- Equity markets declined significantly last week, with US small caps taking the biggest losses. Year-to-date, US large caps are barely positive while small caps are down 4.6%. - Risk aversion has increased as volatility has risen from last year's lows. Yield spreads continue to widen, indicating concern in the markets. - All major global markets declined last week, with Germany suffering the largest losses. REITs were one of the only bright spots, up over 6% year-to-date. - The decline has caused over half of stocks in the analyst's universe to now be in a down trend phase. Models favor reducing risk exposure through positive allocations to cash and

1. The Equity Observer
Weekly Review – December 9, 2018
Eric J. Weigel

2. ► The seesaw continues for risky assets
► Last week was particularly bad as
equity markets took a deep dive
again
► Surprisingly, EM stocks are up over the
last month but YTD remain the worst of
the major equity categories
► YTD US large caps are barely in
positive territory but US small caps are
now down for the year
► The S&P 500 is up 0.3% for the year
while the Russell 2000 is down 4.6%
► International strategies have
underperformed both in local market
returns and a strong USD
Equity markets get pounded again with US
small caps taking the biggest licks
2
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
US LCAP US SCAP INTL EQ EM EQ
%
Major Equity Asset Class Returns
1 Month 5 Days
-16
-14
-12
-10
-8
-6
-4
-2
0
2
US LCAP US SCAP INTL EQ EM EQ
%
Major Equity Asset Class Returns
YTD

3. Equity volatility spikes up again while yield spreads continue
widening indicating concern
3
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2015-12-11 2016-06-11 2016-12-11 2017-06-11 2017-12-11 2018-06-11
US Interest Rates
10 Yr Gov AAA BBB
8.0
13.0
18.0
23.0
28.0
33.0
2015-12-11 2016-06-11 2016-12-11 2017-06-11 2017-12-11 2018-06-11
Stock Index Implied Volatility
VIX SCAP VIX
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2015-12-11 2016-06-11 2016-12-11 2017-06-11 2017-12-11 2018-06-11
Option Adjusted Spreads
US HYLD EM Debt
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2015-12-11 2016-06-11 2016-12-11 2017-06-11 2017-12-11 2018-06-11
US Inflationary Expectations
5/5 Yr FORW 10 Yr

4. ► The carnage continues –all major global
markets took a nosedive with Germany
suffering the most
► Commodity indices recovered last
week as oil prices moved marginally up
► REITS continue to be the standout
performer – up 1.6% last week and over
6% for the year
► In the US Value and Growth both got
pounded last week (down 3.8%)
► In international markets Growth
outperformed Value last week
► Utilities continue delivering – only equity
sector up last week
► Financials and Industrials had the
largest loses – fears of a slow down hurt
these sectors disproportionally
Global Equities
4
-5.0
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
%
Global Equities (USD)
5 DAYS
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
%
Global Sectors (USD)
5 DAYS
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
%
Global Sectors (USD)
5 DAYS

5. ► In the US, we saw a strong size effect
last week with small caps
dramatically under-performing
► Value performed as badly as Growth
despite Utilities being up for the week
► Within equity styles, Low Vol and Div
Yield strategies resulted in smaller
losses
► The Momentum trade has gone in
reverse and Growth Stocks are key
losers but remain ahead YTD
► Emerging markets outperformed
Developed international markets but
remain still 13% down for the year
► EM LATAM continues extremely
volatile and was down 2% last week
Style and Geography
5
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
%
US Equities
5 DAYS
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
%
International Equities
5 DAYS

6. ► Investors woke up to capital
market risk over the last couple of
months
► Our risk aversion index jumped
last week as risky assets cratered
► Asset class volatility has risen
significantly from the lows of last
year – in our view volatility is here
to stay
► We still see a huge disconnect
between volatility, valuations and
economic conditions
► Global growth is still good but
leveling off, valuations are high
and economic policy is highly
uncertain
Investor Risk Aversion returns to the Fear Zone
6
0.00
0.25
0.50
0.75
1.00
Risk Aversion Index - Last 12 Months
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
ASSET CLASS VOLATILITY
US LCAP US SCAP INTL EQ EM EQ

7. US Equities
Weekly Performance
7

8. Deteriorating
Break Down
Down Trend
Up Trend
Break Out
Improving
12%
(14%)
59%
(52%)
6%
(6%)
9%
(9%)
4%
(5%)
10%
(14%)
The Bear Market is here and it is showing signs of industry rotation
GF CAP US All Equity Universe
STAGE LATEST
UP TREND 11.84%
BREAK OUT 3.85%
IMPROVING 9.58%
DOWN TREND 59.46%
BREAK DOWN 8.79%
DETERIORATING 6.41%
Numbers in
parenthesis
correspond to last
week

9. ► The mean stock in our universe
was down 5.1% over the last 5
trading days
► Utilities were the only sector
with positive median returns –
lower interest rates might have
prompted this positive response
► The widest variability in
performance was seen in the
Utility sector – good for stock
picking
► We use the median absolute
deviation as a robust measure
of within sector variability
The Sector Look – median performance and
dispersion
9
-8.0%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
CD CS EN FN HC IN IT MA RE TS UT
1 Week Median Retur ns
US Equity Universe
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
CD CS EN FN HC IN IT MA RE TS UT
1 Week Retur ns MAD
US Equity Universe

10. ► Valuation was a non-factor
last week
► The best performers over the
last 5 days actually had
higher than average P/E’s
► We saw a similar pattern for
P/B – better performers had
higher P/B ratios
► More expensive growth stocks
continue to do better YTD
What did the markets reward last week:
Valuation Multiples
10
12
13
14
15
16
17
18
19
20
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Forward P/E
1.5
1.7
1.9
2.1
2.3
2.5
2.7
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median P/B

11. ► The median stock in our
universe is under-valued by
3% according to a DCF
valuation
► The worst performing stocks
last week (Decile 10)
appeared most under-valued
► In terms of analyst price
targets, there was a perverse
relationship
► Stocks doing the best had the
lowest price targets
What did the markets reward last week:
Valuation Models
11
-5%
0%
5%
10%
15%
20%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median DCF UPSIDE
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Analyst Upside

12. ► On an equally weighted
basis, dividend yield had a
good week
► The best performing stocks
had higher than average
yields
► Short interest, a measure of
sentiment, showed a “U”
shaped pattern of returns
► The best performing stocks
last week had the second
highest levels of short interest
What did the markets reward last week:
Yield and Sentiment
12
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
3.4%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Dividend Yield
3.0
3.5
4.0
4.5
5.0
5.5
6.0
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Shor t Interest Ratio

13. ► Beta worked extremely well
last week
► The lower the beta the
smaller the losses
► In terms of market cap over
the last week we have seen
an inverted V pattern –
repeat from previous weeks
► The Russell 2000 index under
performed the S&P 500 by
1.2% over the last 5 trading
days
What did the markets reward last week:
Beta and Size
13
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Equity Beta
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Market Cap

14. ► The 1 year momentum effect has
lost effectiveness but worked last
week
► The two top deciles for weekly
performance had higher median
trailing one year performance
► The best performing decile last
week had the poorest trailing 1 year
performance
► The industry rotation that started
about 8 weeks ago is gaining
strength
► Revenue growth as a factor
exhibited a perverse relationship to
return – higher growth companies
showed the worst performance
What did the markets reward last week:
Momentum and Growth
14
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Trailing 1 Year Median Retur ns
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Forward Revenue Growth

15. Down
Big Movers – Last 5 Days
15
Up
TESARO, Inc. TSRO Healthcare
Tribune Media Company TRCO Consumer Discretionary
Restoration Hardware Holdings Inc.RH Consumer Discretionary
BGC Partners, Inc. BGCP Financials
Global Blood Therapeutics, Inc.GBT Healthcare
Vanda Pharmaceuticals Inc.VNDA Healthcare
Clovis Oncology, Inc. CLVS Healthcare
Momenta Pharmaceuticals, Inc.MNTA Healthcare
Lattice Semiconductor CorporationLSCC Information Technology
Revance Therapeutics, Inc. RVNC Healthcare
American Outdoor Brands CorporationAOBC Consumer Discretionary
Comtech Telecommunications Corp.CMTL Information Technology
Syros Pharmaceuticals, Inc.SYRS Healthcare
Genie Energy Ltd. GNE Utilities
MDC Partners Inc. MDCA Consumer Discretionary
Immune Design Corp. IMDZ Healthcare
vTv Therapeutics Inc. VTVT Healthcare
Hudson Technologies, Inc.HDSN Industrials
Navios Maritime Holdings Inc.NM Industrials
Novelion Therapeutics Inc.NVLN Healthcare
FedEx Corporation FDX Industrials
American International Group, Inc.AIG Financials
Ross Stores, Inc. ROST Consumer Discretionary
Square, Inc. SQ Information Technology
State Street Corporation STT Financials
Lam Research Corporation LRCX Information Technology
Northern Trust CorporationNTRS Financials
Ulta Salon, Cosmetics & Fragrance, Inc.ULTA Consumer Discretionary
lululemon athletica inc. LULU Consumer Discretionary
American Airlines Group, Inc.AAL Industrials
Ameriprise Financial, Inc. AMP Financials
Cooper Companies, Inc. (The)COO Healthcare
Lincoln National CorporationLNC Financials
E*TRADE Financial CorporationETFC Financials
SVB Financial Group SIVB Financials
Vail Resorts, Inc. MTN Consumer Discretionary
DaVita Inc. DVA Healthcare
XPO Logistics, Inc. XPO Industrials
Alaska Air Group, Inc. ALK Industrials
United Rentals, Inc. URI Industrials

16. Reporting Soon
This Coming Week
16
► Risk Aversion should stay high and we expect choppy
markets this coming week again
► Equity Technicals have deteriorated to the point that
over half of our US universe in is a Down Trend Phase
► Political drama in Washington is exacerbating the
uncertainty of market participants
► Brexit is up this week – will the Parliament vote for it?
► Tariff wars are taking a bite with the IMF recently citing
trade wars as the main reason for a cut in their forecast
of global growth
► Small caps have massively under-performed large caps
over the last 3 months – risk is being shunned at the
moment
► Surprisingly EM equities have outperformed developed
markets in the last month.
► REITS have performed extremely well and are YTD our
best performing asset class
► Our models still favor a reduction in risk in our portfolios
with positive active allocations to cash and bonds
Oracle Corporation ORCL Information Technology
Adobe Systems IncorporatedADBE Information Technology
Costco Wholesale CorporationCOST Consumer Staples
Progressive Corporation (The)PGR Financials
Nordson Corporation NDSN Industrials
Caseys General Stores, Inc. CASY Consumer Staples
American Eagle Outfitters, Inc.AEO Consumer Discretionary
Sanderson Farms, Inc. SAFM Consumer Staples
Dave & Buster's Entertainment, Inc.PLAY Consumer Discretionary
DSW Inc. DSW Consumer Discretionary
ABM Industries IncorporatedABM Industrials
Scholastic Corporation SCHL Consumer Discretionary
Oxford Industries, Inc. OXM Consumer Discretionary
Tailored Brands, Inc. TLRD Consumer Discretionary
INTL FCStone Inc. INTL Financials
Investors Real Estate TrustIRET Real Estate
Photronics, Inc. PLAB Information Technology
Ascena Retail Group, Inc. ASNA Consumer Discretionary
Civitas Solutions, Inc. CIVI Healthcare
Quanex Building Products CorporationNX Industrials
Vera Bradley, Inc. VRA Consumer Discretionary
Powell Industries, Inc. POWL Industrials
Alico, Inc. ALCO Consumer Staples
Value Line, Inc. VALU Financials
Uranium Energy Corp. UEC Energy
Oil-Dri Corporation Of AmericaODC Consumer Staples
Fred's, Inc. FRED Consumer Discretionary
Francesca's Holdings CorporationFRAN Consumer Discretionary

17. Eric J. Weigel
eweigel@gf-cap.com
Website: https://gf-cap.com
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