the ten surprises of 2016 - seeking alpha · 1/7/2016 · the extreme positions of the republican...

The Ten Surprises of 2016

Byron R. Wien Vice Chairman, Multi-Asset Investing

Tel: 212.583.5055 Email: [email protected]

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1

Brief Review of The Ten Surprises of 2015

1. The Federal Reserve acts early.

2. Our luck runs out on cyber invasions.

3. The market rises 15%.

4. The European Central Bank eases aggressively.

5. Japan has a tough year.

6. China admits it is not growing at 7%.

7. The Iran deal is signed.

8. Brent slips into the $40s, but rises later.

9. There are opportunities in the high yield market.

10. The Republicans try to position themselves as the party that can get something done in Washington.

2

Key Points in the Outlook

1. The Federal Reserve is in a tightening mode. Don’t fight the Fed.

2. There is general agreement among strategists that the Standard and Poor’s 500 will be up 10% in 2016.

3. Wages are increasing and companies have limited pricing power. Margins are likely to be squeezed.

4. The high yield market is in disarray, particularly in commodity and energy issues. There is no liquidity.

5. Consensus estimates for world growth is 3%; for the U.S. it is 2.0-2.5%.

6. Fear of terrorism may be dampening consumer spending and encouraging investors to hold higher than normal cash balances.

3

The Ten Surprises of 2016

1. Riding on the coattails of Hillary Clinton, the winner of the presidential race against Ted Cruz, the Democrats gain control of the Senate in November. The extreme positions of the Republican presidential candidate on key issues are cited as factors contributing to this outcome. Turnout is below expectations for both political parties.

2. The United States equity market has a down year. Stocks suffer from weak earnings, margin pressure (higher wages and no pricing power) and a price- earnings ratio contraction. Investors keeping large cash balances because of global instability is another reason for the disappointing performance.

3. After the December rate increase, the Federal Reserve raises short-term interest rates by 25 basis points only once during 2016 in spite of having indicated on December 16 that they would do more. A weak economy, poor corporate performance and struggling emerging markets are behind the cautious policy. Reversing course and actually reducing rates is actively considered later in the year. Real gross domestic product in the U.S. is below 2% for 2016.

4. The weak American economy and the soft equity market cause overseas investors to reduce their holdings of American stocks. An uncertain policy agenda as a result of a heated presidential campaign further confuses the outlook. The dollar declines to 1.20 against the euro.

5. China barely avoids a hard landing and its soft economy fails to produce enough new jobs to satisfy its young people. Chinese banks get in trouble because of non-performing loans. Debt to GDP is now 250%. Growth drops below 5% even though retail and auto sales are good and industrial production is up. The yuan is adjusted to seven against the dollar to stimulate exports.

4

The Ten Surprises of 2016 (continued)

6. The refugee crisis proves divisive for the European Union and breaking it up is again on the table. The political shift toward the nationalist policies of the extreme right is behind the change in mood. No decision is made, but the long-term outlook for the euro and its supporters darkens.

7. Oil languishes in the $30s. Slow growth around the world is the major factor, but additional production from Iran and the unwillingness of Saudi Arabia to limit shipments also play a role. Diminished exploration and development may result in higher prices at some point, but supply/demand strains do not appear in 2016.

8. High-end residential real estate in New York and London has a sharp downturn. Russian and Chinese buyers disappear from the market in both places. Low oil prices cause caution among Middle East buyers. Many expensive condominiums remain unsold, putting developers under financial stress.

9. The soft U.S. economy and the weakness in the equity market keep the yield on the 10-year U.S. Treasury below 2.5%. Investors continue to show a preference for bonds as a safe haven.

10. Burdened by heavy debt and weak demand, global growth falls to 2%. Softer GNP in the United States as well as China and other emerging markets is behind the weaker than expected performance.

5

The Ten Surprises of 2016 - Also Rans

11. As a result of enhanced security efforts, terrorist groups associated with ISIS and al Qaeda do NOT mount a major strike involving 100 or more casualties against targets in the U.S. or Europe in 2016. Even so, the United States accepts only a very limited number of asylum seekers from the Middle East during the year.

12. Japan pulls out of its 2015 second half recession as Abenomics starts working. The economy grows 1%, but the yen weakens further to 130 to the dollar. The Nikkei rallies to 22,000.

13. Investors get tough on financial engineering. They realize that share buybacks, mergers and acquisitions, and inversions may give a boost to earnings per share in the short term, but they would rather see investment in capital equipment and research that would improve long-term growth. Multiples suffer.

14. 2016 turns out to be the year of breakthroughs in pharmaceuticals. Several new drugs are approved to treat cancer, heart disease, diabetes, Parkinson’s and memory loss. The cost of developing the breakthrough drugs and their efficacy encourage the political candidates to soften their criticism of pill pricing. Life expectancy will continue to increase, resulting in financial pressure on entitlement programs.

15. Commodity prices stabilize as agricultural and industrial material manufacturers cut production. Emerging market economies come out of their recessions and their equity markets astonish everyone by becoming positive performers in 2016.

6

“Radical” Asset Allocation

Asset Class %

Global large cap Multinationals 5% Good value in terms of yield and multiple

Other U.S. long only 10% Moderate growth continuing

European long only 10% Recovery underway

Emerging Market equities 5% Growth has slowed

Japanese Equities 5% Stimulus working

Hedge Funds (all strategies) 15% Selected strategies attractive

Private Equity 10% Competition intense for deals

Real Estate 10% Taking some profits

Gold 0% Hedge against currency debasement

Natural Resources and agricultural commodities

5% World standard of living rising

Non-conventional High Yield Fixed Income (Mezzanine, Leveraged Loans, Emerging market Debt)

20% Good values because of recent sell-off

Cash 5% No return

Total 100%

7

53.5

33.9

59.4

33.9

75.7

51.9

68.1

43.8

54.8

73.5

67.1

46.6

69.6

49.7

71.9

42.5

70.5

49.9

69.5

47.6

72.2

41.3 38.0

58.1

37.1 32.5

30.9

62.2

46.8

69.8

51.3

70.7

40.5

73.0

50.3

63.2

38.4

70.7

47.2

68.3

48.2

71.6

55.2

73.9

53.3

73.3

45.8

66.6

30

35

40

45

50

55

60

65

70

75

80

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NDR Crowd Sentiment Poll (7/31/2002 – 12/22/2015)

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

________________________________________________

Source: Ned Davis Research.

S&P 500 Index

NDR Crowd Sentiment Poll

12/22/15: 52.8

Extremes generated when sentiment reading: Rises above 61.5% = Extreme Optimism Declines below 55.5% = Extreme Pessimism

Average value of indicator at: Optimistic extremes (down arrows) = 68.3 Pessimistic extremes (up arrows) = 46.8 Average spread between extremes = 21.5

Arrows represent extremes in optimism and pessimism. They do not represent buy and sell signals and can only be known for certain (and added to the chart) in hindsight

Extreme Optimism (Bearish)

Extreme Pessimism (Bullish)

S&P 500 Gain / Annum When: 12/1/1995–12/22/2015

NDR Crowd Sentiment Poll is: Gain/Annum % of Time

Above 61.5 1.6 42.4

Between 55.5 and 61.5 10.1 21.3

Below 55.5 9.5 36.4 Sentiment must reverse by 10 percentage points to signal an extreme in addition to the above extreme levels reached

8

Endowments Asset Allocation (Dollar-Weighted Average)

________________________________________________

Source: NACUBO-Commonfund Study of Endowments (’09–’14) and NACUBO Endowment Study (’02–’08) Strategas Research.

Year Equities Fixed Income Alternatives Cash/Other

2002 50% 23% 24% 2%

2003 49% 21% 27% 2%

2004 51% 17% 28% 4%

2005 48% 17% 32% 3%

2006 48% 15% 35% 2%

2007 47% 13% 37% 2%

2008 40% 13% 46% 1%

2009 32% 13% 51% 4%

2010 31% 12% 52% 5%

2011 33% 10% 53% 4%

2012 31% 11% 54% 4%

2013 34% 10% 53% 3%

2014 36% 9% 51% 4%

9

Median State Pension Returns For Period Ending June 30th, 2015

3.2%

10.3% 10.4%

6.6%

7.8%

8.4%

Median Assumption = 7.75%

0%

2%

4%

6%

8%

10%

12%

1 3 5 10 20 25

________________________________________________

Source: Callan Associates, Strategas Research.

10

€1.25

€1.50

€1.75

€2.00

€2.25

€2.50

€2.75

€3.00

€3.25

€3.50

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

2008 2009 2010 2011 2012 2013 2014 2015

ECB

Fe

de

ral R

ese

rve

Ban

k

U.S. Federal Reserve ($Bn) European Central Bank (Bn €)

Fed Balance Sheet vs. ECB Balance Sheet (Trillions)

________________________________________________

Source: Federal Reserve, ECB, Strategas Research Partners.

11

Stock Market Returns

________________________________________________

Source: Bianco Research, LLC.

QE Return Table

Periods Beginning Date End Date Point Change Return

QE 1 11/25/2008 3/16/2009 -97.92 -11.50%

QE 1 Expanded 3/17/2009 3/30/2010 419.38 55.63%

QE 2 8/27/2010 6/28/2011 249.45 23.82%

Operation Twist 8/26/2011 4/3/2012 254.11 21.92%

No Twist End Date 6/6/2012 8/16/2012 130.01 10.11%

QE 3 Hinted 8/17/2012 11/28/2012 -5.58 -0.39%

QE 3 Implemented 11/29/2012 4/30/2013 187.64 13.31%

Taper Tantrum 5/1/2013 9/16/2013 100.03 6.26%

Tantrum Off 9/17/2013 12/16/2013 88.94 5.24%

Tapering QE 3 12/17/2013 10/27/2014 175.09 9.80%

Non QE Return Table

Periods Beginning Date End Date Point Change Return

No QE 1 3/31/2010 8/26/2010 -126.05 -10.74%

No QE 2 6/29/2011 8/25/2011 -137.40 -10.60%

Twist End Date Suggested 4/4/2012 6/5/2012 -127.88 -9.05%

No QE 3 10/28/2014 12/10/2015 88.29 4.50 %

12

Comparison Of Then And Now

________________________________________________

Source: Standard & Poor’s, Factset Research Systems, Strategas Research Partners.

Revenue vs. Earnings: Market Low March 9, 2009 vs. Today – Per Share

12/31/2008 9/30/2015 Pct. Chg.

S&P 500 Operating EPS (TTM) 49.51 104.14 110.3%

S&P 500 Sales Per Share (TTM) 1,042.5 1,136.1 9.0%

S&P 500 Ex-Financials EPS (TTM) 64.38 80.44 24.9%

S&P 500 Ex-Financials Sales Per Share (TTM) 902.9 982.7 8.8%

S&P 500 Operating Margin 4.7% 9.2% 93.0%

Revenue vs. Earnings: Market Low March 9, 2009 vs. Today – Notional Dollars

12/31/2008 9/30/2015 Pct. Chg.

S&P 500 Operating Earnings (TTM, $BN) 431.60 920.5 113.3%

S&P 500 Sales (TTM, $BN) 9,082.0 10,054.2 10.7%

S&P 500 Ex-Financials Earnings (TTM, $BN) 561.05 711.05 26.7%

S&P 500 Ex-Financials Sales (TTM, $BN) 7,865.8 9,717.4 23.5%

S&P 500 Operating Margin 4.8% 9.2% 92.6%

13

World Growth Forecasts and Crude Oil Prices

________________________________________________

Source: Bianco Research LLC.

$36.97 3.00%

$30

$40

$50

$60

$70

$80

$90

$100

$110

3.0%

3.1%

3.2%

3.3%

3.4%

3.5%

3.6%

5/1/13 8/14/13 11/28/13 3/14/14 6/28/14 10/12/14 1/26/15 5/12/15 8/26/15 12/10/15

WTI Spot Crude Oil Median Estimate 2015 World Growth

The Outlook for the U.S. Economy

15

% Change in Real GDP, 5-Year Moving Average SAAR

-3

-2

-1

0

1

2

3

4

5

6

7

’48

’50

’52

’54

’56

’58

’60

’62

’64

’66

’68

’70

’72

’74

’76

’78

’80

’82

’84

’86

’88

’90

’92

’94

’96

’98

’00

’02

’04

’06

’08

’10

’12

’14

________________________________________________

Source: Strategas Research Partners.

16

Economic Cycle Research Institute – Soft Patch Coming?

________________________________________________

Source: Evercore ISI Group.

11/27/15 131.7

105

110

115

120

125

130

135

140

145

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ECRI Leading Index (Level) ECRI Leading Index 4 Wk. Avg.

17

Nominal & Real GDP

________________________________________________

Source: Bianco Research, L.L.C.

4.10% 11/30/15

3.10%

2.40%

11/30/15 2.20%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

Sep-2011 Jul-2012 May-2013 Mar-2014 Jan-2015 Nov-2015

GDP Real GDP

Sep-2012 Dec-2013

(YoY Change)

18

ISM Manufacturing vs. Non-Manufacturing

________________________________________________


11/1/15 59.10

11/1/15 48.60 48.00

50.00

52.00

54.00

56.00

58.00

60.00

62.00


ISM Non Manufacturing ISM Manufacturing

Sep-2012 Dec-2013

19

Fiscal Year 2015 S&P 500 Revenue Expectations

(Fiscal Year Sales Estimates Year-Over-Year Change)

11/27/2015 -0.6%

11/27/2015 -0.9%

11/27/2015 3.1%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

4/5/13 7/21/13 11/5/13 2/21/14 6/8/14 9/23/14 1/9/15 4/26/15 8/11/15 11/27/15

All S&P 500 Companies S&P 500 Less Financials S&P 500 Less Energy

________________________________________________


20

Fiscal Year 2015 S&P 500 Earnings Expectations

(Fiscal Year Operating Earnings Estimates Year-Over-Year Change)

11/27/2015 -0.4%

11/27/2015 -0.9%

11/27/2015 6.5%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

4/26/13 8/9/13 11/22/13 3/7/14 6/20/14 10/3/14 1/16/15 5/1/15 8/14/15 11/27/15

All S&P 500 Companies S&P 500 Less Financials S&P 500 Less Energy

________________________________________________


21

U.S. Real Median Family Income Struggling (USD in thousands)

________________________________________________


9/1/2015 61.8

45.0

47.5

50.0

52.5

55.0

57.5

60.0

62.5

65.0

1981 1985 1989 1993 1998 2002 2006 2010 2015

22

Consumer – Savings

________________________________________________

Source: Monticello Associates.

5.4% 5.6%

2%

4%

6%

8%

10%

12%O

ct-1

0

Feb

-11

Jun

-11

Oct

-11

Feb

-12

Jun

-12

Oct

-12

Feb

-13

Jun

-13

Oct

-13

Feb

-14

Jun

-14

Oct

-14

Feb

-15

Jun

-15

Oct

-15

Savi

ngs

Rat

e a

s %

of

Dis

po

sab

le In

com

e

23

Adjusted Unemployment

________________________________________________


7.80%

11/1/15 5.00%

8.40%

11/1/15 6.80%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

9.00%


Unemployment Rate Unemployment Adjusted to a Static Participation Rate

Sep-2012 Dec-2013

24

Consumer Spending

________________________________________________


-12%

-8%

-4%

0%

4%

8%

12%N

ov-

07

May

-08

No

v-0

8

May

-09

No

v-0

9

May

-10

No

v-1

0

May

-11

No

v-1

1

May

-12

No

v-1

2

May

-13

No

v-1

3

May

-14

No

v-1

4

May

-15

No

v-1

5

YoY

%

Retail Sales Retail Sales ex Autos and Gasoline

25

Compensation and Productivity

7/1/2015 0.58

7/1/2015 1.99

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1980 1982 1984 1987 1989 1991 1994 1996 1998 2001 2003 2005 2008 2010 2012 2015

Productivity (QoQ, SAAR, 5-yr avg) Unit Labor Costs (QoQ, SAAR, 5-yr Avg)

________________________________________________

Source: Evercore ISI.

26

Gone Are The Good Old Days

________________________________________________

Source: BLS, Haver Analytics, Strategas Research Partners.

2.8%

1.4%

3.1%

1.3%

1.4%

1.7%

0.8%

0.5%

0%

1%

2%

3%

4%

5%

1948-1973 1973-1995 1996-2004 2005-2Q2015

Productivity (real output per hour) Hours Worked

(%)

27

U.S. Layoffs Up

________________________________________________


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1/3

/10

8/7

/10

3/1

1/1

1

10

/13

/11

5/1

7/1

2

12

/19

/12

7/2

3/1

3

2/2

5/1

4

9/2

9/1

4

5/3

/15

12

/6/1

5

U.S. Employee Layoff Announcements

28

Capital Spending

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

’90 ’93 ’96 ’99 ’02 ’05 ’08 ’11 ’14

________________________________________________

Source: Compustat, FactSet, Strategas Research Partners

Net Income per Employee – S&P 500

30%

40%

50%

60%

70%

80%

90%

’90 ’93 ’96 ’99 ’02 ’05 ’08 ’11 ’14

CapEx as % of Cash Flow

29

Housing Outlook Should Improve

________________________________________________

Source: BLS, Federal Reserve Bank of St. Louis, Census Bureau, Strategas Research.

1905 507

1918 118

1925 937

1933 93

1944 139

1947 846

1950 1,352

1973 2,045

1982 1,062

1986 1,805

1991 1,014

2005 2,068

2014 1,003

0

500

1,000

1,500

2,000

2,500

18

89

18

94

18

99

19

04

19

09

19

14

19

19

19

24

19

29

19

34

19

39

19

44

19

49

19

54

19

59

19

64

19

69

19

74

19

79

19

84

19

89

19

94

19

99

20

04

20

09

20

14

29.5

30.0

30.5

31.0

31.5

32.0

32.5

33.0

20

00

20

01

20

03

20

05

20

06

20

08

20

10

20

11

20

13

20

15

Nov 2015: 32.8→

Annual Housing Starts Since 1889 U.S. Household Employment, 25–34 (in millions)

30

U.S. Average Age of Total Private Capital Stock 2014: 22.3

17

18

19

20

21

22

23

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

________________________________________________


31

Oil and Gas Rig Count

0

500

1,000

1,500

2,000

2,500

Jan-07 Nov-07 Oct-08 Sep-09 Jul-10 Jun-11 May-12 Apr-13 Feb-14 Jan-15 Dec-15

________________________________________________


32

DOE Total Crude Oil Inventories (Crude High: $107.53 July 23, 2014) (millions of barrels)

11/29/2015 489.42M

367M

300

350

400

450

500

11/28/2010 8/16/2011 5/3/2012 1/19/2013 10/7/2013 6/25/2014 3/13/2015 11/29/2015

DOE Total Crude Oil Production (millions of barrels)

11/29/2015 9.20M

8.44M

5.006.007.008.009.00

10.00

11/28/2010 8/16/2011 5/3/2012 1/19/2013 10/7/2013 6/25/2014 3/13/2015 11/29/2015

Spot WTI Prices

$106.34

11/29/2015 $39.97 $30

$50

$70

$90

$110

11/28/2010 8/16/2011 5/3/2012 1/19/2013 10/7/2013 6/25/2014 3/13/2015 11/29/2015________________________________________________


33

Corporate Profit Margins vs. ULC (Quarterly data 3/31/1947 – 6/30/2015)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

1947 1951 1956 1960 1965 1970 1974 1979 1983 1988 1992 1997 2002 2006 2011 2015

Corporate Profit Margins (%) Unit Labor Costs (Smoothed Year-to-Year % Change)

Corporate Profit Margins (LHS)

9/30/2015 = 11.4 %

Unit Labor Costs (Smoothed Year-to-Year Change)

(RHS) 9/30/2015 = 2.4%

________________________________________________

Source: Ned Davis Research.

Correlation Coefficient = -0.37

34

Corporate Profits as % GDP and Labor Share of Corporate GDP

________________________________________________

Source: BEA, Strategas Research Partners

56%

58%

60%

62%

64%

66%

68%

6%

7%

8%

9%

10%

11%

12%

13%

14%

1947 1952 1958 1964 1969 1975 1981 1986 1992 1998 2003 2009 2015

Labo

r Share

of C

orp

orate

GD

P C

orp

ora

te P

rofi

ts a

s %

of

GD

P

Corporate Profits as % of GDP, Left Labor Share of Corporate GDP, Right

Corporate Profits as % of GDP

Labor Share of Corporate GDP

2014 Market and Earnings Outlook

36

S&P Earnings Estimates Continue To Weaken

________________________________________________


S&P Revenue Consensus

Level Y/Y %

2014 3Q $1,172 +5%

4Q $1,192 +3%

2015 1Q $1,093 -2%

2Q $1,108 -5%

3Q $1,104 -6%

4QE $1,141 -4%

2016 1QE $1,116 +2%

2QE $1,151 +4%

3QE $1,166 +6%

S&P 500 EPS Consensus

Level Y/Y %

2014 3Q $119 +10%

4Q $118 +5%

2015 1Q $112 +1%

2Q $117 0%

3Q $116 -2%

4QE $115 -2%

2016 1QE $115 +3%

2QE $123 +6%

3QE $128 +10%

37

S&P 500 Operating Margins (1994–3Q 2014)

________________________________________________

Source: Standard and Poors, Strategas Research. Note: Latest 3Q Data.

Current 21-Year Avg. Ratio

Tech 17.5% 10.4% 1.68

Discretionary 7.3% 4.6% 1.60

Financials 15.3% 10.3% 1.48

Utilities 10.1% 7.6% 1.32

Industrials 9.2% 7.3% 1.26

S&P 500 9.2% 7.7% 1.20

Staples 6.5% 6.5% 1.00

Materials 5.9% 6.0% 0.99

Health Care 8.4% 10.3% 0.82

Telecom 6.8% 8.5% 0.80

Energy 0.3% 7.2% 0.04

38

15

20

25

30

35

40

45

50

55

60

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

S&P 500 Energy Sector Estimated EPS in CY 2015

________________________________________________


S&P 500 Earnings Per Share in CY 2014

39

10

14

18

22

26

30

1990 1992 1995 1997 2000 2002 2005 2007 2010 2012 2015

Median

-1 Std

-2 Std

+1 Std

+2 Std

S&P 500 TTM Median P/E

________________________________________________


40

Average S&P 500 LTM P/E by CPI Y/Y Tranche

________________________________________________

Source: BLS, Standard & Poor’s, Strategas Research Partners.

16.8x

17.9x

17.2x

14.7x

10.9x

9.5x

8.5x 8.3x

8x

10x

12x

14x

16x

18x

20x

-2-0% 0-2% 2-4% 4-6% 6-8% 8-10% 10-12% 12-14%

(1950 – Current)

41

Valuations Of Five Largest Stocks Then Vs. Now

________________________________________________

Source: Factset, Strategas Research Partners.

5 Largest S&P 500 Companies (March 2000)

Company Market Cap

($BN) NTM P/E

MSFT Microsoft $553 59.7

CSCO Cisco $538 132.9

GE General Electric $513 41.7

INTC Intel $441 44.8

XOM Exxon Mobil $271 22

5 Largest S&P 500 Companies (Nov. 2015)

Company Market

Cap ($BN) NTM P/E

AAPL Apple $600 11.9

MSFT Microsoft $434 18.6

XOM Exxon Mobil $340 20.1

AMZN Amazon $312 129.0

GE General Electric $303 20.0

42

Earnings Yield Spread with 10-Year Treasury Yield

0%

2%

4%

6%

8%

10%

12%D

ec-9

9

Jan

-01

Feb

-02

Mar

-03

Ap

r-0

4

Ap

r-0

5

May

-06

Jun

-07

Jul-

08

Jul-

09

Au

g-1

0

Sep

-11

Oct

-12

Oct

-13

No

v-1

4

Dec

-15

S&P 500 Earnings Yield (Earnings/Price) 10-Year Treasury Yield

________________________________________________

Source: Factset, Strategas Research Partners.

43

Easy Monetary, Tight Regulatory Policies Favor “Financial” Rather Than Economic Risk Taking

________________________________________________

Source: Strategas Research Partners. Note: As of 9/30/15.

Uses of Cash: Pre-Crisis High, Post-Crisis Low, vs. Now

Use of Cash Pre-Crisis High Post-Crisis Low Current

Buybacks (TTM, $BN) $589 $138 $559

M&A (TTM, $BN) $1,024 $336 $1,271

Bond Issuance (TTM, $BN) $2,737 $766 $1,675

Dividends (TTM, $BN) $252 $193 $376

Capex (SAAR, $BN) $1,982 $1,584 $2,319

Non-Financial Corporate Profits w/ IVA & CC Adj (SAAR, $BN) $1,078 $655 $1,299

Non-Financial Corporate Cash (TTM, NSA, $BN) $5,043 $4,894 $6,772

44

________________________________________________


50 Day Rolling Sum of Announced U.S. Mergers & Acquisitions

$0B

$50B

$100B

$150B

$200B

$250B

$300B

$350B

$400B

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mo

vin

g Su

m o

f U

.S. M

&A

($ in billions)

Our Improving Fiscal Dilemma

46

Some Unexpected Polling Results

45%

77%

37%

21%

48%

18%

55%

73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Total Democrats Independents Republicans

DC Experience DC Outsider

________________________________________________


President Should Have DC Experience or Be a DC Outsider? (Quinnipiac, 8/20/15–8/25/15)

47

50%

53%

55%

58%

60%

63%

65%

68%

70%

73%

’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 ’10 ’15

Consumer Spending As Pct GDP Ex-Healthcare Physician ServicesDental Services Paramedical ServicesHospitals Nursing HomesPharmaceutical & Other Medical Products Therapeutic Appliances & Equipment

All Other Consumer Spending = 53.9%

Total Consumer Spending = 68.4%

U.S. Consumer Spending As % GDP

________________________________________________


48

Ratio of Social Security Covered Workers to Beneficiaries

________________________________________________


2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

49

Income Tax Shares as Pct of Income Taxes Paid

25.8

42.6

54.7

76.0

93.5

6.5

37.8

58.6

69.8

86.3

97.2

2.8

0

25

50

75

100

Top 1% Top 5% Top 10% Top 25% Top 50% Bot 50%

1986 2013

________________________________________________

Source: Strategas Research Partners and Tax Foundation, November 2015

The Status of the European Economy

51

Eurozone Real GDP

________________________________________________


Jun-00 4.4% Dec-06

3.8%

Mar-09 -5.5%

Mar-11 2.9%

Sep-14 0.8%

Sep-15 1.6%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

52

European PMI Data Is Solid

________________________________________________


-1.6%

-0.1%

0.8% 0.8%

-0.3%

0.8%

-0.2%

1.8%

0.6%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

42

44

46

48

50

52

54

56

Austria France Germany Greece Ireland Italy Netherlands Spain Eurozone

Current Manufacturing PMI MoM Change

China and the Emerging Markets

54

EM Capital Flows

Jun-14 = $3.99

Nov-15 = $3.44

$2.4

$2.6

$2.8

$3.0

$3.2

$3.4

$3.6

$3.8

$4.0

2010 2011 2012 2013 2014 2015

China Foreign Reserves ($ in trillions)

________________________________________________


55

6.0%

8.4%

5%

7%

9%

11%

13%

15%

17%

'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15

Services Industry

Rebalancing The Economy

China Real GDP YTD Y/Y Growth by Industry: Manufacturing/Construction vs. Services Industry

________________________________________________


42.7%

48.1%

38%

40%

42%

44%

46%

48%

50%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Services Industry

Manufacturing Industry

Share of China Nominal GDP by Industry: Manufacturing/Construction vs. Services Industry

56

China Property Sales Price Index

________________________________________________

Source: China Index Academy/Soufun, Strategas Research Partners.

(6%)

(4%)

(2%)

0%

2%

4%

6%

8%

10%

12%

14%

Jun-11 Jan-12 Aug-12 Mar-13 Sep-13 Apr-14 Nov-14 Jun-15 Dec-15

(Y/Y % Chg)

57

China – Share of Global Commodities Consumption

________________________________________________

Source: Monticello Associates. 2014,2015 data

China 60%

Rest of the World 40% China

54%

Rest of the World 46%

China 12%


China 49%


China 48%


China 46%


Concrete Aluminum

Oil Coal

Copper Steel

58

Real GDP Y/Y% Change

________________________________________________


2009–2011 Consensus 2015:4Q e

Consensus 2016:4Q e

Brazil +5.0% -2.5% +0.5%

Russia +4.3% -5.5% 0.0%

India +9.7% +7.8% +7.5%

Indonesia +6.3% +5.0% +5.5%

China +10.2% +6.5% +6.0%

Avg (weighted by GDP) +8.6% +3.8% +4.6%

The Continuing Recovery in Japan

60

________________________________________________

Source: FactSet Market Aggregates, Strategas Research Partners.

Nikkei 225 Earnings per Share (TTM, Yen)

Current

NTM P/E Current

Div. Yield 10-yr Yield

Japan 14.5 1.97% 0.30%

U.S. 16.7 2.15% 2.21%

Europe 15.3 3.57% 0.60%

Japanese Valuations Are Attractive

(200)

0

200

400

600

800

1,000

1,200

1,400

2001 2002 2004 2005 2007 2008 2010 2011 2013 2014

61

Disclaimer

The views expressed in this commentary are the personal views of Byron Wien, Vice Chairman in the Multi-Asset Investment group (together with its affiliates, "Blackstone") and do not necessarily reflect the views of Blackstone itself. The views expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstone undertakes to advise you of any changes in the views expressed herein. Blackstone and others associated with it may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary and may also perform or seek to perform investment banking services for those companies. Blackstone and/or its employees have or may have a long or short position or holding in the securities, options on securities, or other related investments of those companies. Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Where a referenced investment is denominated in a currency other than the investor's currency, changes in rates of exchange may have an adverse effect on the value or price of or income derived from the investment. Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one's investment and tax advisors. Certain assumptions may have been made in this commentary as a basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differing facts from the assumptions may have a material impact on any indicated returns. Past performance is not necessarily indicative of future performance. The price or value of investments to which this commentary relates, directly or indirectly, may rise or fall. This commentary does not constitute an offer to sell any security or the solicitation of an offer to purchase any security. To recipients in the United Kingdom: this commentary has been issued by Blackstone Advisory Partners L.P. and approved by The Blackstone Group International Partners LLP, which is authorized and regulated by the Financial Services Authority. The Blackstone Group International Partners LLP and/or its affiliates may be providing or may have provided significant advice or investment services, including investment banking services, for any company mentioned or indirectly referenced in this commentary. The investment concepts referenced in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. This commentary is disseminated in Japan by The Blackstone Group Japan KK and in Hong Kong by The Blackstone Group (HK) Limited.

Appendix – Life’s Lessons

64

Life’s Lessons

1. Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.

2. Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.

3. When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.

4. Read all the time. Don’t just do it because you’re curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.

5. Get enough sleep. Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.

6. Evolve. Try to think of your life in phases so you can avoid a burn-out. Do the numbers crunching in the early phase of your career. Try developing concepts later on. Stay at risk throughout the process.

Here are some of the lessons I have learned in my first 80 years. I hope to continue to practice them in the next 80

65

Life’s Lessons (Cont’d)

7. Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.

8. When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen. It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.

9. On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don’t need you. Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.

10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people don’t become comfortable with who they are until they’re in their 40’s. By that time they can underplay their achievements and become a nicer, more likeable person. Try to get to that point as soon as you can.

11. Take the time to give those who work for you a pat on the back when they do good work. Most people are so focused on the next challenge that they fail to thank the people who support them. It is important to do this. It motivates and inspires people and encourages them to perform at a higher level.

12. When someone extends a kindness to you write them a handwritten note, not an e-mail. Handwritten notes make an impact and are not quickly forgotten.

13. At the beginning of every year think of ways you can do your job better than you have ever done it before. Write them down and look at what you have set out for yourself when the year is over.

14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Short-cuts can be construed as sloppiness, a career killer.

66

Life’s Lessons (Cont’d)

15. Don’t try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.

16. When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable. If it pays the most, you’re lucky. If it doesn’t, take it anyway, I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.

17. There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a happy person and the right job is essential to that.

18. When your children are grown or if you have no children, always find someone younger to mentor. It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.

19. Every year try doing something you have never done before that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.

20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.

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