- The document analyzes global economic growth trends and forecasts from 2008-2017. It summarizes The World Bank's forecast of moderate global GDP growth rising to 3.0% in 2015 and averaging 3.3% through 2017. - The strategist argues The World Bank is overly optimistic given factors like China's economic slowdown and the end of the commodity super cycle. Slow global growth is expected to continue in the near future. - Key themes discussed include diverging economic policies driving US dollar strength and deflation, China's transition from manufacturing to services, and tailwinds for short-term US growth amid a challenging global environment.

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2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
“Overall, global growth
is expected to rise
moderately, to 3.0 percent
in 2015, and average
about 3.3 percent through
2017 … on the back of
gradually recovering labor
markets, ebbing fiscal
consolidation, and still
low financing costs”
-The World Bank
December 20, 2015
Chris Kearns
Strategist
Key global themes and insights:
 Diverging economic policies leading to a
strong dollar and continued deflation
 Declining growth in China as they wane from
an old economic system comprised of
manufacturing to a service based economy
 Short term economic tailwinds fueling US
economic growth
 The end of the commodity super cycle
Global GDP (annual)
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
1.5% -2.1% 4.1% 2.8% 2.2% 2.4% 2.5% 2.5% 3.3% 3.2%
Divergingbusiness cycles telegraph volatility to come in the next fiscal year for equity markets. Domestically,the United
States steadily moves towards and expandingeconomy as cyclical businesspick up and economic growth accelerates.Other
developed nations (i.e. Eurozone, Japan, etc.) struggleto find footing in the global business cycleand continueto see sub-
par growth indicators.Emergingmarkets are also experiencing lowgrowth in an unforgivingcommodity downturn. The
World Bank estimates suggest the opposite and support a healthy and expanding global economy going forward for 2016
with an increasein global GDP by 3.3% YoY. Figure 1 below shows the actual global GDP figures from 2008-2014 and
estimated for 2015-2017 (World Bank).In my opinion The World Bank is overestimatingthe global economy given China’s
slowdown and the end of the commodity super cycle.There is littlereason to believe that the global economy with
continue on its slowbut steady track back to healthy 3.0% growth in the near future. Overly bullish estimates likeThe
World Bank’s can lead to falseconfidenceand have a detrimental effect in the equity markets when sentiment shifts.
To further understand the causes of slowingglobal growth a further analysisof the current economic indicators is
necessary.The economic backdrop will becrucial in determiningequity valuations and industry growth trends for 2016.
Global Strategy Outlook 2016
Equity Strategy Report
Figure 1:Global GDPGrowthYoY (%)
Source: World Bank Database

2. Quantitative Easing
Quantitativeeasinghas created cheap borrowing costs keeping rates at all -timelows and draggingbond yields down with
it. This process has been implemented across developed countries since2009 and even earlier in Japan in hopes of curbing
the effects economic recession. In Figure2 below you can see the countries that have or are currently implementing
quantitativeeasing.The Eurozone, Sweden, China,and Japan all currently utilizequantitativeeasingwhilethe United States
has discontinued quantitativeeasing.This creates divergingeconomic policies thathavecaused a largeshareof economic
and macro trends globally,namely the rapid appreciation of the dollar againstother currencies,continual declinein yield of
Non-US government bonds (more recently), and suppressed commodity prices (due to dollar denomination).
Figure 3 belowchartsthe Iron Price Index,BrentCrude Oil,CopperPrice Index,andthe DollarIndex.Afterthe
UnitedStates cut itsquantitative easingprogramdue toimprovingjobmarkets,wage growth,andoverall
economicstability,the dollarbegantorapidlyrise againstothercurrencies. FromQ22014 to Q2 2015 the Dollar
Index rose 15.9% accordingto the Federal Reserve. Figure3showsa sharp decline incommodityprices
followingthe appreciationof the dollar.Crude oil priceshave fallenover56% since Q2 2014 fromoversupplyto
the marketbut pricesare sustainednotonlybyoversupplybuta relativelystrongdollar. Thistrendwill greatly
reduce growthof emergingmarketsthatderive alarge share of GDP fromcommodities.
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Iron Price Index Brent Crude Oil Price Index Dollar Index Copper Price index
Source: FactSet & FRED
Figure 2:Countries Implementing Quantitative Easing
Figure 3:CommodityPrice Indices Since 2005

3. We can alsosee the effectof lowcommoditypricesonhighyieldspreadsasthe global energysectorhas
become riskierdue tolowerpriceswhichdirectlyaffectsrevenue andcashflow of commodityandenergybased
companies.ShowninFigure 4below,highyieldspreadsinthe UnitedStateswidenedsignificantlyinresponseto
lowerenergypriceswhile the Eurozone andEmergingmarketsremainedmore orlessthe same.GoingforwardI
expectthistrendtocontinue unlessthe underlyingfundamentalsforcrude oil change.
As expected,lowcommoditypriceshave exasperatedthe global lowinflationenvironment.Despitecentral bank
effortstostimulate inflation,inflationgrowthhasremainedlow atanaverage rate of 0.72%, 0.04%, and1.44%
for the UnitedStates,Eurozone,andChinarespectivelyonaverage forthe past12 months.Figure 5 below
showsthe steadydropin inflationrates.We canexpectthistrendtocontinue goingforwardshouldcommodity
fundamentalsremainunchangedandthe dollarremainsstrong.The UnitedStates’exportationof deflationisa
definingfactorinslowingglobal growth,butthisisdue inpart to the US economygaininggroundoverother
countriessince the GreatRecession. The goodnewsisthatalthoughthe pastyear hasbeenbelow expectations
of 2.0%, we saw an uptickcomparedto YoY (%) inflationfor2014.
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US High Yield YTW Eurozone High Yield YTW Emerging Markets High Yield YTW
Figure 4:HighYield Spreads of US, Eurozone, and EmergingMarkets
Source: FactSet & Bloomberg
Figure 5:InflationRates for US, Eurozone, & China
Source: Bloomberg &FRED
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Eurozone CPI China CPI US CPI

4. Yieldson US, Canadian,andUK bondshave seena slightuptickatthe endof thisyear aftera generallydown
yearin 2014. GermanyhascontinueditsdownwardtrendalongwithJapan.Overall,the USshouldsee its
upwardtrendcontinue hasthe Federal Reserve hasinitiatedarate hike.Japanhassuccessfullyhitits2.0%
inflationmark,whichisamilestone forthemasJapanhas seensubparinflationfordecadesanditsdeclining
spreadon tax revenue andinterestpaymentshasadded pressure forAbenomics(Japan’squalitative easing
program) to succeed.
Trade globallycontinuestoslide inAsiaandNorthAmericanwhile the Eurozone remainsconsistentlyinthe
greenfortrade growth.Worriesabouta slowingChinahave destabilizedmarketsandworriedinvestorsinQ3 of
2015. The fact of the matteris that we have beenlivingwithaneverslowingChinafor some time nowand
investorshave beenslow toconsiderthe realityof China’sslowinggrowth. Figures 7,8 and 9 below showthe
exportgrowthforChinaand importgrowthfor the Eurozone andthe UnitedStates.Figure 7revealsthatChina’s
exportgrowthhasactuallybeennegative forover13 straightmonthsdroppingbyas muchas 21.0% monthover
month.It shouldbe nosurprise toinvestorsthatChina’sGDPgrowthwas to follow suit.
Anotherkeycomponentindeterminingthe healthof global trade isthe BalticFreightDryIndex.This indexis
oftenusedasan indicatorof future global growthor contractionthat measuresthe trade activityforlarge
merchantships.Figure 10 on the nextpage showsthe BalticIndex withmovingaverage figures.
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UK Bond - 10 Year - Yield Japan Bond - 10 Year - Yield Germany Bond - 10 Year - Yield
Canada Bond - 10 Year - Yield US Bond - 10 Year - Yield
Figure 7:China QuarterlyExports
Figure 6:Government BondSpreads Globally
Source: Bloomberg
Figure 8:Eurozone Imports Figure 9:US Imports

5. YTD Sector Performance (MSCI World Index) - As of November, 2015
Consumer Discretionary 3.2
Consumer Staples 3.0
Energy -24.1
Financials -6.8
Health Care 3.6
Industrials -5.2
Information Technology 4.1
Materials -19.0
Telecommunication Services -2.5
Utilites -11.7
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Since Q1 of 2015, the BalticFreightDryIndex hasbeenona significantdownswinghittingthe lowestlevelsin
the past 5 yearsto a level of justover477. For reference inindex wasstartedin1985 witha level of 1000. Going
forwardthisindicatesthatwe will continue tosee slowerglobal growthascontractsfor large merchantships
are longertermandrequire leadtime fornew orders.ThislookscloselytiedtoChina’sslowingexports,which
we have seendecline significantlyoverthe lastfiscal year.
Giventhe bleak macro-economicoutlookitshouldbe nosurprise equiteshave performedpoorlyinthis
environment.Figure 11belowshowsthe YTDreturnsfor the 10 GICS sectorsaccording to the MSCI WorldIndex.
Energyis the clearlaggard here withadrop in24.1% overthe pastyear mainlydue tothe crude oil price decline.
Materialsdroppednearlyasmuchby 19.0% whichisa peripheral sectortoenergythatusesmanycommodities
and inputcostsfor itsproducts.As a result,the inputcostsare cheaperbut that alsoreducesthe sellingprice.
Giventhe rise inthe dollarwhichisthe currency denominationof mostcommodities,we are leftwith
companiespayinglessforinputcostsbutdue to relative currencydeflationagainstthe dollar,material company
productsbringinginrelativelylessrevenue forproductssoldtopforeignmarkets. TechandHealthCare posted
the highestreturnsinthe global marketwithreturnsof 4.1% and 3.6% respectively.Overall,the equitymarkets
have performedpoorlysofarin 2015. Lookingtowards2016, I expectlacklustergrowthtocontinue asthe
economicsshownpreviouslypointtoalongcycle of low growthand economicstagnation.
I alsoanticipate emergingmarketstostruggle hasthe low global trade andproductionwill limitindustrial and
manufacturingindustryrevenue whichisaprimaryexportof emergingmarketeconomies.The strongdollarwill
alsodecrease the value of emergingmarketgoodsleadingtolowerpotential growth.
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Baltic Freight Dry Index Baltic Freight Dry Index - 2 Mo moving avg
Baltic Freight Dry Index - 6 Mo moving avg
Figure 10:Baltic DryIndex
Source: Bloomberg
Source: Bloomberg

6. 0.0
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New Housing Starts (Left) U6 Unemployment Rate (Right)
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Consumer Revolving Credit (Right) Net Charge Offs (Left)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
OECD 4 1.4 1.6 2.1 3.2 2.6 3.0 2.6 0.2 -3.6 0.9 1.7 1.2 1.4 1.7
UK 3.8 2.7 2.5 4.3 2.5 2.8 3.0 2.6 -0.3 -4.3 1.9 1.6 0.7 1.7 2.6
Japan 2.3 0.4 0.3 1.7 2.4 1.3 1.7 2.2 -1.0 -5.5 4.7 -0.5 1.8 1.6 -0.1
Germany 3 1.7 0 -0.7 1.2 0.7 3.7 3.3 1.1 -5.6 4.1 3.6 0.4 0.1 1.6
US 4.1 1.0 1.8 2.8 3.8 3.3 2.7 1.8 -0.3 -2.8 2.5 1.6 2.3 2.2 2.4
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Source: World Bank
Figure 1: World GDP (%) Change & Estimates 2015-2017
UnitedStatesMacro Economicsat a Glance
The US has proven to be the most resilientdeveloped country sincethe Great Recession.Key economic statisticspointto
the US havingsignificanttailwinds goingforward for 2016 and it could prove to be a strong pick for equity securities
compared to other countries. Valuations remain high for domestic indices likethe S&P 500,but itmay be supported by
strong economics.
As shown above, the US remains consistently more stableand with better growth figures than other developed nations.
Going into 2016, a lot of the growth will bedependent on consumers’confidence and financial stability. Wewill explore
these growth factors and additional cyclical patterns thatcould lead to further growth down the road.
The economic cyclical patterns takingplacein the United States areencouraging. Overall unemployment is atcycle lows;
new housingstarts suggesta steadily improvinghousingmarket.Figure 14 below shows since2008 consumer debt has
slightly decreased whilebank charge-offs on debt have substantially decreased to pre-recession lows.This points to an
improved consumer balancesheet that has less exposureto defaultrisk and debt burdens.
Source: Bloomberg
Figure 12:GDPFigures for DevelopedCountries
Source: Bloomberg
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Consumer Revolving Credit (Right) Net Charge Offs (Left)
Figure 13:New Housing Starts Vs. Unemployment Figure 14:Consumer Debt Vs. Charge Offs
Source: Bloomberg

7. New construction projects haveseen considerablegrowth since2011,but when includingimprovements to existing
infrastructure,construction is down for the past5 quarters. Figure 15 below shows the YoY% growth for total new
construction put in placeversus new construction plus improvements. This implies thegrowth in new construction is
slowingand improvements have been negative for some time. The lack of new construction may leak into new housing
starts if consumer demand drops,but I expect the oppositeto take placeas other economic indicators pointto a potential
risein consumer demand, sentiment, and spending.
Increased lendingcosts is another catalystthatwill propel this trend forward (lower growth) assumingborrowingcosts rise
significantly dueto the Federal Reserve rate hike. In the figure below, the 10-yr Treasury Bond yield is plotted againstthe
Consumer PriceIndex on the right. In the latter half of 2015,the CPI hit0.0% inflation growth,which is ala rmingand well
below the desired target of 2.0-2.5%. Given the lowinflation environment and mild rate hikes, I expect rates to remain low
for all of 2016 risingby at most 150 basis points fromDecember of 2015 through December of 2016.The economy will s till
have room to rideeven with higher rates. I do not expect the higher rates to slowdown new housingstarts or construction
if consumers and business’balancesheets remain healthy through 2016.
Lower consumer credit also leaves roomfor additional spendingand will bea catalystfor economic growth going forward.
The economy in the US has been pickingup pace and I expect the CPI to continue to riseas we move into a more inflation
friendly environment. In figure16 below, the 10 Year Treasury Yield is plotted againstthe CPI.In 2015 we are much lower
than we should be, but given the tailwinds for consumers I believedemand will pick up and push the CPI back into a normal
range of 2.0-2.5%.
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Total Construction Put in Place, SA, Mil USD - YoY%
Total Private Construction Put in Place, Residential (inc. Improvements), SA, Mil USD - YoY%
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10-yr Treasury Bond - CPI - Right 10-yr Treasury Bond - Left CPI - Left
Figure 15:Total ConstructionVs Private Construction
Source: Bloomberg
Figure 16:10 Year TreasuryRate Vs. CPI
Source: Bloomberg

8. 94
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Civillian Unemployment Labor Force Participation
The civilian
unemployment rate
has dropped by
nearly 5% since 2009
while the labor force
participation rate
dropped by 3% over
the same period of
time. Employment
figures are not as
good as they appear.
We have seen the unemployment rate drop significantly since2008,buthas employment really improved enough to
supporta resurgence in the US economy or are consumer justmore confident and comfortabl ewith the state of the
economy? Figure 17 below suggests the decrease in unemployment is largely due to a reduction in labor forceparticipation.
This suggests that the unemployment situation has notreally changed drastically with only a net 2.0% increasein actual
employment, but the improvement we have seen could lead to wage growth and future economic expansion.
The casefor continued growth insidethe US is also supported by expanding consumer confidence that has been on the rise
sincethe 2008/2009 recession. Figure18 below charts consumer confidence and consumer free cash flowfrom 2005 Q3
until 2015 Q3. Consumer confidence is on a normalized scalewhere 100 is the startingpointfor the data set and is an
indicator of overall economic health accordingto consumers.Looking at the chart we see that consumer free cash flow
typically lags consumer confidencedue to the frequency of the data recorded. Consumers will immediately notice
additional cash flowbefore the data can speak for itself.This trend was clearly reversed in 2007 - 2008 when extreme
financial conditionsoccurred.Based on the data we can infer that consumer free cash flowis continuingto rise,which has
the potential to fuel equites with high domestic exposure and potential lead to margin or multipleexpansion in the future.
Consumer free cash flowis a definite indicator for potential future growth going forward. Other economic indicators
suggest we may see a slowingUS economy going forward if not in 2016 than in 2017 potentially,should the trends remain
intact.On the next page Figure19 shows the ISM PMI compositeindex versus the ISM Non-Manufacturingindex.
Consumer Free Cash
Flows = Personal
Disposable Income –
Financial Obligations
– Foot and Energy
Costs
A decline in energy
costs has boosted
CFCF!
Figure 17:Unemployment Vs. Labor Force Participation
Source: FRED
Figure 18:Consumer Free CashFlowVs. Consumer Confidence
Source: FRED

9. The PMI (PurchasingManagers Index) CompositeIndex is a comprised of five sub categories;production level, new orders
from customers, supplier delivery speed, inventory levels,and employment levels with managers ratingeach category as
“better”, “same” or “worse”. This is converted into a scalebetween 0 and 100 with higher numbers indicatinga better
purchasingindex.The business activity index measures the health of a business in a similar fashion to the PMI Index.
Overall,the PMI index has seen a sharp declinein 2014 and 2015 will the Non-Manufacturingindex has remained strong
through 2015. This indicates manufacturingsectors arestruggling(i.e.industrials/ materials),butnon-manufacturing
companies have seen conditions remain aboutthe same sincethe startof 2015. Going forward I anticipatethat added
consumer free cash flowand growing employment will ignitespendingin non-manufacturingbusiness lines and push the
Non-ManufacturingIndex up in 2016.
Despite the positiveyear for consumers in 2015,retail sales turned negative YoY for 2015.Figure 20 below outlines the
change in retail sales YoY%change from 2005 until the end of Q3 2015. We have not seen negative sales growth in the US
since2009 duringthe Great Recession.Lower automotive sales arepartly responsiblefor the decrease in retail sales
accountingfor a 0.5% drop in November and a similardrop-off in August as well. Given the stronggrowth in consumer free
cash flowand confidence, I expect retail sales to pick up in 2016 which will push consumer discretionary to be a leading
sector for returns
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Retail Sales, Total, SA - 1 yr chg % Retail Sales, NAICS, SA - 1 yr chg %
Despite a stronger
consumer balance
sheet, retail sales
have slide to a -1.0%
growth rate according
to the North
American Industry
Classification System
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Figure 19:PMI Composite Index Vs. ISMBusiness Activity
Source: Bloomberg
Figure 20:Retail SalesYoY (%) Change
Source: Bloomberg

10. YTD Sector Performance (MSCI US Index) - As of November, 2015
Growth -1.9
Small Cap -3.7
Mid Cap -2.1
Large Cap 0.0
Value -2.0
Small Cap -4.5
Mid Cap -2.3
Large Cap -0.5
Small Cap -5.2
Large Cap -1.6
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EquityPerformance forUS Markets
Overall equity performance for the US has been lackluster in 2015 due to the downturn in August which resulted from poor
economic outlook in China.Figure 21 below shows the various market returns for Growth and Valuestocks categorized by
market capitalization.Valuehas slightly underperformed growth with small cap signifiacntly underperforminglargecap
accordingthe MSCI US Indicies.
Since2008 we have seen a significantmultipleexpansion in US stocks. Figure 22 below illustrates thehistorical P/Eeach
quarter for the S&P 500. Current equity valuations for the S&P 500 sitat nearly 2 standard deviations fromthe average over
the past10 years.For the samplethis looks likethe current valuations areoutof line,however; over a longer time-horizon
valuations areactually closer to the long term historical averageof about 16 P/E.
The rapid increasein corporateprofits following2008/2009 alongwith lowinterest rates, and quantatativeeasingare
largely responsiblefor the continous multipleexpansion wehave seen sincethe Great Recession.As the Fed begins to hike
rates we should seea general multiplecontraction as barrowingcosts riseand bond yield become more attractive. We can
see further evidence of fundamental justification for multipleexpansion in Figures 22 and 23 on the next page that show
the steady increasein corporatemargins and consistentper sharefigures.
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Source: FactSet & Bloomberg
Figure 21:S&P 500 Historical P/E Ratio
Source: FactSet

11. EBITDA margins haveremained consistently high comingout of 2009 hittinga high in 2014 and droppingjust4 bps in the
most recent reporting quarter (September Q3). Profitmargins arealso atcyclehighs hittingas high as 10% in 2014.Since
2009 margins havehit record highs with the exception of free cash flowmargin which has largely been reduced by
increasingcapital expenditures.
The per sharefigures show a similar story with EPS growing exponentially since2009 even more that profitmargins due
mainly to increased sharebuy backs funded through lowinterest rate loans and excess cash on the balancesheet. This
trend has waned off in 2015 amidstslowingglobal growth. The S&P 500 is largely exposeto global conditions and the
economic slowdown abroad has already startingto slowearnings growth and EPS. Going forward I expect companies with
high foreign sales to domestic sales ratiosto struggleand miss earnings in 2016.
Therefore, largecap companies with international revenue with be a definite under-performer in 2016 and I recommend
companies with lowexposure to international markets.
Dec '05 Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Sep '15
EPS (recurrent earnings) 76.28 86.21 94.77 74.35 47.18 84.30 99.56 105.28 110.07 120.59 113.40
Free Cash Flow Per Share 73.54 102.53 45.62 133.90 38.03 107.67 111.32 98.10 110.03 104.59 102.36
Sales Per Share 841.22 937.31 1,017.47 1,079.45 907.07 966.66 1,066.93 1,111.30 1,147.54 1,188.33 1,182.00
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EBITDA Margin 17.40 18.03 18.00 16.00 15.23 18.22 18.62 18.71 19.16 19.73 19.69
Net Margin 9.01 9.18 9.23 6.89 5.16 8.55 9.19 9.35 9.53 9.99 9.55
Free Cash Flow Margin 8.11 10.87 4.54 11.83 4.48 10.86 10.31 8.71 9.56 8.76 8.63
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Figure 23:Historical Margins for the S&P500
Source: Bloomberg
Figure 24:Historical Per Share Figures for the S&P500
Source: Bloomberg

12. Figures 25 and 26 below show the S&P 500’s Debt to Assets Ratio and EBITDA to Interest Expense ratio sinceAugust 2014
until November 2015.Overall,corporatebalancesheets remain more leveraged than in 2014 with Debt to Assets risingby a
multipleof 1.1 over the data set. Over the same time frame EBITDA to Interest Expense has risen by a multipleof
approximately 0.5.Therefore, and added risk is in play for largecap companies buttheir earnings ability has keptthem
solventwith relatively strongbalancesheets.I do not expect leverage to work to the detriment of these companies in 2016,
and I believe going into 2016 with higher interest rates they will maintain healthy solvency ratios.
Outsidethe US demand has stagnated for US exports and dollar denominated goods due to the relativerisein the dollar.
This was especially detrimental to earnings in 2015.In addition,energy underperformed substantially understandably of
coursedue to the poor commodity fundamentals.In figures XXX and XXX below you can see the difference in the S&P 500’s
earnings / revenue with and without energy. Overall,earnings growth was very positivewith the energy sector removed
from the analysisata respectable6.9% YoY growth rate. Sales growth although in the red with energy is positiveas well
with a 1.9% growth rate so far in 2015.
Looking at Figure 28, the chartshows consensus estimates for earnings growth in 2016 are 8.2%. Analysts are anticipatinga
net economic tailwind fromlow oil prices and high GPD growth north of 3.0%. Also builtinto this estimate is a rebound of
oil prices back into the $60-70-dollarrangeby year end. I find these estimates to high and overly optimistic.Given the poor
growth outlooks globally and high international exposurelargestcap and mid cap companies have abroad,I believe the
market is settingitself up for under performance in 2016. In addition,there has yet to be a catalystfor oil fundamentals to
change and the most likely candidateto reduce production is the United States. Reduced production domestically will
continue to drawdown earnings and giveus similar results as 2015.
8.5
9
9.5
10
10.5
11
7.2
7.4
7.6
7.8
8
8.2
8.4
8.6
Earnings
Earnings:Ex -
Energy
Revenue
Revenue Ex -
Energy
CY 2015 -0.3% 6.9% -3.4% 1.9%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2009 2010 2011 2012 2013 2014 2015 2016
Earnings -8.0% 38.4% 12.6% 5.3% 5.2% 5.1% -0.3% 8.2%
Sales -7.7% 9.2% 10.6% 1.8% 1.8% 3.4% -3.4% 4.5%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Figure 25:Debt to Assets Ratio for S&P500 Figure 26:EBITDA to Interest Expense Ratiofor S&P500
Source: Bloomberg Source: Bloomberg
Figure 27:S&P500 Earnings andSales in 2015 Figure 28:S&P500 Earnings andSales in 2009-2015
Source: FactSet Source: FactSet

13. The draw down earlier this year in August was in responseto negative growth prospects and poor economics comingout of
China.As shown in Figure 29 below, the VIX reacted violently when China devalued its currency and when its stock market
corrected resultingin China implementing a form of quantitativeeasingonly with equity markets instead of bonds. This
reinforces my view of reducingforeign exposure especially nowas volatility is heavily dependent on foreign markets.
Conclusions& Recommendations
Going into 2016 I estimate the US economy will see a healthy growth rate of 3.0% or more and as the Fed raises rates I
expect to see the US outpace most other developed economies. This will causethedollar to remain strongor continue to
appreciateagainstother currencies thus increasethe purchasingpower of the dollar,which may provide consumers with
tailwinds for a shortperiod of time. This is under the condition thatthe United States can maintain its growth in spiteof
slowingglobal growth if only for the short term.
A strongdollar will keep commodities in check or at low prices which will resultin a lowPPI for domestic producers.I
expect lower input costs for producers to hurt industrialsand materialsdueto inability to export because of high dollar
strength and low inputcosts. As a result,these companies will havelowsales and earnings growth in 2016 if they are
expose to foreign markets that are forced to buy in dollars.
Additionally,a strongdollar dueto divergingeconomic policies and exportingof deflation from low commodity prices has
led to weak emerging market growth, and goingforward I expect the same in 2016 unless underlyingfundamentals for
commodities change
Whilea low commodity pricedestroys valueabroad,itmay lead to net economic tailwinds domestically.As seen in the
consumer free cash flowchart,consumers should have lower overall economic expense which has the potential to driveup
confidence and spending. Companies highly exposed to domestic US markets will benefitgreatly from growing consumer
sentiment and free cash flow.Strategically itmakes most sense to invest where the money will flowfirst –mainly retail,
staples,and potentially tech.
Therefore, I recommend investingin US based mid cap companies with high domestic exposure in the Consumer
Discretionary,Consumer Staples,and Information Technology.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
CBOE Volatility Index (VIX) Yuan : Dollar FX Rate
Figure 29:YuanDollar Exchange Rate Vs. CBOE VIX
Source: FactSet