THE SKINNYCG’s Monthly Market Commentary

January 2016

Cafaro Greenleaf | Market Commentary 2

with many cross-currents transpiring through global

markets. The S&P ended slightly negative for 2015, treasury

bonds (i.e. 10 year) were essentially flat even as the Federal

Reserve raised rates for the first time in 7 years; international

stocks (i.e. MSCI ex/ US) were down nearly 6%.

So what are the dynamics heading into the 2016?

AFTER A DIFFICULT END TO 2015, WE HAVE STARTED 2016

Global Growth Outlook

THE SKINNY | January 2016

The World Bank predicted the global economy would grow 3 percent this year, below a forecast of 3.4 percent made in June.

The US is raising interest rates while most foreign developed

and developing economies are still lowering them – hence, a

continued structural strength in the US dollar, which maybe

a headwind to earnings growth and asset prices.

Growth projections globally are declining – driven mostly

by China, where estimates are now for GDP growth to be

about 6% in 2016 (likely lower based on actual macro data);

the European Union and Japan which are unable to see

any visible signs of improvement despite unprecedented

stimulus by their respective central banks; emerging

markets – Brazil and China are experiencing their own

growth issues, while in India, it may take some time for

Prime Minister Modi’s reform policies to fully manifest

themselves into its economy.

Source • World Bank

2014 estimate

0 1 2 3 4 5 6 7

2015 forecast 2016 forecast

WORLD

High Income

Euro zone

Japan

United States

Developing countries

East Asia & Pacific

Europe & Central Asia

Latin America & Caribbean

Middle East & North Africa

South Africa

Sub-Saharan Africa

Real GDP Growth (%)

Cafaro Greenleaf | Market Commentary 3

Oil prices have yet to find a bottom. Despite posturing

by OPEC and rig count reductions globally, oil

prices continue to languish given the supply glut we

are experiencing compounded by a global growth

slowdown that has led to constrained demand for

crude. Albeit, there isn’t much more room to the

downside, there also doesn’t appear to be many

positive catalysts supporting a substantial rebound

in oil prices (abundant capacity stored in offshore

tankers). Moreover new supply from Iran will likely

create more medium term havoc. In short, we believe

you need a clearing of prices – a rationalization of

marginal producers in order for the market to cleanse

and have an opportunity for prices to rise.

The pace of any potential rate rise will be extremely

slow – The Federal Reserve is guiding to 4 rate hikes

in 2016. That said, we contend that it is very possible

should equity market deteriorate substantially that

they move even slower or possibly suspend any

future rate hikes.

WHY AN EQUITY MARKET SWOON IS SOMEWHAT REMOTE?

The financial health of corporations are in much

better conditions than they were during the previous

distress periods. Corporations have much lower

debt loads and their liquidity and funding ratios

are much higher. We are still in an extraordinarily

low interest rate environment that many companies

are still able to support share repurchases via new

debt issuances.

U.S. Crude Oil Inventories & Rig Count

Federal Funds Rate Expectations

Price of Oil Brent Crude, Nominal Prices, USD/barrel

Source • JP Morgan research

Million Barrels, Number of Active Rigs

FOMC & Market Expectations for the Fed Funds Rate

Jul. 2008: $135.73

Inventories (incl. SPR) Active rigs

Jun. 2014: $111.93

Dec. 2008: $43.09

Dec. 2015: $38.01

1,200

1,150

1,100

1,050

1,000

950

‘13 ‘14 ‘15

2,500

2,000

1,500

1,000

500

0

7%

6%

5%

4%

3%

2%

1%

0%

$160

$140

$120

$100

$80

$60

$40

$20

$0

‘99 ‘03 ‘07 ‘11 ‘15 Long run

0.38%

1.38%

2.38%

3.25%

FOMC Dec. 2015 ForecastsPercent

2015 2016 2017 2018

Change in real GDP, Q4 to Q4Unemployment rate, Q4PCE inflation, Q4 to Q4

2.15.00.4

2.44.71.6

2.24.71.9

2.04.72.0

2.04.92.0

Longrun

3.50%

0.84%

1.35%

FOMC year-end estimates

Market expectations on 12/16/15

Federal funds rate

FOMC long-run projection

Source • JP Morgan research

Cafaro Greenleaf | Market Commentary 4

Since we will continue to be in a low interest rate

and slow growth environment – large cap value

oriented names tend to outperform other styles given

their dividend orientation which can substitute for

bond yields. Large caps tend to outperform small

caps during periods of heightened volatility owing to

their ability to access the capital markets and more

defensible business models.

WHAT IS GOING TO BE MORE FAVORABLY POSITIONED AND WHAT IS GOING TO BE MORE CHALLENGED?

Within fixed income, treasuries and investment

grade corporates and agency mortgage back

securities should continue to out-perform as they

have throughout 2015. Given what we have seen

in the high-yield market (depressed oil prices),

investors’ appetite for more credit sensitive bonds

will be muted. Moreover, we believe non-US fixed

income will continue to be challenged given that most

foreign central banks are devaluing their currencies.

Empirical evidence also shows that active

management is more favorably inclined than passive.

The reason is that active managers are able to

allocate their holdings more to defensive areas such

as value, and more specifically utilities and REITs,

which are less sensitive to economic conditions.

Sources : JP Morgan Research and Bloomberg.com

Source • Interactive Investors

MARKET PHASE Bottom

20%Improving but

ignored

30%Solid underlying

performance

Value

Growth

40%Sweet summer of

growth

20%Optimistic, long-

duration projection

30%Overawareness of

deteriorating conditions

20%Attractive, but no

takers

20%Abundant bargains

30%Willingness to

pay up

20%Revised models justify stretching

20%Shocked recognition of outlandish prices paid

60%Exhaustion, disbelief

& demoralization

60%Doubt, ref lection

& conversion

30%Faith, hope

& charity

60%Euphoria, greed &

extrapolation

50%Fear, panic & loathing

Early Stage Recovery

Mid-StageBull Market

Peak of Bull Market

Bear Market

INVESTMENT STYLE

FUNDAMENTALS

VALUATION

PSYCHOLOGY/ TECHNICAL

General vertical direction (but not

horizontal direction) of recent price

movements

Balance Sheet