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A Division of Arbor Research & Trading What We Do: ​ ​ Group-think and a

A Division of Arbor Research & Trading

What We Do:Group-think and a herd mentality plague conventional financial market research, undermining the

utility of traditional surveys and economic data in understanding our interconnected world. ​Arbor Data Science​ offers a potent blend of innovative models, alternative data and domain knowledge to give our clients a new perspective on the global economy and financial markets. Our philosophy is to put the right data and tools in the hands of decision makers.

The New Wave of Economic Indicators.Arbor Data Science​ team of data scientists leverage

alternative data sources, including: social media, Google searches, news trends, government speeches, and more, to anticipate changes in economic growth and financial market performance. Arbor Data Science uses search trends to gain insight into the consumers and business owners. This lens into the purchasing and investing decisions of consumers and businesses offers direct insights into economic activity without the lag of officially-reported dat​a.

Tracking Some of Our Calls:Below are examples of the performance of some of the analysis and

research we have produced over the last 3 months. Using alternative data and our in-house expertise, these calls have been across equities, commodities and Fixed Income markets.

“Rotation Out of Financials”​ - By Peter Forbes - December 7th, 2018 Summary:​ “The financial sector is in investors crosshairs as a rotation out of cyclical sectors continues. Asset managers and insurers have underperformed so far, but banks and diversified financials are more exposed to contacting leverage.” Link:​ https://datascience.arborresearch.com/rotation-out-of-financials/ Result:​ S15BANXX Index (S&P composite bank Index) and S15DIVF Index (S&P Diversified Financials Index) fell 19.08 and 15.9% respectively between Nov 28th to Dec 24th.

and S15DIVF Index (S&P Diversified Financials Index) fell 19.08 and 15.9% respectively between Nov 28th to

“Positioning For 2019 Weekly Round-Up”​ -By Ben Breitholtz and Peter Forbes - ​January 2nd, 2019 Summary: Energy and U.S. 10-year TIPS breakevens due to rebound U.S. 10-year yields to rise, Yield curve grind sideways-to-flatter U.S. high yield OAS to tighten The S&P 500 and MSCI World ex-US have stabilized with most of the global weakness already priced in.”

Result: ​Jan Performance:

Oil +14.4% 10yr Tip breakeven +19 basis points 10yr yield just 1bp higher 2/10s curve unchanged in Jan High yield OAS tightened 19.6% S&P +7.86% MSCI World ex-US: +7.02%

yield just 1bp higher 2/10s curve unchanged in Jan High yield OAS tightened 19.6% S&P +7.86%
WTI Performance January 2019:

WTI Performance January 2019:

WTI Performance January 2019:

US HY OAS Index Performance January 2019:

US HY OAS Index Performance January 2019: S&P Performance January 2019:

S&P Performance January 2019:

US HY OAS Index Performance January 2019: S&P Performance January 2019:

“U.S. 10-Year Notes Enjoy Best Risk-Adjusted Rally in History” -By Ben Breitholtz - January 3rd, 2019

Summary: U.S. 10-year notes have gained over 5.5% since the low on November 8th, 2018. ​The reward-to-risk ratio or risk-adjusted return for the past 30 trading days is the HIGHEST ON RECORD​. We show how U.S. 10-year notes have performed following similar instances when its reward-to-risk ratio pushes above 8.5. Six out of these eight instances saw U.S. 10-year notes post negative returns 50 trading days later by an average of -2%.” Link: ​https://datascience.arborresearch.com/u-s-10-year-notes-enjoy-best-risk-adjusted-rally-in-history/ Result: ​10yr yield rose from 2.55 on January 3rd to 2.785 on January 18th.

​ 10yr yield rose from 2.55 on January 3rd to 2.785 on January 18th. U.S. 10YR

U.S. 10YR Yield 3rd January to 18th January 2019:

​ 10yr yield rose from 2.55 on January 3rd to 2.785 on January 18th. U.S. 10YR

“Even Your Grandma is Afraid a Recession is Imminent”​ -By Ben Breitholtz - January 2nd, 2019

Summary: “Investors’ fears of a recession or bear market have grown the most since the period before the great recession. The environment of ultra-low U.S. Treasury volatility & heightened equity volatility will persist deep into 2019.” Link:​ https://datascience.arborresearch.com/even-your-grandma-is-afraid-a-recession-is-imminent/ Result: ​By Feb 26th the U.S. 30-year bond’s yield 35 trading day range had been its narrowest (12 bps) since Dec 1989.

​ By Feb 26th the U.S. 30-year bond’s yield 35 trading day range had been its
​ By Feb 26th the U.S. 30-year bond’s yield 35 trading day range had been its

“Investors’ Rush to Safety Reaches Extreme” ​- ​Ben Breitholtz - January 14th, 2019

Summary: We show the spread between flows for risk and safe asset ETFs along with the three-month spread between the S&P 500 Technology index and U.S. 10-year note. The amazing divergence in performance at -30.3% is one heck of an extreme. Past spreads in excess of two standard deviations have been followed by rebounds in technology equities.”​Link: ​https://datascience.arborresearch.com/investors-rush-to-safety-reaches-extreme/ Result: ​S&P Tech Index +18.5% from January 14th to 12th March

Result: ​ S&P Tech Index +18.5% from January 14th to 12th March S&P Tech Index January

S&P Tech Index January 14th to 12th March 2019:

Result: ​ S&P Tech Index +18.5% from January 14th to 12th March S&P Tech Index January

“Search Trends Still Favor Resilient Eurozone Growth” -Peter Forbes - January 24, 2019

Summary: Last week we argued that the concerns over eurozone growth looked overblown. We’ve revamped our eurozone GDP model based on Google Search Data and it still paints a resilient picture for growth in the first half of

2019.”

Link: ​https://datascience.arborresearch.com/search-trends-still-favor-resilient-eurozone-growth/ Result: ​​Eurozone PMI improved (above expectations) to 51.9 in Feb after 51.1 in December and 51 in January

PMI improved (above expectations) to 51.9 in Feb after 51.1 in December and 51 in January

Eurozone PMI 2018-2019:

PMI improved (above expectations) to 51.9 in Feb after 51.1 in December and 51 in January

“Investors Too Pessimistic on Inflation” - ​By Ben Breitholtz - ​January 28, 2019

Summary: We want to highlight our view U.S. inflation expectations have grown too pessimistic relative to realized economic growth and alternative data.” Link: ​https://datascience.arborresearch.com/investors-too-pessimistic-on-inflation/ Result:​ U.S. 10yr TIP Breakeven spread moved 17bps wider since January 28th

TIP Breakeven spread moved 17bps wider since January 28th U.S. 10yr TIP Breakeven Spread 28th January

U.S. 10yr TIP Breakeven Spread 28th January to 12th March 2019:

TIP Breakeven spread moved 17bps wider since January 28th U.S. 10yr TIP Breakeven Spread 28th January

“How Markets Respond to Global Synchronized Slowing”​ -By Ben Breitholtz - January 31, 2019

Summary: We compare recent reactions to global synchronized slowing to those from the past. The majority of markets are following the script. In an update to our January 2nd piece “Positioning for 2019”, we think Tip breakevens and oil will continue to perform through quarter end” Link: ​https://datascience.arborresearch.com/how-markets-respond-to-global-synchronized-slowing-update/ Result: ​Oil +6.3% January 31st to 12th March

Result: ​ Oil +6.3% January 31st to 12th March Oil Performance January 31st to 12th March

Oil Performance January 31st to 12th March 2019:

Result: ​ Oil +6.3% January 31st to 12th March Oil Performance January 31st to 12th March

“Gold Held Aloft by Political Chaos“ ​- By Peter Forbes - February 3rd, 2019

Summary: The bottom line is that gold continues to look exposed, held aloft by the uncertainty about public policy and government spending. These issues may persist and even intensify in the coming weeks, but other factors are eroding this potential hedge on political chaos.” Link: ​https://datascience.arborresearch.com/gold-held-aloft-by-political-chaos/ Result: ​Gold -$32.69 since February 3rd

Result: ​ Gold -$32.69 since February 3rd Gold 4th February to 7th March 2019:

Gold 4th February to 7th March 2019:

Result: ​ Gold -$32.69 since February 3rd Gold 4th February to 7th March 2019:

“News Sentiment Too Bearish on S&P 1500 Companies” ​- By Ben Breitholtz - February 6th, 2019

Summary: News sentiment of S&P 1500 companies has grown too bearish, favoring a continued rebound in equities and weaker U.S. 10-year note.” Link: ​https://datascience.arborresearch.com/news-sentiment-too-bearish-on-sp-1500-companies/ Result: ​S&P 1500 +2.2% and US 10yr +4.5bps since February 6th

S&P 1500 +2.2% and US 10yr +4.5bps since February 6th S&P 1500 6th February to 12th

S&P 1500 6th February to 12th March 2019:

February 6th S&P 1500 6th February to 12th March 2019: “​ Bond Investors are Set to

“​Bond Investors are Set to Finally Awake” ​- By Ben Breitholtz, - ​February 26th, 2019

Summary: Long-end Treasuries are expected to see higher volatility in the weeks and months to follow after the tightest trading range since December 1989.” Link:​ https://datascience.arborresearch.com/bond-investors-are-set-to-finally-awake/

“U.S. 10-Year Yields More Apt to Break Higher Than Lower” ​- By Ben Breitholtz - February 28th 2019

Summary: The U.S. 10-year note yield continues to grind sideways, but past ultra-tight ranges of this length have habitually given way to higher volatility. Our bias is for a breakout to higher yields in the weeks to come.” Link: ​https://datascience.arborresearch.com/u-s-10-year-yields-more-apt-to-break-higher-than-lower/

Result:​ Calls In Progress

Weekly Roundup March 11, 2019 Benjamin Breitholtz and Peter Forbes A Division of 1
Weekly Roundup March 11, 2019 Benjamin Breitholtz and Peter Forbes A Division of 1

Weekly Roundup

March 11, 2019

Benjamin Breitholtz and Peter Forbes

A Division of

Weekly Roundup March 11, 2019 Benjamin Breitholtz and Peter Forbes A Division of 1

A Summary of our Current Major Themes

A Summary of our Current Major Themes US economy playing follow the leader - All major
A Summary of our Current Major Themes US economy playing follow the leader - All major
A Summary of our Current Major Themes US economy playing follow the leader - All major

US economy playing follow the leader

- All major regions are producing data below one-year average

- Leading indicators have shifted so world economy is leading the US, so the global economy is in the driver's seat not the US

- Soft (survey) data is US is leading hard data lower but continued deterioration in hard data is needed to signal a real down turn in US economy

- An increasing ECB balance sheet vs that of Federal Reserve means Eurozone economic performance is the most important

- Our deep dive into business and consumer search trends (Google) across the Eurozone makes us more optimistic than most that a rebound is indeed a possibility in the months to come.

US Treasuries Avoid chasing a bullish breakout

- Investors have already priced in no hikes along with the Fed, meaning further declines in U.S. Treasury yields will likely need the pricing in of a cut.

- Remarkable Easing in Financial Conditions Leaves Treasuries Looking Exposed

- Seasonality suggests nominal and real spreads should see an end to recent convergence, bringing the difference currently at 15.4 basis points to well above 50 basis points. All in all, this is a steepening -friendly outlook.

- The seasonality of three -month flows across all money market funds since 1990 strongly suggests a peak is in the making. The coming period has typically been of the ‘risk -on’ variety, meaning flows into equities and out of U.S. Treasuries.

Energy the Canary in the Coal Mine for Credit Markets

- Discussions of free cash flow remain at the best level in years. Discussions of capital expenditures have also been dented as funding challenges arose. This will be the key advantage for well -funded integrated majors.

- Unfortunately, many of these energy companies have been unable to reduce high leverage ratios. The energy industry’s total debt -to -assets ratio remains elevated near 24% relative to a healthier 16% ahead of the financial crisis.

- Investment grade corporates in the energy industry have become the most sensitive to rising U.S. 10 -year real yields since

2018.

- Returns in the riskier neighborhoods of the energy sector, independent producers and oil field services firms, will be tightly tied to funding costs, real yields especially.

3 U.S. Economy Playing Follower the Leader With the Global Economy
3
3

U.S. Economy Playing

Follower the Leader With

the Global Economy

All major regions are producing below one-year average economic data

changes for the first time since March

2016. Citigroup’s economic data change indices measure incoming data releases relative to one-year average growth rates.

The Eurozone was first to break below

average (i.e. zero) on April 24 th , 2018. The U.S. finally followed suit on December 6 th , 2018, causing equity markets and FOMC rate hiking to tumble into month- end.

followed suit on December 6 t h , 2018, causing equity markets and FOMC rate hiking

Here’s where the dynamic between U.S. and

global economies gets interesting. The correlation between the U.S. and World economies using OECD composite leading indicators has shift to the world leading the U.S.

The U.S. economy had been the leader from the early 1970s through the financial

crisis. But, the global average (ex-U.S.) took command in October 2008 with a significantly higher correlation to the U.S.

economy three months forward. In other

words, the global economy is in the driver’s seat, not the U.S.

to the U.S. economy three months forward. In other words, the global economy is in the

U.S. hard economic data is rivalling its worst momentum post-crisis, while soft data bears the brunt of the damage.

A continued deterioration in hard data like industrial production, durables goods, personal spending, and more is needed to signal a real slowdown in the United States.

production, durables goods, personal spending, and more is needed to signal a real slowdown in the

So why are the S&P 500 and Stoxx 50

both up 10% year-to-date?

Investors have been making a bet in

recent weeks on the Eurozone and global economy rebounding into the summer

months.

The chart shows three-month changes in the Eurozone economic data change index and S&P 500 lagged by two months. Stable to higher equity prices suggest investors are more optimistic on the global economy than the ECB or OECD. On the flip side, a drawdown in equity markets would signal lost hope for a rebound.

economy than the ECB or OECD. On the flip side, a drawdown in equity markets would

A bigger and bigger ECB balance sheet

relative to the Federal Reserve will make the Eurozone’s economic performance that much more important.

The rolling one-year correlation of both

Eurozone and U.S. economic data to the

S&P 500 are shown in the top panel of the chart below. Note how the Eurozone’s correlation has run significantly higher during periods of diverging balance sheets like we have now.

The U.S. will ultimately follow the path of the global economy.

periods of diverging balance sheets like we have now. The U.S. will ultimately follow the path

Our deep dive into business and

consumer search trends (Google) across the Eurozone makes us more optimistic than most that a rebound is indeed a possibility in the months to come.

Please see these recent posts:

a possibility in the months to come. Please see these recent posts: Search Trends Still Favor

9

10
10

U.S. Treasuries

Avoid Chasing a

Bullish Breakout

10 U.S. Treasuries – Avoid Chasing a Bullish Breakout
10 U.S. Treasuries – Avoid Chasing a Bullish Breakout

The Federal Reserve and investors are finally on the same page in expecting no hikes over the next 12 months. The chart offers the

comparison between market-based (OIS) and

Fed-speech implied expectations for the next 12 months.

Our natural language processing of Fed communications is used to estimate the number

of hikes to come in basis points based on

historical relationships from 1994 through 2007.

Investors have already priced in no hikes along with the Fed, meaning further declines

in U.S. Treasury yields will likely need the

pricing in of a cut.

no hikes along with the Fed, meaning further declines in U.S. Treasury yields will likely need

Our classification model for pauses or the end to tightening cycles has jumped to a probability of 64%.

The random forest model incorporates

major economic and inflation data

releases, markets returns, and volatility.

64% . The random forest model incorporates major economic and inflation data releases, markets returns, and

The chart shows a scatter plot of three-

month (13-week) changes in the credit subindex against three-month total returns for the Bloomberg Barclays Treasury index with data back through 2011.

Treasuries have been more reluctant to

embrace easier financial conditions as yields have remained stubbornly low. The Treasury index is higher by 2% over the past three months, very near the upper range of historical performance.

The Treasury index is higher by 2% over the past three months, very near the upper

The U.S. real 2-year 10-year spread is

coming out of inversion for the first time since a brief stint in early October 2018.

Short-end real yields have collapsed (2y from 1.9% to 0.8%) since the Fed capitulated

in very late December 2018.

2018. Short-end real yields have collapsed (2y from 1.9% to 0.8%) since the Fed capitulated in

The seasonality of the difference between U.S. nominal and real 2-year 10-year spreads has been very strong since the financial

crisis. We show this seasonal component in

the bottom panel, which will reoccur each year.

The top panel offers the actual difference between the nominal and real spreads along

with a forecast based on its seasonality.

Seasonality suggests nominal and real spreads should see an end to recent

convergence, bringing the difference currently at 15.4 basis points to well-above 50 basis points. All in all, this is a

steepening-friendly outlook.

currently at 15.4 basis points to well-above 50 basis points. All in all, this is a

The ‘great de-risking’ to end 2018 fueled

heavy steepening positioning in ETFs with investors’ voracious demand for ultra-short duration safety. But, risk-on flows have since ensued in 2019, leading to a flattening bias.

On the contrary, futures positioning (large

speculators) maintains a hefty steepening position. Past divergences with ETF positioning significantly flatter than futures have been followed by

steepening, but predominately by the U.S.

real 2-year 10-year spread.

Remember, history shows ‘going with’ futures positioning and fading ETF flows is advantageous.

10-year spread. Remember, history shows ‘going with’ futures positioning and fading ETF flows is advantageous. 16

The seasonality of three-month flows across all money market funds since 1990 strongly suggests a peak is in the making. The

coming period has typically been of the

‘risk-on’ variety, meaning flows into equities and out of U.S. Treasuries.

The bottom panel shows the seasonal component, which repeats every year. We

have highlighted the current point in this

seasonal historically to show money market flows do indeed decline in the weeks and months ahead.

current point in this seasonal historically to show money market flows do indeed decline in the
18 Energy, the Canary in the Coal Mine for Credit Markets
18
18

Energy, the

Canary in the Coal

Mine for Credit

Markets

Spot prices have risen comfortably above the $21-48 range of breakeven prices for

Permian shale producers. So have prices for

crude oil swaps, a key hedging tool for

producers. The next chart shows crude oil swaps for 2019 through 2021 are all trading north of $55 per barrel. Those marginal producers who are inclined to hedge can do so at attractive prices.

all trading north of $55 per barrel. Those marginal producers who are inclined to hedge can

We use data from Sentieo to track the discussions of analysts and management in earnings calls and presentations. While

expectations for margins, free cash flow and

capital investment were running high into the end of 2018, some cracks are starting to appear.

The chart shows the six-month average ratio of positive to negative mentions of three topics

(margins, free cash flow, and capital expenditures)

for companies on the oil & gas industries.

The chart highlights weakening but still strong expectations for margins as prices have stabilized. Discussions of free cash flow remain at the best level in years. Discussions of capital expenditures have also been dented as funding challenges arose. This will be the key advantage for well-funded integrated majors.

have also been dented as funding challenges arose. This will be the key advantage for well-funded

The zombie infestation has become

increasingly concentrated to the energy industry, which held 35% of all zombies through 2017. WTI crude oil’s plummet in 2014 has left a serious mark.

Unfortunately, many of these energy

companies have been unable to reduce high leverage ratios. The energy industry’s total debt-to-assets ratio

remains elevated near 24% relative to a healthier 16% ahead of the financial

crisis.

total debt -to-assets ratio remains elevated near 24% relative to a healthier 16% ahead of the

Investment grade corporates in the

energy industry have become the most sensitive to rising U.S. 10-year real yields since 2018.

The scatterplot highlights the deeply

negative slope of returns by independent

energy, integrated energy, oil & field services, refining, rails roads, and transportation.

returns by independent energy, integrated energy, oil & field services, refining, rails roads, and transportation. 22

The surer bet for production growth in the Permian is with the integrated

majors, but less uncertainty means lower

returns.

Returns in the riskier neighborhoods of

the energy sector, independent producers and oil field services firms, will

be tightly tied to funding costs, real

yields especially.

independent producers and oil field services firms, will be tightly tied to funding costs, real yields

Contact Us

Give us a call for more information about our services and products

a call for more information about our services and products Ben Breitholtz – Data Scientist

Ben Breitholtz Data Scientist ben.breitholtz@arborresearch.com

Pete Forbes Data Scientist

Arbor Research & Trading, LLC

1000 Hart Road Suite 260

Barrington, IL 60010 847 756 3575

Neil Tritton- Director, Arbor Research & Trading UK, Ltd neil.tritton@arborresearch.com

0207 100 1051 or 07808 294378

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