20140502 lookout report

Cross-Asset Divergences,And The Conundrum Of The EconomicOutlook For The Balance Of 2014

The financial markets' current circumstances are among the most complex and challenging that

we've ever seen. There are so many crosscurrents and contradictions flowing through the U.S.

and global financial markets right now that it is impossible to address them all in a single

forum.

For example, core inflation is declining and continues to head in the opposite direction from the

U.S. Federal Reserve's preference. Also, the European Central Bank (ECB) is reported to be

seriously considering unconventional monetary policy steps, potentially including negative

interest rates, to combat rising risks of deflation across Europe. Despite these concerns over

falling consumer prices, gold, the traditional inflation hedge, continues to firmly trade at what

are historically elevated prices.

Furthermore, there is a large discrepancy between the signals emulating from the U.S. debt and

equity markets. The yield on the 10-year Treasury note has now declined to 2.675% from

3.05% at year-end 2013, seemingly in line with expectations for a slowing economy, coupled

with a disinflationary environment. The signals coming out of the bond market contrast sharply

with consensus corporate earnings expectations that, beginning with the second quarter,

continue to look for record quarterly S&P 500 earnings-per-share over the balance of this year.

Speaking of corporate earnings, while it is a positive development that expected first-quarter

earnings growth has rebounded to 2.3% from -1.2% just a couple of weeks ago, this result

nonetheless is disappointing when compared with the 5% growth that analysts anticipated at

the close of 2013. Despite sharply reduced expectations for the first quarter, Wall Street remains

optimistic about the balance of 2014, looking for 8% to 11% sequential quarterly earnings

growth over the next three quarters to be followed by 10% to 13% earnings growth in 2015.

In a year characterized by expectations for successive record highs in corporate earnings, it

seems inconsistent that the best performing year-to-date S&P 500 industry sector would be the

defensive utilities sector (14% growth) and not one of the more economically cyclical sectors

such as the consumer discretionary (-4.2%) or financials (0.5%) sectors. The lack of cyclical

leadership in the stock market and the outperformance of the utilities sector may be completely

Lookout Reportfrom Global Markets Intelligence

May 2, 2014

Michael G Thompson

Managing Director

Global Markets Intelligence

(1) 212-438-3480

[email protected]

Robert A Keiser

Vice President


(1) 212-438-3540

[email protected]

The Lookout Report is a compendium

of current data and perspectives from

across S&P Capital IQ and S&P Dow

Jones Indices covering corporate

earnings, market and credit risks,

capital markets activity, index

investing, and proprietary data and

analytics. Published bi-weekly by the

Global Markets Intelligence research

group, the Lookout Report offers a

detailed cross-market and cross-asset

view of investment conditions, risks,

and opportunities.

1309011 | 301128617

consistent with the decline in bond-market yields since the start of the year, but they are in direct contradiction to the

optimism implied by consensus expectations and a stock market that refuses to pull back by more than a couple of

percentage points from all-time record highs.

As far as the goods-and-services consumption-based U.S. economy is concerned, a divergence exists in consumers'

collective appetite for large-ticket purchases of automobiles and housing. Auto and home purchases were both improving

in tandem over the first half of 2013, but the pace of housing-market activity has dropped off since the mid-point of last

year after the Fed mentioned the possibility of "tapering" before year-end. So, while consumers have been purchasing light

vehicles at better than a 16 million unit annual pace, the best level seen since late 2007, the pace of U.S. existing home

sales has collapsed to 4.6 million units annualized in each month of the first quarter of this year from the recent peak of

5.4 million units recorded in July 2013. An alignment of consumers' appetite for large-ticket item purchases, similar to

what occurred in the first half of last year, would help fortify the U.S. macroeconomic outlook for the balance of this year,

in our view.

Global Markets Intelligence (GMI) Research fully expects that the economic and market-based contradictions that we

observed in the first quarter of 2014 will be gradually resolved over the balance of this year. This process starts in May as

economic data is reported for the month of April, representing the start of the second quarter, which follows the heavily

weather-influenced first quarter. Where the stock market is concerned, we want to see sustained evidence that the U.S. and

global economies are healthy enough to empower S&P 500 corporations to earn something close to the $118 per share

that S&P Capital IQ consensus data foreshadowed.

The fundamentals conspiring to provide direction for the bond market are more complex, in our view. Issues that need to

be resolved include the near-term path and eventual medium-term equilibrium rate of inflation; the vigor of the U.S.

economy and its effect on the timing and magnitude of adjustments to monetary policy, specifically the overnight Fed

funds interest rate; and ultimately, the ability of the U.S. economy and financial system to continue to heal and eventually

flourish, despite the potential for a significant increase in short- and long-term interest rates.

Furthermore, economic inconsistencies are clearly not limited to the U.S. While some previously problematic countries

have recently witnessed sustained monthly declines in their unemployment rate (Spain's rate declined to 25.6% in

February 2014 from 26.5% August 2013), others such as Italy and France have yet to see a cyclical peak in their

unemployment rates (13% and 10.4%, respectively). Additionally, the China manufacturing Purchasing Managers Index

(PMI) has hovered just above the neutral 50 level in each month of the first quarter of this year, suggesting negligible

economic momentum in the world's second-largest economy since the start of 2014.

GMI Research is closely following 10-year Treasury note yields for signs of a developing alignment between the signals

coming from the stock and bond markets. The 10-year Treasury note yield has been locked into a fairly restrained 2.50%

to 3.00% trading range since June 2013. Should market participants begin to sense a resolution of the divergences and

conundrums that characterize current conditions, in the direction of a sustained improvement in U.S. economic

performance, then yields could easily head toward the 4.00% level last seen in the early years of this recovery cycle.

Yields hit 4.00% in June 2009, despite the fact that the Federal Reserve was conducting its first round of quantitative

easing (QE1) that commenced in November 2008 and the 10-year Treasuries then touched 4.00% again in April 2010 as

the Fed was set to temporarily suspend QE1 in June 2010. However, the spike in yields proved to be temporary as the Fed

resumed buying securities in August in response to ongoing sub-par economic growth. With the Fed now in the process of

winding down its third round of quantitative easing, it is a bit surprising that yields are so low, reinforcing the notion of

an outlook that lacks clarity. A sustained break above the 3.00% yield level by the 10-year Treasury (see chart 1) could

potentially be signaling a resolution of the market conundrum and the start of a move toward the 4.00% yield level, in our

Cross-Asset Divergences,And The Conundrum Of The Economic Outlook For The Balance Of 2014 Lookout Report from Global Markets Intelligence

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view.

Chart 1

Inside This Issue:

Macroeconomic Overview

In a year characterized by expectations for successive record highs in corporate earnings, it seems inconsistent that the best

performing year-to-date S&P 500 industry sector would be the defensive utilities sector (14% growth) and not one of the

more economically cyclical sectors such as the consumer discretionary (-4.2%) or financials (-0.5%) sectors. The lack of

cyclical leadership in the stock market and the outperformance of the utilities sector may be completely consistent with the

decline in bond-market yields since the start of the year, but they are in direct contradiction to the optimism implied by

consensus expectations and a stock market that refuses to pull back by more than a couple of percentage points from

all-time record highs.

Economic And Market Outlook: North American And European Earnings

Companies reporting in the first half of the earnings season beat estimates by 4.8% and if companies maintain this pace

over the second half of earnings season, final growth would end just north of 3.0%. Even if we do end with 3.0%, it

would still mark the weakest quarter for S&P 500 profit growth since third-quarter 2012.


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International Update: The Jakarta, Taipei, Manila, Seoul, And Hong Kong Equity Markets Are Set To Outshine Shanghai's

This Year

Since Xi Xinping and Li Keqiang's appointments to the presidency and the premiership, respectively, last year, the

authorities in Beijing are still keenly focused on resolving issues that they were elected to prioritize for the remaining nine

years of their terms in office. Alleviating worsening waterway and atmospheric pollution as well as prosecuting corrupt

government officials rank among the most important items the current regime intends to tackle in the coming years.

S&P Dow Jones Index Commentary: Market Uncertainty Increases Volatility

Last year saw significant gains in the market, as 2013 posted a 29.6% gain, with 457 of the S&P 500 issues gaining.

Year-to-date, S&P 500 companies are up 1.93%, with 298 issues gaining. Also differentiating this year is the number of

issues moving well outside the index average of a 1.93% gain year-to-date. So far in 2014, 111 issues are up at least 10%

this year, with 43 declining at least 10%. While the index has been flat, it would appear the battle from within has been

ranging, and that has added to the perception of volatility.

Leveraged Commentary And Data: The Loan Default Rate Hits Its Four-Year High Of 4.64% With EFH's Bankruptcy Filing

While EFH's default weighs heavily on the rate by amount--it is, after all, the largest loan in the S&P/LSTA Index and

accounts for 3.43% of the index--it barely registers by number of loans. Indeed, the default rate by number is 1.01% in

April including EFH, or 0.87% excluding it.

R2P Corporate Bond Monitor

On April 16, the Federal Reserve's Beige Book survey revealed that the U.S. economy continued to expand in most regions

as businesses benefited from the retreat from harsh winter weather. Eight of 12 Fed districts characterized growth as

"modest or moderate," and consumer spending increased in most districts. In addition, U.S retail sales and housing starts

rose in March, while inflation remained below the Federal Reserve's 2% goal, according to the April 13 Commerce

Department report. Retail sales in March climbed the most since 2012. The 1.1% increase reflects more spending on cars,

clothing, and garden supplies.

Market Derived Signal Commentary: Investors See Credit Strength In The Industrials Sector

Through April 28, 72.5% of S&P 500 industrials companies beat the S&P Capital IQ consensus estimate, ranking third of

the 10 sectors, behind only the energy (73.33%) and utilities (80%) sectors. The average for the 10 sectors is 65.7%.

Analysts polled by S&P Capital IQ now expect first-quarter earnings growth of 1.5% versus an estimated loss of 1% on

March 31. The consensus growth estimate for industrials is 6.44% for 2014 and 9.21% for 2015.

Capital Market Commentary: IPOs, M&A, And Debt

With accelerating announced merger and acquisition (M&A) activity positioning deal proceeds to reach their best levels

since 2007 and buyers eagerly pursuing targets, GMI is interested in discovering trends among canceled deals. It would

seem reasonable to assume that as more deals are announced, more deals will ultimately be canceled. After searching the

S&P Capital IQ database, GMI found that the canceled deal count has been relatively small from the year-to-date periods

between 2007 and 2013. However, there has been a sharp decrease in the number of deals that have been canceled so far

this year (this includes any deals canceled between Jan. 1, 2014, and April 28, 2014, regardless of their announcement

date), as just 113 deals have been pulled to date.


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Economic And Market Outlook

North America

After a rough start to the first-quarter earnings season, estimates have finally turned positive. With 75% of S&P 500

companies having reported, analysts now expect growth of 2.3%.

Consensus expectations bottomed out at -1.2% on April 11, right after dismal results from JPMorgan Chase & Co. were

reported. At that time, 29 companies had reported. Generally speaking, it's the companies within the financials sector that

have weighed down S&P 500 earnings growth. In fact, profit growth, excluding the financials sector, turns out to be a

much healthier 5.0%. After seven consecutive quarters of record earnings per share (EPS) figures, it looks like that trend

will end in the first quarter, with analysts expecting EPS to come in at $27.31, about $1.15 shy of last quarter's record.

Chart 2

At the beginning of the season, Global Markets Intelligence predicted that first-quarter growth would settle somewhere

around the 3.0% mark, based on the historical trend in which expectations at the beginning of any given earnings season

rise by 3.9% by the time all companies have reported. With 67% of companies beating analysts' estimates at this point,

we're well on our way toward that 3.0%.

Companies reporting in the first half of the earnings season beat estimates by 4.8% and if companies maintain this pace

over the second half of earnings season, final growth would end just north of 3.0%. Even if we do end with 3.0%, it


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would still mark the weakest quarter for S&P 500 profit growth since third-quarter 2012.

The defensive sectors continue to lead first quarter growth, with the telecommunications services and utilities sectors

expecting the highest growth rates of 42.8% and 22.1%, respectively. On the flipside, the financials (-8.5%) and energy

(-2.5%) sectors continue to lag.

Chart 3

Very broadly, some similar themes have emerged amongst first-quarter press releases. The most commonly cited reasons

for weakness have been poor weather during the quarter, unfavorable foreign exchange rates, and weakness in mortgage

originations and applications. Alternatively, some reasons for strength have been positive retail figures, the continued

health of the U.S. consumer, and robust sales in China.

Revenues will continue to be in focus for the first quarter as a true measure of corporate health. Currently, analysts

anticipate top-line growth to come in at 3.2%. This is the first time since the second quarter of 2012 that analysts expect

sales growth to outpace bottom-line results. Despite the upward trend, this is still a persistently low number, which shows

that corporations are continuing to streamline and cost-cut their way to growth each quarter. Expectations for the second

half of the year are slightly better at 4% for the third and fourth quarters.


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Chart 4

Looking ahead, 77 companies are scheduled to release results next week, at which point 90% of the index will have

reported. Next week's focus will be on utilities companies.

Europe

The U.S. earnings season is beyond the halfway mark, but the S&P Europe 350, with 31 companies reporting this week,

just entered peak season. Of those companies, 48% beat analysts' estimates on the bottom line, while 52% beat on the top

line. A majority of the earnings beats came from companies in the energy sector, still poised to fall 8.0% in the first

quarter, while many of the misses were from companies within the financials sector, which analysts expected to be down

5.1% year-over-year.

Analysts expect profits to decline 1.2% for the S&P Europe 350 index in the first quarter, as compared with the first

quarter of 2013. This is based on the 204 companies (58% of the index) that have estimates for first-quarter 2014, and

reported in first-quarter 2013. European companies are not required by the FSA to report quarterly, hence the low number

of expected releases. Analysts anticipate six of the 10 sectors to post negative growth for the first quarter--energy (-8%),

consumer staples (-10%), health care (-2.6%), financials (-5.1%), telecommunications services (-8.4%)and utilities

(-19.2%). On the other hand, the strongest sector is once again the information technology sector, which analysts expect

to post growth of 92.3%, on top of 68% growth in the fourth quarter.


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Chart 5

While earnings growth estimates for the first quarter remain in the low-single digits for the S&P 500, overall 2014

expectations for the S&P 350 remain strong at 12.0%. However, this is a decrease of 1.5 percentage points since the

publication of our last report (see "Lookout Report: The U.S. Consumer Shrugs Off Old Man Winter And Comes Back

Strong," published April 17, 2014). If the S&P 350 achieves this growth rate, it will be the highest profit growth for the

index since 2010 (45.3%). Analysts expect five of the 10 sectors to post double-digit growth for the year, with strength

coming from the information technology (60.1%), financials (21.5%), and consumer discretionary (19.7%) sectors.

Unlike the S&P 500, the defensive sectors such as the telecommunications services (0.5%) and utilities (0.7%) sectors are

a drag on the earnings growth estimate, with only consumer staples expecting negative growth of 0.2%.


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Chart 6

Next week, first-quarter peak earnings season for companies within the S&P Europe 350 continues, with 71 companies

expected to report.

Contact Information: Christine Short, Associate Director—Global Markets Intelligence, [email protected]

International Update: The Jakarta, Taipei, Manila, Seoul, And Hong Kong Equity Markets AreSet To Outshine Shanghai's This Year

Analysts are projecting further weakening of the Chinese economy, spelling more trouble for domestic stock market

returns in the months immediately ahead. Already ranked the 11th worst performing equity market thus far this year by

Bloomberg's market ranking function, the Shanghai exchange may not be generating double-digit losses comparable to

those of its counterpart in Moscow. Yet, the former could be competing with the latter for the worst ranking in the

coming months if the government in Beijing continues to resist pressure for implementing some form of stimulus to bolster

economic activity.

Denominated in U.S. dollars, cumulative year-to-date losses totaled 7.4% and 5.9% for the Shanghai and Shenzen

exchanges, respectively. The bearish retreat of the mainland's shares markets, meanwhile, has been no less prejudicial to

the fate of Hong Kong's Hang Seng index, which has slumped 5% since the beginning of the year. Although China's real

GDP growth will probably slow to 7.5% in 2014, restrained fiscal and counter-inflationary monetary policies should

proceed to dampen enthusiasm for domestic stocks.


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Chart 7

Since Xi Xinping and Li Keqiang's appointments to the presidency and the premiership, respectively, last year, the

authorities in Beijing are still keenly focused on resolving issues that they were elected to prioritize for the remaining nine

years of their terms in office. Alleviating worsening waterway and atmospheric pollution as well as prosecuting corrupt

government officials rank among the most important items the current regime intends to tackle in the coming years. The

enhancement of President Xi's authority, in the wake of the third plenum of the Chinese Communist party's central

committee last November, arguably makes him the most powerful leader of the world's most populous nation since the

reign of Deng Xiaoping from 1978 to 1992. Although Xi has pledged to institute far-reaching reforms on the economic

front, consolidating power--which he appears to have achieved already--and addressing festering social, political, and

environmental problems ignored by his predecessors remain paramount to him and his cabinet in order to shore up

China's long-term stability.

Considering the current priorities of the recently installed government, what does President Xi's immediate agenda entail

for national economic prospects this year and next? On the one hand, his government appears confident the

macro-economy will expand at over 7% for the remainder of 2014--giving his team enough time to concentrate on the key

issues at hand. Also, a slowdown in economic momentum is consistent with the credit tightening stance that the People's

Bank of China adopted soon after President Xi took office. So, a cooling of the economy, in an effort to abate the pace of

wholesale and consumer inflation, seems a deliberate strategy of his regime. On the other hand, the reluctance of Xi's

administration to provide fresh stimulus to the domestic economy should proceed to not only dampen upside expectations

for the country's economy for the foreseeable future, but also darken the outlook for emerging economies that are highly


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dependent on Chinese industrial demand for their natural resources. Only a sharp rise in joblessness might prompt a credit

relaxation.

On a relative valuation basis, China's 8.6x positive-adjusted, 2014 forward price/earnings multiple (p/e) may be at a solid

discount to every other market in Asia, except perhaps South Korea--for which data remain unavailable. Yet, Chinese

equities do not appear at all attractive in light of the nation's near- and intermediate-term economic prospects and in spite

of the fact that its single-digit p/e is more than four times lower than its record high (36.5x), less than four points above its

all-time low and just five points under its historical average (13.7x).

A combination of relatively steady, projected real Chinese growth of over 7% and a single-digit 2014 forward p/e multiple

would ordinarily be the envy of nearly every other economy on the planet, and almost certainly a signal for upgrading

domestic shares to a portfolio over-weight were it not for the Communist government's uncompromising refusal to

reinvigorate the national economy via fiscal and monetary stimulative measures any time soon. Until Chinese real GDP

regains its past vibrancy from either external sources or some form of official stimulus, comparatively more appealing

stock markets in the Asian region offer investors more enticing alternatives than China. South Korea's economy is growing

strongly despite its presumed expensiveness vis-à-vis its neighbor to the west. Philippines, Indonesia, Taiwan, and even

Hong Kong--despite its exposure to China--all offer options for diversification in view of an improving outlook for

economic activity in each country.

Contact Information: John Krey, Director and International Investment Analyst—Global Markets

Intelligence, [email protected]

S&P Dow Jones Index Commentary: Market Uncertainty Increases Volatility

Recently, volatility has returned to the market. Daily volatility, as measured by the daily high price divided by the daily

low price, has increased to an average of 0.95% from last year's 0.85%. However, daily volatility in 2012 and 2011, was

1.07% and 1.64%, respectively. The 50-year average for daily volatility is 1.47%--over 50% more than the current year.

Compared with historical volatility data, today's market is tame. The increased perception is due to last year's volatility,

which was the lowest since 1995. If you truly want to see market volatility, investigate the numbers from 2008 to 2009,

when daily volatility averaged over 2.4% a day. Furthermore, we saw days where the index was up 1% at 3 p.m. and was

down 1% at the close.

Last year saw significant gains in the market, as 2013 posted a 29.6% gain, with 457 of the S&P 500 issues gaining.

Year-to-date, S&P 500 companies are up 1.93%, with 298 issues gaining. Also differentiating this year is the number of

issues moving well outside the index average of a 1.93% gain year-to-date. So far in 2014, 111 issues are up at least 10%

this year, with 43 declining at least 10%. While the index has been flat, it would appear the battle from within has been

ranging, and that has added to the perception of volatility.


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Chart 8

Contact Information: Howard Silverblatt, Senior Index Analyst—S&P Dow Jones Indices, [email protected]

Leveraged Commentary And Data: The Loan Default Rate Hits Its Four-Year High Of 4.64% WithEFH's Bankruptcy Filing

On April 29, Energy Future Holdings (EFH), which was formerly known as TXU Corp., filed for Chapter 11 bankruptcy.

The issuer's debt stems from the largest-ever leveraged buyout, and the bankruptcy was a long time in the making. As

early as November 2009, EFH was included in S&P's speculative-grade default rate after being downgraded on account of

a distressed exchange. What's more, the loan has been trading at 70 cents on the dollar, give or take, since August 2011.


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Chart 9

Thus, April begins a year of dual-track default-rate reporting for the leveraged loan market. With EFH's bankruptcy filing,

the loan default rate jumps to a nearly four-year high of 4.64% by amount, from 1.21% in March. Excluding EFH's

action, the rate drops to an 18-month low of 1.14%, from 1.21%.


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Chart 10

While EFH's default weighs heavily on the rate by amount--it is, after all, the largest loan in the S&P/LSTA Index and

accounts for 3.43% of the index--it barely registers by number of loans. Indeed, the default rate by number is 1.01% in

April including EFH, or 0.87% excluding it.


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Chart 11

If, for the sake of historical perspective, we reset the date of the EFH loan default to October 2009 to match the timing of

the S&P speculative-grade rate mentioned above, the peak loan default rate from November 2009 would balloon to

13.58% on a pro forma basis, from the 10.8% rate as reported under LCD's criteria. The historical chart, meanwhile,

would look like this:


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Chart 12

As for the long-term average rate by amount, it would have been slightly higher, at 3.37%, versus 3.20% as it now stands

with EFH's April default.

Contact Information: Steve Miller, Managing Director—Leveraged Commentary And

Data, [email protected]

R2P Corporate Bond Monitor

North America

On April 16, the Federal Reserve's Beige Book survey revealed that the U.S. economy continued to expand in most regions

as businesses benefited from the retreat from harsh winter weather. Eight of 12 Fed districts characterized growth as

"modest or moderate," and consumer spending increased in most districts. In addition, U.S retail sales and housing starts

rose in March, while inflation remained below the Federal Reserve's 2% goal, according to the April 13 Commerce

Department report. Retail sales in March climbed the most since 2012. The 1.1% increase reflects more spending on cars,

clothing, and garden supplies.

Europe

The eurozone's recovery appears to be on a relatively strong footing after Markit's latest purchasing managers' indices

(PMIs) revealed on April 23 that growth in business activity is approaching a three-year peak. The success of countries in


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the bloc remains mixed, however, with the pace of growth accelerating in Germany, unlike neighboring France. The PMI

was 56.3 in Germany, 50.5 in France, and 54 for the 18 eurozone states (all scores over 50 indicate growth). Outside

France and Germany, the rate of growth has been the fastest since early 2011, suggesting that the recovery in the

peripheral countries is gaining traction. The return to job creation across the region is also very encouraging news,

according to Markit's survey. The rise in employment is at the highest rate since September 2011, even though the level of

job creation remains only modest with factory and services firms still focused on reducing costs.

The British economy is also showing improvement according to the GDP figure published on April 29, showing a reported

0.8% expansion at the start of 2014, driven by manufacturing and services. This means that the British economy has

grown by 3.1%, compared with the same period in 2013.

Credit Markets

With positive economic news in the U.S. and Europe, risk-reward profiles, as measured by average Risk-to-Price (R2P)

scores, increased in both regions in the month to April 25 (see tables 1 and 2). Despite a decrease in yields, scores

increased due to lower market and credit risks.

In North America, scores increased by 7% as a result of a 0.01% decrease in the average probability of default (PD), and a

0.06% decrease in the average historical 20-day bond price volatility (BP Vol.), more than offsetting a tightening of 6 basis

points (bps) in the average option-adjusted spread (OAS).

In Europe, scores increased by 16% as a result of a 0.11% decrease in the average PD, and a 0.03% decrease in the

average BP Vol., which offset a 6 bps contraction in the average OAS.

Table 1

North American Risk-Reward Profiles By Sector--One Month Average R2P Score And Components Changes

Scores (%) OAS (bps) PD (%) BP Vol. (%)

Consumer discretionary 3 0 0.075 (0.052)

Consumer staples 22 (4) 0.068 (0.074)

Energy 11 (10) (0.058) (0.050)

Financials 8 (3) (0.007) (0.055)

Health care (2) (2) (0.041) (0.057)

Industrials 8 (5) (0.052) (0.063)

Information technology 1 (3) 0.004 (0.060)

Materials 8 (9) (0.075) (0.080)

Telecommunication services 0 (10) 0.009 (0.067)

Utilities 12 (11) 0.000 (0.063)

Average 7 (6) (0.008) (0.062)

One month change to April 25, 2014. Source: S&P Capital IQ.

Table 2

Europe Risk-Reward Profiles By Sector--One Month Average R2P Score And Components Changes

Scores (%) OAS (bps) PD (%) BP Vol. (%)

Consumer discretionary 11 (16) (0.262) (0.023)

Consumer staples 23 (4) (0.151) (0.062)

Energy 9 (3) (0.130) 0.036

Financials 7 (6) (0.271) (0.032)


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Table 2

Europe Risk-Reward Profiles By Sector--One Month Average R2P Score And Components Changes (cont.)

Health care (8) (4) (0.001) (0.018)

Industrials 6 (5) (0.072) (0.035)

Information technology 40 4 (0.014) (0.096)

Materials 11 (6) (0.057) (0.010)

Telecommunication services 31 (18) (0.087) (0.057)

Utilites 32 (6) (0.049) (0.031)

Average 16 (6) (0.110) (0.033)

One month change to April 25, 2014. Source: S&P Capital IQ.

Contact Information: Fabrice Jaudi, Vice President—Global Markets Intelligence, [email protected]

Market Derived Signal Commentary: Investors See Credit Strength In The Industrials Sector

With an improving domestic economy and growth outside the U.S., the industrials sector is poised to have a solid 2014

and an even better 2015. Indeed, the S&P 500 companies within the sector are already revealing year-over-year

improvement in first-quarter 2014 results with the earnings reporting season at its mid-point.

Through April 28, 72.5% of S&P 500 industrials companies beat the S&P Capital IQ consensus estimate, ranking third of

the 10 sectors, behind only the energy (73.33%) and utilities (80%) sectors. The average for the 10 sectors is 65.7%.

Analysts polled by S&P Capital IQ now expect first-quarter earnings growth of 1.5% versus an estimated loss of 1% on

March 31. The consensus growth estimate for industrials is 6.44% for 2014 and 9.21% for 2015.

Within the sector, analysts are estimating growth of 2% to $6.59 per share for the capital goods subsector, 6% to $2.13

for the commercial services and supplies subsector, and 4% to $5.43 for the transportation subsector.

Over the past month, the S&P 500 industrials index rose 1.5%, with a bounce off the bottom when earnings reporting

season commenced. The index has outperformed the S&P 500, which rose 0.3% over the same period (see chart 13).


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Chart 13

The Global Markets Intelligence research team checked the S&P Capital IQ database to see how the credit market was

pricing the industrials sector, and found that the average five-year credit default swap (CDS) spread for S&P 500

companies with CDS contracts tightened 1.3 basis points (bps), or 6.5%, to 65 bps over the 30-day period ended April 28.

We also found similar stability in the information technology sector (see "Lookout Report: The U.S. Consumer Shrugs Off

Old Man Winter And Comes Back Strong" published April 17, 2014, on RatingsDirect).

The average spread of 65 bps for the industrials sector appears to be about equivalent to a Standard & Poor's Ratings

Services industrials benchmark of 'A+,' which implies low risk. The spread for the Standard & Poor's 'A' benchmark is 74

bps, and the spread for the Market Derived Signal benchmark of 'aa' is 48 bps.

Standard & Poor's largely expects stable credit quality in 2014 for U.S. industrials companies (see table 3). Its view is

predicated on certain assumptions, which include an estimated 10% to 15% risk of recession in the U.S. versus the 15%

to 20% forecast it established in October 2013 (see "Industry Economic And Ratings Outlook: The Outlook For The U.S.

Environmental Services Sector Remains Stable" published April 2, 2014).

Standard & Poor's also sees 2.8% U.S. GDP growth in 2014, supported by the expectation that total industrial production

will grow 3.5% in 2014 from 2.7% in 2013; real nonresidential construction will accelerate to 5% from 1.3%; and real

investment in industrial equipment will rise by 8.3% from 3.3% (see "Industry Economic And Ratings Outlook: U.S.

Capital Goods Credit Quality Largely Stable Amidst Improving Domestic Economic Conditions" published March 26,


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2014).

The fragility of the global economic recovery presents a risk to this view, which could negatively impact S&P 500

industrials earnings and thus the risk perception in the CDS market.

Table 3

U.S. Industrials Sector

Credit

CDS (basis

points)

Change (basis

points) Change (%)

Benchmark

(basis points) CDS ICR OL/CW

NorthropGrumman Corp.

23.80 (3.90) (14.20) 115.60 aa BBB+ Stable

Norfolk SouthernCorp.

22.80 (4.90) (17.80) 115.60 aa BBB+ Stable

Raytheon Co. 22.80 (5.00) (17.90) 92.38 aa A- Stable

InternationalLease FinanceCorp.

189.90 12.80 7.20 200.78 bb BBB- CW negative

Cummins Inc. 34.40 (1.20) (3.40) 73.82 aa A Stable

HoneywellInternational Inc.

22.80 (1.70) (7.00) 73.82 aa A Stable

SouthwestAirlines Co.

66.70 (5.40) (7.50) 200.78 bbb BBB- Stable

Stanley Black &Decker Inc.

60.90 (5.00) (7.60) 73.82 bbb+ A Stable

3M Co. 16.20 (2.00) (11.10) 55.09 aaa AA- Stable

CSX Corp. 25.80 (3.40) (11.60) 115.60 aa- BBB+ Stable

Union PacificCorp.

19.80 (2.80) (12.60) 73.82 aa+ A Stable

Lockheed MartinCorp.

25.80 (4.60) (15.10) 92.38 aa- A- Stable

United ParcelService Inc.

18.70 (3.40) (15.40) 63.77 aa+ A+ Negative

Delta Air LinesInc.

241.00 5.40 2.30 447.63 b+ BB- Stable

JetBlue AirwaysCorporation

335.50 6.40 1.90 599.74 b B Stable

WasteManagementInc.

53.10 0.70 1.40 92.38 bbb+ A- Stable

Danaher Corp. 42.00 0.20 0.50 63.77 a- A+ Stable

GeneralDynamics Corp.

23.80 (0.30) (1.30) 73.82 aa A Stable

Textron Inc. 83.20 (2.50) (2.90) 200.78 bbb BBB- Positive

UnitedTechnologiesCorp.

25.90 (1.30) (4.90) 73.82 aa- A Stable

Eaton Corp. 51.40 (2.80) (5.10) 92.38 bbb+ A- Stable

Ingersoll-RandCo.

45.40 (2.50) (5.30) 144.67 a- BBB Stable

Boeing Co. 35.40 (2.10) (5.50) 73.82 a A Stable

Ryder SystemInc.

63.90 (5.70) (8.20) 144.67 bbb+ BBB Positive

Deere & Co. 29.40 (3.60) (10.80) 73.82 a+ A Stable


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Table 3

U.S. Industrials Sector (cont.)

Emerson ElectricCo.

36.90 (7.10) (16.00) 73.82 a A Stable

Masco Corp. 156.20 25.40 19.40 200.78 bb+ BBB- Positive

Pitney BowesInc.

117.60 2.90 2.50 144.67 bb+ BBB Stable

RepublicServices Inc.

47.40 0.00 0.00 115.60 a- BBB+ Stable

Dover Corp. 46.70 (1.60) (3.20) 73.82 a- A Stable

Ingersoll-RandCo. Ltd.

89.40 (5.70) (6.00) 144.67 bbb- BBB Stable

Illinois ToolWorks Inc.

31.40 (4.10) (11.40) 63.77 a+ A+ Stable

Caterpillar Inc. 39.90 (15.60) (28.10) 73.82 a A Stable

CDS--Credit default swap. ICR--Issuer credit rating. OL/CW--Outlook/Creditwatch. Source: S&P Capital IQ.

Lisa Sanders, Director—Global Markets Intelligence, [email protected]

Capital Market Commentary:

IPOs

The pace of IPO underwriting activity cooled lately, as evidenced by the fact that weekly proceeds in underwriting volume

came in under $1 billion the past two weeks after four consecutive weeks where weekly IPO deal volume topped the $1

billion mark. Following this development, the Global Markets Intelligence research unit found generally restrained

performance in regard to recent IPOs. First, while nearly 33% of the 98 IPOs so far this year have gained 10% or more

from their offer price, about 20% declined 10% or more. Also, four of the top 10 IPOs brought to market this year are

trading below their offer price. This group includes the two largest issues: a $2.8 billion IPO by Ally Financial Inc. and

Santander Consumer USA Holdings Inc.'s $1.8 billion issue. On the other end of the spectrum, the 10 smallest IPOs

brought to market this year have seen an average loss of almost 9% from their offer price. Featured below are the leading

and lagging IPOs.

Table 4

2014 IPO Leaders Year-To-Date

Effective date Issuer

Total transaction

value (mil. $) Price per share ($)

Latest day close

price ($) Change (%)

2/4/2014 Revance TherapeuticsInc.

96.00 16.00 34.33 114.60

2/4/2014 AuspexPharmaceuticals Inc.

84.00 12.00 23.38 94.80

3/27/2014 Energous Corp. 24.00 6.00 11.39 89.80

4/10/2014 Zoe's Kitchen Inc. 87.50 15.00 27.83 85.50

1/30/2014 UltragenyxPharmaceutical Inc.

121.00 21.00 35.25 67.90

1/9/2014 GlycoMimetics Inc. 56.00 8.00 13.26 65.80

1/30/2014 Malibu Boats Inc. 100.00 14.00 21.92 56.60

2/4/2014 Genocea BiosciencesInc.

66.00 12.00 17.96 49.70

1/23/2014 Rice Energy Inc. 924.00 21.00 30.87 47.00

1/29/2014 Celladon Corp. 44.00 8.00 11.60 45.00


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Table 4

2014 IPO Leaders Year-To-Date (cont.)

Source: S&P Capital IQ.

Table 5

2014 IPO Laggards Year-To-Date

Effective date Issuer

Total transaction

value (mil. $) Price per share ($)

Latest day close

price ($) Change (%)

2/4/2014 Biocept Inc. 19.00 10.00 4.72 (52.80)

2/10/2014 NephroGenex Inc. 37.20 12.00 6.63 (44.80)

2/12/2014 ConcertPharmaceuticals Inc.

84.00 14.00 8.90 (36.40)

2/4/2014 uniQure N.V. 91.80 17.00 11.00 (35.30)

3/12/2014 GalmedPharmaceuticals Ltd.

38.30 13.50 9.00 (33.30)

2/11/2014 Eagle PharmaceuticalsInc.

50.25 15.00 10.23 (31.80)

1/16/2014 CHC Group Ltd. 310.00 10.00 6.85 (31.50)

2/20/2014 Semler Scientific Inc. 10.01 7.00 5.01 (28.40)

3/19/2014 MediWound Ltd. 70.00 14.00 10.10 (27.90)

2/26/2014 Lumenis Ltd. 75.00 12.00 8.83 (26.40)


M&A

With accelerating announced merger and acquisition (M&A) activity positioning deal proceeds to reach their best levels

since 2007 and buyers eagerly pursuing targets, GMI is interested in discovering trends among canceled deals. It would

seem reasonable to assume that as more deals are announced, more deals will ultimately be canceled. After searching the

S&P Capital IQ database, GMI found that the canceled deal count has been relatively small from the year-to-date periods

between 2007 and 2013. However, there has been a sharp decrease in the number of deals that have been canceled so far

this year (this includes any deals canceled between Jan. 1, 2014, and April 28, 2014, regardless of their announcement

date), as just 113 deals have been pulled to date.

Similarly, the volume of canceled U.S. M&A deals stands at less than $22 billion, compared with $33 billion in canceled

deal volume at this time a year ago. Among notable cancellations include Liberty Media Corp.'s cancellation last month of

its proposed $10.4 billion acquisition of a remaining stake in Sirius XM Holdings Inc. Also, on Jan. 7, 2014, Dish

Network Corp. terminated its previously announced acquisition of substantially all of the assets of LightSquared LP for

$2.2 billion. Those two transactions accounted for about 58% of the $21.8 billion in U.S. M&A deals canceled so far this

year.

Table 6

Canceled U.S M&A Transactions

Cancellation Dates Total deal value (bil. $) Number of deals

1/1/2007 - 4/28/2007 119.1 226

1/1/2008 - 4/28/2008 52.7 250

1/1/2009 - 4/28/2009 23.1 271

1/1/2010 - 4/28/2010 27.1 234

1/1/2011 - 4/28/2011 43.2 259


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Table 6

Canceled U.S M&A Transactions (cont.)

1/1/2012 - 4/28/2012 53.0 213

1/1/2013 - 4/28/2013 33.0 214

1/1/2014 - 4/28/2014 21.8 113


Debt

The recent weekly count of debt-related security identifier demand, based upon information provided by CUSIP Global

Services, revealed a generally positive tone upon first impression, as week-over-week CUSIP demand in several debt asset

classes rose by 15%. Of the six categories profiled, three--domestic corporate debt, municipals, and PPN domestic

debt--saw increases in identifier orders, while the remaining three categories--short-term and long-term municipal notes

and international debt--saw declines. Despite the recent advance, our review of selected debt category CUSIP requests for

2014 to date reveals a double-digit percentage drop led by reduced identifier orders in the field of municipal debt and

long-term municipal notes.

Table 7

Selected Debt CUSIP Requests

Security

Week ending

4/25/14

Week ending

4/18/14 2014* 2013*

Year-over-year

change (%)

Domestic corporatedebt

80 69 3234 3506 (7.76)

Municipals 238 210 1581 2214 (28.59)

Long-term municipalnotes

16 20 324 336 (3.57)

Short-term municipalnotes

6 9 137 158 (13.29)

International debt 48 49 832 769 8.19

PPN domestic debt 46 20 712 762 (6.56)

Total 434 377 6820 7745 (11.94)

*Year-to-date. Source: Cusip Global Services.

Contact Information: Rich Peterson, Director—Global Markets Intelligence, [email protected]


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