Consumer Discretionary

In early-April we boosted our S&P cable & satellite exposure to above benchmark, as cord-cutting has been less destructive than feared and the industry continues to successfully lift subscription rates in a world plagued by deflation. Similarly, in mid-June we lifted the S&P movies & entertainment index to overweight, because value was simply too attractive to ignore amidst signs of fundamental improvement. For instance, the latest ISM services release was comfortably above the boom/bust line, signaling that services-industry demand remains upbeat. That is consistent with solid media pricing power (second panel). Entertainment admissions, cable network and cable TV pricing power are all showing solid gains. The better-than-expected June employment report should soothe any lingering concerns about the sustainability of discretionary outlays on media services, and provide confidence in the durability of pricing power gains. Consequently, good value should ultimately be realized. Bottom Line: We reiterate our recent upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5MOVI - DIS, TWX, FOXA, VIAB, FOX. bca.uses_in_2016_07_13_001_c1 bca.uses_in_2016_07_13_001_c1

Our <i>Cyclical Indicator Update</i> reveals that a defensive portfolio strategy remains the best bet to navigate the crosscurrents of stagnant profit/economic growth yet abundant global liquidity.

There is a strong incentive for homeowners to invest in their own homes, as existing home prices have eclipsed pre-crisis peaks. Mortgage credit is also readily available and growing again after a multiyear contraction, which will aid in the resale process. There is significant scope for mortgage credit to grow, which implies a long sales runway for home improvement retailers. The latter had battened down the hatches following the housing crisis, closing stores and curtailing investment. Low construction spending is supportive of near-term same-store sales performance, and also implies that the industry can shift back into expansion mode at some point. If so, then historically appealing relative valuation levels have room to expand. We recommend moving back to an overweight stance in this group. Please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5HOMI- HD, LOW. bca.uses_in_2016_07_06_002_c1 bca.uses_in_2016_07_06_002_c1

The decline in global bond yields and negative interest rates outside the U.S. represent a windfall for U.S. housing, to the extent that U.S. mortgage rates are pushed below levels warranted on U.S. fundamentals alone. With a fully functioning banking system, and a willingness to extend mortgage credit, the housing sector should accelerate in the second half of the year. By extension, the S&P home improvement retailing index is poised for liftoff. The group has corrected laterally in recent months, ignoring the bullish signal from the plunge in Treasury yields (shown inverted, top panel). There is already evidence that lower mortgage rates are stoking housing demand: mortgage purchase applications are gaining traction after a long slumber, and refinancing activity is perking up. Mortgage rates have declined sufficiently to make refinancing a viable option for many homeowners. As housing-related financing becomes more readily accessible, the means and incentive to undertake renovation projects should accelerate. The NAHB remodeling survey has been grinding lower, but a reversal is likely given rising mortgage demand and a high level of pending home sales, a catalyst for home improvement projects. Importantly, there is a long runway for growth ahead, please the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HOMI- HD, LOW. bca.uses_in_2016_07_06_001_c1 bca.uses_in_2016_07_06_001_c1

Housing activity should accelerate in the back half of the year given the drop in Treasury yields. Buy home improvement retailers and add to long homebuilding positions.

The Brexit drama has moved from the realms of psephology into the realms of game theory. How will the game play out? And how will the economy and financial markets react?

The S&P media sector has been in a consolidation phase for over two years, in relative performance terms. That is consistent with cash flow trends, which flat-lined alongside a slump in sales growth and rising costs. However, we expect both relative performance and cash flow to turn higher. Sales growth has hooked back, because the industry has been able to introduce new services and raise selling prices by enough to drive up consumers' share of spending on media services (second panel). Pricing power has surged in both the cable and entertainment industry. If cash flow grows again, as we expect, then an increasing scarcity of media shares outstanding should ultimately act as an upward force on share prices as investors boost allocations to the space. We reiterate our recent moves to overweight in both the S&P cable & satellite and S&P movies & entertainment sub-components. The ticker symbols for the stocks in this index are: BLBG: S5MEDA - DIS, CMCSA, TWX, FOXA, CBS, OMC, VIAB, IPG, SNI, DISCA, NWSA, TGNA, DISCK, FOX, NWS. bca.uses_in_2016_06_29_001_c1 bca.uses_in_2016_06_29_001_c1

The previous Insight showed that mortgage demand was rising steadily, courtesy of the decline in mortgage rates and willingness of banks to extend mortgage credit. We expect this to translate into steady sales increases for the homebuilding industry. New home sales are gaining as a share of total home sales, flirting with their highest level in the post-crisis era. Importantly, the supply of new homes is now falling relative to total supply, underscoring that meeting this new demand will require faster new home construction. Single family housing starts are rising relative to total starts, a significant change since the financial crisis ended when multifamily dwellings dominated construction activity, as commercial/financial developers were the only ones with easy access to financing. The upshot is that good value in the S&P homebuilding index should be realized. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM. bca.uses_in_2016_06_22_002_c1 bca.uses_in_2016_06_22_002_c1

The decline in global bond yields and negative interest rates abroad represents a windfall for U.S. housing, to the extent that U.S. mortgage rates are lower than they otherwise would be. The latest plunge in yields is translating into a clear acceleration in mortgage demand, as proxied by the advance in mortgage purchase applications. That is a leading indicator for home sales, the lifeblood of the homebuilding industry. Importantly, the financial incentive to buy a home is high and rising, given the attractiveness of owning vs. renting, and the growing gap between house price inflation and mortgage rates. It is no wonder that the latest National Homebuilder's Survey recorded a sharp jump in sales expectations, heralding faster top-line growth ahead. That should be sustainable, as discussed in the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM. bca.uses_in_2016_06_22_001_c1 bca.uses_in_2016_06_22_001_c1