Ned Davis7.15

MARKET DIGESTNed DavisResearch

Group

PUBLISHED MONTHLY JULY 2015

Please see important disclosures at the end of this report. www.ndr.com | Periodical | Issue #MKTDG201507101

Tony Welch, CMT ETF StrategistTim Hayes, CMT Chief Global Investment Strategist

FOLLOW US:

I7000_MAP© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

NDR Regional Allocation Recommendations 2015-07-09



U.S.Europeex. U.K.

EmergingMarkets U.K. Japan

Pacificex. Japan Canada

NDRAllocation:

BenchmarkWeight:

60.0

51.1

18.0

15.6

9.0

10.7

0.0

7.3

13.0

7.5

0.0

4.3

0.0

3.5

Source: All data from Ned Davis Research, Inc.





U.S.Europeex. U.K.

EmergingMarkets U.K. Japan

Pacificex. Japan Canada

NDRAllocation:

BenchmarkWeight:

60.0

51.1

18.0

15.6

9.0

10.7

0.0

7.3

13.0

7.5

0.0

4.3

0.0

3.5

Source: All data from Ned Davis Research, Inc.

Time to Think Contrarian?

ECONOMY AND BONDS ` Global Economy: Strength in U.S., Mexico, and Europe, weakness in emerging economies.

` U.S. Economy: Moderate economic growth and subdued inflation in 2015.

` Bonds: We are slightly underweight at 95% of benchmark duration.

U.S. ASSET ALLOCATIONGLOBAL ASSET ALLOCATION

Baseline allocation is 55% Stocks, 35% Bonds, and 10% Cash. This is considered a conservative portfolio allocation for investors who are not risk-tolerant. (This should be used for illustrative purposes only.) See Glossary for more information on Asset Allocation.

Global Overview 2-3

U.S. Market 4-5

Sectors & Industries 6-7

Global Economic Outlook 8-9

U.S. Economy and Bonds 10

Ned's Corner 11

Glossary of Terms 12-13

Overweight Underweight

Stocks Bonds, Cash

REGIONAL

STOCKS70%

CASH 5%

BONDS25%

CASH 5%

STOCKS70%

BONDS25%

S&P 500 Sector Current View Effective DateConsumer Discretionary Overweight 2015-04-01

Consumer Staples Overweight 2015-02-05

Health Care Overweight 2013-04-10

Information Technology Overweight 2014-02-12

Financials Marketweight 2014-12-03

Industrials Marketweight 2014-03-05

Utilities Marketweight 2015-01-07

Energy Underweight 2015-01-14

Materials Underweight 2014-12-03

Telecom Services Underweight 2015-01-07

Source: Standard & Poor’s and Current View: Ned Davis Research, Inc.

European Equity

Upgrade

Please see important disclosures at the end of this report.

NED DAVIS RESEARCH GROUP Market Digest | JULY 2015

www.ndr.com | Periodical | Issue #MKTDG201507102

GLOBAL OVERVIEW

THINK CONTRARIAN

From Greece to China to oil to _____ (fill in the blank), in-vestors have found plenty of things to worry about, with our DSI Global Sentiment Composite indicating levels of pessimism last seen around the lows last October and the bottoms of 2012 and 2011 (below). A contrarian approach is advisable. Reflect-ing the positive economic and earnings implications of globally accommodative monetary policies, the MSCI All Country World Index and 65% of its component markets have maintained ris-ing 200-day moving averages despite the ACWI’s 5% slide since April 27. We remain with our maximum overweight equity allocation of 70%.

Likewise, among the MSCI indices in our seven-way frame-work, we are maintaining our overweight allocations to the U.S. (60%) while staying away from the Pacific ex. Japan region, the U.K., and Canada altogether. But we are making adjustments to the allocations of the three other indices in the framework, dropping Japan from an overweight allocation of 15% to a less aggressive overweight of 13%, cutting Emerging Markets from an overweight allocation of 14% to a marketweight allocation of 9% and raising Europe ex. U.K. from an underweight alloca-tion of 11% to an overweight allocation of 18%.

I4121A© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Global Stock/Bond Ratio vs. DSI Global Sentiment Composite Daily Data 2010-07-08 to 2015-07-07 (Log Scale)

I4121A© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Global Stock/Bond Ratio vs. DSI Global Sentiment Composite Daily Data 2010-07-08 to 2015-07-07 (Log Scale)

2010Jul Oct

2011Jan Apr Jul Oct

2012Jan Apr Jul Oct

2013Jan Apr Jul Oct

2014Jan Apr Jul Oct

2015Jan Apr Jul

94

100

106

112

119

126

133

141

150

94

100

106

112

119

126

133

141

150

Global Stock/Global Bond Total Return Ratio* (2015-07-07=152.28)

*Stock Returns Based on MSCI ACWI Total Return Index. Bond Returns Based on Barclays Global Long-Term Government Bond Total Return Index

Global Stock/Bond Gain per Annum When:

DSI GlobalSentiment Composite:

% Gain/Annum

%of Time

Above 75 6.24 19.73

40-75 6.17 60.05

* Below 40 15.97 20.22

5101520253035404550556065707580859095

5101520253035404550556065707580859095DSI Global Sentiment Composite (2015-07-07=18.14)

Optimism

Pessimism

DSI Global Composite based on sentiment indices for S&P 500, NDX, Nikkei, FTSE 100, DAX, CAC 40, and Euro-Stoxx 50.




BUY EUROPE NOW, CHINA LATER

Europe ex. U.K. -- The region’s markets have been relatively calm in the face of the Greek referendum and continuing nego-tiations. While the focus on Greece has weighed on sentiment, contagion expectations have been limited. And thus investors have been recognizing positive economic and valuation devel-opments. And while the Europe ex. U.K. Index price and relative strength lines have both dropped below their 200-day moving averages, the moving averages are still rising, indicative of long-term uptrends. We would also point out that the Greek cri-sis has had the positive influence of keeping the euro and German bund yields in check, while encouraging the ECB to maintain its accommodative approach. That was also the backdrop during the bottoming process of late 2014 and early 2015. We also see potential for European institutional re-allocation toward equities, with rapid earnings growth alleviat-

ing valuation concerns and economic growth maintaining its gradual recovery.

China -- Signs of excessive China-driven pessimism suggest that further downside risk is limited, a major reason why we have downgraded Emerging Markets to marketweight rather than un-derweight. Following the suspension of initial public offerings, relaxation of margin lending rules, and other measures to stabi-lize the market, China’s latest moves to restrict share sales and use central bank funds to buy equities are typical of the panic-driven initiatives often seen around market bottoms. And the chart below suggests that broad-based selling has left the market extremely oversold, similar to past bottoms. If a Chi-na recovery were to have a positive influence on other Emerging Markets, a return to overweight on the region may be warranted.

Daily Data 9/21/2009 - 7/07/2015 (Log Scale)

(I 18064F)

MSCI ChinaGain/Annum When:

% of Stocks Above Gain/ %50-Day Smoothings Annum of Time

Above 65.5 4. 6 29. 4Between 22.5 and 65.5 1. 7 57. 2

* Below 22.5 -5. 0 13. 4Source: MSCI

43

46

49

52

56

60

64

68

72

77

82

43

46

49

52

56

60

64

68

72

77

82

7/07/2015 = 1.0%-505

101520253035404550556065707580859095

-505

101520253035404550556065707580859095

N J2010

M M J S N J2011

M M J S N J2012

M M J S N J2013

M M J S N J2014

M M J S N J2015

M M J

MSCI China Index

Percentage of Dow Jones China Stocks Above 50-Day Moving Averages Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

.www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

OVERSOLD




U.S. MARKET OUTLOOK

Coming into 2015, we noted several hurdles the market needed to overcome, including sluggish economic growth, plunging oil prices, potential rate hikes, and stretched valua-tions. Halfway through the year, few of those questions have been answered, and several more have surfaced. In only a few minutes, we brainstormed dozens of questions. We narrowed them down to eight, list them below, and summarize the po-tential market implications.

And while the exercise of asking questions and research-ing answers is useful for anticipating market reactions to future events, as always, our recommendations will be driven by our models, which remain constructive. We are giving the long-term uptrend the benefit of the doubt.

2015 Second Half QuestionsQuestion Answer Market Implication

1. Will earnings rebound as expected? Yes, but not as much as consensus Positive for stocks but valuations limit degree of rally

2. Will the Fed raise rates? Yes, but slowly Speed more important than when. Key to dividend trade.

3. Will Greece or China derail the U.S.?

Unlikely, but U.S. economy too weak to withstand external shock

Tail risk of major correction

4. Will the economy reach escape velocity?

Not in 2015 Growth over Value

5. Will sentiment continue to turn pessimistic on small declines?

Not expected at this time Watch for wall of worry to turn into complacency

6. Will technicals continue to deteriorate?

Not expected at this time Breakdown would warn of 10%+ correction

7. Will the market realign with presidential cycle?

To be determined Cycle less bullish Sept. '15 - May '16

8. Will small-caps' rally continue? Unlikely through end of year Small-cap secular bear could start in earnest

Ned Davis Research Group T_SSF15_09.1




MOST OVERVALUED AREA OF AN OVERVALUED MARKET

Recently, clients have asked if any stocks are especially re-sponsible for the S&P 500’s high median P/E ratio. The natural assumption would be to look to high-flying stocks like Inter-net stocks during the dotcom bubble. However, currently the highest dividend yielders, whose P/Es have been well be-low the market historically, are among the biggest culprits.

The chart below shows the median P/E ratio of the highest dividend growing stocks in the S&P 500 minus the median P/E

of the highest dividend yielders. Since 1983, the highest grow-

ers’ P/E has been 2.2 points higher than the highest yielders, on

average. The fact that the highest yielders are more expensive

than the highest growers is rare. Before 2011, the highest yield-

ers were more expensive than the highest growers only 4% of

the time. Overvaluation of the highest yielders versus the highest growers is confirmed by price/book, shareholder yield, and cash flow yield.

SBOX_873B_SP5© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

S&P 500 Median Forward P/Es of High Dividend Growers minus High Dividend YieldersWeekly Data 1983-09-30 to 2015-07-02

Data Range (Years): 1, 2, 3, 5, 10, 20, Max Standard Deviations on Full History Remove Links SBOX_873B_SP5

© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

S&P 500 Median Forward P/Es of High Dividend Growers minus High Dividend YieldersWeekly Data 1983-09-30 to 2015-07-02

Data Range (Years): 1, 2, 3, 5, 10, 20, Max Standard Deviations on Full History Remove Links 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5Source: S&P Capital IQ Compustat2015-07-02 = -0.81

High GrowersMore Expensive

High YieldersMore ExpensiveMean and standard deviation lines based on data from 1983-09-30 through 2015-07-02

+1 SD

+2 SD

+3 SD

-1 SD

-2 SD

Mean

(+) S

tan

da

rd D

ev

iatio

ns (-)




SECTORS AND INDUSTRIES

CONSUMER TAILWINDS FOR NOW, BUT STAY ALERT

Recent concerns over Greece and China, and the likelihood that the Fed will soon be raising interest rates, have provided support for the U.S. dollar and tailwinds for the consumer ver-sus commodity trade. Consumers and their sectors benefit from lower import prices and lower inflation, while commodity sectors (largely exporters) are hurt by a rising U.S. dollar and weaker global demand. Subsequently, consumer sectors have been making new relative highs and commodity sectors new relative lows, as both sides of this trade are impacted.

From a valuation perspective, the consumer run has left consumer sectors with some of the highest valuations based

on their forward P/E ratios. But when measured in terms of how far these ratios have stretched relative to their historical norms (i.e., via standard deviations), as well as adjusting them for their differing growth rates using the PEG Ratio, Health Care and Consumer Discretionary do not appear overly burdened. Consumer Staples, however, is no longer a bargain. Meanwhile, Energy is the most overvalued based on all of these metrics, and will have significant valuation headwinds to contend with due to the 50% slide in oil prices since last year’s peak, and con-sequently much lower earnings. In all, we believe the consum-er versus commodity trade has further to run, although the potential for Fed rate hikes in the second half of this year may also lead to some interim sector rotation...

S&P 500 SECTOR VALUATIONS

Sector Forward P/E # Std Dev LT EPS Growth Est % PEG Ratio

Telecommunication Services 13.3 -0.4 2.3 5.8

Financials 14.0 0.7 9.5 1.5

Utilities 15.3 0.9 4.7 3.3

Information Technology 15.7 -0.5 11.8 1.3

Industrials 15.7 0.2 11.9 1.3

Materials 16.1 0.3 10.9 1.5

Health Care 17.3 -0.2 10.9 1.6

Consumer Staples 18.8 0.9 8.8 2.1

Consumer Discretionary 19.1 0.6 13.0 1.5

Energy 24.4 2.1 10.0 2.4

Forward P/E sector earnings estimate calculated by NDR using available mean 1-year forward earnings estimates for sector constituents (charts BA557A-J). #Std Dev = Number of standard deviations of Forward P/E from 23.6 year norm. Long-term EPS Growth Estimate = Median anlayst expected growth in operating earnings over the company's next full business cycle (usually between 3 and 5 years). PEG Ratio = Forward P/E to Long-term EPS Growth Estimate. Source: Thomson I/B/E/S, S&P Dow Jones Indices.

Ned Davis Research Group T_IF15_15.1

OK

BEST

?

OK

OVERVALUED

http://www.ndr.com/invest/vendorinfo/#thompson




COMMODITY SECTORS

We are currently positive on oil prices, but negative on E&P names. This is an odd combination, so we’d like to ex-plain... Historically, when oil moves, it pulls E&P companies along for the ride. In fact, it seems many equity investors buy E&P stocks as a proxy for oil or as a way to express a bullish view on crude prices. For the most part, the assumption that “as goes oil, so goes E&P” is sound. This can be seen in the scatter plot below, which highlights E&P stock returns around oil rallies of 10% or more over a quarter. However, E&P returns can occasion-ally disconnect from oil price movements. These cases, only six of them since 1983, are highlighted in yellow. These were in-stances where oil prices rallied by more than 10%, yet E&P re-turns were negative. We’ve felt for some time that the current environment was ripe for a seventh case, and as it turns out it happened in Q2 2015.

If history has its way, we may see yet another case in 2015. The prior six cases had similar backdrops to one another, and to

our current 2015 environment. Four characteristics specifically were shared by each:

1) Followed a major oil price decline

2) Crude oil futures curve in extreme contango

3) E&P stocks overvalued

4) Oversupplied oil market

Drilling deeper, two of the six cases followed the 1986 oil crash. We previously identified this period as the closest historical cousin to the 2015 version. 1986 and 2015 are unique in that both oil price declines were supply, not demand, driven. Most major oil price declines are demand, not supply, driven. The bottom line is that the environment remains the same for E&P names as we enter the back half of 2015: 1) recent major oil decline, 2) futures in contango, 3) E&P stocks overvalued, 4) oil market oversupplied. We continue to advise avoiding E&P names.

COMF201505251G_C© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

E&P - The Relationship Between Returns & Oil Price Moves Quarterly Data 1985-12-31 to 2015-03-31

COMF201505251G_C© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

E&P - The Relationship Between Returns & Oil Price Moves Quarterly Data 1985-12-31 to 2015-03-31

-60 -55 -50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60

Oil Returns

-50.0-47.5-45.0-42.5-40.0-37.5-35.0-32.5-30.0-27.5-25.0-22.5-20.0-17.5-15.0-12.5-10.0

-7.5-5.0-2.50.02.55.07.5

10.012.515.017.520.022.525.027.530.032.535.037.540.042.545.0

E&P

Stoc

k Re

turn

s

-50.0-47.5-45.0-42.5-40.0-37.5-35.0-32.5-30.0-27.5-25.0-22.5-20.0-17.5-15.0-12.5-10.0

-7.5-5.0-2.50.02.55.07.5

10.012.515.017.520.022.525.027.530.032.535.037.540.042.545.0

Source: NDR Multi-Cap Institutional (Universe), S&P Capital IQ and MSCI, Inc. (GICS), EIA

R-Squared = 28%

CASES WHERE OIL UP 10%

BUT E&P NEGATIVE

98

09

02

86 Q3 86 Q4

88




GLOBAL ECONOMY OUTLOOK

Despite a slow start to the beginning of the year, we ex-pect global economic growth to accelerate in the second half of the year, with developed economies outperforming their emerging counterparts. We anticipate that the U.S. economy will pick up after the weather-induced slowdown in Q1, while trends in developed Europe and Japan have improved com-pared to last year. China is slowing; however, given such a

high base, it will continue to contribute substantially to global growth. But marked slowdowns in some emerging econo-mies, namely Russia and Brazil, pose risks to the global outlook. As a result, we expect the global economy to grow at a similar rate as last year, which was 3.4%, vs. our prior pro-jection of 3.6%.

Monthly Data 9/30/1992 - 5/31/2015

(IE14)

5/31/2015 = 98.8Brazil Composite Leading Indicator

Amplitude-Adjusted Series(Long-Term Average = 100)96

979899

100101102103

96979899

100101102103

Russia Composite Leading Indicator 5/31/2015 = 99.0

92949698

100102104

92949698

100102104

India Composite Leading Indicator 5/31/2015 = 99.5

99

100

101

102

103

99

100

101

102

103

China Composite Leading Indicator 5/31/2015 = 97.3

Source: OECD, Main EconomicIndicators (MEI), www.oecd.org94

9698

100102104

949698

100102104

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

OECD Composite Leading Indicators for BRIC Economies

Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

BRAZIL LOWEST SINCE 7/2009

RUSSIA TENTATIVELY IMPROVING!

INDIA STILL GOING STRONG!

CHINA AT SIX-YEAR LOW




HOW MARGIN DEBT IN CHINA COMPARES TO THE U.S.

On an absolute basis, the U.S. still beats China. The outstand-ing balance of margin transactions in the U.S. was $499 billion in May, compared to $335 billion in China. But as a share of GDP and market cap, the meteoric rise in China’s use of margin debt has pushed it above the U.S. As a percentage of GDP, the balance of margin transactions in China was 3.2% in May, more than double the proportion recorded at the end of last year (see chart below). In the U.S., the share came below China’s at 2.9%, but it’s still an all-time high. Even so, it has taken the U.S. decades to get to this point, while in China it’s taken less than four years, as margin accounts became a standard program in October 2011.

As a share of market cap, the difference is even larger. In China, the proportion climbed to 3.2% in May, compared to just 2.0% in the U.S. Even though the government has taken ma-jor, rather unsuccessful, steps to push up the market over the past weeks, the stock market still plays a relatively smaller part in everyday life than in the U.S. Reportedly just 15% of Chinese household financial assets are held in equities. This compares to about 50% in the U.S. China’s market cap (A-shares) as share of GDP has surged since late last year to 74%, but that’s still well below the U.S., which comes in at 137%.

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U.S. vs. China Margin Debt as a Share of GDP Monthly Data 1947-03-31 to 2015-05-31

IE15570D© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

U.S. vs. China Margin Debt as a Share of GDP Monthly Data 1947-03-31 to 2015-05-31

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

0.10.20.30.40.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.12.22.32.42.52.62.72.82.93.03.13.23.33.43.5

0.10.20.30.40.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.12.22.32.42.52.62.72.82.93.03.13.23.33.43.5Source: Department of Commerce, Haver Analytics

China Outstanding Balance of Margin Transactions as a % of Nominal GDP 2015-05-31 = 3.2U.S. Outstanding Balance of Margin Transactions as a % of Nominal GDP 2015-04-30 = 2.9

CHINA’S MARGIN DEBT/GDP HIGHER THAN U.S.




U.S. ECONOMY AND FIXED INCOME

Global - There are no changes to our global allocation. We remain overweight Japan at 20% and maximum overweight the U.K. at 14%. We are a marketweight 51% in the U.S. and un-derweight Europe at 15%. We believe this is perhaps the last chance to buy non-Greek peripheral debt ahead of the final phase of spread compression.

U.S. - We remain 95% of benchmark duration. Five-year Trea-surys are in the middle of our 1.25% to 1.85% trading range. Fair value on the 10-year Treasury ranges from 2.13% to 2.70%.

We currently have no curve positions. Our yield curve models are all in the neutral zone.

We remain overweight spread product, particularly credit. Within domestic taxables, we are overweight invest-

ment grade and high yield corporates and CMBS, neutral on agencies, agency MBS, and ABS, and underweight Treasurys. Most high quality munis are attractive for income-oriented in-vestors in upper tax brackets.

FED POLICY

The FOMC will likely remain on hold as long as Greece and China are upsetting markets and creating added eco-nomic uncertainty. But if these situations resolve themselves quickly, September would still be in play for the start of rate normalization. More importantly, the path of future rate hikes will be slow and the slope flat. The shrinkage of the balance sheet will likely commence a year after the first rate hike.

Monthly Data 6/30/1998 - 6/30/2015 (Log Scale)

(B2029A)

Source: Barclays104112120128137147157168180193206221236

104112120128137147157168180193206221236

Monthly % Change

-2

-1

0

1

2

-2

-1

0

1

2

Year-to-Year Change

-202468

1012

-202468

1012

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Barclays Euro-Aggregate Bond Total Return Index

Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

RECORD DROP IN Q2




v NED’S CORNER Ned Davis, Senior Investment Strategist

WHERE IS THE DELEVERAGING?

Latest data on world private domestic

non-financial debt shows it has soared to

$97 trillion at the end of 2014, up from

$68.2 trillion at the end of 2007, and $43.4

trillion at the end of 2000. Where is the

deleveraging? Private non-financial debt is some 149.4%

of GDP. Historically, since 1969, that is in a zone that has

seen reduced world GDP growth. And this rise has come despite the ratio of private debt-to-GDP falling sharply in Japan, Germany, and the U.S.

The main culprits for the jump in debt/ GDP in recent years are China at 193.4% (chart below), France, and Can-ada. Remember that this private non-financial debt leaves out government debt and Financial debt. Ex-tremely low interest rates and QE makes the debt man-ageable, but problems remain.

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China Private Domestic Non-Financial Debt as a Percentage of GDP Quarterly Data 1992-12-31 to 2014-12-31

DAVIS214G© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

China Private Domestic Non-Financial Debt as a Percentage of GDP Quarterly Data 1992-12-31 to 2014-12-31

30

40

50

60

70

80

90

100

110

120

130

30

40

50

60

70

80

90

100

110

120

130Nominal GDP 3-Year Rate of Change 2014-12-31 = 31.69%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

84

89

94

100

106

112

119

126

133

141

150

158

168

178

188

200

84

89

94

100

106

112

119

126

133

141

150

158

168

178

188

200

Source: Haver Analytics, Private Debt Source: Bank for InternationalSettlements, Long series on credit to the private non-financial sector

Private Domestic Non-Financial Debt as a Percentage of GDP 2014-12-31 = 193.35%

Nominal GDPGain/Annum When

Debt/GDP is:% Gain/Annum

% ofTime

* Above 131% 13.12 26.15

Between 111% and 131% 15.24 35.21

Below 111% 17.24 38.64

Concept Courtesy: Richard Vague, The Next Economic Disaster




Asset Allocation: Ned Davis Research, Inc.

constrains the recommended equity weight-

ing (which can theoretically range from zero

to 100%) to be limited to a minimum of

40% stocks and a maximum of 70% stocks.

Due to the constraint on equity weighting,

the combination of bonds and cash can be

weighted no greater than 60% and no less

than 30% in NDR’s recommendations. The

benchmark for bond allocation is 35% and

for cash is 10%.

Benchmark Duration: The most commonly

used measure of bond risk, quantifies the ef-

fect of changes in interest rates on the price

of a bond or bond portfolio. The longer the

duration, the more sensitive the bond or

portfolio should be to changes in interest

rates. Point of reference for a measurement.

Beta: A number describing the relation of an

investment return with that of the financial

market as a whole. Numbers greater than

one suggest an investment will increase

more than the broad market when it is ris-

ing, and have greater declines when the

market is falling.

Breadth: A technical term used to demon-

strate how broadly a market is moving.

Capital Market: Is a market for securities

(debt or equity), where business enterpris-

es (companies) and governments can raise

long-term funds.

Commercial Mortgage-Backed Securi-

ties (CMBS): A type of mortgage-backed

security backed by commercial mortgages

rather than residential mortgages. When

compared to a residential mortgage-backed

security, a CMBS provides a lower degree of

prepayment risk because commercial mort-

gages are most often set for a fixed term.

Core Inflation: Is a measure of inflation which

excludes certain items that face volatile price

movements, notably: food and energy.

Cyclical Bear: Cyclical swings in the mar-

ket can last from several months to a few

years, and are designed to be in line with

the primary trend. A cyclical bear market

is a cyclical swing when the market is in a

downtrend.

Cyclical Bull: Cyclical swings in the market

can last from several months to a few years,

and are designed to be in line with the pri-

mary trend. A cyclical bull market is a cycli-

cal swing when the market is in an uptrend.

Deflation: Is a slight decrease in the general

price level of goods and services. Deflation

occurs when the annual inflation rate falls

but stays above 0%.

Demographics: Studies of population

based on factors such as age, race, sex, eco-

nomic status, level of education, income

level, and employment.

Echo Bull/Bear: An echo bear market is a

shallower correction which occurs in the eq-

uity market that does not coincide with an

economic recession. An echo bull market is

one that follows and echo bear market.

European Central Bank (ECB): Is the insti-

tution of the European Union (EU) which

administers the monetary policy of the EU

Eurozone member states. It is thus one of

the world’s most important central banks.

The bank was established by the Treaty of

Amsterdam in 1998, and is headquartered in

Frankfurt, Germany.

Eurozone/European Union: Is an economic

and monetary union (EMU) of the European

Union (EU) member states which have ad-

opted the euro currency as their sole legal

tender. It currently consists of Austria, Bel-

gium, Cyprus, Finland, France, Germany,

Greece, Ireland, Italy, Luxembourg, Malta,

the Netherlands, Portugal, Slovakia, Slove-

nia, and Spain.

Federal Open Market Committee (FOMC:

A component of the Federal Reserve Sys-

tem, is charged under United States law

with overseeing the nation’s open market

operations. It is the Federal Reserve com-

mittee that makes key decisions about in-

terest rates and the growth of the United

States money supply.

Gross Domestic Product (GDP): The total

output of goods and services produced in a

given country during a given period.

Lagging Indicator: An economic factor

that changes after the economy has al-

ready begun to follow a particular pattern

or trend; used to confirm long-term trends.

Leading Indicator: An economic factor

that changes before the economy starts to

follow a particular pattern or trend; used to

predict changes in the economy.

Median P/E: Numeric value separating the

higher half of a sample, a population, or

a probability distribution, from the lower

half. This is the middle price-to-earnings

ratio of a series.

Mortgage-Backed Securities (MBS): A

type of asset-backed security that is secured

by a mortgage or collection of mortgages.

These securities must also be grouped

in one of the top two ratings as determined

by an accredited credit rating agency.

MSCI Emerging Market Index: An index

developed by Morgan Stanley Capital Inter-

national, Inc. (MSCI) as an equity benchmark

for emerging market stock performance. It

is a capitalization-weighted index that aims

to capture 85% of publicly available total

market capitalization. Component compa-

nies are adjusted for available float.

GLOSSARY OF TERMS




NDR Global Equity Allocation Model: The

model is dynamic, using panel regression to

rank six regional and country indices. The

weight of the evidence is assessed based

on external and internal factors, with 60%

of the weight on the externals (non-price-

based) and 40% on the internals (price-

based). A factor used for one index is also

used for the other five, with data unique to

that region or country.

NDR-Weighted Foreign Market Indexes:

These are capitalization-weighted indexes

constructed by Ned Davis Research, Inc. to

reflect the overall trend in a global market

sector or region.

Optimistic: A sentiment term, investors are

said to be optimistic if they think the market

will rise. We find that it is best to go with the

flow of sentiment until it reaches an extreme

and reverses, at which point we take a con-

trary position.

Overvaluation: A stock is said to be overval-

ued when its current price is not justified by its

earnings outlook or price/earnings (P/E) ratio

and, therefore, is expected to drop in price.

P/E: Is a measure of the price paid for a share

relative to the annual net income or profit

earned by the firm per share.

Personal Consumption Expenditures

(PCE): A measure of price changes in con-

sumer goods and services.

Pessimistic: A sentiment term, investors are

said to be pessimistic if they think the mar-

ket will fall. We find that it is best to go with

the flow of sentiment until it reaches an ex-

treme and reverses, at which point we take a

contrary position.

Quantitative Easing: A government mon-

etary policy occasionally used to increase

the money supply by buying government

securities or other securities from the

market. Quantitative easing increases the

money supply by flooding financial institu-

tions with capital in an effort to promote

increased lending and liquidity.

Relative Strength: Is the ratio of a stock

price to a market average.

S&P 500 Index Equally Weighted Geomet-

ric Index: An index constructed of the 500

stocks in the S&P 500 index on an equally

weighted geometric average basis (see geo-

metric average).

Secular Bear: Secular moves in the mar-

ket can last from several years to decades,

and are designed to call overriding trends

through several cyclical cycles. A secular

bear is a downward-trending secular move

in the market.

Secular Bull: Secular moves in the mar-

ket can last from several years to decades,

and are designed to call overriding trends

through several cyclical cycles. A secular

bull is an upward-trending secular move in

the market.

Sovereign Debt: Is money (or credit) owed

by a central government.

Spread Product: Favoring not only invest-

ment-grade corporate debt, but also asset-

backed and commercial mortgage-backed

securities, as well as senior secured loans,

sectors over Treasury securities.

Standard and Poor’s 500 Sectors: Stocks

in the S&P 500 index are classified into one

of 10 sectors/industries using the Standard

and Poor’s Global Index Classification Sys-

tem (GICS).

Standard and Poor’s 500 Stock Index: An

index of 500 stocks chosen for market size,

liquidity, and industry grouping, among

other factors. The S&P 500 is designed to

be a leading indicator of U.S. equities and is

meant to reflect the risk/return characteris-

tics of the large-cap universe.

Treasury Inflation-Protected Securities

(or TIPS): Are the inflation-indexed bonds

issued by the U.S. Treasury. The principal is

adjusted to the Consumer Price Index, the

commonly used measure of inflation. The

coupon rate is constant, but generates a dif-

ferent amount of interest when multiplied

by the inflation-adjusted principal, thus pro-

tecting the holder against inflation.

Value: A stock that tends to trade at a lower

price relative to its fundamentals (i.e., divi-

dends, earnings, sales, etc.) and thus consid-

ered undervalued.

VIX Index: A popular measure of the implied

volatility of S&P 500 index options. Often re-

ferred to as the fear index or the fear gauge,

it represents one measure of the market’s

expectation of stock market volatility over

the next 30-day period.

Volatility: A statistical measure of the dis-

persion of returns for a given security or

market index. Commonly, the higher the

volatility, the riskier the security.

DISCLAIMER

NDRG ADVISORY EDITORIAL BOARD

VENICE600 Bird Bay Drive WestVenice, FL 34285

NED DAVIS RESEARCH GROUP

[email protected](800) 241-0621(617) 279-4872

The data and analysis contained herein are provided “as is” and without warranty of any kind, either

expressed or implied. Ned Davis Research, Inc. (NDR), d.b.a. Ned Davis Research Group (NDRG), any NDRG

affi liates or employees, or any third-party data provider, shall not have any liability for any loss sustained

by anyone who has relied on the information contained in any NDRG publication. NDRG disclaims any

and all express or implied warranties, including, but not limited to, any warranties of merchantability,

suitability or fi tness for a particular purpose or use.

NDRG’s past recommendations and model results are not a guarantee of future results. This

communication refl ects our analysts’ opinions as of the date of this communication and will

not necessarily be updated as views or information change. All opinions expressed herein are

subject to change without notice. NDRG or its affi liated companies or their respective shareholders,

directors, offi cers and/or employees, may have long or short positions in the securities discussed

herein and may purchase or sell such securities without notice.

Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade

them presents many diffi culties and their eff ectiveness has signifi cant limitations, including that prior patterns

may not repeat themselves continuously or on any particular occasion. In addition, market participants using

such devices can impact the market in a way that changes the eff ectiveness of such device.

Further distribution prohibited without prior permission. For data vendor disclaimers, refer to

www.ndr.com/vendorinfo.

Copyright 2015 (c) Ned Davis Research, Inc. All rights reserved.

Tony Welch, CMTETF Strategist

Thomas Hansen, CFAMacro Analyst

Victor JessupU.S. Market Analyst

Anoop NathGlobal Analyst

John Lyon, CFASector Analyst

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