Consumer Discretionary

Media stocks have churned in the past few years, but we view this as setting the stage for outperformance and not a precursor to a decline. While the manufacturing side of the U.S. economy continues to struggle in a world of excess capacity and ongoing deflationary pressures from abroad, the ISM non-manufacturing survey suggests that services activity remains in good shape. Media companies tend to thrive when the service sector is outperforming goods producers, because it heralds top-line outperformance. Our proxy for media productivity, sales/employment, is enjoying a nascent reacceleration, which should support relative forward earnings momentum. Importantly, the relative performance consolidation phase has allowed earnings to catch up with the share price ratio, creating enough value to generate another leg up as earnings get re-rated. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5MEDA-CMCSA, DIS, TWX, FOXA, CBS, OMC, VIAB, FOX, IPG, SNI, DISCK, NWSA, TGNA, DISCA, NWS. bca.uses_in_2016_08_05_001_c1 bca.uses_in_2016_08_05_001_c1

While banks are tightening the lending screws in most categories, they remain willing to extend mortgage credit. Long-term mortgage rates are extremely low, and consumers are taking full advantage, as recent U.S. housing data has been on the strong side. We expect the trend to accelerate on the back of firming income growth. The steady uptrend in mortgage purchase applications suggests that owner-occupied purchases are taking over from financially motivated transactions. That has bullish implications for housing-related equities such as homebuilders and home improvement retailers. Importantly, new home sales and existing home prices have surged, with the latter providing increased incentive for homeowners to renovate and invest in order to boost the value of their homes. We reiterate our bullish stance on the S&P homebuilders and S&P home improvement retail indexes. The ticker symbols for the stocks in S&P homebuilders index are: BLBG: S5HOME-DHI, LEN, PHM. The ticker symbols for the stocks in S&P home improvement retail index are: BLBG: S5HOMI-HD, LOW. Housing-Related Equities Remain Attractive Housing-Related Equities Remain Attractive

The odds of an inflation "mini-scare" are rising, although deflationary tail risks from abroad cannot be dismissed.

The S&P restaurants index continues to deflate in relative performance terms and downside risks remain intact. The top panel of the chart shows that the Restaurant Performance Index (RPI, courtesy of the National Restaurant Association) has taken a turn for the worse. Historically, momentum in the RPI has been an excellent leading indicator of relative share prices. The RPI is picking up the downtrend in top-line performance, as measured by restaurant retail sales. The latter warn that relative forward earnings momentum is headed lower. To make matters worse, slow traffic is limiting pricing power gains, which are lagging badly behind a soaring wage bill (fourth panel). Bottom Line: While we have recently boosted the S&P consumer discretionary index to overweight, stick with a below benchmark allocation in the S&P restaurants sub-index. The ticker symbols for the stocks in this index are: BLBG: S5REST - MCD, SBUX, YUM, CMG, DRI. Restaurants: Closed For Business Restaurants: Closed For Business

In recent months we have outlined and acted on the bull case for media by upgrading both the S&P cable & satellite and S&P movies & entertainment indexes. This week we added another sub-component to the overweight column. The S&P advertising index has an opportunity to positively surprise in the coming quarters. Expectations are subdued, as measured by both long-term and cyclical relative forward earnings growth estimates, as well as elevated short interest (third panel). On this front, accelerating outlays on media services are a positive omen for marketing budgets, as well as advertising stocks, particularly if consumers begin to loosen their purse strings. Already, advertisers have enjoyed solid revenue growth, in contrast with the contraction in overall S&P 500 sales. As a result, ad rates have gone up, as proxied by the producer price indexes for radio, broadcasting and network TV (second panel). A demand-driven increase in pricing power should be viewed as sustainable, and has higher odds of translating into premium share price valuations given the positive impact on industry productivity (bottom panel). True, the leveling off in auto sales is a risk given the industry’s massive marketing budget, but there are offsets, including the boom in electronics spending, which has positive implications for content demand and potential digital media spending. Netting it out, the reward/risk tradeoff is favorable for an upshift to overweight. The ticker symbols for the stocks in this index are: BLBG: S5COND - OMC and IPG. bca.uses_in_2016_07_26_002_c1 bca.uses_in_2016_07_26_002_c1

In order to harvest a tactical continuation of the high-risk, momentum-driven broad market advance, we have made a few tweaks to our portfolio, while maintaining a core non-cyclical emphasis given that the global growth outlook remains sketchy. This week, we added the cyclical interest rate-sensitive consumer discretionary sector to the fold after recently upgrading the S&P home improvement retail index back to overweight. Relative performance has dropped to a four year low, once heavyweight Amazon is excluded, but a recovery window has opened if the Fed stays lax while wage growth continues to firm and the U.S dollar regains strength. The consumer is the strongest engine in the U.S. economy, and is benefiting from lower oil prices and plunging mortgage rates. Our Consumer Drag Indicator (CDI), comprising mortgage rates and gasoline prices, has climbed significantly, heralding ongoing consumption resilience. Importantly, the CDI has a good track record in leading relative performance (second panel). Money growth is sending a similar message, particularly given a healthy clip in consumer lending growth (top panel). After deleveraging for several years, financial obligations are not onerous, even if interest rates rise modestly. Any upgrade in consumer confidence as a consequence of income growth could unleash pent up dry powder for consumption. As a result, we recommend buying into relative performance weakness and upgrading to overweight, including a boost to the advertising group, please see the next Insight. BLBG: S5COND. Upgrade The Consumer Discretionary Sector Upgrade The Consumer Discretionary Sector

The major banks are more willing to lend to the consumer and less willing to lend to the corporate sector.

Expectations of a prolonged period of abundant liquidity and rising confidence that recession is not imminent have created the conditions for a potential blow-off phase. This week we are fine-tuning our portfolio for peak performance.

In successful investment analysis "less is more, and usually much more effective."

While we are neutral on the broad consumer discretionary index, we remain constructive on the S&P homebuilding sub-group. U.S. bond yields are probing multi-decade lows mostly as a consequence of global deflationary forces and unorthodox monetary policy abroad. This is a welcome assist to the U.S. housing market, as these exogenous factors have pushed down the U.S. 30-year mortgage rate, providing an incentive for consumers to reenter the housing market (bottom panel). A simple homebuilding demand/supply indicator, comprising new home sales expectations versus new home inventories, is steadily climbing. Historically, this gauge has led new home sales prices, and the current message is to expect the latter to reaccelerate. Homebuilder profits have considerable leverage to selling prices, underscoring that a round of positive earnings revisions lies ahead. Bottom Line: Continue to overweight the S&P homebuilding index. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM. bca.uses_in_2016_07_14_001_c1 bca.uses_in_2016_07_14_001_c1