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We went overweight the S&P agricultural chemicals index in early May, a contrarian bet to take advantage of extreme bearishness, undervaluation and the potential for a rise in underlying commodity prices. Since then, a rise in industry M&A activity has borne out our thesis of cheap valuations, generating solid relative returns. Nevertheless, operating conditions may be slower to improve than originally anticipated. Burgeoning wheat and corn harvests this year threaten to keep the supply/demand balance for grains out of whack for another year. The USDA forecasts a hefty surplus in both key commodities. When grain prices advance, farm incomes receive a shot in the arm, providing farmers with both the means and the confidence to increase planting acreage, thereby boosting fertilizer demand. If food prices stay soft, then that positive dynamic is not going to take hold on a cyclical horizon. Instead, farmland prices will stay near cyclical lows, and agricultural-related credit availability will continue to tighten. The latter is already at a 10-year low, reflecting reduced farm incomes. Consequently, we recommend taking profits and downgrading to neutral. Please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5FERT - MON, MOS, CF. Take Profits In Ag Chemicals Take Profits In Ag Chemicals

Equities are celebrating domestic economic disappointment rather than re-pricing the risk of ongoing profit struggles. This reinforces that liquidity and share price momentum are still the dominant market forces.

Steel share prices celebrated the introduction of punitive import tariffs earlier this year, but that impact may already be wearing off. The latest data show that U.S. steel imports, while still well below the 2015 peak, have hooked back up, and are rising as a share of domestic production. China's steel prices have plunged, and are well below U.S. prices, a trend that may continue given that Chinese steel production has reaccelerated. Consequently, Chinese steel exports are likely to rise anew, especially given that floor space started is moving laterally and infrastructure spending growth is cooling rapidly (shown inverted, second panel). Less domestic consumption implies increased pressure to export. While U.S. producers may stay somewhat insulated given trade barriers, it will be difficult for U.S. steel prices to rise if prices in the rest of the world are deflating. Balance sheets remain stretched, as measured by historically high net debt/EBITDA ratios, underscoring that risk premiums will increase if low steel prices pressure cash flow. Stay underweight. The ticker symbols for the stocks in this index are: BLBG: S15STEL-NUE, STLD, RS, X, WOR, ATI, CMC, CRS, AKS, HAYN, SXC, TMST, ZEUS. (Part II) Steel Stocks Are Likely To Buckle (Part II) Steel Stocks Are Likely To Buckle

The excitement surrounding steel stocks earlier this year on the back of the liquidity-driven bounce in commodity prices, whiffs of stabilization in Chinese economic growth and new steel import duties is diminishing. We used the rally to reduce positions back to underweight several months ago, as valuations overshot on the back of short covering. We remain concerned that relative performance downside risks have not abated after failing at a key trend line. New orders for steel products continue to contract, signaling that underlying steel commodity prices are at risk of sinking anew. Importantly, new vehicle sales have leveled off, and total construction spending growth has downshifted to almost nil. The implication is that steel demand is likely to stay sluggish in the coming quarters. To make matters worse, China appears likely to ramp up export activity, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S15STEL-NUE, STLD, RS, X, WOR, ATI, CMC, CRS, AKS, HAYN, SXC, TMST, ZEUS. bca.uses_in_2016_08_25_001_c1 bca.uses_in_2016_08_25_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.

Overweight Our early-May upgrade of the S&P agricultural chemical index proved timely, as Bayer launched a bid for Monsanto, sending the index up sharply. It is tempting to book gains, but if underlying profit drivers continue to move in a bullish direction, share prices should have further to go before extreme bearishness will normalize. Raw food prices continue to grind higher, and are likely to receive an assist from a weaker U.S. dollar now that the market is pushing out the imminence of future Fed rate hikes. The world grain stock-to-use ratio is still well below average, despite soft demand in recent years, and could fall further given the production decline. That is supportive of food prices, and should help farm incomes stabilize and boost credit availability. As shown in the May 9th Weekly Report, farm cash rents were already off their lows, a positive sign for underlying property valuations and a critical factor determining capital availability. It wouldn't take much of an increase in fertilizer demand to overcome depressed relative forward earnings expectations. We recommend staying overweight, despite the 12% gains that have accrued in such a short time span. The ticker symbols for the stocks in this index are: BLBG: S5FERT - MON, MOS, CF, FMC. bca.uses_in_2016_06_08_001_c1 bca.uses_in_2016_06_08_001_c1

Risks to global growth remain to the downside. Selling pressure in cyclical markets and assets will escalate. EM currencies will make new lows versus the U.S. dollar, the euro and yen. Take profits on our long JPY/short KRW and long JPY/short SGD trades. Short KRW versus an equal-weighted basket of the U.S. dollar, yen and euro. Continue underweighting Peruvian equities.

Within an overweight allocation to Euro Area corporates versus U.S. corporates, favor single-B rated Euro Area High-Yield and Euro Area Investment Grade sectors that offer higher duration-adjusted spreads.

The bright side to higher food prices is that the S&P agricultural chemical index should finally be finished a brutal bear market. This group has been savaged by the collapse in agricultural commodity prices, worries about the return of Argentine supply and China's future import growth. The good news is that these headwinds are more than discounted. The share price ratio is close to a decade low, expectations are now extremely washed out, valuations are dirt cheap and the industry has retrenched, creating an attractive reward/risk profile. Importantly, the combination of U.S. dollar softness and two years of farming financial pain are sowing the seeds for a recovery in food prices. Global grain production contracted last year, after several years of strong growth, while shipments of pesticides and fertilizers are accelerating. Typically, food prices recover after production falls, particularly if the U.S. dollar declines. A weaker U.S. dollar boosts purchasing power in the rest of the world, which bodes well for increased food consumption, and it reduces the ability of global food exporters to flood the market and keep prices depressed. Higher food prices would stop the erosion in farming real estate values after a difficult few years, a necessary step to improving capital availability. Already, cash rents are off their lows, a positive sign for underlying property valuations. In sum, current agricultural conditions are depressed, but we can envision a slow but steady improvement as food prices climb on the back of a weaker U.S. dollar and supply restraint, which would support narrower risk premiums in related equities. Boost the S&P agricultural chemicals to overweight from underweight, locking in a 34% profit on this call, and please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5FERT - MON, MOS, CF, FMC. bca.uses_in_2016_05_10_002_c1 bca.uses_in_2016_05_10_002_c1

Last autumn we recommended using weakness in the S&P containers & packaging index to augment positions to overweight, on the basis that that global disinflation would optimize profitability at a time when excess bearishness existed. After all, the decline in global export prices would spur an increase in the volume of globally traded goods, and packaging companies benefit from the number of goods sold rather than their value. Packaging firms primarily serve the food and beverage industry. The volume of food and beverages sold is inversely correlated with prices paid. Declining food prices lead to increased spending, and vice versa. The weak U.S. dollar is helping to boost raw food prices (shown inverted, second panel), which could put a damper on the recovery in packaging demand. The contraction in intermodal rail car shipments, mostly consumer goods, is also disconcerting, and warns that non-food packaging demand is also under pressure. Thus, even though valuations are reasonably attractive, our bias is to take profits and downshift to neutral, redeploying the proceeds into a group that benefits from higher food prices. Please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5CONP - IP, WRK, BLL, SEE, AVY, OI. bca.uses_in_2016_05_10_001_c1 bca.uses_in_2016_05_10_001_c1