Sectors

The S&P rail index has bounced off its lows but continues to lack profit support to extend the recovery attempt. Total railcar shipments remain under pressure, which signals ongoing weak utilization rates and low odds of a reversal in selling price deflation. Coal markets are likely to stay under pressure as a consequence of high utility coal inventory levels, as electricity production was adversely impacted by an unseasonably warm North American winter. The latest retail sales report was also soft, and has sustained downward pressure on the retail sales-to-inventory ratio. That can be a decent leading indication for intermodal railcar shipments, the largest freight shipping category. Thus, despite attractive valuations and aggressive cost cutting efforts, we maintain a neutral weighting, preferring another industrials group to benefit from a slightly more reflationary tone in overall markets, please see the next Insight. The ticker symbols for the stocks in this index are: CSX, KSU, NSC, UNP. bca.uses_in_2016_03_16_001_c1 bca.uses_in_2016_03_16_001_c1

If the EM rally is sustained, the Fed will once again become resolute in its commitment to hiking interest rates. This in turn will spur another relapse in EM risk assets. Chinese policymakers are attempting to juggle contradictory objectives without a clear and realistic plan of action to resolve existing problems.

A Chinese reflationary cycle is unfolding. Capital spending is showing signs of regained vigor, driven by both housing and infrastructure. Chinese PPI deflation will ease further. This will help reduce balance sheet stress of materials producers and boost overall industrial profits. Remain positive on Chinese investable stocks.

Materials stocks have traditionally been late cycle plays, as earnings outperform when the economy is heating up and global resource utilization is burgeoning. That is not currently the case, as the global manufacturing sector is battling recessionary conditions. As long as this backdrop persists, it will be difficult for materials stocks to sustain any rallies. True, Chinese money growth has perked up, but this may not lead to increased manufacturing activity and/or import demand, given high existing debt-loads, weak export growth and soft domestic activity measures such as real estate and fixed asset investment. Meanwhile, global trade remains poor. The Baltic Dry Index continues to sink, signaling ongoing weakness in global trade (top panel). That will sustain downward pressure on capital goods prices. Our materials sector pricing power proxy continues to contract, and our sales-per-share model is heading south. The implication is that the negative side of operating leverage has not yet fully played out. To make matters worse, the sector is carrying excessive leverage, warning that there is little room for error and/or to absorb a prolonged period of weak pricing power. Stay clear. bca.uses_in_2016_03_15_002_c1 bca.uses_in_2016_03_15_002_c1

The heavily-shorted S&P steel index has enjoyed some relief of late, as short sellers were given an excuse to cover when China announced it would attempt to shut roughly 10% of its productive capacity in the next few years. While that is a necessary development to eventually rebalance markets, there are no quick fixes. Chinese steel production has already been drifting lower for some time, but exports continue to trend higher. The country has accumulated massive inventories as a consequence of previous overproduction and sinking domestic demand growth. The sharp downturn in infrastructure investment (shown inverted) is likely to sustain upward export pressure, thereby keeping global markets oversupplied. Without a rebound in resource end markets, steelmakers must rely on other sources of demand growth such as global construction. However, even these outlets are also losing steam. The chart shows that BCA's proxy for global commercial REIT supply is contracting at a steep rate, consistent with weak steel uptake. The implication is chronic downward pressure on steel utilization rates, and by extension, pricing power and profits. We recommend selling into strength and reducing positions back to underweight. Please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are: NUE, STLD, RS, X, CMC, ATI, CRS, WOR, AKS, HAYN, SXC, TMST, ZEUS. bca.uses_in_2016_03_15_003_c1 bca.uses_in_2016_03_15_003_c1

Confirming indicators still do not validate the oversold rally. Fade the materials sector bounce, by selling steel down to underweight.

The benefit of including alternative assets in a traditional portfolio is almost at an all-time high, due mostly to increased return enhancement. This is despite the growing popularity of the alternatives industry and the larger number of entrants, which have reduced alpha opportunities.

Cutting through the hype that will surround policy initiatives today, the ECB is caught between a rock and a hard place. We explain why, and what it means for investors.

In recent travel, our clients remain focused on downside risks to today's range-bound markets. And for good reason. Uncertainty regarding Chinese reaction function is the biggest source of political risk in today's markets. We discuss it in detail in this month's report, along with an update on our views of Brazil, Russia, and Turkey. In addition, we examine the potential casualties of the European immigration crisis and the likelihood of Donald Trump becoming the president of the United States.

While high-beta equity areas have rebounded smartly in recent trading sessions, we remain skeptical that earnings-follow through will be forthcoming. Instead, our portfolio remains defensively-geared, where profit support is strongest. For instance, the latest manufacturing data showed that pharmaceutical shipments continue to boom, underscoring that top-line momentum has started on a strong foot in the first quarter. That bodes well for pharmaceutical relative performance. Elsewhere, beverage shipments have also soared on a growth rate basis, sending a similar upbeat message for the S&P soft drink index. Importantly, pricing power remains solid in both industries, underscoring that the surge in manufacturer shipments likely remains demand-driven. We reiterate our overweight position in both indexes. Defensive Industry Earnings Are On A Positive Path Defensive Industry Earnings Are On A Positive Path