us strategy weekly - all star charts · back to levels seen in 2002. we also look at household debt...

Gail M. Dudack, CMT ● Chief Investment Strategist ● [email protected] ● 212-320-2045 October 25, 2017

For important disclosures and analyst certification please refer to the last page of this report.

JIA: 11203.85

SPX: 1305.93

NASDAQ: 2345.5.6 DJIA: 23441.76

SPX: 2569.13

NASDAQ: 6598.43

A Division of Wellington Shields & Co. LLC. Member NYSE, FINRA & SIPC

US Strategy Weekly Household Debt? Not a Problem.

President Trump met with Senate Republicans this week to try to forge the kind of party unity needed to pass tax reform. But political unity appears fragile in the US since Trump and several key GOP lawmakers were openly feuding on the sidelines during the same day. Speaker Paul Ryan held a press conference to assert that he expects the House to have its final tax bill ready by the Thanksgiving holiday. According to Ryan, the Senate is apt to be “a little slower,” but a final package is on track for a vote before the end of the year.

If you believe current politics is more like a soap opera than a democracy in action, we would point out that disruptive politics is not unique to the US. Young politicians like Justin Trudeau in Canada, President Emmanuel Macron of France or more recently the 31 year old Sebastian Kurz of Austria are putting a new face on local politics. This weekend voters in the Czech Republic backed a businessman, Andrej Babis, the country’s second-richest billionaire, and many are drawing comparisons to Donald Trump. Babis is overwhelmingly rejecting establishment parties. The party he formed, ANO (Action for Dissatisfied Citizens party) – which means yes in Czech – is now the biggest political party in the Czech Republic parliament and in prime position to form a coalition government.

In terms of US politics, tax reform is critical to investors and as we often have noted, tax reform could raise our 2018 operating earnings target for the SP500 from $146 to at least $155. This, in turn, would also raise our 2018 target for the market from SPX 2550 to SPX 2750 or more. For this reason, and the fact that signs of a global economic recovery continue to build, we remain bullish on equities.

HOUSEHOLD DEBT AND FINANCIAL STABILITY The International Monetary Fund’s recent GLOBAL FINANCIAL STABILITY REPORT focused on household debt growth over the last decade. It was a comprehensive look at the relationship between household debt, economic growth, and financial stability across a sample of 80 advanced and emerging market economies. It attempted to shed light on how household indebtedness affects growth and stability at the macro level and it noted that there is a trade-off between the short-term benefits of rising household debt and its medium-term costs to macroeconomic and financial stability. In the short term, an increase in the household debt-to-GDP ratio is typically associated with higher economic growth and lower unemployment, but the effects are reversed in three to five years. Moreover, high growth rates in household debt are associated with a greater probability of banking crises and these adverse effects are stronger when household debt is high. The effects are also more pronounced for advanced than for emerging market economies, since household debt and credit market participation tend to be lower in emerging economies. This study and the connection between household debt growth and financial stability attracted media attention and several commentators have noted warily that in the US, consumer debt levels have recently exceeded the levels seen before the Great Recession. Given this interest to household debt, we looked to see if there was indeed risk in the US system. The bottom line is that we found no such risk in the US; and in fact, the IMF also noted in its conclusion, that US household leverage has remained broadly constant, with the except of the poorest income group, where leverage has increased slightly in recent years.

DIGGING INTO DEBT There are two main sources for household debt: the Federal Reserve’s (FRB) quarterly FINANCIAL

ACCOUNTS OF THE UNITED STATES - Z.1 and the Federal Reserve Bank of New York’s (FRBNY)

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US Strategy Weekly ● October 25, 2017 2

, 2013 2

QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT. We would first note that there is a discrepancy between these two sources regarding the level of total household debt. The FRBNY, reports second quarter total household debt was $12.84 trillion, up $552 billion from 2Q16. The Fed’s Z.1 showed 2Q17 household debt to be $14.9 trillion, up $464 billion from a year earlier. Mortgage debt represents roughly 70% of total household debt in each survey and as of June it was reported to be $9.1 trillion by the FRBNY and $9.9 trillion by the Fed. See page 3.

Both releases place household debt at a record high at the end of June; however, we agree with the IMF that the nominal level is less important than debt relative to the economy or debt relative to personal income. This is where the FRB’s Z.1 is important since it indicates that household debt ($14.9 trillion) represented 77.5% of nominal GDP as of 2Q17. This seems like a high percentage but note that it is down substantially from a peak of 97.9% of GDP seen at the end of 2007. Equally important the percentage has been trending lower and this should continue to be true if economic activity strengthens. See page 4. As the largest portion of household indebtedness, mortgage debt represented 51.8% of GDP in June down from a high of 73% in 2009. Both of these percentages are back to levels seen in 2002. We also look at household debt to disposable personal income which reflects the household’s ability to pay off debt. Debt to DPI was 104% in June versus 133% in 2007. Again, these are back to levels seen in 2002. See page 5.

Mortgage debt has been growing slowly in recent years (3.4% and 3.9% YOY in 2Q17, according to the FRB & FRBNY, respectively) and delinquencies were less than 1.5% of balances in June. The stability in these statistics is reassuring. On the other hand, at the end of June smaller segments of debt such as auto loans, student loans and credit card debt grew 7.9%, 6.8%, and 7.9% YOY, respectively. Concerns have centered on student loan balances, which are 10.5% of total debt, where growth rates are high and delinquent balances have been averaging 11% since mid-2012. However, student loan growth rates are currently declining and delinquency rates are stabilizing. Both of these trends are favorable and encouraging. See page 6-7.

Credit expansion is part of any healthy economic recovery. Nevertheless, there are ratios that are helpful in defining when credit expansion is excessive. In the US these ratios are improving. For example, household cash to liabilities was 74% in June up from a 2006 low of 50%. Disposable income to debt is at 94%, well above its 2006 low of 76%. And perhaps most importantly, the total financial obligations ratio is at 15.1% and the debt service ratio is at 9.9%. Both of these are in good shape and in fact, are near all-time low levels. See page 8. Meanwhile, household net worth rose to $96.2 trillion in the second quarter which is 41% above the peak seen in the previous recovery. This improvement in net worth is a result of low debt growth and strong asset growth. Equity and real estate assets totaled $27.9 trillion and $27.1 trillion, respectively, in June. These represent year-over-year gains of 17.1% and 7.5%, respectively. See page 9.

In our view, all leverage contains risk, but government debt growth can be more debilitating to the macro economy than household debt. This is especially true if federal debt is growing faster than GDP or if interest rates are rising. But recent releases are revealing some positive trends. In 2Q17 federal government debt rose 3.6% on a quarter-over-quarter annualized basis. However, overall federal debt has grown 0.3% YTD while nominal GDP grew 3.4% YTD. This is a healthy combination and if it persists (which is tenuous given tax reform policy) the all-important debt-to-GDP ratio for the US economy would continue to trend lower.

TECHNICALS Our indicators continue to confirm the new highs in the broad averages. The 25-day up/down volume oscillator is neutral this week, but its string of overbought readings from late September to mid-October confirmed the bullish trend. The average daily new high list and the NYSE AD line are also confirming. In sum, we remain optimistic for new market highs.

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, 2013 3

The Federal Reserve Bank of New York reported 2Q17 total household debt of $12.84 trillion, up $552 billion from 2Q16. The Fed’s Z.1 had 2Q17 household debt at $14.9 trillion, up $464 billion from a year earlier. Mortgage debt was $9.1 trillion according to the FRBNY versus the Fed at $9.9 trillion.

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Consumer Credit Debt Outstanding

Mortgage Debt Outstanding - $Mil (left)

Source: Dudack Research Group; Federal Reserve Board Z.1

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HE Revolving

Mortgage

Total Household Debt Balance and its Composition $Trillions

Source: FRBNY Consumer Credit Panel/Equifax

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, 2013 4

Both FRB releases put household debt at a record high, however, the nominal level is less important than debt growth relative to the economy or personal income. The Z.1 household debt of $14.9 trillion represented 77.5% of nominal GDP in 2Q17, down from a peak of 97.9% of GDP at the end of 2007.

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Household Debt

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Debt as a % of nominal GDP (right)


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Household Debt as % of GDPOther HH debt Consumer Credit Mortgage Debt

Source: Dudack Research Group; Federal Reserve Board

Tax Reform Act of 1986

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, 2013 5

Mortgage debt is the largest portion of household debt. As of June, mortgage debt was 51.8% of GDP down from 73% in 2009. Also important is that total debt to disposable personal income was 104% versus 133% in 2007. Note that consumer credit (not mortgages) have been expanding recently.

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Household Debt to GDPHousehold Debt to GDP

Mortgage Debt to GDP

Source: Dudack Research Group; Federal Reserve Board; BEA

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Household Debt as a % Personal Disposable Income

Total Household Debt to DPI

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Consumer Credit to DPI

Source: Dudack Research Group; Federal Reserve; BEA

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, 2013 6

Mortgage debt represents more than 70% of total household debt and has been growing slowly in recent years (3.4% and 3.9% YOY in 2Q17, according to the FRB & FRBNY, respectively). Auto, student and credit card loans grew 7.9%, 6.8%, and 7.9% YOY, respectively, at the end of June.

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Household Debt GrowthQuarterly Rates Annualized

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Total Household Debt


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Mortgage HE Revolving Auto Loan Credit Card Student Loan Other

Household Debt: Levels and Growth RateJune 2017

Debt in $Trillion - Left Scale

% Change YOY - Right Scale


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, 2013 7

Again, mortgages represent approximately 70% of household debt and not only is this segment growing slowly, but delinquencies were less than 1.5% of balances in June. Student loan balances, which are 10.5% of total debt, have had delinquent balances averaging 11% since mid-2012.

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Consumer Credit Segment Growth RatesYear -over -Year Perc entages

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Total Debt Balance

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, 2013 8

Credit grows in all healthy expansions. Still, some ratios are good at warning that credit expansion is excessive. Cash to liabilities was 74% in June up from the 2006 low of 50%. Disposable income to debt is at 94%, well above its 2006 low of 76%. The debt service ratio is healthy at 9.9%.

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Debt Service & Financial Obligations Ratios

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Source: Dudack Research Group; FRB; DSR.The Financial Obligations Ratio is a broader measure than the Debt Service Ratio. It includes rent payments on tenant-occupied property, auto lease payments, homeowners' insurance, and property tax payments. The Mortgage DSR, defined as the total quarterly required mortgage payments divided by total quarterly disposable personal income; the Consumer DSR, defined as the total quarterly required consumer debt payments divided by total quarterly disposable personal income. The DSR is the sum of the Mortgage DSR and the Consumer DSR.

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, 2013 9

Household net worth rose to $96.2 trillion in the second quarter, which is 41% above the peak of the previous recovery. And as we show below, this comes from a combination of low debt growth and solid asset growth. Equity and real estate assets totaled $27.9 trillion and $27.1 trillion, respectively.

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Source: Dudack Research Group; Federal Reserve Board; Z.1 (B.100.e); $Billion

2Q17: Net worth is $96.2 trillion41% above the 2Q07 peak

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Household Equity and Real Estate Ownership

Real Estate Market Value

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Source: Dudack Research Group; Federal Reserve; Z.1 $Bil; B.100e and B.100

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, 2013 10

Debt can weigh on an economy; this is especially true when debt is growing faster than the economy or when rising interest rates increase the debt burden. Federal government debt rose 3.6% in 2Q17 (SAAR), but was relatively unchanged from 4Q16. Conversely, nominal GDP has grown 3.4% YTD.

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Nominal GDP Growth vs Federal Debt Growth

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, 2013 11

Federal deficits are a drag on the US economy when they are growing at a faster pace than GDP, and this has been a major issue for much of the last 40 years. The biggest relief from this trend was in the late 1990s when the equity bubble resulted in a surplus of capital gains tax revenues.

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GDP Growth Rate Minus Growth in Federal Debt

Source: Dudack Research Group; Federal Reserve Board Z.1; BEA; quarterly data; recessions shaded

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, 2013 12

The 10-year Treasury yield is rising but remains below the 2.6% level seen throughout the first quarter. WTI crude oil futures are trading in the upper half of a long held range between $40 and $55.

Source: Thomson Reuters

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, 2013 13

The Dow Jones Industrial Average soared above the 23,000 level last week and continues to march higher. All the broad indices are making record highs, including the Dow Jones Transportation Average which confirmed the DJIA’s high with its own all-time high on October 12, 2017.

Source: Thomson Reuters

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, 2013 14

The 25-day up/down volume oscillator is currently neutral at 1.41. However, it was overbought for seven consecutive trading days between October 2 and October 10 and was overbought for 9 of 16 trading sessions between late September and mid-October. Many readings were well above the 3.0 level that defines an overbought reading; however, no reading reached the extreme levels recorded in 2016. An overbought reading in this indicator is a sign of strong volume in advancing stocks and is a classic characteristic of a bull market. In sum, this indicator is displaying robust buying pressure. Long and/or extreme overbought readings should accompany every new high in the indices. The recent overbought readings were the first for 2017; nevertheless, it is a favorable sign for the bulls since this indicator has now been overbought for the five to ten consecutive sessions, which defines strong underlying demand.

Some technical indicators are designed so that overbought readings are a warning of a top; the indicator below is quite the opposite. In fact, the ABSENCE of an overbought reading in 2015 was an early warning that the new highs in price were not accompanied by strong upside volume and therefore unlikely to be sustainable. Arrows in the chart below pinpoint the peak overbought readings seen over the last seven years. Note that all of these took place during long sustained advances. In sum, the current reading is bullish.

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2600SPX and 25-Day Volume Oscillator

NYSE Volume (Bil) - right

SPX - left

10-day average Volume (Bil) - right

25-day Up/Down Volume Oscillator - right

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Overbought>3.0

Source: Dudack Research Group; Thomson Reuters

15151515


, 2013 15 The 10-day average of daily new highs (199) is above the 100 per day level defined as bullish. Average daily new lows (38) are below the 100 per day and favorable. The A/D line made a new record high on October 20, 2017 confirming recent highs.

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, 2013 16

AAII’s sentiment poll was 37.9% bullish (decrease) and 27.9% bearish (increase), the week of October 18. The index remains neutral. The ISE Sentiment reading moved from positive to neutral in mid-September, a sign of diminishing pessimism in the marketplace.

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1300

1400

1500

1600

1700

1800

1900

2000

2100

2200

2300

2400

2500

2600AAII Bull/Bear Spread

S&P Composite

Bull/Bears Spread (8-week Avg.)

Source: Dudack Research Group; American Association of Individual Investors;Thomson Reuters

Negative

Positive

60

80

100

120

140

160

180

200

220

240

260

ISE Sentiment IndexAll Securities: Call/Put Volume

4 Day Average

26 Day Average

Source: Dudack Research Group; International Securities Exchange; 26 day standard deviation lines

Negative

Positive

17171717


, 2013 17

Overweight Neutral Underweight

Technology Financials REITS

Energy Consumer Discretionary Staples

Industrials Materials Telecom

Healthcare Utilities

DRG Recommended Sector Weights

Healthcare upgraded to Neutral 1/18/2017 and to Overweight 7/7/2017 RELATIVE PERFORMANCE CHARTS – TREND DISPLAYS RELATIVE OVER/UNDER/ PERFORMANCE TO SP500

0.26

0.27

0.28

0.29

0.30

0.31

0.32

0.33

0.34

0.35

0.36

0.37

0.38

0.39

0.40

0.41

0.42

2009 2010 2011 2012 2013 2014 2015 2016 2017

Technology Sector relative to SPXwith 20-Week Moving Average

Source: Dudack Research Group; Intrinsic Research0.10

0.11

0.12

0.13

0.14

0.15

0.16

0.17

0.18

0.19

0.20

0.21

0.22

2009 2010 2011 2012 2013 2014 2015 2016 2017

Financials Sector relative to SPXwith 20-Week Moving Average


0.06

0.07

0.08

0.09

0.10

0.11

0.12

2009 2010 2011 2012 2013 2014 2015 2016 2017

REITS Sector relative to SPXwith 20-Week Moving Average Bands

Source: Dudack Research Group; Intrinsic Research

0.17

0.19

0.21

0.23

0.25

0.27

0.29

0.31

0.33

0.35

0.37

0.39

0.41

0.43

0.45

2009 2010 2011 2012 2013 2014 2015 2016 2017

Energy Sector relative to SPXwith 20-Week Moving Average


0.18

0.19

0.20

0.21

0.22

0.23

0.24

0.25

0.26

0.27

0.28

0.29

0.30

0.31

0.32

2009 2010 2011 2012 2013 2014 2015 2016 2017

Consumer Discretionary Sector relative to SPXwith 20-Week Moving Average


0.21

0.22

0.23

0.24

0.25

0.26

0.27

0.28

0.29

0.30

2009 2010 2011 2012 2013 2014 2015 2016 2017

Staples Sector relative to SPXwith 20-Week Moving Average


0.19

0.20

0.21

0.22

0.23

0.24

0.25

0.26

2009 2010 2011 2012 2013 2014 2015 2016 2017

Industrials Sector relative to SPXwith 20-Week Moving Average


0.125

0.130

0.135

0.140

0.145

0.150

0.155

0.160

0.165

0.170

0.175

0.180

0.185

0.190

0.195

0.200

2009 2010 2011 2012 2013 2014 2015 2016 2017

Material Sector relative to SPXwith 20-Week Moving Average


0.055

0.060

0.065

0.070

0.075

0.080

0.085

0.090

0.095

0.100

0.105

0.110

0.115

0.120

0.125

0.130

0.135

0.140

2009 2010 2011 2012 2013 2014 2015 2016 2017

Telecom Sector relative to SPXwith 20-Week Moving Average


0.26

0.27

0.28

0.29

0.30

0.31

0.32

0.33

0.34

0.35

0.36

0.37

0.38

0.39

0.40

0.41

0.42

0.43

2009 2010 2011 2012 2013 2014 2015 2016 2017

Healthcare Sector relative to SPXwith 20-Week Moving Average


SP500 Sector % Change

S&P INFORMATION TECH 30.3%

S&P HEALTH CARE 21.5%

S&P MATERIALS 17.6%

S&P 500 14.6%

S&P INDUSTRIALS 14.3%

S&P FINANCIAL 14.2%

S&P UTILITIES 12.8%

S&P CONSUMER DISCRETIONARY 11.5%

S&P REITS 5.8%

S&P CONSUMER STAPLES 4.3%

S&P ENERGY -10.0%

S&P TELECOM SERVICES -13.2%

Source: Dudack Research Group; Intrinsic

2017 Performance to Date - Ranked

0.09

0.10

0.11

0.12

0.13

0.14

0.15

0.16

0.17

0.18

0.19

2009 2010 2011 2012 2013 2014 2015 2016 2017

Utilities Sector relative to SPXwith 20-Week Moving Average Bands


18181818


, 2013 18

GLOBAL MARKETS - RANKED BY YEAR-TO-DATE TRADING PERFORMANCE

Index/EFT Symbol Price 5-Day% 20-Day% QTD% YTD%

iShares MSCI Austria Capped ETF EWO 23.96 0.8% 2.0% 2.3% 44.9%

iShares MSCI South Korea Capped ETF EWY 72.72 0.5% 4.9% 5.3% 36.6% Outperformed SP500

iShares China Large Cap ETF FXI 45.63 -0.8% 2.4% 3.6% 31.5% Underperformed SP500

iShares MSCI Emerg Mkts ETF EEM 45.89 -1.1% 1.1% 2.4% 31.1%

Guggenheim BRIC ETF EEB 37.21 -1.1% 0.6% 1.5% 29.2%

iShares MSCI Taiwan ETF EWT 37.60 -0.4% 2.9% 4.2% 28.0%

iShares MSCI Hong Kong ETF EWH 24.87 -1.8% 0.4% 0.7% 27.7%

Technology Select Sector SPDR XLK 60.98 0.4% 4.2% 3.2% 26.1%

iShares MSCI Singapore ETF EWS 25.13 -0.1% 2.8% 2.9% 26.1%

NASDAQ 100 NDX 6080.22 -0.7% 2.5% 1.7% 25.0%

iShares MSCI Brazil Capped ETF EWZ 41.50 -2.7% -2.9% -0.5% 24.5%

iShares MSCI Germany ETF EWG 32.65 -0.2% 1.4% 0.7% 23.3%

Nasdaq Composite Index Tracking Stock ONEQ.O 259.40 -0.4% 2.9% 1.7% 22.6%

iShares Nasdaq Biotechnology ETF IBB.O 325.17 -3.8% -1.4% -2.5% 22.5%

SPDR Homebuilders ETF XHB 41.44 2.9% 7.7% 4.1% 22.4%

iShares Russell 1000 Growth ETF IWF 128.23 0.2% 2.9% 2.5% 22.2%

SPDR S&P Semiconductor ETF XSD 68.57 1.9% 6.3% 4.6% 22.2%

Vanguard FTSE All-World ex-US ETF VEU 53.50 -0.3% 1.2% 1.5% 21.1%

Health Care Select Sect SPDR XLV 83.11 -0.1% 1.9% 1.7% 20.6%

iShares MSCI EAFE ETF EFA 69.30 -0.1% 1.3% 1.2% 20.0%

iShares MSCI Japan ETF EWJ 58.14 1.0% 4.9% 4.4% 19.0%

Materials Select Sector SPDR XLB 58.96 1.4% 4.3% 3.8% 18.6%

SPDR DJIA ETF DIA 234.29 1.9% 5.0% 4.7% 18.6%

DJIA .DJI 23441.76 1.9% 4.9% 4.6% 18.6%

PowerShares Water Resources Portfolio PHO 29.16 1.0% 2.3% 2.3% 18.6%

iShares MSCI Mexico Capped ETF EWW 51.65 -2.2% -7.8% -5.4% 17.5%

iShares Russell 2000 Growth ETF IWO 180.56 0.4% 3.5% 0.9% 17.3%

Industrial Select Sector SPDR XLI 72.91 1.3% 3.1% 2.7% 17.2%

Financial Select Sector SPDR XLF 26.81 2.4% 5.4% 3.7% 15.3%

iShares Russell 1000 ETF IWB 142.85 0.4% 2.4% 2.1% 14.8%

SP500 .SPX 2569.13 0.4% 2.7% 2.0% 14.8%

iShares MSCI Australia ETF EWA 23.00 -0.3% 1.3% 2.5% 13.7%

iShares MSCI Malaysia ETF EWM 31.88 -1.1% -2.3% -1.6% 13.6%

iShares MSCI United Kingdom ETF EWU 34.80 -0.7% -0.1% -0.1% 13.4%

Utilities Select Sector SPDR XLU 54.94 1.1% 3.2% 3.6% 13.1%

Consumer Discretionary Select Sector SPDR XLY 90.96 -0.5% 1.6% 1.0% 11.7%

iShares MSCI Canada ETF EWC 29.04 -0.4% 0.8% 0.3% 11.1%

Gold Future GCc1 1275.00 -0.6% -1.4% -0.5% 10.9%

SPDR Gold Trust GLD 121.33 -0.7% -1.5% -0.2% 10.7%

iShares Russell 2000 ETF IWM 149.17 0.2% 3.4% 0.7% 10.6%

Shanghai Composite .SSEC 3388.25 0.5% 1.0% 1.1% 9.2%

iShares Russell 1000 Value ETF IWD 120.49 0.6% 1.9% 1.7% 7.6%

Silver Future SIc1 16.95 -0.2% 0.2% 2.0% 6.3%

iShares Silver Trust SLV 16.55 -0.4% -0.1% 1.8% 6.2%

SPDR S&P Bank ETF KBE 45.68 2.6% 5.1% 1.3% 5.1%

iShares Russell 2000 Value ETF IWN 124.66 0.1% 3.3% 0.4% 4.8%

iShares US Real Estate ETF IYR 80.04 -1.5% 0.0% 0.2% 4.0%

Consumer Staples Select Sector SPDR XLP 53.67 -1.3% -0.5% -0.6% 3.8%

iShares 20+ Year Treas Bond ETF TLT 123.43 -2.0% -2.2% -1.1% 3.6%

iShares iBoxx $ Invest Grade Corp Bond LQD 120.88 -0.4% -0.1% -0.3% 3.2%

iPath MSCI India ETN INP 83.54 0.3% 3.0% 5.6% -1.8%

Oil Future CLc1 52.53 1.1% 3.7% 3.9% -2.2%

SPDR S&P Retail ETF XRT 40.90 2.2% 0.2% -2.1% -7.2%

Vangard Telecom ETF VOX 90.56 -1.0% -2.9% -1.8% -9.6%

United States Oil Fund, LP USO 10.54 0.5% 2.9% 1.1% -10.1%

Energy Select Sector SPDR XLE 67.55 -1.1% 0.5% -1.4% -10.3%

iShares US Telecomm ETF IYZ 30.17 -1.2% -2.4% -0.8% -12.6%

iShares DJ US Oil Eqpt & Services ETF IEZ 31.77 -5.6% -9.5% -10.1% -30.1%

Source: Dudack Research Group; Thomson Reuters Priced as of close October 24, 2017

Blue shading represents non-US and yellow shading represents commodities

19191919


, 2013 19

US Asset Allocation Benchmark DRG % Recommendation

Equities 60% 70% Overweight

Treasury Bonds 30% 20% Underweight

Cash 10% 10% Neutral

100% 100%

Source: Dudack Research Group; raised equity and lowered cash 5% on November 9, 2016

DRG Earnings and Economic Forecasts (New data for S&P EPS was not available at publishing time)

S&P 500

Price

S&P

Reported

EPS

S&P

Operating

EPS

DRG

Operating

EPS Forecast

DRG EPS

YOY %

T ho mso n

C o nsensus

B o tto m-Up

$ EP S**

T ho mso n

C o nsensus

B o tto m-Up

EP S YOY%

S&P's

Op PE

Ratio

S&P

Divd

Yield

GDP

Annual

Rate

GDP Profits

post-tax w /

IVA & CC YOY %

2001 1148.08 $24.69 $38.85 $38.85 -30.8% NA NA 29.6X 1.4% 1.0% $550.70 6.7%

2002 879.82 $27.59 $46.04 $46.04 18.5% $46.89 NA 19.1X 1.8% 1.8% $714.80 29.8%

2003 1111.92 $48.74 $54.69 $54.69 18.8% $55.44 18.4% 20.3X 1.6% 2.8% $812.60 13.7%

2004 1211.92 $58.55 $67.68 $67.68 23.8% $67.10 20.9% 17.9X 1.8% 3.8% $977.30 20.3%

2005 1248.29 $69.93 $76.45 $76.45 13.0% $76.28 13.7% 16.3X 1.8% 3.3% $1,065.30 9.0%

2006 1418.30 $81.51 $87.72 $87.72 14.7% $88.18 15.6% 16.2X 1.8% 2.7% $1,173.10 10.1%

2007 1468.36 $66.18 $82.54 $82.54 -5.9% $85.12 -3.5% 17.8X 1.8% 1.8% $1,083.50 -7.6%

2008 903.25 $14.88 $49.51 $49.51 -40.0% $65.47 -23.1% 18.2X 2.5% -0.3% $976.00 -9.9%

2009 1115.10 $50.97 $56.86 $56.86 14.8% $60.80 -7.1% 19.6X 2.6% -2.8% $1,127.50 15.5%

2010 1257.64 $77.35 $83.77 $83.77 47.3% $85.28 40.3% 15.0X 1.9% 2.5% $1,375.90 22.0%

2011 1257.60 $86.95 $96.44 $96.44 15.1% $97.82 14.7% 13.0X 2.0% 1.6% $1,437.50 4.5%

2012 1426.19 $86.51 $96.82 $96.82 0.4% $103.80 6.1% 14.7X 2.1% 2.2% $1,550.50 7.9%

2013 1848.36 $100.20 $107.30 $107.30 10.8% $109.68 5.7% 17.2X 2.0% 1.7% $1,565.20 0.9%

2014 2127.83 $102.31 $113.01 $113.01 5.3% $118.78 8.3% 18.8X 1.9% 2.6% $1,619.30 3.5%

2015 2043.94 $86.53 $100.45 $100.45 -11.1% $118.20 -0.5% 20.3X 2.1% 2.9% $1,534.30 -5.2%

2016 2238.83 $94.55 $106.26 $106.26 5.8% $119.08 0.7% 21.1X 2.1% 1.5% $1,614.10 5.2%

2017E ~~~~~~ $114.23 $125.65 $127.00 19.5% $130.83 9.9% 20.4X 2.0% 2.9% NA NA

2018E ~~~~~~ $132.01 $144.17 $146.00 15.0% $146.01 11.6% 17.8X NA 3.0% NA NA.

2011 1Q 1325.83 $21.44 $22.56 $22.56 16.4% $23.50 16.4% 13.7 1.8% -1.5% $1,279.90 -2.6%

2011 2Q 1320.64 $22.24 $24.86 $24.86 18.9% $24.14 18.9% 13.7 1.8% 2.9% $1,406.60 7.0%

2011 3Q 1131.42 $22.63 $25.29 $25.29 17.3% $25.65 17.3% 11.7 2.2% 0.8% $1,475.60 3.4%

2011 4Q 1257.60 $20.64 $23.73 $23.73 8.2% $24.55 8.2% 13.0 2.1% 4.6% $1,588.00 9.6%

2012 1Q 1408.47 $23.03 $24.24 $24.24 7.4% $25.60 8.9% 14.4 1.9% 2.7% $1,573.30 22.9%

2012 2Q 1362.16 $21.62 $25.43 $25.43 2.3% $25.84 7.0% 13.8 2.1% 1.9% $1,543.70 9.7%

2012 3Q 1440.67 $21.21 $24.00 $24.00 -5.1% $26.00 1.4% 14.8 2.1% 0.5% $1,548.10 4.9%

2012 4Q 1426.19 $20.65 $23.15 $23.15 -2.4% $26.32 7.2% 14.7 2.2% 0.1% $1,537.10 -3.2%

2013 1Q 1569.19 $24.22 $25.77 $25.77 6.3% $26.74 4.5% 16.0 2.0% 2.8% $1,547.10 -1.7%

2013 2Q 1606.28 $24.87 $26.36 $26.36 3.7% $27.40 6.0% 16.2 2.1% 0.8% $1,557.80 0.9%

2013 3Q 1681.55 $24.63 $26.92 $26.92 12.2% $27.63 6.3% 16.5 2.0% 3.1% $1,561.50 0.9%

2013 4Q 1848.36 $26.48 $28.25 $28.25 22.0% $28.62 8.7% 17.2 1.9% 4.0% $1,594.20 3.7%

2014 1Q 1872.34 $24.87 $27.32 $27.32 6.0% $28.18 5.4% 17.2 1.9% -0.9% $1,479.50 -4.4%

2014 2Q 1960.23 $27.14 $29.34 $29.34 11.3% $30.07 9.7% 17.5 1.9% 4.6% $1,622.10 4.1%

2014 3Q 1972.29 $27.47 $29.60 $29.60 10.0% $30.04 8.7% 17.2 2.0% 5.2% $1,698.10 8.7%

2014 4Q 2058.90 $22.83 $26.75 $26.75 -5.3% $30.54 6.7% 18.2 1.9% 2.0% $1,741.40 9.2%

2015 1Q 2108.88 $21.81 $25.81 $25.81 -5.5% $28.60 1.5% 18.9 2.0% 3.2% $1,653.70 11.8%

2015 2Q 2166.05 $22.80 $26.14 $26.14 -10.9% $30.09 0.1% 20.0 2.0% 2.7% $1,658.50 2.2%

2015 3Q 1920.03 $23.22 $25.44 $25.44 -14.1% $29.99 -0.2% 18.4 2.2% 1.6% $1,650.30 -2.8%

2015 4Q 2043.94 $18.70 $23.06 $23.06 -13.8% $29.52 -3.3% 20.3 2.1% 0.5% $1,477.70 -15.1%

2016 1Q 2059.74 $21.72 $23.97 $23.97 -7.1% $26.96 -5.7% 20.9 2.1% 0.6% $1,584.80 -4.2%

2016 2Q 2098.86 $23.28 $25.70 $25.70 -1.7% $29.61 -1.6% 21.4 2.1% 2.2% $1,525.10 -8.0%

2016 3Q 2168.27 $25.39 $28.69 $28.69 12.8% $31.21 4.1% 21.4 2.1% 2.8% $1,614.10 -2.2%

2016 4Q 2238.83 $24.16 $27.90 $27.90 21.0% $31.30 6.0% 21.1 2.0% 1.8% $1,685.70 14.1%

2017 1Q 2362.72 $27.46 $28.82 $28.82 20.2% $30.90 14.6% 21.3 2.0% 1.2% $1,642.70 3.7%

2017 2Q 2423.41 $27.01 $30.51 $30.51 18.7% $32.58 10.0% 20.9 1.9% 3.1% $1,643.80 7.8%

2017 3QE 2519.36 $28.33 $31.66 $33.07 15.3% $32.31 3.5% 21.2 NA NA NA NA

2017 4QE* 2569.13 $31.43 $34.66 $34.60 24.0% $35.04 11.9% 20.4 NA NA NA NA

2018 4QE $30.38 $33.59 $35.00 21.4% $34.09 10.3% 19.7 NA NA NA NA

2019 4QE $33.14 $35.50 $35.50 16.4% $36.03 10.6% 19.0 NA NA NA NA

2020 4QE $33.34 $36.66 $37.50 13.4% $37.09 14.8% 18.3 NA NA NA NA

2021 4QE $35.15 $38.42 $38.00 9.8% $38.80 10.7% 17.8 NA NA NA NA

Source: Dudack Research Group; Standard & Poors; Thomson Reuters Consensus estimates; **Thomson quarters may not sum to CY *10/24/2017 close

20202020


, 2013 20 Regulation AC Analyst Certification I, Gail Dudack, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

IMPORTANT DISCLOSURES

RATINGS DEFINITIONS:

Sectors/Industries: “Overweight”: Overweight relative to S&P Index weighting “Neutral”: Neutral relative to S&P Index weighting “Underweight”: Underweight relative to S&P Index weighting

Other Disclosures This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment. The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein. Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes. Accordingly, an investor may receive back less than originally invested. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report.

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates. DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report.

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000. Additional information will be made available upon request.

©2017. All rights reserved. No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect. Dudack Research Group a division of Wellington Shields & Co. LLC. Main Office: Wellington Shields & Co. LLC 140 Broadway New York, NY 10005 212-320-3511 Research Sales: 212-320-2046 Florida office: 91 San Juan Drive Suite D3 Ponte Vedra Beach, FL 32082 212-320-2045

Closing prices as of the close of October 24, 2017

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