U.S.

Financials
Jonathan Casteleyn, CFA, CMT - Analyst

2016/2017

LONGS

Dividend Yield

Visa (V)

Market Cap
($MM)
$184,000

0.60%

Short Interest (%
of Float)
3.8%

Sell Side
Sentiment
80% Positive

Fundamental
Factor
Quality

Mastercard (MA)

$110,000

0.66%

1.1%

79% Positive

Quality

Goldman Sachs (GS)

$78,000

1.3%

1.9%

21% Positive

Quality

Allianz SE (ALV)

$67,000

3.6%

0.5%

51% Positive

Value

CME Group (CME)

$29,000

2.1%

2.1%

31% Positive

Quality

Intercontinental Exchange
(ICE)

$29,000

1.3%

2.3%

65% Positive

Momentum

FNF Group (FNF)

$10,000

2.3%

2.1%

77% Positive

Quality

NASDAQ OMX (NDAQ)

$6,700

1.5%

5.3%

61% Positive

Value

eTrade (ETFC)

$6,500

0.0%

3.8%

60% Positive

Momentum

Legg Mason (LM)

$6,000

1.2%

7.0%

26% Positive

Value

Zions Bancorp (ZION)

$5,537

0.5%

6.4%

24% Positive

Value

Och Ziff (OZM)

$6,300

6.8%

1.6%

66% Positive

Yield

Federated Investors (FII)

$3,400

3.0%

9.0%

15% Positive

Value

Rationale
The Networks perform
best late cycle and this
defensive business is one
of the few groups we like
The Networks perform
best late cycle and
International networks
grow faster than U.S.
Like GS as a Pair with short
MS with higher operating
leverage at GS and better
exposure to M&A
PIMCO outflows are
waning and performance
is improving great time
to own this value insurer
with a dividend yield
Prime beneficiary of
renewed volatility in the
US good pair against
short ICE
Market data business has
strong growth and
volatility helps NYSE
businesses
Great way to invest in
housing theme - great
mgmt and buying back lots
of stock - Black Knight
worth $10 per share
40% of market share
trades off exchange which
will change
A potential takeout
candidate with US retail
back loan book is
improving
Pension reallocation helps
them with still high short
interest and low sell side
sentiment in this stock
Regional banks can grow
their loan segments with
the big banks in the
penalty box ZION still
under book value
Alts have a massive
tailwind with Pension
reallocation 10% fully
loaded dividend yield too
My EPS opportunity is 15%
above the Street and
sentiment is way too low

Risk
Units
3

SHORTS

Dividend Yield

Citigroup

Market Cap
($MM)
$146,000

Sell Side
Sentiment
63% Positive

Style Factor

Rationale

0.0%

Short Interest (%
of Float)
1.2%

Value

$82,000

4.2%

2.5%

52.4%
Positive

Momentum

Morgan Stanley (MS)

$71,000

1.1%

1.0%

37% Positive

Quality

T Rowe Price (TROW)

$20,000

2.1%

1.5%

51% Positive

Quality

Lazard (LAZ)

$6,700

2.3%

0.3%

60% Positive

Quality

Nationstar Mortgage
(NSM)

$3,100

0.0%

34.5%

18% Positive

Momentum

PRA Group

$2,600

0.0%

27.8%

62% Positive

Momentum

Janus Capital (JNS)

$2,300

2.6%

19.7%

20% Positive

Value

Home Capital Group (HCG)

$2,100

2.8%

3.9%

38% Positive

Momentum

Financial Engines (FNGN)

$2,200

0.5%

15.2%

71% Positive

Momentum

WisdomTree (WETF)

$1,500

2.0%

5.0%

60% Positive

Momentum

Encore Capital (ECPG)

$1,000

0.0%

32.4%

90% Positive

Momentum

Walters Investment
Management (WAC)

$1,000

0.0%

16.6%

63% Positive

Momentum

Lots of hope for

recovery but EM
exposure will take them
down and no U.S. loan
growth
The Canadian economy
is in recession and the
banking system is
undercapitalized with
an over levered
consumer
Will lag GS as Vol picks
up and has higher
expectations now with
retail recovery
Institutional Large Cap
Equity in outflow and
Fund closures to hurt
their ability to net new
AUM
Hyper cyclical exposure
to M&A and negative
EM exposure in their
AUM business
Horrible accounting and
MSR transfer
opportunity dwindling
lots of regulatory risk
Highly leveraged and in
the wrong part of the
late cycle
Bill Gross premium is
over discounted with
former Total Return
money not qualifying
for mgmt
The Canadian economy
is in recession and the
banking system is
undercapitalized with
an over levered
consumer
High multiple small cap
with lots of insider
selling and Sell Side still
off sides with Positive
Recommendations
Firm has very high
concentration to 2
funds which
underperform in local
currency
Company has levered
up to make acquisitions
and now has no
tangible equity capital.
IRRs on purchased
receivables are
declining too
There is a chance this
company is a zero with
bad accounting and
leverage and MSR opps
dwindling

Royal Bank of Canada (RY)

Risk
Units
3

Market Thesis: After a volatile 2015 with our call for the market to be down a little looking prescient,
we are now calling for a more substantial equity market decline in 2016. Late cycle indicators are
flashing more brightly and with the Federal Reserve boxed in for a rate hike in the New Year, the
effectiveness of quantitative easing will now reverse. U.S. corporate earnings have tripped into
recession with the second consecutive quarter of negative growth in the current 3Q15 earnings season.
The Street however is not heeding this warning and is still modeling mid-single digit corporate earnings
growth in 2016 which will lead to disappointment. The U.S. labor market has peaked with
unemployment as measured by initial jobless claims having hit their low water mark in May. Historically
initial jobless claims have averaged 33 months underneath 330,000 claims per week (the mean of the
Bulls of the late 80s, the late 90s, and in 2007). This post Financial Crisis Bull has now entered the 20th
month below this threshold indicating that, while there may be a year left of track for claims to stay low,
the path of least resistance is higher and that claims should back up outside of Bull market ranges.
While the Fed has overly telegraphed its intensions with short term rates, what is not well understood is
that EVERY single rate hiking cycle has resulted in credit spreads widening over Treasuries. Thus with
20% of corporate credit up for refinancing in 2016/2017, rising interest costs with be a consideration for
non-healthy corporates. The high yield market is reflecting SOME of this concern with non-investment
grade indices down sharply to 2011 levels (down over 20% YTD in 2015). Thus with U.S. equities down
only marginally entering 16, we think there is a catch up move downward in stocks to adequately
reflect the more realistic move in the bond market. Lastly, the Senior Loan Officer survey from the Fed is
relaying that lending standards are no longer loosening and are tightening in the C&I category,
something that occurred all throughout 1999 and 2007 before substantial market declines.
In Financials, we continue to like the Exchange group which benefits from the return of nascent
volatility; and the payment processors as the move from cash to cards continues; and select assets
managers that benefit from a pension rotation into fixed income and alternatives. Conversely, we
remain short the equity asset managers on the rotation from mutual funds and forthcoming negative
beta; recommend shorts on the heavily indebted specialty finance names who will get hit on re-finance
and leverage difficulty; and remain short Canadian banks on an economy in recession with high
debt/income ratios.
No variable has correlated more closely to the equity market like the trajectory of jobless claims:

and the year-over-year improvement in jobless claims peaked in May and is now converging towards
zero:

and Bull Market levels below 330,000 per week is getting long in the tooth now eclipsing over 20
months:

During the start of the past 7 rate hiking cycles, high yield spreads over Treasuries have widen EVERY
single time between 200-2,000 basis points (yellow line right hand scale)

The Feds Senior Loan Officer Survey has been leading/concident with the trajectory of the Financials
sector. C&I lending standards peaked (loosened most) in 2014 and is now tightening which it did all
throughout 1999 and 2007 before the decline in the Financials sector:

Corporate earnings are entering a recession in 3Q15 with then an unrealistic recovery to mid single digit
growth in 2016 (some of this will be comping the negative comp):

And some thing has to give with High Yield prices at 2011 levels with U.S. equities only marginally off
their highs (either high yield prices rise and equities make new highs or equities need a catch up trade
downward):

A recent Barrons contributor outlined that 20% of corporate credit needs to be refinanced in 2016/2017
which means widening credit spreads matter:

Late Cycle Financial subgroup outperformers include Fin Tech, Exchanges, and Credit Card companies.
Convesely, the Debt Collectors, Mortgage Finance, and Auto Insurers perform poorly:

The landscape North of the Border is a precarious state with high leverage in the system and Canadian
banks now posing a risk to the economy:

And the Canadian housing market is now +50% higher than where the U.S. housing market imploded:

And Canadian Debt/Income ratios have continued to grow to over 160%, surpassing the U.S. peak
of 130%: