Sectors

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.

Some near-term upside in Treasury yields is very likely as flight to safety flows begin to unwind. However, given that global growth divergences remain in place, we will continue to look for an opportunity to increase duration on any meaningful back-up in yields.

Financial stocks around the world have plunged, with U.S. relative performance on the cusp of setting new cyclical relative performance lows. While the sector is well capitalized and has low balance sheet risk, our negative stance is predicated on income statement concerns. Brexit represents another deflationary shock in a world struggling to generate trend growth. To the extent that faltering economic confidence further undermines business activity and sends capital to the perceived safety of the U.S. dollar, it amounts to a tightening in global financial conditions. Under these conditions, downward pressure on the interest rate structure will persist (second panel), robbing the financial sector of a much needed source of income. Thus, while the financial sector appears 'cheap', it is still too soon to consider bottom fishing, at least until deflationary pressures subside. We reiterate our below-benchmark position. The ticker symbols for the stocks in this index are: BLBG: S5FINL. bca.uses_in_2016_06_30_002_c1 bca.uses_in_2016_06_30_002_c1

While the economic fallout from Brexit is likely to play out over a long horizon as the U.K.'s exit is negotiated, this political event will have repercussions for U.S. equity markets in the interim. For instance, defensive sectors have surged, in relative performance terms. Since the financial crisis, consumers' propensity to save has steadily climbed. That has coincided with increased traffic at non-cyclical retail stores, to the extent that their sales have largely outpaced overall retail sales in recent years, which is unusual during an economic expansion. Policy and political uncertainty are likely to fuel this trend. Thus, the consumer staples sector should continue to enjoy an upward re-rating in relative forward earnings estimates. Both valuations and technical conditions are below previous overbought extremes, underscoring that there are few barriers to ongoing stealth outperformance. We reiterate our overweight position. The ticker symbols for the stocks in this index are: BLBG: S5CONS. bca.uses_in_2016_06_30_001_c1 bca.uses_in_2016_06_30_001_c1

Post-Brexit uncertainty will continue for some time. But we were already cautiously positioned, and would not go any more defensive.

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 Brexit vote has ended the reflation trade, but does not represent a "Lehman moment" either. Stick close to benchmark in terms of broad asset allocation, and watch European bank CDS for signs that another financial crisis is brewing.

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 combination of biotech stabilization and a health care facilities plateau argues for profit taking in our long/short trade between the two groups. We had exploited the valuation mismatch because hospital profit prospects were far superior to those of the biotech group, especially within the context of a soaring U.S. dollar. Now that the primary upward thrust in the currency has played out, the revenue playing field will shift to a more neutral setting, on the margin. Indeed, while hospital spending is still growing much faster than pharmaceutical exports, a proxy for relative top-line trends, pricing power has not followed suit. Against a backdrop of soaring hospital wage bills, especially relative to pharmaceutical wages, we are closing this pair trade for a profit of 10%. The ticker symbols for the stocks in both indexes are: BLBG: S15HCFA - HCA, UHS, WOOF, AMSG, LPNT, THC, CYH, SCAI, SEM, KND, ENSG, USPH, QHC and BLBG: S5BIOT - AMGN, GILD, ABBV, CELG, BIIB, REGN, ALXN, VRTX. bca.uses_in_2016_06_28_003_c1 bca.uses_in_2016_06_28_003_c1

Health care facilities equities may become the odd man out in the overall health care sector bull market. While we are not concerned that hospitals will see a drop off in activity levels, slowing revenue growth may constrain incremental valuation expansion. Hospital procedures are labor-intensive, underscoring that business models are not scalable. Hospitals have hired at the most aggressive pace in the entire history of the BLS data. Other costs are also inflating. Hospitals are one of the largest buying groups for pharmaceuticals, and the relentless advance in drug prices is profit margin sapping. The producer price indexes for physician services and medical equipment, while still low in absolute terms, are beginning to accelerate. These forces will limit earnings growth potential, especially given that they appear to have been strong enough to offset the benefit from falling bad debt expenses and low capital spending. If operating margins and ROE cannot expand in the current environment, both are unlikely to improve much if overall employment growth continues to cool, as we expect, causing a second derivative slowdown in bad debt recoveries and surgical procedures. Downshift to neutral. The ticker symbols for the stocks in this index are: BLBG: S15HCFA - HCA, UHS, WOOF, AMSG, LPNT, THC, CYH, SCAI, SEM, KND, ENSG, USPH, QHC. bca.uses_in_2016_06_28_002_c1 bca.uses_in_2016_06_28_002_c1