Risk-Adjusted Return Monitor Summary & Views

a global macro investment newsletter by Neil Azous

Morning Edition | November 26, 2018

Risk-Adjusted Return Monitor

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* Highlights the largest overnight positive and negative risk-adjusted returns across 160+ market proxies

Summary & Views Contents

It Is Worse Than Just Positive Seasonality Being Negated Summary & Views Top Observations . It Is Worse Than Just Positive Seasonality Being Negated Tracking Portfolio . Credit – Risk Is Spreads Widen Today Economic Data . Tracking Portfolio – New Trade – Short France CAC 40 index

. Tracking Portfolio – Performance – November 23, 2018 COB: WTD +0.26%, MTD - 0.55%, +4.61% YTD net Tracking Portfolio

Tracking Portfolio Admin – Schedule Twitter @sbstimestamp Bloomberg MCRO The next edition of Sight Beyond Sight will be delivered on Wednesday.

Any updates to the tracking portfolio will be sent via Twitter (@sbstimestamp) or Links Bloomberg (MCRO).

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It Is Worse Than Just Positive Seasonality Being Negated

Numerous positive performance statistics are associated with fourth quarter calendar seasonality. Given the weakness in risk assets in October, added emphasis was placed on positive seasonality for a turnaround in risk assets. Here are the standard periods analog-enthusiasts focus on:

. November-December . November-December from the eve of the midterm election . The week of Thanksgiving . Santa Clause rally

As stated in previous editions of Sight Beyond Sight, this year’s heavy focus on positive seasonal analysis disregards the key cyclical ailment – that is, tighter financial conditions. if you add in the filter of tighter financial conditions – higher yields or wider credit spreads – leading up to November, the market rallies less than half the time into the end of the year, and when it does, the average gain is less than 0.75%.

. US Financial Conditions: We monitor the Goldman Sachs US Financial Conditions Index (GSUSFCI) Index because it was created by former New York Fed President, William Dudley, when he worked at GS, and is incorporated in the Fed’s DSGE model for conducting monetary policy. As you can see, financial conditions have now roundtripped back to the start of the Fed tightening cycle.

. Monetary Offsets Fiscal Policy in 2019: By next year, tighter financial conditions from the Fed are set to completely offset increased spending & tax cuts. (Source: Goldman Sachs)

Here is a list that argues the positive seasonality has been negated:

1. SPX confirms technical correction, closes -10% from September 20th closing high.

2. Thanksgiving Week: SPX -3.79%, INDU -4.44%, NDX -4.95%, the biggest weekly percentage drops since March.

3. Last week, NDX made a new intraday and closing low. The S&P 500 had the lowest close since June, which is more relevant than the October intra-day low.

4. All index weakness occurred on a “weekly” closing basis.

5. SPX is well below the 55-week moving average, the common denominator for why this correction is different than most others since 2009.

All that said, investors who use statistics should be less concerned about yesterday and more worried about tomorrow. Also, if you use analogs as part of your discipline, to be balanced, then you must adhere to negative statistics as well.

Here are some examples of what we mean by “tomorrow” and the “negative” statistics.

1. Thanksgiving week was the 3rd worst since 1950, and it was the 2nd time since 1950 that the SPX dropped at least -1.5% on both Monday and Tuesday of Thanksgiving Week (the other being 1973). And what happened over next 10 days? The SPX fell -11.5%. (Source: Odd Stats)

2. Cyber Monday has been “a thing” since 2005. Since then, SPX has been negative 11 of the 13 Cyber Mondays (85% of the time). In fact, SPX has not been positive on Cyber Monday since 2011.

a. Note, in 2011, the S&P 500 rallied +7% and Euro Stoxx 50 +11% over the next 7 days in advance of a summit to save the Eurozone. The parallel for those holding out “hope” is this weekend’s G20 meeting.

3. Last Wednesday, the SPX 38-day simple moving average (SMA) crossed under the 200-day SMA for the first time since January 4, 2016, when SPX dropped 10% over the next month. Not coincidentally, the 38/200-day SMA cross-over coincided with the last two times WTI crude oil fell 25-35% in the preceding 40-60-day period. The key point here is that the 38/200-SMA cross-over is the “death cross” used for a leading indicator, not the traditional 50/200-SMA cross-over.

4. Liquidity Reminder – Fed Quantitative Tightening (“QT”): November 30th is a Fed SOMA day, $24.9 billion is expected to be withdrawn.

We highlight all these examples because the biggest downside moves almost always occur when the market is more than mid-way to re-testing the lows or oversold. WTI crude oil is classic example over the last several trading days.

At a minimum, the “W-shaped” recovery that was supposed to materialize with the help of the positive seasonality was negated on a “weekly” closing basis last Friday. This is important to recognize because it was everyone’s favorite technical pattern to play a bounce back to the highs and where the SPX found a bottom during the correction last April.

Regarding the last positive seasonal – Santa Claus rally – that is an eternity from now and predicated on what the Fed says on December 19th.

Credit – Risk Is Spreads Widen Today

Last week, WTI crude oil had the biggest move ever in volatility terms. The CBOE Oil ETF VIX Index (OVX) increased to 65 from 40, or up 60%. On Friday, the OVX index jumped 13 points or 26%.

Next, WTI crude oil has fallen ~$27 from the October high. The United States produces ~11mm/bpd. The decline in crude oil equates to ~$9 billion of lost revenue per month, or $110 billion a year.

As a yardstick, the entire industry is only valued at ~$1 trillion.

We highlight this because the cash credit market closed early last Friday and the volume in credit-related ETF’s – JNK, HYG, LQD, etc. – was significantly lower because of the holiday period.

Put another way, if crude oil does not stabilize, there is a high probability credit will play catch up today (i.e., spreads widen) because of Friday’s weakness in crude oil.

Tracking Portfolio – New Trade – Short France CAC 40 index

The French CAC 40 Index is displaying multiple bearish technical formations on the weekly chart – a broadening top pattern and break below the 200-week moving average.

Like the German DAX Index’s classical technical patterns – H&S Top, Diamond formation, 200-week MAVG – this price structure typically arrives at the conclusion of a bull market, is a bearish development, and can take months- to-years to develop.

Here are the identification guidelines used to confirm the broadening top.

Source: Thomas N. Bulkowski

The best method for trading a broadening top chart pattern is to wait for a break of the second bottom in the formation, after the third and final peak has been put in. The price target for a broadening formation is 2/3 from the beginning of the bull move to the highest peak of the broadening top formation.

We view the 200-day moving average (DMAVG) as a short-term trend change, the 55-week moving average (WMAVG) as a medium-term trend change, and the 200-week moving average (WMAVG) as a cycle change.

A broadening top and a cycle change are a technical combination we cannot ignore.

Earlier this morning, we sold short French CAC 40 futures (CFZ8).

Below is a trade matrix with a pre-defined game plan for managing gains and losses.

The trade was sent out in real-time via Twitter (@sbstimestamp) and Bloomberg (MCRO).

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Top Observations

Markit Tidbits

. US Data: Dallas Fed expected to show a mild deterioration this afternoon (e: 24.5 from 29.4). Odds are that the consensus is underestimating the impact from oil price crash. (Source: Nordea)

. Geopolitics: President Trump has to jawbone down oil and talk-up SPX while this is happening:

o North Korea not responding to US offer for talks (Source: South Korea press) o Russia seized Ukraine naval ships o Chemical weapons used in Aleppo, Syria o Mexican border closed

. Italy: Salvini is suggesting that a budget deficit forecast of 2.2% of GDP rather than 2.4% of GDP might be acceptable. This emphasizes that deficits in Europe are about political spin not economic reality. Economists cannot make a reliable forecast of a 0.2% deficit change. If we get the number before the decimal point right, we congratulate ourselves. (Source: UBS)

. Brexit: The British Parliament will probably reject Prime Minister Theresa May’s Brexit deal, but then approve it on a second attempt amid market pressure. We reckon this prediction is now the consensus view in financial markets. (Source: UBS Wealth Management, chief economist Paul Donovan)

o Tory dissenters and opposition parties, including Labour lawmakers, reject the deal, as the ambitious wording in the political declaration on the future ties is “not going to significantly change the prospects” of it getting through Parliament o After it’s rejected, a vote of no confidence against the government “will almost certainly” be triggered, but is likely to fail, “as nobody wants no government with two weeks to go before Christmas and three months before a hard Brexit.”

Money Flow

. Lipper For the week ended 11/21/2018

o ExETFs - All Equity funds report net outflows totaling -$7.113 billion o ExETFs - Domestic Equity funds reporting net outflows of -$5.410 billion o ExETFs - Non-Domestic Equity funds reporting net outflows of -$1.703 billion o ExETFs - Emerging Markets Equity funds report net inflows of $0.091 billion o Net inflows are reported for All Taxable Bond funds of $4.470 billion, bringing the rate of outflows for the $2.755 trillion sector to -$0.001 billion/week o International & Global Debt funds posted net outflows of -$0.080 billion o Net inflows of $0.287 billion were reported for Corp-Investment Grade funds o High Yield funds reported net outflows of -$2.191 billion o Money Market funds reported net inflows of $18.306 billion o ExETFs - Municipal Bond funds report net outflows of -$0.780 billion.

. Fund Flows – Bond Outflows Greater than Equity Outflows: Equities saw an outflow $0.9b in the week through Nov. 20, compared to $7.3b outflow from bonds. (Source: EPFR data, BAML, Jefferies)

o ETF inflows were $9.6b and mutual fund outflows were $10.5b o Investment-grade bond fund outflows were $3.7b, similar to high-yield bond outflows at $3.1b . Global HY and IG corporate bond funds saw combined outflows of $5.7b in the week ended Nov. 21, while European bond funds also experienced outflows . Government bonds recorded a $3.3b inflow. th o U.S. equity funds saw $1b exit, Japan saw $0.6b inflow and Europe lost $1.9b, their 7 straight week of outflows o U.S. large-cap funds saw $2.4b inflows and U.S. small-cap funds saw $0.5b exit o Chinese mutual funds saw inflows of $62m, substantially below the weekly purchase of $835m during a 17-week buying streak

. UK Flows: Investors have withdrawn more than $1 trillion from UK focused equity funds since the Brexit referendum vote passed in 2016. (Source: EPFR data)

. Bank Loan ETF – BKLN: The $6.4 billion Invesco Senior Loan ETF, ticker BKLN, has seen 7 straight days of outflows, with investors pulling about $660 million since Nov. 13. More than $129 million came out on Wednesday alone, which reduced the fund’s assets by 2%. Assets now stand at their lowest in more than 2 years. (Source: Bloomberg)

o Turnover: 29 million shares of BKLN, worth $654 million, on Tuesday, a record trading day for the fund and more than eight times its average daily turnover for the past five years.

Trade War

. Expectations are low for anything substantial to come from the Xi-Trump sit down. The one positive takeaway from this is that the bar is low for an upside surprise. (Source: Citigroup)

. Cost Per Citizen: Trade wars will only result in economic losses, most of which end up in the countries directly involved (the US and China), but also negatively affect third parties. Based on current knowledge, we expect global economic growth as result of the trade war to end up 0.7ppts lower in 2030 compared to our benchmark scenario (no trade war). In case of a further escalation, global economic growth will be 2.0ppts lower in 2030In China, the current and announced measures shave off 1.6ppts of economic growth (400 USD per Chinese citizen) in the long-run (2030), and could be as high as 5.7ppts (1,500 USD per Chinese citizen) in case of a full-fledged trade war. The US will have to absorb economic losses of 0.9ppts to 1.6ppts (600-1,110 USD per US citizen), respectively. (Source: Rabobank)

. Risk premium carried by different markets for a trade war that lowers global growth significantly. (Source: JPMorgan)

o Methodology: Compare past year’s actual returns to those predicted by a one-variable regression relating them to the level of the global JPM Manufacturing PMI index. The greater the residual, the greater the risk premium for a trade war that damages global growth.

Central Banks

. Fed’s Favorite Measure of Inflation: The consensus month-over-month reading is 0.2% for October. However, if the core PCE deflator posts a 0.1% gain for October, it will push the year-over-year advance down to 1.8%, which would be the lowest reading in 8 months.

. ECB - The Case for a New TLTRO: We believe there are compelling macro- and micro-economic reasons for a new TLTRO, and now expect the ECB to announce a round of TLTRO funding in December or early 2019. Macroeconomic challenges are stacking up: external demand has fallen as risks related to trade, Italy, Brexit and China’s slowing growth have proliferated. As such, we see TLTRO III as an effective way for the ECB to prevent a tightening in lending conditions at a time of growing macroeconomic risks. (Source: Barclays)

. ECB - TLTROs and MREL will be the main drivers of the primary market for European banks in 2019. (Source: Santander)

Cross Asset

. VIX Inconsistent with Flattening Yield Curve: It is always important to compare narratives in different markets to see if they are consistent. The narrative at the moment in rates is that the economy is late cycle and the flattening yield curve is signaling that a recession is coming soon. Equities, on the other hand, are driven by idiosyncratic stories and not worried about the risk of a recession. Both these stories cannot be true. If the signal from the yield curve is correct then equities and VIX should be more worried. The bottom line from the chart below is that either the yield curve will soon begin to steepen or VIX will soon begin to move higher. (Source: Deutsche Bank, Chief International Economist, Torsten Slok)

Equities

. S&P 500 – Playing for +0.82% Only: We still have a week of November left, but here is a list of every year (since 1950) where SPX was negative YTD at the end of November and then how it did that December. In general, it was green, including 8 of the 9 events since 1982. (Source: OddStats)

o 1987, 1984, 1978, 1970, 1956: That's every year since 1950 that SPX was negative YTD at the end of November but finished positive for the entire year. None of those years saw an annual return of more than +2.6% (1956).

. Poor China IPO Performance: Of the 36 IPO’s above $100mm in Hong Kong this year, the average performance is a 7.9% loss. Those with a higher retail subscription rate have suffered larger losses. (Source: Bloomberg)

. US Equities – Not At Capitulation Levels (Source: Jefferies)

Foreign Exchange

. British Pound Sterling (GBP): Our working assumption is the House of Commons will pass the Brexit bill on 10 December (or whenever the vote is held). If the House of Commons passes the Brexit bill, we expect GBP to enjoy a limited rally of around 1to 3%. But if the House of Commons does not pass the Brexit bill, we expect GBP to slump by at least 3%. (Source: Commonwealth Bank of Australia “CBA”)

. Euro (EUR): If there's downside potential in USDCNH, then there's less downside room in the near term for EURUSD. In the last six months or so, the correlation between these two fax pairs has been even closer and a ‘deal' to ease US/Chinese tensions would help pout a solid floor under EURUSD. It's just a pity that the poor PMI data we saw on Friday (for Germany and the Eurozone) put a cap on EURUSD at the same time, leaving us in a 1.1300-1.1450 range. Italian budgetary emollience is helping the euro too, but we need to break 1.1450 to change the mood. The same goes for risk sentiment more broadly, probably. (Source: SocGen)

. Short NZDNOK: The ripple effect of the end of easy money has generated cross-asset market stress through the likes of equities, credit and commodities. The latest crude oil sell-off reflects a mix of geopolitics and supply/demand but we also think that QT amplifies greater two-ways across global markets. Higher volatility is the consequence. In turn, the combination of European politics and the oil shock have clobbered NOK. NZD, for its part, has seen external and local drivers offer it some tailwinds. Even so, our models underscore the disconnect between NZDNOK and cyclical drivers, implying roughly a 5% gap from implied fair value. Our pricing of global macro themes also highlights the stressed price action while positioning implies that the market is flat NZD. Against a backdrop of heightened macro stress, we find mean-reversion and valuation trades more attractive than momentum into yearend, suggesting that this cross comes back down to Earth (Source: TD Securities)

. Chinese Yuan: PBOC net FX purchase data (a proxy for intervention) showed the authorities were in the market for a second month in a row in October. Intervention was around $17.4bn in Sep and $13.1bn in Oct, after being absent since Jan 2017. Clearly not wanting CNY to weaken past 7. (Source: ANZ, Head of Asia Research, Khoon Goh)

. 2019 Global FX Outlook - Top 10 FX Trades: US growth outperformance, driven by fiscal expansion and deregulation, drove global growth de-synchronization and the 2018 USD rally. Now, higher funding costs and fiscal tailwinds subsiding should see this process reverse. Rising capital demand in Northern Asia and Europe should reduce their excess savings, weakening global liquidity conditions and supporting asset volatility. Rising capital scarcity and funding costs should render foreign-financed economies like USD vulnerable to FX weakness while capital exporters like EUR and JPY should rise. USD weakness and cheap valuations should keep EM supported. (Source: Morgan Stanley, Hans Redeker, James Lord)

o 1) Short USD vs. EUR, SEK basket - Bullish EZ inflation and integration outlook while US growth slows o 2) Short USD/JPY - Japanese repatriation and a US growth slowdown o 3) Short AUD/JPY - Weak household balance sheets, tighter liquidity conditions and repatriation

o 4) Short AUD, NZD, CAD vs. SEK, NOK basket - Strong EU performance contrasts w/ weak balance sheets o 5) Short CHF/JPY - Diverging repatriation support and more European integration o 6) Long BRL/MXN - Policy uncertainty and fiscal slippage risks are likely to weigh on MXN o 7) Short USD vs. ARS, ZAR, IDR basket - Select high-yielding EM FX supported by high carry & weaker DXY o 8) Short USD/INR - Strong growth, wide real rate differential, weaker oil and high FX carry o 9) Short CHF/CZK - Stronger EUR and EM sees CZK outperform o 10) Long SGD/CNH - Effective way to short the CNY NEER basket as China slows down

Fixed Income

. Reasons why QT won't drive UST yields up much. (Source: Capital Economics)

. Italy: Reiterates bullish BTP call on 1) a lot of bearishness priced in @ 300 over 2) possible change in gov’t positive 3) rating agencies will not lead but follow 4) january has big BTP issuance, so call is into year-end only. (Source: SocGen)

. History - Yields: 2 year notes will be 70 bp's lower in yield 3 months after....10 year 65 bp's lower in yield 3 months after the final hike. (Source: JPMorgan)

. Municipal bonds currently yield more than corporate bonds after taxes at the 24%-and-above tax brackets. (Source: Barclays)

Credit

. CoCo Bond Universe – the "ring of fire": Currently with the 3 musketeers DBK, UCG, ISP but SocGen and Santandar crawling up too. Historical yield (inverted) vs. share price charts follow. (Source: KP, MacroTechnicals)

. US IG & HY credit: Current market points to recession starting in spring of 2020. Chart shows change in US IG and HY credit spreads 2 years before/after start of US recessions. (Source: JPM via FT Mackenzie)

Commodities

. Copper: For the first time this century, the generic copper futures contract (HG1) formed a death cross last week on the MONTHLY chart. The 50- crossed down and below the 200-month moving average.

o Support Levels: 263.35, the 50-month MAVG & 263.94, the 200-month MAVG. Friday’s close 276.65.

. Iron Ore: Iron ore traded on the Dalian exchange traded limit down overnight. There was speculative reports that Chinese steelmakers were offloading inventories ahead of a ratchet lower in prices in 2019. (Source: CBA)

. Analogs – Crude Oil: Seven straight weeks with a lower close than the week before. Last streak that went this long (Jun-Aug '15) lasted 19 weeks. (Source: OddStats)

o This is now the 10th time since 1983 (and 7th time in 20 years) that crude oil has dropped -34% (or more) in 40 trading days (or less). Here are the biggest spikes over the NEXT 50 trading days (from market close, the first day crude was down -34% or more within 40 days).

China

. Can’t Make This One Up: A Chinese building products firm bought a Michelangelo's painting and its shares jumped 26%. It'll finance the purchase by issuing shares to "open the opportunity of shared ownership of its acquired masterpieces to anyone with a brokerage account.” (Article)

. Yield: The CSI 300's dividend yield is 2.54%, surpassing the 1-year government rate of 2.51%. It's the first inversion in two years. (Source: Bloomberg)

Sell-Side Strategy & Calls Of Note

. S&P 500 To End Next Year at 2,400 as Recession Looms: The S&P 500 will fall toward a bear market decline of 20 percent next year as the economy approaches a recession (Source: Societe Generale, strategists, Roland Kaloyan, Charles de Boissezon, dated 11/21/18)

o Forecast the S&P 500 to end 2019 at 2,400, a 10% decline from its recent price and a 18% drop from its peak in September o Sees U.S. recession starting in early to mid 2020 o “We see downside potential to global equity indices for the next 12 months, with poor performances likely to be concentrated in 2H as investors discount the next US recession” o Europe: 2019 target for EuroStoxx 50: 2,800, or down 11% from its recent close o Japan: Target for Nikkei 225: 21,400, little changed from where it is now o “The challenge will be to balance the risks of a prolonged economic cycle (resulting from continued central bank liquidity injections) against the opportunities offered by solid companies and undervalued (sometimes oversold) segments” o Upgrades consumer staples to neutral from underweight o Cuts consumer discretionary to underweight from overweight o Cuts technology to neutral from overweight o Remains overweight on health-care, energy, financials and raw materials o Remains underweight on industrials, real estate, utilities and telecoms

. Now Is Wrong Time To Sell Equities: Investors shouldn’t be selling stocks at this point given the recent sharp drop in equity valuations and as risks of a global recession remain limited (Source: HSBC Private Bank, Chief Market Strategist, Willem Sels, dated 11/21/18 via Bloomberg)

o Maintains a small overweight in stocks, with a preference for U.S. market; sees long-term structural opportunities in Asian emerging markets o Increasingly focuses on quality stocks, such as companies with sustainable earnings; has a defensive tilt in Europe and a neutral exposure to cyclicals in the U.S. o Is underweight European stocks overall because of less supportive earnings outlook vs U.S., valuation discount vs U.S. has narrowed after the U.S. sold off, and because expects the euro to weaken further, which will weigh on foreign investors’ returns o Has been holding “more cash than usual in recent months,” was looking for a better entry point; says after recent correction, equities are “now better valued” overall o Investors could balance risks of buying equities by adding to gold and to high-rated USD corporate credit

. Credit-Market Sell-Off May Have Further to Go: Correction in credit markets may continue due to rising idiosyncratic risks, poor liquidity and an economic slowdown. (Source: BNP Paribas)

o “We are in the process of a late-stage business cycle unwind and as such the recent risk-off move may have further to go,” o “Credit valuations do not seem consistent with the fundamentals in both IG and HY,” o “In spite of the recent spread widening credit markets are still expensive” o Default rates may pick up next year and into 2020 due to “daunting refinancing schedules” even if low lending standards will ease short-term pressures o Leveraged loans, the only credit market to deliver positive 2018 returns, may also suffer if there is a further correction due to the rise in covenant-lite and second lien loans

. 2019 Asia EM Equity Outlook - Clouds to Clear: We double upgrade EM to OW and upgrade Japan to OW from EW. We expect Value to continue to outperform Growth and map out signposts for how we could upgrade China to OW. (Source: Morgan Stanley, Jonathan Garner)

o We are double upgrading EM to OW today and raising Japan from EW to OW as part of a global call to prefer ex-US equity markets to the US in 2019. Base case upsides to our Dec. 2019 targets range from 11% for Topix to 7% for MSCI China. We think EM GDP growth and earnings growth differentials versus the US should narrow going forward. Meanwhile, absolute - and to a lesser extent relative - valuations have de-rated in both EM and Japan sufficiently to compensate for many key uncertainties: China easing cycle / US trade policy / reform implementation in Brazil and South Africa / elections in 2019 in India and Indonesia. Consensus forward P/E for EM is at the 15th percentile of the 5-year range (and 2nd percentile for Topix).

o Prefer Value to Growth - on greater earnings achievability, resilience to rising rates and with valuation relative only partially reversing thus far from post GFC extremes.

o Continue to OW Materials - with a particular focus on Metals and Mining. Copper prices are rallying and Chinese steel prices are holding up much better than in the last cycle. Supply discipline in the sector has improved for the major producers and Chinese SOEs.

o Upgrade Korea from UW to EW, and downgrade Australia back to UW and Taiwan to EW - on relative valuations and bottom-up analyst input.

o Look to upgrade Tech Hardware in H1 if the DRAM / mobile handset cycle gets closer to the trough. We could also potentially upgrade Autos if evidence builds up for sales growth yoy in 2H turning up.

o Maintain EW China vs. EM, but watching for signposts to upgrade back to OW on low valuations and likely EPS growth re-acceleration in 2H should we get positive news on a) at least a pause in US / China trade conflict, b) accelerated policy easing targeting, and c) improving private sector business and consumer sentiment.

o OW Japan given our Blue Paper thesis on productivity led growth, ROE convergence with DM peers, low valuation starting point and the catalyst for Banks of removal of NIRP in 2Q. Key headwinds are Consumption tax hike in October 2019 and likely Yen strength.

o Close out our preference for EM US$ sovereign debt versus EM equities on improved relative valuations and similar forecast returns profiles.

o Key OW countries are: Japan, Brazil, Indonesia, India, & Thailand. Key OW sectors are: Materials, Financials (both EM and Japan).

. Bullish Japan, Topix To Reach 1,900 Next Year: Topix may climb in 2019 as loose monetary policy and cheap yen support economy. (Source:, Jefferies, Strategist, Sean Darby)

o With economy facing tight labor market and capacity constraints, stock market may see “slower top- line growth but resilient pricing power” o BOJ likely to remain super-accommodative as Fed tightens o While profit outlook is for single-digit growth in 2019 fiscal year, the equity market trades on “exceptionally cheap multiples” o Japan’s stock market is one of the world’s cheapest based on the fact that “FCF and running yield spreads are still high versus JGB yields”

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Tracking Portfolio

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Details & Disclaimer

The linked document includes FAQs regarding how the tracking portfolio is administered, and important disclaimers.

The tracking portfolio illustrations referenced within this material are hypothetical and intended for informational purposes only. No actual investments have been implemented, and any references to transactions, positions, gains, or losses on the portfolio are theoretical. Past performance is not necessarily indicative of future results.

Economic Data

Japan

Event Period Surv(M) Actual Prior Revised Nikkei Japan PMI Mfg Nov P -- 51.8 52.9 --

. Headline falls to lowest since November 2016 . New orders component falls to lowest since September 2016

New Zealand

Event Period Surv(M) Actual Prior Revised Retail Sales Ex Inflation QoQ 3Q 1.0% 0.0% 1.1% --

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RESEARCH: Rareview Macro LLC is an independent research company and is not a registered investment advisor and is not acting as a broker-dealer under any federal or state securities laws.

Neil Azous is the Founder and Managing Member of Rareview Macro LLC.

Rareview Macro LLC and Neil Azous provides research-related services to clients separate and apart from the position as a publisher/writer of Sight Beyond Sight. In that separate capacity, RVM/Azous may recommend that such clients maintain positions or purchase or sell securities discussed or mentioned in the applicable subscription newsletter. It is also possible that RVM/Azous may recommend that their clients maintain positions or purchase or sell securities that are not mentioned to readers of the subscription newsletter or that conflict with information provided in the subscription newsletter.

There are readers of this subscription newsletter that also receive services and advice from the writer as a client.

In accordance with applicable SEC and FINRA requirements, Rareview Macro LLC may have a marketing relationship with products and services mentioned in this letter for a fee.

Rareview Macro LLC, Sight Beyond Sight, www.rareviewmacro.com, www.sightbeyondsight.com, www.rvmacro.com, @neilazous, and @sbstimestamp are not an offering for any investment. They represent only the opinions of Neil Azous. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Azous’ other firms and affiliations.

INVESTMENT ADVISORY: Neil Azous is the Founder and Managing Member of Rareview Capital LLC (“RVC”), an investment advisory firm registered with the SEC.

Rareview Capital LLC may provide complimentary subscriptions of this newsletter to investment advisory clients or prospective clients.

Rareview Capital may market and use the Tracking Portfolio referenced herein with investment advisory clients or prospective clients.

Rareview Macro LLC and Rareview Capital LLC share resources, including staff, physical location, technology, data analytics, and administration.

Certain personnel of Rareview Macro LLC (i.e. Research Analysts) are registered investment adviser representatives of Rareview Capital LLC.

As registered investment adviser representatives of Rareview Capital LLC our analysts must follow Rareview Capital LLC’s Compliance Policies and Procedures Manual. Notable compliance policies include (1) prohibition of insider trading or the facilitation thereof, (2) maintaining client confidentiality, (3) archival of electronic communications, and (4) appropriate use of electronic communications, amongst other compliance related policies.

POSITION NOTICE: It should be assumed that, from time, or as of the publication date of this newsletter referencing any instrument or security in Equities, Foreign Exchange, Interest Rates, Commodities, or Credit, RVM (possibly along with or through our partners, affiliates, employees, clients, investors, industry contacts and/or consultants) may have a position in the instrument or security covered herein, and therefore stands to realize gains if the forecasts and judgments about the future presented in this communication prove to be accurate. Following publication of this newsletter, it should also be assumed that we intend to continue transacting in the instruments and securities highlighted therein, and RVM may be long, short or neutral at any time thereafter regardless of the initial position or communication.

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