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The Taper Tantrum Of 2013 Suggests That The Fed WillCautiously Normalize Policy In The Coming Year

The Federal Reserve at long last appears set to raise interest rates and commence the

normalization of U.S. monetary policy. The much stronger-than-expected October employment

and Institute of Supply Management (ISM) Services Purchasing Managers' Index (PMI) reports

have given the data-dependent Fed a green light to increase the overnight Fed fund interest rate

for the first time in nearly a decade. The 1.9% consumer price inflation--excluding food and

energy--at the end of September also appears to be increasing Fed officials' confidence that core

inflation will eventually return to and stabilize near the stated 2.0% objective.

Relative to U.S. unemployment and the prior Fed tightening cycle that began in June 2004, it

also seems that the time has arrived for U.S. monetary policy to depart the nominal zero interest

rate boundary and proceed with the process of normalization. As of October, the average U.S.

unemployment rate, between the headline 5.0% number and the 9.8% level of U6

unemployment, equals 7.4%. This is just below the average 7.55% level recorded in June 2004

at the start of the Fed's prior tightening cycle (see chart 1).

Lookout Reportfrom Global Markets Intelligence

November 13, 2015

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 biweekly 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.

Chart 1

If the Federal Open Market Committee (FOMC) is indeed within weeks of raising the overnight interest rate target and

starting the first tightening cycle in a decade, one question immediately arises: How quickly and how far will the Fed

further tighten monetary policy in 2016? Global Markets Intelligence (GMI) Research believes, as do most investors, that

the Fed will prefer to adjust policy at a measured pace in the year ahead. With hindsight, we now know that the bar was

set really high within FOMC policy debate circles in terms of the macroeconomic requirements permitting the inaugural

rate hike, and the bar is not likely to be lowered significantly for subsequent Fed rate hikes.

Careful consideration will also likely be given to the effects this tightening cycle will have on the term structure of

market-controlled interest rates. In the spring of 2013 when Chairman Ben Bernanke foreshadowed the likely

discontinuation of open market fixed income security purchases by the Fed, triggering what is now called the "Taper

Tantrum," the 10-year Treasury note yield quickly increased from 1.66% at the beginning of May to 3.04% at year-end

2013.

In the wake of the Taper Tantrum, 30-year fixed-rate mortgage interest rates increased 120 basis points (bps) in 2013,

sending a chill through the housing market that continues by some measures even through today. The Mortgage Bankers

Association's home purchase application index reached a current recovery high watermark of 220.6 in early May 2013

but then steadily declined to the point of reaching a new cycle low of 152.4 at year-end 2014 (see chart 2). The index has

recovered and stabilized at an average level of 195 as of Nov. 12 for calendar-year 2015. Therefore, the Fed will likely

seek to avoid repeating the chilling effects witnessed in housing post-Taper Tantrum, especially because housing and

The Taper Tantrum Of 2013 Suggests That The Fed Will Cautiously Normalize Policy In The ComingYear Lookout Report from Global Markets Intelligence

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November 13, 2015

automobile unit sales numbers continue to suggest that the U.S. consumer is still underpinning U.S. and global economic

activity.

Chart 2

We believe that the Fed, at minimum, needs to hike rates by 75 bps, relative to current core personal consumption

expenditure deflator inflation of 1.3% as of September 2015. But as long as there's a wide gulf between the performances

of the largely U.S. service sector-oriented economy and the manufacturing-related portion of the economy and as long as

the U.S. continues to display much healthier growth than the rest of the world, the FOMC will likely be as cautious about

raising rates in 2016 as they have proven to be in 2015.

Inside This Issue:

Macroeconomic Overview: The Taper Tantrum Of 2013 Suggests That The Fed Will Cautiously Normalize Policy In The

Coming Year

The Federal Reserve at long last appears set to raise interest rates and commence the normalization of U.S. monetary

policy. The much stronger-than-expected October employment and ISM Services PMI reports have given the

data-dependent Fed a green light to increase the overnight Fed fund interest rate for the first time in nearly a decade. We

believe that the Fed, at minimum, needs to hike rates by 75 bps. But as long as there's a wide gulf between the

performances of the largely U.S. service sector-oriented economy and the manufacturing-related portion of the economy

and as long as the U.S. continues to display much healthier growth than the rest of the world, the FOMC will likely be as


3

November 13, 2015

cautious about raising rates in 2016 as they have proven to be in 2015.

Economic And Market Outlook: Retailers Are Set To Close Out Third-Quarter Earnings

Third-quarter earnings season is in its final stages as more than 90% of the S&P 500 Index has reported results. Current

growth is projected to be -1.6% on EPS of $29.57, or 6.5% excluding the energy sector's drag. The consumer

discretionary sector, which accounts for nearly 15% of the S&P 500 market capitalization (the third largest), will be key

in winding down third-quarter earnings as about 20% of its constituents are left to report. In particular, the retailing

industry group will be in focus as upcoming earnings releases are heavily concentrated within the group over the next few

weeks. The index currently has a 65% beat rate, just below the historic beat rate of 66%.

S&P Dow Jones Index Commentary: Buybacks Could Be Ready To Pounce

Third-quarter 2015 buybacks are up 17.1% from second-quarter and up 9.8% over third-quarter 2014. Although many

news stories talk of potential buyback declines, third quarter's expenditures ticked up. Companies not only continued to

use buybacks to reduce shares and add to earnings per share this past quarter, but they also increased their rate. Cash

remains high, giving boards the ability to do buybacks and share count reduction (increasing earnings per share) even as

some choose to finance them via debt offerings, permitting them to maintain their cash reserves (and in some cases not to

have to repatriate it).

Leveraged Commentary And Data: Energy Future Holdings Corp. Weighs Heavily On S&P/LSTA Loan Index

Texas Competitive Electric Holdings Co. LLC's pre-petition term debt (also known as EFH), by dint of its massive size

and falling secondary price, is on track to be the most influential S&P/LSTA Loan Index constituent on record. As of Oct.

31, EFH single-handedly reduced index returns over the first 10 months of the year by 0.74 percentage points to 1.25%

from 1.99% excluding EFH. Although that's not the largest absolute annual contribution to index returns on record, it

has the most significant influence on overall index returns.

R2P Corporate Bond Monitor

In North America, bullish data in the past two weeks have revived discussions about a potential December rate rise, driven

by growth in the services sector and improved employment data, which have pushed Treasury yields higher in expectation.

In the eurozone, peripheral risk once again came to the fore as political debate in Portugal appeared to lean toward

anti-austerity--a potentially undercooked version of what we've seen in Greece in recent times. Meanwhile in Greece, the

government approved a reform proposal as it continues to seek fresh bailout funds. Just like we've experienced before, the

impact will likely result in higher volatility in bond markets, exacerbated by continued challenging liquidity conditions.

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

Biotechnology and pharmaceutical firms dominate the list of the top IPOs completed this year, according to S&P Capital

IQ data. Of the top 10 percentage gainers among the year-to-date crop of IPOs, six come from these industries. Leading

the way is Philadelphia-based Spark Therapeutics Inc., a developer of gene therapy products. Just as the level of

announced U.S. M&A in 2015 has reached record highs, so too has the dollar amount of foreign acquisition of U.S.

targets and businesses. GMI reviewed the location of deal buyers and investors for past M&A activity and found that

nearly $430 billion in transactions involve foreign buyers targeting U.S. businesses.


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November 13, 2015

Economic And Market Outlook: Retailers Are Set To Close Out Third-Quarter Earnings

North America

Third-quarter earnings season is in its final stages as more than 90% of the S&P 500 Index has reported results. Current

growth is projected to be -1.6% on earnings per share (EPS) of $29.57, or 6.5% excluding the energy sector's drag. The

consumer discretionary sector, which accounts for nearly 15% of the S&P 500 market capitalization (the third largest of

the 10 sectors), will be key in winding down third-quarter earnings as about 20% of its constituents are left to report. In

particular, the retailing industry group will be in focus as upcoming earnings releases are heavily concentrated within the

group over the next few weeks. The index currently has a 65% beat rate, just below the historic beat rate of 66%.

Chart 3

Thus far, consumer discretionary is leading third-quarter earnings growth with a rate of 16.1%. Although the sector will

unlikely lose the top spot this quarter, we will be keeping a close eye on forward guidance for clues into the group's ability

to maintain a top growth position in the future. Further, the heavy hitters (Target Corp., Lowe's Cos. Inc., Home Depot

Inc., and TJX Cos. Inc.) will need large beats to push total S&P 500 Index growth into positive territory and avoid the

first quarterly earnings decline since 2009.


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November 13, 2015

Chart 4

The retail industry group accounts for the majority of the companies that are left to report earnings results. Currently,

retail is expected to post the second best growth in the consumer discretionary sector with growth of 16.8%. Automobiles

and components (e.g., General Motors Co. and Ford Motor Co.) is the only subsector with better growth (43.3%).

The retail index, however, has the best stock performance within consumer discretionary (+24.3% year to date). The

Internet and catalog industry within retail has lead that upside thanks to Amazon.com Inc., Netflix Inc., and to a lesser

extent Expedia Inc. Growth rates for these companies have been and will continue to be outsized for the next several

quarters given the high growth nature of their businesses, with investors often mistaking these stocks as part of the

technology sector. The Priceline Group Inc. actually accounts for the majority of earnings for the industry on a dollar basis

with Amazon.com accounting for a much smaller dollar amount even though it is growing at a much faster rate.

Amazon.com, however, is expected to become a larger contributor to 2016 earnings growth for the group. Thus, these

two companies will be essential in maintaining earnings growth going forward.

The Internet and catalog companies have all reported third-quarter results. The multiline and specialty retailer industries

will close out retail earnings with many companies reporting numbers next week. The specialty retail industry is important

because it accounts for 45% of the industry group's market capitalization and is expected to contribute 11% in earnings

growth for the third quarter. Home improvement retailers Home Depot and Lowe's are the largest retailers in this industry

and still have to report. So far, the automotive retailers--including O'Reilly Automotive Inc., CarMax Inc., and

AutoNation Inc., which reported third-quarter earnings growth of 26.2%, 26.1%, and 16.7%, respectively--have


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November 13, 2015

contributed growth for the specialty industry. The performance we have seen from the retailer thus far dovetails with the

monthly retail sales data that have been reported by the U.S. government as housing, autos, online, and electronics have all

exhibited strength.

Table 1

Detailed Retail EPS Growth Estimates And Performance Metrics

EPS growth estimates (%)

Third-quarter Fourth-quarter

Fiscal-year

2016

Year-to-date

price change (%)

Next 12 months

price-to-earnings ratio

(x)

% of retail market

capitalization

Retailing 16.8 13.6 18.4 24.3 25.0 100.0

Distributors (0.0) (3.8) 7.1 (16.1) 18.6 1.3

Internet andcatalog retail

48.8 52.9 49.6 83.9 66.6 42.7

Multiline retail 13.7 11.0 12.6 (13.9) 13.5 10.7

Specialty retail 11.0 10.5 14.2 7.8 19.0 45.3

EPS--Earnings per share. Source: S&P Capital IQ.

Mixed results from Macy's Inc., Kohl's Corp., Nordstrom Inc., and J.C. Penney Co. Inc. leaves the outlook for the

traditional retailers in question. High levels of inventories, increased promotions, and unseasonably warm weather leave

little to get excited about for the upcoming holiday selling season. Although the health of consumers remains solid, in our

opinion, given the improvement in jobs, spending, confidence, and more recently wages, consumers remains picky about

where they are shopping. We would expect retailer performance to be best assessed on a situational basis as the broader

themes mentioned above play out.

Eleven retailers will report third-quarter results the week ended Nov. 20, including Home Depot, Target, The TJX Cos.

Inc., and The Gap Inc.

Europe

Earnings growth rates for the Euro 350 continue to deteriorate from month-ago levels, though they are strong overall,

especially when compared with the anemic growth of -0.6% expected in the U.S. for 2015. Earnings growth is currently

pegged at 8.6% (versus 8.3% a month ago) for 2015, and it is expected to be 7.4% in 2016 (versus 8.5% a month ago).

Eight of 10 sectors are expected to report growth this year with six of eight projecting double-digit figures. Technology

(26.1%), financials (21.1%), industrials (18.3%), consumer discretionary (17.1%), and telecommunication services

(16.3%) lead with robust growth rates. Health care, utilities, and consumer staples round out the index with growth of

12.9%, 9.3%, and 6.4%, respectively. Energy (-35.1%) and materials (-14.3%) are the only sectors with projected

declines.

Table 2

Calendar-Year 2015 And 2016 EPS And Growth Rate

--Calendar-year 2015-- --Calendar-year 2016--

EPS (€) Growth (%) EPS (€) Growth (%)

Consumer discretionary 119.89 17.1 137.16 14.4

Consumer staples 154.15 6.4 166.95 8.3

Energy 78.35 (35.1) 82.51 5.3

Financials 73.88 21.1 77.48 4.9


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November 13, 2015

Table 2

Calendar-Year 2015 And 2016 EPS And Growth Rate (cont.)

Health care 127.06 12.9 137.05 7.9

Industrials 109.33 18.3 117.52 7.5

Information technology 61.58 26.1 70.89 15.1

Materials 119.56 (14.3) 132.40 10.7

Telecommunication services 74.86 16.3 78.91 5.4

Utilities 93.67 9.3 93.52 (0.2)

S&P 350 95.91 8.6 103.00 7.4

EPS--Earnings per share. Source: S&P Capital IQ.

Contact Information: Lindsey Bell, Senior Analyst--Global Markets Intelligence, [email protected].

S&P Dow Jones Index Commentary: Buybacks Could Be Ready To Pounce

Third-quarter 2015 buybacks are up 17.1% from second-quarter and up 9.8% over third-quarter 2014.

Although many news stories talk of potential buyback declines, third quarter's expenditures ticked up. Companies not

only continued to use buybacks to reduce shares and add to earnings per share this past quarter, but they also increased

their rate. Based on the current third-quarter 2015 shares over the fourth-quarter 2014 shares, they may tick up again in

the current quarter.

With 87% of the buybacks reported, aggregate buybacks are 17.1% above second-quarter 2015 and 9.8% above

third-quarter 2014. Furthermore, share count reduction continues as companies buy back more shares than they issue.

Sector counts continue to vary greatly. One standout this quarter was consumer staples, which was off 40.1% last quarter

(second-quarter 2015 over second-quarter 2014), increased 62.6% in third quarter this year over second quarter.

However, the sector's counts remain 9.8% lower than third-quarter 2014.

Energy is a tick up, but only barely, as its third-quarter count is less than 1% over second quarter. However, it is down

41.8% over this quarter of 2014.

Information technology expenditures are up 13.1% for the quarter and less than 1% year over year as the sector

represents 28.5% of all buyback expenditures.

Third-quarter dividends set a sixth quarterly record of $95.2 billion cash payment, and fourth quarter should easily make

that seven.

Shareholder return (dividends and buybacks) for the third quarter is set to post a new 12-month record with the full-year

2015 on the verge of setting an annual record.

With 88% of capital expenditures reported, the overall expenditures for third quarter are 3.7% above second-quarter

2015 but 3.1% below third-quarter 2014. Energy's expenditures are 2.9% lower than second quarter and 29.6% lower

than third-quarter 2014. Excluding energy, the S&P 500 is up 6.2% over second-quarter 2015 and up 10.9% over

third-quarter 2014.

With 88% of the share counts reported, the overall count is down over second-quarter 2015. Share count reduction

continues to affect earnings per share with the current picture expected to extend into the fourth-quarter reporting period.

With 88% reported, cash for the S&P 500 industrial sectors (i.e., excluding financials, transportation, and utilities), the


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November 13, 2015

cash and equivalent level is coming in 1.2% lower than second-quarter 2015 and 1.3% lower than the record $1.33

trillion set in fourth quarter of 2014.

Cash remains high, giving boards the ability to do buybacks and share count reduction (increasing earnings per share)

even as some choose to finance them via debt offerings, permitting them to maintain their cash reserves (and in some cases

not to have to repatriate it).

Table 3

Preliminary Third-Quarter 2015 Energy Sector Capital Expenditures

Company

12 months

ended

September

2015

12 months

ended

September

2014

Change

(%)

Change

(mil. $)

Third-quarter

2015 (mil. $)

Second-quarter

2015 (mil. $)

First-quarter

2015 (mil. $)

Fourth-quarter

2014 (mil. $)

Third-quarter

2014 (mil. $)

Chevron Corp. 31,723 37,352 (15.07) (5,629) 6,810 7,643 7,602 9,668 8,264

Exxon MobilCorp.

29,238 32,494 (10.02) (3,256) 6,401 7,109 6,844 8,884 8,198

ConocoPhillips 12,269 16,985 (27.77) (4,716) 2,174 2,407 3,332 4,356 4,588

AnadarkoPetroleumCorp.

7,080 9,683 (26.88) (2,603) 1,360 1,544 1,957 2,219 2,189

EOGResources Inc.

6,177 7,946 (22.26) (1,769) 1,357 1,268 1,546 2,007 2,113

Devon EnergyCorp.

479 12,807 (96.26) (12,328) 1,193 1,445 2,121 (4,280) 1,703

KinderMorgan Inc.

3,956 3,777 4.74 179 1,090 1,012 897 957 961

OccidentalPetroleumCorp.

6,859 7,029 (2.42) (170) 1,084 1,427 1,681 2,667 1,728

Apache Corp. 6,636 10,596 (37.37) (3,960) 1,002 2,083 3,551 2,900

Phillips 66 4,412 3,270 34.92 1,142 987 1,209 1,090 1,126 1,514

Top 10 108,829 141,939 (23.33) (33,110) 23,458 25,064 29,153 31,155 34,158

Source: S&P Dow Jones Indices.

Table 4

Issues With Diluted Share Counts

Third-quarter 2015

No. % of issues

Third-quarter 2015 with lower shares than third-quarter 2014 304 67.7

4% lower shares 99 22.0

Third-quarter 2015 with higher shares than third-quarter 2014 140 31.2

4% higher shares 41 9.1

Second-quarter 2015

No. % of issues

Second-quarter 2015 with lower shares than second-quarter 2014 324 65.1


Second-quarter 2015 with higher shares than second-quarter 2014 165 33.1



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November 13, 2015

Table 4

Issues With Diluted Share Counts (cont.)

First-quarter 2015

No. % of issues

First-quarter 2015 with lower shares than first-quarter 2014 334 66.9


First-quarter 2015 with higher shares than first-quarter 2014 161 32.3


Fourth-quarter 2014

No % of issues

First-quarter 2015 with lower shares than first-quarter 2014 337 67.8


First-quarter 2015 with higher shares than first-quarter 2014 154 31.0



Table 5

S&P 500 Preliminary Third-Quarter Cash And Equivalents

Company Sector Third-quarter 2015 (mil. $) Second- quarter 2015 (mil. $) Change (mil. $)

Largest cash holdings

Microsoft Corp. Information technology 99,226 96,451 2,775

Alphabet Holding Co. Inc. Information technology 70,912 67,725 3,187

Oracle Corp. Information technology 55,930 54,368 1,562

Apple Inc. Information technology 41,995 34,863 7,132

Johnson & Johnson Health care 37,306 33,954 3,352

Amgen Inc. Health care 31,120 29,993 1,127

The Coca-Cola Co. Consumer staples 22,798 20,953 1,845

Ford Motor Co. Consumer discretionary 22,177 20,729 1,448

General Motors Co. Consumer discretionary 21,862 22,727 (865)

Intel Corp. Information technology 21,208 14,215 6,993

Largest cash increases

Apple Inc. Information technology 41,995 34,863 7,132

Gilead Sciences Inc. Health care 15,714 8,611 7,103

Intel Corp. Information technology 21,208 14,215 6,993

International Paper Co. Materials 5,949 1,590 4,359

Biogen Inc. Health care 5,843 2,369 3,474

Johnson & Johnson Health care 37,306 33,954 3,352

Alphabet Holding Co. Inc. Information technology 70,912 67,725 3,187

Microsoft Corp. Information technology 99,226 96,451 2,775

Monsanto Co. Materials 3,638 1,101 2,537

The Kraft Heinz Co. Consumer staples 4,437 2,147 2,290

Largest cash decreases

AT&T Inc. Telecommunication services 6,602 20,956 (14,354)

Pfizer Inc. Health care 20,659 30,272 (9,613)


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November 13, 2015

Table 5

S&P 500 Preliminary Third-Quarter Cash And Equivalents (cont.)

eBay Inc. Information technology 5,301 10,554 (5,253)

Abbott Laboratories Health care 6,139 11,177 (5,038)

Sysco Corp. Consumer staples 388 5,130 (4,742)

Qualcomm Inc. Information technology 17,321 21,331 (4,010)

Twenty-First Century Fox Inc. Consumer discretionary 5,830 8,428 (2,598)

Expedia Inc. Consumer discretionary 1,491 3,383 (1,892)

3M Co. Industrials 1,758 3,485 (1,727)

Endo International PLC Health care 836 2,531 (1,695)


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

Leveraged Commentary And Data: Energy Future Holdings Corp. Weighs Heavily On S&P/LSTALoan Index

Texas Competitive Electric Holdings Co. LLC's pre-petition term debt (also known as Energy Future Holdings Corp.

[EFH]), by dint of its massive size and falling secondary price, is on track to be the most influential S&P/LSTA Loan Index

constituent on record. As of Oct. 31, EFH single-handedly reduced index returns over the first 10 months of the year by

0.74 percentage points to 1.25% from 1.99% excluding EFH. Although that's not the largest absolute annual contribution

to index returns on record, it has the most significant influence on overall index returns.

Table 6

Largest Annual Contributors

Year

Annual return

(%) Issuer

Return contribution

(%)

Return without biggest

mover (%)

Influence on returns

(%)

2002 1.91 Charter Communications Inc. (1.01) 2.92 34.53

2003 9.97 Charter Communications Inc. 0.29 9.68 3.03

2004 5.17 Wyndham International Inc. 0.06 5.11 1.19

2005 5.08 Charter Communications Inc. 0.15 4.93 3.14

2006 6.77 Georgia-Pacific Corp. 0.14 6.63 2.13

2007 2.02 Tribune Media Co. (0.11) 2.13 5.10

2008 (29.10) Tribune Media Co. (0.86) (28.24) (3.04)

2009 51.62 Univision Communications Inc. 0.92 50.70 1.82

2010 10.13 Clear Channel CommunicationsInc.

0.22 9.91 2.21

2011 1.52 TXU Corp. (0.22) 1.74 12.82

2012 9.66 Tribune Media Co. 0.41 9.25 4.48

2013 5.29 Clear Channel CommunicationsInc.

0.26 5.03 5.13

2014 1.60 Cengage Learning Holdings IIInc.

0.09 1.51 5.98

2015* 1.25 TXU Corp. (0.74) 1.99 37.23

*Through Oct. 31. Source: S&P Capital IQ LCD.

There are three reasons for EFH's outsized impact. First, EFH is the largest member of the S&P/LSTA Loan Index despite

a low price point that reduces its market capitalization.


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November 13, 2015

Table 7

Largest Issuer In The Index By Market Value

Issuer Average price year to date (% of par) Average market value weight year to date (%)

Energy Future Holdings Corp. 53.85 1.51

First Data Corp. 99.62 1.03

Valeant Pharmaceuticals International Inc. 99.49 0.90

Albertson's Holdings LLC 100.15 0.90

Asurion Corp. 98.76 0.87

H.J. Heinz Co. 99.91 0.84

Community Health Systems Inc. 100.07 0.78

Clear Channel Communications Inc. 92.87 0.75

Burger King Corp. 100.25 0.74

Dell Inc. 100.01 0.72

Source: S&P Capital IQ LCD.

Second, EFH's bid fell to 34.61% of par on Nov. 5 from 64.54% of par at year end, according to Markit, as a result of

collapsing natural gas prices, technical issues surrounding its size (with collateralized loan obligations feeling pressure to

reduce 'CCC' and defaulted holdings), and heightened investor scrutiny on distressed and defaulted names.

Chart 5

Third, loan returns have been modest in 2015, exaggerating EFH's influence.


12

November 13, 2015

Contact Information: Steve Miller, Managing Director--Leveraged Commentary And Data,

[email protected].

Follow Steve on Twitter for an early look at LCD analysis and for market commentaries.

R2P Corporate Bond Monitor

In North America, bullish data in the past two weeks have revived discussions about a potential December rate rise, driven

by growth in the services sector and improved employment data, which have pushed Treasury yields higher in expectation.

Non-farm payrolls grew by 271,000 in October--the strongest since December 2014--and unemployment dropped 0.1% to

5%, the lowest since April 2008. The report also showed wage inflation of 0.4%. The data indicated stronger consumer

spending and was supported by nonrelated reports that suggested vehicle sales have increased 13.6% year over year in

October (according to AutoData Corp.) and continued growth in construction spending since April 2015 with September's

figure growing 0.6% (per the U.S. Department of Commerce) on a monthly basis (0.7% in August) mainly because of

residential expenditure. October's nonmanufacturing Institute of Supply Management (ISM) data also buoyed the

economy, registering 59.1 in the month from 56.9 in September, bucking a three-month downward trend and showing

near-record levels in new orders, backlogs, and even export orders. The positivity, however, was slightly tempered with

weakness in manufacturing with the ISM reading continuing to flirt with contraction at 50.1 for October (50.2 in

September) and as factory orders declined 1% on a monthly basis following a 1.7% decline in September. It's still unclear

whether the weak spots and global influences will continue to sway Federal Reserve decisions in December despite the

majority of signs indicating domestic economic firmness.

In the eurozone, peripheral risk once again came to the fore as political debate in Portugal appeared to lean toward

anti-austerity--a potentially undercooked version of what we've seen in Greece in recent times. Meanwhile in Greece, the

government approved a reform proposal as it continues to seek fresh bailout funds. Just like we've experienced before, the

impact will likely result in higher volatility in bond markets, exacerbated by continued challenging liquidity conditions.

Meanwhile, data generally exhibited a weaker tone as inflation faltered (again) and retail sales stumbled for the first time

in six months, falling 0.1% on a monthly basis. Consumer prices were flat in October after falling 0.1% in September and

have failed to materially respond to the quantitative easing program initiated in March to revive price levels. Producer

prices followed suit with the steepest annual decline since January –as they recorded -3.1% in September (-0.3% on a

monthly basis compared with August). This leaves the European Central Bank far away from its objectives with monetary

easing as the only expected solution.

Changes in risk-reward profiles have been positive in both Europe and North America as volatility has improved in recent

weeks and spreads have slightly widened overall.

In North America, spread levels widened overall as tightening in some sectors were more than offset by widening in the

utilities, health care, and consumer staples sectors. Credit risk (as measured by the probability of default) worsened

overall, and market risk (as measured by bond-price volatility) improved across all sectors.

In Europe spreads experienced an overall widening, despite some tightening in the consumer discretionary sector. Credit

and market risks remained fairly flat in the month.

For more of our market views and sector credit opinions, please see "Fixed-Income Strategy: Eurozone Growth Steady As

The European Central Bank Provides Hope Of More Quantitative Easing," published Nov. 4, 2015.


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November 13, 2015

Table 8

North America Risk-Reward Profiles By Sector*

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

Consumer discretionary 19 (9) (0.123) (0.101)

Consumer staples 21 13 (0.141) (0.054)

Energy 17 (8) (0.008) (0.280)

Financials 16 9 (0.004) (0.008)

Health care 17 16 1.065 (0.006)

Industrials 27 (0) 0.212 (0.095)

Information technology 11 12 0.376 (0.052)

Materials 18 (8) 0.049 (0.225)

Telecommunications services 38 (9) 0.057 (0.305)

Utilities 16 22 0.704 (0.073)

Average 20 4 0.219 (0.120)

*One-month average Risk-to-Price score and components changes to Nov. 6, 2015. OAS--Option-adjusted spreads. bps--Basis points.

PD--Probability of default. BP Vol.--Bond-price volatility. Source: S&P Capital IQ.

Table 9

Europe Risk-Reward Profiles By Sector*

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

Consumer discretionary 5 (19) 0.011 (0.065)

Consumer staples 24 2 (0.004) (0.041)

Energy 6 23 0.007 (0.058)

Financials 14 3 (0.014) (0.029)

Health care 13 4 0.017 (0.039)

Industrials 8 (3) (0.002) (0.028)

Information technology 3 22 0.010 0.076

Materials 23 24 0.010 (0.195)

Telecommunication services 10 (0) 0.007 0.012

Utilites 15 2 0.035 (0.050)

Average 12 6 0.008 (0.042)

*One-month average Risk-to-Price score and components changes to Nov. 6, 2015. OAS--Option-adjusted spreads. bps--Basis points.

PD--Probability of default. BP Vol.--Bond-price volatility. Source: S&P Capital IQ.

Fabrice Jaudi, Vice President--Global Markets Intelligence, [email protected].

Kunaal Vora, Credit Research Analyst, London; [email protected].

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

IPOs

Biotechnology and pharmaceutical firms dominate the list of the top IPOs completed this year, according to S&P Capital

IQ data. Of the top 10 percentage gainers among the year-to-date crop of IPOs, six come from these industries. Leading

the way is Philadelphia-based Spark Therapeutics Inc., a developer of gene therapy products. The company completed its

IPO in January 2015 in the form of a $161 million issue with 7 million shares at $23 each. Those shares now trade nearly

160% higher from their debt price. Biotechnology firm Global Blood Therapeutics Inc., has also performed well as it

ranks third in 2015. Its shares have more than doubled from the $20-per-share share offering price. Among top


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performers outside the biotechnology and pharmaceutical industries include restaurant chain Shake Shack Inc., which is

up 122% from its $21-per-share offering, and Fitibit Inc., up almost 80%.

Table 10

Leading Year-To-Date 2015 IPO Performers

Effective date Issuer

Total transaction value

(mil. $)

Offer price per

share ($)

Latest price per

share ($)* Change (%)

01/29/2015 Spark Therapeutics Inc. 161.0 23.00 59.71 159.61

01/29/2015 Shake Shack Inc. 105.0 21.00 46.68 122.29

08/11/2015 Global Blood TherapeuticsInc.

120.0 20.00 43.95 119.75

02/17/2015 Inotek Pharmaceuticals Corp. 40.0 6.00 12.28 104.67

06/17/2015 Fitbit Inc. 731.5 20.00 35.92 79.60

05/06/2015 Collegium Pharmaceutical Inc. 69.6 12.00 21.16 76.33

04/14/2015 Aduro BioTech Inc. 119.0 17.00 29.88 75.76

06/25/2015 Seres Therapeutics Inc. 133.75 18.00 31.43 74.61

05/20/2015 Shopify Inc. 130.9 17.00 28.59 68.18

03/31/2015 GoDaddy Inc. 460.0 20.00 32.21 61.05

*As of Nov. 10, 2015. Source: S&P Capital IQ.

M&A

Just as the level of announced U.S. merger and acquisition activity (M&A) in 2015 has reached record highs, so too has

the dollar amount of foreign acquisition of U.S. targets and businesses. GMI reviewed the location of deal buyers and

investors for past M&A activity and found that nearly $430 billion in transactions involve foreign buyers targeting U.S.

businesses. That surpasses the previous annual record of $377.4 billion set in 2000 when foreigner purchases accounted

for almost 22% deal proceeds. The financials sector has had the most foreign buyer activity to date in 2015 with $112.7

billion in deals followed by $111.2 billion from health care transactions and $87.6 billion in information technology.

Meanwhile, several rumored deals, if they come to market, will add to the record of foreign M&A buying in the U.S.

According to published reports, Canadian Pacific Railway Ltd. is exploring a potential acquisition of Norfolk Southern

Corp. With a market capitalization of more than $26 billion, a Canadian Pacific Railway deal for Norfolk Southern

would be the largest-ever Canadian acquisition of a U.S. company. Also, reports recently surfaced that several Chinese

companies were seeking government approval to place bids for Starwood Hotels & Resorts Worldwide Inc. With a market

capitalization of more than $13 billion, a potential Chinese acquisition of Starwood would represent the largest-ever

Chinese acquisition in the U.S.

Table 11

Foreign Acquisitions In the U.S.

Year U.S. M&A (bil. $) Foreign acquisitions in the U.S. (bil. $) % of foreign M&A to U.S. M&A

1999 1,257.0 262.7 20.90

2000 1,722.4 377.4 21.91

2001 730.6 117.8 16.12

2002 450.5 62.0 13.76

2003 509.3 52.7 10.35

2004 800.1 72.5 9.06

2005 1,045.8 118.7 11.35


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Table 11

Foreign Acquisitions In the U.S. (cont.)

2006 1,407.1 276.5 19.65

2007 1,321.3 324.2 24.54

2008 828.4 200.6 24.22

2009 729.6 60.4 8.28

2010 845.1 194.1 22.97

2011 1,005.2 158.2 15.74

2012 916.0 198.3 21.65

2013 1,106.1 163.9 14.82

2014 1,527.3 277.3 18.16

Year-to-date 2015 1,890.5 429.9 22.74

M&A--Mergers and acquisitions.

Debt

According to information provided by Committee on Uniform Security Identification Procedures (CUSIP) Global Services,

the past month saw 2,250 security identifier orders processed for the six asset classes profiled below. That represents a

modest increase from September's 2,141 CUSIP orders for the same asset classes. Domestic corporate debt CUSIP orders

rose to 669 from 653 in September. Also, with October being the first month of the fourth quarter and the start of

fiscal-year 2016, it's not surprising that the number of municipal securities CUSIP demand was on the rise: It jumped in

October to 1,111, up nearly 20% from September's tally of 926. International debt CUSIP demand declined to 199 from

215 in the prior month, and private placement number domestic debt CUSIP order volume fell as 131 identifiers were

requested, down from 160 in September.

Table 12

Selected CUSIP Requests

Asset October 2015 September 2015 2015 2014 Year-over-year change (%)

Domestic corporate debt 669 653 7,954 8,075 (1.50)

Municipal bonds 1,111 926 12,618 10,328 22.17

Short-term municipal notes 127 156 1,203 1,256 (4.22)

Long-term municipal notes 13 31 315 534 (41.01)

International debt 199 215 2,472 2,353 5.06

PPN domestic debt 131 160 1,756 1,942 (9.58)

Total 2,250 2,141 26,318 24,488 7.47

CUSIP--Committee on Uniform Security Identification Procedures. PPN--Private placement number. Source: CUSIP Global Services.

Contact Information: Rich Peterson, Senior Director--Global Markets Intelligence, [email protected].


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