Consumer Discretionary

Earlier this month we made a full shift from underweight to overweight in the S&P cable & satellite index, a sub-component of the broader media sector, in response to receding risk that cord cutting and skinnier cable packages would threaten profits. Given that the outlook for the heavyweight S&P movies & entertainment index has improved, it no longer pays to be underweight. This group has underperformed the broad market since early January, savaged by uncertainty about the outlook for key cable networks, particularly ESPN. However, if our cable read is accurate, then material and widespread deterioration in the value of high-quality specialty channels and networks is unlikely. In fact, one of the drivers of higher media spending has been recreational outlays. That improvement may reflect a delayed response to the windfall from lower fuel bills (second panel). Importantly, attendance at theme parks, movie theaters and other attractions has been sufficiently strong to generate increased ticket prices (third panel). That will buffer any advertising slippage from TV to digital. At the same time, wage inflation is non-existent. Against this backdrop, there is less risk of sustained profit margin pressure in the movies & entertainment index. Underperformance has returned valuations to an attractive level, with the relative forward P/E well below the broad market and not far above the Great Recession low (bottom panel). This warrants a lift in our underweight stance. Bottom Line: Lift the S&P movies & entertainment index to neutral, and take the S&P media group off the high-conviction underweight list. For additional details please see yesterday's Weekly publication. The ticker symbols for the stocks in this index are: BLBG: S5MOVI - DIS, TWX, FOXA, VIAB, FOX. Retuning Our Media Exposure Retuning Our Media Exposure

Sell the bounce in banks, which face a triple whammy of earnings threats. This will reduce our financials sector allocation to underweight, making room for last week's energy upgrade.

Earlier this month we made a rare shift from underweight to overweight in the S&P cable & satellite index, because fears of cord cutting and skinnier cable packages undermining profitability were no longer justified. In fact, in real terms, consumer outlays on cable have jumped to new highs. Unsurprisingly, the latest consumer price report showed that cable TV inflation is following in the footsteps of spending: the rate of pricing power growth is accelerating (bottom panel). That implies low subscriber churn, reducing the likelihood that capital spending will need to materially increase to maintain competitiveness. Importantly, cyclical share price momentum is still well below levels that have marked previous interim relative performance peaks, and should continue to climb based on the uptrend in real consumer spending (middle panel). We reiterate our upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5CBST - CMCSA, CVC, TWC. bca.uses_in_2016_04_20_002_c1 bca.uses_in_2016_04_20_002_c1

Overall consumer spending growth has been sub-par, as the windfall from lower energy prices has translated largely into a high personal savings rate rather than increased consumption growth. As a result, performance among retailing stocks has become highly fragmented, as marked divergences in spending among specific retailing industries are developing. Investing alongside top-line trends tends to pay off. The latest retail sales report showed the industries such as hypermarkets and retail drug stores are experiencing accelerating top-line momentum (top and second panels), consistent with a more discerning consumer. That bodes well for related-industry profit outperformance and valuation expansion. Conversely, restaurant sales are slipping, similar to the cautious message from the National Association of Restaurants. We are overweight retail drug stores and hypermarkets, but underweight restaurants. bca.uses_in_2016_04_14_002_c1 bca.uses_in_2016_04_14_002_c1

A lack of confirming growth indicators puts the equity advance at risk. Lift hypermarkets to overweight, stick with homebuilders and fade any small and/or mid cap relative strength.

We are confident that the reward/risk tradeoff to holding equities and high-yield corporate bonds is deteriorating and that rallies in these assets are high-risk affairs.

The self-driving car, or Autonomous Vehicle (AV), will have a profound impact on a variety of industries. However, expectations for the timeframe of commercial AV availability are too optimistic. The greatest near-term impact is likely to be from advanced safety technologies developed on the path to full autonomy. In today's <i>Special Report</i>, we discuss our expectations for the timeframe of AV development, and the effect of advanced safety technologies on the Insurance, Health Care, Semiconductors, and Automotive industries.

The self-driving car, or Autonomous Vehicle (AV), will have a profound impact on a variety of industries. However, expectations for the timeframe of commercial AV availability are too optimistic. The greatest near-term impact is likely to be from advanced safety technologies developed on the path to full autonomy. In today's <i>Special Report</i>, we discuss our expectations for the timeframe of AV development, and the effect of advanced safety technologies on the Insurance, Health Care, Semiconductors, and Automotive industries.

Our bearish thesis on the S&P cable & satellite index is not playing out. Instead of skinnier cable packages and cord cutting denting profitability, the industry has managed not only to sustain pricing power, but also to increase selling prices at a faster rate than overall inflation. The latest personal consumption expenditures report showed that cable outlays, in real terms, have begun to march higher again after flat-lining for two years. The cable industry has monopolistic properties, enjoying decades of rising 'real' pricing power. Now that real spending has reaccelerated, it will boost the odds that real selling prices will follow suit. One of our fears had been that slowing sales and rising subscriber churn would force cable providers to ramp up investment to retain customers. However, the largest cable distributors reportedly saw their total cable subscribers decline only 1% in the fourth quarter, similar to the loss in the third quarter, reinforcing that cord cutting is ebbing. The downtrend in capital spending-to-sales has been a major driver of the expansion in operating margins. If capital spending is not going to accelerate, then profit margins won't come under much pressure. We made a full shift to overweight in yesterday's Weekly Report. The ticker symbols for the stocks in this index are: BLBG: S5CBST - CVC, CMCSA, TWC. bca.uses_in_2016_04_05_002_c1 bca.uses_in_2016_04_05_002_c1

Equities are back in overshoot territory. We added the health care sector to our high-conviction overweight list, boosted managed care to overweight and put health care equipment on downgrade alert. Buy cable stocks.