Jan. ‘15
is quite modest for a
typical expansion phase

7
US GDP
Atlanta Fed’s GDPNow
model is now forecasting
the Q4 US GDP at 2.6%
This is slightly down from
2.9% forecasted on Dec 1st,
and well below the Q3’s 3.2%
growth.

8
Auto Loans – The next issue to deal with?
According to the Fed Board of
Governors, auto loan balances
jumped by $30 billion in Q3 to
$1.1 trillion
This is the biggest (per
quarter) jump in auto loan
originations in US history
Subprime auto loans is now
representing 24% (or $272
billion) of the total.

9
Auto Loans – The next issue to deal with?
The delinquency rate of subprime
auto loans have been worsening at a
pronounced pace over the last few
years. It now exceeds the 2001 peak.
During the Q3, delinquencies of 90-plus
days jumped up to 3.6% of total auto
loan balances. Six million people with
subprime credit scores (below 620) are
at least 90 days past due on their
payments
The boom in the auto industry was
mainly driven by easy lending to
subprime buyers. But with higher
delinquency risk, lending standard will
be tightened, weighing on auto sales
and the economy as a whole.

10
Inflation Risk: Money Supply & GDP
Money Supply growth
has been much faster
than GDP for the last 8
years
The money supply has
continued its steady
growth (~6% p.a.) when
the economic growth
remained week.
The M2 to GDP ratio
have remained around
55% till 2008. Since, it
has increased rapidly to
its all-time highs of 70%
and is still climbing.
May that be an
inflationary signal?

11
Inflation Risk: The Fiscal Spending Effect
Actually, a better signal for
inflation has to be found in
government spending.
High fiscal spending growth
drives inflation up
Trends in fiscal spending
growth and inflation are clearly
correlated (R²~55%).
Trump’s administration plans
to boost fiscal spending should
be monitored closely in order
to assess their double effect
on real growth and inflation.

12
EQUITY
The Trump’s rally is still going on. We have to recognize its surprising strength and to cope with.
According to our positioning rules (please see our previous reports), we turned (tactically) OW on the
S&P500 as the index broke above the 2070-2090 range.
With the clean break of the S&P500 above 2200-2225, we have to recognize that our alternative
scenario is in.
Nevertheless, we don't believe the Trump rally has any substance. No details are available about the
incoming Trump Administration’s regulatory and policy changes, but markets have rallied on the general
view of lower taxes, more spending and faster growth, downplaying the risks to other Trump's policies
(trade barriers…). Markets seem to see in Trump the new Wonderful Wizard of Oz.
We do not expect more concrete details about Trump’s policies (tax reform, fiscal stimulus, trade,
deregulation) to be available before end of Q1-2017.
Over the last few years, the sluggishness of growth and inflation expectations has induced an
outperformance of defensives vs cyclicals, of growth vs value stocks, as well as of low volatility stocks.
All these trends have reversed in mid-2016 with the increase in bond yields and inflation expectations.
It’s always nice to catch a momentum, but avoiding to be caught up in it is nicer.

13
EQUITY
Our equity outlook remains cautious as we see headwinds from the resumption of the Fed rate
hike cycle and a strong Dollar.
The US equity valuation picture has hardly changed since last quarter. Whatever metrics we
consider, US stocks look expensive, making the pressure to deliver a positive earnings growth very
substantial
US equities seem priced for a rebound in earnings growth, but hardly for a stronger dollar, nor for
higher treasury yields…
The question is how far can bond yields and/or inflation expectations rise without damaging
equities. In our view, this will depend on the pace of the move. At some level, we expect the
correlation between bonds and stocks to become positive enough to weigh on equity prices.

14
EQUITY
Bottom line :
De-risking should continue. A higher allocation to cash is sensible, especially as bonds loose
some of their diversification role. We believe equities are likely to outperform bonds over the next
12 months
We adjust our positioning rules on the S&P 500 as follows:
We will turn Neutral again after a clean break below the uptrend through the lows since
Feb.’16 (~2210)
We will switch to UW as soon as the 2170 level is materially broken to the downside.
Any clean break below the ‘09 trend would make us move massively short
We like the low US beta. We remain Neutral Japan and UW Europe vs. US.
We remain UW Europe because of elevated political uncertainty and uncertainty on ECB policy
We remain UW in US small caps vs large caps.
We remain Neutral value vs growth stocks, and OW defensives vs cyclicals
Given the new configuration of yields and inflation expectations, we prefer stocks with strong
balance sheets and low inflation sensitivity
In our previous reports, we expressed the view that low vol/min vol stocks are increasingly
vulnerable. We maintain this view.
A stronger USD, rising yields and a potential headwind to global trade (with more protectionism)
are expected to lead to renewed pressure on EMs. LatAm is the most vulnerable EM region to
these factors, specially US dollar strengthening. We remain UW EMs vs DMs.

15
US Earnings
The S&P500 confirms its move
out of earnings recession.
For Q4 2016, the blended earnings
growth rate for the S&P 500 is
3.3%. If the index reports growth in
earnings for the quarter, it will mark
the first time the index has seen
YoY growth in earnings for 2
consecutive quarters since Q1
2015.
For all of 2016, the estimated S&P
500 growth rate is now projected at
+0.1% for earnings and +2.2% for
revenues
The forward 12-month P/E ratio is
now 16.7, which is well above the
5-year (15.0) and 10-year (14.4)
averages.

16
US Earnings
Currently, the gap between the
earnings yield (E/P) and bond
yield stands at 3.5%
The gap is above the above the
long-term average of 2.5%, but still
below the 10-year average of 4.5%
With UST yields moving up, we
expect the yield gap to continue its
narrowing.

17
US Equity – The Credit Balance View
The Credit Balance is the sum of
Free Credit Cash Accounts and
Credit Balances in Margin
Accounts minus Margin Debt.
As margin debt decreased, the
credit balance diverged from the
market index.
The divergence has been notable
since the start of the year and may
be the precursor to a major market
decline like in 2000 and 2007.
But the picture remains biased by
the CB interventions and massive
QEs

18
Equities – Valuation
Since the start of the move in
bond yields (mid-2016), we’ve
seen a substantial twist in
valuations with value moving
from Defensives (bond-like
stocks) to Cyclicals (including
Financials).
The move may be explained by
rising inflation expectations,
rising interest rates, better growth
perspectives, more fiscal
spending and potentially reduced
regulation under Trump’s
administration.
Is still there value in cyclicals
vs. defensives? We are
skeptical because the trend is
already mature.
We choose to stay OW
defensives vs. cyclicals

19
S&P500 – A Long-Term Perspective
Equity markets still appear at
lofty valuations on virtually
any and every historical
valuation metric
At the end of November, the
average of the 43indicators we
use stands at 71%, not far
below its interim peak of 78% in
Feb. ‘15
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

20
S&P500 – A Medium-Term Perspective
The SPX has been through the
2219 resistance, reintegrating
the uptrend through the lows
since Feb ’16.
The move was impulsive
enough to breach the following
resistance at 2250.
The market seems able to have
another impulse towards 2390
– 2450.
According to our positioning
rules, we’ve turned OW as the
index broke above the 2170 –
2190 range.
We will turn Neutral again after
a clean break below the
uptrend through the lows since
Feb.’16 (~2210)
We will switch to UW as soon
as the 2170 level is materially
broken to the downside.

21
S&P500 – Market Breadth
The 50-day moving average breadth is about to test its downtrend since Mar. ‘16.
Should breadth break through that line, it will open the way for another impulsive move higher.
Failure to break through would likely signal a new important correction.

22
S&P500 – Another Short-Term Perspective
Our prop. Short-Term trading model has stopped its losses and reduced its shorts on Nov 28 (@
2201).
Only 2 systems are still there, targeting a break below 2233 and 2211. Next level to watch on the
upside: 2302
Bottom line: Flat
0
0.25
0.5
0.75
1
2000.0
2050.0
2100.0
2150.0
2200.0
2250.0
2300.0
2350.0
2400.0
2450.0
2500.0
2550.0
356
224
343
328
333
351
269
172
340
112
271
373
375
250
285
165
164
100
217
254
177
400
34
31
UpProba&NextMove(1=Up/0=Down)
Lower/UpperBound
System ID
Lower
Bound
Upper
Bound
Next Digit Up
Proba
600.0
800.0
1000.0
1200.0
1400.0
1600.0
1800.0
2000.0
2200.0
2400.0
39000.0
41000.0
43000.0
45000.0
47000.0
49000.0
51000.0
53000.0
janv.-06 sept.-08 juin-11 mars-14 déc.-16
S&P500
NAV
Quant Model
S&P500

23
FIXED INCOME & CREDIT
GOVIES
Global sovereign bond yields bottomed in early July and have been on a steadily increasing trend
since then. The yield curve has been steepening globally over the last several weeks.
The bond market has started to price in a macroeconomic landscape of higher inflation and interest
rates.
The end of the 35 year bull market in bonds is looming. Reflation momentum is picking up.
We expect the Fed will hike interest rates in December and three additional times in 2017, probably
pushing the 10-year US Treasury yields to 2.65%. – 2.75%
The dramatic move in bond yields (in terms of level and slope) is coming from reduced recession
risks and higher inflation expectations. Is that a bull signal for the economy?
We’ve turned to UW on 10y-USTs since the 1.85 resistance was breached.
We keep our long steepeners position.
We expect the rise in the US to exert upward pressure on other European yields.
We remain Underweight US 10-year bonds vs. Germany as reflation pressures are much more
focused on the US.

24
INFLATION-LINKED
Like Treasury yields, implied inflation have taken a sharp turn higher in recent weeks
The transition from a deflation-prone world to a more inflationary world seems underway. The
Trump election victory just strengthens these trends
We like being long breakeven inflation in the US, given the supportive macroeconomic backdrop and
record retail demand for TIPS. We remain OW 10y-TIPS.
We remain Neutral HICP Inflation as we see breakevens trading sideways

25
CORPORATE CREDIT
Corporate credit total returns have been surprisingly strong in H2-2016, particularly in High Yield in
both Europe and the US. But credit investors should be more cautious going forward.
IG spreads adjusted for leverage and HY default-adjusted spreads have rarely been tighter
We are cautious on credit, despite the fact that it may continue to outperform from here on a more
favorable macro and earning backdrop.
The risk of an inflation upside surprise pushing both spreads and rates higher has increased. Higher
Treasury yields would make the “search for yield” argument for credit less attractive.
Credit is expensive relative to the fundamentals. the only way to rationalize current valuations is to
assume a benign default environment for several years, which seems improbable.
Furthermore, fundamentals are clearly showing signs of deterioration in the credit cycle: Lending
conditions have tightened and leverage is very high
We still see significant demand for US spread products given the differential between USD fixed
income markets and the rest of the G10 complex. As a confirmation, EUR spreads have sharply
underperformed their USD counterparts since early November,
Despite the fact that fundamentals appear weaker in the US than in Europe, we remain overweight
US vs EUR credit (more on IG than HY) because of (1) our perception of European credit as being
riskier, (2) the substantial relative carry advantage of USD vs EUR and (3) the fact that the re-
leveraging cycle looks more mature in the US..

26
In high yield, we keep our bias towards higher quality as we don’t think this is the point in the cycle to
reach for yield. Any unpriced rate hike (and/or dollar strengthening) would weigh on low quality bonds
(High Yield and EM debt). We remain UW on HY and Neutral on IG.
EM DEBT
The dollar strengthening is on track and would weigh on 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
Bottom line : We change nothing to our views: UW Govies, UW US vs Eurozone Govies, long
steepeners on the US yield curve, remain short duration in 2y USTs, UW credit mainly through HY and
Neutral on IG (duration hedged), UW Eurozone vs US in IG & HY credit, OW 10y-TIPS breakevens and
Neutral HICP Inflation, UW High Yield vs High Grade, Neutral on EM sovereigns with a little preference
for hard currencies bonds.

27
US Govies – 10y UST
rules, we’ve moved from
Neutral to UW 10y USTs as
the 10y yield breached 1.80.
Despite the recent stagnation,
the underlying trend in yields is
still intact. 2.30 is the level to
watch closely.
We remain UW 10y USTs.
Our positioning rules are
adjusted as follows:
Remain UW above 2.30,
targeting 2.65
Neutral between 1.65 and
2.30
OW below 1.65
Move to Neutral again
around 1.25

28
US Govies – Curve Slope
End of September, we’ve
decided to get out of our long
flatteners on the US yield
curve, a position we’ve been in
since Dec. ’14
A month later, we switched to
a long steepeners positioning.
Since then, the 10y/2y spread
has surged in an impulsive
way, gaining 50bps in just two
weeks following the US
election
The curve has steepened
despite the fact the short part
of the curve is trading at the
highest levels in more than five
years.
We keep our long
steepeners for the moment.

29
US Govies – 10y TIPS
The 10-year nominal UST
yield jumped by 50 bp in just a
few weeks.
The move in UST yields was
mainly driven by higher
inflation expectations.
It’s worth noting that with
output and employment almost
at full capacity, the inflationary
risk is no more negligible.
Like Treasury yields, implied
inflation have taken a sharp
turn higher.
The 10-year breakeven
inflation rose by 20 bps to
1.9% in few days, which marks
the highest level since Apr.
‘15.

30
US Credit
The macro environment
remains supportive for credit.
Nevertheless, we expect any
further credit spread
compression from here (in the
US, like in the Eurozone) to be
modest
Credit spreads should be
able to digest higher rates
as far as the move is not too
sharp.
The risk to this benign view is
that of an inflationary shock
and a bonds sell-off.

31
US Credit - Fundamentals
The macro environment remains
supportive for credit. But the micro
environment less…
The balance sheets for S&P500
firms have deteriorated over the
past two years.
The median net debt to EBITDA
ratio has risen to its highest level
since the 90s.
Interest coverage ratio remains
high, but has been declining over
the past two years.

32
US vs EUR Credit
EUR spreads have sharply
underperformed their USD
counterparts over last month.
The spread differential is back
to levels last seen after the
Brexit referendum.
We keep our tactical OW on
USD vs EUR spreads, both
in cash and synthetic

33
EXCHANGE RATES
Central banks remain the key driver of foreign exchange,
We have remained Dollar bulls since early 2014. Our rationale was based on the divergence in
growth / inflation and its ability to move rate differentials in favor of the Dollar.
The technical and fundamental pictures favor a continuation of the dollar rally.
Trump’s planed tax cuts on offshore profits could, if implemented, provide an additional support to the
Dollar by encouraging the repatriation of these profits .
The dollar index (DXY) remains bullish. As expected, its break above the previous highs and the major
resistance at 100 has opened the way towards 103-103.50
EUR-USD remains under pressure. We keep our UW positioning for the moment, and maintain our
downside projections towards 1.04-parity.
For that, we need to break throughout the successive supports at 1.0530 (critical), 1.0460 (Mar ’15
lows) and 1.0360
Our positioning rules are adjusted as follows:
Remain UW below the 1.09 level
Move to Neutral within the 1.09 - 1.14 range
Move to OW if the spot breaks above the 1.14 resistance to target 1.18

34
EXCHANGE RATES
The core driver for USD-JPY continues to be the relationship between US and Japanese real yields
On USD-JPY, we’ve been OW since the spot broke above 104 (Oct. 11th). All our targets (108, 111,
113) was reached.
We adjust our positioning rules on USD-JPY as follows:
Remain OW above 111.60 and target 116.30 and 118.60
Move to Neutral below
Only a break below the downtrend from Jan. ‘16 and bearish momentum, would make us move to
UW
EM currencies have weakened since the middle of August as Fed risks have been repriced.
We maintain our view 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. We keep a bullish bias on the USD-CNY (targeting 7.00-
7.20) as we expect China to fix (progressively) the RMB lower to keep its competiveness.

35
US Dollar
As expected, the break above the previous highs and the significant resistance of 100 has opened the
way towards 103-103.50.
The Dollar Index was boosted by the jump in UST yields and the induced USD-G3 spread widening

36
EUR-USD
Technically, EUR-USD remains
under pressure.
We keep our UW positioning
for the moment, and maintain
our downside projections towards
1.04-parity.
For that, we need to break
throughout the successive
supports at 1.0530 (major),
1.0460 (Mar ’15 lows) and 1.0360

37
USD-JPY
The USD-JPY Yen has
soared since the US
election.
We’ve been OW since the
spot broke above 104 (Oct.
11th). All our targets (108,
111, 113) was reached.
We adjust our positioning
rules on USD-JPY as
follows:
Remain OW above
111.60 and target
116.30 and 118.60
Move to Neutral below
Only a break below the
downtrend from Jan.
‘16 and bearish
momentum, would
make us move to UW

38
COMMODITY
We continue to view upward moves since Jan. ‘16 more as technical adjustments than as a
fundamentally-driven ones.
Furthermore, the contango curve structure has weighed on total returns over the whole year;
But the current move to backwardation (implying positive roll returns) makes commodities more
attractive from an asset-allocation perspective. Thus, we decide to turn (tactically) Neutral on the
asset class as a whole, and wait for a better view on growth/inflation to move the cursor.
In order to be more constructive on commos, we would need a weaker US dollar, a higher global
growth, and stronger investment flows (rather than hot money).
We don’t see any sustainable recovery without a pick-up in global growth or a material
tightening on the supply side. It is likely that supply destruction (due to pull-back in capital
investment) will be the main catalyst for the next sustainable recovery in prices.
We also expect a considerable volatility along the way
We remain UW commodities over a 6 months horizon
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 weigh on prices. Dollar will dictate both direction and velocity
in commos. We expect the stronger dollar to put downward pressure on commodities despite
supportive fundamentals for some of them

39
COMMODITY
Bottom Line :
Energy:
The short squeeze in oil continues with the OPEC’s deal in Vienna. But prices seem capped as many
producers have increased their hedging activities.
While supporting oil prices, OPEC’s agreement could encourage unconventional oil producers to rump
up investments and increase production, pushing prices lower again.
$40-$50 per barrel remains the range for WTI over the short-term. Only an unexpected exogenous
event could cause oil to break out of it, on one side or the other..
We actually expect the spot to test again the 30 level before putting in a permanent rebound. At this
stage, we watch a few key levels ($52, $40, $36, $31). We need to see how the price behaves around
these levels to make our projections.
Our bearish bias is still intact. Only a material break above 52.5 would open scope for a rally.
According to our positioning rules, we’ve turned from Neutral to UW as the spot broke bellow the $49.8-
$50 area (end of October), and then to Neutral again as the spot reintegrated the triangle formed
since June.
Our tactical rules are adjusted as follows:
Move to OW above $52.5 (to target 60 – 65) or below $29 (to play the rebound).
Remain Neutral as long as the spot stays in the triangle formed since June
Move to UW if the triangle is broken to the downside.

40
COMMODITY
Precious Metals:
Outlook for precious metals continues to be dominated by Fed rhetoric, macroeconomic and political
uncertainties and the subsequent impact on US dollar, real yields and sovereign credit.
Our baseline outlook for gold / silver prices has not changed. We are bullish precious metals over the
long-term , no matter what happens (on US dollar, China, growth…)!
But, we still think that lower lows can be seen before the next bullish phase takes place.
In November, we saw massive flows out of precious metals funds / ETFs, weighing on prices. Fed’s
clear message for a December hike has accentuated the move.
Over the short-term, we expect the precious metal to trade lower over the next months as US dollar
rates go higher. We are not far from the target range of $1,100-1,150 that we’ve mentioned one month
ago.
The risk to our view is that the Trump’s Administration decides to implement its trade protectionist plans,
inducing trade conflicts and threatening global growth.
Applying our positioning rules (please have a look to our previous Monthly Reports), we’ve switched to
UW as the spot broke below 1210 (on Nov 22)
Our positioning rules are adjusted :
Go Neutral between 1180 and 1300
Go OW above 1300, targeting 1380 and even 1430
Go OW below 1070

41
COMMODITY
Base Metals: .
The rally in industrial metals was much stronger than anticipated. The S&P GSCI Industrial Index is back
to its Jan. ‘15 level, on a TR basis.
Our UW positioning has proved dramatically wrong. But it is too late to change it, as we missed the
November move.
During November, we’ve already seen a major re-basing in metals prices on hopes of growth and
reflationary-driven exuberance. But we feel skeptical about the ability of Trump’s announced fiscal /
infrastructure spending to be a fundamental game changer to industrial metals. We still think these
announced plans will be of limited impact on US growth over the next two years.
Considering a more realistic growth outlook for both China and the US, we see a lot of risks to this
ambient bullishness, especially on oversupplied markets like copper and aluminum.
We believe that lower prices are still needed to induce more supply adjustments, even with
stronger Chinese demand forecasts.
We remain UW on base metals and avoid Copper in particular.

42
COMMODITY
Agriculture:
As said in our previous reports, and despite more evidence of consumption growth (supported by an
improving global growth), sizable inventories should keep grain prices in a low trading range through the
winter.
Furthermore, the US harvest ended up the largest on record for both corn and soybeans, which may go
back to their respective costs of production.
We think that grains prices are nearing a floor. But we choose to remain Neutral, with an UW bias
on corn and soybeans.

43
Crude Oil – The Fundamentals
Recently, with the rebound in oil
prices, the number of active
U.S. oil drilling rigs saw
another increase, driving the
production higher
It’s worth noting that US shale
producers have survived to
prices pullback thanks to
hedging.
Most of them have increased
their hedging activity every time
that oil prices reached current
levels (near $50)
Furthermore, they have
aggressively cut costs and are
taking actions to make their
businesses survive in a $50/bbl
world

44
Crude Oil – Tech. Perspective
Every time oil trades near the
$50 level, hedging activity
reappears from producers,
creating a resistance around this
area.
We are currently testing the $50
area for the fourth time since
Sep. ‘15. A break out above 52
should be very bullish.
But we still think that oil is due
for another leg down.

45
Crude – Tech. Perspective
rules, we’ve turned from
Neutral to UW as the spot
broke bellow the $49.8-$50
area (end of October), and
then to Neutral again as the
spot reintegrated the
triangle formed since June.
Next levels to watch: 52.30-
52.70 on one side, and . 46.6-
47.70 on the other.
Breaching either of these
levels would signal
potential for an impulsive
move out of the triangle.

46
Crude Oil – The USD Effect
Over the past few month,
we’ve seen the oil breaking its
historical correlation to the US
dollar.
With our bullish view on the
dollar, we expect the correlation
to rebuild again, pushing the oil
down to $30-$35/bbl

47
Gold – Market Flows
November saw massive fund
flows out of precious metal
funds
ETFs have liquidated over 4.5M
ounces of gold in the past 6
weeks
Almost $6 billion dollars were
pulled out precious metals funds
in November, a number last
seen in 2013

48
Gold – Market Flows
The net long CME managed money positioning in Gold has been reduced substantially since Sep.
‘16.
There is still room for further reduction in long positions and another selloff, pushing gold
prices lower ($1150 to $1200/oz)
A similar picture is visible through ETFs. Gold ETFs have also reduced their holdings by more than 2
millions oz over the last few weeks. But given the important longs accumulated, there is still room for
further reduction.
Global gold ETF holdings

49
Gold – Tech. Perspective
Applying our positioning rules
(please have a look to our
previous monthly reports), we
have moved to UW on Gold as
the spot broke below 1210 (on
Nov 22nd)
Our positioning rules are
adjusted :
Go Neutral between 1180
and 1300
Go OW above 1300,
targeting 1380 and even
1430
Go OW below 1070
The next critical level to watch
is 1120. We may see a base
forming there. But a break
through would open the way to
another leg down (target ~1050
– 1100).

50
ALTERNATIVE STRATEGIES
In November, the Trump’s victory-driven expectations for better growth, more fiscal/infrastructure
spending and reduced regulation has helped The HFRI Fund Weighted Composite Index to post
gains of +0.9% MoM (+4.6% Ytd). The index is back to its May ‘15 level.
Gains were lead Event-Driven strategy (+2.2% MoM, +9.4% Ytd) and Equity Hedge (+1.5% MoM)
Macro hedge funds posted declines (HFRI Discretionary Thematic Index : -1.7% MoM, -1.8% Ytd) due
to their short equities and long US bonds. They made money on their long Energy futures.
CTAs were also off -0.5% MoM (-2.1% Ytd). CTAs’ exposures shifted dramatically over the recent
weeks. They are now long Equities, short US bonds, long Energy and long Metals.
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.
Within the hedge fund universe, we continue to prefer strategies with moderate market
directionality (“risk diversifiers” type) such as L/S Equity Market Neutral, Global Macro and CTAs.
The reason for that is: (1)Traditional asset classes look richly valued, (2) a risk-off environment could
not be excluded at this stage of the cycle.

51
Equity Hedges & Dispersion
Equity hedge funds have been underperforming the S&P500 for over 6 years. One of the main reasons
for that is the below-average return dispersion we’ve experienced since 2010.
Return dispersion is a key measure of the potential alpha that may be generated by stock-pickers and
other active managers.
We think that the picture is currently changing with the US new administration plans and the maturing
economic cycle. We expect higher dispersion from here, with more alpha opportunities to be
captured, and potentially a better performance for active management.

Bottom Line: Global Asset Allocation
The recent string of economic data has been generally better than
expected.
The Trump’s rally is still going on. Nevertheless, we don't believe it
has any substance. No details are available about the incoming
Trump Administration’s regulatory and policy changes, but markets
have rallied on the general view of lower taxes, more spending and
faster growth, downplaying the risks to other Trump's policies (trade
barriers…).
The end of the 35 year bull market in bonds is looming. Reflation
momentum is picking up. Is that a bull signal for the economy? Not
sure…
Rotation out of bonds is under way. But opportunities in other risk
assets (equity, credit, commodities…) are limited given the current
valuations.
Credit is priced for a benign environment for several years. But we
thinks it is moving out of the 'sweet spot‘ as we progressively get out of
ultra-accommodative CB policy, ultra-low rates and ultra-low volatility.
We still feel concerned with the major loss of liquidity we’ve seen in
recent years. A higher market volatility would be the natural
consequence.
The VIX stands near its all-time lows despite the political / economic
turmoil we expect in the future.
We summarize our views as follows
52
09/12/2016 16/11/2016 14/10/2016
View View View
Dec'16 Nov'16 Oct '16
Equity OW N N
S&P 500 OW OW OW
Euro Stoxx 50 UW UW UW
NIKKEI 225 N N N
MSCI Emerging Markets UW UW UW
Fixed Income UW UW N
T-Note 10Y UW UW UW
Bund 10Y OW OW OW
US TIPS OW OW OW
Euro HICP N N N
Credit N N N
Inv. Grade N N N
US High Grade OW OW OW
EUR High Grade UW UW UW
High Yield UW UW UW
US High Yield OW OW OW
EUR High Yield UW UW UW
EMSovereigns N N N
Forex N/A N/A N/A
EUR-USD UW UW UW
USD-JPY OW OW OW
Commodity N UW UW
Energy N UW N
Base Metals UW UW UW
Precious Metals UW N N
Agri N N N
Alternatives OW OW OW
Return Enhancers UW UW UW
Risk Diversifiers OW OW OW

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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55

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